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 June 30, 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)

            2, S. University Drive, Suite 220, Plantation Florida 33324
            --------------------------------------------------------
                    (Address of principal executive offices)

                                  954-473-0850
                                  ------------
                           (Issuer's telephone number)

         3511, W. Commercial Blvd., Suite 209, Fort Lauderdale, Florida 33309

                          ----------------------------
              (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: 42,007,211 shares of common stock as
of July 31, 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
XStream Beverage Network, Inc., a Nevada corporation, and our subsidiaries.



<PAGE>
                          XSTREAM BEVERAGE NETWORK, INC.
                                AND SUBSIDIARIES

                                      INDEX

                                                                            Page
                                                                            ----


Part I.  Financial Information


Item 1.  Financial Statements

Consolidated Balance Sheet as of June 30, 2006 (Unaudited).....................4

Consolidated Statements of Operations (Unaudited)
for the six months ended June 30, 2006
and June 30, 2005 (Restated)...................................................5

Consolidated Statements of Cash Flows (Unaudited)
for the six months ended June 30, 2006
and six months ended June 30, 2005.............................................6

Notes to Consolidated Financial Statements (Unaudited)
as of June 30, 2006............................................................7



Item 2.  Management's Discussion and Analysis or Plan of Operation............42


Item 3.  Controls and Procedures..............................................48


Part II.  Other Information...................................................50


Item 1.  Legal Proceedings....................................................50


Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds..........52


Item 3.  Default on Senior Securities.........................................52


Item 4.  Submission of Matters to a Vote of Security Holders..................52


Item 5.  Other Information....................................................52

Item 6.  Exhibits.............................................................52

SIGNATURES....................................................................53


                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 June 30, 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.


<PAGE>

                         PART I. FINANCIAL INFORMATION


ITEM 1.  FINANCIAL STATEMENTS


              XSTREAM BEVERAGE NETWORK INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEET
                               (Unaudited)

<TABLE>
<CAPTION>
                                                                                         JUNE 30,
                                                                                           2006
                                                                                       ------------
<S>                                                                                    <C>
ASSETS
    CURRENT ASSETS:
       CASH                                                                            $    269,541
       Accounts receivable, net of allowance for doubtful                                   768,670
       accounts of $12,521
       Other receivables                                                                     96,096
       Inventory                                                                            749,089
       Prepaid expenses                                                                      67,452
                                                                                       ------------
          Total current assets                                                            1,950,848
                                                                                       ------------

    Property and equipment                                                                  296,092
    Less: Accumulated depreciation                                                         (149,403)
                                                                                       ------------
    Property and equipment, net                                                             146,689
                                                                                       ------------
    Other Assets:
       Capitalized Funding Costs, net of accumulated amortization of $3,699,905           1,327,918
       Trademarks                                                                           303,017
       Customer lists, net of accumulated amortization of $789,296                        1,183,944
       Goodwill                                                                             847,620
       Other assets                                                                          62,249
                                                                                       ------------
          Total Other Assets                                                              3,724,748
                                                                                       ------------
Total Assets                                                                           $  5,822,285
                                                                                       ============
LIABILITIES & STOCKHOLDERS' DEFICIENCY
    LIABILITIES:
       CURRENT LIABILITIES:
          NOTES PAYABLE                                                                $    957,682
          Loans payable - related party                                                      50,355
          Revolving line of credit                                                          580,658
          Convertible term loan, net of discount of $264,063                              3,870,647
          Current portion of long term debt                                               2,808,234
          Accounts payable                                                                2,016,635
          Overdraft liability                                                                 1,000
          Accrued expenses                                                                2,408,368
          Dividends payable                                                                  87,632
          Derviative Liability                                                            5,662,171
          Other current liabilities                                                          20,798
                                                                                       ------------
             Total Current Liabilities                                                   18,464,180
                                                                                       ------------

       LONG TERM LIABILITIES:
          LONG TERM NOTES, NET OF DISCOUNT OF $2,137,322                                  3,413,261
          Preferred Series B ($0.001 par value, 41 Shares issued and outstanding),
          net of discount of $701,143                                                     1,458,857
                                                                                       ------------
             Total long term liabilities                                                  4,872,118

                                                                                       ------------
             Total Liabilities                                                           23,336,298
                                                                                       ------------

    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,
          41,323,136 issued and outstanding                                                  41,323
       Additional paid in capital                                                        41,328,323
       Accumulated other comprehensive loss                                             (10,353,085)
       Accumulated deficit                                                              (44,297,363)
       Less: subscription receivable                                                     (3,856,947)
       Less: deferred costs                                                                (376,464)
                                                                                       ------------
             Total stockholders' deficiency                                             (17,514,013)
                                                                                       ------------
TOTAL LIABILITIES & STOCKHOLDERS'  DEFICIENCY                                          $  5,822,285
                                                                                       ============
</TABLE>


     See accompanying notes to unaudited consolidated financial statements.

                                        4

<PAGE>

                   XSTREAM BEVERAGE NETWORK INC. AND SUBSIDIARIES
                       CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (UNAUDITED)


<TABLE>
<CAPTION>
                                                        THREE MONTHS ENDED JUNE 30,           SIX MONTHS ENDED JUNE 30,
                                                           2006              2005              2006              2005
                                                       ------------      ------------      ------------      ------------
                                                                    RESTATED - NOTE 2                   RESTATED - NOTE 2
<S>                                                    <C>               <C>                  <C>            <C>
SALES                                                  $  2,856,305      $  2,738,350         5,523,891      $  5,272,037

Cost of goods sold                                        2,321,266         2,266,789         4,518,466         4,318,437
                                                       ------------      ------------      ------------      ------------
Gross profit                                                535,039           471,561         1,005,425           953,600

   Marketing, selling, general & administrative           2,776,857         2,932,906         4,250,091         5,185,516
                                                       ------------      ------------      ------------      ------------
      Total operating expense                             2,776,857         2,932,906         4,250,091         5,185,516
                                                       ------------      ------------      ------------      ------------
Loss from operations                                     (2,241,818)       (2,461,345)       (3,244,666)       (4,231,916)
Other Income/(Expense)
   Other income                                              21,672             9,505            28,165            19,505
   Interest income                                               --                --                --             1,526
   Interest expense                                      (3,185,621)       (1,345,808)       (8,054,941)       (2,689,845)
   Change in fair value of derivative                     6,582,697        (3,545,413)        2,553,089         6,640,755
   Settlement gain, (loss)                                       --             1,912                --             1,912
   Other expense                                                 --           (32,328)       (1,626,367)          (82,196)
   Gain on disposal of fixed assets                         (28,745)               --           (40,174)               --

                                                       ------------      ------------      ------------      ------------
      Total other income/(expense)                        3,390,003        (4,912,132)       (7,140,228)        3,891,657
                                                       ------------      ------------      ------------      ------------
Net Income (loss)                                         1,148,185        (7,373,477)      (10,384,894)         (340,259)
                                                       ------------      ------------      ------------      ------------

Unrealized loss on subscription receivable               (1,589,928)         (473,684)       (2,110,981)         (473,684)
                                                       ------------      ------------      ------------      ------------
Comprehensive (Loss) Income                            $   (441,743)     $ (7,847,161)     $(12,495,875)     $   (813,943)
                                                       ============      ============      ============      ============
Preferred stock dividends                                   (33,747)          (34,272)          (66,626)          (67,662)
                                                       ------------      ------------      ------------      ------------

NET INCOME (LOSS) AVAILABLE TO COMMON STOCKHOLDERS     $  1,114,438      $ (7,407,749)     $(10,451,520)     $   (407,921)
                                                       ============      ============      ============      ============

Net Income (Loss) per share - Basic                    $       0.03      $      (0.80)     $      (0.30)     $      (0.07)
                                                       ============      ============      ============      ============

Net Income (Loss) per share - Diluted                  $       0.03      $      (0.80)     $      (0.30)     $      (0.07)
                                                       ============      ============      ============      ============

Weighted Average Shares Outstanding - Basic              39,382,037         9,281,718        35,204,915         6,256,500
                                                       ============      ============      ============      ============

Weighted Average Shares Outstanding - Diluted            39,582,037         9,281,718        35,204,915         6,256,500
                                                       ============      ============      ============      ============
</TABLE>

     See accompanying notes to unaudited consolidated financial statements.

