================================================================================

                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-QSB

(Mark One)

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

                For the quarterly period ended March 31, 2006

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

                 For the transition period from______to________

                       Commission file number: 331-30158A

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

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

            3511, W. Commercial Blvd., Suite 209, Fort Lauderdale, Florida 33309
            --------------------------------------------------------
                    (Address of principal executive offices)

                                  954-598-7997
                                  ------------
                           (Issuer's telephone number)

                                       N/A
                          ----------------------------
              (Former name, former address and former fiscal year,
                         if changed since last report)

Check whether the issuer is not required to file reports pursuant to Section 13
or 15(d) of the Exchange Act[X]

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 [ ]

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


                      APPLICABLE ONLY TO CORPORATE ISSUERS

State the number of shares outstanding of each of the issuer's classes of common
equity as of the latest practicable date: 36,552,211 shares of common stock as
May 19, 2006.

Transitional Small Business Disclosure Format: Yes [ ] No [X]

================================================================================

<PAGE>


         CERTAIN CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING INFORMATION

         Certain statements in this quarterly report 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, our ability to raise sufficient working
capital to fund our ongoing operations, pay our obligations and implement our
strategic initiatives, 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 and readers should carefully review this quarterly
report in its entirety. 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. These
forward-looking statements speak only as of the date of this quarterly report,
and you should not rely on these statements without also considering the risks
and uncertainties associated with these statements and our business.

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


                                       2



<PAGE>


                          XSTREAM BEVERAGE NETWORK, INC.
                                AND SUBSIDIARIES

                                      INDEX

                                                                            Page
                                                                            ----
Part I.  Financial Information

Item 1.  Financial Statements

Consolidated Balance Sheet as of March 31, 2006 (Unaudited)...................4

Consolidated Statements of Operations (Unaudited)
for the three months ended March 31, 2006
and March 31, 2005 (Restated).................................................5

Consolidated Statements of Cash Flows (Unaudited)
for the three months ended March 31, 2006
and three months ended March 31, 2005.........................................6

Notes to Consolidated Financial Statements (Unaudited)
as of March 31, 2006..........................................................7

Item 2.  Management's Discussion and Analysis or Plan of Operation............30

Item 3.  Controls and Procedures..............................................37

Part II.  Other Information...................................................38

Item 1.  Legal Proceedings....................................................38

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds..........40

Item 3.  Default on Senior Securities.........................................40

Item 4.  Submission of Matters to a Vote of Security Holders..................41

Item 5.  Other Information....................................................41

                SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

To the extent that the information presented in this Quarterly Report on Form
10-QSB for the quarter ended March 31, 2006 discusses financial projections,
information or expectations about our products or markets, or otherwise makes
statements about future events, such statements are forward-looking. We are
making these forward-looking statements in reliance on the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. Although we
believe that the expectations reflected in these forward-looking statements are
based on reasonable assumptions, there are a number of risks and uncertainties
that could cause actual results to differ materially from such forward-looking
statements. These risks and uncertainties are described, among other places in
this Quarterly Report, in "Management's Discussion and Analysis or Plan of
Operation."

In addition, we disclaim any obligations to update any forward-looking
statements to reflect events or circumstances after the date of this Quarterly
Report. When considering such forward-looking statements, you should keep in
mind the risks referenced above and the other cautionary statements in this
Quarterly Report.
                                       3

<PAGE>

PART I.  FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

                 XSTREAM BEVERAGE NETWORK INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEET
                                   (UNAUDITED)
<TABLE>
<CAPTION>
                                                                                        March 31, 2006
                                                                                        --------------
<S>                                                                                      <C>
ASSETS
      Current Assets:
          Cash                                                                           $      6,517
          Accounts receivable, net of allowance for doubtful                                  651,589
          accounts of $142,297
          Other receivables                                                                   332,307
          Inventory                                                                           798,902
          Prepaid expenses                                                                     56,219
                                                                                         ------------
              Total current assets                                                          1,845,534
                                                                                         ------------

      Property and equipment                                                                  358,613
      Less: Accumulated depreciation                                                         (160,398)
                                                                                         ------------
      Property and equipment, net                                                             198,215
                                                                                         ------------
      Other Assets:
          Capitalized Funding Costs, net of accumulated amortization of $3,311,258          1,676,565
          Trademarks                                                                          303,017
          Customer lists, net of accumulated amortization of $706,612                       1,304,978
          Goodwill                                                                            892,315
          Other assets                                                                         67,624
                                                                                         ------------
              Total Other Assets                                                            4,244,499
                                                                                         ------------
Total Assets                                                                             $  6,288,248
                                                                                         ============
LIABILITIES & STOCKHOLDERS' DEFICIENCY
      Liabilities:
          Current Liabilities:
              Notes payable                                                              $    791,018
              Loans payable - related party                                                   100,355
              Convertible term loan, net of discount of $984,368                            3,020,741
              Current portion of long term debt                                             2,568,023
              Accounts payable                                                              1,738,779
              Overdraft liability                                                              14,032
              Accrued expenses                                                              2,417,353
              Dividends payable                                                                53,885
              Derviative Liability                                                         12,244,865
              Other current liabilities                                                        37,998
                                                                                         ------------
                  Total Current Liabilities                                                22,987,049
                                                                                         ------------

          Long Term Liabilities:
              Long term notes, net of discount of $2,331,625                                3,368,375
              Preferred Series B ($0.001 par value,
                47 Shares issued and outstanding),
                net of discount of $891,426                                                 1,268,571
                                                                                         ------------
                  Total long term liabilities                                               4,636,946

                                                                                         ------------
                  Total Liabilities                                                        27,623,995
                                                                                         ------------
      Stockholders' Deficiency
          Preferred Stock, $0.001 par value,
            Series A, 200,000 shares issued and outstanding                                       200
          Common Stock, $0.001 par value, 50,000,000 shares authorized,
            36,018,136 issued and outstanding                                                  36,018
          Additional paid in capital                                                       40,076,725
          Accumulated other comprehensive loss                                             (8,763,157)
          Accumulated deficit                                                             (45,411,800)
          Less: subscription receivable                                                    (5,647,822)
          Less: deferred costs                                                             (1,625,911)
                                                                                         ------------
                  Total stockholders' deficiency                                          (21,335,747)
                                                                                         ------------
TOTAL LIABILITIES & STOCKHOLDERS'  DEFICIENCY                                            $  6,288,248
                                                                                         ============
</TABLE>

     See accompanying notes to unaudited consolidated financial statements.


                                       4
<PAGE>
                 XSTREAM BEVERAGE NETWORK INC. and SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (Unaudited)
<TABLE>
<CAPTION>
                                                          For The Three Months Ended
                                                                 March 31,
                                                       --------------------------------
                                                           2006              2005
                                                       ------------   -----------------
                                                                      RESTATED - NOTE 1
<S>                                                    <C>               <C>
Sales                                                  $  2,667,586      $  2,533,686

Cost of goods sold                                        2,197,200         2,049,933
                                                       ------------      ------------
Gross profit                                                470,386           483,753

    Marketing, selling, general & administrative          1,473,233         2,254,327
                                                       ------------      ------------
       Total operating expense                            1,473,233         2,254,327
                                                       ------------      ------------
Loss from operations                                     (1,002,847)       (1,770,574)

Other Income/(Expense)
    Other income                                              6,493            10,000
    Interest income                                              --             1,526
    Interest expense                                     (4,869,319)       (1,344,038)
    Change in fair value of derivative                   (4,029,608)       10,136,310
    Other expense                                        (1,626,367)              (10)
    Gain on disposal of fixed assets                        (11,430)               --
                                                       ------------      ------------
       Total other income/(expense)                     (10,530,231)        8,803,788
                                                       ------------      ------------
Net (loss) income                                       (11,533,078)        7,033,214
                                                       ------------      ------------

Unrealized loss on subscription receivable                 (521,053)               --
                                                       ------------      ------------
Comprehensive (loss) income                            $(12,054,131)     $  7,033,214
                                                       ============      ============
Preferred stock dividends                                   (32,878)          (33,390)
                                                       ------------      ------------

NET (LOSS) INCOME AVAILABLE TO COMMON STOCKHOLDERS     $(11,565,956)     $  6,999,824
                                                       ============      ============

Net (loss) income per share - Basic                    $      (0.37)     $       2.07
                                                       ============      ============

Net (loss) income per share - Diluted                  $      (0.37)     $       1.95
                                                       ============      ============

Weighted Average Shares Outstanding - Basic              30,981,381         3,380,528
                                                       ============      ============

Weighted Average Shares Outstanding - Diluted            30,981,381         3,580,528
                                                       ============      ============
</TABLE>

     See accompanying notes to unaudited consolidated financial statements.


                                       5
<PAGE>
                 XSTREAM BEVERAGE NETWORK INC. and SUBSIDIARIES
                             CONSOLIDATED CASH FLOWS
                      FOR THE THREE MONTHS ENDED MARCH 31,
                                   (Unaudited)
<TABLE>
<CAPTION>
                                                                             2006              2005
                                                                         ------------      ------------
<S>                                                                      <C>               <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss                                                                 $(11,533,078)     $  7,033,214

Adjustments to reconcile net loss to
  net cash used in operating activities:
Bad debts                                                                         354                --
Depreciation                                                                   22,645            22,605
Amortization of deferred consulting and compensation                          406,260           105,000
Fair value of derivative liabilities                                          765,529         1,143,991
Amortization of debt discount and fees to interest expense                  2,666,757           485,373
Amortization of intangibles                                                   100,579           107,969
Amortization of capital funding costs                                       1,254,598           264,689
Liquidated damages for failure to timely file registration statement          261,000            81,000
Default premium -  Laurus Master  Fund                                        166,281                --
Stock based loan fee                                                          375,769                --
Stock based services                                                          218,997            12,391
Loss on disposition of fixed assets                                            11,430                --
Change in the fair value of derivative liabilities                          4,029,608       (10,136,310)

Changes in operating assets and liabilities:
Accounts receivable                                                          (186,802)           36,044
Inventory                                                                     (61,137)           88,043
Other current and non-current assets                                           18,613           381,876
Accounts payable                                                              109,341            (9,116)
Accrued expenses                                                              137,512            27,822
Other current and non-current liabilities                                       1,250            14,616
                                                                         ------------      ------------

Net cash used in operating activities                                      (1,234,494)         (340,793)
                                                                         ------------      ------------

CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of equipment                                                           --            (5,887)
Proceeds from disposition of fixed assets                                       3,420                --
                                                                         ------------      ------------

Net cash provided by (used in) investing activities                             3,420            (5,887)
                                                                         ------------      ------------

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from non - related party loans                                     4,883,531           300,000
Payment of Laurus default premium                                            (692,839)               --
Repayment of non - related party loans                                     (2,840,224)          (55,441)
Capitalized funding costs                                                    (254,500)               --
Cash overdraft                                                                 (2,121)          127,159
Proceeds from related party loans                                              50,000                --
                                                                         ------------      ------------
Net cash provided by financing activities                                   1,143,847           371,718
                                                                         ------------      ------------
Net cash increase                                                             (87,227)           25,038
Cash at beginning of year                                                      93,744            84,326
                                                                         ------------      ------------
Cash at end of period                                                    $      6,517      $    109,364
                                                                         ============      ============
Supplemental Disclosure of Cash Flow Information:

Cash paid during the period for:
     Interest paid                                                       $    836,935      $    117,602
     Taxes paid                                                                    --                --
</TABLE>

     See accompanying notes to unaudited consolidated financial statements.

                                       6
<PAGE>
                         XSTREAM BEVERAGE NETWORK, INC.
                                AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 MARCH 31, 2006

NOTE 1 - ORGANIZATION:
---------------------

         XStream Beverage Network, Inc. is an operating brand development and
         distribution company and completed the first five acquisitions
         anticipated in its business strategy as follows:

         Beverage Network of South Florida, ("BNSF)          April 9, 2003
         Beverage Network of Connecticut, Inc. ("BNCT")        May 1, 2003
         Beverage Network of Hawaii ("BNHI")                 March 1, 2004
         Beverage Network of Massachusetts ("BNMA")         March 15, 2004
         Beverage Network of Maryland, Inc. ("BNMD")          July 1, 2004

         These acquisitions were accounted for under the purchase method of
         business combinations.

NOTE 2 - STATEMENT OF ACCOUNTING PRESENTATION AND OTHER INFORMATION:
-------------------------------------------------------------------

         BASIS OF PREPARATION AND SUMMARY OF ACCOUNTING POLICIES

         The accompanying unaudited consolidated financial statements of Xstream
         Beverage Network, Inc. and its subsidiaries (XStream) 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.

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

         REVENUE RECOGNITION

         The Company follows the criteria of the Securities and Exchange
         Commission Staff Accounting Bulletin 104 for revenue recognition. 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" and
         (EITF) Issue 02-16 "Accounting By a Customer (Including a Reseller) for
         Certain Considerations Received from Vendors." Accordingly, the Company
         does not recognize revenue on free promotional products, discounts or
         rebates received. These incentives are recognized as a reduction of the
         cost of products. Promotional products given to customers are
         recognized as a cost of sales, net of any charge-backs received from
         vendors. Cash incentives provided to customers are recognized as a
         reduction of the related sale price, and, therefore, are a reduction in
         sales.

         INTANGIBLE ASSETS

         Acquired goodwill is considered to have an indefinite life pursuant to
         Statement of Financial Accounting Standards No. 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. Acquired trademarks are
         considered to have an infinite life but will be subject to impairment
         analysis on an annual basis. In accordance with SFAS No. 142, the
         Company is required to evaluate the carrying value of its intangible
         assets (goodwill, trademarks and customer lists) subsequent to their
         acquisition. Between April 2003 through December 31, 2004, the Company
         acquired five beverage distribution companies together with a natural
         juice company and certain intellectual property rights related to other
         new age beverage names. The Company's intangible assets, including
         goodwill, trademarks and customers lists, were acquired in these
         acquisitions.

                                       7
<PAGE>
                         XSTREAM BEVERAGE NETWORK, INC.
                                AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 MARCH 31, 2006

         DERIVATIVE INSTRUMENTS

         The Company accounts for its liquidated damages pursuant to Emerging
         Issue Task Force ("EITF ")05-04, View C, "The Effect of a Liquidated
         Damages Clause on a Freestanding Financial Instrument Subject to EITF
         Issue No. 00-19, "Accounting for Derivative Financial Instruments
         Indexed to, and Potentially Settled in, a Company's Own Stock".
         Pursuant to EITF 05-04, View C, the liquidated damages paid in cash or
         stock are accounted for as a separate derivative, which requires a
         periodical valuation of its fair value and a corresponding recognition
         of liabilities associated with such derivative. The Company accounts
         for its embedded conversion features and freestanding warrants pursuant
         to SFAS No. 133, "Accounting for Derivative Instruments and Hedging
         Activities", which requires a periodic valuation of their fair value
         and a corresponding recognition of liabilities associated with such
         derivatives. The recognition of derivative liabilities related to the
         issuance of shares of common stock is applied first to the proceeds of
         such issuance, at the date of issuance, and the excess of derivative
         liabilities over the proceeds is recognized as other expense in the
         accompanying consolidated financial statements. The recognition of
         derivative liabilities related to the issuance of convertible debt is
         applied first to the proceeds of such issuance as a debt discount, at
         the date of issuance, and the excess of derivative liabilities over the
         proceeds is recognized as other expense in the accompanying
         consolidated financial statements. Any subsequent increase or decrease
         in the fair value of the derivative liabilities is recognized as other
         expense or other income, respectively.

         SHARE-BASED PAYMENTS

         In December 2004, the FASB issued SFAS No. 123(R), "Share-Based
         Payment," which replaces SFAS No. 123 and supersedes APB Opinion No.
         25. Under SFAS No. 123(R), companies are required to measure the
         compensation costs of share-based compensation arrangements based on
         the grant-date fair value and recognize the costs in the financial
         statements over the period during which employees are required to
         provide services. Share-based compensation arrangements include stock
         options, restricted share plans, performance-based awards, share
         appreciation rights and employee share purchase plans. In March 2005
         the SEC issued Staff Accounting Bulletin No. 107, or "SAB 107". SAB 107
         expresses views of the staff regarding the interaction between FAS No.
         123(R) and certain SEC rules and regulations and provides the staff's
         views regarding the valuation of share-based payment arrangements for
         public companies. SFAS No. 123(R) permits public companies to adopt its
         requirements using one of two methods. On April 14, 2005, the U.S.
         Securities and Exchange Commission adopted a new rule amending the
         compliance dates for SFAS 123R. Companies may elect to apply this
         statement either prospectively, or on a modified version of
         retrospective application under which financial statements for prior
         periods are adjusted on a basis consistent with the pro forma
         disclosures required for those periods under SFAS 123. The Company is
         currently evaluating which transitional provision and fair value
         methodology it will follow. The Company expects that any expense
         associated with the adoption of the provisions of SFAS 123R will have a
         material impact on its results of operations. Effective January 1,
         2006, the Company has fully adopted the provisions of SFAS No. 123R and
         related interpretations as provided by SAB 107. The Company did not
         issue any stock options as of the quarter ending March 31, 2006.

