UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549


                                   FORM 10-QSB

                                   (Mark One)

[X]      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
         EXCHANGE ACT OF 1934

                  For the quarterly period ended June 30, 2004

[ ]      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
         EXCHANGE ACT OF 1934

                 For the transition period from______to________

                       Commission file number: 333-30158-A

                          Xstream Beverage Group, Inc.
                          ----------------------------
        (Exact name of small business issuer as specified in its charter)

           Nevada                                                05-0547629
           ------                                                ----------
(State or other jurisdiction of                                 (IRS Employer
Incorporation or organization)                               Identification No.)

            4800 NW 15 Avenue, Bay A, Fort Lauderdale, Florida 33309
            --------------------------------------------------------
                    (Address of Principal executive offices)

          Issuer's telephone number, including area code: 954-598-7997
                                                          ------------

         Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15 (d) of the Exchange Act during the past 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 [ ]

APPLICABLE ONLY TO CORPORATE ISSUERS

         Indicate the number of shares outstanding of each of the issuer's
classes of common stock as of the latest practicable date: 2,509,954 shares of
common stock as of August 5, 2004.

<PAGE>
                          XSTREAM BEVERAGE GROUP, INC.

                 Form 10-QSB for the period ended June 30,, 2004

              CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

         Certain statements in this quarterly report on Form 10-QSB contain or
may contain forward-looking statements that are subject to known and unknown
risks, uncertainties and other factors which may cause actual results,
performance or achievements to be materially different from any future results,
performance or achievements expressed or implied by such forward-looking
statements. These forward-looking statements were based on various factors and
were derived utilizing numerous assumptions and other factors that could cause
our actual results to differ materially from those in the forward-looking
statements. These factors include, but are not limited to, economic, political
and market conditions and fluctuations, government and industry regulation,
interest rate risk, U.S. and global competition, and other factors. Most of
these factors are difficult to predict accurately and are generally beyond our
control. You should consider the areas of risk described in connection with any
forward-looking statements that may be made herein. Readers are cautioned not to
place undue reliance on these forward-looking statements, which speak only as of
the date of this report. Readers should carefully review this quarterly report
in its entirety, including but not limited to our financial statements and the
notes thereto. Except for our ongoing obligations to disclose material
information under the Federal securities laws, we undertake no obligation to
release publicly any revisions to any forward-looking statements, to report
events or to report the occurrence of unanticipated events. For any
forward-looking statements contained in any document, we claim the protection of
the safe harbor for forward-looking statements contained in the Private
Securities Litigation Reform Act of 1995.

         When used in this quarterly report, the terms "Xstream Beverage," "
we," "our," and "us" refers to Xstream Beverage Group, Inc. a Nevada
corporation, and our subsidiaries.

         All per share information contained in this Quarterly Report gives
proforma effect to the one for 20 reverse stock split of Xstream Beverage's
common stock effected on July 6, 2004.

                                      INDEX

Part I.  Financial Information

Item 1.  Financial Statements

Consolidated Balance Sheet at June 30, 2004 (unaudited)........................3
Consolidated Statements of Operations for the three months
         and six months ended June 30, 2004 and 2003 (unaudited)...............4
Consolidated Statements of Cash Flows (unaudited) for the
         six months ended June 30, 2004 and 2003...............................5
Notes to Consolidated Financial Statements (unaudited) ........................6

Item 2.  Management's Discussion and Analysis of Financial
           Condition and Results of Operations................................24

Item 3.  Controls and Procedures..............................................29

Part II  Other Information....................................................29

                                       2
<PAGE>
PART I.  FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

                  XSTREAM BEVERAGE GROUP INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEET
                                  JUNE 30, 2004
                                   (Unaudited)

<TABLE>
<S>                                                                        <C>
ASSETS
   Current Assets:
      Cash                                                                 $     54,300
      Accounts Receivable, net                                                  231,194
      Inventory                                                                 268,224
      Other Current Assets                                                      360,828
                                                                           ------------
         Total Current Assets                                                   914,546
                                                                           ------------

   Property and Equipment, Net                                                  120,927

   Trademarks                                                                   303,017
   Cash-restricted                                                            2,451,154
   Customer Lists, net                                                          174,947
   Goodwill                                                                     216,315
   Other Assets                                                                  14,750
                                                                           ------------
TOTAL ASSETS                                                               $  4,195,656
                                                                           ============
LIABILITIES & SHAREHOLDERS' EQUITY
   Liabilities:
      Current Liabilities:
         Accounts Payable
                                                                           $    816,564
         Accrued Expenses                                                       575,548

         Loans payable                                                          358,776
         Loans, related party                                                   162,855
         Other Current Liabilities                                                5,137
                                                                           ------------
            Total Current Liabilities                                         1,918,880
                                                                           ------------

      Long Term Liabilities:
         Convertible term note, net of discounts                              1,523,707
                                                                           ------------
            Total Liabilities                                                 3,442,587
                                                                           ------------
   Shareholder's Equity:
      Preferred Stock, $0.001 par value, 10,000,000 shares authorized,              200
         Series A, 200,000 shares issued and
         outstanding
      Common Stock, $0.001 par value, 50,000,000 shares authorized,               2,382
         2,382,008 shares issued and outstanding
      Common Stock Issuable (105,734 shares)                                        106
      Additional paid-in Capital                                             21,343,195
      Accumulated Deficit                                                   (20,573,814)
      Less: deferred consulting expense                                         (19,000)
                                                                           ------------
            Total Shareholder's Equity                                          753,069
                                                                           ------------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY                                   $  4,195,656
                                                                           ============
</TABLE>

                 See accompanying notes to financial statements.

                                       3
<PAGE>

                  XSTREAM BEVERAGE GROUP INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS

                                   (Unaudited)

<TABLE>
<CAPTION>

                                                            Three Months Ended June 30,        Six Months Ended June 30,
                                                           ----------------------------      ----------------------------
                                                               2004             2003             2004            2003
                                                           -----------      -----------      -----------      -----------
<S>                                                        <C>              <C>              <C>              <C>
Sales                                                      $ 1,226,583      $   553,067      $ 1,831,143      $   605,490

Cost of Goods Sold                                             863,483          362,482        1,381,122          370,046
                                                           -----------      -----------      -----------      -----------
Gross Profit                                                   363,100          190,585          450,021          235,444

Expense
  Marketing & Selling                                           86,696           97,288          123,415          133,169
  Warehouse & Delivery                                          68,414          141,035          109,888          149,764
  Compensation                                                 838,161          174,920        2,561,062          303,549
  Rent                                                          44,141           21,373           84,114           29,164
  Consulting Fees                                              197,962          193,703          367,058          616,451
  Professional Fees                                             68,178          133,236          138,134          187,842
  Guarantee Fee                                                 41,750               --          167,000               --
  Bad Debt Expense                                              17,064            6,833           17,064            6,833
  Other General & Administrative                               195,249           39,553          504,053           69,159
                                                           -----------      -----------      -----------      -----------
    Total Operating Expense                                  1,557,615          807,941        4,071,788        1,495,931
                                                           -----------      -----------      -----------      -----------
Loss From Operations                                        (1,194,515)        (617,356)      (3,621,767       (1,260,487)

Other Income/(Expense)

  Other Income                                                  23,274               --           52,649               --
  Settlement of employee options                                    --         (418,750)              --         (418,750)
  Conversion loss on debentures                                     --          (85,050)              --          (85,050)
  Interest Income                                                1,156               --           15,185               --
  Interest Expense                                            (100,734)          (2,453)        (105,368)         (55,931)
  Settlement gain, (loss)                                        5,900               --          (15,021)        (193,000)
  Other expense                                                (12,803)         (27,455)         (30,823)         (25,644)
                                                           -----------      -----------      -----------      -----------
    Total Other Income/(Expense)                               (83,207)        (533,708)         (83,378)        (778,375)
                                                           -----------      -----------      -----------      -----------
Net Loss                                                   $(1,277,722)     $(1,151,064)     $(3,705,145)     $(2,038,862)
                                                           ===========      ===========      ===========      ===========

Net Loss per share - Basic and diluted                     $     (0.61)     $     (1.67)     $     (2.10)     $     (3.43)
                                                           ===========      ===========      ===========      ===========

Weighted Average Shares Outstanding -Basic and diluted       2,106,611          687,357        1,763,196          593,907
                                                           ===========      ===========      ===========      ===========
</TABLE>


                 See accompanying notes to financial statements.