                                        5

<PAGE>

                 XSTREAM BEVERAGE NETWORK INC. AND SUBSIDIARIES
                             CONSOLIDATED CASH FLOWS
                        FOR THE SIX MONTHS ENDED JUNE 30,
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                                    2006              2005
                                                                                ------------      ------------
<S>                                                                             <C>                <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net Loss                                                                     $(10,384,894)         (340,259)

   Adjustments to reconcile net loss to
      net cash used in operating activities:
      Bad debts                                                                        16,519            16,903
      Depreciation                                                                     43,563            45,450
      Amortization of deferred consulting                                             897,623           483,194
      Fair value of derivative liabilities                                          1,097,153                --
      Amortization of debt discount and fees to interest expense                    5,110,513         2,060,990
      Amortization of intangibles                                                     200,518           215,937
      Amortization of capital funding costs                                         1,643,243           529,379
      Liquidated damages for failure to timely file registration statement            342,000           162,000
      Default premium -  Laurus Master  Fund                                          166,281                --
      Stock based loan fee                                                            566,665           145,056
      Stock based services                                                          1,289,547         1,339,746
      Loss on disposition of fixed assets                                              40,174                --
      Change in the fair value of derivative liabilities                           (2,553,089)       (6,640,755)
      Impairment of intangibles                                                        65,789           890,000

      Changes in operating assets and liabilities:
         Accounts receivable                                                         (320,403)           23,196
         Inventory                                                                    (11,325)           33,796
         Other current and non-current assets                                         (10,343)          (90,602)
         Accounts payable                                                             387,203           305,646
         Accrued expenses                                                              47,881           (23,787)
         Other current and non-current liabilities                                    (15,948)           10,777
                                                                                -------------      ------------

             Net cash used in operating activities                                 (1,381,330)         (833,333)
                                                                                -------------      ------------

CASH FLOWS FROM INVESTING ACTIVITIES:
   Acquisition of equipment                                                            (5,137)          (10,651)
   Proceeds from disposition of fixed assets                                           10,420                --
                                                                                -------------      ------------

             Net cash provided by (used in) investing activities                        5,283           (10,651)
                                                                                -------------      ------------

CASH FLOWS FROM FINANCING ACTIVITIES:
   Proceeds from non - related party loans                                          6,668,352           361,388
   Repayment of non - related party loans                                          (4,806,855)         (138,206)
   Capitalized funding costs                                                         (294,500)               --
   Cash overdraft                                                                     (15,153)          210,127
   Proceeds from related party loans                                                   50,000                --
   Repayment of related party loans                                                   (50,000)          (25,000)
   Disbursement of restricted cash                                                         --           452,771
                                                                                -------------      ------------
             Net cash provided by financing activities                              1,551,844           861,080
                                                                                -------------      ------------
Net cash increase                                                                     175,797            17,096
Cash at beginning of year                                                              93,744            84,326
                                                                                -------------      ------------
Cash at end of year                                                             $     269,541      $    101,422
                                                                                =============      ============


Supplemental Disclosure of Cash Flow Information:
   Cash paid during the period for:
   Interest paid                                                                $     969,694      $    193,562
   Taxes paid                                                                              --                --

</TABLE>

     See accompanying notes to unaudited consolidated financial statements.

                                       6

<PAGE>

                         XSTREAM BEVERAGE NETWORK, INC.
                                AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 JUNE 30, 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.

                                       7

<PAGE>

                         XSTREAM BEVERAGE NETWORK, INC.
                                AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 JUNE 30, 2006


         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.

         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.

                                        8
<PAGE>

                         XSTREAM BEVERAGE NETWORK, INC.
                                AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 JUNE 30, 2006


         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 June 30, 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.

                                       9
<PAGE>

                         XSTREAM BEVERAGE NETWORK, INC.
                                AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 JUNE 30, 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.

         In February 2006, the FASB issued Statement of Financial Accounting
         Standards ("SFAS") No. 155, "Accounting for Certain Hybrid Financial
         Instruments-an amendment of FASB Statements No. 133 and 140." SFAS No.
         155 improves financial reporting by eliminating the exemption from
         applying SFAS No. 133 to interests in securitized financial assets so
         that similar instruments are accounted for similarly regardless of the
         form of the instruments. It also improves financial reporting by
         allowing a preparer to elect fair value measurement at acquisition, at
         issuance, or when a previously recognized financial instrument is
         subject to a remeasurement (new basis) event, on an
         instrument-by-instrument basis, in cases in which a derivative would
         otherwise have to be bifurcated. SFAS No. 155 is effective for all
         financial instruments acquired or issued after the beginning of an
         entity's first fiscal year that begins after September 15, 2006. The
         Company is currently evaluating the impact of SFAS No. 155 on the
         Company's consolidated results of operations and financial condition.

         In June 2006, the Financial Accounting Standards Board ("FASB") issued
         FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes
         - an interpretation of FASB Statement No. 109" ("FIN 48"). FIN 48
         clarifies the accounting for uncertainty in income taxes recognized in
         accordance with FASB Statement No. 109, "Accounting for Income Taxes."
         FIN 48 prescribes a two-step process to recognize and measure a tax
         position taken or expected to be taken in a tax return. The first step
         is to determine whether a tax position has met the more-likely-than-not
         recognition threshold and the second step is to measure a tax position
         that meets the threshold to determine the amount of benefit to
         recognize. FIN 48 also provides guidance on derecognition,
         classification, interest and penalties, accounting in interim periods,
         disclosure and transition. FIN 48 is effective for fiscal years
         beginning after December 15, 2006. The Company is currently evaluating
         the impact of FIN 48 on the Company's consolidated results of
         operations and financial condition.

                                       10
<PAGE>

                         XSTREAM BEVERAGE NETWORK, INC.
                                AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 JUNE 30, 2006


         In July 2006, the FASB issued FASB Interpretation ("FIN") No. 48
         "Accounting for Uncertainty in Income Taxes - An Interpretation of FASB
         Statement 109." FIN 48 prescribes a comprehensive model for
         recognizing, measuring, presenting and disclosing in the financial
         statements tax positions taken or expected to be taken on a tax return,
         including a decision whether to file or not to file in a particular
         jurisdiction. FIN 48 is effective for fiscal years beginning after
         December 15, 2006. If there are changes in net assets as a result of
         application of FIN 48 these will be accounted for as an adjustment to
         retained earnings. Because the guidance was recently issued, we have
         not yet determined the impact, if any, of adopting the provisions of
         FIN 48 on our financial position, results of operations and liquidity.

         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)  Cost of Goods Sold: an increase of $284,872 and $529,005,
                    respectively, as of the three months and six months ending
                    June 30, 2005.

               (B)  Selling, General & Administrative: A net decrease of $11,353
                    and $128,223, respectively, as of the three months and six
                    months ending June 30, 2005.

               (C)  Interest Expense: An increase of $621,416 and $1,224,975,
                    respectively, as of the three months and six months ending
                    June 30, 2005.

               (D)  Change in Fair Value of Derivative: An increase of
                    $3,545,413 and a decrease of $6,640,755, respectively, for
                    the three months and six months ending June 30, 2005.

               (D)  Other Expense: An increase of $32,328 and $82,186,
                    respectively, for the three and six months ending June 30,
                    2005.

