SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                              REPORT ON FORM 10-KSB

                  Annual Report pursuant to Section 13 or 15(d) of the
                  Securities Exchange Act of 1934

         For the fiscal year ended December 31, 1998.

                  Transition Report pursuant to Section 13 or 15(d) of
                  The Securities Exchange Act of 1934


   For the transition period from ___________________ to ___________________.

                          Commission File No. 0-13181


                          CAPITAL BEVERAGE CORPORATION
             (Exact name of registrant as specified in its charter)

                 Delaware                                     13-3878747
(State of or other jurisdiction                (IRS Employer Identification No.)
   of incorporation or organization)

1111 East Tremont Avenue,  Bronx, New York                   10460
------------------------------------------                   -----
(Address of Principal Executive Officers)                  (Zip Code)


Registrant's telephone number, including area code: (718) 409-2337

Securities registered pursuant to Section 12(b) of the Act:  None.

Securities registered pursuant to Section 12(g) of the Act:

                     Common Stock, par value $.001 per share
                                (Title of Class)

           Unitsconsisting of one (1) share of Common Stock, par value
              $.001 per share and one-half (1/2) Class A Redeemable
                          Common Stock Purchase Warrant
                                (Title of Class)

                Class A Redeemable Common Stock Purchase Warrant
                                (Title of Class)
<PAGE>

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

         Indicate by check mark if disclosure of delinquent filers pursuant to 
Item 405 of the Regulation S-B is not contained in this form, and no disclosure 
will be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB.           [X]

         Issuer's revenues for its most recent fiscal year were $8,572,985.

         The aggregate  market value of the voting stock held by non- affiliates
of the  Registrant,  computed by reference to the closing price of such stock as
of April 6, 1999, was approximately $12,657,000.

         Number of shares  outstanding of the issuer's  Common Stock as of April
6, 1999 was 2,378,409.




<PAGE>


                      DOCUMENTS INCORPORATED BY REFERENCE:
                                     PART I

Item 1.  BUSINESS.

         Statements  in this Form 10-K that are not  statements of historical or
current fact constitute  "forward-looking  statements" within the meaning of the
Private  Securities   Litigation  Reform  Act  of  1995.  Such   forward-looking
statements  involve  known and unknown  risks,  uncertainties  and other unknown
factors  that could  cause the actual  results of the  Company to be  materially
different  from the historical  results or from any future results  expressed or
implied by such  forward-looking  statements.  In  addition to  statements  that
explicitly describe such risks and uncertainties,  readers are urged to consider
statements labeled with the terms "believes,"  "belief,"  "expects,"  "intends,"
"anticipates"   or   "plans"   to  be   uncertain   and   forward-looking.   The
forward-looking  statements contained herein are also subject generally to other
risks and  uncertainties  that are described  from time to time in the Company's
reports and  registration  statements  filed with the  Securities  and  Exchange
Commission.

General

         Capital   Beverage   Corporation   ("Capital"  and  the   "Company")was
incorporated  under the laws of the State of Delaware  on  December 5, 1995.  In
January 1996, the Company acquired from Consolidated Beverage  Corporation,  the
right to become the  exclusive  distributor  ("Pabst  Distribution  Rights") for
certain beer and malt liquor products ("Pabst  Products")  manufactured by Pabst
Brewing Company  ("Pabst").  The consideration paid by the Company for the Pabst
Distribution  Rights was One Million Six Hundred Thousand Dollars  ($1,600,000),
payable  Eight  Hundred  Thousand  Dollars  ($800,000)  in cash at or  prior  to
closing,  and the balance by delivery of a series of 120 promissory  notes, each
in the  amount of Ten  Thousand  Dollars  ($10,000)  (collectively,  the  "Pabst
Notes").  The Pabst  Notes bear  interest  at 9% per annum,  which  interest  is
included in the monthly $10,000 payments.  If the Company defaults in payment of
any of the Pabst Notes,  such default may result in a re-conveyance of the Pabst
Distribution Rights to Consolidated Beverage  Corporation.  Any such loss of the
Pabst Distribution  Rights may have a materially adverse effect on the Company's
financial condition and results of operations.

         Subject to the conditions set forth in the agreement  pursuant to which
the Company  acquired  the Pabst  Distribution  Rights,  the Company  became the
exclusive  distributor of the following  Pabst  Products in the following  areas
(collectively, the "Territory"):

         Borough of Manhattan:  Pabst Blue Ribbon Beer,  Pabst Extra Light Beer,
Pabst Light Beer,  Pabst Genuine Draft Beer, Pabst 10E Draft Beer, Pabst Non Ala
Beer, Andeker Beer, Hamm's Beer, Hamm's Special Light Beer, Hamm's Genuine Draft
Beer, Big Bear Malt Liquor,  Olde English "800" Malt Liquor,  Olde English "800"
Genuine Draft Malt Liquor, "800" Ice Malt Liquor and Old Tankard Ale.
<PAGE>
         Borough of the Bronx:  Hamm's Beer,  Hamm's Special Light Beer,  Hamm's
Genuine Draft Beer,  Olde English "800" Malt Liquor,  Olde English "800" Genuine
Draft Malt Liquor and "800" Ice Malt Liquor.

         Borough of Queens:  In that portion of Queens County  situated west and
north of the following described boundary lines: starting at a point in Flushing
Bay at the boat  basin;  thence  southerly  along Grand  Central  Parkway to the
intersection of Union Turnpike and Interborough  Parkway to the western boundary
of Queens County,  thence  northerly along the western boundary of Queens County
to the East River, being the terminal of Queens County:  Olde English "800" Malt
Liquor, Olde English "800" Genuine Draft Malt Liquor and "800" Ice Malt Liquor.

         Borough of Staten  Island:  Pabst Blue Ribbon  Beer,  Pabst Extra Light
Beer,  Pabst Light Beer,  Pabst Genuine Draft Beer,  Pabst 10E Draft Beer, Pabst
Non Ala Beer,  Andeker Beer,  Hamm's Beer,  Hamm's  Special  Light Beer,  Hamm's
Genuine Draft Beer, Big Bear Malt Liquor,  Olde English "800" Malt Liquor,  Olde
English "800"  Genuine Draft Malt Liquor,  "800" Ice Malt Liquor and Old Tankard
Ale.

         Westchester County: In that portion of Westchester County situated 
south of Interstate Highway No. 287, but not including the Towns of Ardsley and 
Dobbs Ferry: Hamm's Beer, Hamm's Special Light Beer and Hamm's Genuine Draft
Beer.

         State of New York: Old Tankard Ale.

Distributorship Agreement with Pabst

         Duties and Responsibilities: At the time the Company acquired the Pabst
Distribution Rights, it simultaneously entered into an agreement with Pabst (the
"Distributorship  Agreement")  to become  the  exclusive  distributor  for Pabst
Products within the Territory.  Pursuant to the Distributorship  Agreement,  the
Company is required to solicit and seek to service every retail  account  within
the Territory and to use its best efforts to market,  promote and sell the Pabst
Products   within  such   Territory.   The  Company  is  prohibited   under  the
Distributorship  Agreement from selling or supplying Pabst Products to customers
located outside the Territory.

         The responsibilities of the Company under the Distributorship Agreement
include,  but are not limited to: (i) establishment and maintenance of a planned
overall sales and contact program on a continuing basis; (ii)  establishment and
maintenance of a place of business within the Territory,  including distribution
and warehouse facilities;  (iii) establishment and maintenance of stock rotation
procedures  for the Pabst  Products  in the  warehouse,  on trucks and in retail
accounts to the extent  permitted by law and adherence to all stated policies of
Pabst in regard to overage Pabst  Products  (with the cost of replacing  overage
products to be absorbed by the Company); (iv) establishment and maintenance of a
fleet of trucks; (v) cooperation with Pabst in the distribution of point-of-sale
materials  necessary to support Pabst  Products;  (vi) personal  involvement  of
management of the Company in maintaining satisfactory contact with all accounts;
(vii)  maintenance  of  adequate  capital  and cash flow to  insure  competitive
strength  in  facilities,   inventory,  equipment,  personnel,  advertising  and
promotions;  (viii) maintenance of a continuous  in-house training program where
practicable and attendance at sales meetings and training  schools  scheduled by
Pabst; and (ix)  maintenance of sufficient  inventories and mix of package types
as reasonably  requested by Pabst and justified by market conditions existing in
the Territory.
<PAGE>
         Terms of Sale. Any orders for the Pabst Products  placed by the Company
will be  subject  to the  written  approval  of Pabst,  and  Pabst  shall not be
obligated to fill such order.  Sales made by Pabst to the Company  shall be upon
such  terms  and  prices  as  are  approved  by the  Pabst  Credit  and  Pricing
Departments from time to time in their discretion. The Company is required under
the Distributorship Agreement to grant to Pabst a security interest in the Pabst
Products to secure the performance of all obligations owed by it to Pabst.