                                       4
<PAGE>

                  XSTREAM BEVERAGE GROUP INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                            FOR THE SIX MONTHS ENDED
                                   (Unaudited)
<TABLE>
<CAPTION>

                                                                       June 30,         June 30,
                                                                         2004             2003
                                                                     -----------      -----------
<S>                                                                  <C>              <C>
    CASH FLOWS FROM OPERATING ACTIVITIES:
       Net Loss                                                      $(3,705,145)     $(2,038,862)
       Adjustments to reconcile net cash used in operations:
          Depreciation                                                     6,048            1,792
          Amortization of deferred consulting                                 --          219,980
          Amortizaton of debt discount to interest expense                73,958           51,667
          Amortization of intangibles                                     56,160           23,333
          Amortization of unearned compensation                               --            7,000
          Loss on Conversion of Debt                                      23,921           85,050
          Stock Based Settlement gain                                     (3,000)              --
          Stock Based Loan Fee                                           375,000               --
          Interest Income on subscription receivable                     (14,030)         (84,098)
          Stock based expenses                                         1,826,516          526,075
          Stock based settlement                                              --          720,000

       Changes in operating assets and liabilities:
          Accounts receivable                                           (104,436)         (32,049)
          Inventory                                                      (57,250)         (68,637)
          Other current and non-current assets                           (46,769)         (25,545)
          Accounts payable                                                20,665          149,309
          Accrued expenses                                                87,218           89,638
          Other current liabilities                                      (32,141)          10,316
                                                                     -----------      -----------
    Net cash used in operating activities                             (1,493,285)        (365,031)

    CASH FLOWS FROM INVESTING ACTIVITIES:
       Acquisition of property and equipment                             (18,187)          (6,572)
       Business acquisitions                                            (140,500)        (137,551)
                                                                     -----------      -----------
    Net cash used in investing activities                               (158,687)        (144,123)

    CASH FLOWS FROM FINANCING ACTIVITIES:
       Loan proceeds (repayments), net                                  (299,067)         168,041
       Proceeds from sale of common stock, net of offering costs       1,535,736          181,100
       Loan proceeds, net of issuance costs                            2,869,000               --
       Cash overdraft                                                         --           10,372
       Proceeds from related party loans                                      --          103,343
                                                                     -----------      -----------
    Net cash provided by financing activities                          4,105,669          462,856
                                                                     -----------      -----------
Net cash increase (decrease)                                           2,453,697          (46,298)
Cash at beginning of period                                               51,764           46,298
                                                                     -----------      -----------
Cash at end of period                                                $ 2,505,461      $        --
                                                                     ===========      ===========

Supplemental Disclosure of Cash Flow Information:

    Cash paid during the period for:
       Interest Paid                                                 $   105,368      $        --

Supplemental Disclosure of Non-cash Investing and
Financing Activities:

          Common Stock issued for acquisitions                       $   126,000      $        --
          Common Stock issued for debt settlement                         72,418               --
          Common Stock issued for debt conversion                        140,000               --
          Cancellation of Common Stock for subscription
            receivable                                                 2,446,822               --
          Common Stock issued for deferred services                       35,500               --
          Stock based prepaid acquisition costs                          281,769               --
          Equity related debt discount                                 1,419,251               --
                                                                     -----------      -----------
                                                                     $ 4,521,760      $        --
                                                                     ===========      ===========
</TABLE>

                 See accompanying notes to financial statements.

                                       5
<PAGE>

                          XSTREAM BEVERAGE GROUP, INC.
                                AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 2004
                                   (UNAUDITED)

NOTE 1 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

         (A) Basis of Presentation
         -------------------------

         The accompanying unaudited consolidated financial statements of XStream
         Beverage Group, Inc. and its subsidiaries ("XStream" or "the Company")
         have been prepared in accordance with generally accepted accounting
         principles for interim consolidated financial information. Accordingly,
         they do not include all the information and notes necessary for
         comprehensive consolidated financial statements.

         It is management's opinion, all material adjustments (consisting of
         normal recurring adjustments) that are considered necessary for a fair
         presentation have been included. Results for the interim periods
         presented are not necessarily indicative of the results that might be
         expected for the entire fiscal year.

         XStream completed the first four acquisitions anticipated in its
         business strategy as follows, Beverage Network of South Florida, Inc.
         ("BNSF") on April 9, 2003; Beverage Network of Connecticut, Inc.
         ("BNCT") on May 1, 2003; Beverage Network of Hawaii, Inc. ("BNHI") on
         March 1, 2004; Beverage Network of Massachusetts, Inc. ("BNMA") on
         March 15, 2004. These acquisitions were accounted for under the
         purchase method. (See Note 2 for details.) XStream is now an operating
         brand development and distribution company.

         For further information, refer to the audited consolidated financial
         statements and footnotes for the year ended December 31, 2003 included
         in XStream's Form 10-KSB.

         (B) Principles of Consolidation
         -------------------------------

         The accompanying consolidated financial statements include the accounts
         of XStream and its subsidiaries. All material intercompany balances and
         transactions have been eliminated in consolidation.

         (C) Revenue Recognition
         -----------------------

         The Company follows the general criteria of the United States
         Securities and Exchange Commission Staff Accounting Bulletin 104 for
         revenue recognition. In general, the Company recognizes revenue when
         persuasive evidence of an arrangement exists, delivery of product has
         occurred, the sales price is fixed or determinable, and collectibility
         is reasonably assured. The Company recognizes revenue upon acceptance
         of delivery of its product by its customers at agreed prices. Based on
         market conditions, the Company or its suppliers may choose to promote
         certain brands by offering free product or case volume discounts. The
         cost of any supplier-sponsored promotion is recoverable in whole or in
         part from the supplier. The Company follows the guidance of Emerging
         Issues Task Force (EITF) Issue 01-9 "Accounting for Consideration Given
         by a Vendor to a Customer." Accordingly, the Company does not recognize
         revenue on free promotional products or discounts. Further, the Company
         recognizes as a cost of sale, the cost of free promotional products net
         of any available charge-backs to the suppliers.

                                       6
<PAGE>
                          XSTREAM BEVERAGE GROUP, INC.
                                AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 2004
                                   (UNAUDITED)

         (D) Goodwill
         ------------

         Acquired goodwill is considered to have an indefinite life pursuant to
         SFAS 142, "Goodwill and Other Intangible Assets," and accordingly is
         not amortized but subject to periodic impairment tests. Acquired
         customer lists are considered to have a finite life pursuant to SFAS
         142 to be amortized over the period the asset is expected to contribute
         to the future cash flows. XStream expects the period to be five years.
         The customer lists will also be subject to periodic impairment tests.

NOTE 2 - NET LOSS PER COMMON SHARE:

Basic net income (loss) per common share (Basic EPS) excludes dilution and is
computed by dividing net income (loss) available to common stockholder by the
weighted-average number of common shares outstanding for the period. Diluted net
income per share (Diluted EPS) reflects the potential dilution that could occur
if stock options or other contracts to issue common stock were exercised or
converted into common stock or resulted in the issuance of common stock that
then shared in the earnings of XStream. For the six months ended June 30, 2004
and 2003, the diluted loss per share is the same as basic loss per shares since
the effect of all common stock equivalents was antidilutive due to the net loss.
At June 30, 2004, there were warrants for 240,000 common shares outstanding,
which may dilute future earnings per share.

NOTE 3 - ACQUISITIONS:

Squeeze Transaction - On January 14th, 2004, our wholly owned subsidiary,
XStream Brands, Inc., a Florida Corporation, entered into an Assignment of
Trademark with Squeeze Beverage, Inc., for the assignment of all of its rights
and interests in the Mark "SQUEEZE" for carbonated flavored soft drinks and
seltzer water, including all variations thereof such any spelling, formatives,
phonetic variations and stylized designs of the same and all goodwill associated
therewith. We delivered 20,000 shares of our restricted common stock to Squeeze
Beverages, Inc. in exchange for the assignment of the Mark. Based upon the
contemporaneous private placement offering price of $2.40 per share we valued
the acquisition at $48,000.

Maui Juice Transaction - On March 1, 2004, our wholly owned subsidiary, XStream
Brands, Inc., a Florida Corporation, ("XStream Brands"), entered into an
Assignment of Trademark with The Maui Juice Company, Inc. ("Maui"), for the
assignment of all of its rights and interests in the Mark "Maui Juice Company",
including all variations thereof such any spelling, formatives, phonetic
variations and stylized designs of the same and all goodwill associated
therewith. The purchase price for the assignment of the Mark was $300,000 in
cash with $25,000 paid at the acquisition date and $275,000 to be paid under the
terms of the agreement.

Pacific Rim Transaction - On March 1, 2004, our wholly owned subsidiary,
Beverage Network of Hawaii, Inc. a Florida corporation ("BNHI"), acquired
substantially all of the assets and assumed certain liabilities of Pacific Rim
Natural Juice Company, Inc., a Hawaii corporation ("Pacific Rim"). This
acquisition was consummated pursuant to an Asset Purchase Agreement (the
"Purchase Agreement") dated March 1, 2004 by and among BNHI (the "Acquirer") and
Pacific Rim. Under the terms of the Purchase Agreement, the Acquirer purchased
substantially all of the assets of Pacific Rim and assumed certain liabilities
for 12,500 shares of XStream's restricted common stock, which, based upon the
contemporaneous private placement offering price of $2.40 per share had a value
of $30,000. In addition, prior to the closing, we advanced Pacific Rim, $15,500
resulting in a total purchase price of $45,500.

                                       7
<PAGE>

                          XSTREAM BEVERAGE GROUP, INC.
                                AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 2004
                                   (UNAUDITED)

Simultaneously with the Asset Purchase agreement, Beverage Network of Hawaii,
Inc. entered in to a one-year consulting agreement (with the option for annual
renewals as agreed upon by both parties) with the owner of Pacific Rim. The
consulting fee (to be paid quarterly) is a calculation based on 1% of adjusted
gross profit with a minimum guaranteed payment of $1,250 per quarter.

The following table summarizes the estimated fair values of the assets acquired
and liabilities assumed at the date of acquisition of Pacific Rim. Subject to
BNHI's performance and third-party valuations, the allocation of purchases price
is subject to refinement.

                                                        March 1, 2004
                                                        -------------

         Aggregate purchase price                          $ 45,500
                                                           ========
         Current assets                                    $ 10,911
         Fixed assets                                        17,650
         Customer list                                       38,350
         Goodwill                                            44,695
                                                           --------
                            Total assets acquired           111,606
                                                           --------
         Current liabilities assumed                         66,106
                                                           --------
                                   Net assets acquired     $ 45,500
                                                           ========

Goodwill recognized is expected to be deducted over a 15-year period for tax
purposes.

