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 January 31, 2005

              |_| 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 February 28, 2005
------------------------------   ---------------------------------------
Common stock, $0.01 par value                4,326,929

<PAGE>

                   CANAL CAPITAL CORPORATION AND SUBSIDIARIES
                           FORM 10-Q JANUARY 31, 2005

                                      INDEX

The following documents are filed as part of this report:

Accountants' Review Report .................................................   3

Part I - Financial Information .............................................   4

Item I.  Condensed Financial Statements:

         Consolidated Balance Sheets - January 31, 2005 and October 31,
           2004 ............................................................   5

         Consolidated Statements of Operations and Comprehensive Income
           (Loss) for the Three Month Periods ended January 31, 2005
           and 2004 ........................................................   7

         Consolidated Statements of Changes in Stockholders' Equity for the
           Three Month and One Year Periods ended January 31, 2005 and
           October 31, 2004 ................................................   9

         Consolidated Statements of Cash Flows for the Three Month Periods
           ended January 31, 2005 and 2004 .................................  10

         Notes to Consolidated Financial Statements ........................  11

Item II.  Management's Discussion and Analysis of Financial Condition ......  24

         Liquidity and Capital Resources ...................................  32

         Other Factors .....................................................  33

Item III. Quantitative and Qualitative Disclosures About Market Risk .......  33

Item IV.  Controls and Procedures ..........................................  34

Part II - Other Information ................................................  35

     Items 1 through 6 .....................................................  36

     Signatures and Certifications .........................................  37


                                        2

<PAGE>

                           ACCOUNTANTS' REVIEW REPORT

To the Stockholders of Canal Capital Corporation:

We have reviewed the consolidated balance sheet of Canal Capital Corporation and
subsidiaries  as of January 31, 2005,  the related  consolidated  statements  of
operations  and  comprehensive  (loss)  income for the three month  period ended
January 31, 2005 and the  consolidated  statements  of changes in  stockholders'
equity and cash flows for the three month period ended  January 31, 2005.  These
consolidated  financial  statements  are  the  responsibility  of the  company's
management.

We conducted our review in accordance with standards established by the American
Institute  of  Certified  Public  Accountants.  A review  of  interim  financial
information consists principally of applying analytical  procedures to financial
data and making  inquiries of persons  responsible  for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with  generally  accepted  auditing  standards,  the  objective  of which is the
expression of an opinion regarding the consolidated  financial  statements taken
as a whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material  modifications that should
be made to the  consolidated  financial  statements for them to be in conformity
with generally accepted accounting principles.

The  financial  statements  have been  prepared  assuming  that the Company will
continue as a going concern. As discussed in Note 1 to the financial statements,
the Company has suffered  recurring  losses from operations in eight of the last
ten years and is obligated to continue making substantial  annual  contributions
to its defined  benefit  pension plan.  All of these  matters raise  substantial
doubt about the Company's  ability to continue as a going concern.  Management's
plans in regard to these matters are also described in Note 1. 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.


New York, N.Y.                         /S/ Todman & Co., CPA's,P.C.
March 11, 2005                         ----------------------------
                                       TODMAN & CO., CPA's,P.C.
                                       Certified Public Accountants (N.Y.)


                                        3
<PAGE>

                                     PART I

                              FINANCIAL INFORMATION


                                       4
<PAGE>

                    CANAL CAPITAL CORPORATION & SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                      JANUARY 31, 2005 AND OCTOBER 31, 2004


<TABLE>
<CAPTION>
                                                            JANUARY 31,   OCTOBER 31,
                                                               2005          2004
                                                            (UNAUDITED)    (AUDITED)
                                                            -----------   -----------
<S>                                                         <C>           <C>
ASSETS:

CURRENT ASSETS:

       CASH AND CASH EQUIVALENTS                            $     9,796   $    86,158
       NOTES AND ACCOUNTS RECEIVABLE, NET OF AN
         ALLOWANCE FOR DOUBTFUL ACCOUNTS OF $ZERO AT
         BOTH JANUARY 31, 2005 AND OCTOBER 31, 2004,            255,577       281,533
       ART INVENTORY, NET OF A VALUATION ALLOWANCE OF
         $913,900 AND $938,300 AT JANUARY 31,
         2005 AND OCTOBER 31, 2004, RESPECTIVELY                375,900       413,200
       STOCKYARDS INVENTORY                                      32,403        10,122
       PREPAID EXPENSES                                          84,429        32,985
                                                            -----------   -----------

            TOTAL CURRENT ASSETS                                758,105       823,998
                                                            -----------   -----------

NON-CURRENT ASSETS:

       PROPERTY ON OPERATING LEASES, NET OF
             ACCUMULATED DEPRECIATION OF $337,798
             AND $1,176,248 AT JANUARY 31, 2005 AND
             OCTOBER 31, 2004, RESPECTIVELY                   1,860,188     2,715,485
                                                            -----------   -----------

          PROPERTY USED IN STOCKYARD OPERATIONS, NET OF
             ACCUMULATED DEPRECIATION OF $153,754 AND
             $148,508 AT JANUARY 31, 2005 AND OCTOBER
              31, 2004, RESPECTIVELY                          1,136,968     1,142,205
                                                            -----------   -----------

       LONG-TERM MORTGAGE NOTE RECEIVABLE                     1,750,000             0
                                                            -----------   -----------

OTHER ASSETS:

       PROPERTY HELD FOR DEVELOPMENT OR RESALE                  817,435       817,435
       RESTRICTED CASH - TRANSIT INSURANCE                       53,149        50,000
       DEFERRED LEASING AND FINANCING COSTS                           0        12,075
       DEPOSITS AND OTHER                                       113,720       120,220
                                                            -----------   -----------

                                                                984,304       999,730
                                                            -----------   -----------