         RECENT ACCOUNTING PRONOUNCEMENTS

         In May 2005, the Financial Accounting Standard Board ("FASB") issued
         Statement No. 154, "Accounting Changes and Error Corrections, a
         replacement of APB Opinion No. 20, Accounting Changes, and Statement
         No. 3, Reporting Accounting Changes in Interim Financial Statements"
         (SFAS 154). SFAS 154 changes the requirements for the accounting for,
         and reporting of, a change in accounting principle. Previously, most
         voluntary changes in accounting principles were required to be
         recognized by way of a cumulative effect adjustment within net income
         during the period of the change. SFAS 154 requires retrospective
         application to prior periods' financial statements, unless it is
         impracticable to determine either the period-specific effects or the
         cumulative effect of the change. SFAS 154 is effective for accounting
         changes made in fiscal years beginning after December 15, 2005;
         however, the Statement does not change the transition provisions of any
         existing accounting pronouncements. We do not believe adoption of SFAS
         154 will have a material effect on our financial position, results of
         operations or cash flows.

         In June 2005, the Emerging Issues Task Force ("EITF") issued EITF 05-2,
         "The Meaning of Conventional Convertible Debt Instrument in Issue No.
         00-19". EITF 05-2 retained the definition of a conventional convertible
         debt instrument as set forth in EITF 00-19, and which is used in
         determining certain exemptions to the accounting treatments prescribed
         under SFAS 133, "Accounting for Derivative Instruments and Hedging
         Activities". EITF 05-2 also clarified that certain contingencies
         related to the exercise of a conversion option would not be outside the
         definition of "conventional" and determined that convertible preferred
         stock with a mandatory redemption date would also qualify for similar
         exemptions if the economic characteristics of the preferred stock are
         more akin to debt than equity. EITF 05-2 is effective for new
         instruments entered into and instruments modified in periods beginning
         after June 29, 2005. We adopted the provisions of EITF 05-2 on July 1,
         2005, which did not have a material effect on our financial statements.

                                       8
<PAGE>
                         XSTREAM BEVERAGE NETWORK, INC.
                                AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 MARCH 31, 2006

         In July 2005, the FASB issued FASB Staff Position ("FSP") 150-5,
         "Accounting Under SFAS 150 for Freestanding Warrants and Other Similar
         Instruments on Redeemable Shares". FSP 150-5 clarifies that warrants on
         shares that are redeemable or puttable immediately upon exercise and
         warrants on shares that are redeemable or puttable in the future
         qualify as liabilities under SFAS 150, regardless of the redemption
         feature or redemption price. The FSP is effective for the first
         reporting period beginning after June 30, 2005, with resulting changes
         to prior period statements reported as the cumulative effect of an
         accounting change in accordance with the transition provisions of SFAS
         150. We adopted the provisions of FSP 150-5 on July 1, 2005, which did
         not have a material effect on our financial statements.

         In July 2005, the FASB issued EITF 05-6, "Determining the Amortization
         period for Leasehold Improvements Purchased After Lease Inception or
         Acquired in a Business Combination", which addressed the amortization
         period for leasehold improvements made on operating leases acquired
         significantly after the beginning of the lease. The EITF is effective
         for leasehold improvements made in periods beginning after June 29,
         2005. We adopted the provisions of EITF 05-6 on July 1, 2005, which did
         not have a material impact to the Company's financial position, results
         of operations and cash flows. Other accounting standards that have been
         issued or proposed by the FASB or other standards-setting bodies that
         do not require adoption until a future date are not expected to have a
         material impact on the consolidated financial statements upon adoption.

         RECLASSIFICATION

         Certain amounts in the 2005 consolidated financial statements have been
         reclassified to conform to the 2006 presentation. Such
         reclassifications had no effect on the reported net loss.

         RESTATEMENT OF 2005

         There were adjustments to the 2005 statement of operations attributable
         to SFAS 133 and EITF 00-19. The adjustments were as follows:

              (A) Selling, General & Administrative: A net decrease of $137,860.

              (B) Interest Expense: An increase of $603,559. This was
                  attributable to a reclassification of $156,651 in loan fees
                  from selling, general and administrative expenses. $278,408
                  was reclassified from dividends paid and the balance of
                  $168,500 was a result of expense attributable to derivatives.

              (C) Other Income: An increase of $10,136,310 attributable to the
                  change in fair value of derivatives.

              (D) Preferred Stock Dividends: A decrease of $287,408. This was
                  attributable to a reclassification to interest expense.

NOTE 3 - NET LOSS PER COMMON SHARE:
----------------------------------

         Basic net income (loss) per common share (basic EPS) does not include
         common stock equivalents and is computed by dividing net income (loss)
         available to common stockholders 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 three months ended
         March 31, 2006 and 2005, the diluted loss per share is the same as
         basic loss per share since the effect of all common stock equivalents
         was antidilutive, with the exception of 200,000 common shares
         equivalents pursuant to shares issuable pursuant to the conversion of
         200 preferred a shares during the three-month period ended March 31,
         2005. The total outstanding warrants which have been excluded from the
         calculation of loss per share, were 9,957,548 and 5,035,904 at March
         31, 2006 and 2005, respectively. In addition the company has Series A
         Cumulative Convertible Preferred Stock that could convert into 200,000
         and 200,000 shares of common stock and Series B Convertible Preferred
         Stock that could convert into 5,145,550 and 3,628,510 shares of common
         stock at March 31, 2006 and 2005, respectively. The Company also has
         Preferred Series B dividends that could convert to 119,744 shares and
         58,867 shares of common stock as of march 31, 2006 and 2005,
         respectively. The preferred series b stockholders also have accrued
         liquidated damages for the failure to file the sb-2 registration
         statement. These could convert to 426,616 shares and 136,800 shares of
         common stock as of March 31, 2006 and 2005, respectively. The Company
         has Convertible Notes that could convert into 353,381 and 384,615
         shares of common stock as a result of the Master Distributors
         acquisition; 4,444,444 and 3,628,510 shares of common stock as a result
         of the laurus secured note (see note 19 - Long Term Notes Payable) and
         7,234,706 shares and 305,031 shares, as a result of the Term Notes (See
         Note 14 - Convertible Term Loan) at March 31, 2006 and 2005. The
         potential dilutive effects of the convertible preferred stock,
         dividends, liquidated damages and convertible notes have been excluded
         from the calculation of net loss per common share.

         Basic earnings per share (EPS) for the periods ended March 31, 2006 and
         2005 were determined by dividing net income for the years by the
         weighted average number of common shares outstanding. Diluted earnings
         per share for the periods ended March 31, 2006 and 2005 included the
         effect of 200,000 shares of the Company's series "A" convertible
         preferred stock, as more fully described in Note 21(Stockholders'
         Deficiency and Recapitalization). Each share of the Company's series
         "A" convertible preferred stock is convertible into one share of common
         stock. In 2006, common stock equivalents were excluded from the
         computation of diluted earnings per share as they would be
         antidilutive.

         The reconciliations of the denominators of the basic and diluted EPS
         computations are as follows:


                                                       MARCH 31,    MARCH 31,
                                                         2006         2005
                                                     -----------   ----------

         Denominator for Basic EPS                    30,981,381    3,380,528
                                                     ===========   ==========


         Weighted average effect on denominator for
         Basic EPS                                    30,981,381    3,380,528

         Effect of series "B" convertible preferred
         stock                                                --      200,000
                                                     -----------   ----------


         Denominator for Diluted EPS                  30,981,381    3,580,528
                                                     ===========   ==========

                                       9
<PAGE>
                         XSTREAM BEVERAGE NETWORK, INC.
                                AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 MARCH 31, 2006


NOTE 4 - OTHER RECEIVABLES:
--------------------------

         The Company began conducting business with a distribution partner
         servicing the Pacific Northwest, in an effort to expand its current
         distribution channel during fiscal 2005. As a result, the Company
         purchased raw materials and inventory to initiate the distributor
         partnership; the balance due from the new distributing partner as of
         March 31, 2006 is $68,129.

         The subscription receivable balance of $259,308 as of March 31, 2006
         represented the remaining proceeds from the $4,000,000 secured term
         loan issued by Laurus Master Fund, remitted to the Company in April
         2006 (See Note 19 - Long Term Notes Payable).

         The remaining balance of $4,870 is comprised of returned checks from
         current customers and miscellaneous credits with vendors.

NOTE 5 - INVENTORY:
------------------

         Inventories are stated at the lower of cost or market determined in a
         "first-in, first-out" basis. The inventory balance consisted of the
         following:

                                                      March 31, 2006
                                                      --------------
         Resalable products                            $  765,221
         Proprietary brand raw materials                   33,681
                                                       ----------
         Total:                                        $  798,902
                                                       ==========

NOTE 6 - PREPAID EXPENSES:
-------------------------

         The prepaid expense balance consisted of the following:

                                                      March 31, 2006
                                                      --------------
         Warehouse/Office Supplies                     $   18,118
         Service Contracts                                  7,763
         Rent                                               8,135
         Insurance                                         22,203
                                                       ----------
         Total:                                        $   56,219
                                                       ==========

NOTE 7 - FIXED ASSETS:
---------------------

         Depreciation expense for the three months ending March 31, 2006 and
         March 31, 2005 was $22,645 and $22,605, respectively.

         Property and equipment at March 31, 2006 is as follows:

                                                      March 31, 2006
                                                      --------------
         Delivery Trucks                               $   95,199
         Warehouse Equipment                               38,987
         Coolers                                           72,777
         Office Equipment                                  99,947
         Furniture & Fixtures                              14,945
         Leasehold Improvements                            36,758
                                                       ----------
                                                          358,613
         Less: Accumulated depreciation                  (160,398)
                                                       ----------
         Net                                           $  198,215
                                                       ==========

                                       10
<PAGE>
                         XSTREAM BEVERAGE NETWORK, INC.
                                AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 MARCH 31, 2006

NOTE 8 - CAPITALIZED FUNDING COSTS, NET:
---------------------------------------

         The table below summarizes the balance of capitalized funding costs as
         of March 31, 2006:

                                                            March 31, 2006
                                                            --------------
         Capitalized Funding Costs                            $4,987,823

         Accumulated Amortization:                            (3,311,258)
                                                              ----------
                  Total:                                      $1,676,565
                                                              ==========

         In March 2004, the Company entered into a placement agent agreement to
         assist with capital raising activities. The Company closed on first of
         two financing transactions on May 14, 2004 (See Note 15 - Current
         Portion, Long Term Debt) upon which a placement agent fee was paid
         according to the terms of the agreement. The Company issued 426,250
         common stock purchase warrants, at a fair market value of $1,879,809
         (valued using the Black-Scholes model) resulting in capitalized funding
         costs of $1,879,809 to be amortized over the 36 month term of the
         financing agreement (See Note 21 - Stockholders' Deficiency and
         Recapitalization). The debt instrument attributed to these warrants was
         refinanced on March 31, 2006; the Company amortized the remaining
         balance of capitalized funding costs in the amount of $861,579 for the
         three months ending March 31, 2006, while recognizing $156,651 for the
         same period in 2005.

         In connection with the same financing, the Company paid from net
         proceeds $131,000 in legal and closing costs. Due to the debt
         refinancing, the Company amortized the balance of capitalized funding
         costs of $60,042 for the three months ending March 31, 2006; amortized
         funding costs for the three months ending March 31, 2005 were $10,917.
         (See Note 19 - Long Term Notes Payable)

         On March 31, 2006, the Company refinanced the Secured Convertible Loan
         with the Laurus Master Fund. The Company paid from net proceeds
         $254,500 in legal and closing costs which will be amortized over the 36
         month term of the notes.

         The Company closed a second financing transaction on July 30, 2004 (See
         Note 19 - Long Term Notes Payable ). The Company issued 423,529 common
         stock purchase warrants, realizing a fair value of $1,359,712 recorded
         to capitalized funding costs (valued using the Black-Scholes model);
         the value is being amortized over the 42 month term of the financing
         agreement (See Note 21 - Stockholders' Deficiency and
         Recapitalization). The Company recognized amortized funding costs of
         $97,122 and $97,122, respectively, for the three months ending March
         31, 2006 and 2005. The remaining balance of unamortized funding costs
         attributable to this transaction is $712,230.

         In June 2005, the Company entered into a series of related agreements
         with Cogent Capital Corp. and 16 institutional accredited investors
         pursuant to which the Company has issued 19,736,848 common shares at a
         purchase price of $0.76 per share in exchange for a total of
         $15,000,000 in U.S. government bonds. To execute the agreement, Cogent
         was to receive $300,000 as an initiation fee along with $28,500 for
         legal fees. These costs are being amortized over the 42 month term of
         the agreement; the Company recognized an expense of $23,577 with a
         remaining balance of $258,035 as of March 31, 2006. There were no
         comparable expenses for the three months ending March 31, 2005. (see
         Note 18 - Derivative Liability) The Company also issued 394,729
         warrants to an investment banker as a placement agent fee. The warrants
         had a term of five years at an exercise price of $0.76 and were
         considered to have a fair value of $240,902 (valued using a
         Black-Scholes Model); an expense of $17,221 was recognized, with a
         remaining balance of $188,474 as of March 31, 2006. There were no
         comparable expenses for the three months ending March 31, 2005.

         Pursuant to the terms of the Financial Advisory and Investment Banking
         Agreement executed in April 25, 2005, the Company paid a placement
         agent fee of $301,950, or 10% of the gross units sold in the debt
         financing placement along with legal fees and administrative expenses
         of $106,804. The fees are being amortized over the term of notes which
         have maturity dates ranging from July 6, 2006 through November 8, 2006.
         The Company recognized an expense of $100,952 with a remaining balance
         of $142,811 as of March 31, 2006 (see Note 14 - Convertible Term Loan).
         The agreement also contains a provision whereby the Placement agent
         would be granted warrants to purchase shares of restricted common in
         consideration of placement agent fees for the same debt financing
         placement. As of March 31, 2006 the Company has issued 699,253 warrants
         with an exercise price of $0.76, a term of five years and a fair value
         of $384,666 (valued using the Black-Scholes model). The Company
         recognized an expense of $98,083, with a remaining balance of $120,515.

                                       11
<PAGE>
                         XSTREAM BEVERAGE NETWORK, INC.
                                AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 MARCH 31, 2006

NOTE 9 - TRADEMARKS:
--------------------

         Trademarks consist of the following:

                                                      March 31, 2006
                                                      --------------
         Maui Juice                                    $   48,000
         Squeeze Soda                                     255,017
                                                       ----------
            Total:                                     $  303,017
                                                       ==========

         In March and January 2004, respectively, the Company acquired the
         Trademarks of Maui Juice Company and Squeeze. Management believes that
         these trademarks have indefinite life cycles based on the market life
         of the products. In accordance with SFAS No. 142, the Company has
         determined that the trademarks acquired for Maui Juice Company and
         Squeeze have indefinite lives, as supported by the Company's ability
         and intent to renew the trademarks as legally required and management's
         belief that these products have indefinite life cycles based on the
         market.

NOTE 10 - CUSTOMER LIST:
-----------------------

         The table below summarizes the balance of customer lists as of March
         31, 2006:

                                                            March 31, 2006
                                                            --------------
         Beverage Network of Hawaii, Inc. ("BNHI")            $   38,350
         Beverage Network of Maryland, Inc. ("BNMD")           1,973,240
                                                              ----------
                                                               2,011,590

         Accumulated Amortization:                              (706,612)
                                                              ----------
                  Total:                                      $1,304,978
                                                              ==========

         As a result of the acquisitions of the assets of Pacific Rim Natural
         Juice Company and Master Distributors, Inc., the Company recorded an
         identifiable intangible asset classified as customer lists. Acquired
         customer lists are considered to have a finite life pursuant to SFAS
         No. 142 to be amortized over the period the asset is expected to
         contribute to the future cash flows. The customer lists are being
         amortized over a five- year period. Management does not believe that
         there have been any events or circumstances that have resulted in the
         need for a revision to the remaining period of amortization as defined
         in SFAS No. 142.

NOTE 11 - GOODWILL:
------------------

         Acquired goodwill is considered to have an indefinite life pursuant to
         SFAS No. 142 and accordingly is not amortized but subject to periodic
         impairment tests.