The table below summarizes the pro forma information of the results of
operations as though the business combinations had been completed as of January
1, 2003:

                                              Six Months Ended
                                                 June 30,
                                     ---------------------------------
                                         2004                 2003
                                     -----------           -----------

     Sales                           $ 1,861,642           $   685,330
     Cost of Goods                     1,405,450               439,880
                                     -----------           -----------

     Gross Profit                        456,192               245,450
     Operating Expenses                4,134,591             1,758,537
                                     -----------           -----------

     Net Ordinary Loss                (3,678,399)           (1,513,087)

     Other Income (Expense)              (86,574)             (805,513)
                                     -----------           -----------

     Net Loss                        $(3,764,973)          $(2,318,600)
                                     ===========           ===========

     Net Loss per Share              $     (2.14)          $     (3.31)
                                     ===========           ===========

                                       8
<PAGE>
                          XSTREAM BEVERAGE GROUP, INC.
                                AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 2004
                                   (UNAUDITED)

Ayer Beverage Transaction - On March 15, 2004, our wholly owned subsidiary,
Beverage Network of Massachusetts, Inc., a Florida Corporation ("BNMA") acquired
substantially all of the assets and assumed certain liabilities of Ayer
Beverages, Inc., a Massachusetts corporation ("Ayer Beverage"). This acquisition
was consummated pursuant to an Asset Purchase agreement (the "Purchase
Agreement") dated March 15, 2004, by and among BNMA (the "Acquirer") and Ayer
Beverage. Under the terms of the purchase Agreement,, the Acquirer purchased
substantially all of the assets of Ayer Beverage and assumed certain of its
liabilities for $200,000 cash and 20,000 shares of XStream's restricted common
stock which, based upon the contemporaneous private placement offering price of
$2.40 per share had a value of $48,000 resulting in a total purchase price of
$248,000.

BNMA has also entered into an employment agreement with existing key management
of Ayer Beverage. The agreement is for a period of thirty-six months, commencing
March 15, 2004, at a base salary of $80,000 per year. The employee is also
entitled to receive an issue of 750 shares of XStream Beverage Group, Inc.
("XSBG") restricted stock upon completion of the first and second anniversary of
the agreement and 1,500 shares upon completion of the third anniversary of the
agreement. The agreement also stipulates for an employee bonus to be calculated
on the quarterly gross profit (from 2% - 3%) based upon performance as mandated
by management's profit targets.

The following table summarizes the estimated fair values of the assets acquired
and liabilities assumed at the date of acquisition of Ayer Beverages subject to
BNMA's performance and third-party valuations, the allocation of purchases price
is subject to refinement.

                                                      March 15, 2004
                                                      --------------

         Aggregate purchase price                        $248,000
                                                         ========

         Current assets                                  $ 39,041
         Fixed assets                                      44,450
         Customer list                                    147,773
         Goodwill                                         171,620
                                                         --------
                            Total assets acquired         402,884
                                                         --------

         Current liabilities assumed                      154,884
                                                         --------
                                   Net assets acquired   $248,000
                                                         ========

Goodwill recognized is expected to be deducted over a 15-year period for tax
purposes.

The table below summarizes the pro forma information of the results of
operations as though the business combinations had been completed as of January
1, 2003:

                                       9
<PAGE>
                          XSTREAM BEVERAGE GROUP, INC.
                                AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 2004
                                   (UNAUDITED)

                                             Six Months Ended
                                                 June 30,
                                     ---------------------------------
                                        2004                  2003
                                     -----------           -----------
     Sales                           $ 2,002,582           $   969,372
     Cost of Goods                     1,604,186               889,860
                                     -----------           -----------

     Gross Profit                        398,396                79,512
     Operating Expenses                4,129,577             1,691,859
                                     -----------           -----------

     Net Ordinary Loss                (3,731,181)           (1,612,347)

     Other Income (Expense)              (84,129)             (783,537)
                                     -----------           -----------

     Net Loss                        $(3,815,310)          $(2,395,884)
                                     ===========           ===========

     Net Loss per Share              $     (2.17)          $     (3.42)
                                     ===========           ===========

NOTE 4 - ACCOUNTS RECEIVABLE:

Accounts Receivable for the six months ending June 30, 2004 is $301,044 with an
allowance for bad debt of $69,850.

NOTE 5 - INVENTORY:

Inventories are stated at the lower of "first-in, first-out" cost or market. The
Company had $268,224 of inventory consisting primarily of resalable products as
of June 30, 2004.

NOTE 6 - OTHER CURRENT ASSETS:

The balance of $360,828 as of June 30, 2004 consists primarily of prepaid
expenses, which are detailed below:

                  Prepaid Insurance                  $ 11,610
                  Prepaid Inventory                     2,500
                  Prepaid Rent                          5,450
                  Prepaid Acquisition Costs           341,268
                                                     --------
                           Total:                    $360,828
                                                     ========

NOTE 7 - FIXED ASSETS:

Property and equipment at June 30, 2004 is as follows:

                           Delivery Trucks                $  55,399
                           Warehouse Equipment               34,395
                           Coolers                            7,977
                           Computers                         29,536
                           Office Equipment                   4,261
                           Furniture & Fixtures               3,847
                                                          ---------
                                                            135,415
                  Less: Accumulated Depreciation            (14,488)
                                                          ---------

                                     Net:                 $ 120,927
                                                          =========

                                       10
<PAGE>
                          XSTREAM BEVERAGE GROUP, INC.
                                AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 2004
                                   (UNAUDITED)

Depreciation expense for the six months ended June 30, 2004, and June 30, 2003
was $6,048 and $1,792, respectively.

NOTE 8 - CUSTOMER LIST:

(See Note 3 - Acquisitions)

NOTE 9 - GOODWILL:

(See Note 3 - Acquisitions)

NOTE 10 - OTHER ASSETS:

The balance of $14,750 reflected as of June 30, 2004 consisted of security
deposits.

NOTE 11 - ACCRUED EXPENSE-SALARIES, ACCRUED EXPENSE-OTHER:

Effective April 9, 2003, concurrent with closing its first acquisition, XStream
entered into three-year employment agreements for President and CEO calling for
annual base compensation of $85,000 each. These employment agreements also
granted 100,000 options each at an exercise price of $28.00 per share, vesting
over the term of the agreement. Based on the contemporaneous offering price of
$10.00 per common share there was no compensation expense computed under the
intrinsic value method of APB 25. On June 1, 2003, concurrent with the
resignation of the previous officers, the options were cancelled under amended
employment agreements with each officer.

Effective February 5, 2004, the company executed revised employment agreements
for its Chairman, President, and Vice President stipulating an annual base
compensation of $130,000 each. Accrued compensation reflecting officers, new
hires, and acquisitions, for the period ending June 30, 2004 was as follows:

         Accrued Expense Salaries-Officers/Directors:     $ 522,657
         Accrued Expense - Other:                            52,891
                                                          ---------

                                Total Accrued Expenses:   $ 575,548
                                                          =========

NOTE 12 - LOANS PAYABLE AND LOANS PAYABLE, RELATED PARTY:

In January 2004, an agreement was made to convert a $15,000 third party,
non-interest bearing demand note to equity with the common shares valued at the
contemporaneous private placement offering price of $2.40 per share. The
transaction resulted in the company recognizing a gain on conversion of $3,000.

In March 2004, a principal shareholder advanced $25,000 to the company as a
non-interest bearing demand note with no specified term.

                                       11
<PAGE>
                          XSTREAM BEVERAGE GROUP, INC.
                                AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 2004
                                   (UNAUDITED)

Loans payable at June 30, 2004 were as follows:

Loans Payable:

   September 2003, $12,000 plus 8% Interest (loan in default)        12,754
   Bank Line of Credit 6% Interest                                   11,200
   Automotive equipment loan                                          2,616
   March 2003, non-interest bearing, due April, 2005                100,434
   March 2003, interest bearing demand note 6%, due April 2112      206,459
   March 2003, $25,313 Plus 8%, due June 2004                        25,313
                                                                   --------

  Total Loans Payable - Other                                      $358,776

                                                                    162,855
                                                                   --------
                                                                   $521,631
                                                                   ========

NOTE 13 - OTHER CURRENT LIABILITIES:

The balance of $5,137 reflected as of June 30, 2004 consists of customer credit
balances.

NOTE 14 - NOTES PAYABLE - LONG TERM & DEBT DISCOUNT:

On May 14, 2004, the Company secured a financing arrangement with Laurus Master
Funds, Ltd. ("Laurus Funds"). The financing consists of a $3 million Senior
Secured Convertible Note that bears interest at the rate of prime plus two
percent and has a term of three years (May 14, 2007). The Note is convertible
into shares of the Company's common stock, only upon effectiveness of a
registration statement registering the underlying shares, at a fixed price of
$4.60 per share for the first $50,000 with the remaining $2,950,000 convertible
at a fixed price of $5.20 per share, a premium to the 22-day average closing
share price as of May 14, 2004. In connection with the financing, Laurus Funds
was also issued a Warrant (the "Warrant") to purchase up to 225,000 shares of
the Company's common stock. The warrants are exercisable as follows: 75,000
shares at $6.40 per share; 75,000 shares at $7.80 per share and the balance at
$9.00 per share. The Company recorded a debt discount of (i) $822,000 for the
valuation of the 225,000 warrants issued with the note (computed using a
Black-Scholes model with an interest rate of 2.53%, volatility of 149%, zero
dividends and expected term of three years); (ii) $597,251 for a beneficial
conversion feature inherent in the note and (iii) $131,000 for debt issue costs
paid to affiliates of the lender, for a total discount of $1,550,251. The
$822,000 and $131,000 are being amortized over the term of the note. Since the
conversion is contingent on the effectiveness of the registration statement,
which date cannot be determined, the Company will begin amortizing the $597,251
over the remaining term of the debt once the registration statement is declared
effective. Amortization of the debt discounts through June 30, 2004 was $73,958.
The following summary reflects long-term debt at June 30, 2004