                                                            $ 6,489,565   $ 5,681,418
                                                            ===========   ===========
</TABLE>


                                        5

<PAGE>

                    CANAL CAPITAL CORPORATION & SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                      JANUARY 31, 2005 AND OCTOBER 31, 2004

<TABLE>
<CAPTION>
                                                        JANUARY 31,     OCTOBER 31,
                                                           2005            2004
                                                        (UNAUDITED)      (AUDITED)
                                                        ------------    ------------
<S>                                                     <C>             <C>
LIABILITIES & STOCKHOLDERS' EQUITY:

CURRENT LIABILITIES:

       ACCOUNTS PAYABLE AND ACCRUED EXPENSES            $    671,814    $    770,564
       INCOME TAXES PAYABLE                                    1,877          10,000
                                                        ------------    ------------

         TOTAL CURRENT LIABILITIES                           673,691         780,564
                                                        ------------    ------------

NON-CURRENT LIABILITIES:

       LONG-TERM PENSION LIABILITY                           934,976         934,976
       REAL ESTATE TAXES PAYABLE                             285,598         308,116
                                                        ------------    ------------

         TOTAL NON-CURRENT LIABILITIES                     1,220,574       1,243,092
                                                        ------------    ------------

LONG-TERM DEBT, RELATED PARTY                              2,767,000       2,767,000
                                                        ------------    ------------

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY:

  PREFERRED STOCK, $0.01 PAR VALUE:
       10,000,000 SHARES AUTHORIZED; 6,198,367 AND
       6,198,367  SHARES ISSUED AND  OUTSTANDING
       AT JANUARY 31, 2005 AND OCTOBER 31, 2004,
       RESPECTIVELY AND AGGREGATE  LIQUIDATION
       PREFERENCE OF $10 PER SHARE FOR $ 61,983,670
       AND $61,983,670 AT JANUARY 31, 2005 AND
       OCTOBER 31, 2004, RESPECTIVELY                         61,984          61,984

  COMMON STOCK, $0.01 PAR VALUE:
       10,000,000 SHARES AUTHORIZED; 5,313,794
       SHARES ISSUED AND 4,326,929 SHARES OUTSTANDING
       AT JANUARY 31, 2005 AND OCTOBER 31, 2004,
       RESPECTIVELY                                           53,138          53,138

  ADDITIONAL PAID-IN CAPITAL                              28,075,908      28,060,908

  ACCUMULATED DEFICIT                                    (13,109,096)    (14,031,634)

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

  COMPREHENSIVE INCOME:
    PENSION VALUATION RESERVE                             (2,250,089)     (2,250,089)
                                                        ------------    ------------

                                                           1,828,300         890,762
                                                        ------------    ------------

                                                        $  6,489,565    $  5,681,418
                                                        ============    ============
</TABLE>


                                        6

<PAGE>

                    CANAL CAPITAL CORPORATION & SUBSIDIARIES
          CONSOLIDATED STATEMENTS OF OPERATIONS & COMPREHENSIVE INCOME
              FOR THE THREE MONTHS ENDED JANUARY 31, 2005 AND 2004

                                                           2005          2004
                                                       (UNAUDITED)   (UNAUDITED)
                                                       -----------   -----------

STOCKYARD OPERATIONS:

 STOCKYARD REVENUES:
    YARD HANDLING AND AUCTION                          $   892,974   $   787,695
    FEED AND BEDDING INCOME                                 47,756        43,152
    RENTAL INCOME                                            1,035         1,501
    OTHER INCOME                                            30,313        32,714
                                                       -----------   -----------

                                                           972,078       865,062
                                                       -----------   -----------

STOCKYARD EXPENSES:
    LABOR AND RELATED COSTS                                376,247       342,952
    OTHER OPERATING AND MAINTENANCE                        182,504       198,262
    FEED AND BEDDING EXPENSE                                37,065        34,643
    DEPRECIATION AND AMORTIZATION                            5,237         5,136
    TAXES OTHER THAN INCOME TAXES                           42,670        43,128
    GENERAL AND ADMINISTRATIVE                              93,491        91,750
                                                       -----------   -----------

                                                           737,214       715,871
                                                       -----------   -----------

INCOME FROM STOCKYARD OPERATIONS                           234,864       149,191
                                                       -----------   -----------

REAL ESTATE OPERATIONS:

 REAL ESTATE REVENUES:
    SALE OF REAL ESTATE                                  1,750,000        58,873
    EXCHANGE BUILDING RENTAL INCOME                         25,671       102,325
    OUTSIDE REAL ESTATE RENT                               132,317       127,601
    OTHER INCOME                                                 0             0
                                                       -----------   -----------

                                                         1,907,998       288,799
                                                       -----------   -----------

 REAL ESTATE EXPENSES:
    COST OF REAL ESTATE SOLD                               900,255        38,382
    LABOR, OPERATING AND MAINTENANCE                        18,836        88,377
    DEPRECIATION AND AMORTIZATION                            5,550        32,550
    TAXES OTHER THAN INCOME TAXES                           18,000        37,500
    GENERAL AND ADMINISTRATIVE                               6,500        12,994
                                                       -----------   -----------

                                                           949,141       209,803
                                                       -----------   -----------


INCOME FROM REAL ESTATE OPERATIONS                         958,847        78,996
                                                       -----------   -----------


                                        7

<PAGE>

                    CANAL CAPITAL CORPORATION & SUBSIDIARIES
          CONSOLIDATED STATEMENTS OF OPERATIONS & COMPREHENSIVE INCOME
              FOR THE THREE MONTHS ENDED JANUARY 31, 2005 AND 2004
                         Continued ...