         The table below summarizes the balance of goodwill as of March 31,
         2006:

                                                      March 31, 2006
                                                      --------------
         Beverage Network of Hawaii, Inc. ("BNHI")     $   44,695
         Beverage Network of Maryland, Inc. ("BNMD")      847,620
                                                       ----------
                  Total:                               $  892,315
                                                       ==========

         Pursuant to SFAS No. 142, goodwill of a reporting unit is required to
         be tested for impairment on an annual basis and between annual tests in
         certain circumstances. Testing for impairment, beyond an annual basis,
         is required if there is a significant adverse change in the entity
         carrying the goodwill. The Company evaluates the carrying value of
         intangible assets as of the fiscal year end for all entities.
         Management does not believe that there have been any events or
         circumstances that have resulted in the need for a revision to the
         remaining period of amortization as defined in SFAS No. 142.

                                       12
<PAGE>
                         XSTREAM BEVERAGE NETWORK, INC.
                                AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 MARCH 31, 2006

NOTE 12 - OTHER ASSETS:
----------------------

         The balance of other assets in the amount of $67,624 as of March 31,
         2006 is comprised of rental security deposits.

NOTE 13 - LOANS PAYABLE AND LOANS PAYABLE, RELATED PARTY:
--------------------------------------------------------

         XStream Beverage, Inc. ("XBI"), a principal stockholder of the Company
         owned by XStream's Chairman, periodically loans money to XStream. In
         March 2004, the principal shareholder advanced $25,000 to the Company;
         XStream's loans from XBI are non-interest bearing demand note with no
         specified term. The balance due was $50,355 at March 31, 2006.

         In March 2006, a shareholder advanced $50,000 to the Company as an
         interest bearing demand note at 6% per annum with no specified term.

         Loans payable at March 31, 2006 were as follows:

         Loans Payable:

         Bank Line of Credit 6% per annum(1)                     $    8,148
         Automotive equipment loan (1)                                  923
         March 2004, interest bearing demand note 8%
          per annum, due June 2004 (loan in arrears) (1)              3,048
         March 2004, non-interest bearing, due April 2005            72,934
          due April, 2005 (loan in arrears) (1)
         July 2004, interest bearing demand note 6%
          per annum, (2) (loan in default)                           90,965
         December 2005 - May 2006, 60 day demand notes,
          fixed interest                                            615,000
                                                                  ----------
           Total Loans Payable - Other                              791,018

           Loans Payable, Related Party                             100,355
                                                                 ----------
           Total Loans Payable                                   $  891,373
                                                                 ==========
         ----------
         (1) Resulted from the acquisition of Beverage Network of Massachusetts,
             Inc.("BNMA")
         (2) Resulted from the acquisition of Beverage Network of Maryland, Inc.
             ("BNMD")

         On September 29, 2005 we received a notice of default under the terms
         of an unsecured promissory note issued in connection with our purchase
         of Master Distributors, Inc. The note holder is demanding payment of
         $90,965 which includes outstanding principal and interest due. We do
         not know at this time what action, if any, the note holder may take.

         From December 2005 to March 2006, the Company executed sixty day demand
         notes to investors that resulted in $550,000 of proceeds to the
         Company. The notes contain maturity dates ranging from February 23,
         2006 to May 1, 2006 and contain provisions for fixed interest that
         amounts to $65,000. There is a provision in the notes whereby the
         holders received, in aggregate, 532,500 shares of restricted common
         stock which the Company valued at $183,725. The value is being
         amortized over the term of the notes; interest expense of $129,175,
         with a remaining deferred balance of $51,923 was recognized for the
         three months ending March 31, 2006. The Company also issued 1,875,000
         share of its common stock as a pledge of collateral for the notes (See
         Note 21 (B) - Stockholders' Deficiency and Recapitalization).

NOTE 14 - CONVERTIBLE TERM LOAN:
-------------------------------

         The balance of the convertible term notes, accrued interest and related
         debt discount at March 31, 2006 is as follows:

                   Term note 18% per annum                       $  625,000
                   Term note 12% per annum                        3,019,500
                   Accrued interest                                 360,609
                   Less: debt discount                             (984,368)
                                                                 ----------
                                                                 $3,020,741
                                                                 ==========

                                       13
<PAGE>
                         XSTREAM BEVERAGE NETWORK, INC.
                                AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 MARCH 31, 2006

         The Company secured $725,000 from investors resulting from a debt
         placement offering originating in February 2005. The debt instruments
         are convertible term notes at 18% per annum, with maturity dates
         ranging from September 1 to November 15, 2005. The net proceeds
         received by the Company was $725,000 to be used as general working
         capital. As a pledge for collateral, the Company issued 100,000 shares
         of restricted common stock to be held in escrow. Should the Company
         default, the exercise price of the warrants automatically reduce by 5%
         for each 30 day period in which the Company remains in default.
         Attached to the notes was a provision whereby the purchasers were
         issued common stock warrants, with a five year term and exercisable at
         $1.50, in an amount equiv- alent to the face value of each note. The
         notes also contain, at the discretion of the holder, a conversion
         option contingent upon a future secondary offering. The 725,000
         warrants issued to the debt holders were valued at $635,511 and
         recorded to derivative liability (See Note 21 (C) - Stockholders'
         Deficiency and Recapitalization).

         In September 2005, we received a notice of default under the terms of
         two secured promissory notes issued by us in to investors in the
         aggregate principal amount of $200,000. These notes were due and
         payable by us on September 1, 2005. As collateral for these notes we
         pledged 100,000 shares of our common stock and Theodore Farnsworth, our
         CEO, pledged 100,000 shares of our common stock owned by him. The
         Company has repaid $100,000 of the principal balance, however, the note
         holders are demanding payment of $233,279. In February 2006, the
         Company executed an agreement in consideration of 2,500,000 shares of
         restricted common stock, to defer payments of these note holders until
         May 10, 2006. The shares were valued at 1,050,000 and the Company
         recognized interest expense of $272,222 with a remaining deferred
         balance of $777,778 as of March 31, 2006 (See Note 21 (B) -
         Stockholders' Deficiency and Recapitalization).

         In January 2006, the Company executed an agreement with the remaining
         note holders to defer all payments until March 31, 2006. In
         consideration, the Company issued an aggregate of 550,000 restricted
         shares valued at $148,500 and recognized the entire amount as interest
         expense for the three months ending March 31, 2006 (See Note 21 (B) -
         Stockholders' Deficiency and Recapitalization).

         As of July 5, 2005, the Company has completed the sale of $3,019,500
         units of its securities to 44 institutional and/or accredited
         investors. The units consisted of $100,000 principal amount of
         convertible notes, warrants to purchase 100,000 shares of common stock
         at an exercise price of $0.76 per share with a term of five years and
         10,000 shares of common stock. The maturity date of the notes range
         from July 6 through November 8, 2006 and bear interest at the rate of
         12% per annum payable at the maturity date or upon conversion of the
         notes if prior to the maturity date. The holders of the notes have the
         option to convert the notes into common shares of the Company at a
         price equal to the public offering price of common shares of the
         Company in any underwritten registered public offering involving common
         stock of the Company less a discount of 20%. If the Company does not
         complete a public offering prior to maturity, the holders may, at their
         option, convert their notes at maturity into common shares at a price
         of $0.76 per share, subject to adjustment in the event of any dilution
         events. The issuance of the Laurus Master Fund convertible loan on
         March 31, 2006 triggered an adjustment in the conversion price from
         $0.76 to $0.45. The transaction resulted in net proceeds of $2,610,766
         to be used for general working capital, after payment of offering costs
         and fees of $408,734. As of March 31, 2006, the Company reflected a
         balance of principal and interest due of $3,255,618. The Company
         allocated $2,885,290 to debt discount; it recognized interest expense
         from debt discount amortization of $716,236 with a remaining balance of
         $984,368 to be amortized through fiscal 2006. (See Note 18 - Derivative
         Liability)

         The 301,950 shares of common stock, issued to the debt holders, were
         valued at $236,471 and are being amortized over the term of the notes.
         The Company recognized an expense of $59,376 with a remaining deferred
         component of $75,487 as of March 31, 2006. (See Note 21 (B) -
         Stockholders' Deficiency and Recapitalization).

         Notice of Default:

         The event of default under the Laurus Secured Convertible Term Note
         (see Note 19 - Long Term Notes Payable), prior to being paid as of
         March 31, 2006, has triggered an event of default under unsecured
         promissory notes in the aggregate principal amount of $3,019,500 which
         we issued to an aggregate of 44 purchasers in a private placement of
         our securities between June and November, 2005. At the option of the
         holders of greater than 50% of the face amount of these outstanding
         notes, the notes will become immediately due and payable. We do not
         know at this time what action, if any, the note holders may take.

                                       14
<PAGE>
                         XSTREAM BEVERAGE NETWORK, INC.
                                AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 MARCH 31, 2006

NOTE 15 - CURRENT PORTION, LONG TERM DEBT & DEBT DISCOUNT:
---------------------------------------------------------

         The current portion of long term debt and debt discount as of March 31,
         2006 is as follows:

         Interest bearing demand note 6% per annum, due
         April 2012 (Maui Trademark)                      $  173,601
         Secured 6% convertible note ("BNMD")              2,094,422
         Senior secured note ("Laurus")*                     300,000
                                                          ----------
          * (see Note 19 - Long Term Notes payable)        2,568,023
                                                          ==========

         On July 9, 2004, the Company's wholly owned subsidiary, Beverage
         Network of Maryland, Inc. ("BNMD"), (a Florida Corporation) announced
         it has completed the acquisition of substantially all of the assets and
         certain liabilities of Master Distributors, Inc. Pursuant to the terms
         of the agreement, the Company issued a convertible promissory note for
         $2,000,000 payable in 60 equal monthly payments and bearing 6% interest
         per annum. The Company executed an amended agreement to defer all
         payment of the note until June 15, 2005. 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 January 2005, the Company issued 150,000 shares of restricted
         common stock to the principal owner of Master Distributors, Inc. as
         consideration for deferring all debt payments until June 15, 2005. In
         September 2005, the Company received a notice of default from the
         principal owner of Master Distributors. We do not know at this time
         what action, if any, Master Distributors, Inc. may take. The balance
         due as of March 31, 2006 is $2,094,422.

NOTE 16 - ACCRUED EXPENSE-SALARIES, ACCRUED EXPENSE-OTHER:
---------------------------------------------------------

         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
         March 31, 2006 was as follows:

         Accrued Expense-Salaries: Officers/Directors     $  458,357
         Accrued Expense-Salaries: Other                     292,472
         Accrued Expense-Liquidated Damages                  171,977
         Accrued Expense-Cogent                            1,150,470
         Accrued Expense-Taxes                               335,171
         Accrued Expense-Other                                 8,906
                                                          ----------

                                Total Accrued Expenses:   $2,417,353
                                                          ==========

         The Company has accrued salaries of $458,357, in aggregate, due to the
         Chairman, President and Vice President. The remaining accrued salaries
         balance of $292,472 consists of $255,564 of current payroll due to
         non-officers/directors and $36,908 due to a former employee.

         The Series B preferred shareholders have a provisions contained within
         the registration rights agreement that stipulate they are entitled to
         liquidated damages if the SB-2 registration statement is not effective
         by a specified date. The Series B preferred offering resulted in gross
         proceeds of $2,160,000 with liquidated damages accruing at 2% for month
         1 (September 2004) and at 1.25% for each month thereafter (October 2004
         - March 2006) until the registration is effective. The Company has the
         option to remit payment of the liquidated damages by issuing more
         series B preferred stock. The balance of accrued series B preferred
         liquidated damages is $171,977 as of March 31, 2006.

         The Laurus Master Fund, Ltd. registration rights agreement executed in
         May 2004 also contained a provision for liquidated damages; this
         transaction resulted in gross proceeds of $3,000,000 with liquidated
         damages accruing at 2% per month for not having the SB-2 effective
         (commencing August 14, 2004). On March 31, 2006 the secured convertible
         loan associated with the registration rights agreement was refinanced
         and the balance of $1,170,000 of accrued liquidated damages was paid
         with the issuance of the $2 million secured convertible note on March
         31, 2006. (See Note 19- Long Term Notes Payable)

         In June 2005, The Company has entered into a series of related
         agreements with Cogent Capital Corp. and 16 institutional accredited
         investors pursuant to which the Company has issued 19,736,848 common
         shares at a purchase price of $0.76 per share in exchange for a total
         of $15,000,000 in U.S. government bonds. Under the terms of the equity
         swap, the 15,789,472 common shares and the bonds are maintained in
         escrow until the earlier of 42 months or such time as all of these
         shares are covered by an effective registration statement filed with
         the SEC. During the period of the escrow, Cogent Capital Corp. will
         also receive from the swap agreement, interest earned on the
         $15,000,000 at a rate equal to LIBOR +125 basis points, payable
         monthly. The balance of accrued expenses and interest due to Cogent as


                                       15
<PAGE>

                         XSTREAM BEVERAGE NETWORK, INC.
                                AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 MARCH 31, 2006

         of March 31, 2006 is $1,150,470. (See Note 22 - Subscription
         Receivable)

         Under the terms of the Secured Convertible Term Note issued by us to
         Laurus Master Fund, Ltd. in May 2004, this judgment constituted an
         event of default. As security for this note we have granted a security
         interest to Laurus Master Fund, Ltd. in all of our assets, the
         obligations under the secured convertible term note have been
         guaranteed by our subsidiaries, and we have pledged the stock of all of
         our current and any future subsidiaries acquired by us during the term
         of the secured convertible term note. As a result of this default,
         Laurus Master Fund, Ltd. is entitled to 2% default premium in addition
         to the stated interest rate currently accrued on the remaining balance
         of the note per month. On March 31, 2006 the secured convertible note
         was refinanced and the balance paid. The balance of accrued interest
         associated with the default premium in the amount of $332,563 was
         forgiven.

         The Company is legally pursuing a former payroll processor, Florida
         Employer Solutions, Inc. (FES), for restitution in the form of
         reimbursement of payroll taxes monies that the payroll processor failed
         to pay on behalf of the Company. The balance due is $335,171 as of
         March 31, 2006.

NOTE 17 - DIVIDENDS PAYABLE:
---------------------------

         The Series B Preferred pays cumulative semi-annual dividends of 6% per
         annum, payable at the Company's option in cash, registered shares of
         the Company's common stock or additional shares of Series B Preferred.
         The dividends payable as of March 31, 2006 was $53,885.

NOTE 18 - DERIVATIVE LIABILITY:
------------------------------

         The Company recognized liabilities for the following derivatives at the
         date of their issuance during the three-month period ended March 31,
         2006 and 2005, respectively:

                                           During the three-month period
                                                  Ended March 31,
                                           -----------------------------
                                                 2006         2005
                                              ----------   ----------
         Embedded conversion
         features and liquidated damages
         and freestanding warrants issued
         to investors-
         $2,000,000 senior convertible note   $2,599,716   $       --
         Term loans                                   --      203,050
         Freestanding warrants issued to
         placement agents
         Other warrants                               --       23,931
                                              ----------   ----------
                                              $2,599,716   $  226,981

         The fair value of the derivative liabilities at March 31, 2006 are as
         follows:

         Embedded conversion features and
           liquidated damages and
           freestanding warrants issued
           to investors-
           $3,000,000 convertible note          $   299,255
           $2,000,000 senior convertible note     2,599,716
           Series B preferred shares              4,294,044
           Term loans                             3,936,701
           Freestanding warrants issued to
           placement agents
           $3,000,000 convertible note              137,110
           Series B preferred shares                138,937
           Term loans                               243,680
           Other warrants                           595,422
                                                -----------
                                                $12,244,865

                                       16
<PAGE>
                         XSTREAM BEVERAGE NETWORK, INC.
                                AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 MARCH 31, 2006

         The Company used the following assumptions to measure the identified
         derivatives as follows:

Embedded conversion feature and liquidated damages
<TABLE>
<CAPTION>
                                                    During the three-month
                                                  Period ended March 31, 2006   At March 31, 2005
                                                  ---------------------------   -----------------
<S>                                                       <C>                   <C>
         Market price:                                    $     0.40                $     0.40
         Conversion price:                                $     0.45                $0.45-1.50
         Term:                                               3 years            2.55-4.0 years
         Volatility:                                             146%                      146%
         Risk-free interest rate:                               4.73%                     4.73%
         Maximum liability:
         $3,000,000 convertible note                      $9,000,000                $       --
         $2,000,000 senior convertible note                3,680,000                        --
         Series B preferred shares                         5,817,159                 5,817,159
         Term loans                                        7,573,218                 3,544,738
</TABLE>

Freestanding warrants
                                                At March 31, 2006
                                                -----------------
         Market price:                                $    0.40
         Exercise price:                              $0.20-100
         Term:                                  2.75-4.25 years
         Volatitlity:                                       146%
         Risk-free interest rate:                          4.73%
         Outstanding other
           options and warrants                       9,957,548

         The embedded conversion features are as follows:

         Reset Feature Following Subsequent Financing-: 50% for all debt
         financing, which is the effective discount to market value the Company
         would offer in the event we provide for a subsequent private placement
         financing.