                  Gross Proceeds:          $ 3,000,000
                  Debt Discount             (1,476,293)
                                           -----------
                  Net                      $ 1,523,707
                                           ===========

                                       12
<PAGE>
                          XSTREAM BEVERAGE GROUP, INC.
                                AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 2004
                                   (UNAUDITED)

To secure the payment of all Obligations, XStream Beverage Group, Inc "XBGI" and
its subsidiaries entered into a Master Security Agreement which assigns and
grants to Laurus Funds a continuing security interest in all of the following
property now owned or at any time upon execution of the agreement, acquired by
XBGI or it's subsidiaries, or in which any Assignor now have or at any time in
the future may acquire any right, title or interest (the "Collateral"): all
cash, cash equivalents, accounts, deposit accounts, inventory, equipment, goods,
documents, instruments (including, without limitation, promissory notes),
contract rights, general tangibles, chattel paper, supporting obligations,
investment property, letter-of-credit rights, trademarks, trademark
applications, patents, patent applications, copyrights, copyright applications,
tradestyles and any other intellectual property, in each case, in which any
Assignor now have or may acquire any right, title or interest, all proceeds and
products thereof (including, without limitation, proceeds of insurance) and all
additions, accessions and substitutions. In the event any Assignor wishes to
finance an acquisition in the ordinary course of business of any
hereafter-acquired equipment and have obtained a commitment from a financing
source to finance such equipment from an unrelated third party, Laurus Funds
agrees to release its security interest on such hereafter-acquired equipment so
financed by such third party financing source.

The Secured Term Note Agreement stipulates the note to be repaid using cash
payment along with an equity conversion option; the details of both methods for
repayment are as follows: The cash repayments stipulate that beginning on
September 1, 2004, or the first Amortization Date, the company shall make
monthly payments to Larurus Funds on each Repayment Date until the Maturity
Date, each in the amount of $1,470.59 (the "Tranche A Monthly Principal
Amount"), together with any accrued and unpaid interest to date on such portion
of the first Fifty Thousand Dollars ($50,000) aggregate principal amount of the
Note ("Tranche A") and each in the amount of $16,176.47 (the "Tranche B Monthly
Principal Amount"), together with any accrued and unpaid interest to date on
such portion of the next Two Million Nine Hundred Fifty Thousand Dollars
($2,950,000) aggregate principal amount of the Note ("Tranche B"). The
conversion repayment states that each month by the fifth (5th) business day
prior to each Amortization Date, the Larurus Funds shall deliver to the Company
a written notice converting the Monthly Amount payable on the next Repayment
Date in either cash or Common Stock, or a combination of both. If a Repayment
Notice is not delivered by Larurus Funds on or before the applicable Notice Date
for such Repayment Date, then the Company pays the Monthly Amount due in cash.
Any portion of the Monthly Amount paid in cash shall be paid to Larurus Funds in
an amount equal to 102% of the principal portion of the Monthly Amount due. If
Larurus Funds converts all or a portion of the Monthly Amount in shares of
Common Stock, the number of such shares to be issued by the Company will be the
number determined by dividing the portion of the Monthly Amount to be paid in
shares of Common Stock, by the applicable Fixed Conversion Price (the initial
"Tranche A Fixed Conversion Price" means $4.60 and the initial fixed conversion
price with respect to Tranche B means $5.20).

$2,450,000 was deposited by Larurus Funds on behalf of the Company into an
account, which is in the sole dominion and control of Larurus Funds. The purpose
of the account is to ensure funds are readily accessible for the cash-financing
portion of acquisitions or for any other purpose that Larurus Funds deemed
appropriate for use of such funds. The balance with accumulated interest at June
30, 2004 was $2,451,154.

A registration rights agreement was executed to register the shares underlying
the note and warrants. Certain liquidated damages of 2% of the note balance per
month accrue if stipulated deadlines are not met. There were no liquidated
damages due as of June 30, 2004.

                                       13
<PAGE>
                          XSTREAM BEVERAGE GROUP, INC.
                                AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 2004
                                   (UNAUDITED)

NOTE 15 - COMMITMENTS AND CONTINGENCIES:

         (A) FACILITY LEASES
         -------------------

         Effective December 1, 2003, XStream terminated its month-to-month lease
         at its corporate headquarters in Boca Raton and co-located with its
         subsidiary, BNSF. Effective June 1, 2003, BNSF entered into a 24-month
         lease for new distribution facilities. In November 2003, this lease was
         cancelled by the landlord and succeeded by another lease effective
         December 1, 2003 for a 12-month term ending November 30, 2004. The rent
         is $4,552 per month. Rent expense for the period ending June 30, 2004
         for corporate headquarters and BNSF was $24,032 while rent expense in
         2003 was $25,308 for the same period.

         Effective November 1, 2003, BNCT entered into a 60-month lease for new
         distribution facilities. The rent is $5,108 for the 13,622 square foot
         facility, with annual increases of $0.50 per square foot, per year.
         Rent expense for the period ending June 30, 2004, was $33,150, compared
         to $2,500 as of June 30, 2003.

         BNHI assumed the current lease as part of acquiring the assets of
         Pacific Rim. The terms are month-to-month with the rent of $1,038 per
         month. In March of 2004, BNHI entered into a month-to-month lease
         agreement for management facilities with monthly rent of $4,200. The
         space is being utilized as housing for marketing consultants and other
         individuals active in expanding the brand and current distribution
         territory. Rent expense charged to operations for the period ending
         June 30, 2004 was $16,232.

         BNMA assumed the lease from Ayer Beverage, Inc., consisting of 4,300
         square foot facility at a cost of $1,425 monthly. The current lease
         expires on June 30, 2004 with an annual renewal option. On June 1,
         2004, BNMA entered into a second lease agreement for 13,500 sq. ft. of
         space located in Lawrence, MA. The terms are month-to-month at a cost
         of $5,000 per month. The rent charged to operations was $10,700 as of
         June 30, 2004.

         (B) EMPLOYMENT AGREEMENTS
         -------------------------

         See Note 8 for details regarding accrued compensation.

NOTE 16 - STOCKHOLDER'S EQUITY AND RECAPITALIZATION:

         (A) RECAPITALIZATION
         --------------------

         On the July 19, 2004, the Company completed a 1 for 20 reverse
         stock-split of the Company's outstanding common stock. All share and
         per share data in the accompanying consolidated financial statements
         have been retroactively adjusted for all periods presented to reflect
         the reverse split.

                                       14
<PAGE>
                          XSTREAM BEVERAGE GROUP, INC.
                                AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 2004
                                   (UNAUDITED)

         (B) PREFERRED STOCK
         -------------------

         The Company has authorized 10,000,000 shares of preferred stock at
         $0.001 par value. The Board of Directors is authorized to issue two
         series of preferred stock and to fix the designation, powers,
         preferences, and rights of the shares of each series. In addition, the
         Company may pay dividends of common stock to preferred stockholders. In
         October 2001, the Board of Directors authorized Series A preferred
         stock, which is cumulative voting and convertible and does not have
         dividend rights. Each share of preferred stock is convertible to one
         share of common stock and each share of preferred stock is entitled to
         100 votes on each matter submitted to a vote of the total capital stock
         of the Company. There were 200,000 preferred Series A shares
         outstanding at June 30, 2004.

         (C) COMMON STOCK
         ----------------

         In February 2002, the Company issued 213,375 of its common shares to
         its founder and principal stockholder, XStream Beverage, Inc. ("XBI").
         XBI is controlled by an officer of the Company. For purposes of results
         of operations, the issuance was considered in substance, a compensation
         expense to be recognized during the service period pursuant to a verbal
         consulting agreement, which was effective April 1, 2002. Accordingly,
         the value of $10,668,750 had been recorded as a deferred compensation
         expense at March 31, 2002. In July 2002, effective April 1, 2002 the
         Company rescinded the consulting agreement and received a subscription
         for the 213,375 common shares, paid for in the form of a promissory
         note at the contemporaneous offering price of $10.00 per share
         resulting in a subscription promissory note receivable of $2,133,750.
         Under Delaware law, the promissory note is considered valid
         consideration for the issuance of capital stock. The note bears
         interest at 8% and is due August 13, 2003. Due to the rescission of the
         consulting agreements, the $10,668,750 deferred compensation and
         related $10,664,483 additional paid-in capital were reversed. Interest
         income for 2003 and 2002 was $170,700 and $128,142, respectively and
         accrued interest receivable is $299,042 and is deducted from equity as
         a subscription receivable at December 31, 2003. In January 2004, the
         Company forgave the subscription receivable promissory note for its
         parent and related accrued interest in exchange for the return of the
         213,375 subscribed shares. The shares have been returned to our
         treasury but have not been cancelled.

         On January 15, 2003, the Company issued 17,500 shares pursuant to a
         twelve-month consulting agreement. The 17,500 shares were vested at
         the grant date resulting in a value of $350,000 based on the trading
         price on the grant date to be recognized over the twelve-month service
         period. During the twelve months ended December 31, 2003, $321,450 was
         recognized as consulting expense $28,550 as deferred. The deferred
         balance of $28,550 was recognized as consulting expense as of March 31,
         2004.

         In November 2003, the company issued 25,000 shares as a loan fee in
         consideration of a one-year note. The value of $250,000 based on the
         contemporaneous offering price of $10.00 per share is recognized over
         the one-year term with $42,000 expensed as of December 31, 2003 and
         $63,000 expensed as of March 31, 2004. On May 31, 2004, the principal
         balance of note $125,000 was converted into 52,083 common shares
         based on the then contemporaneous offering price of $2.40. The
         remaining deferred component of $145,000 was recognized as an expense
         as of June 30, 2004.