                                                       2005             2004
                                                   (UNAUDITED)      (UNAUDITED)
                                                   -----------      -----------

GENERAL AND ADMINISTRATIVE EXPENSE                    (207,105)        (204,217)
                                                   -----------      -----------

INCOME FROM OPERATIONS                                 986,606           23,970
                                                   -----------      -----------

OTHER (EXPENSE) INCOME:

  INTEREST & OTHER INCOME                                    0               16
  INTEREST EXPENSE                                     (71,056)         (69,333)
  INCOME FROM ART SALES                                 21,988            4,602
  REALIZED GAIN ON INVESTMENTS                               0                0
  OTHER EXPENSE                                              0                0
                                                   -----------      -----------

                                                       (49,068)         (64,715)
                                                   -----------      -----------

INCOME (LOSS) BEFORE PROVISION FOR
  INCOME TAXES                                         937,538          (40,745)

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

NET INCOME (LOSS)                                      937,538          (40,745)

OTHER COMPREHENSIVE INCOME (LOSS):

  MINIMUM PENSION LIABILITY ADJUSTMENT                       0                0
                                                   -----------      -----------

COMPREHENSIVE INCOME (LOSS)                        $   937,538      $   (40,745)
                                                   ===========      ===========

INCOME (LOSS) PER COMMON SHARE - BASIC
  AND DILUTED                                      $      0.21      $     (0.02)
                                                   ===========      ===========

AVERAGE SHARES OUTSTANDING - BASIC
  AND DILUTED                                        4,327,000        4,327,000
                                                   ===========      ===========


                                        8

<PAGE>

                   CANAL CAPITAL CORPORATION AND SUBSIDIARIES
           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
                FOR THE YEAR ENDED OCTOBER 31, 2004 (AUDITED) AND
             FOR THE THREE MONTHS ENDED JANUARY 31, 2005 (UNAUDITED)

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

BALANCE, OCTOBER 31, 2003        5,313,794   $53,138    5,443,979    $54,440
 NET (LOSS)                              0         0            0          0
 PREFERRED STOCK DIVIDEND                0         0      754,388      7,544
 MINIMUM PEN. LIAB. ADJ.                 0         0            0          0
                                --------------------   ---------------------

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            0          0
 MINIMUM PEN. LIAB. ADJ.                 0         0            0          0
                                --------------------   ---------------------

BALANCE, JANUARY 31, 2005        5,313,794   $53,138    6,198,367    $61,984
                                ====================   =====================

<TABLE>
<CAPTION>
                             ADDITIONAL                                  TREASURY
                              PAID-IN     ACCUMULATED   COMPREHENSIVE     STOCK,
                              CAPITAL       DEFICIT     (LOSS)INCOME      AT COST
<S>                         <C>           <C>             <C>          <C>
BALANCE, OCTOBER 31, 2003   $28,018,997   ($13,404,934)   ($2,315,543) ($11,003,545)
 NET (LOSS)                           0       (577,227)             0             0
 PREFERRED STOCK DIVIDEND        41,911        (49,473)             0             0
 MINIMUM PEN. LIAB. ADJ.              0              0         65,454             0
                            -----------   ------------    -----------  ------------

BALANCE, OCTOBER 31, 2004   $28,060,908   ($14,031,634)   ($2,250,089) ($11,003,545)
 NET INCOME                           0        937,538              0             0
 PREFERRED STOCK DIVIDEND        15,000        (15,000)             0             0
 MINIMUM PEN. LIAB. ADJ.              0              0              0             0
                            -----------   ------------    -----------  ------------
BALANCE, JANUARY 31, 2005   $28,075,908   ($13,109,096)   ($2,250,089) ($11,003,545)
                            ===========   ============    ===========  ============
</TABLE>


                                        9

<PAGE>

                    CANAL CAPITAL CORPORATION & SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
              FOR THE THREE MONTHS ENDED JANUARY 31, 2005 AND 2004
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                           2005          2004
                                                           ----          ----
<S>                                                     <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  NET INCOME (LOSS)                                     $ 937,538      $(40,745)
                                                        ---------      --------

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

   DEPRECIATION AND AMORTIZATION                           12,287        39,546
   GAIN ON SALES OF REAL ESTATE                          (849,745)      (20,491)
   GAIN ON ART SALES (NET OF RESERVE)                     (21,988)       (4,602)

CHANGES IN ASSETS AND LIABILITIES:

   NOTES AND ACCOUNTS RECEIVABLES, NET                     25,956       (34,928)
   ART INVENTORY, NET                                      37,300         9,833
   PREPAID EXPENSES AND OTHER, NET                       (152,419)      (53,671)
   PAYABLES AND ACCRUED EXPENSES, NET                    (129,391)       37,075
                                                        ---------      --------

NET CASH (USED) BY OPERATING
   ACTIVITIES                                            (140,462)      (67,983)
                                                        ---------      --------

CASH FLOWS FROM INVESTING ACTIVITIES:

  PROCEEDS FROM SALES OF REAL ESTATE                            0        58,873
  PROCEEDS FROM SALES OF ART                               64,100             0
  CAPITAL EXPENDITURES                                          0             0
                                                        ---------      --------

NET CASH PROVIDED BY INVESTING
  ACTIVITIES                                               64,100        58,873
                                                        ---------      --------

CASH FLOWS FROM FINANCING ACTIVITIES:

  PROCEEDS FROM LONG-TERM DEBT-RELATED
    PARTIES                                                     0             0
  REPAYMENT OF SHORT-TERM BORROWINGS                            0             0
  REPAYMENT OF LONG-TERM DEBT OBLIGATIONS                       0             0
                                                        ---------      --------
NET CASH (USED) BY FINANCING ACTIVITIES                         0             0
                                                        ---------      --------

NET (DECREASE) IN CASH AND CASH
  EQUIVALENTS                                             (76,362)       (9,110)

CASH AND CASH EQUIVALENTS AT BEGN OF YEAR                  86,158        14,191
                                                        ---------      --------

CASH AND CASH EQUIVALENTS AT END OF YEAR                $   9,796      $  5,081
                                                        =========      ========
</TABLE>

NOTE: CANAL MADE FEDERAL AND STATE INCOME TAX PAYMENTS OF $8,000 AND $7,000 AND
      INTEREST PAYMENTS OF $71,000 AND $69,000 IN THE NINE MONTH PERIODS ENDED
      JANUARY 31, 2005 AND 2004, RESPECTIVELY.