         Liquidated Damage Clause: 46% and 48.75% for the convertible note and
         the preferred Series B shares, respectively, which is the difference,
         in months between the time the underlying shares are free- trading and
         the grace period to obtain a registration statement, multiplied by the
         liquidated damage rate of ranging between 1.25% to 2% per month.

         Prepayment Penalty: 25% for the convertible note, which is the stated
         penalty rate in the event of prepayment.

         Default Premium: 25% and 23% for the convertible notes and the
         Preferred Series B shares, respectively, which is the stated premium in
         event of default.

         Incremental Default Interest Rate: 54% for the convertible notes, which
         is the difference between the default rate and the stated rate,
         multiplied by the term of the loan.

         During the three-month period ended March 31, 2006 and 2005, the
         Company allocated $2,000,000 and $203,050, respectively, of the fair
         value of the derivatives issued in connection with the debt, at their
         date of issuance, to debt discount. The excess of the fair value of the
         derivative liabilities over the debt discount has been recognized as
         other expense, which amounts to $765,528 and $0 during the three-month
         period ended March 31, 2006 and 2005, respectively.

         During the three-month period ended March 31, 2005, the Company
         allocated $23,931 of the fair value of the derivatives issued in
         connection with services performed by consultants to consulting
         expenses.

         The variation in fair value of the derivative liabilities between the
         measurement dates amounted to an increase of approximately $(4.1)
         million and a decrease of $(5.4) million during the three-month period
         ended March 31, 2006 and 2005, respectively. The decrease in fair value
         of the derivative liabilities has been recognized as other income and
         the increase has been recognized as other expense.

                                       17
<PAGE>
                         XSTREAM BEVERAGE NETWORK, INC.
                                AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 MARCH 31, 2006

NOTE 19 - LONG TERM NOTES PAYABLE:
---------------------------------

         The current portion of long term debt and debt discount as of March 31,
         2006 is as follows:

         43.2 shares of Series B Convertible Preferred Stock        2,160,000
         Senior Secured convertible note ("Laurus")                 2,000,000
         Senior secured note ("Laurus")                             4,000,000
         Less: Debt discount Convertible Preferred Stock             (891,429)
         Less: Debt discount Secured convertible note ("Laurus")   (2,000,000)
         Less: Debt discount on senior secured note                  (331,625)
         Less: Current portion of senior secured note *              (300,000)
                                                                   ----------
                                                                   $4,636,946
                                                                   ==========
         ---------
         * (see Note 15 - Current Portion, Long Term Debt)

         On August 2, 2004 Xstream Beverage Group, Inc. sold 43.2 shares of its
         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. Pursuant to the
         terms of the placement documents the debt instrument is convertible or
         redeemable at the discretion of the holder at the end of the 42 month
         term. The balance of the $2,160,000 gross proceeds, less debt discount
         of $891,429, is reflected as of March 31, 2006 (See Note 21 (A) -
         Stockholders' Deficiency and Recapitalization).

         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 per annum of prime plus two percent and has a term of three years
         (May 14, 2007).

         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 $3 million to be amortized over
         the term of the note. On March 31, 2006, the debt was retired as a
         result of issuing the $4 million secured, non- convertible note. The
         remaining balance of debt discount, $1,375,000, was amortized to
         interest expense for the three months ending March 31, 2006.

         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. The SB-2 registration was originally submitted on September 30,
         2004, and resubmitted on October 14, 2005. The registration statement
         has not been declared effective as of March 31, 2006. The Company
         recorded liquidated damages attributable to the registration statement
         in the amount of $1,170,000 which were paid with the issuance of the $2
         million secured convertible term loan as of March 31, 2006. (See Note
         16 - Accrued Expenses Salaries, Accrued Expense Other).

         On March 31, 2006, the Company issued a $4 million secured note, a $2
         million senior secured convertible note and a $4 million line of credit
         ("Laurus Debt"). The Laurus Debt bears interest at the highest of 9% or
         prime plus 2% and matures in March 2009. Interest is payable monthly.

         Principal on the $4 million secured note is payable monthly as follows:
         $75,000 a month between December 2006 and November 2007, $137,500 a
         month between December 2007 and November 2008, $187,500 a month between
         December 2008 and March 2009, with the remaining balance due in March
         2009.

         Additionally, if the Company's cash flows from operating activities
         adjusted for the aforementioned principal repayments ("Excess Cash
         flows") exceeds the fixed principal repayments, the Company shall make
         additional principal repayments of 50% of the Excess Cash Flows. The $2
         million senior convertible note is convertible at a fixed rate of $0.45
         per share.

         In the event of default, the Laurus Debt bears interest at 2% per month
         a default payment amounting to 130% of the outstanding principal at the
         time of default.

         The funds received from the Laurus Debt were used to repay
         approximately $2.8 million of principal and interest due on a $3
         million convertible note and to satisfy approximately $1.5 million in
         liquidated damages and accrued default interest. The balance of
         $259,308 was sent to the Company for working capital. The Laurus Debt
         outstanding at March 31, 2006 amounts to the $4 million secured note
         and the $2 million senior secured convertible note. The $4 million line
         of credit is unused at March 31, 2006.

                                       18
<PAGE>
                         XSTREAM BEVERAGE NETWORK, INC.
                                AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 MARCH 31, 2006

         To secure the payment of all obligations, Xstream Beverage Network, Inc
         "XBNI" 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 XBNI or its subsidiaries, or in
         which any Assignor now has 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 has 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 has 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.

NOTE 20 - 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. BNSF renewed the lease for twelve months in November
         2004. The current facility is 7,200 sq. ft. at a monthly rate of
         $4,776. On October 24, 2005, the facility was rendered uninhabitable
         due to damage sustained during Hurricane Wilma. The current lease
         expired on November 30, 2005 and the Company opted not to renew the
         lease for the current space and rented an executive suite while trying
         to secure a more permanent space. The month-to-month rental was
         approximately $1,350 per month. In February 2006, Xstream executed a 5
         year sublease beginning in March 2005. The space is approx- imately
         4,900 square feet at a rate of $12.50 per sq. ft. Rent expense was
         $6,387 for the three months ending March 31, 2006.

         BNSF moved its inventory to a warehouse facility on a month-to-month
         basis with no lease agreement at a cost of approximately $500 per
         month; in addition the BNSF incurs charges for loading and handling for
         the inventory. Rent expense for the three months ending March 31, 2006
         was $2,540.

         BNCT leases a 13,622 square foot facility in Bristol, CT. The rent is
         $5,676 per month and the lease expires in October 2008. Rent expense
         for the three months ending March 31, 2006 was $17,027.

         BNHI assumed the current lease as part of acquiring the assets of
         Pacific Rim. The terms were month-to- month with 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 $2,000. The
         space was being utilized as housing for marketing consultants and other
         individuals active in expanding the brand and current distribution
         territory. Subsequently, in April 2005, Xstream entered into a three
         year lease agreement for the benefit of BNHI. The lease provides for
         2,750 square feet of retail, office, and warehouse space at a cost of
         $2,750 per month plus real estate taxes and escalation. Rent expense
         charged to operations for the three months ending March 31, 2006 was
         $19,327.

         BNMA assumed the lease from Ayer Beverage, Inc., consisting of a 4,300
         square foot facility at a cost of $1,425 monthly. 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 lease was terminated in November, 2004. BNMA
         renewed the assumed lease from Ayer Beverage, Inc. in June 2005 at a
         monthly rate of $1,688. Rent expense charged to operations for the
         three months ending March 31, 2006 was $5,768.

         BNMD assumed the lease from Master Distributors, Inc., consisting of a
         70,261 square foot facility at a current cost of $24,775 monthly. The
         current lease expires on March 31, 2008, and the Company is provided
         with an annual credit each March, equivalent to one months' rent. BNMD
         also subleases to four tenants 12,250 sq. ft. of warehouse space along
         with parking spaces adjacent to the building. The total space subleased
         yielded and $12,550 per month. The sublease rent is offset against rent
         expense. The total rent charged to operations for the period ending
         March 31, 2006 was $9,900.

         (B) EMPLOYMENT AGREEMENTS

         See Note 16 for details regarding accrued compensation.

                                       19
<PAGE>
                         XSTREAM BEVERAGE NETWORK, INC.
                                AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 MARCH 31, 2006

         (C) LITIGATION

         Our subsidiary, Beverage Network of Massachusetts, Inc. was named as a
         party in a legal proceeding filed by Kraft Foods, Inc. in the Superior
         Court of the County of Middlesex, Commonwealth of Massachusetts with
         respect to Civil Docket Number MICV2005-02503. For financial reasons we
         were unable to contest the plaintiff's claims and on August 26, 2005 a
         default order was entered in favor of Kraft Foods, Inc. against
         Beverage Network of Massachusetts, Inc. On October 4, 2005 Beverage
         Network of Massachusetts, Inc. was served with an execution order in
         the amount of $91,902.44, which includes costs. We have agreed the
         terms of a payment plan with the plaintiff's attorney. Whereby we have
         agreed to remit monthly payments of $14,172 until the entire balance is
         paid.

         On September 12, 2005 we received a notice of default under the terms
         of two secured promissory notes issued by us to investors in the
         aggregate principal amount of $300,000. These notes were due and
         payable by us on September 1, 2005. As collateral for these notes we
         pledged 100,000 shares of our common stock and Theodore Farnsworth, our
         CEO, pledged 100,000 shares of our common stock owned by him. The note
         holders are demanding payment of $328,814. As we have been unable to
         pay these amounts, the note holders are entitled to foreclose on the
         collateral at any time. On March 16, 2006, we reached agreement with
         the two note holders whereby we would redeem the notes and make all
         payments due to the note holders thereto, on or before March 31, 2006
         in exchange for which agreement, we granted each note holder 750,000
         shares of our common stock. We also issued in escrow, 500,000 shares of
         our common stock to each note holder which would be subject to release
         from escrow on March 31, 2006 should the notes not be redeemed by that
         date. We failed to redeem the notes and consequently, the shares in
         escrow have been released by the escrow agent to the note holders. No
         further agreement has been discussed or reached with these two note
         holders. The default under these notes created another event of default
         under the unsecured promissory notes in the principal amount of
         $3,019,500.

         On September 29, 2005 we received a notice of default from Morris
         Stodard and Master Distributors, Inc. under the terms of an unsecured
         promissory note issued in connection with our purchase of Master
         Distributors, Inc. as well as under an employment agreement with Mr.
         Stodard. The note holder is demanding payment of $517,735 which he
         asserts is the amount of outstanding principal and interest due under
         the note, as well as amounts due under the employment agreement. We
         continue to make payments to Mr. Stodard and Master Distributors based
         on the balances that were reflected at the time of the Master
         Distributors acquisition. The balance of payments due to Mr. Stodard
         and Master Distributors was $132,631 as of April 15, 2006. The default
         under this note has created another event of default under the
         unsecured promissory notes in the principal amount of $3,019,500.

         In October 2005, American Beverages Inc filed a demand against beverage
         Network of Connecticut and Beverage Network of Massachusetts in the
         amount of $69,452. We have reached agreement on a settlement plan with
         their attorneys.

         In October 2005, Good-O Beverages was awarded a judgment on the amount
         of $28,500 against beverage Network of Connecticut for product ordered
         by us in fiscal 2004. We have made regular payments in settlement of
         this amount and there is a balance of $3,900 as of May 15, 2006.

         On November 16, 2005 Beverage Network of Connecticut received a demand
         letter from the attorneys representing Food Collage, Inc for payment of
         $17,067.86 for product ordered by us in 2004 but not paid for. We are
         working with the plaintiff to settle the account.

         On December 5, 2005 Hobarama ,Inc. obtained a judgment in the amount of
         $16,740 against Beverage Network of Connecticut. We have reached
         agreement on a settlement plan with their attorneys.

         On January 15, 2006 Export Development Canada obtained a judgment
         against Total Beverage Network, Inc in the amount of $22,357 for
         products that we ordered in 2004 but did not pay in full. We have not
         yet reached an agreement with the plaintiff.

         On January 25, 2006, we received a Civil Action Summons from the
         attorney for the Maui Juice Company and Lawrence Lassek for breach of
         contract, for our failure to pay certain installment payments under the
         terms of the Purchase and Sale Agreement with Maui Juice Company in the
         amount of $30,000. We are working with the plaintiffs to make the
         account current.

         In February, 2006 we received a demand letter from Ayer Beverage, Inc.
         in the amount of $72,934 for payments due under the Purchase and Sale
         Agreement between Ayer Beverage and Beverage Network of Massachusetts.
         Under the same agreement, we are also required to make payments under
         obligations that we assumed for $7,889 plus costs and interest to
         Citizen's Bank and $30,000 to Mr. Tom MacIntire. We have reached
         agreement with Mr. Lehan and Ayer Beverages to pay the obligations to
         Mr. MacIntire and Citizen's Bank in full and pay Ayer Beverage $36,467
         followed by three monthly payments thereafter of $9,467. As of May 15,
         2006, we have made a payment of $7,000 to Citizen's Bank.

         In February 2006, Total Beverage Network received a demand from Le
         Natures, Inc in the amount of $17,057 for product that was ordered in
         2004 but not paid in full. We are working with their attorney to reach
         a settlement agreement.

                                       20
<PAGE>
                         XSTREAM BEVERAGE NETWORK, INC.
                                AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 MARCH 31, 2006

         In March of 2004, we contracted with Florida Employer Solutions Inc. to
         handle our company's payroll, payroll added costs and certain other
         employee benefits such as health insurance. The collection and payment
         of payroll taxes was an integral part of this service. In June 2005, we
         were informed by the Internal Revenue Service that we were in default
         of certain payroll tax related payments, which monies had been paid by
         us to Florida Employer Solutions for tax payment purposes. Florida
         Employer Solutions has admitted to us and to the IRS that they had not
         made the mandatory payments when due and have agreed to repay all
         monies owed to the IRS in this regard. We believe that the total amount
         due to the IRS is approximately $300,000, which includes unpaid taxes
         as well as interest and penalties. The IRS have agreed to waive
         penalties upon receiving the principal balance due. In September 2005
         we filed a complaint in the 17th Judicial Circuit in and for Broward
         County, Florida against Florida Employer Solutions, Inc. and Luis
         Ferrer and Maria G. Legarda, officers of Florida Employer Solutions.
         Our complaint alleges breach of contract, fraud, conversion, violation
         of the Florida Unfair and Deceptive Trade Practices Act and unjust
         enrichment and seeks judgment against Florida Employer solutions for
         all damages interests and costs.

         We have been advised by our attorneys that this case will be going to
         trial in January 2007 if the monies are not paid during a mediation
         hearing that will be scheduled prior to the trial date. In the event
         that we receive such monies, it will be applied the tax portion of the
         liability due the IRS.

         We have been further advised by our attorney handling this matter that
         on May 4, 2006, he reached a voluntary payment arrangement with the IRS
         whereby we would make payments to the IRS of $20,000 per month towards
         the outstanding tax only amount of $204,371, which amount does not
         include any interest or penalties. The attorney has filed an appeal
         with the IRS to have all penalties and interest abated and feels it is
         highly probable that this will occur due do the circumstances
         surrounding the case. In their confirmatory letter to our attorney, a
         copy of which is attached hereto as Exhibit the IRS agrees not to issue
         any further levies provided that we adhere to the voluntary payment
         arrangement. On May 8, 2006, the IRS garnished a bank account in the
         amount of $113,314; this amount has been applied to the outstanding
         balance owed.

         Our subsidiary, Beverage Network of Massachusetts, Inc. was named as a
         party in a legal proceeding filed by Fuze Beverage, LLC in the Superior
         Court for the County of Middlesex, Commonwealth of Massachusetts with
         respect to Civil Docket Number MICV2005-01392. For financial reasons we
         were unable to contest the plaintiff's claims and on May 27, 2005 a
         default order was entered in favor of Fuze Beverage, LLC against
         Beverage Network of Massachusetts, Inc. The court has entered a
         judgment against us in the amount of $36,873.


NOTE 21 - STOCKHOLDERS'DEFICIENCY AND RECAPITALIZATION:
------------------------------------------------------

         (A) 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
         5 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 March 31, 2006.