         In November of 2003, the Company issued 25,050 shares of common stock
         in consideration of $109,000 of substituted collateral to secure a

                                       15
<PAGE>

                          XSTREAM BEVERAGE GROUP, INC.
                                AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 2004
                                   (UNAUDITED)

         commercial line of credit for Beverage Network of Connecticut (BNCT). A
         guarantee fee computed as $250,500 based on the then contemporaneous
         private placement offering of $10.00 per share is recognized over the
         6-month term with $83,500 charged to loan and loan guarantee fees in
         2003 and $167,000 deferred as a component of equity at December 31,
         2003. The Company recognized an expense of $125,250 with a deferred
         balance of $41,750 as of March 31, 2004. The $41,750 balance was
         expensed as of June 30, 2004.

         In December 2003, the company issued 15,000 shares to a consultant for
         services under a 9-month contract. The resulting expense of $36,000
         based on the then contemporaneous offering price of $2.40 per shares
         will be recognized over the 9 month term beginning in 2004. On May 18,
         2004, the company paid the balance due on the line of credit, thereby
         releasing the substituted collateral. (See Note 14 - Notes Payable Long
         Term) The remaining deferred balance of $24,000 was recognized as an
         expense as of June 30, 2004.

         In January 2004, the company issued 5,500 shares of restricted common
         stock for legal services provided to the company. The shares were
         valued at the then contemporaneous private placement offering price of
         $2.40 per share with the expense of $13,200 recognized immediately.

         In the first quarter, an agreement was made to convert a $15,000 third
         party, non-interest bearing demand note to 5,000 common shares valued
         at the then contemporaneous private placement offering price of $2.40
         per share. The transaction resulted in the company recognizing a gain
         on conversion of $3,000.

         In January 2004, the company issued 775 of restricted common stock to
         consultants for past services. The shares were valued at the then
         contemporaneous offering price of $2.40 per share with the expense of
         $1,860 recognized immediately.

         In January 2004, our wholly owned subsidiary, XStream Brands, Inc.
         entered into an Assignment of Trademark with Squeeze Beverage, Inc.,
         for the assignment of all of its rights and interests in the Mark of
         "SQUEEZE" for carbonated flavored soft drinks and seltzer water,
         including all variations thereof such any spelling, formatives,
         phonetic variations and stylized designs of the same an all goodwill
         associated therewith. The Company issued 20,000 restricted common
         shares valued based upon the then contemporaneous private placement
         offering price of $2.40 per share resulting in a valuation of $48,000.
         (See Note 3)

         The company also issued 3,750 common shares to a consultant valued at
         the then contemporaneous private placement offering price of $2.40 per
         share. The services provided are for a period of six months, (01/01/04
         -06/30/04) with full $9,000 expensed as of June 30, 2004.

         In February 2004, the company issued 500,000 shares in consideration of
         employment services provided to the company: 300,000 shares were issued
         to Theodore Farnsworth, Chairman; 100,000 shares each to Jerome
         Pearring, President/CEO and Barry Willson, Vice President/Secretary.
         The company retained the services of an independent accounting firm to
         perform a valuation analysis on this transaction; the results were as
         follows: The 300,000 shares were valued at $2.50 per share, while the
         two issuances of 100,000 each were valued at $3.00 per share. As the
         shares were issued for past services, the expense of $1,350,000 was
         recognized immediately.

                                       16
<PAGE>
                          XSTREAM BEVERAGE GROUP, INC.
                                AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 2004
                                   (UNAUDITED)

         In February 2004, the company entered into a Termination Agreement,
         Waiver and Release with two prior officers, terminating their
         consulting agreement of June 2003 by issuing 16,268 restricted common
         shares valued at the then contemporaneous offering price of $2.40 per
         share. A loss of $23,921 was recognized immediately as a result of the
         transaction.

         In March of 2004, the company issued 5,208 shares of restricted common
         stock for legal services provided to the company. The shares were
         valued at the then contemporaneous offering price of $2.40 per share
         with the expense of $12,500 recognized immediately.

         The company also issued 147 shares to a consultant pursuant to the
         execution of a 12-month agreement, which stipulates shares to be issued
         quarterly. Per the agreement, the shares were valued at $8.20 per share
         and an expense of $1,206 was recognized immediately.

         The company issued 30,000 shares to a broker for past services. The
         shares were valued at the then contemporaneous offering price of $2.40,
         with the company recognizing an expense of $72,000.

         In March 2004, our wholly owned subsidiary, Beverage Network of Hawaii,
         Inc. (a Florida corporation), acquired all assets and certain
         liabilities of a Hawaii beverage company for 12,500 shares of the
         company's restricted common stock. The shares were valued at the then
         $2.40 contemporaneous private placement offering price resulting in a
         value of $30,000. (See Note 3)

         In March 2004, our wholly owned subsidiary, Beverage Network of
         Massachusetts, Inc. (a Florida corporation), acquired substantially all
         assets and certain liabilities of a Massachusetts beverage company for
         cash and 20,000 shares of the company's restricted common stock valued
         at $48,000 based on the then contemporaneous private placement offering
         price of $2.40 per share. (See Note 3)

         As agreed in January 2004, the Company issued 16,268 common shares to
         two former officers in exchange for $57,418 of liabilities due to them.
         The shares were valued at the best-estimated fair value at that time
         which was the quoted trading price of $5.00 on the agreement date or a
         total $81,339 resulting in a loss on settlement of $23,921.

         During the first quarter, 2004, the company issued 330,707 shares of
         restricted common stock in consideration of subscriptions for the then
         contemporaneous private placement memorandum at an offering price of
         $2.40 per share for gross proceeds of $793,696 and received an
         additional $137,000 pursuant to subscriptions for which 57,083 shares
         were recorded as issuable. Offering costs were $108,370.

         In April of 2004, the company issued 32,500 shares of restricted common
         stock to employees for past services. The stock was valued at the then
         contemporaneous private placement offering price of $2.40 per share
         with company recognizing a compensation expense of $78,000.

         A six-month consulting agreement was executed on April 13, 2004. The
         agreement stipulated that the individual would be issued 5,000 shares
         of restricted common stock. The company issued the shares recognizing
         an expense of $5,000, with a remaining deferred component of $7,000 as
         of June 30, 2004.

                                       17
<PAGE>
                          XSTREAM BEVERAGE GROUP, INC.
                                AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 2004
                                   (UNAUDITED)

         On April 8, 2004, the company executed a contract with a member of its
         advisory board. The term of the contract will continue until either
         Advisor or the Company terminates the agreement or the Advisor's
         participation in the advisory board by sending written notice to the
         other party. The company issued 2,500 restricted shares per the
         stipulations of the contract and recognized an expense of $6,000 based
         on the then contemporaneous offering price of $2.40 per share.

         The company also issued 2,500 shares to a second member of its
         strategic advisory board for the execution of a consulting agreement.
         The term of the contract will continue until either Advisor or the
         Company terminates the agreement or the Advisor's participation in the
         advisory board by sending written notice to the other party. The
         company recognized an expense of $6,000 based on the then
         contemporaneous private placement offering price of $2.40 per share.

         In May 2004, the company issued 30,000 shares to an investment banker
         for past services rendered. The company recognized an expense of
         $72,000 based on the then contemporaneous offering price of $2.40 per
         share.

         On July 9, XBGI's wholly owned subsidiary, BNMD (Beverage Network of
         Maryland, Inc.), executed an asset purchase agreement with Master
         Distributors, Inc. (See Note 17). A stipulation of the agreement was to
         issue shares of XBGI restricted common stock to current employees of
         Master Distributors, Inc. in consideration of services rendered as well
         as being an incentive to remain in their current positions to ensure a
         seamless transition for all parties involved. The company issued 21,250
         shares of stock on June 8, 2004 with the contingency that the
         certificates were to be held by an escrow agent until after the six
         month anniversary date of the closing of the asset purchase agreement.
         The company also issued 96,154 shares to the principal owner of Master
         Distributors, Inc. in advance of the purchase agreement and upcoming
         closing of the transaction. The shares, totaling 117,404, were valued
         at the then contemporaneous offering price of $2.40 with the company
         recording a prepaid acquisition cost of $281,769 as of June 30, 2004.

         In April, May and June 2004, the company issued 69,861 shares,
         previously recorded as issuable as of March 31, 2004.

         During the quarter ended June 30, 2004, the company issued 255,000
         shares of restricted common stock in consideration of subscriptions
         from the then current private placement memorandum at an offering price
         of $2.40 per share for gross proceeds of $612,000. Additionally, as of
         June 2004, 100,000 shares of common stock became issuable for $240,000
         proceeds received as of June 30, 2004. Offering costs were $138,590.

         In May 2004, a note payable of $125,000 was converted into 52,083
         common shares valued at the then contemporaneous private placement
         offering price of $2.40 per share, resulting in no gain or loss.

NOTE 17 - RELATED PARTY

The loan balance due to a corporate principal stockholder at June 30, 2004 was
$162,865.

                                       18
<PAGE>

                          XSTREAM BEVERAGE GROUP, INC.
                                AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 2004
                                   (UNAUDITED)

NOTE 18 - GOING CONCERN

As reflected in the accompanying consolidated financial statements, the Company,
for the six months ended June 30, 2004, has a net loss and cash used in
operations of $3,705,145 and $1,493,292, respectively, and an accumulated
deficit and working capital deficit of $20,573,814 and $1,004,334, respectively,
at June 30, 2004. The ability of the Company to continue as a going concern is
dependent on the Company's ability to further implement its business plan, raise
capital, and generate revenues. The Company continues to raise capital and is
continuing its acquisition plan. The Company believes that these actions provide
it the ability to continue as a going concern. The consolidated financial
statements do not include any adjustments that might be necessary if the Company
is unable to continue as a going concern.