                                       10

<PAGE>

                   CANAL CAPITAL CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                   FOR THE THREE MONTHS ENDED JANUARY 31, 2005
                                   (UNAUDITED)

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.

      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 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.

                                       11

<PAGE>

      Canal  intends  to  continue  its  soliciting  efforts  at its St.  Joseph
stockyards  in fiscal 2004.  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.

      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
Exchange  Buildings  (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.

      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  in eight of the last ten years 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.


                                       12

<PAGE>

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  Available  for Sale -- During  fiscal 2004,  Canal had an
investment in a company in which it,  together with other  affiliated  entities,
comprised a reporting  group for  regulatory  purposes.  It is important to note
that it was the group (as  defined)  that  could  exercise  influence  over this
company,   not  Canal.   Accordingly,   this  investment  did  not  qualify  for
consolidation  as a  method  of  reporting.  Certain  of  Canal's  officers  and
directors  also  served as  officers  and/or  directors  of this  company.  This
investment  (in which  Canal's  ownership  interest  was  approximately  1%) was
carried  at  market  value  and the  realized  gains  or  losses,  if any,  were
recognized in operating results.

      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 Canal.  The
carrying  amount of such  investments  was $111,000 at both January 31, 2005 and
October 31, 2004,  and is included in other  assets.  The  operating  results of
joint ventures  accounted for on the equity method,  for the three month periods
ended  January  31,  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  59  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


                                       13

<PAGE>

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.  Canal  has  had  varying
percentages of its art inventory  appraised by independent  appraisers  prior to
fiscal 2004.  For fiscal 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,  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


                                       14

<PAGE>

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
$8,000 and $7,000 and  interest  payments  of $71,000  and $69,000 for the three
month periods ended January 31, 2005 and 2004, respectively.

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

      M)  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.

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

      O) Recent Accounting  Pronouncements -- In June 2002, the FASB issued SFAS
No. 146, Accounting for Costs Associated with Exit and Disposal Activities. SFAS
No. 146 nullifies  Emerging  Issues Task Force  ("EITF")  issue 94-3,  Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring). Under EITF issue
94-3,  a  liability  for an exit cost is  recognized  at the date of an entity's
commitment to an exit plan. Under SFAS No. 146, the liabilities  associated with
an exit or disposal  activity will be measured at fair value and recognized when
the liability is incurred and meets the  definition of a liability in the FASB's
conceptual  framework.   This  statement  is  effective  for  exit  or  disposal
activities  initiated  after  December 31, 2002. We believe the adoption of SFAS
No. 146 did not have a material impact on our financial statements.

      In May  2003,  the  FASB  issued  SFAS No.  150,  Accounting  for  Certain
Financial  Instruments with Characteristics of both Liabilities and Equity. This
Statement  establishes  standards for  classifying  and measuring as liabilities
certain  financial  instruments  that embody  obligations of the issuer and have
characteristics  of both liabilities and equity.  The provisions of SFAS No. 150
are effective for all financial  instruments  created or modified  after May 31,
2003,  and  otherwise  effective at the  beginning of the first  interim  period
beginning  after  June 15,  2003.  The  adoption  of SFAS No. 150 did not have a
material impact on our consolidated financial statements.


                                       15

<PAGE>

      In  January  2003,  the  Financial   Accounting   Standards  Board  issued
Interpretation  No.  46,  Consolidation  of  Variable  Interest  Entities,   and
interpretation  of  Accounting  Research  Bulletin  No.  51 ("FIN  46").  FIN 46
requires the  consolidation of variable interest entities in which an enterprise
absorbs a majority of the entity's  expected losses,  receives a majority of the
entity's  expected  residual  returns,  or  both,  as  a  result  of  ownership,
contractual or other financial interests in the entity. Currently,  entities are
generally  consolidated  by  an  enterprise  that  has a  controlling  financial
interest  through  ownership of a majority of the voting interest in the entity.
We will adopt FIN 46 as of January 31, 2004. The adoption of FIN 46 did 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 without audit. In the opinion of Management,  the accompanying
unaudited  financial  statements of Canal contain all  adjustments  necessary to
present fairly its financial  position as of January 31, 2005 and the results of
its  operations  and its cash flows for the three month period ended January 31,
2005. 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,  2004 and the notes  thereto  which are  contained  in Canal's  2004
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 2005.

4. 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 livestock handled by the 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.


                                       16

<PAGE>

      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  on 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.

      As discussed  above,  virtually  all of the volume at Canal's  Sioux Falls
stockyards is handled  through market agencies or independent  commission  sales
people,  while the St. Joseph stockyards has solicitation  operations of its own
which accounts for  approximately  50% of its livestock volume  annually.  Canal
intends to continue  its  soliciting  efforts at its St.  Joseph  stockyards  in
fiscal 2005.  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 $32,000 and
$10,000 at January 31, 2005 and October 31, 2004, respectively.

      Stockyard operations resulted in operating income of $235,000 and $149,000
for the three month  periods  ended  January  31,  2005 and 2004,  respectively.
Additionally,  stockyard operations contributed $972,000 and $865,000 to Canal's
revenues  for  the  three  month  periods  ended  January  31,  2005  and  2004,
respectively.

5.    REAL ESTATE OPERATIONS

      Canal's  real  estate  properties  located  in  five  Midwest  states  are
primarily   associated  with  its  current  and  former   agribusiness   related
operations.  Each property is adjacent to a stockyards  operation  (two of which
are  operated by the Company)  and  consist,  for the most part,  of an Exchange
Building  (commercial office space), land and structures leased to third parties
(meat packing  facilities,  railcar 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


                                       17

<PAGE>

revenues  are derived  from rental  income from its  Exchange  Buildings,  lease
income  from  land and  structures  leased  to  various  commercial  and  retail
enterprises and proceeds from the sale of real estate properties.

