You should read the following discussion together with the more detailed business information and consolidated financial statements and related notes that appear elsewhere in this report and in the documents that we incorporate by reference into this report. This report may contain certain "forward-looking" information within the meaning of the Private Securities Litigation Reform Act of 1995. This information involves risks and uncertainties. Our actual results may differ materially from the results discussed in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in "Risk factors".

Company Overview

The Registrant, Canal Capital Corporation ("Canal" or the "Company"), incorporated in the state of Delaware in 1964, commenced business operations through a predecessor in 1936.

Canal is engaged in two distinct businesses -- real estate and stockyard operations.

Real Estate Operations - Canal's real estate properties are located in Sioux City, Iowa, South St Paul, Minnesota, St Joseph, Missouri, Omaha, Nebraska and Sioux Falls, South Dakota. The properties consist, for the most part, of an Exchange Building (commercial office space), land and structures leased to third parties (meat packing facilities, rail car repair shops, lumber yards and various other commercial and retail businesses) as well as vacant land available for development or resale. Its principal real estate operating revenues are derived from lease income from land and structures leased to various commercial and retail enterprises, rental income from its Exchange Building, and proceeds from the sale of real estate properties. In addition to selling what was excess stockyard property, the company entertains any offers to purchase, develop and restructure real estate lots surrounding its existing operating lease properties, stockyard operating properties and properties held for development or resale in order to enhance the value of the existing properties and surrounding real estate. See "Real Estate Operations".

Stockyard Operations - As a result of an August 1, 1999 asset purchase agreement, Canal now operates two central public stockyards located in St. Joseph, Missouri and Sioux Falls, South Dakota (collectively the "Stockyards"). Public stockyards act much like a securities exchange, providing markets for all categories of livestock and

fulfilling the economic functions of assembly, grading, and price discovery. The Company's principal stockyard revenues are derived from a per head charge ("yardage charge") imposed on all livestock consigned for sale at the stockyards and the sale of feed and bedding. See "Stockyard Operations".

Real estate operations resulted in operating income of $329,000 and $309,000 for the six month periods ended April 30, 2009 and 2008, respectively. Included in the fiscal 2009 results is a 194,000 gain on the sale of approximately 16 acres of vacant land located in St. Joseph, Missouri. Included in the 2008 real estate operating income is a $127,000 gain on the sale of approximately 1 acre of land and the associated improvements located in South Saint Paul, Minnesota. Additionally, real estate operations contributed $471,000 and $464,000 to Canal's revenues for the six month periods ended April 30, 2009 and 2008, respectively.

As of April 30, 2009, there are approximately 2 acres of undeveloped land owned by Canal adjacent to its stockyard properties. In addition to selling what was excess stockyard property, the company entertains any offers to purchase, develop and restructure real estate lots surrounding its existing operating lease properties, stockyard operating properties and properties held for development or resale in order to enhance the value of the existing properties and surrounding real estate.

Risk - Real estate activities in general may involve various degrees of risk, such as the ability to collect receivables, competition for tenants, general market conditions and interest rates. Furthermore, there can be no assurance that Canal will be successful in the development, lease or sale of its real estate properties.

Competition - Canal competes in the area of real estate development with other regional developers, some of which are substantially larger and have significantly greater financial resources than Canal. To a certain extent, Canal's real estate revenues are dependent on the ability of the stockyard operations and the various meat packers located adjacent to Canal's properties to successfully compete in their respective businesses.

General - Through an August 1, 1999 asset repurchase agreement, Canal now operates two central public stockyards located in St. Joseph, Missouri and Sioux Falls, South Dakota.

Public stockyards act much like a securities exchange, providing markets for all categories of livestock and fulfilling the economic functions of assembly, grading, and price discovery. The livestock handled by the Company's stockyards include cattle, hogs, and sheep. Cattle and hogs may come through the stockyard facilities at two different stages, either as feeder livestock or slaughter livestock. The Company's stockyards provide all services and facilities required to operate an independent market for the sale of livestock, including veterinary facilities, auction arenas, auctioneers, weigh masters and scales, feed and bedding, and security personnel. In addition, the stockyards provide other services including pure bred and other specialty sales for producer organizations. The Company promotes its stockyard business through public relations efforts, advertising, and personal solicitation of producers.