NOTE 19 - SUBSEQUENT EVENTS:

         (A) Asset Purchase Agreement with Master Distributors, Inc.
         -----------------------------------------------------------

         On July 9, 2004, the company's wholly owned subsidiary, Beverage
         Network of Maryland, Inc., (a Florida Corporation) announced it has
         completed, through its wholly owned subsidiary, Beverage Network of
         Maryland, Inc. the acquisition of substantially all of the assets and
         certain liabilities of Master Distributors Inc. (d/b/a Atlantic
         Beverage Company.), a mid-Atlantic distributor of non- alcoholic
         beverages serving Washington, D.C., Virginia and Maryland.

         Atlantic Beverage Company, which operates under the corporate entity of
         Master Distributors, Inc., has a leased warehouse in Jessup, Maryland
         just outside of Baltimore. The consideration and terms of the
         acquisition were 96,154 shares of the Company's restricted common stock
         (valued at $2.40 for accounting purposes), $570,000 in cash, $554,648
         in cash due within 60 days of the closing, a convertible promissory
         note for $2,000,000 payable in 60 equal monthly payments and bearing 6%
         interest and a separate $250,000 payment to be made in 12 equal weekly
         installments commencing July 15, 2004 totaling $3,605,417. The holder,
         at his discretion, may elect to receive XStream stock in lieu of a cash
         payment. The minimum conversion is $25,000 at a predetermined value of
         $5.20 per share. In addition, XStream issued 21,250 common stock shares
         to various non-owner employees as an incentive to retain them.

         Beverage Network of Maryland, Inc, has also entered into an employment
         agreement with existing key management of Master Distributors, Inc. The
         initial term of the agreement is for a period of six months, commencing
         July 1, 2004, at a monthly salary of $18,750. The final term of the
         employment agreement, commencing December 31, 2004, for a period of
         eight months, provides for a per-diem rate of $1,000 for each day that
         XStream may request the services of the employee.

                                       19
<PAGE>

                          XSTREAM BEVERAGE GROUP, INC.
                                AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 2004
                                   (UNAUDITED)

         The following table summarizes the estimated fair values of the assets
         acquired and liabilities assumed at the date of acquisition of Master
         Distributors, Inc. Subject to BNMD's performance and third-party
         valuations, the allocation of purchase price is subject to refinement.

                                                 July 1, 2004
                                                 ------------
         Current assets                           $1,421,087
         Fixed assets                                140,800
         Other assets                                 21,371
         Customer list                             1,973,240
         Goodwill                                  1,760,820
         Current liabilities                        (950,230)
         Loans and notes                            (749,321)
         Other liabilities                           (12,350)
                                                  ----------
             TOTAL PURCHASE PRICE                 $3,605,417
                                                  ==========

         Goodwill recognized is expected to be deducted over a 15 year period
         for tax purposes.

         (B) Reverse Stock Split
         -----------------------

         (See Note 16 - Stockholder's Equity and Recapitalization)

         As of August 12, 2004, the company has received $121,730, net of
         offering costs from the sale of 58,300 shares of restricted common
         stock and the stock is recorded as issuable.

         (C) Private Placement of Series B Preferred Stock and Common Stock
         ------------------------------------------------------------------
         Warrants
         --------

         On August 2, 2004 XStream sold 43.2 shares of Series B Convertible
         Preferred Stock to nine accredited investors and issued the purchasers
         Series A Common Stock Purchase Warrants and Series B Common Stock
         Purchase Warrants in a private transaction exempt from registration
         under the Securities Act of 1933 in reliance on Section 4(2) of that
         act and Rule 506 of Regulation D. XStream received gross proceeds of
         $2,160,000.

         The designations, rights, and preferences of the Series B Preferred
         provide that the Series B shares are (i) the shares have a liquidation
         preference of $50,000 per share; (ii) the shares of our Series B
         Preferred are convertible into shares of XStream common stock equal to
         the liquidation preference divided by the conversion price of $1.50 per
         share. The conversion price is subject to adjustment in the event of
         stock splits and combinations, dividends or distributions,
         reclassifications or reorganizations, or in the event, we issue or sell
         any additional shares of common stock or other securities, which are
         convertible into common stock or common stock equivalents at a price
         less than the then current conversion price. Holders are restricted in
         their ability to convert the Series B Preferred into common stock if at
         the time of conversion the number of shares of common stock to be
         issued, together with all other shares of common stock owned by the
         holder, would result in the holder owning in excess of either 4.9% or
         9.9% of the then issued and outstanding shares of our common stock,
         subject to a waiver by the holder of these limitations upon 61 days
         notice to us,

                                       20
<PAGE>

                          XSTREAM BEVERAGE GROUP, INC.
                                AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 2004
                                   (UNAUDITED)

         The holders have the right to require XStream to redeem all or a
         portion of the shares the Series B Preferred under certain
         circumstances, including (i) upon the occurrence of a Major Transaction
         (as that term is defined in the designations of the Series B
         Preferred). In this event, the redemption price would be equal to 100%
         of the liquidation preference plus all accrued but unpaid dividends,
         and (ii) upon the occurrence of a Triggering Event (as that term is
         defined in the designations of the Series B Preferred). In this event,
         the redemption price would be equal to 120% of the amount of the
         liquidation preference plus all accrued but unpaid dividends. Upon
         either occurrence, at the Company's discretion XStream can pay the
         redemption price in cash or shares of common stock based upon the then
         current conversion price.

         On the date which is 42 months from the date of issuance of the Series
         B Preferred (the "redemption date"), at the option of the holder
         XStream is required to redeem the outstanding shares of Series B
         Preferred into such number of shares of our common stock as equal the
         liquidation preference plus all accrued but unpaid dividends divided by
         the conversion price then in effect, or for cash at a price equal to
         the number of shares of common stock each holder would be entitled to
         receive at the conversion price then in effect multiplied by $1.85.

         So long as the Series B Preferred is outstanding, without the consent
         of the holders of at least 3/4 of the outstanding shares of Series B
         Preferred we cannot (i) amend the provisions of the Series B Preferred,
         (ii) repurchase, redeem or pay any dividends on our common stock or any
         other securities which rank junior to the Series B Preferred, (iii)
         amend our Articles of Incorporation or By-laws in a manner which would
         materially and adversely any right of the Series B Preferred, (iv) make
         any distribution with respect to any junior security, (v) voluntarily
         file for bankruptcy, liquidate our assets or make an assignment for the
         benefit of our creditors (vi) change the nature of our business, or,
         (vii) so long as at least $1,500,000 of the Series B Preferred is
         outstanding (which represents 30 shares), we cannot authorize or create
         any class of securities which ranks senior to our pari passu with the
         Series B Preferred.

         The Series B Preferred has no voting rights, it ranks senior to our
         common stock and to all other classes of our securities which do not
         specifically provide that they are senior to our Series B, but
         subordinate to all of our indebtness, and it pays cumulative
         semi-annual dividends of 6% per annum, payable at our option in cash,
         registered shares of our common stock or additional shares of our
         Series B Preferred. If we choose to pay the dividends in registered
         shares of our common stock, the shares are valued at the then
         conversion price of the Series B Preferred and if we choose to pay the
         dividends in shares of Series B Preferred, those shares are valued at
         the liquidation preference of the stock.

                                       21
<PAGE>

                          XSTREAM BEVERAGE GROUP, INC.
                                AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 2004
                                   (UNAUDITED)

         XStream issued the purchasers of the Series B Preferred two series of
         five year common stock purchase warrants. The Series A Warrants are
         exercisable into a number of shares of our common stock equal to 100%
         of the shares issuable upon the conversion of the Series B Preferred at
         an exercise price of $2.00 per share. The Series B Warrants are
         exercisable into a number of shares of our common stock equal to 50% of
         the shares issuable upon the conversion of the Series B Preferred at an
         exercise price of $4.00 per share. All other terms of the warrants are
         identical, and include:

                  (i) the warrants are transferable at the discretion of the
                  holder,

                  (ii) the number of shares underlying the warrant and the
                  exercise price of each warrant are subject to adjustment in
                  the event of recapitalization, reorganization,
                  reclassifications, consolidations, mergers or a sale of all or
                  substantially all of our assets or properties, stock
                  dividends, subdivisions and combinations and distributions as
                  well as issuance of additional shares of our common stock or
                  any common stock equivalents (as that term is defined in the
                  warrant) at a price less than the then current exercise price
                  of the warrant or if we purchase any shares of our common
                  stock at a price greater than the market value or the current
                  exercise price,

                  (iii) holders are restricted in their ability to exercise the
                  warrants if at the time of exercise the number of shares of
                  common stock to be issued, together with all other shares of
                  common stock owned by the holder, would result in the holder
                  owning in excess of either 4.9% or 9.9% of the then issued and
                  outstanding shares of our common stock, subject to a waiver by
                  the holder of these limitations upon 61 days notice to us, and

                  (iv) beginning 12 months from the effective date of the
                  registration statement covering the resale of the shares of
                  common stock underlying the warrants at our option upon 20
                  days notice we can call up to 100% of the warrants at $0.01
                  per share if the market value of our common stock has been
                  greater than 400% of the conversion price then in effect for
                  our Series B Preferred for 20 trading days immediately
                  preceding the call notice, subject to certain requirements

         XStream paid a 10% cash commission ($216,000) and five year common
         stock purchase warrants to purchase 228,000 shares of our common stock
         at an exercise price of $1.50 per share as an offering cost, which is
         charged against the proceeds of the offering for financial accounting
         purposes. In connection with the transaction, XStream also agreed to
         pay the attorney's fees of the purchasers in an amount not to exceed
         $35,000. XStream also granted the purchasers a three year right of
         first offer and refusal for certain subsequent financings, other than
         those we may enter into with Laurus Master Fund, Ltd. or any entity,
         which Laurus Master Fund, Ltd. may introduce to us.