         Termination.   Pabst  may  terminate  the   Distributorship   Agreement
immediately upon the occurrence of any of the following  events:  (i) assignment
or  attempted  assignment  for  the  benefit  of  creditors  by the  Company  or
insolvency  of  the  Company;  (ii)  institution  of  voluntary  or  involuntary
bankruptcy proceedings or for receivership or dissolution;  (iii) non-payment by
the Company of sums past due and owing to Pabst,  which sums  continue to remain
owing  upon  the  expiration  of  twenty  (20)  days  after  written  notice  of
non-payment to the Company by Pabst; (iv) fraudulent conduct of the Company; (v)
loss by the Company of any federal,  state or local  license  required by law or
necessary in order to carry out the Company's  duties as a distributor  of Pabst
Products;  (vi)  attempted  assignment of the  Distributorship  Agreement by the
Company or change in control of the Company's business without the prior written
consent of Pabst;  (vii) violation by the Company of its obligations to sell and
distribute the Pabst's  Products only within the Territory and/or its obligation
to solicit every retail account within the Territory and to use its best efforts
to market and promote Pabst Products and protect their quality.

         Deficiency  Termination.  Pabst may also terminate the  Distributorship
Agreement if any of the following  occurs:  (i) the Company fails to perform its
duties and  responsibilities  in the reasonable judgment of Pabst; or (ii) other
breaches  by the Company of its  obligations  contained  in the  Distributorship
Agreement (a "deficiency  termination").  In the case of any such default, Pabst
has  agreed to  provide  the  Company  with  notice of the  manner in which such
default has  occurred and to allow the Company not less than ninety (90) days to
cure such default.  Moreover,  in the event of any such deficiency  termination,
Pabst will pay the Company an amount  equal to twice the  Company's  pre-tax net
earnings arising from the sale and distribution of the Pabst Products during the
immediate preceding annual accounting period of the Company. In addition,  Pabst
will purchase from the Company its entire  inventory of saleable  Pabst Products
at an amount equal to the cost of such inventory plus a handling  charge of $.10
per case, $.50 per half-barrel and $5.25 per quarter-barrel. Upon request by the
Company,  Pabst will purchase  from the Company,  at the then fair market value,
those  local  delivery  vehicles  regularly  used by the Company in the sale and
distribution of Pabst Products.

         Uniform  Termination.  Pabst  also  has  the  right  to  terminate  the
Distributorship   Agreement  if  Pabst   simultaneously   terminates  all  other
agreements  that are  substantially  similar  to the  Distributorship  Agreement
between the Company and Pabst.
<PAGE>
         Partial Termination. Pabst has the right to assign any individual brand
of beer listed as a Pabst Product to another  distributor  if, in the reasonable
judgment of Pabst,  the Company  cannot or does not  adequately  promote  and/or
market such brand of beer.  Pabst also has the right to effect a termination  of
the part of the Company's Territory if, in its reasonable judgment,  the Company
does not  adequately  promote  and  market  Pabst  Products  in that part of the
Territory.

         Change of Control  Termination.  Pabst also has the right to  terminate
the  Distributorship  Agreement  if there is a change in ownership or control in
the Company's  business which occurs without the prior written  consent of Pabst
(which  consent  may  not  be  unreasonably  withheld).   For  purposes  of  the
Distributorship  Agreement,  the  term  "control"  means  record  or  beneficial
ownership of (i)  thirty-three  percent  (33%) or more of the  Company's  voting
stock;  (ii)  thirty-three  percent  (33%)  or more of its  business;  or  (iii)
thirty-three  percent (33%) or more  interest in an entity which owns  fifty-one
percent (51%) or more of the Company's voting stock.

Strategy

         Management  of the  Company  believes  it has  developed  a strategy to
effectively  market,  sell and distribute beer Products throughout its marketing
Territory.  This strategy includes plans to expand the Company's  customer base;
to increase sales and marketing efforts;  and to develop a distribution  network
utilizing independent licensed distributor wholesalers ("Wholesalers") that will
result in reduced costs.

         The Company has also  finalized a new  distribution  agreement  for the
brands  of  Pittsburgh  Brewery.   Based  on  this  agreement  the  Company  has
established  a  driver-sales  program  to market  and  distribute  these  brands
directly  to our  customers.  Driver-sales  are a  proven  method  for  building
distribution  and  creating  consumer  awareness.  This  program  will allow the
Company to effectively  generate demand for new and relatively unknown brands in
the marketplace without enormous expenditures in advertising dollars in contrast
to the major brand competitors.

         The Company is also seeking to acquire other competing brand 
wholesalers in order to achieve greater economics of scale and synergy.  The 
Company believes that such acquisitions would significantly lower the cost of 
doing business and would also achieve the Company's goal of expanding retail 
account access and obtaining brands that would complement rather  than compete 
with the Company's products.

Expanding Customer Base

         In an effort to expand its customer base, the Company entered into an 
agreement with the Pittsburgh Brewery in the last quarter of 1998.  As a result
of this agreement the Company became the exclusive distributor for the 
Pittsburgh Brewery brands in New York State.
<PAGE>
         The Company has also utilized a federal excise tax credit available 
through a relationship called an "alternating proprietorship" for a brand called
"Prime Time."  This tax relief allows the Company to go to market at a lower 
price and assist in competing with the major brands.

         Based on initial results and the Company's belief in the long-term 
growth potential of the "alternating proprietorship" concept, the Company has 
filed for the federal and state approvals necessary to produce a similarly 
priced beverage.  Capital intends to own the label and contract with Pittsburgh 
Brewing to produce the product.

         At this time the federal  government  has approved  both the permit and
the brand label and New York state approval is pending.

         Upon receipt of state  approval,  Capital  intends to  distribute  this
product on an exclusive basis  throughout New York State.  In addition,  and for
the first time, Capital intends to commence distribution into adjacent states in
the Northeastern portion of the country and build a distribution network for the
new brand. The Company believes that this expansion into new territory will take
place some time in the second quarter of 1999.

Sales and Marketing

         The  Company  employs  sales  people to obtain  new  accounts  for beer
distribution  and to increase  sales of beverages to existing  accounts for such
products in their marketing  Territory.  In addition to employing a sales staff,
the Company employs sales supervisors who recommend sales policies and incentive
programs to the  Wholesalers  in order to motivate these  Wholesalers  and their
sales personnel to sell products within the Territory.  The Company also creates
promotional  materials and has formulated  marketing  plans to increase sales by
the Company and the other  Wholesalers  within their  marketing  Territory.  The
Company's  sales  personnel  receive formal training both at Company and brewery
related  seminars.  The Company also intends to hire a training  coordinator  to
conduct seminars,  covering such topics as draft  technology,  brewing processes
and   role-playing.   Sales  personnel  are  responsible  for  preparing  weekly
schematics  on key store  resets  (both  shelf and  cooler)  to secure  the most
visible  positions  for  maximum  consumer   exposure.   Shelf  allocations  are
periodically  reviewed under the supervision of the  Vice-President of Sales and
Marketing to assure that space  allocations  and placement  comply with retailer
policies,  distribution  philosophies,  and recommendations from suppliers.  The
Company has also implemented merchandising services to handle trade problems and
seek future sales opportunities.

         The  Company  offers  bonuses  to sales  personnel  who market and sell
additional  products to existing  customers  and maintain  established  goals on
reorders of  products.  This  incentive  program is designed to achieve long and
steady growth for additional product placements.

         Consistent with the Company's plan to expand its customer base, it 
expects to incur additional selling and marketing costs of approximately 
$150,000 in the next fiscal year.  Such estimates have been derived from
management's plans and budgets for 1999.
<PAGE>
Distribution

         The  Company   has   implemented   a  strategy  to  achieve   effective
distribution  of their  products  in the  Territory.  Under this  strategy,  the
Company acts as an exclusive distributor for their products, subject to policies
and procedures determined by the breweries, so that all orders for products come
through the Company.  The products are sold into the marketplace in a variety of
ways. The Company has its existing  pre-sell  sales force.  With the addition of
the brands of the Pittsburgh,  Brewery the Company has added a driver-sales team
to its  distribution  and sales efforts.  Beyond that and because of the size of
the  Territory,  the  Company  also  relies on  independent,  licensed  beverage
wholesalers  that are responsible  for hiring and maintaining  their own staffs,
maintaining trucking fleets to distribute their products to the wholesale and/or
retail customers.