      Real estate  operations  resulted  in  operating  income of  $949,000  and
$210,000  for  the  three  month  periods  ended  January  31,  2005  and  2004,
respectively.  Additionally,  real estate operations  contributed $1,908,000 and
$289,000 to Canal's  revenues for the three month periods ended January 31, 2005
and 2004, respectively.

      As of January 31, 2005,  there are  approximately  59 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.

6.    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.

      In fiscal  2005,  Canal sold 3 pieces of  contemporary  art.  Canal's  art
operations have generated income of approximately  $22,000,  and $5,000 on gross
sales of  approximately  $64,000 and $20,000 for the three month  periods  ended
January 31, 2005 and 2004, respectively.

      Antiquities  and  contemporary  art  represented  50%  ($189,122)  and 50%
($186,778)  and 46%  ($189,122)  and 54%  ($224,078)  of total art  inventory at
January 31, 2005 and October 31, 2004, respectively. All of the contemporary art
inventory held for resale is comprised of the work of Jules Olitski.

      The amount  recorded as the current  portion of art  inventory  represents
management's  estimate  of the  inventory  expected  to be sold  during the next
twelve months.  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 2005 Canal applied  against sales $24,400 of the
valuation  allowance  against its art inventory,  thereby,  decreasing the total
valuation  allowance  to $913,900 as of January 31, 2005 as compared to $938,300
at October 31, 2004.

      The Company had approximately $250,000 of art inventory (at original cost)
on consignment with third party dealers at both January 31, 2005 and October 31,
2004.


                                       18

<PAGE>

7.    LEASE COMMITMENTS

      In June 2004,  Canal entered into a lease for  approximately  1,000 square
feet  of  office  space  in  Hauppauge,   New  York,  at  a  monthly  rental  of
approximately $1,400, which space serves as its headquarters operations.

      Former Lease  Obligations - On March 4, 2004, WHGA Fifth Avenue Investors,
LP (the  "Landlord")  commenced an action against Canal Capital  Corporation and
its two co-tenants (the "Tenants") of its New York City commercial office space.
The  Landlord is seeking the  eviction of the Tenants as well as  judgement  for
unpaid back and holdover rental amounts of approximately $175,000.

      Subsequent to year end Canal and its co-tenants entered into a stipulation
agreement  with the  landlord  requiring  the  tenants  to pay two  months  rent
(approximately  $85,000),  forfeit  the entire  security  deposit and vacate the
leased  premises as of May 31, 2004 in  exchange  for a release  from all future
obligations under the lease. All requirements of the stipulation  agreement have
been met.

8.    BORROWINGS

      The Company's  variable rate mortgage notes (originally issued in 1998 and
amended  several times since then) are due May 15, 2006 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 October 31, 2004,  the balance due under these notes was
$2,767,000, all of which is classified as long-term debt-related party.

      At January 31, 2005,  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:

                                                  January 31,  October 31,
($ 000's Omitted)                                    2005         2004
-----------------                                    ----         ----
Variable rate mortgage notes due
  May 15, 2006 - related party ................     $ 2,767     $  2,767
                                                    -------     --------


                                       19

<PAGE>

9.    PROPERTY AND EQUIPMENT

      A) Property on Operating Leases

      Property on operating  leases  consist of  approximately  34 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 January 31,
2005 is as follows (000's omitted):

                     Carrying                                    Carrying
                       Value                                      Value
Description (1)      10/31/04   Additions  Retirements  Deprec.   1/31/05
---------------      --------   ---------  -----------  -------   -------
Headquarters office
Various leasehold    $     5      $   0      $    0      $   (1)   $    4
improvements

11 acres of land
in Omaha, NE           1,215          0           0          (1)    1,214
Acquired in 1976

5 acres of land
in S. St. Paul, MN     1,092          0        (848)         (5)      239
Acquired in 1937

18 acres of land
in Sioux City, IA        403          0           0           0       403
                      ------      -----       -----      ------    ------
Acquired in 1937
                      $2,715      $   0       $(848)     $   (7)   $1,860
                      ======      =====       =====      ======    ======

      A schedule of the Company's reconciliation of property on operating leases
carried for the fiscal years 2005, 2004 and 2003 is as follows (000's omitted):

                                              2005       2004       2003
                                              ----       ----       ----

      Balance at beginning of year          $ 2,715    $ 2,874    $ 3,337
      Acquisitions                                0          0          0
      Improvements                                0          8        179
      Cost of property sold                    (855)      (167)      (142)
      Reclassification to property held
        for development or resale                 0          0       (500)
                                            -------    -------    -------
      Balance at end of year                $ 1,860    $ 2,715    $ 2,874
                                            -------    -------    -------

(1)   Substantially  all of Canal's real property is pledged as  collateral  for
      its debt obligations (see Note 8).


                                       20

<PAGE>

      B) 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 on operating  leases at January 31,
2005 is as follows (000's omitted):

                     Carrying                                    Carrying
                       Value                                      Value
Description (1)      10/31/04   Additions  Retirements  Deprec.   1/31/05
---------------      --------   ---------  -----------  -------   -------

30 acres of land
in St. Joseph, MO    $   984      $    0      $    0     $  (3)   $   981
Acquired in 1942

30 acres of land
in Sioux Falls, SD       158           0           0        (2)       156
                     -------      ------      -------    ------    ------
Acquired in 1937

                     $ 1,142      $    0      $    0     $  (5)   $ 1,137
                     =======      ======      =======    ======   =======

      A schedule of the Company's  reconciliation  of property used in stockyard
operations  carried for fiscal  years 2005,  2004 and 2003 is as follows  (000's
omitted):

                                              2005       2004       2003
                                              ----       ----       ----

      Balance at beginning of year          $ 1,142    $ 1,136    $ 1,176
      Acquisitions                                0          0         40
      Improvements                                0         25         32
      Cost of property sold                      (5)       (19)      (112)
                                            -------    -------    -------
      Balance at end of year                $ 1,137    $ 1,142    $ 1,136
                                            -------    -------    -------

(1)   Substantially  all of Canal's real property is pledged as  collateral  for
      its debt obligations (see Note 8).