         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 (i) have a liquidation
         preference of $50,000 per share; (ii) 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,
         Xstream issues or sells 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. The
         issuance of the 12% convertible term loans originating on June 30, 2005
         triggered an adjustment in the conversion price from $1.50 to $0.76.
         The issuance of the Laurus Master Fund convertible loan on March 31,
         2006 triggered an adjustment in the conversion price from $0.76 to


                                       21
<PAGE>

                         XSTREAM BEVERAGE NETWORK, INC.
                                AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 MARCH 31, 2006

         $0.45. 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 Company's common stock, subject to a waiver by the holder of these
         limitations upon 61 days notice to the Company. Gross proceeds of
         $2,160,000 from the issuance of 43.2 shares of Series B Preferred, five
         year Series A detachable common stock purchase warrants to purchase
         1,440,000 shares of the Company's common stock with an exercise price
         of $2.00 per share and five year Series B detachable common stock
         warrants to purchase 720,000 shares of the Company's common stock with
         an exercise price of $4.00 per share. The Series B Preferred, which has
         a liquidation preference of $50,000 per share, is convertible into
         shares of the Company's common stock equal to the liquidation
         preference divided by the conversion price of $1.50 per share. The
         issuance of the 12% convertible term loans originating on June 30, 2005
         triggered an adjustment in the exercise price from $1.50 to $0.76. The
         issuance of the Laurus Master Fund convertible loan on March 31, 2006
         triggered an adjustment in the exercise price from $0.76 to $0.45. The
         Company recognized debt discount of $2,160,000 along with a mandatory
         redemption premium of $504,000, to be amortized over the 42 month term
         of the agreement. The Company recognized interest expense from debt
         discount amortization of $190,286 as of the three months ended March
         31, 2006 with a remaining balance of debt discount of $891,429.

         The holders have the right to require Xstream to redeem all, or a
         portion of the shares of 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 current conversion price of $0.45.

         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 its common stock equal to 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 the Company cannot; (i) amend the provisions of the Series B
         Preferred, (ii) repurchase, redeem or pay any dividends on its common
         stock or any other securities which rank junior to the Series B
         Preferred, (iii) amend the Articles of Incorporation or By-laws in a
         manner which would materially and adversely affect any right of the
         Series B Preferred, (iv) make any distribution with respect to any
         junior security, (v) voluntarily file for bankruptcy, liquidate its
         assets or make an assignment for the benefit of its creditors (vi)
         change the nature of its business, or, (vii) so long as at least
         $1,500,000 of the Series B Preferred is outstanding, (which represents
         30 shares), authorize or create any class of securities which ranks
         senior to our pari passu with the Series B Preferred.

         A registration rights agreement was executed to register the shares
         underlying the note and warrants. Certain liquidated damages of 1.25%
         of the note balance, per month, accrue if stipulated deadlines are not
         met. The SB-2 registration was originally submitted on September 30,
         2004, and resubmitted on October 14, 2005. In December 2005, the
         Company issued 7.14 shares of Series B Preferred stock in lieu of
         payment for $357,223 of liquidated damages. The balance of accrued
         liquidated damages is $171,977 as of March 31, 2006. (See Note 16 -
         Accrued Expense Salaries, Accrued Expense Other)

         The Series B Preferred has no voting rights, it ranks senior to
         Xstream's common stock and to all other classes of its securities which
         do not specifically provide that they are senior to the Series B, but
         subordinate to all of the Company's indebtness, and it pays cumulative
         semi-annual dividends of 6% per annum, payable at the Company's option
         in cash, registered shares of common stock or additional shares of the
         Company's Series B Preferred. If Xstream chooses to pay the dividends
         in registered shares of the Company's common stock, the shares are
         valued at the then conversion price of the Series B Preferred and if
         Xstream chooses to pay the dividends in shares of Series B Preferred,
         those shares are valued at the liquidation preference of the stock. In
         December 2005, the Company issued 3.43 shares of Series B Preferred
         shares as payment of $171,622 for accrued dividends. The dividends
         payable as of March 31, 2006 was $53,885. (See Note 17 - Dividends
         Payable)

         On July 1, 2005, the Company issued 10 shares of Series B Preferred
         stock (convertible to 500,000 shares of restricted common stock) to a
         consultant pursuant to the terms of a service agreement. The shares
         were valued at $1.10, the closing price of the Company's common stock
         as of the grant date. The $550,000 value of the transaction will be
         amortized over the term of the agreement (see Note 21 (B) -
         Stockholders' Equity and Recapitalization).

         During the period of January 1, 2006 and March 31, 2006, 12.26 shares
         of Series B Preferred stock was converted to 806,579 shares of
         restricted common stock at the request of the holders. The shares were
         valued at par and recorded to additional paid-in-capital, with no
         effect on operations.

         There are 47 shares of Series B Preferred Stock issued and outstanding
         as of March 31, 2006.

                                       22
<PAGE>
                         XSTREAM BEVERAGE NETWORK, INC.
                                AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 MARCH 31, 2006


         (B) COMMON STOCK

         In June 2005 the Company executed a consulting agreement with a term of
         twelve months in consideration for services consisting of 25,000 shares
         of restricted common stock. The shares were valued at $1.00; the
         closing price on the date of grant. The Company recognized consulting
         expense of $6,181 with a remaining deferred component of $4,190 as of
         March 31, 2006.

         In June 2005, the Company has also entered into a series of related
         agreements with Cogent Capital Corp. and 16 institutional accredited
         investors pursuant to which the Company has issued 19,736,848 Common
         shares at a purchase price of $0.76 per share in exchange for a total
         of $15,000,000 in U.S. government bonds. The price per common share was
         based on a discount of 20% from the closing price of the common stock
         on May 26, 2005. The U.S. government bonds were issued at current
         market value. The transaction resulted in the Company recording a
         subscription receivable in the amount of $15,000,000 (See Note 22 -
         Subscription Receivable).

         The Company executed a twelve month consulting agreement on July 1,
         2005. The consultant was granted 500,000 restricted common shares and
         10 Series B Preferred shares which can convert into 500,000 restricted
         shares (see (A) Preferred Stock above). The shares were valued at
         $1.10, the closing price of the stock on the agreement date. The
         Company recognized an expense of $271,978 with a remaining deferred
         component of $275,000 as of March 31, 2006.

         The Company executed a consulting agreement with a six month term
         commencing on July 12, 2005. The consultant was granted 10,000
         restricted common shares valued at $0.95; the closing price of the
         stock on the grant date. The Company recognized and expense of $620 as
         of March 31, 2006.

         The Company issued 301,950 shares of restricted common stock to
         subscribers as a result of purchasing 3,019,500 units in the debt
         placement financing (see Note 14 - Convertible Term Loan). The shares
         values ranged from $0.43-$1.05, the closing price of the stock on the
         date subscriptions were executed. The total value was $236,471 and is
         being recognized of the term of the notes which contain due dates
         ranging from June 30, 2006 to November 8, 2006. The Company recognized
         interest expense of $59,376 for the three months ending March 31, 2006,
         with a remaining deferred balance of $75,487.

         The Company executed a twelve month consulting agreement, commencing
         November 11, 2005, in consideration of 200,000 shares of restricted
         common stock. The shares were valued at $0.40; the closing price on the
         date of grant. The Company recognized consulting expense of $19,726
         with a remaining deferred component of $49,315 as of March 31, 2006.

         The Company executed a consulting agreement with a term of twelve
         months, commencing November 30, 2005. In consideration for services,
         the consultant received 300,000 shares of restricted common stock
         valued at $.22; the closing price on the grant date. For the period
         ending March 31, 2006, the Company recognized an expense of $16,274
         with a remaining deferred component of $44,121.

         On December 23, 2005, the Company executed a 60 day promissory note,
         resulting in gross proceeds of $100,000. Attached to the note was a
         provision for the Company to issue 50,000 shares of restricted common
         stock to the holder. The shares were valued at $0.44; the closing price
         on the date of grant. The Company recognized an expense of $19,373 for
         the three months ending March 31, 2006.

         On December 15, 2005, the Company executed a six month consulting
         agreement in consideration of 100,000 shares of restricted common
         stock, valued at $0.51. The Company recognized and expense of $25,219
         with a remaining deferred balance of $21,297 at March 31, 2006.

         During the period of January 1, 2006 and March 31, 2006, the Company
         issued a total of 7,536,079 shares of restricted common stock. Shares
         issued for services and loan fees are valued at the closing price of
         the stock on the grant date and recognized over the term of the
         corresponding contract and/or agreements; shares issued as a pledge of
         collateral are considered issued but not outstanding; shares issued
         from the conversion of Preferred Series B stock, are valued at par with
         no effect on operations. The table below represents the activity of
         shares issued as of March 31, 2006:

                                       23
<PAGE>
                         XSTREAM BEVERAGE NETWORK, INC.
                                AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 MARCH 31, 2006
<TABLE>
<CAPTION>
         Consideration                         No. Shares      Price Range         Value          Balance         Recognized
         -------------                         ----------     -------------     -----------     -----------      -----------
<S>                                             <C>           <C>               <C>             <C>              <C>
         Services                               1,572,000     $0.24 - $0.42     $   583,440     $  (326,800)     $   256,640

         Loan Fees                              3,532,500     $0.27 - $0.43     $ 1,360,225     $  (829,701)     $   530,524

         Pledge of Collateral                   1,625,000               -0-             -0-             -0-              -0-

         Conversion of Preferred Series B         806,579               -0-             -0-             -0-              -0-
                                                ---------     -------------     -----------     -----------      -----------
               Total:                           7,536,079               N/A     $ 1,943,665     $(1,156,501)     $   787,164
                                                =========     =============     ===========     ===========      ===========
</TABLE>

         (C) STOCK OPTIONS AND WARRANTS

         In March 2004, the Company signed an agreement with a company to act as
         placement agent to arrange the sale of debt, equity or equity-linked
         securities on behalf of the Company. In accordance with the terms of
         the agreement, the Company granted the placement agent a retainer
         consisting of 37,500 warrants exercisable at $0.20 for five years,
         37,500 warrants exercisable at $1.50 for five years, 37,500 warrants
         exercisable at $3.00 for five years. The warrants were valued at an
         aggregate $556,009 or $4.97, $4.92, $4.88 per option, respectively,
         were recognized as consulting expense at issuance. Upon the closing of
         the Laurus Master Fund financing transaction on May 14, 2004, the
         Company recorded a liability for derivatives in the amount of $498,567.
         The issuance of the 12% convertible term loans originating on June 30,
         2005 triggered an adjustment in the exercise price of the warrants
         ranging from $1.50-$3.00, to $0.76. The issuance of the Laurus Master
         Fund Secured Convertible Term Loan on March 31, 2006, resulted in a
         decrease of the exercise price from $0.76 to $0.45. The fair market
         value of the stock warrants granted to the consultant was estimated on
         the date of grant using the Black-Scholes Model using the following
         assumptions: expected dividend yield 0%, risk-free interest rate of
         1.58%, volatility 191% and expected term of five years.

         On May 14, 2004, the Company secured a financing arrangement with
         Laurus Master Fund, Ltd. ("Laurus Fund"), (See Note 19 - Long Term
         Notes Payable). The financing consisted of a $3 million Senior Secured
         Convertible Note with an interest rate of prime plus two percent and
         had a term of three years (May 14, 2007). The Company then issued
         426,250 options to the placement agent mentioned above, as they were
         directly engaged in securing the Laurus transaction. The five year
         warrants were exercisable at $1.50 and the Company recorded the fair
         value of the options as capitalized funding costs with an offset to
         derivative liability in the amount of $1,879,809 at the date of
         issuance. (See Note 8 - Capitalized Funding Costs) The issuance of the
         12% convertible term loans originating on June 30, 2005 triggered an
         adjustment in the exercise price of the warrants from $1.50 to $0.76.
         The issuance of the Laurus secured convertible term loan on March 31,
         2006 triggered an adjustment in the purchase price of the warrants from
         $0.76 to $0.45. (The transaction was valued using the Black-Scholes
         model with the following assumptions expected dividend yield of 0%
         risk-free interest rate of 2.53%, volatility 124% and expected term of
         5 years.)

         On August 2, 2004 Xstream Beverage Group, Inc. sold 43.2 shares of our
         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. The gross
         proceeds of $2,160,000 is reflected as of March 31, 2006, (See Note 21
         - (A) Above), the Company compensated a placement agent engaged in the
         transaction with warrants to purchase the Company's common stock
         consisting of 160,941 warrants exercisable at $1.50 for five years,
         118,588 warrants exercisable at $2.00 for five years, 144,000 warrants
         exercisable at $4.00, for five years. The fair value of the warrants
         were valued at an aggregate $1,359,712 recorded as capitalized funding
         costs and derivative liability at the date of issuance. The issuance of
         the 12% convertible term loans originating on June 30, 2005 triggered
         an adjustment in the exercise price of the warrants ranging from
         $1.50-$4.00 to $0.76. The issuance of the Laurus secured convertible
         term loan on March 31, 2006, triggered an adjustment in the purchase
         price of the warrants from $0.76 to $0.45. (The transaction was valued
         using the Black-Scholes Model with the following assumptions: expected
         dividend yield of 0%, risk-free interest rate of 2.51%, volatility 161%
         and expected term of five years.

         In January 2005, the Company entered into a one year agreement for
         consulting services. The agreement stipulated that a warrant to
         purchase 50,000 shares of common stock be issued. The warrants are
         exercisable at $2.00 per share. The issuance of the 12% convertible
         term loans originating on June 30, 2005 triggered an adjustment in the
         exercise price of the warrants; the exercise price of the warrants
         decreased from $2.00 to $0.76. The issuance of the Laurus secured
         convertible term loan on March 31, 2006, triggered an adjustment in the
         purchase price of the warrants from $0.76 to $0.45. The fair value of
         such warrants were recorded as a derivative liability amounting to
         $69,162 at the date of issuance. (The transaction was valued using the
         Black-Scholes model with an interest rate of 3.01%, volatility of 96%,
         zero dividends and expected term of five years).

         On January 3, 2005, the Company entered into a one year agreement for
         consulting services. The agreement stipulated as consideration of
         services, the Company grant warrants for the purchase 200,000 shares of


                                       24
<PAGE>

                         XSTREAM BEVERAGE NETWORK, INC.
                                AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 MARCH 31, 2006

         common stock to be issued, as follows: 100,000 at $4.00 per share and
         100,000 at $5.00 per share. The fair value of the warrants, $220,017,
         were recorded as a derivative liability at the date of issuance. The
         issuance of the 12% convertible term loans originating on June 30, 2005
         triggered an adjustment in the exercise price of the warrants ranging
         from $4.00-$5.00 to $0.76. The issuance of the Laurus secured
         convertible term loan on March 31, 2006, triggered an adjustment in the
         purchase price of the warrants from $0.76 to $0.45 (computed using a
         Black-Scholes model with an interest rate of 3.22%, volatility of
         104.25%, zero dividends and expected term of five years).

         In January 2005, the Company entered into another one year agreement
         for consulting services. The agreement stipulated as consideration of
         services, the Company granted warrants for the purchase of 300,000
         shares of common stock issued as follows: 100,000 warrants at $2.00 per
         share, 100,000 warrants at $2.50 per share, 100,000 warrants at $3.00
         per share. The fair value of the warrants, $371,825, were recorded as a
         derivative liability at the date of issuance. The issuance of the 12%
         convertible term loans originating on June 30, 2005 triggered an
         adjustment in the exercise price of the warrants ranging from
         $2.00-$3.00, to $0.76. The issuance of the Laurus secured convertible
         term loan on March 31, 2006, triggered an adjustment in the purchase
         price of the warrants from $0.76 to $0.45 (computed using a
         Black-Scholes model with an interest rate of 3.22%, volatility of
         104.25%, zero dividends and expected term of five years).

         On January 15, 2005, the Company issued Laurus warrants to purchase
         165,000 shares of the Company's common stock with an exercise price of
         $2.00 per share which expire July 20, 2014. The warrants were issued as
         interest in consideration for the release of $398,595 of the restricted
         cash. The fair value of such warrants were recorded as a derivative
         liability in the amount of $216,215 at the date of issuance (The
         transaction was valued using the Black-Scholes Model with the following
         assumptions: expected dividend yield of 0.0%, risk-free interest rate
         of 3.22%, volatility of 88.93% and expected term of 10 years).

         On February 25, 2005, the Company issued warrants to purchase 300,000
         shares of common stock exercisable at $1.50 in accordance with the
         terms of the convertible term loan. (See Note 14 - Convertible Term
         Loan) The fair value note and warrants were recorded as a derivative
         liability in the amount of $269,488 at the date of issuance (computed
         using the Black-Scholes model with an interest rate of 3.38%,
         volatility of 87.86%, zero dividends and expected term of five years).