         The  Company's   objective  in  utilizing   these  alternate  means  of
distribution  to  service  each  sector  within  the  Territory  is to  increase
effective  sales and  distribution of all products while not incurring the total
expense of such sales and distribution  efforts.  Specific  strategies  include:
developing sales incentives with the cooperation of brewery  representatives for
wholesalers  that meet sales  goals for both  "on-premises"  and  "off-premises"
accounts; establishing a method of monitoring accounts within the Territory that
do  not  purchase  the  Company's  products  and  establishing   incentives  for
wholesalers  who reverse such pattern;  scheduling  monthly  promotions  for all
on-premises accounts; and utilizing and promoting "Brewery Rebate" programs.

Advertising

         The Company intends to present to the trade and the consumer an ongoing
marketing campaign.  To achieve this, the Company will establish and maintain an
advertising  and  marketing  budget.  Such  budget  will  be used  primarily  to
participate in cooperative radio and billboard  advertising programs established
by the  breweries.  A  proposed  budget  of $.05 per  case  based  upon  monthly
estimated  sales  during  Fiscal 1999 of 60,000 cases will enable the Company to
allocate $3,000 per month toward this advertising.

Employees

         As of April 14, 1999, the Company employed a staff of 42, including two
(2) sales supervisors,  one (1) sales manager, nine (9) sales people, and thirty
(30)  managerial/administrative and distribution employees. The Company does not
have any  collective  bargaining  agreements  and has not  experienced  any work
stoppages  as a result of labor  disputes.  The Company  considers  its employee
relations to be good.

Competition

         The  business  conducted  by the Company is highly  competitive.  As of
December  31,  1998,  the Company  competed  with  approximately  ten (10) other
companies in the  metropolitan New York area that are engaged in businesses that
are  substantially  similar  to  that  engaged  in by the  Company.  Some of the
Company's competitors are better capitalized,  better financed, more established
and more experienced  than the Company and may offer beer,  beverage and related
products at lower prices or concessions than the Company. Should the Company not
be  able to  compete  effectively,  its  results  of  operations  and  financial
condition could be materially adversely affected.

<PAGE>
Sources of Supply

         In  addition  to  purchasing  Pabst  Products  directly  from Pabst and
Pittsburgh  products  directly from Pittsburgh  Brewery,  the Company intends to
purchase products from a number of nationally known beer and beverage companies.
Since there are other manufacturers of alcoholic and non-alcoholic products sold
by the Company,  the Company does not  anticipate  difficulty in obtaining  such
products  if its  relationship  with  one or more of its  suppliers  terminates.
Management  of the Company  believes that except for Pabst and  Pittsburgh,  the
loss  of  any  supplier  will  not  adversely  affect  the  Company's  business.
Termination of the Company's Distributorship Agreement with Pabst and Pittsburgh
could have a materially adverse effect on the business of the Company.

Seasonality

         The Company's business is subject to substantial  seasonal  variations.
Historically,  a significant portion of the Company's net sales and net earnings
have been  realized  during the month of December  and the months of May through
September,  and  levels  of net  sales  and net  earnings  have  generally  been
significantly  lower during the period from  October  through  April  (excluding
December). The Company believes that this is the general pattern associated with
other  beverage  distributors  with  which it  competes.  If for any  reason the
Company's sales were to be  substantially  below seasonal norms during the month
of  December  and/or  the  months  of  May  through  September,   the  Company's
anticipated revenues and earnings could be materially and adversely affected.

Government Regulation

         Wholesale and retail  distribution of alcoholic  beverages is regulated
by federal and state law. The Company's business is highly regulated by federal,
state and local laws and  regulations.  The company  must comply with  extensive
laws and regulations regarding such matters as state and regulatory approval and
licensing  requirements,  trade and pricing  practices,  permitted  and required
labeling,  advertising,  promotion and marketing  practices,  relationships with
distributors and related  matters.  Since the Company intends to distribute such
alcoholic  beverages  in New York  State,  the  Company  is  required  to obtain
authorization  from the Federal Bureau of Alcohol,  Tobacco and Firearms  (BATF)
and the New York State Liquor Authority (SLA). The Company has received from the
BATF and SLA its required  licenses.  In the experience of management,  although
such agencies may impose conditions on the grant of such licenses, such licenses
are ordinarily  granted.  In the event, either the SLA or the BATF should impose
conditions on the grant of such licenses,  the Company intends to take all steps
necessary to satisfy such conditions. There can be no assurance that the various
governmental regulations applicable to the beverage industry will not be changed
so as to impose more stringent  requirements on the Company.  If the Company was
to fail to be in compliance with any applicable  governmental  regulation,  such
failure  could  cause the  Company's  licenses to be revoked and have a material
adverse effect on the business of the Company. The Company's beer operations may
be  subject to  increased  taxation  by  federal,  state and local  governmental
agencies as compared with those of non-alcohol related business. In addition, if
federal or state  excise  taxes are  increased,  the  Company  may have to raise
prices to maintain  present profit margins.  The Company does not believe that a
price  increase  due to increased  taxes will reduce unit sales,  but the actual
effect  will  depend  on the  amount  of any  such  increase,  general  economic
conditions and other  factors.  Higher taxes may reduce overall demand for beer,
and thus negatively impact sales of the Company's beer products.
<PAGE>
Item 2.  PROPERTIES.

         In 1998 the Company amended its lease with East Tremont  Partners.  The
lease  amendment  provides  for a  reduction  in the  leased  area  at  its  two
facilities located at 1111 East Tremont Avenue and 415 Devoe Avenue in the Bronx
from approximately 22,000 square feet at a rental of $10,000 per month to 10,000
square  feet at 1111 East  Tremont  Avenue for $4,000  per month.  East  Tremont
Partners  is a New  York  partnership  in which  Mr.  Stella  holds a  one-sixth
interest.  Management of the Company  believes that the rent paid by the Company
under  this  lease is less than  what it would be  required  to pay for  similar
premises  within  the area in which the  Company's  administrative  offices  are
located.

         The Company has also  entered into an agreement to utilize the premises
at 425 Devoe Avenue which they feel will better serve their  distributor  needs.
The premises,  425 Devoe Avenue in the Bronx, have some 15,000 square feet which
cost the Company $7,000 per month.  Management of the Company  believes that the
rent paid by it under  this  lease is also less  than the fair  market  value of
similar premises within the area in which such premises are located.

         Management  believes that the facilities used by it in the operation of
its business are  adequately  covered by insurance and are suitable and adequate
for their respective purposes.

Item 3. LEGAL PROCEEDINGS.

         Management  is not  aware of any  material  legal  proceedings  pending
against the Company.

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

         (a)      On November 10, 1998, the Company held its annual meeting of 
                  Shareholders.

         (b)      At said meeting, the following five individuals were elected 
                  by the following vote to serve as directors until the next 
                  annual meeting of stockholders and until their successors are 
                  elected and qualified:
<PAGE>
                                FOR                                     AGAINST



Carmine Stella                2,160,062                                   6,602
Carol Russell                 2,158,312                                   8,352
Robert A. Vessa               2,159,312                                   7,352
Dawn A. Collins               2,158,312                                   8,352
Joseph M. Luzzi               2,158,312                                   8,352


         (c)      At said meeting 2,161,164  shares of Common Stock were voted 
in favor of and 4,700 shares of Common Stock were voted against a proposal to 
ratify the appointment of Feldman, Sherb, Ehrlich & Co. to serve as the 
independent certified public accountants for the 1999 fiscal year.


<PAGE>




                                     PART II

Item 5.  MARKET FOR REGISTRANT'S COMMON
                    EQUITY AND RELATED STOCKHOLDER MATTERS.

         The Company's Units, Common Stock and Class A Warrants commenced 
trading on the Nasdaq SmallCap Market on the effectiveness of the Company's 
Initial Public Offering on July 17, 1997 under the symbols "CBEVU," "CBEV" and 
"CBEVW," respectively.  The Common Stock and Warrants are regularly quoted and 
traded on the Nasdaq SmallCap Market. The Company's Units were de-listed from 
trading on August 29, 1997

         The following table indicates the high and low prices for the Company's
Units, Common Stock and Class A Warrants for the period from July 17, 1997 to 
December 31, 1998 based upon information supplied by the NASDAQ system.  Prices 
represent quotations between dealers without adjustments for retail markups, 
markdowns or commissions, and may not represent actual transactions.