                                       21

<PAGE>

      C) Property Held for Development or Resale

      Property held for development or resale consist of  approximately 59 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
January 31, 2005 is as follows (000's omitted):

                     Carrying                                    Carrying
                       Value                                      Value
Description (1)      10/31/04   Additions  Retirements  Deprec.   1/31/05
-----------------    --------   ---------  -----------  -------  --------
19 acres of land
in St. Joseph, MO    $   47       $   0      $    0     $     0   $   47
Acquired in 1942

10 acres of land
in S. St. Paul, MN      144           0           0           0      144
Acquired in 1937

30 acres of land
in Sioux City, IA       626           0            0          0      626
                     ------       -----      --------    ------   ------
Acquired in 1937
                     $  817       $   0      $     0     $    0   $  817
                     ======       =====      ========    ======   ======

      A  schedule  of  the  Company's   reconciliation   of  property  held  for
development or resale carried for fiscal years 2005, 2004 and 2003 is as follows
(000's omitted):

                                                2005      2004       2003
                                                ----     -----      -----

      Balance at beginning of year              $817     $ 900      $ 518
      Acquisitions                                 0         0          0
      Improvements                                 0         0          0
      Cost of property sold                        0       (83)      (118)
      Reclassification from property
        on operating leases                        0         0        500
                                                ----     -----      -----

      Balance at end of year                    $817     $ 817      $ 900
                                                ----     -----      -----

(1)   Substantially  all of Canal's real property is pledged as  collateral  for
      its debt obligations (see Note 8).


                                       22

<PAGE>

10.   PENSION VALUATION RESERVE

      The Pension Valuation Reserve  represents the excess of additional minimum
pension  liability  required  under  the  provisions  of 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.

11.   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 of the Company.  Canal or its  subsidiaries are party to the following
litigations:

      WHGA Fifth Avenue Investors, LP v. Canal Capital Corporation etal

      On March  4,  2004,  WHGA  Fifth  Avenue  Investors,  LP (the  "Landlord")
commenced an action  against Canal Capital  Corporation  and its two  co-tenants
(the  "Tenants") of its New York City commercial  office space.  The Landlord is
seeking the  eviction of the  Tenants as well as  judgement  for unpaid back and
holdover rental amounts of approximately $175,000.

      Subsequent to year end Canal and its co-tenants entered into a stipulation
agreement  with the  landlord  requiring  the  tenants  to pay two  months  rent
(approximately  $85,000),  forfeit  the entire  security  deposit and vacate the
leased  premises as of May 31, 2004 in  exchange  for a release  from all future
obligations under the lease. All requirements of the stipulation  agreement have
been met.

12.   Restricted Cash - Transit Insurance

      Due  to  significant  proposed  increases  in  the  premiums  for  transit
insurance,  management  decided to initiate a plan of self insurance  commencing
November 1, 2002.  Transit  insurance  covers livestock for the period that they
are 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  $50,000 at January  31,  2005 and October 31,  2004,
respectively,  represents  the  excess  of per head  fees  charged  over  actual
payments made for livestock that was injured or died while at the stockyards.


                                       23

<PAGE>

ITEM II. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
         RESULTS OF OPERATIONS AND FINANCIAL CONDITION
         FOR THE THREE MONTHS ENDED JANUARY 31, 2005

      The following  discussion should be read in conjunction with our financial
statements and notes thereto included elsewhere in this report.

                    FORWARD-LOOKING AND CAUTIONARY STATEMENTS

      We may from time to time make written or oral forward-looking  statements,
including  those  contained  in the  following  section.  These  forward-looking
statements  involve  risks and  uncertainties  and actual  results  could differ
materially  from those  discussed in the  forward-looking  statements.  For this
purpose,  any  statements  contained in this section that are not  statements of
historical fact may be deemed to be  forward-looking  statements.  Factors which
may effect our  results  include,  but are not limited to, our ability to expand
our customer base,  our ability to develop  additional and leverage our existing
distribution  channels for our products and  solutions,  dependance on strategic
and channel partners including their ability to distribute our products and meet
or renew  their  financial  commitments,  our  ability to address  international
markets, the effectiveness of our sales and marketing activities, the acceptance
of our products in the market place,  the timing and scope of deployments of our
products by customers, fluctuations in customer sales cycles, customers' ability
to  obtain  additional  funding,   the  emergence  of  new  competitors  in  the
marketplace, our ability to compete successfully against established competitors
with greater resources, the uncertainty of future governmental  regulation,  our
ability  to  manage  growth,  and  obtain  additional  funds,  general  economic
conditions  and other risks  discussed  in this report and in our other  filings
with the Securities and Exchange Commission. All forward- looking statements and
risk factors included in this document are made as of the date hereof,  based on
information  available to us as of the date thereof, and we assume no obligation
to update any forward-looking statement or 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  -- real estate and 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,


                                       24

<PAGE>

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".

      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

      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 $1.0 million, while contributing $1.9 million to
Canal's revenues for the first three months of fiscal 2005. In the first quarter
of fiscal 2005,  Canal sold its Exchange  Building and the associated five acres
of land  located in South Saint Paul,  Minnesota on a contract for deed for $1.8
million, generating operating income of $0.9 million.

      As of January 31, 2005,  there are  approximately  59 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 2005.

      Risk - Real estate  activities in general may involve  various  degrees of
risk,  such as 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.