Actual marketing transactions at a stockyard are managed for livestock producers by market agencies and independent commission sales people to which the livestock are consigned for sale. These market agencies (some of which are owned and operated by the Company) and independent sales people receive commissions from the seller upon settlement of a transaction and the stockyard receives a yardage fee on all livestock using the facility which is paid within twenty-four hours of the sale. Yardage fees vary depending upon the type of animal, the extent of services provided by the stockyard, and local competition. Yardage revenues are not directly dependent upon market prices, but rather are a function of the volume of livestock handled. In general, stockyard livestock volume is dependent upon conditions affecting livestock production and upon the market agencies and independent commission sales people which operate at the stockyards. Stockyard operations are seasonal, with greater volume generally experienced during the first and fourth quarters of each fiscal year, during which periods livestock is generally brought to market.

Virtually all of the volume at Canal's Sioux Falls stockyards is handled through market agencies and independent commission sales people, while the St. Joseph stockyards has solicitation operations of its own which account for approximately 50% of its livestock volume annually.

Canal intends to continue its soliciting efforts at its St. Joseph stockyards in fiscal 2009. Further, Canal tries to balance its dependence on market agencies and independent commission sales people in various ways, including: developing solicitation operations of its own; direct public relations; advertising and personal solicitation of producers on behalf of the stockyards; providing additional services at the stockyards to attract sellers and buyers; and providing incentives to market agencies and independent commission sales people for increased business.

Stockyard operations resulted in operating income of $184,000 and $125,000 for the six month periods ended April 30, 2009 and 2008, respectively. Additionally, stockyard operations contributed $1,685,000 and $1,726,000 to Canal's revenues for the six month periods ended April 30, 2009 and 2008, respectively.

Risk - Stockyard activities face a variety of risks and uncertainties related to the safeguarding of the national food supply which are beyond our control. Public confidence in the government's efforts to safeguard the food supply is essential for the success of our stockyard operations. An outbreak of a disease such as bovine spongiform encephalopathy (BSE) better known as Mad Cow Disease could have a devastating impact on stockyard operations. For the company's part we strictly follow all USDA regulations to ensure to the extent we can the safety of the food supply. Furthermore, stockyard activities in general may involve various degrees of risk, such as competition from other regional stockyards and sale barns, general market conditions and to a lesser extent interest rates.

Competition - Canal competes in the area of public stockyards with other regional public stockyards and sale barns, some of which are substantially larger and have greater financial resources than Canal. To a certain extent, Canal's stockyard revenues are dependent on the ability of the market agencies and independent commission sales people at each of Canal's stockyard locations to compete within the region.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States. These generally accepted accounting principles require management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of net sales and expenses during the reporting period. We continually evaluate our estimates, including those related to revenue recognition, bad debts, income taxes, fixed assets, restructuring, contingencies and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the facts and circumstances. Actual results may differ from these estimates under different assumptions or conditions.

Management believes the following critical accounting policies impact our most difficult, subjective and complex judgments used in the preparation of our consolidated financial statements, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. For a further discussion of these and other accounting policies, please see Note 2 of the Notes to Consolidated Financial Statements included elsewhere in this Quarterly Report.

Revenue Recognition -- Lease and rental revenues are recognized ratably over the period covered. All real estate leases are accounted for as operating leases. Revenues from the sale of real estate are recognized at the time the sale has been consummated on the full accrual method wherein the seller has transferred to the buyer the usual risks and rewards of ownership in a transaction that is in substance a sale and does not have a substantial continuing involvement with the property; the seller's receivable is not subject to future subordination and the buyer's initial and continuing investments are adequate to demonstrate a commitment to pay for the property. Revenues from stockyard operations which consist primarily of yardage fees (a standard per head charge for each animal sold through the stockyards) and sale of feed and bedding are recognized at the time the service is rendered or the feed and bedding are delivered.