         On February 25, 2005, the Company entered into a six month agreement
         for financial consulting services. The Company agreed to issue warrants
         to purchase 40,000 shares of restricted common stock at $1.50. The
         Company recorded a derivative liability in the amount of $35,932 for
         the fair value of the warrants at the date of issuance (computed using
         the Black-Scholes model with an interest rate of 3.38%, volatility of
         87.86%, zero dividends and expected term of five years).

         In April 2005, the Company issued warrants to purchase 290,000 shares
         of common stock exercisable at $1.50 in accordance with the terms of
         the convertible term loan (See Note 14 - Convertible Term Loan). The
         Company recorded a derivative liability in the amount of $240,746 for
         the fair value of the warrants at the date of issuance (computed using
         the Black-Scholes model with an interest rate of 3.65%, volatility of
         90.46%, zero dividends and expected term of five years).

         On April 4, 2005, the Company executed a sixty month consulting
         agreement in consideration of granting warrants to purchase 127,059
         shares at $1.50 and 169,412 shares at $2.00. The Company recorded a
         derivative liability in the amount of $171,527 for the fair value of
         the warrants at the date of issuance (computed using the Black-Scholes
         model with an interest rate of 3.65%, volatility of 73.35%, zero
         dividends and expected term of five years). The issuance of the 12%
         convertible term loans originating on June 30, 2005, triggered an
         adjustment in the exercise price of the warrants ranging from
         $1.50-$2.00 to $0.76. The issuance of the Laurus secured convertible
         term loan on March 31, 2006, triggered an adjustment in the purchase
         price of the warrants from $0.76 to $0.45.

         On April 7, 2005, the Company executed a twelve month consulting
         agreement in consideration of granting warrants to purchase 150,000
         shares of common stock at $1.50; The Company recorded consulting
         expense and a derivative liability in the amount of $121,283 for the
         fair value of the warrants at the date of issuance (computed using the
         Black-Scholes model with an interest rate of 3.65%, volatility of
         83.09%, zero dividends and expected term of five years). The issuance
         of the 12% convertible term loans originating on June 30, 2005
         triggered an adjustment in the exercise price of the warrants from
         $1.50 to $0.76. The issuance of the Laurus secured convertible term
         loan on March 31, 2006, triggered an adjustment in the purchase price
         of the warrants from $0.76 to $0.45.

         In May 2005, the Company issued warrants to purchase 135,000 shares of
         common stock exercisable at $1.50 in accordance with the terms of the
         convertible term loan, (See Note 14 - Convertible Term Loan) The
         Company recorded a derivative liability in the amount of $117,860 at
         the date of issuance. (computed using the Black-Scholes model with an
         interest rate of 3.64%, volatility of 94.78%, zero dividends and
         expected term of five years).

         In June 2005, the Company executed a twelve month consulting agreement
         in consideration of granting warrants to purchase 150,000 shares of


                                       25
<PAGE>

                         XSTREAM BEVERAGE NETWORK, INC.
                                AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 MARCH 31, 2006

         common stock at $1.50. The Company recorded consulting expense and a
         derivative liability in the amount of $91,515 for the fair value of the
         warrants at the date of issuance (computed using the Black-Scholes
         model with an interest rate of 3.64%, volatility of 83.65%, zero
         dividends and expected term of five years).

         On June 30, 2005 the Company issued 394,729 warrants to purchase common
         stock at $0.76 as placement agent fees attributed to the Cogent Capital
         transaction (See Note 18 - Derivative Liability). The Company recorded
         a derivative liability in the amount of $240,902 for the fair value of
         the warrants at the date of issuance. The issuance of the Laurus
         secured convertible term loan on March 31, 2006, triggered an
         adjustment in the purchase price of the warrants from $0.76 to $0.45.
         Computed using the Black-Scholes model with an interest rate of 3.64%,
         volatility of 77.36%, zero dividends and expected term of five years.

         In July 2005, the Company issued warrants to purchase 1,400,000 shares
         of restricted common stock exercisable at $0.76 in accordance with the
         terms of the convertible term loan, (See Note 14 - Convertible Term
         Loan). The Company recorded a derivative liability in the amount of
         $1,281,624 for the fair value of the warrants at the date of issuance.
         The issuance of the Laurus secured convertible term loan on March 31,
         2006, triggered an adjustment in the purchase price of the warrants
         from $0.76 to $0.45 (computed using the Black-Scholes model with an
         interest rate of 3.64%, volatility of 77.36%, zero dividends and
         expected term of five years).

         Pursuant to the terms of a Financial Advisory and Investment Banking
         agreement, the Company issued 324,211 warrants to purchase restricted
         common stock in consideration as placement agent fees for subscribers
         purchasing 1,400,000 units of the debt placement financing (See Note 14
         - Convertible Term Loan). The Company recorded a derivative liability
         in the amount of $197,865 for the fair value of the warrants at the
         date of issuance. The issuance of the Laurus secured convertible term
         loan on March 31, 2006, triggered an adjustment in the purchase price
         of the warrants from $0.76 to $0.45 (computed using the Black-Scholes
         model with an interest rate of 3.64%, volatility of 77.36%, zero
         dividends and expected term of five years).

         The Company issued warrants to purchase 215,000 shares of restricted
         common stock exercisable at $0.76 in accordance with the terms of the
         convertible term loan, (See Note 14 - Convertible Term Loan). The
         Company recorded a derivative liability in the amount of $245,850 for
         the fair value of the warrants at the date of issuance. The issuance of
         the Laurus secured convertible term loan on March 31, 2006, triggered
         an adjustment in the purchase price of the warrants from $0.76 to $0.45
         (computed using the Black-Scholes model with an interest rate of 3.87%,
         volatility of 81.62%, zero dividends and expected term of five years).

         Pursuant to the terms of a Financial Advisory and Investment Banking
         agreement, the Company issued 49,789 warrants to purchase restricted
         common stock in consideration as placement agent fees for subscribers
         purchasing 215,000 units of the debt placement financing (See Note 14 -
         Convertible Term Loan). The Company recorded a derivative liability in
         the amount of $37,956 for the fair value of the warrants at the date of
         issuance. The issuance of the Laurus secured convertible term loan on
         March 31, 2006, triggered an adjustment in the purchase price of the
         warrants from $0.76 to $0.45 (computed using the Black-Scholes model
         with an interest rate of 3.87%, volatility of 81.62%, zero dividends
         and expected term of five years).

         In August 2005, the Company issued warrants to purchase 475,000 shares
         of restricted common stock exercisable at $0.76 in accordance with the
         terms of the convertible term loan, (See Note 14 - Convertible Term
         Loan). The Company recorded a derivative liability in the amount of
         $415,850 for the fair value of the warrants at the date of issuance.
         The issuance of the Laurus secured convertible term loan on March 31,
         2006, triggered an adjustment in the purchase price of the warrants
         from $0.76 to $0.45 (computed using the Black-Scholes model with an
         interest rate of 4.04%, volatility of 93.60%, zero dividends and
         expected term of five years).

         Pursuant to the terms of a Financial Advisory and Investment Banking
         agreement, the Company issued 110,000 warrants to purchase restricted
         common stock at $0.76 in consideration as placement agent fees for
         subscribers purchasing 475,000 units of the debt placement financing
         (See Note 14 - Convertible Term Loan). The Company recorded a
         derivative liability in the amount of $64,201 for the fair value of the
         warrants at the date of issuance. The issuance of the Laurus secured
         convertible term loan on March 31, 2006, triggered an adjustment in the
         purchase price of the warrants from $0.76 to $0.45 (computed using the
         Black-Scholes model with an interest rate of 4.04%, volatility of
         93.60%, zero dividends and expected term of five years).

         In September 2005, the Company issued warrants to purchase 357,500
         shares of restricted common stock exercisable at $0.76 in accordance
         with the terms of the convertible term loan, (See Note 14 - Convertible
         Term Loan). The Company recorded a derivative liability in the amount
         of $282,456 for the fair value of the warrants at the date of issuance.
         The issuance of the Laurus secured convertible term loan on March 31,
         2006, triggered an adjustment in the purchase price of the warrants
         from $0.76 to $0.45 (computed using the Black-Scholes model with an
         interest rate of 3.95%, volatility of 100.29%, zero dividends and
         expected term of five years).

         Pursuant to the terms of a Financial Advisory and Investment Banking
         agreement, the Company issued 82,789 warrants to purchase restricted


                                       26
<PAGE>

                         XSTREAM BEVERAGE NETWORK, INC.
                                AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 MARCH 31, 2006

         common stock at $0.76 in consideration as placement agent fees for
         subscribers purchasing 357,500 units of the debt placement financing
         (See Note 14 - Convertible Term Loan). The Company recorded a
         derivative liability in the amount of $43,607 for the fair value of the
         warrants at the date of issuance. The issuance of the Laurus secured
         convertible term loan on March 31, 2006, triggered an adjustment in the
         purchase price of the warrants from $0.76 to $0.45 (computed using the
         Black-Scholes model with an interest rate of 3.95%, volatility of
         100.29%, zero dividends and expected term of five years).

         The Company issued warrants to purchase 375,000 shares of restricted
         common stock exercisable at $0.76 in accordance with the terms of the
         convertible term loan, (See Note 14 - Convertible Term Loan). The
         Company recorded a derivative liability in the amount of $170,890 for
         the fair value of the warrants at the date of issuance. The issuance of
         the Laurus secured convertible term loan on March 31, 2006, triggered
         an adjustment in the purchase price of the warrants from $0.76 to $0.45
         (computed using the Black-Scholes model with an interest rate of 3.95%,
         volatility of 97.15%, zero dividends and expected term of five years).

         Pursuant to the terms of a Financial Advisory and Investment Banking
         agreement, the Company issued 86,842 warrants to purchase restricted
         common stock at $0.76 in consideration as placement agent fees for
         subscribers purchasing 375,000 units of the debt placement financing
         (See Note 14 - Convertible Term Loan). The Company recorded a
         derivative liability in the amount of $25,152 for the fair value of the
         warrants at issuance. The issuance of the Laurus secured convertible
         term loan on March 31, 2006, triggered an adjustment in the purchase
         price of the warrants from $0.76 to $0.45 (computed using the
         Black-Scholes model with an interest rate of 3.95%, volatility of
         97.15%, zero dividends and expected term of five years).

         The Company extended a consulting agreement, originally executed in
         February 2005 for an additional eight months through March 15, 2006. In
         consideration, the consultant was granted warrants to purchase 50,000
         restricted common shares at $0.76. The Company recorded a derivative
         liability in the amount of $19,822 for the fair value of the warrants
         at the date of issuance (computed using the Black-Scholes model with an
         interest rate of 4.0%, volatility of 100.29%, zero dividends and
         expected term of five years).

         In November 2005, the Company issued warrants to purchase 197,000
         shares of restricted common stock exercisable at $0.76 in accordance
         with the terms of the convertible term loan, (See Note 14 - Convertible
         Term Loan). The Company recorded a derivative liability in the amount
         of $102,898 for the fair value of the warrants at the date of issuance.
         The issuance of the Laurus secured convertible term loan on March 31,
         2006, triggered an adjustment in the purchase price of the warrants
         from $0.76 to $0.45 (computed using the Black-Scholes model with an
         interest rate of 4.42%, volatility of 125.56%, zero dividends and
         expected term of five years).

         Pursuant to the terms of a Financial Advisory and Investment Banking
         agreement, the Company issued 45,621 warrants to purchase restricted
         common stock at $0.76 in consideration as placement agent fees for
         subscribers purchasing 197,000 units of the debt placement financing
         (See Note 14 - Convertible Term Loan). The Company recorded a
         derivative liability in the amount of $15,886 for the fair value of the
         warrants at the date of issuance. The issuance of the Laurus secured
         convertible term loan on March 31, 2006, triggered an adjustment in the
         purchase price of the warrants from $0.76 to $0.45 (computed using the
         Black-Scholes model with an interest rate of 4.42%, volatility of
         125.56%, zero dividends and expected term of five years).

         The following table summarizes information about stock options and
         warrants outstanding at March 31, 2006:
<TABLE>
<CAPTION>
                   Warrants Outstanding                                              Options Exercisable
-----------------------------------------------------------------------------------------------------------------
                                                         Weighted         Weighted                       Weighted
            Range of                 Number               Average          Average          Number        Average
            Exercise              Outstanding at         Remaining        Exercise      Exercisable at   Exercise
             Price                March 31, 2006        Contractual        Price        March 31, 2006    Price
        --------------           -----------------      -----------       --------    -----------------  ---------
<S>                                  <C>                <C>               <C>             <C>            <C>
       $   6.40 - 100.00               242,125          7.65 Years        $  12.46          242,125      $  12.46
       $   3.00 -   6.39               147,500          8.31 Years        $   3.34          147,500      $   3.34
       $    .76 -   2.99             1,599,000          5.75 Years        $   1.68        1,599,000      $   1.68
       $            0.45             7,959,459          3.83 Years        $   0.45        7,959,459      $   0.45
       $            0.20                 9,464          3.00 Years        $   0.20            9,464      $   0.20
                                     ---------                            --------        ---------      --------
                                     9,957,548                            $   0.98        9,957,548      $   0.98
                                     =========                            ========        =========      ========
</TABLE>


                                       27
<PAGE>

                         XSTREAM BEVERAGE NETWORK, INC.
                                AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 MARCH 31, 2006
NOTE 22 - SUBSCRIPTION RECEIVABLE:
---------------------------------

         The Company has entered into a series of related agreements with a
         placement agent and certain investors pursuant to which the Company has
         issued 19,736,848 common shares at a purchase price of $0.76 per share.
         The fair value of such shares at the date of issuance amounted to
         $15,000,000. The price per common share was based on a discount of 20%
         from the closing price of the common stock on May 26, 2005. In
         connection with the issuance of shares, the investors deposited
         $15,000,000 in US government bonds, which are held by the placement
         agent for the potential future benefit of the Company.

         In conjunction with this investment, the Company and the placement
         agent entered into an escrow agreement with the investors as well as
         Cogent pursuant to which the 15,789,472 shares, as well as the bonds,
         were deposited with the designated escrow agent. In addition, the
         Company and the placement agent entered into the following agreements:

         1.   2002 Master Agreement conforming to the form of the
              International Swaps and Derivatives Association, Inc.;

         2.   Credit Support Annex to the Master Agreement consistent with the
              ISDA form;

         3.   Equity swap transaction letter of agreement; and

         4.   Equity option transaction letter of agreement.

         Under the terms of the equity swap, the 15,789,472 common shares and
         the bonds are maintained in escrow until the earlier of 42 months or
         such time as all of these shares are covered by an effective
         registration statement filed with the SEC. The Company, however, is not
         obligated to register the common shares.

         Pursuant to the series of arrangements with the placement agent, the
         Consideration that the Company will receive in connection with the
         issuance of the shares to the investors will vary based on the
         Company's stock price at predetermined periods ("Subscription
         Receivable"). In addition, the Company unilaterally can terminate the
         agreement by exercising the call option for the common shares in
         escrow. The Company does not intend to exercise its call option.

         The Subscription Receivable is computed as follows: at the earliest of
         the Company's completion of a registration statement covering the
         19,736,848 common shares of the Company or the common shares have
         satisfied the holding period under Rule 144-K at June 10, 2007, the
         Company will be entitled to receive a quarterly amount equal to
         2,631,578 shares times the Company's price per share of common stock
         for the last ten days of the preceding quarter. At that time, the
         shares and the corresponding value of the funds are released from
         escrow to the appropriate party.

         As additional consideration, the Company has agreed to compensate the
         private placement agent with a monthly payment amounting to LIBOR +
         1.25% times $15,000,000, less the interest earned on the US Government
         bonds. This amount is payable until the funds and the shares are
         released from escrow. The Company estimates the aggregate payments
         under this arrangement to amount to $1,178,250 over the terms of the
         agreement. The Company has recorded a corresponding amount as accrual
         for placement agent fees at the date of issuance of shares, which was
         offset against additional paid-in capital. The balance of accrued
         expenses related to this transaction were $1,150,470 as of March 31,
         2006 (see Note 16 - Accrued Expense-Salaries, Accrued Expense-Other).