         The Company also granted the purchasers registration rights covering
         the shares of our common stock issuable upon the conversion of the
         Series B Preferred and the exercise of the Series A and Series B
         warrants, including the shares underlying the warrants issued to the
         placement agent (the "Registrable Securities"). We have agreed to file
         a registration statement with the Securities and Exchange Commission
         within 30 days of the closing of this offering which, when declared
         effective, will permit the public resale of the Registrable Securities.
         If we should fail to file the registration statement on a timely basis
         or if the registration statement is not declared effective by the
         Securities and Exchange Commission within 120 days from its filing

                                       22
<PAGE>

                          XSTREAM BEVERAGE GROUP, INC.
                                AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 2004
                                   (UNAUDITED)

         date, or in certain other instances specified in the registration
         rights agreement, we are required to pay the holders liquidated damages
         equal to 2% of their initial investment for the first month or any
         portion of that month and thereafter 1.25% for each successive month or
         any portion of that month until the registration statement is effective
         or we have cured the other events of default.

         XStream computed a beneficial conversion feature amount for the
         transaction equal to $2,160,000, which will be recognized as a
         constructive dividend ratably over the 42 month term to the redemption
         date.

                                       23

<PAGE>

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
         RESULTS OF OPERATIONS

         The following discussion and analysis should be read in conjunction
with our financial statements and the accompanying notes.

Overview

         We develop, market, sell and distribute alternative beverage category
natural sodas, fruit juices and energy drinks (sometimes referred to as New Age
Beverages). Our goal is to become a leading brand owner and distributor of
beverage products through multiple distribution channels. We believe that our
acquisition strategy is key to our ability to grow our company. Since our
acquisition of Total Beverage Network in April 2003 through June 30, 2004, we
have acquired additional beverage distribution companies together with a natural
juice company and certain intellectual property rights related to other
alternative beverage names. The acquisitions included:

         *        April 2003 - Total Beverage Network.
         *        April 2003 - Universal Florida Beverage Distributors
         *        May 2003 - Finish-Line Distributors
         *        January 2004 - SQUEEZE trademark
         *        March 2004 - Pacific Rim Natural Juice Company
         *        March 2004 - Maui Juice Company trademark
         *        March 2004 - Ayer Beverages.

         In July 2004 we acquired substantially all of the assets of a fourth
company, Master Distributors, Inc. Our business strategy includes the
acquisitions of additional distribution companies and proprietary value-added
brands currently engaged in various aspects of the alternative beverage
industry. Our success is dependent on our ability to make these additional
acquisitions and then to effectively integrate their operations into our
company.

         The formation of Coca Cola Enterprises and then The Pepsi Bottling
Group began the demise of the independent beverage distributors, whose fate was
sealed when Cadbury Schweppes began buying up strong brands such as Snapple, Dr
Pepper, Seven Up and Mistic and running them through a few strong regional
distribution companies, such as S.E. Atlantic in the southeast U.S. The former
strong independents have consolidated and acquired many smaller competitors.
Most of the surviving small distributors are under- resourced, entrepreneurial
operations with weak core brand business and inadequate infrastructures.

         It is within this group of companies, distributors with solid
management but without the means to grow, that we have identified potential
acquisition targets. Our business objective is to market a full range of
proprietary new age brands. To achieve this goal, we are acquiring and
developing brands and products that we believe are appropriate and desirable for
target consumers, as well as acquiring a network of beverage distribution
companies. Our strategy is to complete our network of small to medium sized
beverage distributors in major markets throughout the United States. We believe
that we will generate stronger than industry average margins by selling
value-added proprietary brands and third party value-added brands that are
dependent upon our multi-market distribution network. We also believe that the
acquisition of beverage distribution companies will give us access to our target


                                       24
<PAGE>

customers as well as enabling us to earn revenues by distributing a portfolio of
third party brands.

RESULTS OF OPERATIONS

         Our sales for the three months and six months ended June 30, 2004
increased $673,516, or approximately 122% and $1,225,653, or approximately 202%,
from the comparable periods in fiscal 2003. The increase in sales is
attributable to the implementation of our acquisition strategy which we believe
is the key driver to grow our company. Our sales for the three and six months
ended June 30, 2004 includes revenues attributable to our Total Beverage
Network, Universal Florida Beverage Distributors and Finish-Line Distributors
for the entire period reported as compared to sales reported for only a portion
of the comparable period in fiscal 2003 as a result of the timing of the
acquisitions. We anticipate that our sales will continue to increase during the
balance of fiscal 2004 as a result of the continued implementation of our
acquisition strategy.

         The cost of goods sold as a percentage of sales for the three months
and six months ended June 30, 2004 was approximately 70% and approximately 75%,
respectively, of sales as compared to approximately 66% and approximately 61%,
respectively, for the comparable periods in fiscal 2003. We reported gross
profit as a percentage of sales of approximately 30% and approximately 25%,
respectively, for the three and six months ended June 30, 2004 as compared to
approximately 34% and approximately 39% for the comparable three and six months
periods in fiscal 2003. The decline in our operating margins is attributable to
a change in product mix sold as a result of the expansion or our business.
During the comparable periods in fiscal 2003 our product offerings were limited
to our own product which generates greater margins whereas in six months ended
June 30, 2004 we generated sales from both our proprietary products as well as
the sale of third party beverage brands sold through our distributors. While the
third party products have lower margins, we believe that the increased volume of
sales attributable to a broader product line will in time create better margins
and contribute to our overall profitability.

         Total operating expenses for the three months and six months ended June
30, 2004 increased approximately 93% and approximately 172%, respectively, from
the three months and six months ended June 30, 2003. For the six months ended
June 30, 2004 as compared to the six months ended June 30, 2003, this increase,
which is attributable to the growth of our company during fiscal 2004, primarily
includes:


         *        an increase of approximately $ 2,257,513, or approximately
                  744%, in compensation expense. Included in this increase is an
                  increase of approximately $1,689,905 which reflects non-cash
                  compensation paid which includes $1,350.000 attributable to
                  the issuance of 500,000 shares of our common stock to the
                  directors in February 2004, We do not presently anticipate we
                  will record any similar non-cash expenses during the balance
                  of fiscal 2004. We anticipate that the cash component of our
                  compensation expense will remain relatively constant during
                  the balance of fiscal 2004, subject to increases if we acquire
                  additional companies and their related personnel,

         *        an increase of approximately $54,950, or approximately 188%,
                  in rent expense which is attributable to the addition of
                  physical locations as a result of our various acquisitions
                  during fiscal 2004,

                                       25
<PAGE>

         *        a guarantee fee of $167,000 during fiscal 2004 for which there
                  was no comparable response during fiscal 2003. This guarantee
                  fee related to our acquisition of Beverage Network of
                  Connecticut and our issuance of shares of our common stock as
                  substitution of collateral for a commercial line of credit,
                  and

         *        an increase of approximately $434,894, or approximately 629%,
                  in other general and administrative expenses which includes
                  approximately $367,000 of non-recurring consulting fees.

         The foregoing increases were partially offset by a decrease of
approximately $249,393, or approximately 40%, in consulting fees and a decease
of approximately $49,708, or approximately 26%, in professional fees.

         During the balance of fiscal 2004 we anticipate that our operating
expenses will continue to increase, both in relation to the integration of
additional acquired companies into Xstream Beverage, as well as professional
fees related to both our reporting requirements under the Securities Exchange
Act of 1934 and fees related to financings and acquisitions we consummate.

         Total other income/expense for the three months and six months ended
June 30, 2004 decreased approximately 84% and approximately 89%, respectively,
from the three months and six months ended June 30, 2003. This decrease is
primarily attributable to one-time settlements we recognized during the six
months ended June 30, 2003. As a result of the $3,000,000 principal amount
secured convertible note we issued in May 2004 to Laurus Master Fund, Ltd. as
well as the Series B Convertible Preferred Stock we sold in August 2004, both in
financing transactions to provide us with capital to implement our acquisition
strategy, we anticipate that our interest expense will significantly increase
during the balance of fiscal 2004.

LIQUIDITY AND CAPITAL RESOURCES

         We have a history of losses and at June 30, 2004 we had an accumulated
deficit of $20,573,814 and a working capital deficit of $1,004,334. At June 30,
2004 we also have $2,451,154 of restricted cash which represents a portion of
net proceeds from the sale of the $3 million secured convertible note to Laurus
Master Fund, Ltd. in May 2004..

         Net cash used in operating activities for the six months ended June 30,
2004 was $1,493,292 as compared to $365,031 for the six months ended June 30,
2003. The increase was primarily attributable to:

         *        an increase of approximately $1,666,285 in our net loss,

         *        a decrease of $219,980 in amortization of deferred consulting
                  expenses,

         *        an increase of $22,291 in amortization of debt discount to
                  interest expense,

         *        an increase of $32,827 in amortization of intangibles,

                                       26
<PAGE>

         *        a decrease of $61,129 on loss on conversion of debt,

         *        an increase of $375,000 in non-cash stock based loan fee,

         *        an increase of $70,068 in interest income on subscription
                  receivable,

         *        an increase of $580,441 of non-cash expenses related to
                  expenses and settlements,

         *        an decrease of approximately $128,644 in accounts payable,

         *        an increase of $21,224 in other current and non-current
                  assets,

         *        a increase of $72,387 in accounts receivable,

         *        an increase of approximately $11,387 in inventory, and

         *        a decrease of approximately $42,457 in other current
                  liabilities..