Units

1997 Fiscal Year                                              Quoted Price
----------------                                               ------------
                                                           High             Low
                                                           ----             ---
First Quarter                                                  DID NOT TRADE
Second Quarter                                                 DID NOT TRADE
Third Quarter                                              9 7/8            61/2
Fourth Quarter                                                 DID NOT TRADE

1998 Fiscal Year                                                Quoted Price
----------------                                                ------------
                                                           High             Low
                                                           ----             ---
First Quarter                                                  DID NOT TRADE
Second Quarter                                                 DID NOT TRADE
Third Quarter                                                  DID NOT TRADE
Fourth Quarter                                                 DID NOT TRADE

Common Stock

1997 Fiscal Year                                                Quoted Price
----------------                                                ------------
                                                           High             Low
                                                           ----             ---
First Quarter                                                  DID NOT TRADE
Second Quarter                                                 DID NOT TRADE
Third Quarter                                              8 3/8           4 3/8
Fourth Quarter                                              61/2           5

<PAGE>

1998 Fiscal Year                                                Quoted Price
----------------                                                ------------
                                                           High             Low
                                                           ----             ---
First Quarter                                              7                4.5
Second Quarter                                             7.47             6.37
Third Quarter                                              7.5              4.87
Fourth Quarter                                             6                4.5

Class A Warrants

1997 Fiscal Year                                                Quoted Price
----------------                                                ------------
                                                           High             Low
                                                           ----             ---
First Quarter                                                  DID NOT TRADE
Second Quarter                                                 DID NOT TRADE
Third Quarter                                              3 3/8             3/4
Fourth Quarter                                             1 7/8             7/8

1998 Fiscal Year                                               Quoted Price
----------------                                               ------------
                                                           High             Low
                                                           ----             ---
First Quarter                                              1.62             .62
Second Quarter                                             2.94             1.12
Third Quarter                                              3                1
Fourth Quarter                                             2                .75

         On April 6, 1999 the closing price of the Common Stock as reported on 
NASDAQ SmallCap Market was $6.69.  On April 6, 1999 the closing price for the 
Class A Warrant reported on NASDAQ SmallCap was $2.25.  The Units did not trade.
On April 6, 1999 there were 13 holders of record of Common Stock.

Item 6.           CAPITAL BEVERAGE CORPORATION MANAGEMENT'S DISCUSSION AND 
                  ANALYSIS OF FINANCIAL  CONDITION AND RESULTS  OF OPERATIONS

         The following discussion and analysis provides information which 
management believes is relevant to an assessment and understanding of the 
Company's results of operations and financial operations and financial 
conditions.  This discussion should be read in conjunction with the financial
statements and notes thereto appearing elsewhere herein.

Results of Operations

Year ended December 31, 1998 ("fiscal  1998") as compared to year ended December
31, 1997 ("fiscal 1997")

         Net sales for the year ended December 31, 1998 were $8,572,985 
reflecting a decrease of $5,114,649 or 37% from the $13,687,634 of net sales for
the year ended December 31, 1997.  Net sales for 1998 were unfavorably impacted 
primarily for the following two (2) reasons:
<PAGE>
         1.       Management's decision to eliminate its multi-brand sales and 
                  concentrate solely on its contractual brands that it has 
                  obtained from each supplier; and

         2.       Management also decided to decrease its sales to its largest 
                  wholesale customers which they feel protects the Company from 
                  a risk associated with such concentration, Capital has 
                  subsequently bypassed these customers and increased its direct
                  selling relationship with its retail customer base.

         Cost of sales was $7,984,408 or 93% of net sales, for fiscal 1998, as 
compared to $12,400,645 or 90% of net sales, for fiscal 1997.  The decrease in 
dollar terms, of $4,416,237 in cost of sales from 1997 to fiscal 1998 reflects 
the significantly lower net sales in fiscal 1998 as compared to fiscal 1997,

         The Company's  gross margin was $588,577 or 6.9% of net sales,  in 1998
as compared to $1,286,989  or 9.4% of net sales in fiscal 1997.  The decrease in
gross  margin is due to the lower  selling  prices  reflected  to compete in its
marketing area of distribution. The gross margin was also negatively impacted by
the increase in redemption of used beverage containers,  which the Company feels
it has not  initiated  deposit for.  (Under the NYS  returnable  container  act,
Capital  has the  responsibility  under law to redeem all  brands of  containers
which it sells in its marketing territory.) Management expects an improvement in
both net sales  and gross  margin in the year  1999.  Due to  changes  currently
implemented as well as the introduction of new product lines associated with our
relationship with Pittsburgh  Brewery,  Capital increased its control over these
new labels as well as its marketing territory.  Management can give no assurance
that these conditions will maintain  themselves over a guaranteed  period,  as a
result of increased competition and other risk factors.

         Selling and delivery  expenses were $310,410 in fiscal 1998 as compared
to $371,603 for fiscal 1997 reflecting a decrease due to its  significant  lower
net sales in 1998.

         General and administrative  expenses were $1,518,959 for fiscal 1998 as
compared to $1,455,264 for fiscal 1997.  This  represents an increase of $63,695
or 4% from fiscal 1997 to fiscal 1998.  Amortization  of  intangible  assets was
$160,000 in fiscal 1998, as compared to $160,000 in fiscal 1997. The cost of the
license is being  amortized  over ten (10)  years.  The  increase in general and
administrative  is due primarily to fees  associated with being a public company
as well as additional costs  associated with the due diligence  process incurred
by management in reviewing potential acquisitions.

         Interest expense was $57,522 for 1998, as compared to $97,245 for 1997.
This represents a decrease of $39,723.  The decrease in interest expense is a 
result of paying off debt.
<PAGE>
         CAP Communications  Ltd. was formed in November 1998 to explore,  as an
ancillary to beverage sales,  the rapidly  expanding  prepaid phone card market.
Within  New York  City,  the bulk of  phone  cards  sales  occur  within  ethnic
neighborhoods, with major sales occurring within the Hispanic based communities.
Given Capital  Beverage's  well  established  position in local Hispanic  retail
markets and its' connection with the business owners, phone cards may serve as a
significant  source of new revenues to Capital's  expanding  beverage sales. The
synergism of the two, beer sales and phone cards,  may prove to be the catalyst,
which  sparks  continued  revenue  growth  for  Capital  Beverage.   Working  in
conjunction with Orion Telecommunications Corporation, with offices in New York,
Capital  Beverage has begun an  infrastructure  development  to explore this new
potential  market.  Orion has  agreed to provide  funding  to  Capital  Beverage
through April 1999 which will allow Capital Beverage to determine what course of
action to take to make their card a success here in New York.

Material Change in Financial Condition, Liquidity and Capital Resources

         The Company's working capital decreased from $3,706,851 at December 31,
1997 to $2,457,022 at December 31, 1998.  The decrease of $1,249,829 was due to
direct result of the 1998 losses incurred in operations.

         At December 31, 1998, the Company's primary resources of liquidity were
$2,088,741 in cash, $341,769 in accounts receivable and $579,099 in inventories.

Year 2000

         The Company  recognizes that a challenging  problem exists in that many
computer  systems  worldwide do not have the capability of recognizing  the year
2000 or the years  thereafter.  No easy  technological  "quick fix" has yet been
developed  for this  problem.  While  the issue is not of  significance  for the
Company because of its minimal  reliance on computers,  this "Year 2000 Computer
Problem"  creates  risk for the  Company  from  unforeseen  problems  in its own
computer  systems  and from third  parties  with whom the  Company  deals.  Such
failures of third parties' computer systems could have a material adverse effect
on the Company and its ability to conduct its business in the future.

Item 7.  FINANCIAL STATEMENTS.

         See  financial  statements  following  Item 13 of this Annual Report on
Form 10-KSB.

Item 8.  CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS
              ON ACCOUNTING AND FINANCIAL DISCLOSURE.

         None.


<PAGE>
                                    PART III

Item 9.  DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
           PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE
              ACT.

Directors and Executive Officers

         The names and ages of the directors, executive officers and significant
employees, and promoters of the Company are set forth below.