         The Company adjusts quarterly the amount of the subscription receivable
         to reflect the variations in its stock price. Additionally, the Company
         discounts the Subscription Receivable to reflect the time value of
         money until it is entitled to receive the Subscription Receivable. At
         the date of issuance of the shares, the Company recorded a subscription
         receivable of $12,718,150, adjusted for a discount of $1,082,211. The
         Company used a discount rate of 3.66% at the date of issuance and a
         stock price of $0.92. At March 31, 2006, the Subscription Receivable
         amounted to $5,647,822, adjusted for a discount of $641,900. The
         Subscription receivable at March 31, 2006 is based on a discount rate
         of 4.82% and a stock price of $0.40. The decrease in subscription
         receivable between the date of issuance and March 31, 2006, has been
         recorded as an element of comprehensive income/(loss) of $8,763,157.
         As an initial entrance amount in the equity swap transaction, Cogent
         Capital Corp. has received 1,381,579 common shares of the Company (See
         Note 21 - Stockholders' Deficiency and Recapitalization).

                                       28
<PAGE>
                         XSTREAM BEVERAGE NETWORK, INC.
                                AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 MARCH 31, 2006

NOTE 23 - RELATED PARTIES:
-------------------------

         The balance due to a corporate principal stockholder controlled by a
         Director and the principal of Master Distributors, Inc. at March 31,
         2006 was $100,355 (See Note 13 - Loans Payable, Related Party).


NOTE 24 - GOING CONCERN:
-----------------------

         As reflected in the accompanying consolidated financial statements, the
         Company, has a net loss in 2006 of $11,533,078, cash used in operations
         in 2006 of $1,234,494 and an accumulated deficit of $45,411,800 at
         March 31, 2006, stockholders' deficiency of $21,335,747 and a working
         capital deficit of $21,141,515 at March 31, 2006. 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

NOTE 25 - SUBSEQUENT EVENTS:
---------------------------

         In April 2006, the Company received $250,000 in proceeds from a 120 day
         demand note. The Company also issued 250,000 shares of restricted
         common stock valued at $0.37 in connection with the demand note.

         The Company also issued 1,040,000 shares of restricted common stock to
         employees as compensation valued at $0.37 per share.

         In May 2006 the Company issued 500,000 shares of restricted common
         stock pursuant to the terms of an payment deferral agreement to a note
         holder. The shares were valued at $0.29.

                                       29


<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 appearing elsewhere in
this Quarterly Report.

OVERVIEW

         We develop, market, sell and distribute new age beverage category
products under our own trademarks, including gourmet sodas, fruit juices, fruit
drinks and energy drinks. We are also a wholesale distributor of third party new
age beverages, energy drinks, juices and non-carbonated sodas, specialty and
nutritional drinks, vitamin waters and non-alcoholic beer. New Age or
alternative beverages are distinguishable from mainstream carbonated soft drinks
in that they are uncarbonated or tend to have less carbonation and are made from
primarily natural ingredients. As a general rule, three criteria have been
established for such a classification, including relatively new introductions to
the market-place, a perception by consumers that consumption is healthful when
compared to mainstream carbonated soft drinks and the use of natural ingredients
and flavors in the products. This beneficial perception by consumers allows the
soft drink industry to charge higher prices than those commanded by regular
carbonated soft drinks. For this reason, new age beverages are sometimes
referred to as value added 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 September 30, 2005, we have
acquired additional beverage distribution companies together with a natural
juice company and certain intellectual property rights related to other new age
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
         *        July 2004 - Master Distributors

         Our business strategy includes the acquisitions of additional
distribution companies and proprietary value-added brands currently being
commercialized in various segments of the new age beverage industry. Our success
is dependent on our ability to make these additional acquisitions and then to
effectively integrate their operations into our company. We will require
additional capital to undertake additional acquisitions and to integrate those
acquired companies into our operations. Accordingly, as we do not have any firm
commitments for additional capital, and given our current financial condition,
we may be unable to undertake additional acquisitions in the foreseeable future.

         As previously reported and as included in this report, we are in
default under various loan covenants and agreements which could be accelerated
by the parties involved. We do not currently have sufficient assets or resources
to satisfy these obligations at the present time and do not have immediate
prospects of obtaining such financing at this juncture. Laurus Master Fund has a
security interest in substantially all of our assets, and it is unlikely that
any of the other parties who have obligations owing to them by us would be in a
position to receive any recovery in the event that Laurus Master Fund were to
exercise dominion over our assets should it seek to exercise its remedies on the
default. We are in discussions with all of the affected parties, and while we
believe we have a reasonable relationship with all of these parties, there can
be no assurances that any of these parties might proceed to undertake legal
action against our company or pursue other measures to enforce any remedies to
which they would be entitled.


                                       30
<PAGE>


Results of Operations


                                Xstream Beverage Network & Subsidiaries
                                        Statement of Operations
                              For the Three Month Period Ending March 31,

<TABLE>
<CAPTION>
                                                                            Variance         Variance
                                                                          2006 vs. 2005   2006 vs. 2005
                                          2006            2005                  $               %
                                     -------------    ------------        ------------     -----------
<S>                                  <C>              <C>                 <C>                       <C>
Sales                                $   2,667,586    $  2,533,686        $    133,900              5%
Cost of Goods Sold                       2,197,200       2,049,933             147,268              7%
                                     -------------    -------------       ------------     ----------

Gross Profit                               470,385         483,753             (13,368)            -3%

Expenses
Selling, General & Administrative        1,473,233       2,254,327            (781,093)           -35%

                                     --------------   ------------        ------------     ----------
Total Operating Expenses                 1,473,233       2,254,327            (781,093)           -35%

Income/(Loss) From Operations           (1,002,847)     (1,770,574)            767,725            -43%
Other Income/(Expense)
Other Income                                 6,493          10,000              (3,507)           -35%
Interest Income                            -                 1,526              (1,526)          -100%
Interest Expense                        (4,869,319)     (1,344,038)         (3,525,281)           262%
Change in fair value
  of derivatives                        (4,029,608)     10,136,310         (14,165,918)          -140%
Other Expense                           (1,626,367)            (10)         (1,626,357)       159,291%
Gain on Disp of Fixed Assets               (11,430)             --             (11,430)          -100%
                                     -------------    ------------        ------------     -----------

Total Other Income/ (Expense)          (10,530,231)      8,803,788         (19,334,019)          -220%


Net Income / (Loss)                    (11,533,078)      7,033,214         (18,566,294)          -264%
                                     =============    ============        ============     ===========
</TABLE>



Sales

Our sales comprise revenues related to the sale of beverage products. The
increase in our sales for the first quarter of fiscal 2006 from the first
quarter of fiscal 2005 is primarily attributable to an increase in sales by our
Beverage Network of Maryland, Inc. subsidiary $330,754 and consisted primarily
of sales of third party brands. We also experienced an increase in the sales of
third party and proprietary brands in our other subsidiaries that totaled
approximately $209,521. These increases were offset by a decrease in sales of
our remaining distributors in S. Florida, Massachusetts, Connecticut and Hawaii
that totaled approximately $406,376; this was attributable to insufficient
working capital to purchase inventory for resale of third party brands during
the quarter ending March 31, 2006. Sales for proprietary brands were
approximately 1% of sales for the three months ending March 31, 2006 as compared
to approximately 4% of sales for the three months ending March 31, 2005. If we
do not raise additional operating capital for the purchase of inventory, we
believe that our sales will remain relatively constant for the remainder of
fiscal 2006.

                                       31
<PAGE>

Cost of Goods Sold

Our cost of goods sold includes the cost of buying third-party beverage products
as well the manufacturing costs of our proprietary brands and along with
warehouse and distribution costs for all products sold. The cost of goods sold
as a percentage of sales for the quarter ending March 31, 2006 was approximately
82% as compared to approximately 81% for the comparable period in 2005. We
anticipate that our cost of goods sold and related gross profit margins will
remain relatively constant until such time, if ever, we are successful in
increasing sales of our proprietary products, which carry higher gross profit
margins.


Sales, General, and Administrative Expenses

Our sales, general, and administrative expenses are comprised primarily of
consulting fees, salaries and benefits of our sales and administrative staff,
marketing programs and related sales expenses. The decrease in our sales and
general and administrative expenses during the period ending March 31, 2006 when
compared to the same period during 2005, is primarily attributable to:


         * a decrease of approximately $485,000 in expenses for consulting,
financial advisory and public relations firms. The decrease in such expenses is
primarily due to a decline in the use of consultants as compared to the same
period in 2005. We anticipate that consulting fees will remain relatively
constant for the remainder of the fiscal 2006.

         * a decrease of approximately $260,000 in compensation expense. The
number of employees was reduced during the later part of fiscal 2005 due to
insufficient working capital and in our efforts to maximize the utilization of
financial resources. We anticipate that the cash component of our compensation
expense will remain relatively constant during calendar year 2006, subject to
increases should we acquire additional companies.


Other income/expenses


Interest Expense

Interest expense consists primarily of amortization of debt discount resulting
from the issuance of both common stock and common stock purchase warrants as
provisions contained within various debt instruments issued by us. The increase
in interest expense during the calendar quarter ending March 31, 2006 as
compared to the similar calendar quarter for 2005 is attributable to the
amortization of capital funding costs, debt issue costs and debt discount of
$3.5 million. We anticipate that our interest expense may increase significantly
during the remainder of fiscal year 2006 as the Company refinanced its
outstanding $3 million senior secured convertible note with the Laurus Master
Fund on March 31, 2006. The refinancing transaction resulted in the issuance of
a $4 million revolving line of credit, a secured convertible promissory note for
$2 million, and a $4 million secured non-convertible note. The notes mature
March 31, 2009, bear interest subject to the current prime rate, and never less
than nine percent per annum.

                                       32
<PAGE>

Change in Fair Value of Derivatives

The increase in other income-derivative liabilities during the calendar quarter
ending March 31, 2006 when compared to the comparable calendar quarter ending
March 31, 2005 is attributable to a decrease in fair value of derivatives
liabilities between measurement dates. We recognize other income or other
expense based on changes in the fair value of derivative liabilities which are
related to the debt and equity transactions we have entered into in the past as
more fully described in Note 2 - Derivative Instruments in our financial
statements contained elsewhere in this quarterly report. We recognize non-cash
income or expense on a quarterly basis based upon changes in the fair value of
these instruments from the prior measurement period. This income (expense) is
reflected on our Consolidated Statements of Operations for the three months
ended March 31, 2006 and 2005 as an expense of $4,029,608 for the three months
ended March 31, 2006 and income of $10,136,310 for the three months ended March
31, 2005. While this non-cash expense had the effect of increasing our loss for
the first quarter of fiscal 2006 the non-cash income in the first quarter of
fiscal 2005 resulted in our reporting net income for the period. We are unable
to predict what effect the change in fair value of derivative liabilities will
have on our results of operations in future periods.

Other Expense

The increase in other expenses was primarily attributable to on one-time stock
based expense of approximately $168,000; derivative related expense of
approximately $765,000 and a default premium paid to Laurus Master Fund for the
repayment of the senior secured convertible loan on March 31, 2006 in the amount
of $692,839.

LIQUIDITY AND CAPITAL RESOURCES

Net cash used in operating activities for quarter ending March 31, 2006 was
$(1,234,494) as compared to $(340,793) for quarter ending March 31, 2005 and
includes the following:

         * an increase of $18,566,294 in our net loss,

         * an increase of $354 in bad debt expense which relates to our current
assessment of the collectability of our accounts receivable, ,

         * an increase of $40 in depreciation,

         * an increase of $301,260 in amortization of deferred consulting and
deferred fees which relates consulting agreements entered into during 2005.
These agreements provide for the issuance of shares of our common stock under
long-term agreements,

         * an decrease of $378,462 in change of fair value of derivative
liabilities attributable to the issuance of common stock purchase warrants for
service agreements and certain debt instruments,

         * an increase of $2,181,384 in amortization of debt discount and fees
to interest expense relating to payment deferral agreements entered into during
the quarter ending March 31, 2006. The Company also retired the secured
convertible note with Laurus Master Fund and amortized the remaining balance of
debt discount and fees in excess of $1,375,000.

         * an decrease of $7,390 in amortization of intangibles which is our
customer lists; a 2005 impairment adjustment reduced the monthly amortization
basis,

          * an increase of $989,909 in amortization of capitalized funding costs
attributable to the $3,000,000 secured convertible note, the Series B
Convertible Preferred stock, swap transaction with Cogent Capital and debt
financing costs related the Maxim Group.

                                       33
<PAGE>
         * an increase of $180,000 in liquidated damages for our failure to
timely obtain effectiveness of a previously filed registration statement which
has subsequently been withdrawn. These costs are payable to our Series B
preferred shareholders and to the Laurus Master Fund. The Series B Liquidated
damages will continue through fiscal 2006 unless obtain an effective
registration. Liquidated damages will not be incurred for the Laurus Master
Fund, due to the refinancing transaction on March 31, 2006,

         * an increase of $765,529 in fair value of derivatives pertaining to
interest, resulting from the Laurus Master Fund $2 million convertible note
issued on March 31, 2006.

         * an increase of $166,281 in the default premium attributable to the
Laurus secured convertible note that was retired on March 31, 2006.

         * an increase, in aggregate, of $582,375 of stock based loan fees and
other stock based expenses attributable to an increase in current agreements
that provide for the issuance of stock.,

         * an increase of $14,165,918 in the change of the fair value of
derivatives. This results from the issuance of warrants issued for services and
in lieu of interest on debt instruments,

         * an increase of $11,430 from a loss on the disposition of fixed
assets,

         * a decrease of $222,846 in accounts receivable, attributable to
a decline in sales in the S. Florida an New England operations,

         * a decrease of $149,179 in inventory, attributable to a lack of
working capital to purchase inventory in our S. Florida an New England
operations

         * a decrease of $363,263 in other current and non-current assets,

         * an increase of $118,457 in accounts payable,

         * an increase of $109,690 in accrued expenses,

         * a decrease of $13,366 in other current and non-current liabilities,

Net cash provided from investing activities for the quarter ending March 31,
2006 was $3,420 as opposed to $(5,887) used from investing activities for the
quarter ending March 31, 2005 and includes the following:

         * an increase of $5,887 for the acquisition of equipment,

         * an increase of $3,420 for the proceeds included in the disposition of
fixed assets,

Net cash provided by financing activities for quarter ending March 31, 2006 was
$1,143,847 in comparison to $371,718 provided from financing activities for the
quarter ending March 31, 2005. This difference includes:

         * an increase of $4,583,531 provided from the proceeds of non-related
party loans, specifically the Laurus refinancing that occurred on March 31,
2006,

         * a decrease of $692,839 attributable to a 25% default premium on the
repayment of the Laurus secured convertible term loan on March 31, 2006. This
was a one-time payment

         * a decrease of $2,784,783 resulting from the repayment of non-related
party loans,

         * a decrease of $254,500 in capitalized funding costs paid in lieu of
the Laurus Master Fund refinancing that occurred on March 31, 2006,

         * a decrease of $129,280 in overdraft liabilities

         * an increase of $50,000 from related party loan proceeds

                                       34
<PAGE>


            We do not generate sufficient profit to pay our operating expenses.
We have historically relied on funds from financing transactions to provide
capital to pay our expenses and the terms of these transactions have resulted in
significant non-cash expense to us during fiscal 2005 and fiscal 2004. In
addition, the swap transaction entered into with Cogent Capital may never result
in any capital for us notwithstanding the issuance of shares of our common stock
which represented approximately 75% of our issued and outstanding common stock.

            At March 31, 2006 we had cash on hand of approximately $6,000 and a
working capital deficit of approximately $21.1 million. In addition to the
foregoing, we have past due obligations and judgments of approximately $896,000.
We restructured our secured promissory note to Laurus Master Fund, L.P. in April
2006, but this restructure only resulted in additional available working capital
to us of approximately $259,000. In order to sustain our operations and grow our
company we will be required to raise significant additional capital. We do not
presently have any firm commitments for any additional capital and our financial
condition may make our ability to secure this capital difficult. There are no
assurances that we will be able to continue our business and we may be forced to
cease operations if we do not raise significant additional working capital in
which event investors could lose their entire investment in our company.


RECENT FINANCING TRANSACTIONS

         On January 12, 2006, we sold a secured term note to Broadlawn Master
Fund Ltd. in the amount of $100,000. The note had a maturity date of March 12,
2006 on which date the principal and an interest payment of $10,000 become due
and payable. The note was secured with 250,000 shares of our common stock, we
also issued a grant of 75,000 shares of common stock as an additional
consideration to the payee.

         On February 2, 2006, we sold a secured term note to Broadlawn Master
Fund Ltd. in the amount of $100,000. The note had a maturity date of April 2,
2006 on which date the principal and an interest payment of $10,000 become due
and payable. The note was secured with 250,000 shares of our common stock, we
also issued a grant of 75,000 shares of common stock as an additional
consideration to the payee.