Art Inventory Held for Sale -- The nature of art makes it difficult to determine a replacement value. The most compelling evidence of a value in most cases is an independent appraisal. Canal has had varying percentages of its art inventory appraised by independent appraisers in previous years. For fiscal 2009 the net realizable value of Canals remaining art inventory has been estimated by management based in part on the Company's history of art sales in the current and previous years and in part on the results of the independent appraisals done in previous years.

Properties and Related Depreciation -- Properties are stated at cost less accumulated depreciation. Depreciation is provided on the straight-line method over the estimated useful lives of the properties. Such lives are estimated from 35 to 40 years for buildings and from 5 to 20 years for improvements and equipment.

Property held for Development or Resale -- Property held for development or resale consist of approximately 2 acres located in the Midwest of undeveloped land not currently utilized for corporate purposes nor included in any of the present operating leases. The Company constantly evaluates proposals received for the purchase, leasing or development of this asset. The land is valued at cost which does not exceed the net realizable value.

Long-Lived Assets -- The Company reviews the impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company considers historical performance and future estimated results in its evaluation of potential impairment and then compares the carrying amount of the assets to the estimated future cash flows expected to result from the use of the asset. The measurement of the loss, if any, will be calculated as the amount by which the carrying amount of the asset exceeds the fair value of the asset.

Results of Operations

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


                                            Six Months Ended April 30,
                                            --------------------------
                                              2009              2008
                                              ----              ----
                                                 (In Thousands)
Revenues:
Real Estate Revenues                       $     471         $     464
Stockyard Revenues                             1,685             1,725
                                           ---------         ---------
    Total Revenues                             2,156             2,189
                                           ---------         ---------

Costs and Expenses:
Real Estate Expenses                             142               154
Stockyard Expenses                             1,501             1,601
General and Administrative Expenses              449               551
                                           ---------         ---------
     Total Costs and Expenses                  2,092             2,306
                                           ---------         ---------

Income from Operations                            64              (117)

Other Income                                       8                27
Other Expenses                                   (66)             (108)
                                           ---------         ---------

Net Income (Loss)                          $       6         $    (198)
                                           ---------         ---------

While the Company is currently operating as a going concern, certain significant factors raise substantial doubt about the Company's ability to continue as a going concern. The Company has suffered recurring losses from operations and is obligated to continue making substantial annual contributions to its defined benefit pension plan. The financial statements do not include any adjustments that might result from the resolution of these uncertainties. Additionally, the accompanying financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

Canal recognized net income of approximately $6,000 in the first six months of fiscal 2009 as compared to a net loss of $198,000 for the same period in fiscal 2008. After recognition of accrued preferred stock dividends of $36,000 and $54,000 in 2009 and 2008, respectively, the results attributable to common stockholders were a net loss of $30,000 in 2009 and a net loss of $252,000 in 2008.

Canal's revenues from continuing operations consist of revenues from its real estate and stockyard operations. Revenues for the first six months of fiscal 2009 decreased by $33,000 to $2,156,000 as compared with 2008 revenues of $2,189,000. The fiscal 2009 decrease in revenues is due primarily to a $40,000 decrease in stockyard revenues due.

COMPARISON OF FISCAL PERIODS ENDED APRIL 30, 2009 AND 2008

Real Estate Revenues

Real estate revenues for the six months ended April 30, 2009 of $471,000 accounted for 21.9% of the fiscal 2009 revenues as compared to real estate revenues of $464,000 or 21.2% for the same period in fiscal 2008. Real estate revenues are comprised of sale of real estate (55.8% and 43.1%), rentals and other lease income from the rental of vacant land and certain structures (41.0% and 53.3%) and rental income from commercial office space in its Exchange Buildings (3.2% and 3.6%) for the six months ended April 30, 2009 and 2008, respectively. The percentage variations in the year to year comparisons are due to the increase in sales of real estate combined with a decrease in outside real estate rent (due to a fiscal 2008 property sale) in the first six months of fiscal 2009.

Real Estate Revenues

Real estate revenues for the three months ended April 30, 2009 of $367,000 accounted for 29.7% of the fiscal 2009 revenues as compared to real estate revenues of $134,000 or 13.9% for the same period in fiscal 2008. Real estate revenues are comprised of sale of real estate (71.5% and 0.0%), rentals and other lease income from the rental of vacant land and certain structures (26.4% and 93.3%) and rental income from commercial office space in its Exchange Buildings (2.1% and 6.7%) for the three months ended April 30, 2009 and 2008, respectively. The percentage variations in the year to year comparisons are due to the increase in sales of real estate in the second quarter of fiscal 2009.