               Name               Age      Position Held

         Carmine N. Stella         46      President, Chief Executive Officer,
                                           Chairman of the Board of Directors

         Robert A. Vessa           48      Director

         Anthony Stella            47      Vice President of Sales and Managing
                                           Director

         Carol Russell             42      Secretary, Treasurer and Director

         Dawn A. Collins           29      Director

         Joseph M. Luzzi           50      Director
-----------------------

         Carmine N. Stella - Mr. Stella has served as President, Chief Executive
Officer  and  Chairman  of the  Board of  Directors  of the  Company  since  its
inception in December  1995.  From 1991 to the present,  Mr. Stella has been the
sole officer,  director and shareholder of VSI, a wholesale and retail seller of
alcoholic and  nonalcoholic  beverages  with  $12,000,000 of sales during fiscal
1994 and  $7,000,000 of sales during fiscal 1995.  From 1986 to 1990, Mr. Stella
served as President and a director of Gotham Wholesale Beer Distributors, a beer
and   non-alcoholic   beverage   wholesaler  with  annual  sales  in  excess  of
$20,000,000.  Mr.  Stella served as a President and Director of the Empire State
Beer Distributors Association from 1984 to 1988. Mr. Stella received a B.B.A. in
Accounting from Bernard M. Baruch College, New York, New York in 1973.

         Robert A. Vessa - Mr. Vessa has served as Vice President - Sales and
Marketing since February 1996, and has been a Director of the Company since 
October 29, 1997. From 1984, Mr. Vessa has acted as Business Affairs Coordinator
and a member of the Board of Directors of the Empire State Beer Distributors 
Association. Mr. Vessa received a B.B.A. degree in Marketing and Advertising 
from Bernard M. Baruch College, City University of New York in 1973.
<PAGE>
         Anthony Stella.  Mr. Stella has served as Vice President - Sales and 
Marketing and an employee of the Company since inception.  Mr. Stella has acted 
as executive sales manager for Vito Santoro, Inc., Gotham Wholesale Beer, Inc., 
Miller Home Service, Inc. and College Point Beer Distributors over the past 15
years .  Anthony Stella is the brother of Carmine Stella.

         Carol Russell - Mrs. Russell  has served as Secretary, Treasurer and a 
Director of the Company since February 1996. From 1991. Mrs. Russell has also 
served as Comptroller and Operations Manager of VSI from 1991 to the present.  
Mrs. Russell graduated from Central Commercial High School in New York City in 
1973.

         Dawn A. Collins - Ms. Collins has been a Director of the Company since 
October 29, 1997.  Ms. Collins has also served as an accountant for Restaurant 
Systems International, Inc. since 1995. From 1993 to 1995, Ms. Collins served as
an accountant for Ocean View Management. From 1991 to 1993, Ms. Collins was an 
accountant with Barr Beatty Devlin & Co., Inc. Ms. Collins received a B.B.A. in 
accounting from Baruch College in 1992.

         Joseph M. Luzzi - Mr. Luzzi has been a Director of the Company since 
October 29, 1997. Mr. Luzzi has also served as President, Chief Executive 
Officer and Chairman of the Board of Directors of Boro Recycling, Inc. since its
inception in December 1980. From 1973 to 1980, Mr. Luzzi was the New York City 
sales manager for the Sunshine Biscuit Company, a subsidiary of American Brands,
Inc. Mr. Luzzi attended New York City Community College from 1967 to 1969.

Compliance with Section 16(a) of  The Securities Exchange Act of 1934
---------------------------------------------------------------------

         Section  16(a) of the  Securities  Exchange  Act of 1934  requires  the
Company's  directors and executive  officers,  and persons who own more than ten
percent (10%) of a registered class of the Company's equity securities,  to file
with the Securities  and Exchange  Commission  initial  reports of ownership and
reports of changes in ownership of common stock and other equity  securities  of
the Company.  Officers,  directors and greater than ten percent shareholders are
required by SEC  regulation  to furnish  the Company  with copies of all Section
16(a) forms they file.

         Except as provided below, to the Company's  knowledge,  based solely on
its review of the copies of such  reports  furnished  to the Company  during the
year ended December 31, 1998, all Section 16(a) filing  requirements  applicable
to its officers,  directors and greater than ten percent  beneficial owners were
satisfied.



<PAGE>

ITEM 10. EXECUTIVE COMPENSATION.

         The  following  table  sets  forth the  compensation  paid to the Named
Executive Officers for the fiscal year ending December 31, 1998.
<TABLE>
<CAPTION>

                                                       Summary Compensation Table
    
                                     Annual Compensation Awards              Long-Term Compensation
______________________________________________________________               ______________________
        (a)                         (b)        (c)           (d)               (e)               (f)

                                                         Other Annual       Restricted       Stock Option
Name and Principal Position          Year     Salary       Compensation        Award             Grants
<S>                                  <C>    <C>                <C>              <C>             <C> 
Carmine N. Stella                    1998   $307,799.19         -0-             -0-              -0-
President, Chief Executive Officer,  1997   $291,763.68         -0-             -0-              -0-
Chairman of the Board

Anthony Stella                       1998   $175,579.19         -0-             -0-              -0-
Vice President of Sales              1997   $161,648.68         -0-             -0-              -0-
and Managing Director

Carol Russell                        1998   $112,115.67         -0-             -0-              -0-
                                     1997   $105,846.24         -0-             -0-              -0-

</TABLE>
         The  following  table sets forth  certain  information  with respect to
options  granted  during the last fiscal year to the Company's  Chief  Executive
Officer and the other executive officers named in the above Summary Compensation
Table.
<TABLE>
<CAPTION>
                                       Option/SAR Grants In Last Fiscal Year
                                   ------------------------------------------
<S>                            <C>                    <C>                       <C>                    <C> 
Name                             Number of Securities   Percent of Total        Exercise or
                                      Underlying       Options/SARS Granded to  BaseePriceFiscal Year
                                     Options/SARS      Employees in Fiscal Year          ($/Sh)        Expiration Sate
                                      Granted (#)                               
                                           -0-                   -0-                       -0-                   -0-
</TABLE>
----------------------------------
(1)      Options are exercisable for shares of Common Stock.

         The  following  table sets forth  certain  information  with respect to
options  exercised  during the last fiscal year by the Company's Chief Executive
Officer and the executive officers named in the Summary  Compensation Table, and
with respect to unexercised  options held by such persons at the end of the last
fiscal year:
<TABLE>
<CAPTION>
         Aggregate Option/SAR Exercises In Last Fiscal Year And Fiscal Year-End Option/SAR Values
<S>             <C>                          <C>               <C>                          <C>   
                        Shares                                    Number of Securities        Value of Unexercised in the Money 
    Name         Acquired on Exercise(#)(1)  Value1Realized $    Underlying Unexercised                 Options/SARs at  
----------       --------------------------  ----------------   Options/SARS at FY-End (#)                FY-End ($) (2)
                                                           Exercisable        Unexercisable     Exercisable         Unexercisable
                                                           -----------        -------------     -----------          ------------ 
                          -0-                    -0-          -0-                  -0-              -0-                  -0-

</TABLE>

<PAGE>
         Each director of the Company is entitled to receive reasonable 
out-of-pocket expenses  incurred in attending meetings of the Board of Directors
of the Company.  The members of the Board of Directors meet at least quarterly 
during the Company's fiscal year, and at such other times duly
called.

Employment Agreements

      The  Company  entered  into an  employment  agreement  with Mr.  Stella on
October  1, 1996  which  provides  for a  three-year  term and  includes  annual
compensation of $300,000, plus certain fringe benefits including health and life
insurance.

Stock Option Plans and Agreements

      The Company's 1996  Incentive  Stock Option Plan was approved by the Board
of  Directors  and  holders of Common  Stock of the  Company on June 19, 1996 to
provide for the grant of incentive  stock options  within the meaning of Section
422 of the  Internal  Revenue  Code of 1986 to  officers  and  employees  of the
Company.  A total of  350,000  shares of Common  Stock has been  authorized  and
reserved for issuance  under the 1996  Incentive  Stock Option Plan,  subject to
adjustment to reflect changes in the Company's  capitalization  in the case of a
stock split, stock dividend or similar event. No options have been granted under
the Company's 1996 Incentive  Stock Option Plan. The 1996 Incentive Stock Option
Plan will be  administered  by the  Compensation  Committee,  which has the sole
authority to interpret  the 1996  Incentive  Stock Option Plan, to determine the
persons to whom options will be granted,  to determine  the basis upon which the
options will be granted, and to determine the exercise price, duration and other
terms of options to be  granted  under the 1996  Incentive  Stock  Option  Plan;
provided  that,  (i) the exercise  price of each option  granted  under the 1996
Incentive  Stock  Option Plan may not be less than the fair market  value of the
Common Stock on the day of the grant of the option, (ii) the exercise price must
be paid in cash and or stock upon exercise of the option, (iii) no option may be
exercisable  for more than 10 years after the date of grant,  and (iv) no option
is transferable  other than by will or the laws of descent and distribution.  No
option is exercisable  after an optionee ceases to be employed by the Company or
a subsidiary of the Company,  subject to the right of the Compensation Committee
to extend the exercise  period for not more than 90 days  following  the date of
termination  of  an  optionee's  employment.  If  an  optionee's  employment  is
terminated by reason of disability, the Compensation Committee has the authority
to extend the exercise  period for not more than one year  following the date of
termination of the optionee's  employment.  If an optionee dies holding  options
that were not fully exercised, such options may be exercised in whole or in part
within one year of the optionee's  death by the executors or  administrators  of
the optionee's  estate or by the optionee's  heirs. The vesting period,  if any,
specified for each option will be accelerated upon the occurrence of a change of
control or threatened change of control of the Company




<PAGE>

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
              MANAGEMENT.