         On February 2, 2006, we sold a secured term note to T2 Capital
Management, LLC. in the amount of $50,000. The note had a maturity date of April
2, 2006 on which date the principal and an interest payment of $5,000 become due
and payable. The note was secured with 125,000 shares of our common stock, we
also issued a grant of 32,500 shares of common stock as an additional
consideration to the payee.

         On March 9, 2006, we sold a secured term note to Broadlawn Master Fund
Ltd. in the amount of $200,000. The note had a maturity date of May 1, 2006 on
which date the principal and an interest payment of $20,000 become due and
payable. The note was secured with 1,000,000 shares of our common stock, we also
issued a grant of 300,000 shares of common stock as an additional consideration
to the payee.


                                       35
<PAGE>

RECENT ACCOUNTING PRONOUNCEMENTS


         In December 2004, the FASB issued SFAS No. 123(R), "Share-Based
         Payment," which replaces SFAS No. 123 and supersedes APB Opinion No.
         25. Under SFAS No. 123(R), companies are required to measure the
         compensation costs of share-based compensation arrangements based on
         the grant-date fair value and recognize the costs in the financial
         statements over the period during which employees are required to
         provide services. Share-based compensation arrangements include stock
         options, restricted share plans, performance-based awards, share
         appreciation rights and employee share purchase plans. In March 2005
         the SEC issued Staff Accounting Bulletin No. 107, or "SAB 107". SAB 107
         expresses views of the staff regarding the interaction between FAS No.
         123(R) and certain SEC rules and regulations and provides the staff's
         views regarding the valuation of share-based payment arrangements for
         public companies. SFAS No. 123(R) permits public companies to adopt its
         requirements using one of two methods. On April 14, 2005, the U.S.
         Securities and Exchange Commission adopted a new rule amending the
         compliance dates for SFAS 123R. Companies may elect to apply this
         statement either prospectively, or on a modified version of
         retrospective application under which financial statements for prior
         periods are adjusted on a basis consistent with the pro forma
         disclosures required for those periods under SFAS 123. The Company is
         currently evaluating which transitional provision and fair value
         methodology it will follow. The Company expects that any expense
         associated with the adoption of the provisions of SFAS 123R will have a
         material impact on its results of operations. Effective January 1,
         2006, the Company has fully adopted the provisions of SFAS No. 123R and
         related interpretations as provided by SAB 107. The Company did not
         issue any stock options as of March 31, 2006.

         In May 2005, the Financial Accounting Standard Board ("FASB") issued
         Statement No. 154, "Accounting Changes and Error Corrections, a
         replacement of APB Opinion No. 20, Accounting Changes, and Statement
         No. 3, Reporting Accounting Changes in Interim Financial Statements"
         (SFAS 154). SFAS 154 changes the requirements for the accounting for,
         and reporting of, a change in accounting principle. Previously, most
         voluntary changes in accounting principles were required to be
         recognized by way of a cumulative effect adjustment within net income
         during the period of the change. SFAS 154 requires retrospective
         application to prior periods' financial statements, unless it is
         impracticable to determine either the period-specific effects or the
         cumulative effect of the change. SFAS 154 is effective for accounting
         changes made in fiscal years beginning after December 15, 2005;
         however, the Statement does not change the transition provisions of any
         existing accounting pronouncements. We do not believe adoption of SFAS
         154 will have a material effect on our financial position, results of
         operations or cash flows.

         In June 2005, the Emerging Issues Task Force ("EITF") issued EITF 05-2,
         "The Meaning of Conventional Convertible Debt Instrument in Issue No.
         00-19". EITF 05-2 retained the definition of a conventional convertible
         debt instrument as set forth in EITF 00-19, and which is used in
         determining certain exemptions to the accounting treatments prescribed
         under SFAS 133, "Accounting for Derivative Instruments and Hedging
         Activities". EITF 05-2 also clarified that certain contingencies
         related to the exercise of a conversion option would not be outside the
         definition of "conventional" and determined that convertible preferred
         stock with a mandatory redemption date would also qualify for similar
         exemptions if the economic characteristics of the preferred stock are
         more akin to debt than equity. EITF 05-2 is effective for new
         instruments entered into and instruments modified in periods beginning
         after June 29, 2005. We adopted the provisions of EITF 05-2 on July 1,
         2005, which did not have a material effect on our financial statements.

                                       36
<PAGE>
          In July 2005, the FASB issued FASB Staff Position ("FSP") 150-5,
          "Accounting Under SFAS 150 for Freestanding Warrants and Other Similar
          Instruments on Redeemable Shares". FSP 150-5 clarifies that warrants
          on shares that are redeemable or puttable immediately upon exercise
          and warrants on shares that are redeemable or puttable in the future
          qualify as liabilities under SFAS 150, regardless of the redemption
          feature or redemption price. The FSP is effective for the first
          reporting period beginning after June 30, 2005, with resulting changes
          to prior period statements reported as the cumulative effect of an
          accounting change in accordance with the transition provisions of SFAS
          150. We adopted the provisions of FSP 150-5 on July 1, 2005, which did
          not have a material effect on our financial statements.

          In July 2005, the FASB issued EITF 05-6, "Determining the Amortization
          period for Leasehold Improvements Purchased After Lease Inception or
          Acquired in a Business Combination", which addressed the amortization
          period for leasehold improvements made on operating leases acquired
          significantly after the beginning of the lease. The EITF is effective
          for leasehold improvements made in periods beginning after June 29,
          2005. We adopted the provisions of EITF 05-6 on July 1, 2005, which
          did not have a material impact to the Company's financial position,
          results of operations and cash flows. Other accounting standards that
          have been issued or proposed by the FASB or other standards-setting
          bodies that do not require adoption until a future date are not
          expected to have a material impact on the consolidated financial
          statements upon adoption.

CRITICAL ACCOUNTING POLICIES

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

ITEM 3.  CONTROLS AND PROCEDURES

            Our Chief Executive Officer who also serves as our principal
financial officer, has 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 Chief Executive Officer who also serves as our
principal financial officer has concluded that our disclosure controls and
procedures are effective in providing reasonable assurance that the information
required to be disclosed in this report has been recorded, processed, summarized
and reported as of the end of the period covered by this report.

        During the period covered by this report, there have not been any
changes in our internal controls or, to our knowledge, in other factors that
could significantly affect our internal controls except as set forth below.

        On November 2, the Company filed a Current Report on Form 8-K with the
Securities and Exchange Commission in which the Company made certain disclosures
of triggering events that accelerated or increased a direct financial obligation
of the Company, which disclosures were not made in a timely manner.

        As a result of the untimely disclosure, the Company determined that
there was a deficiency in its internal control over financial reporting as of
July 1, 2005. In addition, we during fiscal 2005 we restated our audited
financial statements for fiscal 2004 as well as certain subsequent interim
unaudited financial statements as a result of accounting errors. As a result of
these accounting errors our Chief Executive Officer has previously determined
that we have a material weakness in our internal controls. We do not have a
Chief Financial Officer or other senior financial officer, nor do we have
sufficient accounting staff that are properly trained in the applicable of
generally accepted accounting principles. Based upon an evaluation by our Chief
Executive Officer of the effectiveness of our disclosure controls and procedures
as of the Evaluation Date, he as concluded that the Company needs the services
of a properly qualified and adequately experienced Chief Financial Officer. The
Company is actively seeking such services and as an interim measure, has sought
the advice of suitably qualified consultants as the need has arisen. However,
until such time as a properly qualified Chief Financial Officer is hired, and we
have a sufficient number of properly trained accounting staff, we will continue
to have material weaknesses in our internal controls.

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<PAGE>

                           PART II. OTHER INFORMATION


ITEM 1.  LEGAL PROCEEDINGS

             Our subsidiary, Beverage Network of Massachusetts, Inc. was named
     as a party in a legal proceeding filed by Kraft Foods, Inc. in the Superior
     Court of the County of Middlesex, Commonwealth of Massachusetts with
     respect to Civil Docket Number MICV2005-02503. For financial reasons we
     were unable to contest the plaintiff's claims and on August 26, 2005 a
     default order was entered in favor of Kraft Foods, Inc. against Beverage
     Network of Massachusetts, Inc. On October 4, 2005 Beverage Network of
     Massachusetts, Inc. was served with an execution order in the amount of
     $91,902.44, which includes costs. We have agreed the terms of a payment
     plan with the plaintiff's attorney. Whereby we have agreed to remit monthly
     payments of $14,172 until the entire balance is paid. The balance due as of
     April 1, 2006 was $58,559.

             On September 12, 2005 we received a notice of default under the
     terms of two secured promissory notes issued by us to investors in the
     aggregate principal amount of $300,000. These notes were due and payable by
     us on September 1, 2005. As collateral for these notes we pledged 100,000
     shares of our common stock and Theodore Farnsworth, our CEO, pledged
     100,000 shares of our common stock owned by him. The note holders are
     demanding payment of $328,813.50. As we have been unable to pay these
     amounts, the note holders are entitled to foreclose on the collateral at
     any time. On March 16, 2006, we reached agreement with the two note holders
     whereby we would redeem the notes and make all payments due to the note
     holders thereto, on or before March 31, 2006 in exchange for which
     agreement, we granted each note holder 750,000 shares of our common stock.
     We also issued in escrow, 500,000 shares of our common stock to each note
     holder which would be subject to release from escrow on March 31, 2006
     should the notes not be redeemed by that date. We failed to redeem the
     notes and consequently, the shares in escrow have been released by the
     escrow agent to the note holders.

             In October 2005, Good-o Beverages was awarded a judgment on the
     amount of $28,500 against beverage Network of Connecticut for product
     ordered by us in fiscal 2004. We have made regular payments in settlement
     of this amount and there is a balance of $3,900 as of May 15, 2006.

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<PAGE>

             On January 15, 2006 Export Development Canada obtained a judgment
     against Total Beverage Network, Inc in the amount of $22,357 for products
     that we ordered in 2004 but did not pay in full. We have not yet reached an
     agreement with the plaintiff.

             On January 25, 2006, we received a Civil Action Summons from the
     attorney for the Maui Juice Company and Lawrence Lassek for breach of
     contract, for our failure to pay certain installment payments under the
     terms of the Purchase and Sale Agreement with Maui Juice Company in the
     amount of $30,000. We are working with the plaintiffs to make the account
     current.

             In February, 2006 we received a demand letter from Ayer Beverage,
     Inc. in the amount of $72,934 for payments due under the Purchase and Sale
     Agreement between Ayer Beverage and Beverage Network of Massachusetts.
     Under the same agreement, we are also required to make payments under
     obligations that we assumed for $7, 889 plus costs and interest to
     Citizen's Bank and $30,000 to Mr. Tom MacIntire. We have reached agreement
     with Mr. Lehan and Ayer Beverages to pay the obligations to Mr. MacIntire
     and Citizen's Bank in full and pay Ayer Beverage $36,467 followed by three
     monthly payments thereafter of $9,467. As of May 15, 2006, we have made a
     payment of $7,000 to Citizen's Bank.

             In February 2006, Total Beverage Network received a demand from Le
     Natures, Inc in the amount of $17,057 for product that was ordered in 2004
     but not paid in full. We are working with their attorney to reach a
     settlement agreement.

             In March of 2004, we contracted with Florida Employer Solutions
     Inc. to handle our company's payroll, payroll added costs and certain other
     employee benefits such as health insurance. The collection and payment of
     payroll taxes was an integral part of this service. In June 2005, we were
     informed by the Internal Revenue Service that we were in default of certain
     payroll tax related payments, which monies had been paid by us to Florida
     Employer Solutions for tax payment purposes. Florida Employer Solutions has
     admitted to us and to the IRS that they had not made the mandatory payments
     when due and have agreed to repay all monies owed to the IRS in this
     regard. We believe that the total amount due to the IRS is approximately
     $250,000, which includes unpaid taxes as well as interest and penalties.
     The IRS have agreed to waive penalties upon receiving the principal balance
     due. In September 2005 we filed a complaint in the 17th Judicial Circuit in
     and for Broward County, Florida against Florida Employer Solutions, Inc.
     and Luis Ferrer and Maria G. Legarda, officers of Florida Employer
     Solutions. Our complaint alleges breach of contract, fraud, conversion,
     violation of the Florida Unfair and Deceptive Trade Practices Act and
     unjust enrichment and seeks judgment against Florida Employer solutions for
     all damages interests and costs.

             We have been advised by our attorneys that this case will be going
     to trial in January 2007 if the monies are not paid during a mediation
     hearing that will be scheduled prior to the trial date. In the event that
     we receive such monies, it will be applied the tax portion of the liability
     due the IRS.


                                       39
<PAGE>


             We have been further advised by our attorney handling this matter
     that on May 4, 2006, he reached a voluntary payment arrangement with the
     IRS whereby we would make payments to the IRS of $20,000 per month towards
     the outstanding tax only amount of $204,370.81, which amount does not
     include any interest or penalties that may be later assessed. Nor does it
     include any proceeds held in response to the tax levies previously issued
     relating to this amount. In their confirmatory letter to our attorney,
     the IRS agrees not to issue any further levies provided that we adhere to
     the voluntary payment arrangement. On May 8, 2006, the IRS Garnished a bank
     account $113,314. This amount has been applied to the outstanding balance
     owed.

             Our subsidiary, Beverage Network of Massachusetts, Inc. was named
     as a party in a legal proceeding filed by Fuze Beverage, LLC in the
     Superior Court for the County of Middlesex, Commonwealth of Massachusetts
     with respect to Civil Docket Number MICV2005-01392. For financial reasons
     we were unable to contest the plaintiff's claims and on May 27, 2005 a
     default order was entered in favor of Fuze Beverage, LLC against Beverage
     Network of Massachusetts, Inc. The court has entered a judgment against us
     in the amount of $36,873.33.


ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Securities Authorized for Issuance Under Equity Compensation Plans
We do not have a registered equity compensation plan for our directors or
employees. However, on May 5, 2006. Our Chairman recommended to the Board of
Directors that a grant of 4,040,000 shares of or common stock be distributed as
compensation among certain of our employees and directors in consideration of
services rendered to the company above and beyond the normal scope of their job
responsibilities and for them forgoing payroll payments on numerous occasions
since October 1, 2005. The board of directors voted to approve the Chairman's
recommendation and the shares shall be distributed in accordance with the board
resolution of May 5, 2006. The total number of shares to be issued is 3,965,000
with a market value of approximately $1,070,550. 1,000,000 shares of this total
are granted to Mr. Ted Farnsworth a further 1,000,000 shares of the total
granted to Mr. Jerry Pearring and 1,000,000 shares of the total to Mr. Barry
Willson all of these individuals are directors of our company. The remaining
965,000 shares are to be distributed to 13 of our employees.


ITEM 3.  DEFAULT UPON SENIOR SECURITIES

         Under the terms of the Secured Convertible Term Note issued by us to
Laurus Master Fund, L.P. in May 2004, the judgment entered against our
subsidiary, beverage Network of Massachusetts by Kraft Foods Inc. and other
legal actions as described in Item 1, constituted an event of default. As
security for this note, we had granted a security interest to Laurus Master
Fund, Ltd. in all of our assets, the obligations under the secured convertible
term note had been guaranteed by our subsidiaries, and we had pledged the stock
of all of our current and any future subsidiaries acquired by us during the term
of the secured convertible term note. At December 31, 2005, the outstanding
principal balance due under this Secured Convertible Term Note was $2,771,355.
As a result of this default, Laurus Master Fund, Ltd. was entitled to
immediately accelerate the due date of the note, and we would have owed Laurus
Master Fund, Ltd. 125% of the outstanding principal amount of the note plus
accrued and unpaid interest and fees which, as of October 27, 2005, would total
$3,694,275. Demand was not made by Laurus Master Fund, Ltd. and we have
subsequently redeemed the note with part of the proceeds of a new, non
convertible term note sold to Laurus Master Fund Ltd. The event of default under
the Secured Convertible Term Note has triggered an event of default under
unsecured promissory notes in the aggregate principal amount of $3,019,500 which
we issued to an aggregate of 39 purchasers in a private placement of our
securities between June and December, 2005. At the option of the holders of
greater than 50% of the face amount of these outstanding notes, the notes will
become immediately due and payable. We advised these note holders in writing of
the occurrence of the event of default. We do not know at this time what action,
if any, the note holders may take.


                                       40
<PAGE>

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

         NONE


ITEM 5.  OTHER INFORMATION

         None.


ITEM 6.  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



















                                       41
<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 Network, Inc.



                                         By: /s/ Theodore Farnsworth
                                             -----------------------
                                         Theodore Farnsworth, CEO,
                                         principal executive officer and
                                         principal financial officer

Dated: May 22, 2006.














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