         There were also adjustments to the 2005 statement of operations
         attributable to S.E.C. the Company's SB-2 Registration Statement. The
         adjustments were as follows:

               (E)  Impairment Expense: An increase of $890,000 for both the
                    three and six months ending June 30, 2005.

               (E)  Preferred Stock Dividends: A decrease of $287,408 and
                    $574,815, respectively, for the three months and six months
                    ending June 30, 2005.

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 six months ended
         June 30, 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

                                       11

<PAGE>

                         XSTREAM BEVERAGE NETWORK, INC.
                                AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 JUNE 30, 2006


         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 six-month period ended June 30, 2006. The total
         outstanding warrants which have been excluded from the calculation of
         loss per share, were 9,957,548 and 6,188,795 at June 30, 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 4,591,106 and 2,842,105 shares of common stock at
         June 30, 2006 and 2005, respectively The Company has Convertible Notes
         that could convert into 403,423 and 384,615 shares of common stock as a
         result of the Master Distributors acquisition; 4,538,210 shares of
         common stock as a result of the Laurus secured note 3,947,368 (see note
         20 - Long Term Notes Payable) and 7,445,811 shares and 504,542 shares,
         as a result of the Term Notes (See Note 15 - Convertible Term Loan) at
         June 30, 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. 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 June 30, 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 June 30, 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 22(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:

<TABLE>
<CAPTION>
                                               THREE MONTHS ENDED JUNE 30,    SIX MONTHS ENDED JUNE 30,
                                                  2006            2005           2006           2005
                                               ----------      ----------     ----------     ----------
<S>                                            <C>              <C>           <C>             <C>
DENOMINATOR FOR BASIC EPS                      39,382,037       9,281,718     35,204,915      6,256,500
                                               ==========      ==========     ==========     ==========


WEIGHTED AVERAGE EFFECT ON DENOMINATOR FOR     39,382,037       9,281,718     35,204,915      6,256,500
BASIC EPS

EFFECT OF SERIES "A" CONVERTIBLE PREFERRED        200,000              --             --             --
                                               ----------      ----------     ----------     ----------
STOCK

DENOMINATOR FOR DILUTED EPS                    39,582,037       9,281,718     35,204,915      6,256,500
                                               ==========      ==========     ==========     ==========
</TABLE>


                                       12
<PAGE>

                         XSTREAM BEVERAGE NETWORK, INC.
                                AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 JUNE 30, 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
         alliance. The balance as of June 30, 2006 consisted of the following:


                                                       June 30, 2006
                                                       -------------
         Distributor Alliance                           $  68,129
         Credits from vendors                              19,359
         Tenant sublease rent                               4,800
         Returned checks from customers                     3,297
         Other                                                511
                                                       ----------
         Total:                                         $  96,096
                                                       ==========

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:

                                                      June 30, 2006
                                                      --------------
         Resalable products                            $  715,408
         Proprietary brand raw materials                   33,681
                                                       ----------
         Total:                                        $  749,089
                                                       ==========

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

         The prepaid expense balance consisted of the following:

                                                      June 30, 2006
                                                      --------------
         Inventory                                     $   26,386
         Insurance                                         21,720
         Warehouse/Office Supplies                          5,871
         Service Contracts                                  9,225
         Other                                              4,250
                                                       ----------
         Total:                                        $   67,452
                                                       ==========


                                       13
<PAGE>

                         XSTREAM BEVERAGE NETWORK, INC.
                                AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 JUNE 30, 2006

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

         Depreciation expense for the six months ending June 30, 2006 and June
         30, 2005 was $43,563 and $45,450, respectively.

         Property and equipment at June 30, 2006 is as follows:

                                                      June 30, 2006
                                                      --------------
         Delivery Trucks                               $   41,800
         Warehouse Equipment                               35,642
         Coolers                                           64,000
         Office Equipment                                 101,947
         Furniture & Fixtures                              15,945
         Leasehold Improvements                            36,758
                                                       ----------
                                                          296,092
         Less: Accumulated depreciation                  (149,403)
                                                       ----------
         Net                                           $  146,689
                                                       ==========

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

         The table below summarizes the balance of capitalized funding costs as
         of June 30, 2006:

                                                            June 30, 2006
                                                            --------------
         Capitalized Funding Costs                            $5,027,823

         Accumulated Amortization:                            (3,699,905)
                                                              ----------
                  Total:                                      $ 1,327,918
                                                              ===========

         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 16 - 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 22 - 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
         six months ending June 30, 2006, while recognizing $313,301 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 six months ending June 30, 2006; amortized
         funding costs for the six months ending June 30, 2005 were $21,833.
         (See Note 20 - 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. Amortized funding costs were $21,208 for the
         six months ending June 30, 2006 with a remaining balance of $233,292.
         There were no comparable transactions for the same period in 2005.

                                       14
<PAGE>

                         XSTREAM BEVERAGE NETWORK, INC.
                                AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 JUNE 30, 2006


         The Company closed a second financing transaction on July 30, 2004 (See
         Note 20 - 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 22 - Stockholders' Deficiency and
         Recapitalization). The Company recognized amortized funding costs of
         $194,244 and $194,244, respectively, for the six months ending June 30,
         2006 and 2005. The remaining balance of unamortized funding costs
         attributable to this transaction is $615,108.

         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 $47,415 with a
         remaining balance of $234,194 as of June 30, 2006. There were no
         comparable expenses for the six months ending June 30, 2005 (see Note
         19 - 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 $34,633 was recognized, with a remaining balance of $171,061
         as of June 30, 2006. There were no comparable expenses for the six
         months ending June 30, 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 $202,664 with a remaining balance
         of $40,922 as of June 30, 2006 (see Note 15 - 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 June 30, 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 $197,257, with a remaining balance of $21,345.

         In April 2006 the Company executed a 120 day demand note due August 5,
         2006. The Company paid a placement agent fee, from the proceeds, in the
         amount of $40,000 which is being amortized over the term of the note.
         The Company recognized an expense of $28,000 with a remaining balance
         of $12,000 at June 30, 2006.

                                       15
<PAGE>

                         XSTREAM BEVERAGE NETWORK, INC.
                                AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 JUNE 30, 2006


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

         Trademarks consist of the following:

                                                       June 30, 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 the Beverage Network of
         Maryland ("BNMD") customer list as of June 30, 2006:

                                                            June 30, 2006
                                                            --------------
         Acquired customer list                                1,973,240

         Accumulated Amortization:                              (789,296)
                                                              ----------
                  Total:                                      $1,183,944
                                                              ==========

         As a result of the acquisitions of the assets of Pacific Rim Natural
         Juice Company ("BNHI") and Master Distributors, Inc. ("BNMD"), 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. Upon completion of a
         periodic review of the valuation criteria management determined that
         the $21,094 balance of the customer list for BNHI should be written off
         as it was considered impaired. This was due to a working capital
         deficiency preventing this entity from purchasing inventory and
         generating sales. A review of the valuation criteria for the balance of
         the customer list for BNMD determined that there have not 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.

                                       16
<PAGE>

                         XSTREAM BEVERAGE NETWORK, INC.
                                AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 JUNE 30, 2006


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. 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, however, upon completion of a periodic review of the
         valuation criteria management determined that the $44,695 balance of
         goodwill for BNHI should be written off as it was considered impaired.
         A review of the valuation criteria for the remaining balance of the
         BNMD goodwill in the amount of $847,620, determined that there has not
         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 12 - OTHER ASSETS:
----------------------

         The balance of other assets in the amount of $62,249 as of June 30,
         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 notes 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.
         The Company repaid the loan in May 2006.