                                       25

<PAGE>

      Stockyard Operations

      General - Through an asset repurchase agreement, Canal commenced stockyard
operations  August 1, 1999 in Sioux City Iowa,  St.  Joseph,  Missouri and Sioux
Falls, South Dakota.

      In March 2002, Canal permanently closed its stockyard  operations in Sioux
City, Iowa. The Sioux City stockyard  operations  generated  operating losses of
$0, $0, and $75,000 for the three years ended  October 31, 2004,  2003 and 2002,
respectively. The stockyard facility was dismantled with the equipment, fixtures
and  materials  going either to Canal's  remaining  two  stockyards or sold at a
public  sale held at the  Sioux  City  location  in April  2002.  Canal has been
engaged  in  extended  negotiations  to  sell  this  property  to a real  estate
developer  whose  intention  is to convert the property  into a retail  shopping
center.  Canal  is  continuing  to  pursue  the  sale of this  property  to this
developer as well as exploring any other  opportunities  to develop or sell this
property in fiscal 2005.

      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.


                                       26

<PAGE>

      Canal is continuing its soliciting efforts at its St. Joseph stockyards in
fiscal 2005.  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  $0.2
million while  contributing  approximately  $1.0 million to Canal's revenues for
the first quarter of fiscal 2004.

      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.

                          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


                                       27

<PAGE>

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 Annual
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 -- 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. Canal has had varying percentages of its
art inventory appraised by independent  appraisers in previous years. For fiscal
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,  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.

      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  59  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.


                                       28

<PAGE>

Results of Operations - General

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

                                       Three Months Ended January 31,
                                       ------------------------------
                                            2005         2004
                                            ----         ----
                                              (In Thousands)
Revenues:
Stockyard Revenues                         $   972     $   865
Real Estate Revenues                         1,908         289
                                           -------     -------
    Total Revenues                           2,880       1,154
                                           -------     -------

Costs and Expenses:
Stockyard Expenses                             737         716
Real Estate Expenses                           949         210
General and Administrative Expenses            207         204
                                           -------     -------
     Total Costs and Expenses                1,893       1,130
                                           -------     -------

Income from Operations                         987          24
Other Income                                    22           4
Other Expenses                                 (71)        (69)
                                           -------     -------

Net Income (Loss)                          $   938     $   (41)
                                           =======     =======

      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  in eight of the last ten years 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 recognized net income of  approximately  $938,000 in the first three
months  of 2005 as  compared  to a net loss of  $41,000  for the same  period in
fiscal 2004.  After  recognition of preferred  stock dividend  payments (paid in
additional  shares of  preferred  stock for each of  fiscal  2005,  and 2004) of
$15,000  in 2005 and  $22,000  in  2004,  the  results  attributable  to  common
stockholders  were net income of  $923,000  in 2005 and a net loss of $63,000 in
2004. Canal's 2005 net income of $938,000 is due primarily to a $850,000 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.

      Canal's revenues from continuing  operations  consist of revenues from its
stockyard and real estate  operations.  Revenues in 2005 increased by $1,726,000
to  $2,880,000 as compared  with 2004  revenues of  $1,154,000.  The fiscal 2005
increase in revenues is due primarily to a $1,750,000 sale of the


                                       29

<PAGE>

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.

COMPARISON OF FISCAL PERIODS ENDED JANUARY 31, 2005 AND 2004

Stockyard Revenues

      Stockyard revenues for the three months ended January 31, 2005 of $972,000
accounted  for 33.2% of the  fiscal  2005  revenues  as  compared  to  stockyard
revenues of $865,000 or 75.0% for the same period in fiscal  2004.  As discussed
below,  the 2005  decrease  in the  stockyard  revenues  as a  percent  of total
revenues,  is due to the significant increase in sales of real estate for fiscal
2005.  Stockyard  revenues are comprised of yard handling and auction (91.9% and
91.1%),  feed and bedding income (4.9% and 5.0%),  rental income (0.1% and 0.1%)
and other income (3.1% and 3.8%) for the three month  periods  ended January 31,
2005 and 2004, respectively.  There were no significant percentage variations in
the year to year comparisons.

Stockyard Expenses

      Stockyard expenses for the three months ended January 31, 2005 of $737,000
increased  by $21,000  (2.9%) from  stockyard  expenses of $716,000 for the same
period in fiscal 2004.  Stockyard  expenses  are  comprised of labor and related
costs (51.0% and 47.9%), other operating and maintenance (24.8% and 27.7%), feed
and bedding expense (5.0% and 4.8%),  depreciation  and  amortization  (0.7% and
0.7%),   taxes  other  than  income  taxes  (5.8%  and  6.0%)  and  general  and
administrative  expense  (12.7%  and 12.9%) for the three  month  periods  ended
January 31, 2005 and 2004, respectively. The 2005 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 three  months  ended  January  31, 2005 of
$1,908,000  accounted  for 66.2% of the fiscal 2005 revenues as compared to real
estate  revenues of $289,000  or 25.0% for the same period in fiscal  2004.  The
fiscal 2005  increase in real estate  revenues is due  primarily to a $1,750,000
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.  Real estate  revenues  are  comprised of sale of real
estate  (91.7% and 20.4%),  rental  income from  commercial  office space in its
Exchange  Buildings  (1.3% and 35.4%),  rentals and other lease  income from the
rental of vacant land and certain  structures  (7.0% and 44.2%) and other income
(0.0%  and  0.0%)  for the  three  months  ended  January  31,  2005  and  2004,
respectively.  The sharp decrease (74.9%) in Exchange  Building Rental Income is
also due to the property sale discussed above. The percentage  variations in the
year to year comparisons are due primarily to increased sales of real estate for
fiscal 2005.