      The following  table sets forth as of April 6, 1999,  certain  information
with respect to the beneficial  ownership of Common Stock and Preferred Stock by
each person or entity known by the Company to be the  beneficial  owner of 5% or
more of such shares, each officer and director of the Company,  and all officers
and directors of the Company as a group:


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


Name and Address of Beneficial Owner (1)  Shares of Common    Percentage (%) of
                                            Stock Owned          Common Stock
--------------------------------------------------------------------------------
Carmine Stella(2)                             409,091                     17.2%
--------------------------------------------------------------------------------
Anthony Stella(3)                              77,273                      3.3%
--------------------------------------------------------------------------------
Carol Russell                                       0                      0
--------------------------------------------------------------------------------
Dawn Collins                                        0                      0
--------------------------------------------------------------------------------
Joseph Luzzi                                        0                      0
--------------------------------------------------------------------------------
Robert Vessa                                        0                      0
--------------------------------------------------------------------------------
All officers and  directors as a group (six (6) persons)
                                              486,364                     20.5%
--------------------------------------------------------------------------------

(1)      The address of each Stockholder shown above except as otherwise 
         indicated is c/o Capital Beverage Corporation, 1111 East Tremont 
         Avenue, Bronx, New York 10460.
(2)      Does not include (i) 300,000 shares of Common Stock that may be 
         acquired by Mr. Stella upon conversion of the 300,000 shares of Series 
         B Preferred Stock that were issued to Mr. Stella upon consummation of 
         the Merger; or (ii) 333,600 shares of Common stock that may be acquired
         by Mr. Stella beginning July 17, 1998 upon exercise of 333,600 
         additional Class A Warrants held by Mr. Stella.
(3)      Does not include 83,400 shares of Common Stock that may be acquired by 
         Mr. Anthony Stella beginning July 17, 1998 upon exercise of 83,400 
         Class A Warrants held by him.

ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

         In 1998 the Company amended its lease with East Tremont  Partners.  The
lease  amendment  provides  for a  reduction  in the  leased  area  at  its  two
facilities located at 1111 East Tremont Avenue and 415 Devoe Avenue in the Bronx
from approximately 22,000 square feet at a rental of $10,000 per month to 10,000
square  feet at 1111 East  Tremont  Avenue for $4,000  per month.  East  Tremont
Partners  is a New  York  partnership  in which  Mr.  Stella  holds a  one-sixth
interest.  Management of the Company  believes that the rent paid by the Company
under  this  lease is less than  what it would be  required  to pay for  similar
premises  within  the area in which the  Company's  administrative  offices  are
located.

         In 1998 the Company's carting and recycling services were provided by 
an entity whose principal shareholder, Joseph Luzzi, is also a director of the 
Company.  Such services approximated $200,000.
<PAGE>
         Although  the Company  has no present  intention  of entering  into any
affiliated   transactions,   the  Company  believes  that  material   affiliated
transactions  between  the  Company  and  its  directors,   officers,  principal
shareholders or any affiliates  thereof should be in the future on terms no less
favorable than could be obtained from unaffiliated third parties.

         With respect to each of the foregoing transactions, the Company 
believes that the terms of such transactions were as fair to the Company as 
could be obtained from an unrelated third party.  Future transactions with 
affiliates will be on terms no less favorable than could be obtained from
unaffiliated parties and will be approved by a majority of the independent
and/or disinterested members of the board of directors.






<PAGE>

ITEM 13.          EXHIBITS AND REPORTS ON FORM 8-K

Item              a.                EXHIBITS AND REPORTS ON FORM 8-K

(a)(1)  Financial Statements.
                                                               Index

         Independent Auditors' Report                           F - 2

         Consolidated Financial Statement

                  Balance Sheet                                 F - 3
                  Statements of Operations                      F - 4
                  Statements of Stockholders' Equity            F - 5
                  Statements of Cash flows                      F - 6
                  Notes to Financial Statements                 F - 7 -10

(a) (2)           Exhibits

         A list and description of exhibits filed as part of this Form 10-KSB is
provided in the attached Exhibit Index.

Item 27.          Exhibits.

 1.1     Form of Underwriting Agreement.*
 1.2     Form of Agreement Among Underwriters.*
 1.3     Form of Selected Dealer Agreement.*
 3.1     Certificate of Incorporation.*
 3.2     Certificate of Designations, As Amended,  Relating to Series A 
         Preferred Stock.*
 3.3     Form of Certificate of Designations Relating to Series B Preferred
         Stock.*
 3.4     ByLaws.*
 4.1     Specimen Common Stock Certificate.*
 4.2     Specimen Series A Preferred Stock Certificate.*
 4.3     Specimen Series B Preferred Stock Certificate.*
 4.4     Specimen Class A Warrant Certificate.*
 4.5     Form of Convertible Bridge Note.*
 4.6     Form of Class A Warrants Issued to Certain Members of Management.* 
 4.7     Form of Class A Warrants  Issued in 1996 Private Placement Financing.* 
 4.8     Form of Representative's Unit Purchase Option Agreement.*  
 4.9     Form  of  Warrant Agreement.*
10.1     Agreement with Consolidated Beverage Corp. relating to Pabst
         Distribution Rights *
10.2     Form of Series of Promissory Notes to Consolidated Beverage 
         Corporation *
10.3     Bill of Sale from Consolidated Beverage Corp. to Registrant.*
10.4     Distributorship Agreement with Pabst Brewing Company *
<PAGE>
10.5     Agency Agreement with Vito Santoro, Inc.*
10.6     Employment Agreement between Registrant and Carmine N. Stella.*
10.7     1996 Incentive Stock Option Plan.*
10.8     Agreement with Carmine N. Stella relating to Option to acquire Vito 
         Santoro, Inc.*
10.9     Merger Agreement relating to Vito Santoro, Inc.*

*        Incorporated by reference to Registrant's Registration Statement on 
         Form SB-2, and amendments thereto, Registration No. 333-9995 declared 
         effective on July 17, 1997.

(b)      Reports on Form 8-K.

                  None.





                          . . . . . . . . . . . . . . .





<PAGE>




                          CAPITAL BEVERAGE CORPORATION

                              FINANCIAL STATEMENTS



                                      INDEX

                                                                   Page
                                                                   Number
                                                            -------------------
INDEPENDENT AUDITORS' REPORT                                       F - 2
CONSOLIDATED FINANCIAL STATEMENTS:

      Balance Sheet                                                F - 3

      Statements of Operations                                     F - 4

      Statements of Stockholders' Equity                           F - 5

      Statements of Cash Flows                                     F - 6

      Notes to Financial Statements                                F - 7-10




                                                       F - 1

<PAGE>









                          INDEPENDENT AUDITORS' REPORT

Board of Directors and Stockholders
Capital Beverage Corporation

         We have audited the accompanying  consolidated balance sheet of Capital
Beverage  Corporation  as of  December  31,  1998 and the  related  consolidated
statements  of  operations,  stockholders'  equity  and cash flows for the years
ended  December  31,  1998  and  1997.   These  financial   statements  are  the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these financial statements based on our audit.

         We conducted our audit in accordance with generally  accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining on a test basis,  evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.

         In our opinion,  the  financial  statements  referred to above  present
fairly, the consolidated  financial position of Capital Beverage  Corporation as
of December 31, 1998 and the consolidated results of its operations and its cash
flows  for the  years  ended  December  31,  1998  and 1997 in  conformity  with
generally accepted accounting principles.




                                              Feldman Sherb Ehrlich & Co., P.C.