         Loans payable at June 30, 2006 were as follows:

         Loans Payable:


         Automotive equipment loan (1)                           $      923
         March 2004, interest bearing demand note 8%
          per annum, due June 2004 (loan in arrears) (1)             13,201
         March 2004, non-interest bearing, due April 2005
          due April, 2005 (loan in arrears) (1)                      72,934
         December 2005 - May 2006, 60 day demand notes,
          fixed interest                                            605,696
         April 2006, 120 day demand note,
          fixed interest                                            264,928


                                                                  ----------
           Total Loans Payable - Other                              957,682

           Loans Payable, Related Party                              50,355
                                                                 ----------
           Total Loans Payable                                   $1,008,037
                                                                 ==========
         ----------
         (1) Resulted from the acquisition of Beverage Network of Massachusetts,
             Inc. "BNMA")

                                       17
<PAGE>

                         XSTREAM BEVERAGE NETWORK, INC.
                                AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 JUNE 30, 2006


         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 $181,098 was
         recognized for the six months ending June 30, 2006. The Company also
         issued 1,875,000 share of its common stock as a pledge of collateral
         for the notes (See Note 22 (B) - Stockholders' Deficiency and
         Recapitalization).

         In April 2006 Company executed a $250,000, 120 day demand note, fixed
         interest of $25,000 due August 5, 2006. The proceeds to the Company was
         $210,000 after paying a placement fee of $40,000. The note contained a
         provision whereby the holder received 250,000 restricted common shares
         which the Company valued at $92,500 and is being amortized over the
         term of the note. Interest expense for the six months ending June 30,
         2006 was $64,750 with a remaining balance of $27,750.


NOTE 14 - LAURUS MASTER FUND REVOLVING LINE OF CREDIT:
-----------------------------------------------------

         On March 31, 2006, the Company issued a $4 million line of credit with
         the Laurus Master Fund. ("Laurus Debt"). The line of credit bears
         interest at the highest of 9% or prime plus 2% and matures in March
         2009 and interest is payable monthly monthly. The balance with accrued
         interest is $580,658 as of June 30, 2006.

NOTE 15 - CONVERTIBLE TERM LOAN:
-------------------------------

         The balance of the convertible term notes, accrued interest and related
         debt discount at June 30, 2006 is as follows:

                   Term note 18% per annum                       $  625,000
                   Term note 12% per annum                        3,019,500
                   Accrued interest                                 490,210
                   Less: debt discount                             (264,063)
                                                                 ----------
                                                                 $3,870,647
                                                                 ==========

         The Company secured $725,000 from investors resulting from a debt
         placement offering originating in February 2005. The debt instruments
         were 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 equivalent 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 22 (C) - Stockholders'
         Deficiency and Recapitalization).

                                       18
<PAGE>

                         XSTREAM BEVERAGE NETWORK, INC.
                                AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 JUNE 30, 2006


         In September 2005, we received a notice of default under the terms of
         two secured promissory notes issued by us from two 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 for 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 $1,050,000 as of June 30, 2006 (See Note
         22 (B) - Stockholders' Deficiency and Recapitalization). In July 2006
         the Company received a notice of final default judgment from one of the
         note holders demanding $135,053 within 45 days, or by August 24, 2006.

         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 six months ending June 30, 2006. In June 2006, the
         Company issued and additional 190,000 restricted shares valued at
         $51,300 to defer payments until September 15, 2006. The Company
         recognized interest expense of $5,897 with a remaining deferred balance
         of $45,403 as of June 30, 2006 (See Note 22 (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 June 30, 2006, the Company reflected a
         balance of principal and interest due of $3,350,646. The Company
         allocated $2,885,290 to debt discount; it recognized interest expense
         from debt discount amortization of $1,436,541 with a remaining balance
         of $264,063 to be amortized through fiscal 2006. (See Note 19 -
         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 $119,411 with a remaining deferred
         component of $15,451 as of June 30, 2006. (See Note 22 (B) -
         Stockholders' Deficiency and Recapitalization).

                                       19
<PAGE>

                         XSTREAM BEVERAGE NETWORK, INC.
                                AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 JUNE 30, 2006


         Notice of Default:

         The event of default under the Laurus Secured Convertible Term Note
         (see Note 20 - 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.

NOTE 16 - CURRENT PORTION, LONG TERM DEBT & DEBT DISCOUNT:
---------------------------------------------------------

         The current portion of long term debt and debt discount as of June 30,
         2006 is as follows:

         Interest bearing demand note 6% per annum, due
         April 2012 (Maui Trademark)                     $  185,436
         Secured 6% convertible note ("BNMD")             2,097,798
         Senior secured note ("Laurus")*                    525,000
                                                         ----------
          * (see Note 20 - Long Term Notes payable)       2,808,234
                                                         ==========

         On June 28, 2006, the Company received a notice of final default
         judgment from the principal owner of the Maui Juice Company for failure
         to pay principal payments under the terms of the Purchase and Sale
         Agreement for the Maui Juice trademark. The amount in arrears is
         approximately $55,000 and the Company's attorney is negotiating with
         the plaintiffs for an alternative payment schedule.

         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 June 30, 2006 is $2,097,798.


                                       20
<PAGE>

                         XSTREAM BEVERAGE NETWORK, INC.
                                AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 JUNE 30, 2006


NOTE 17 - 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
         June 30, 2006 was as follows:

         Accrued Expense-Salaries: Officers/Directors     $  488,686
         Accrued Expense-Salaries: Other                     282,486
         Accrued Expense-Liquidated Damages                  252,977
         Accrued Expense-Cogent                            1,150,470
         Accrued Expense-Taxes                               201,062
         Accrued Expense-Other                                32,687
                                                          ----------

                                Total Accrued Expenses:   $2,408,368
                                                          ==========


         The Company has accrued salaries of $488,686, in aggregate, due to the
         Chairman, President and Vice President. The remaining accrued salaries
         balance of $282,486 consists of $245,578 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
         - June 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 $252,977 as of June 30, 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 20- 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
         of June 30, 2006 is $1,150,470 (See Note 23 - Subscription Receivable).

                                       21
<PAGE>

                         XSTREAM BEVERAGE NETWORK, INC.
                                AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 JUNE 30, 2006


         Under the terms of the Secured Convertible Term Note issued by us to
         the 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 the 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, The
         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 also
         paid.

         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 $201,062 as of June
         30, 2006.

NOTE 18 - 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 June 30, 2006 was $87,632.

NOTE 19 - DERIVATIVE LIABILITY:
------------------------------

         The Company recognized liabilities for the following derivatives at the
         date of their issuance during the six-month period ended June 30, 2006
         and 2005, respectively:

                           During the six-month period

                                    Ended June 30,

                                          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                                     --             3,460,774
Freestanding warrants issued to
placement agents
Other warrants                                 --             1,012,100
                                       $2,599,716            $4,472,874







                                       22
<PAGE>

                         XSTREAM BEVERAGE NETWORK, INC.
                                AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 JUNE 30, 2006


The fair value of the derivative liabilities at June 30, 2006 are as follows:

Embedded conversion
features and liquidated damages
and freestanding warrants issued
to investors-
$3,000,000 convertible note                    $  173,477
 $2,000,000 senior convertible note             1,414,542
Series B preferred shares                       2,180,840
Convertible Term loans                          1,273,143
Freestanding warrants issued to
placement agents
$3,000,000 convertible note                        73,609
Series B preferred shares                          75,540
Term loans                                        138,653
Other warrants                                    332,367
                                               ----------
                                               $5,662,171

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


Embedded conversion feature and liquidated damages

                                               During the six-month
                                Period ended June 30, 2005     At June 30, 2006
                                --------------------------     ----------------
Market price:                          $    0.90                   $     0.25
Conversion price:                      $    0.76                   $0.45-1.50
Term:                                    4 years               2.3-3.75 years
Volatility:                                  77%                         136%
Risk-free interest rate:                   3.64%                        5.12%
Maximum liability:
$2,000 senior convertible note                                     $3,757,638
Series B preferred shares                                           6,202,936
Term loans                                                          3,544,738



Freestanding warrants
                                               During the six-month
                                Period ended June 30, 2005     At June 30, 2006
                                --------------------------     ----------------
Market price:                         $     0.90                   $    0.25
Exercise price:                       $ 0.20-100                   $0.20-100
Term:                               2.75-5 years             1.24-4.31 years
Volatility:                              73-104%                        136%
Risk-free interest rate:              3.22-3.64%                       5.12%
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.