         Net cash used in investing activities for the six months ended June 30,
2004 was $158,687 as compared to $144,123 in the comparable six month period in
fiscal 2003. The funds expended in fiscal 2004 primarily represent the value of
securities issued by us in acquisitions. Net cash provided by financing
activities for the six months ended June 30, 2004 was $4,105,669 as compared to
$462,856 for the six months ended June 30, 2003. The increase in fiscal 2004 is
primarily attributable to proceeds from the sale of shares of our common stock
and convertible secured note, net of offering costs. Initially, $2,855,000 of
the proceeds of the secured convertible term note were held in a restrictive
account controlled by Laurus Master Fund, Ltd. Of this amount, approximately
$1,737,000 has been released to us subsequent to June 30, 2004 for working
capital purposes and was used by us to close our acquisition of the assets of
Atlantic Beverage. The balance of the funds held in the restricted account are
controlled by Laurus Master Fund, Ltd. until we consummate one or more
acquisitions which will be subject to the approval of Laurus Master Fund, Ltd.
or until all of the outstanding principal amount of the secured convertible term
note is converted into shares of our common stock.

         The report from of our independent auditor on our audited financial
statements at December 31, 2003 contains an explanatory paragraph regarding our
ability to continue as a going concern. While a significant portion of our net
loss for the six months ended June 30, 2004 related to non-cash expenses, and
subsequent to June 30, 2004 we have raised an additional $2,160,000 in working
capital through the sale of our Series B Convertible Preferred Stock, in order
to expand sales of our existing products we will require funds to increase our
product inventory, move our subsidiary to a new facility in Maui and equip that
facility with additional manufacturing equipment, and for receivable financing.
We will also require additional capital to continue to implement our acquisition
strategy. We do not presently have any commitments for additional working
capital and there are no assurances that such capital will be available to us
when needed or upon terms and conditions which are acceptable to us. In
addition, if we raise additional working capital through the issuance of debt or
additional dividend paying securities our future interest and dividend expenses
will increase. If we are unable to secure additional working capital as needed,
our ability to grow our sales and meet our operating and financing obligations
as they become due could be in jeopardy.

                                       27
<PAGE>

RECENT ACCOUNTING PRONOUNCEMENTS

         In December 2002, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards (SFAS) No. 148, Accounting
for Stock- Based Compensation - Transition and Disclosure. Statement 148
provides alternative methods of transition to Statement 123's fair value method
of accounting for stock-based employee compensation. It also amends the
disclosure provisions of Statement 123 and APB Opinion No. 28, Interim Financial
Reporting, to require disclosure in the summary of significant accounting
policies of the effects of an entity's accounting with respect to stock- based
employee compensation on reported net income and earnings per share in annual
and interim financial statements. Statement 148's amendment of the transition
and annual disclosure requirements of Statement's 123 are effective for fiscal
years ending after December 15, 2002. Statement 148's amendment of the
disclosure requirements of Opinion 28 is effective for interim periods beginning
after December 15, 2002. The adoption of the disclosure provisions of Statement
148 as of December 31, 2002 did not have a material impact on our financial
condition or results of operations.

         In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity." This
Statement establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. This Statement is effective for financial instruments entered into or
modified after May 31, 2003, and otherwise is effective for the first interim
period beginning after June 15, 2003, with certain exceptions. The adoption of
SFAS No. 150 did not have a significant impact on our consolidated financial
position or results of operations.

         In November 2002, the FASB issued FASB Interpretation No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others" (FIN 45). FIN 45 requires that
upon issuance of a guarantee, a guarantor must recognize a liability for the
fair value of an obligation assumed under a guarantee. FIN 45 also requires
additional disclosures by a guarantor in its interim and annual financial
statements about the obligations associated with guarantees issued. The
recognition provisions of FIN 45 are effective for any guarantees issued or
modified after December 31, 2002. The disclosure requirements are effective for
financial statements of interim or annual periods ending after December 15,
2002. The adoption of this pronouncement does not have a material effect on our
earnings or financial position.

         In January 2003, the FASB issued Interpretation No. 46 (FIN 46),
"Consolidation of Variable Interest Entities." FIN 46 requires that if an entity
has a controlling financial interest in a variable interest entity, the assets,
liabilities, and results of activities of the variable interest entity should be
included in the consolidated financial statements of the entity. FIN 46 requires
that its provisions are effective immediately for all arrangements entered into
after January 31, 2003. We do not have any variable interest entities created
after January 31, 2003. For those arrangements entered into prior to January 31,
2003, the FIN 46 provisions are required to be adopted at the beginning of the
first interim or annual period beginning after June 15, 2003. We have not
identified any variable interest entities to date and will continue to evaluate
whether it has variable interest entities that will have a significant impact on
its consolidated balance sheet and results of operations.

CRITICAL ACCOUNTING POLICIES

         The preparation of financial statements in conformity with generally
accepted accounting principles (GAAP) requires management to make estimates and


                                       28
<PAGE>

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 may differ from those estimates.

ITEM 3.  CONTROLS AND PROCEDURES

         Our management, which includes our Chief Executive Officer, have
conducted an evaluation of the effectiveness of our disclosure controls and
procedures (as defined in Rule 13a-14(c) promulgated under the Securities and
Exchange Act of 1934, as amended) as of a date (the "Evaluation Date") as of the
end of the period covered by this report. Based upon that evaluation, our
management has 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 in other factors that could significantly affect our internal
controls subsequent to the end of the period covered by this report based on
such evaluation.

PART II. OTHER INFORMATION

Item 1.  Legal Proceedings

         None.

Item 2.  Changes in Securities

         All per share information contained in this Quarterly Report gives
proforma effect to the one for 20 reverse stock split of Xstream Beverage's
common stock effected on July 6, 2004.

         Between April 2004 and June 2004 we issued an aggregate of 72,500
shares of our common stock to consultants for services rendered to us and we
recognized an expense of $2.40 per share. These securities were issued in
reliance on an exemption from registration provided by Section 4(2) of the
Securities Act of 1933.

         On May 14, 2004, we entered into a securities purchaser agreement with
Laurus Master Fund, Ltd. This transaction was exempt from registration under the
Securities Act of 1933 in reliance on an exemption provided by Section 4(2) of
said act. The securities purchase agreement provided for the purchase and sale
of our secured convertible term note in the principal amount of $3,000,000.In
connection with the securities purchase agreement, we issued a 10 year common
stock purchase warrants to Laurus Master Fund, Ltd. to purchase 225,000 shares
of our common stock with an exercise price of $6.40 per share for the first
75,000 shares, $7.80 per share for the next 75,000 shares and $9.00 per share
for the remaining 75,000 shares. The warrant contains a cashless basis whereby
Laurus Master Fund, Ltd. rather than paying the exercise price in cash may
surrender a number of warrants equal to the exercise price of the warrants being
exercised. A complete description of the terms of the Laurus Master Fund, Ltd.
transaction and copies of the relevant documents are contained in the Report on
8-K as filed on May 25, 2004. H.C. Wainwright & Co. acted as placement agent for


                                       29
<PAGE>

us in this transaction and we paid them a cash commission equal to 10% of the
gross proceeds received by us and issued them placement agent warrants for an
aggregate of 470,000 shares of our common stock.

         Between April 9, 2004 and June 30, 2004 we sold an aggregate of 255,000
shares of our common stock to 30 investors in a private placement exempt from
registration under the Securities Act of 1933 in reliance on an exemption
available under Section 4(2) of said act and Regulation D thereof. We received
gross proceeds of approximately $612,000 which we used for general working
capital.

         In June 2004 we issued an aggregate of approximately 96,154 shares of
our common stock to Master Distributors, Inc. as consideration for our
acquisition of the assets of Beverage Network of Maryland, Inc. Please see Note
3 to the Notes to our Consolidated Financial Statements appearing elsewhere
herein. These securities were issued in reliance on an exemption from
registration provided by Section 4(2) of the Securities Act of 1933. In
connection with this transaction, we also issued 15 employees of Beverage
Network of Maryland an aggregate of 21,250 shares of our common stock, valued at
$2.40 per share, as retention bonuses which we recognized as compensation
expense.

         In June 2004 we issued approximately 52,083 shares of our common stock
as satisfaction of a $125,000 note payable which resulted in no gain or loss.
These securities were issued in reliance on an exemption from registration
provided by Section 4(2) of the Securities Act of 1933.

Item 3.  Defaults upon Senior Securities

         None.

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) Exhibits.

Exhibit No.                   Description
-----------                   -----------

31.1         Rule 13a-14(a)/15d-14(a) certification of Chief Executive Officer
31.2         Rule 13a-14(a)/15d-14(a) certificate of Principal Financial Officer
32.1         Section 1350 certification of Chief Executive Officer

         (b) Reports on Form 8-K

         1. On July 21, 2004 we filed a Report on Form 8-K regarding our
acquisition of certain assets of Atlantic Beverage Company;

                                       30
<PAGE>

         2. On July 21, 2004 we filed a Report on Form 8-K regarding the one for
20 reverse stock split of our common stock effective July 16, 2004 and the
corresponding reduction in the number of authorized shares of our common stock
from 100,000,000 to 5,000,000;

         3. On August 3, 2004 we filed a Report on Form 8-K/A which included the
audited financial statements related to our acquisition of Finish Line
Distributors; and

         4. On August 5, 2004 we filed a Report on Form 8-K disclosing our sales
of shares of our Series B Convertible Preferred Stock and related common stock
purchase warrants.

                                       31
<PAGE>

                                   SIGNATURES

         In accordance with the requirements of the Exchange Act, the registrant
has duly caused this report to be signed on its behalf by the undersigned as
duly authorized.

                                  Xstream Beverage Group, Inc.

                                  By: /s/ Jerry Pearring
                                      -----------------------
                                  Jerry Pearring, President,
                                  Principal Executive Officer

Dated: August 19, 2004

                                       32