New York, New York
March 8, 1999


                                      F - 2
<PAGE>



<TABLE>
<CAPTION>

                                                CAPITAL BEVERAGE CORPORATION

                                                CONSOLIDATED BALANCE SHEET

                                                     DECEMBER 31, 1998

 
                                                          ASSETS

<S>                                                                                                   <C>   
CURRENT ASSETS:
     Cash                                                                                                $        2,088,741
     Accounts receivable - trade, net of allowance for doubtful
         accounts of $60,000                                                                                        341,769
     Inventories                                                                                                    579,099
     Prepaid expenses and other                                                                                     156,599
                                                                                                           -----------------
         TOTAL CURRENT ASSETS                                                                                     3,166,208

PROPERTY AND EQUIPMENT, less accumulated depreciation
     of $21,890                                                                                                      53,859

DISTRIBUTION LICENSE, less accumulated amortization $480,000                                                      1,120,000

OTHER ASSETS                                                                                                         75,662
                                                                                                           -----------------

                                                                                                         $        4,415,729
                                                                                                           =================

                                           LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
     Accounts payable                                                                                    $          214,739
     Accrued expenses and taxes                                                                                     156,203
     Current portion of long-term debt                                                                               68,131
     Accrued dividends on preferred stock                                                                           270,113
                                                                                                           -----------------
         TOTAL CURRENT LIABILITIES                                                                                  709,186
                                                                                                           -----------------

LONG-TERM DEBT                                                                                                      559,544
                                                                                                           -----------------

STOCKHOLDERS' EQUITY:
     7% Cumulative Series B Preferred Stock, par value $.01;
         issued and outstanding 300,000 shares (Liquidation value $1,200,000)                                         3,000
     Common stock, $ .001 par value; authorized 20,000,000 shares;
         issued and outstanding 2,378,409 shares                                                                      2,379
     Additional paid-in capital                                                                                   5,365,573
     Accumulated deficit                                                                                         (2,223,953)
                                                                                                           -----------------
         TOTAL STOCKHOLDERS' EQUITY                                                                               3,146,999
                                                                                                           -----------------

                                                                                                         $        4,415,729
                                                                                                           =================




                                            See notes to financial statements.

                                                            F-3
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                               CAPITAL BEVERAGE CORPORATION

                                           CONSOLIDATED STATEMENTS OF OPERATIONS


                                                                                              Year Ended December 31,
                                                                                         -----------------------------------
                                                                                              1998                1997
                                                                                         ----------------    ---------------
<S>                                                                                   <C>                  <C> 
NET SALES                                                                              $       8,572,985   $     13,687,634

COST OF SALES                                                                                  7,984,408         12,400,645

                                                                                         ----------------    ---------------
GROSS PROFIT                                                                                     588,577          1,286,989
                                                                                         ----------------    ---------------

COSTS AND EXPENSES:
     Selling and delivery                                                                        310,410            371,603
     General and administrative                                                                1,518,959          1,455,264
                                                                                         ----------------    ---------------
                                                                                               1,829,369          1,826,867
                                                                                         ----------------    ---------------

LOSS FROM OPERATIONS                                                                          (1,240,792)          (539,878)

INTEREST EXPENSE                                                                                 (57,522)           (97,245)

INTEREST INCOME                                                                                  116,790             63,101
                                                                                         ----------------    ---------------

NET LOSS                                                                                      (1,181,524)          (574,022)

PREFERRED STOCK DIVIDENDS                                                                        (84,000)           (49,613)
                                                                                         ----------------    ---------------

NET LOSS APPLICABLE TO COMMON SHAREHOLDERS                                             $      (1,265,524)  $       (623,635)
                                                                                         ================    ===============

LOSS PER SHARE - BASIC AND DILUTED                                                     $           (0.53)  $          (0.35)
                                                                                         ================    ===============

WEIGHTED AVERAGE NUMBER OF SHARES
     USED IN CALCULATION OF BASIC AND
     DILUTED LOSS PER SHARE                                                                    2,378,409          1,762,263
                                                                                         ================    ===============











                       See notes to financial statements.

                                       F-4
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                    CAPITAL BEVERAGE CORPORATION AND SUBSIDIARY
                                   CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY


                                                                                                Additional                Total
                                                        Preferred Stock          Common Stock    Paid-In  Accumulated  Stockholders'
                                                     ----------------------  -------------------
                                                       Shares      Amount      Shares       Amount  Capital   Deficit      Equity
                                                     ---------- -----------  ----------  ------- --------  ----------  ------------
<S>                                                 <C>        <C>          <C>        <C>       <C>       <C>          <C>
Balance January 1, 1997                                637,500  $1,218,000   1,240,909 $   1,241 $ 348,333 $   (334,794)$ 1,232,780

  Net loss                                                -           -           -          -        -        (574,022)   (574,022)

  Dividends payable to preferred shareholders             -           -           -          -        -         (49,613)    (49,613)

  Conversion of Series A Preferred Stock              (337,500)  (1,215,000)   337,500      338   1,214,662                   -

  Proceeds from issuance of units, less related costs     -           -        800,000      800   3,802,578               3,803,378
                                                     ----------   ---------  ----------  ------- ---------    ---------  -----------

Balance December 31, 1997                              300,000       3,000   2,378,409     2,379  5,365,573    (958,429)  4,412,523
                                                                                    
  Net loss                                                -           -           -          -         -     (1,181,524) (1,181,524)
                                                                                                                                    
  Dividends payable to preferred shareholders             -           -           -          -         -        (84,000)    (84,000)

                                                     ----------   ---------  ----------   ------ --------   ----------  ------------
Balance December 31, 1998                              300,000  $    3,000   2,378,409 $   2,379 $5,365,573 $(2,223,953)$ 3,146,999
                                                     ==========   =========  ==========  ======= =========  ==========  ============
</TABLE>

                                         See notes to financial statements.
                                                         F-5
<PAGE>
<TABLE>
<CAPTION>
                                                            CAPITAL BEVERAGE CORPORATION
                                                             STATEMENTS OF CASH FLOWS

                                                                                       Year Ended December 31,
                                                                                --------------------------------------
                                                                                       1998                 1997
                                                                                -----------------    -----------------
<S>                                                                           <C>                  <C>    
CASH FLOWS FROM OPERATING ACTIVITIES:
     Net loss                                                                  $       (1,181,524)  $         (574,022)
                                                                                -----------------    -----------------
     Adjustments to reconcile net loss to                                                       
         net cash used in operating activities:
            Depreciation and amortization                                                 164,925              167,292

     Changes in assets and liabilities:
         Decrease (increase) in accounts receivable                                       441,331             (358,993)
         (Increase) in inventories                                                       (152,809)             (82,946)
         (Increase) decrease in prepaid expenses                                         (147,051)              (8,027)
         (Decrease) increase in accounts payable and accrued expenses                     275,206              (49,870)
                                                                                -----------------    -----------------
                                                                                          581,602             (332,544)
                                                                                -----------------    -----------------

NET CASH USED IN OPERATING ACTIVITIES                                                    (599,922)            (906,566)
                                                                                -----------------    -----------------

CASH FLOWS FROM INVESTING ACTIVITIES
     Purchases of equipment                                                                (8,726)              (7,023)
                                                                                -----------------    -----------------

CASH FLOWS FROM FINANCING ACTIVITIES:
     Net proceeds from sale of common stock                                                     -            3,803,378
     (Repayment) proceeds of bridge loan                                                        -             (250,000)
     Decrease (Increase) in deferred registration costs                                         -              130,783
     Decrease (Increase) in due from affiliate                                                  -               57,837
     Distributions to stockholders                                                        (84,000)             (49,613)
     Payments of long-term debt                                                           (62,481)             (61,853)

                                                                                -----------------    -----------------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES                                      (146,481)           3,630,532
                                                                                -----------------    -----------------

INCREASE (DECREASE) IN CASH                                                              (755,129)           2,716,943

CASH - BEGINNING OF YEAR                                                                2,843,870              126,927
                                                                                -----------------    -----------------

CASH - END OF YEAR                                                             $        2,088,741   $        2,843,870
                                                                                =================    =================

SUPPLEMENTAL DISCLOSURE OF CASH FLOW
     INFORMATION:

     Cash paid for interest                                                    $           57,522   $          117,245
                                                                                =================    =================

SUPPLEMENTAL NON-CASH FINANCING ACTIVITIES:

     Common Stock issued upon conversion of Series "A" Preferred Stock         $                -   $        1,215,000
                                                                                =================    =================


                                    See notes to financial statements.