                                       23
<PAGE>

                         XSTREAM BEVERAGE NETWORK, INC.
                                AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 JUNE 30, 2006


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 six-month period ended June 30, 2006 and 2005, the Company allocated
$2,000,000 and $720,857, 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
$82,186 during the six-month period ended June 30, 2006 and 2005, respectively.



During the six-month period ended June 30, 2005, the Company allocated
$1,051,636 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 $2.5 million and $6.6
million during the six-month period ended June 30, 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.


NOTE 20 - LONG TERM NOTES PAYABLE:
---------------------------------

         The current portion of long term debt and debt discount as of June 30,
         2006 is as follows:

         43.2 shares of Series B Convertible Preferred Stock        2,160,000
         Senior Secured convertible note ("Laurus")                 2,042,194
         Senior secured note ("Laurus")                             4,033,389
         Less: Debt discount Convertible Preferred Stock             (701,143)
         Less: Debt discount Secured convertible note ("Laurus")   (1,833,333)
         Less: Debt discount on senior secured note                  (303,989)
         Less: Current portion of senior secured note *              (525,000)
                                                                   ----------
                                                                   $4,872,118
                                                                   ==========
         ---------
         * (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 June 30, 2006 (See Note 22 (A) -
         Stockholders' Deficiency and Recapitalization).

                                       24
<PAGE>

                         XSTREAM BEVERAGE NETWORK, INC.
                                AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 JUNE 30, 2006


         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 repaid 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 six months ending
         June 30, 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, resubmitted on October 14, 2005 and subsequently cancelled in
         April 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 17 - 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 on the $2 million
         senior secured convertible note is due at maturity, while interest on
         the $4 million secured note and $4 million line of credit 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 balance of
         principal and accrued interest on the $2 million secured convertible
         note and the $4 million secured note was $2,042,194 and $4,033,389,
         respectively, as of June 30, 2006.


                                       25
<PAGE>

                         XSTREAM BEVERAGE NETWORK, INC.
                                AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 JUNE 30, 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 21 - 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 approximately 3,564
         square feet at a rate of $12.50 per sq. ft. Rent expense was $23,162
         for the six-months ending June 30, 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 six months ending June 30, 2006 was
         $3,780.

         BNCT leased a 13,622 square foot facility in Bristol, CT. The rent is
         $5,676 per month and the lease expires in October 2008. The lease was
         terminated and the premises vacated. Rent expense for the six- months
         ending June 30, 2006 was $27,447.

         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 six-months ending June 30, 2006 was
         $33,494.

                                       26
<PAGE>

                         XSTREAM BEVERAGE NETWORK, INC.
                                AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 JUNE 30, 2006


         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. In April 2006, the lease was terminated and
         BNMA moved its inventory to a warehouse facility on a month-to-month
         basis with no lease agreement at a cost of approximately $750 per
         month. Rent expense charged to operations for the six-months ending
         June 30, 2006 was $13,008.

         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
         provides $12,550 per month. The sublease rent is offset against rent
         expense. The total rent charged to operations for the six-month period
         ending June 30, 2006 was $42,804.

         (B) EMPLOYMENT AGREEMENTS

         See Note 17 for details regarding accrued compensation.

         (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
         the Company was 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, which includes costs. The Company
         agreed the terms of a payment plan with the plaintiff's attorney to
         remit monthly payments of $14,172 until the entire balance is paid.

         On September 12, 2005 the Company 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. The notes were due and
         payable on September 1, 2005. As collateral for these notes the Company
         pledged 100,000 shares of restricted common stock and Theodore
         Farnsworth, our CEO, pledged 100,000 shares of common stock personally
         held 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, an
         agreement was made with the two note holders whereby the Company would
         redeem the notes and make all payments due to the note holders, on or
         before March 31, 2006. As consideration, the Company granted each note
         holder 750,000 shares restricted common stock along with 500,000 shares
         of restricted 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. On July 10, 2006 the Company received a notice of final
         judgment by default from one of the note holders in the amount of
         $135,053. The Company has 45 days to satisfy the judgment. No further
         agreement has been discussed or reached with the remaining note holder.
         The default under these notes created another event of default Under
         the unsecured convertible term notes in the principal amount of
         $3,019,500.



                                       27
<PAGE>

                         XSTREAM BEVERAGE NETWORK, INC.
                                AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 JUNE 30, 2006


         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 due to Mr. Stodard and Master
         Distributors was is 2,097,798 as of August 11, 2006. The default under
         this note has created another event of default under the unsecured
         convertible term 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 $2,904 as of August 11, 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 $55,000. 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 an
         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 April
         2006, the debt with Citizen's Bank had been completely satisfied.

                                       28
<PAGE>

                         XSTREAM BEVERAGE NETWORK, INC.
                                AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 JUNE 30, 2006


         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, the Company contracted with Florida Employer
         Solutions, Inc. to process the company payroll 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,
         the Company was informed by the Internal Revenue Service that payroll
         tax payments had not been remitted on our behalf. The Company had
         remitted all payments to Florida Employer Solutions so they could remit
         the tax payments on our behalf. Florida Employer Solutions has admitted
         to the Company and to the IRS that they had not made the mandatory
         payments when due. We believe that the total amount due to the IRS is
         approximately $335,171, which includes the principal balance of unpaid
         taxes. The IRS have agreed to waive certain penalties upon receiving
         the principal balance due. In September 2005 the Company 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. The 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.

         The Company has been advised by 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 such monies are received, it will be applied the tax portion of
         the liability due the IRS. We have been further advised by counsel that
         on May 4, 2006, the IRS negotiated a voluntary payment arrangement
         whereby the Company would remit payments of $20,000 per month towards
         the outstanding tax due of approximately $335,171. 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. The IRS agrees not to issue any
         future liens or levies provided that the Company adheres to the payment
         arrangement.

         In May 2006, the IRS garnished a bank account in the amount of
         $114,110; this amount, along with an additional payment of $60,000 has
         been applied to the outstanding balance. The balance due as of August
         11, 2006 is 161,061.

         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
         the Company was 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 in the amount of $36,873.


                                       29
<PAGE>

                         XSTREAM BEVERAGE NETWORK, INC.
                                AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 JUNE 30, 2006


NOTE 22 - 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 June 30, 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
         $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 $380,573 as of the six months ended June 30,
         2006 with a remaining balance of debt discount of $701,142.

                                       30
<PAGE>

                         XSTREAM BEVERAGE NETWORK, INC.
                                AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 JUNE 30, 2006


         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, resubmitted on October 14, 2005 and subsequently cancelled. 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 $252,977 as of June 30, 2006.
         (See Note 17 - 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 June 30, 2006 was $87,632 (See Note 18 - Dividends
         Payable).

                                       31
<PAGE>

                         XSTREAM BEVERAGE NETWORK, INC.
                                AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 JUNE 30, 2006


         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 22 (B) -
         Stockholders' Equity and Recapitalization).

         During the period of January 1, 2006 and June 30, 2006, 12.26 shares of
         Series B Preferred stock was converted to 1,056,579 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 41 shares of Series B Preferred Stock issued and outstanding
         as of June 30, 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 $10,371 for the six months ended June 30, 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 23 -
         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 consulting expense of $546,798 for the six-months
         ended June 30, 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 June 30, 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 15 - 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 $119,411 for the six-months ending June 30, 2006,
         with a remaining deferred balance of $15,451.