Real Estate Expenses

Real estate expenses for the six months ended April 30, 2009 of $142,000 decreased by $12,000 (8.1%) from real estate expenses of $154,000 for the same period in fiscal 2008. The decrease in real estate expenses is consistent with the 2009 decrease in outside real estate rent. Real estate expenses are comprised of the cost of real estate sold (48.7% and 47.0%), labor, operating and maintenance (20.9% and 24.6%), depreciation and amortization (7.8% and 7.2%), taxes other than income taxes (8.7% and 7.0%) and general and administrative expenses (13.9% and 14.2%) for the six months ended April 30, 2009 and 2008, respectively. The percentage variations in the year to year comparisons are consistent with the decrease in the cost of real estate sold in the first fiscal quarter of 2009.

Real Estate Expenses

Real estate expenses for the three months ended April 30, 2009 of $105,000 increased by $63,000 (148.8%) from real estate expenses of $42,000 for the same period in fiscal 2008. The increase in real estate expenses is consistent with the 2009 increase in real estate revenues. Real estate expenses are comprised of the cost of real estate sold (65.7% and 0.0%), labor, operating and maintenance (13.8% and 47.8%), depreciation and amortization (5.3% and 13.1%), taxes other than income taxes (5.8% and 12.8%) and general and administrative expenses (9.4% and 26.3%) for the three months ended April 30, 2009 and 2008, respectively. The percentage variations in the year to year comparisons are consistent with the increase in the cost of real estate sold in the second fiscal quarter of 2009.

Stockyard Revenues

Stockyard revenues for the six months ended April 30, 2009 of $1,685,000 accounted for 78.1% of the fiscal 2009 revenues as compared to stockyard revenues of $1,726,000 or 78.8% for the same period in fiscal 2008. The 2009 decrease in stockyard revenue was due primarily to the severity of the weather experienced in the mid-west. Stockyard revenues are comprised of yard handling and auction (87.8% and 88.5%), feed and bedding income (6.9% and 6.4%) and rental and other income (5.3% and 5.1%) for the six month periods ended April 30, 2009 and 2008, respectively. There were no significant percentage variations in the year to year comparisons.

Stockyard Revenues

Stockyard revenues for the three months ended April 30, 2009 of $870,000 accounted for 70.3% of the fiscal 2009 revenues as compared to stockyard revenues of $825,000 or 86.1% for the same period in fiscal 2008. The 2009 decrease in stockyard revenue was due primarily to the severity of the weather experienced in the mid-west. Stockyard revenues are comprised of yard handling and auction (87.7% and 88.0%), feed and bedding income (6.6% and 6.5%) and rental and other income (5.7% and 5.5%) for the three month periods ended April 30, 2009 and 2008, respectively. The 2009 decrease in the stockyard revenues as a percent of total revenues, is due primarily to the $263,000 increase in sales of real estate in the second fiscal quarter of 2009. There were no significant percentage variations in the year to year comparisons.

Stockyard Expenses

Stockyard expenses for the six months ended April 30, 2009 of $1,501,000 decreased by $100,000 (6.2%) from stockyard expenses of $1,601,000 for the same period in fiscal 2008. Stockyard expenses are comprised of labor and related costs (45.3% and 45.8%), other operating and maintenance (27.0% and 27.8%), feed and bedding expense (6.1% and 6.5%), depreciation and amortization (0.7% and 0.6%), taxes other than income taxes (6.0% and 5.5%) and general and administrative expense (14.9% and 13.8%) for the six month periods ended April 30, 2009 and 2008, respectively. There were no significant percentage variations in the year to year comparisons.