                                            F-6
</TABLE>
<PAGE>


                          CAPITAL BEVERAGE CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                     YEARS ENDED DECEMBER 31, 1998 AND 1997




1.       DESCRIPTION OF BUSINESS

         Capital  Beverage  Corporation  (the  "Company") was formed in December
         1995 to operate as a wholesale  distributor of beer and other beverages
         in New York City. In December  1998,  CAP  communications,  Ltd.  ("Cap
         Comm"), a wholly-owned subsidiary, was organized to market domestic and
         long distance  prepaid  telephone  calling cards to distributors and to
         the general public.  Cap Comm was in the development  stage at December
         31, 1998.


2.       SIGNIFICANT ACCOUNTING POLICIES

         Principles  of  Consolidation  - The financial  statements  include the
         accounts of the Company and Cap Comm, its wholly-owned subsidiary.  All
         significant intercompany balances and transactions have been eliminated
         in consolidation.

         Inventories - Inventories of beer, other beverage  products and prepaid
         calling  cards  are  stated  at the  lower of cost,  determined  by the
         first-in, first-out method, or market.

         Property and  Equipment - Property and equipment are stated at cost and
         are depreciated  over the estimated useful lives of the related assets,
         ranging  from  5  to  39  years.   Depreciation   is  computed  on  the
         straight-line and accelerated  methods for both financial reporting and
         income tax purposes.

         Income Taxes - The Company  follows  Statement of Financial  Accounting
         Standards  No.  109 -  Accounting  for  Income  Taxes,  which  requires
         recognition  of deferred  tax assets and  liabilities  for the expected
         future  tax  consequences  of events  that have  been  included  in the
         financial  statements or tax returns.  Under this method,  deferred tax
         assets  and  liabilities  are  based  on the  differences  between  the
         financial  statement  and tax bases of  assets  and  liabilities  using
         enacted tax rates in effect for the year in which the  differences  are
         expected to reverse.




                                      F - 7

<PAGE>



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

         Fair  Value  of  Financial  Instruments  - The  Company  considers  its
         financial  instruments,  which are carried at cost, to approximate fair
         value due to their near-term maturities.

         Distribution  License - The  Company's  license to  distribute  certain
         beverage  products in New York City, is recorded at cost.  Amortization
         is provided on a straight-line basis over ten years.

         Revenue  Recognition - Wholesale sales are recognized at the time goods
         are shipped.

         Loss  per  Common  Share - Net loss  per  common  share is based on the
         weighted average number of shares outstanding.  Potential common shares
         includable  in the  computation  of fully diluted per share results are
         not  presented  in the  financial  statements  as their effect would be
         anti-dilutive.


3.       DISTRIBUTION LICENSE

         The  Company has  acquired an  exclusive  license to  distribute  Pabst
         Products within the "territory", as defined in the licensing agreement.
         The Company paid $1,600,000,  of which $800,000 was paid at the closing
         and the  balance  in a note  payable  in 120  monthly  installments  of
         $10,000 each, inclusive of interest at 9% per annum.

         Maturities of the notes over the next five years are: 1999 - $68,131; 
         2000 - $74,292; 2001 - $81,011;  2002 - $88,338; 2003 - $96,327.


4.       WARRANTS

         In July 1997,  the Company  sold  800,000  units for  $3,803,000  after
         expenses. The units consisted of one share of Common Stock and one half
         Class A Redeemable Common Stock Purchase Warrant.  Two Class A warrants
         entitle the holder to purchase  one share of Common  Stock at $6.25 per
         share. The warrants are exercisable commencing July 17, 1998 and expire
         on July 16, 2002.  The warrants are  redeemable by the Company at $.001
         per  warrant  under  terms as  defined  in the  warrant  agreement.  At
         December  31,  1998,   1,659,000  Class  A  warrants  were  issued  and
         outstanding.


                                      F - 8

<PAGE>




         The Company issued a unit purchase warrant to the underwriter for $100,
         enabling the  underwriter to purchase up to 80,000 units at an exercise
         price of at least 120  percent  of the  initial  offering  price of the
         units. The Company has reserved 120,000 shares of Common Stock to cover
         the exercise of such warrant.


5.       INCOME TAXES

         At December 31, 1998, the Company had a net operating loss carryover of
         $1,700,000  available as offsets against future taxable income, if any,
         which expire at various dates through  2013. The Company has a deferred
         tax asset of $700,000  arising from such net operating loss  deductions
         and has  recorded a  valuation  allowance  for the full  amount of such
         deferred tax asset.

         The  difference  between  the  recorded  income  tax  benefits  and the
         computed tax benefits using a 40 percent effective rate are as follows:

<TABLE>
<CAPTION>
                                                                  Year Ended December 31,
                                                                   1998                               1997

<S>                                                        <C>                                 <C>  
         Computed expected income tax (benefit)                   $   (473,000)                   $  (229,600)

         Non-deductible items                                           17,000                         19,600

         Temporary differences                                         ( 2,000)                         6,000

         Benefits not recorded                                         458,000                        204,000
                                                                  ------------                     ----------
                                                              $         -                        $         -
                                                               ---------------                     ----------
</TABLE>
6.       LEASE COMMITMENTS

         The Company  renegotiated the lease of its warehouse and administrative
         facilities in April 1998 thereby  reducing its monthly rental  payments
         from  $10,000  to $4,000 for the  remainder  of its lease  term,  which
         expires in 2001. A principal shareholder in the company has a one-sixth
         interest in the lessor.  Additional warehouse space was acquired from a
         customer on a  month-to-month  basis  commencing  October 1998.  Rental
         payments of $7,000 per month are  offsettable  against amounts due from
         the customer until the balance is liquidated. Rent expense for 1998 and
         1997 was $83,000 and $120,000, respectively.

                                      F - 9

<PAGE>



7.       CONCENTRATION OF CREDIT RISK

         The Company is subject to credit risk  through  trade  receivables  and
         short-term  cash  investments.   Credit  risk  with  respect  to  trade
         receivables is mitigated to a degree because of management's  knowledge
         of the  local  marketplace  and the  relative  creditworthiness  of the
         customers to which it extends credit.  Short-term cash  investments are
         placed  with  high  credit  quality  financial  institutions,   thereby
         limiting the amount of credit exposure.

         The Company's  operations,  and therefore its revenues are concentrated
         in the New York City Metropolitan area.  Additionally,  the majority of
         the  Company's   revenues  are  derived  from  the  sale  of  alcoholic
         beverages.  Downturns  in New York City's  economic  activities  and/or
         negative  changes  in the  publics  perception  of the  consumption  of
         alcoholic beverages may adversely affect the Company's operations.


8.       MAJOR CUSTOMER AND SUPPLIER INFORMATION

         Sales to a single  customer  in 1998  were 13% of net  sales.  Sales to
         three  customers  were 51% of net  sales in  1997.  Purchases  of Pabst
         products were approximately $3,200,000 and $4,600,000 in 1998 and 1997,
         respectively.


9.       OTHER MATTERS

         The Company's carting and recycling  services are provided by an entity
         whose  principle  shareholder  is also a director of the Company.  Such
         services approximated $200,000 in 1998.



                                     F - 10
<PAGE>



                                   SIGNATURES

         In  accordance  with  Section  13 or 15(d)  of the  Exchange  Act,  the
Registrant  caused  this  report to be signed on its behalf by the  undersigned,
thereunto duly executed on this 9th day of April, 1999.

                                                 CAPITAL BEVERAGE CORPORATION


                                                 By:/s/ Carmine Stella
                                                        Carmine Stella
                                          President, Chief Executive Officer
                                          and Chairman of the Board of Directors


         In accordance with the Exchange Act, this report has been signed by the
following persons on behalf of the registrant in the capacities and on the dates
indicated

Signature                               Title                         Date

/s/ Carmine Stella              Chief Executive Officer,         April 9, 1999
--------------------------
Carmine Stella                  President and Chairman of
                                the Board of Directors


/s/ Robert Vessa                Director                         April 9, 1999
---------------------------
Robert Vessa


 /s/Carol Russell               Secretary and Treasurer          April 9, 1999
-----------------------------
Carol Russell                   and Director


/s/ Dawn Collins                Director                         April 9, 1999
------------------------------
Dawn Collins


 /s/ Joseph Luzzi               Director                         April 9, 1999
------------------------------
Joseph Luzzi


/s/ Anthony Stella               Vice President of Sales         April 9, 1999
-----------------------------
Anthony Stella                   and Managing Director