                                       32
<PAGE>

                         XSTREAM BEVERAGE NETWORK, INC.
                                AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 JUNE 30, 2006


         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 $39,671 for
         the six- month period, with a remaining deferred component of $29,370
         as of June 30, 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 $0.22; the closing price on the grant date. For the six-month
         period ending June 30, 2006, the Company recognized an expense of
         $32,729 with a remaining deferred component of $27,666.

         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 six-months ending June 30, 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 $46,516
         for the six-months ending June 30, 2006.

         During the period of January 1, 2006 and June 30, 2006, the Company
         issued a total of 12,841,079 shares of restricted common stock. Shares
         issued for services, compensation 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 June 30,
2006:

<TABLE>
<CAPTION>
                                                                           Aggregate       Deferred          Expense
          Consideration              No. Shares      Price Range             Value         Balance         Recognized
                                    -----------      -------------        -----------    -----------       -----------
<S>                                   <C>            <C>     <C>          <C>            <C>               <C>
SERVICES                              1,722,000      $0.24 - $0.42        $   641,940    $  (230,823)      $   411,117
LOAN FEES                             4,472,500      $0.27 - $0.43        $ 1,689,025        (73,153)      $ 1,615,872

COMPENSATION                          3,965,000          $0.27            $ 1,070,550         -0-          $ 1,070,550

PLEDGE OF COLLATERAL                  1,625,000           -0-                  -0-            -0-               -0-

CONVERSION OF PREFERRED SERIES B      1,056,579           -0-                  -0-            -0-               -0-
                                    -----------      -------------        -----------    -----------       -----------
      TOTAL:                         12,841,079          N/A             $ 3,401,515     $  (303,976)      $ 3,097,539
                                     ----------- ------------------ -------------------  -----------       -----------
</TABLE>



                                       33
<PAGE>

                         XSTREAM BEVERAGE NETWORK, INC.
                                AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 JUNE 30, 2006


         (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 20 - 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 June 30, 2006, (See Note 22 -
         (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


                                       34
<PAGE>

                         XSTREAM BEVERAGE NETWORK, INC.
                                AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 JUNE 30, 2006


         $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
         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 grant 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).

                                       35
<PAGE>

                         XSTREAM BEVERAGE NETWORK, INC.
                                AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 JUNE 30, 2006


         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 15 - 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 15 - 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 15 - 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
         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).

                                       36
<PAGE>

                         XSTREAM BEVERAGE NETWORK, INC.
                                AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 JUNE 30, 2006


         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 19 - 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 15 - 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 15
         - 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 15 - 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 15 -
         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).

                                       37
<PAGE>

                         XSTREAM BEVERAGE NETWORK, INC.
                                AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 JUNE 30, 2006


         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 15 - 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 15 - 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 15 - 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
         common stock at $0.76 in consideration as placement agent fees for
         subscribers purchasing 357,500 units of the debt placement financing
         (See Note 15 - 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 15 - 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).

                                       38
<PAGE>

                         XSTREAM BEVERAGE NETWORK, INC.
                                AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 JUNE 30, 2006


         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 15 - 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 15 - 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 15 - 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 June 30, 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                June 30, 2006        Contractual        Price        June 30, 2006      Price
        --------------           -----------------      -----------       --------    -----------------  ---------
       <S>                           <C>                <C>               <C>               <C>          <C>
       $   6.40 - 100.00               242,125          7.40 Years        $  12.46          242,125      $  12.46
       $   3.00 -   6.39               147,500          8.06 Years        $   3.34          147,500      $   3.34
       $    .76 -   2.99             1,599,000          5.50 Years        $   1.68        1,599,000      $   1.68
       $            0.45             7,959,459          3.59 Years        $   0.45        7,959,459      $   0.45
       $            0.20                 9,464          2.75 Years        $   0.20            9,464      $   0.20
                                     ---------                            --------        ---------      --------
                                     9,957,548                            $   0.98        9,957,548      $   0.98
                                     =========                            ========        =========      ========
</TABLE>

                                       39
<PAGE>

                         XSTREAM BEVERAGE NETWORK, INC.
                                AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 JUNE 30, 2006


NOTE 23 - 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 June 30,
         2006 (see Note 17 - Accrued Expense-Salaries, Accrued Expense-Other).

                                       40
<PAGE>

                         XSTREAM BEVERAGE NETWORK, INC.
                                AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 JUNE 30, 2006


         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 June 30, 2006, the Subscription Receivable
         amounted to $3,856,947, adjusted for a discount of $1,790,875. The
         Subscription Receivable at June 30, 2006 is based on a discount rate of
         5.21% and a stock price of $0.25. The decrease in subscription
         receivable between the date of issuance and June 30, 2006, has been
         recorded as an element of comprehensive income/(loss) of $10,353,085.
         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 22 - Stockholders' Deficiency and Recapitalization).

NOTE 24 - RELATED PARTIES:
-------------------------

         The balance due to a corporate principal stockholder controlled by a
         Director at June 30, 2006 was $50,355 (See Note 13 - Loans Payable,
         Related Party).

NOTE 25 - GOING CONCERN:
-----------------------

         As reflected in the accompanying consolidated financial statements, the
         Company, has a net loss in 2006 of $10,394,894, cash used in operations
         in 2006 of $1,381,330 and an accumulated deficit of $44,297,363 at June
         30, 2006, stockholders' deficiency of $17,514,013 and a working capital
         deficit of $16,513,332 at June 30, 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 concern.

NOTE 26 - SUBSEQUENT EVENTS:
---------------------------

         In July 2006, the Company issued 70,000 shares of restricted common
         stock in consideration of services; the shares were valued at $0.35.

         The Company also executed a consulting agreement in consideration of
         500,000 shares of restricted common stock valued at $0.30.



                                       41

<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. 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.

                                       42
<PAGE>


Results of Operations


                     Xstream Beverage Network & Subsidiaries
                             Statement of Operations
                    For the Six Month Period Ending June 30,

<TABLE>
<CAPTION>
                                                                             Variance         Variance
                                                                          2006 vs. 2005    2006 vs. 2005
                                          2006              2005                $                %
                                      ------------      ------------      ------------     -------------
<S>                                   <C>               <C>               <C>                         <C>
Sales                                 $  5,523,891      $  5,272,037      $    251,854                5%
Cost of Goods Sold                       4,518,466         4,318,437           200,029                5%
                                      ------------      ------------      ------------     ------------

Gross Profit                             1,005,425           953,600            51,825                5%

Expenses
Selling, General & Administrative        4,250,091         5,185,516          (935,425)             -18%

                                      ------------      ------------      ------------     ------------
Total Operating Expenses                 4,250,091         5,185,516          (935,425)             -18%

Income/(Loss) From Operations           (3,244,666)       (4,231,916)          987,250              -23%
Other Income/(Expense)
Other Income                                28,165            19,505             8,660               44%
Interest Income                                 --             1,526            (1,526)            -100%
Interest Expense                        (8,054,941)       (2,689,845)       (5,365,096)             199%
CFVD                                     2,553,089         6,640,755        (4,087,666)             -62%
Settlement gain, (loss)                         --             1,912            (1,912)            -100%
Other Expense                           (1,626,367)          (82,196)       (1,544,171)           1,879%
Gain on Disp of Fixed Assets               (40,174)               --           (40,174)            -100%
                                      ------------      ------------      ------------     ------------

Total Other Income/ (Expense)           (7,140,228)        3,891,657       (11,031,885)            -283%


Net Income / (Loss)                   $(10,384,894)     $   (340,259)     $(10,044,635)           2,952%
                                      ============      ============      ============     ============
</TABLE>



Sales

Our sales comprise revenues related to the sale of beverage products. The
increase in sales is attributable to the implementation of our acquisition
strategy which we believe is a key driver to grow our company. Our increase in
sales is primarily attributable to an increase in sales by our acquired
subsidiary, Beverage Network of Maryland, Inc. The increase in sales related to
this subsidiary was approximately $547,617 and consisted primarily of third
party brands. This increase was offset by a decrease in sales of our remaining
distributors in S. Florida, Massachusetts, Connecticut and Hawaii that totaled
approximately $296,343; this was attributable to insufficient working capital to
purchase inventory for resale of third party brands during the six months ending
June 30, 2006. During the six months ended June 30, 2006, distribution of third
party brands represented approximately 99% of our sales and sales of our
proprietary products represented approximately 1% of our sales. For the six
months ended June 30, 2005 sales of third party brands and sales of our
proprietary products represented approximately 95% and approximately 5%,
respectively, of our sales. The decline in proprietary brand sales was due do
insufficient working capital for purchasing raw materials to manufacture these
products. If we are able to continue implementing our acquisition strategy with
additional acquisitions during the balance of fiscal 2006, of which there are no
assurances, our sales would increase as a result of sales attributable to the
acquired companies.