Stockyard Expenses

Stockyard expenses for the three months ended April 30, 2009 of $775,000 decreased by $23,000 (2.9%) from stockyard expenses of $798,000 for the same period in fiscal 2008. Stockyard expenses are comprised of labor and related costs (42.6% and 45.0%), other operating and maintenance (28.6% and 28.6%), feed and bedding expense (6.4% and 5.9%), depreciation and amortization (0.6% and 0.6%), taxes other than income taxes (5.9% and 5.7%) and general and administrative expense (15.9% and 14.2%) for the three month periods ended April 30, 2009 and 2008, respectively. There were no significant percentage variations in the year to year comparisons.

General and Administrative

General and administrative expenses for the six months ended April 30, 2009 of $449,000 decreased by $102,000 (18.5%) as compared to $551,000 for the same period in fiscal 2008. The major components of general and administrative expenses are officers salaries (52.7% and 43.0%), pension expense (13.4% and 22.9%), insurance expense (5.9% and 6.5%), office salaries (10.5% and 8.5%), travel expense (4.3% and 3.5%), rent (2.6% and 2.0%) and professional fees (3.2% and 2.6%) for the six month periods ended April 30, 2009 and 2008, respectively. The percentage variations in the year to year comparisons are due primarily to the sharp decrease in pension expenses in fiscal 2009.

General and Administrative

General and administrative expenses for the three months ended April 30, 2009 of $225,000 decreased by $43,000 (16.0%) as compared to $268,000 for the same period in fiscal 2008. The major components of general and administrative expenses are officers salaries (52.7% and 44.3%), pension expense (13.3% and 23.6%), insurance expense (5.9% and 6.7%), office salaries (10.5% and 8.8%), travel expense (4.5% and 3.1%), rent (2.6% and 2.1%) and professional fees (3.2% and 2.7%) for the three month periods ended April 30, 2009 and 2008, respectively. The percentage variations in the year to year comparisons are due primarily to the sharp decrease in pension expenses in fiscal 2009.

Interest and Other Income

Interest and other income for the six months ended April 30, 2009 of $8,000 decreased by $19,000 (70.9%) from $27,000 for the same period in fiscal 2008. Interest and other income in fiscal 2008 was comprised primarily of interest income on the $1,600,000 note receivable associated with the fiscal 2005 sale of the company's South St. Paul, Minnesota Exchange Building. As more fully described in note 4 the terms of this mortgage note were amended, including an increase of the rate of interest to 12% per annum. The 2009 decrease in interest and other income is due primarily to the principal reduction of this mortgage note receivable, which was repaid in full in March, 2008.

Interest Expense

Interest expense for the six months ended April 30, 2009 of $63,000 decreased by $43,000 (40.4%) from $106,000 for the same period in fiscal 2008. The 2009 decrease is due primarily to Canal's $1,425,000 partial repayment of this debt in fiscal 2008. The principal balance outstanding at both April 30, 2009 and October 31, 2008 was $1,262,000 all of which is classified as long-term debt-related party. The interest rate (10%) on Canal's variable rate mortgage notes has remained unchanged for the past 12 months.

(Expense) Income from Art Sales & Operations

Other expense from art sales & operations for the six months ended April 30, 2009 was $2,000, while the same period in fiscal 2008 also generated an loss from art sales & operations of $2,000. Canal had no art sales in the first six months of fiscal 2009 or fiscal 2008. Art revenues, if any, are comprised of the proceeds from the sale of antiquities and contemporary art. Art expenses are comprised of the cost of inventory sold and selling, general and administrative expenses. Canal incurred selling, general and administrative expenses of $2,000 and $2,000 for the six month periods ended April 30, 2009 and 2008, respectively. It is the Company's policy to use the adjusted carrying value for sales, thereby reducing the valuation reserve proportionately as the inventory is sold.

Liquidity and Capital Resources

While the Company is currently operating as a going concern, certain significant factors raise substantial doubt about the Company's ability to continue as a going concern. The Company has suffered recurring losses from operations and is obligated to continue making substantial annual

contributions to its defined benefit pension plan. The financial statements do not include any adjustments that might result from the resolution of these uncertainties. Additionally, the accompanying financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

The Company's variable rate mortgage notes (originally issued in 1998 and amended several times since then) are due May 15, 2012 and are held entirely by the Company's Chief Executive Officer and members of his family. These notes carry interest at the rate of ten percent per annum. These notes, among other . . .