                                       30

<PAGE>

Real Estate Expenses

      Real  estate  expenses  for the three  months  ended  January  31, 2005 of
$949,000  increased by $739,000  (352.4%) from real estate  expenses of $210,000
for the same period in fiscal 2004. The sharp  increase in real estate  expenses
is due to the property sale discussed above.  Real estate expenses are comprised
of the  cost of real  estate  sold  (94.8%  and  18.3%),  labor,  operating  and
maintenance  (2.0% and 42.1%),  depreciation and amortization  (0.6% and 15.5%),
taxes  other than income  taxes (1.9% and 17.9%) and general and  administrative
and other  expenses  (0.7% and 6.2%) for the three months ended January 31, 2005
and  2004,  respectively.   The  percentage  variations  in  the  year  to  year
comparisons  are due  primarily  to the  increased  cost of real estate sold for
fiscal 2005.

General and Administrative

      General and administrative expenses for the three months ended January 31,
2005 of $207,000  increased by $3,000  (1.4%) from  expenses of $204,000 for the
same period in fiscal 2004. The major  components of general and  administrative
expenses are officers  salaries (56.1% and 56.9%),  insurance  expense (9.9% and
11.5%),  office salaries (11.3% and 9.5%),  travel expense (4.8% and 4.5%), rent
(2.0% and  0.1%)  and  professional  fees  (2.2%  and 2.2%) for the three  month
periods ended January 31, 2005 and 2004, respectively. There were no significant
percentage variations in the year to year comparisons.

Interest Expense

      Interest  expense for the three months  ended  January 31, 2005 of $71,000
increased  $2,000  (2.5%) from $69,000 for the same period in fiscal  2004.  The
principal  balances  outstanding  at January  31, 2005 and October 31, 2004 were
$2,767,000  and  $2,767,000,  respectively.  The interest  rate (10%) on Canal's
variable rate mortgage notes has remained  unchanged for the past 12 months.  At
January 31, 2005 the  outstanding  balance of these  notes was  $2,767,000.  The
slight  increase  in  the  2005  interest  expense  reflects  Canal's  repayment
(including  additional  accrued interest on the unpaid balance due) of a portion
of the  interest  deferred  by  certain  noteholders  to help ease the cash flow
strain experienced by Canal in fiscal 2004.

Income from Art Sales

      Other income from art sales for the three months ended January 31, 2005 of
$22,000 increased by $17,000 from income of $5,000 for the same period in fiscal
2004.  Art revenues are comprised of the proceeds  from the sale of  antiquities
and  contemporary  art. Canal  recognized gross sales of $64,000 and $20,000 for
the three month  periods  ended  January 31,  2005 and 2004,  respectively.  Art
expenses are  comprised of the cost of inventory  sold and selling,  general and
administrative  expenses.  Canal  incurred cost of inventory sold of $37,000 and
$38,000  (net of a  valuation  allowance  of  $24,000  and  $28,000)  as well as
selling, general and administrative expenses


                                       31

<PAGE>

of $5,000 and $6,000 for the three  month  periods  ended  January  31, 2005 and
2004,  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.

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  in eight of the last ten years 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, 2006 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 January 31, 2005,  the balance due under these notes was
$2,767,000, all of which is classified as long-term debt-related party.

      Cash and cash equivalents of $10,000 at January 31, 2005 decreased $76,000
or 88.6% from $86,000 at October 31, 2004. Net cash used by operations in fiscal
2005 was $140,000.  Substantially all of the 2005 net proceeds from the sales of
real estate and art of $64,000 was used in operations.  During fiscal 2005 Canal
decreased the balance of its current liabilities by a total of $107,000.

      At  January  31,  2005  the  Company's   current   assets  exceed  current
liabilities by $0.1 million which was unchanged as compared to October 31, 2004.
The only required principal  repayments under Canal's debt agreements for fiscal
2005 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


                                       32

<PAGE>

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.

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,  2004,  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 January 31, 2005, 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
         January 31,        ($ US)       Interest Rate      Value
         -----------      ----------     -------------      -----
            2005           $     0            N/A
            2006             2,767            10%
            2007                 0            N/A
            2008                 0            N/A
            2009                 0            N/A
            Thereafter           0            N/A
                           -------
            Total          $ 2,767                          N/A (A)
                           -------                          -------

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


                                       33

<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  January  31,  2005  ("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.


                                       34

<PAGE>

                                     PART II

                                OTHER INFORMATION


                                       35
<PAGE>


Item 1: Legal Proceedings:

      See Item 3 of Canal's October 31, 2004 Form 10-K.

      WHGA Fifth Avenue Investors, LP v. Canal Capital Corporation etal

      On March 4,  2004,  WHGA  Fifth  Avenue  Investors,  LP "(the  "Landlord")
commenced an action  against Canal Capital  Corporation  and its two  co-tenants
(the  "Tenants") of its New York City commercial  office space.  The Landlord is
seeking the  eviction of the  Tenants as well as  judgement  for unpaid back and
holdover rental amounts of approximately $175,000.

      Subsequent to year end Canal and its co-tenants entered into a stipulation
agreement  with the  landlord  requiring  the  tenants  to pay two  months  rent
(approximately  $85,000),  forfeit  the entire  security  deposit and vacate the
leased  premises as of May 31, 2004 in  exchange  for a release  from all future
obligations under the lease. All requirements of the stipulation  agreement have
been met.

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.


                                       36

<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 14th day of
March, 2005.

                                     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
       ---------                       -----                    ----

                               President and Chief
/S/ Michael E. Schultz     Executive Officer and Director
----------------------      (Principal Executive Officer)   March 14, 2005
Michael E. Schultz

                              Vice President-Finance
                              Secretary and Treasurer
/S/ Reginald Schauder         (Principal Financial and
----------------------          Accounting Officer)         March 14, 2005
Reginald Schauder


/S/ Asher B. Edelman            Chairman of the Board
----------------------             and Director             March 14, 2005
Asher B. Edelman


                                       37