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 was approximately 82% for the six months ending June
30, 2006 and June 30, 2005, respectively. 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.


                                       43
<PAGE>


Sales, General, and Administrative Expenses

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 sales, general
and administrative expenses during the six months ending June 30, 2006 when
compared to the same period during 2005, is primarily attributable to:

         * a decrease of approximately $824,000 in impairment of intangibles for
the acquired goodwill as a result of the 2004 Master Distributors acquisition.

         * a decrease of approximately $720,000 for consulting, financial
advisory and public relations firms. The decrease in such expenses is primarily
due to the decline in executed agreements utilizing stock based compensation 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 one-time, stock based expense in compensation attributable to
shares issued to employees resulted in an increase of approximately $1,070,000.
(See Below: Item 2-Unregistered Sales of Equity Securities and Use of Proceeds).
This was offset by a decrease of approximately $448,000 in compensation expense.
The number of employees was reduced during 2005 due to insufficient working
capital and in our efforts to maximize the utilization of financial resources.
We do not anticipate issuing additional shares to employees and 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 period ending June 30, 2006 as compared to the
comparable period in 2005 is attributable to the amortization of capital funding
costs, debt issue costs and debt discount of $5.3 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 Company the
refinancing transaction resulted in the issuance of now $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.

Change in Fair Value of Derivatives

The increase in other income-derivative liabilities during the period ending
June 30, 2006 when compared to the comparable period in June 30, 2005 is
attributable to a decrease in fair value of derivatives liabilities between
measurement dates.

Other Expense

The increase in other expenses was primarily attributable to one-time stock
based expenses of approximately $168,000; derivative related expense of
approximately $683,000 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 $692,000.

LIQUIDITY AND CAPITAL RESOURCES

Net cash used in operating activities for the six months ending June 30, 2006
was $(1,381,330) as compared to $(833,333) for the six month period ending June
30, 2005 and includes the following:

     o    An increase of $10,044,635 in our net loss,

     o    A decrease of $384 in bad debt expense, that relates to our current
          assessment and ability to collect aged accounts receivable,

     o    A decrease $1,887 in depreciation,

     o    An increase of $414,429 in amortization of deferred consulting that
          relates to an stock based expenses attributable to consulting
          agreements entered into in both prior periods and during the six-month
          period ending June 30, 2006. These agreements provide for the issuance
          of shares of our common stock under long-term agreements,

     o    An increase of $1,097,153 in the fair value of derivative liabilities
          attributable to the Laurus Master Fund refinance that occurred on
          March 31, 2006,


                                       44
<PAGE>

     o    An increase of $3,049,523 in amortization of debt discount and fees to
          interest expense relating to our outstanding debt instruments with the
          Laurus Master Fund including a $4,000,000 secured non-convertible note
          and a $2,000,000 secured convertible note; it also includes our Series
          B Convertible Preferred Stock and convertible term loans. In March
          2006, the Company also retired the secured convertible note with the
          Laurus Master Fund and amortized the remaining balance of $1,375,000
          in debt discount,

     o    A decrease of $15,419 in amortization of intangibles, which are the
          acquired customer lists; 2005 and 2006 impairment adjustments reduced
          the monthly amortization basis,

     o    An increase of $1,113,864 in amortization of capital funding costs
          attributable to the Laurus Master Fund $4,000,000 secured
          non-convertible note, $2,000,000 secured convertible note, the Series
          B Convertible Preferred Stock, and convertible term loans,

     o    An increase of $180,000 in liquidated damages for the failure of the
          Company's Form SB-2 to be declared effective on a timely basis. These
          costs are payable to our Series B preferred shareholders and will
          continue through the remainder of 2006 unless the Company obtains and
          effective registration statement,

     o    An increase of $166,281 in the default premium due to the Laurus
          Master Fund for the $3,000,000 secured convertible note that was
          refinanced on March 31, 2006,

     o    An increase of stock based loan fees of $421,609 attributable to the
          issuance of shares of common stock according to provisions in certain
          debt instruments and to defer payments on certain debt instruments;

     o    A decrease in stock based expenses of $50,197, due to a decline in the
          number of service agreements in consideration of restricted common
          stock,

     o    An increase of $4,087,666 in the change of the fair value of the
          derivative liability. This results from the issuance of warrants for
          services under contract agreements and warrants issued as a provision
          on certain convertible debt instruments,

     o    An increase of $40,174 from as a loss on the disposition of fixed
          assets,

     o    A decrease of $824,211 in impairment expense of our customer lists and
          goodwill for acquired intangibles, which was due to a one-time write
          down of acquired goodwill for Beverage Network of Maryland,

     o    A decrease of $343,599 in accounts receivable due to a decrease in
          sales in the S. Florida and New England operations,

     o    A decrease of $45,121 in inventory due to a lack of sufficient working
          capital for purchases in the S. Florida and New England operations,

     o    An increase of $80,259 in other current and non-current liabilities,

     o    An increase of $81,557 in accounts payable,

     o    An increase of $71,668 in accrued expenses,

     o    A decrease of $26,725 in other current and non-current liabilities.


Net cash provided from investing activities for the six month period ending June
30, 2006 was $5,283 as opposed to $(10,651) for the six month period ending June
30, 2005 and includes the following:

     o    An increase of $5,514 for the acquisition of equipment,

     o    An increase of $10,420 from the proceeds included in the disposition
          of fixed assets.

Net cash provided by financing activities for the six month period ending June
30, 2006 was $1,551,844 as compared to $861,080 for the six month period ending
June 30, 2005 and includes the following:

     o    An increase of $6,306,964 from the proceeds of non-related party
          loans, primarily from the Laurus Master Fund and the convertible term
          loans,

     o    A decrease of $4,668,649 resulting from the repayment of non-related
          party loans, primarily to the Laurus Master Fund,

                                       45
<PAGE>

     o    A decrease of $294,500 in capitalized funding costs primarily
          attributable to the Laurus Master Fund $4,000,000 secured
          non-convertible note and the $2,000,000 secured convertible note,

     o    A decrease of $225,280 in the cash overdraft liability,

     o    An increase of $50,000 from the proceeds of related party loans,

     o    A decrease of $25,000 resulting from the repayment of related party
          loans,

     o    A decrease of $452,771 in disbursement of restricted cash from the
          Laurus Master Fund.

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 June 30, 2006 we had cash on hand of approximately $270,000 and a working
capital deficit of approximately $16.6 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 April 7, 2006, we sold a secured term note to an accredited investor in the
amount of $250,000. The note had a maturity date of August 5, 2006 on which date
the principal and an interest payment of $25,000 become due; it has not been
paid. The note was unsecured and ranked pari pasu with all of our existing,
unsecured obligations. We also issued a grant of 250,000 shares of common stock
as an additional consideration to the payee. The securities were issued in
transactions exempt from registration under the Securities Act of 1933 in
reliance on an exemption provided by Section 4(2) of that act and the recipient
was an accredited or otherwise sophisticated investor who had such knowledge and
experience in business matters that the investor was capable of evaluating the
merits and risks of the prospective investment in our securities. The recipient
had access to business and financial information concerning our Company.

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


                                       46
<PAGE>

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 June 30,
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.

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.

                                       47
<PAGE>

In February 2006, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 155, "Accounting for Certain Hybrid Financial Instruments-an
amendment of FASB Statements No. 133 and 140." SFAS No. 155 improves financial
reporting by eliminating the exemption from applying SFAS No. 133 to interests
in securitized financial assets so that similar instruments are accounted for
similarly regardless of the form of the instruments. It also improves financial
reporting by allowing a preparer to elect fair value measurement at acquisition,
at issuance, or when a previously recognized financial instrument is subject to
a remeasurement (new basis) event, on an instrument-by-instrument basis, in
cases in which a derivative would otherwise have to be bifurcated. SFAS No. 155
is effective for all financial instruments acquired or issued after the
beginning of an entity's first fiscal year that begins after September 15, 2006.
The Company is currently evaluating the impact of SFAS No. 155 on the Company's
consolidated results of operations and financial condition.

In June 2006, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - an
interpretation of FASB Statement No. 109" ("FIN 48"). FIN 48 clarifies the
accounting for uncertainty in income taxes recognized in accordance with FASB
Statement No. 109, "Accounting for Income Taxes." FIN 48 prescribes a two-step
process to recognize and measure a tax position taken or expected to be taken in
a tax return. The first step is to determine whether a tax position has met the
more-likely-than-not recognition threshold and the second step is to measure a
tax position that meets the threshold to determine the amount of benefit to
recognize. FIN 48 also provides guidance on derecognition, classification,
interest and penalties, accounting in interim periods, disclosure and
transition. FIN 48 is effective for fiscal years beginning after December 15,
2006. The Company is currently evaluating the impact of FIN 48 on the Company's
consolidated results of operations and financial condition.

In July 2006, the FASB issued FASB Interpretation ("FIN") No. 48 "Accounting for
Uncertainty in Income Taxes - An Interpretation of FASB Statement 109." FIN 48
prescribes a comprehensive model for recognizing, measuring, presenting and
disclosing in the financial statements tax positions taken or expected to be
taken on a tax return, including a decision whether to file or not to file in a
particular jurisdiction. FIN 48 is effective for fiscal years beginning after
December 15, 2006. If there are changes in net assets as a result of application
of FIN 48 these will be accounted for as an adjustment to retained earnings.
Because the guidance was recently issued, we have not yet determined the impact,
if any, of adopting the provisions of FIN 48 on our financial position, results
of operations and liquidity.


CRITICAL ACCOUNTING POLICIES

The preparation of financial statements in conformity with generally accepted
accounting principles (GAAP) equires 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 not 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.

                                       48
<PAGE>

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, 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.


                                       49
<PAGE>

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.

                           PART II. OTHER INFORMATION


ITEM 1.  LEGAL PROCEEDINGS

As previously reported, 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, 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 June 30, 2006 was $58,559. For financial
reasons, we were unable to make any payments during the period ending June 30,
2006 and we are working with the plaintiff's attorney on a revised payment
arrangement.

As previously reported, 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 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. On July 10, 2006. One of the noteholders obtained a default
judgment in the Circuit Court of the 17th Judicial Circuit in and for Broward
County, Civil Docket number 06001160 in the amount of $135,053. This amount
includes the principal amount due under the note of $118,185, interest through
June 30, 2006 of $13,813, costs of $435 and attorney's fees of $2,613. The court
has ordered us to provide information relating to our assets to the noteholder's
attorney by August 24, 2006.

As previously reported, in October 2005, Good-O Beverages was awarded a judgment
in 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 $2,900 as of August 10, 2006.

As previously reported, 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.

As previously reported, 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
$55,000. We are working with the plaintiffs to make the account current.

As previously reported, 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 were 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 in full and pay Ayer
Beverage $36,467 followed by three monthly payments thereafter of $9,467. In May
2006, we made a final payment of $12,591 to Citizen's Bank in full payment of
our obligation including costs and attorney's fees.



                                       50
<PAGE>

As previously reported, 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.

On June 23, 2006, a former employee of XStream Beverage Network ,Inc. filed a
lawsuit in the 11th Judicial Circuit in and for Miami-Dade County, Florida.
Civil Docket number 06-12269 CA32 for overdue severance related payments in the
amount of $17,000. We have reached an agreement with the plaintiff's attorney to
make full restitution.

As previously reported, in March of 2004, we contracted with Florida Employer
Solutions Inc. to process the 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 $335,171, which
includes unpaid taxes. The IRS have agreed to waive certain 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 if this case is not settled in
mediation, it will be going to trial in January 2007. In the event that we
receive such monies, it will be applied the tax portion of the liability due the
IRS. In May 2006, the IRS garnished a bank account for $114,110; we have been
further advised by our attorney handling this matter that a voluntary payment
arrangement was negotiated with the IRS whereby payments of $20,000 per month
would be paid and applied to the outstanding tax only amount of $335,171, In a
confirmatory letter to the attorney, the IRS agreed not to issue any further
levies provided that the Company adhere to the voluntary payment arrangement. In
the period ending June 30, 2006, the IRS applied total payments of $134,110; as
of August 11, 2006 there were additional payments, in total, of $40,000 applied
to the amount due resulting in a balance of $161,061.

As previously reported,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. We have not yet made settlement arrangements with the plaintiff in this
matter.


                                       51
<PAGE>

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 issued was 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
were distributed to 13 of our employees.

In April 2006, the Company executed a 12 month consulting agreement for
advisory services, commencing on May 1, 2006, in consideration of a retainer fee
of 150,000 shares of common stock upon execution of the agreement and $2,500
per month for consulting services rendered. The shares were valued at $0.39; the
closing price on the date of grant. The recipient was an accredited investor and
the securities were issued in a transaction exempt from registration under the
Securities Act of 1933 in reliance on the exemption provided by Section 4(2) of
that act.

In May 2006, the Company issued a grant of 500,000 shares of its common stock in
consideration of late repayment penalties to the holder of four promissory notes
that were sold to the holder by the company on December 23, 2005, January 12,
2006, February 3, 2006 and March 9, 2006. The shares were valued at $0.29; the
closing price on the date of grant. The recipient was an accredited investor and
the securities were issued in a transaction exempt from registration under the
Securities Act of 1933 in reliance on the exemption provided by Section 4(2) of
that act.

In June 2006, the Company executed agreement letters with four holders of
promissory notes that were sold to the holders by the company on February 12,
2005. The agreement letters call for the maturity date of each of the promissory
notes to be extended until September 15, 2006 in consideration of and aggregate
of 190,000 shares of common stock. The shares were valued at $0.27; the closing
price on the date of grant. The recipients were an accredited investors and the
securities were issued in a transaction exempt from registration under the
Securities Act of 1933 in reliance on the exemption provided by Section 4(2) of
that act.

In July 2006, the Company executed a consulting agreement for tax advisory
services and filing services for the 2004 tax year in consideration of 70,000
shares of common stock. The shares were valued at $0.40; the closing price on
the date of grant. The recipient was an accredited investor and the securities
were issued in a transaction exempt from registration under the Securities Act
of 1933 in reliance on the exemption provided by Section 4(2) of that act.

In July 2006, the Company executed a six month consulting agreement for
advisory services, commencing on July 19, 2006, in consideration of 500,000
shares of common stock upon execution of the agreement. The shares were valued
at $0.30; the closing price on the date of grant. The consulting agreement also
calls for automatic renewal on January 19, 2006 and the issuance of a further
500,000 shares of the company's common stock on that date. The recipient was an
accredited investor and the securities were issued in a transaction exempt from
registration under the Securities Act of 1933 in reliance on the exemption
provided by Section 4(2) of that act.

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.


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



                                       52
<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: August 21, 2006.













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