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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

Commission File Number: 333-74589

NATIONAL WINE & SPIRITS, INC.

(Exact name of registrant as specified in its charter)

(317) 636-6092

(Registrant’s telephone number, including area code)

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

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 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 Regulation S-K is not contained herein, and will not 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-K or any Amendment to this Form 10-K.  x

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).    Yes  ¨    No  x

The registrant is a privately held corporation. As such, there is no practicable method to determine the aggregate market value of the voting stock held by non-affiliates of the registrant.

The number of shares of Common Stock, $.01 par value, of National Wine & Spirits, Inc. outstanding as of June 8, 2005 was 5,330,521, of which 104,520 were voting stock.

Documents Incorporated by Reference: None

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Part I

Disclosure Regarding Forward-Looking Statements

This Form 10-K, including, but not limited to the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section, contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, which can be identified by the use of forward-looking terminology, such as “may,” “ intend,” “ will,” “ expect,” “ anticipate,” “ should,” “plans to,” “ estimate” or “continue” or the negative thereof or other variations thereon or comparable terminology. In particular, any statement, express or implied, concerning future operating results or the ability to generate revenues, income or cash flow to service the Company’s debt are forward-looking statements. Such statements are necessarily estimates reflecting the Company’s best judgment and expectations based upon current information. Although the Company believes that the expectations will prove to have been correct, all forward-looking statements are expressly qualified by the cautionary statements set forth on Exhibit 99.1 to this Form 10-K, and the Company undertakes no obligation to update such forward-looking statements.

Item 1. Business

General

National Wine & Spirits, Inc. (NWS or the Company) is one of the largest distributors of wine and spirits in the United States. NWS’ markets include, among others, Illinois and Michigan, which are the fifth largest and the sixth largest markets for spirits in the United States, respectively. NWS is the largest distributor of spirits in Indiana with 59% market share and Michigan with 51% market share. NWS market share in Illinois is estimated at approximately 10% before the additional representation of the Brown Forman brands that commenced during March 2005. NWS was incorporated in the state of Indiana in 1998 and conducts its operations through its wholly owned subsidiaries, National Wine & Spirits Corporation in Indiana (NWS-Indiana), NWS-Illinois, LLC (NWS-Illinois), NWS Michigan, Inc. (NWS-Michigan), National Wine & Spirits, LLC (NWSM-LLC) and United States Beverage, L.L.C. (USB). USB distributes and markets malt based products along with import and craft beer products throughout the United States.

The wine and spirits wholesale industry has undergone significant changes in recent years. Rapid consolidation has occurred in the supplier sector, and distributors have expanded their operations to cover a larger number of states, resulting in consolidation among distributors. In several states, only two major distributors continue to operate. The United States wholesale wine and spirits market was approximately $33 billion during 2004 and is projected to be approximately $34 billion for 2005 according to industry projections. The Company’s revenue, including the wholesale dollar sales for its fee operations, places NWS as the tenth largest wholesaler in the United States, according to industry surveys. The top twenty wholesalers in the United States accounted for approximately 68% of the market during 2004 and are estimated to account for 72% of the market during 2005 according to industry surveys, as compared to approximately 49% in 1995.

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Substantially all of NWS’ revenue results from product sales of liquor, beer and wine, or from distribution and brokerage fees. During fiscal 2005, NWS’ total revenue was $553.7 million, which was a $13.0 million increase from the prior fiscal year, primarily due to the growth in the Company’s product sales segment. Spirits and wine case volume for the Company’s products sales segment and product sales revenue during the most recent fiscal year grew by 3.0% and 2.1%, respectively. The Company’s growth was consistent with the beverage alcohol industry during calendar 2004, when according to industry reports, consumption for distilled spirits increased 4.1% and wine consumption increased 3.4% in the United States. Consumers spent $9.2 billion more on spirits, wine, and beer products than the previous year and the growth in spirits consumption was the largest annual increase in more than twenty years according to industry reports.

Recent Developments

On June 1, 2005, it was announced that the Company had reached an agreement in principle to acquire certain assets of Johnson Brothers’ wine wholesaler business in Illinois. The final terms and conditions are being finalized by the parties. As a result of the proposed acquisition, which is anticipated to close by August 1, 2005, the Company expects to add the E&J Gallo Winery brands to the Company’s operations in Illinois under the Union Beverage company name.

The Supreme Court of the United States, in an opinion dated May 16, 2005, invalidated decisions in Michigan and New York which had the effect of discriminating between in and out of state wineries and limiting interstate commerce. The majority opinion affirmed the broad power of the states to regulate beverage alcohol trade consistent with the Twenty First Amendment including the legitimacy of the three-tier system.

Industry Overview

The United States alcohol-based beverage industry generated total retail sales of approximately $154.6 billion during calendar 2004 versus $145.4 billion in calendar 2003, an increase of 6.3%. Sales of wine and spirits, in which NWS primarily competes, accounted for approximately 15% and 32%, respectively, or $72.4 billion of total retail beverage alcohol sales in 2004. The growth in the retail sales were primarily attributable to the premium and high end brands which included Canadian whisky, flavored and imported vodkas, rums, and tequilas which rebounded after a decline during 2001 due to product shortages. The wine consumption increase was primarily attributable to imported wine, including the Australian Yellow Tail brand which is represented by the Company in its Illinois business. The increase in the import category during 2004 was responsible for approximately half the increase in wine consumption while accounting for one quarter of the wine case sales in the United States, according to industry surveys. The Company believes the current trend of consumer preference for premium brands will continue.

Since the repeal of Prohibition in 1933, the federal and state governments have regulated the sale of spirits, wine, and beer. State regulatory frameworks fall into two types: control and

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open. In nearly all circumstances, suppliers may not legally sell directly to retailers. In the 18 control states, the state controls either the distribution or the retail sale, or both. In open states, including Indiana, Illinois, and Kentucky, the distributors and retailers are privately owned businesses. In the open-franchise states, there are laws and regulations that restrict the suppliers’ ability to change distributors.

Under the three-tier regulatory framework established by federal and state law, suppliers of alcohol-based beverages are generally prohibited from selling their products directly to retail outlets or consumers, effectively requiring suppliers to use distributors such as NWS. This regulatory framework effectively insulates distributors from vertical competition from suppliers or retail customers. Certain large chain retailers have challenged the three tier structure in particular states, in an attempt to gain favorable pricing directly from wineries and breweries. A successful challenge to the three tier system has not occurred, but is a potential long term threat to the current framework. In some states, referred to as “control states,” state law has historically mandated the state to act as the exclusive wholesale distributor and/or retailer of alcohol-based beverages. In 1996, Michigan became the first control state to privatize aspects of the wholesale distribution of spirits, and NWS has become the leading Authorized Distribution Agent (ADA) of spirits in that state.

Given the three tier regulatory structure, the wine and spirits distribution industry varies greatly from other industries such as food, drugs, non-alcohol-based beverages and paper products. As suppliers can compete directly with the distributors in these other industries by shipping directly to retailers, distributor margins can be much lower than those in the wine and spirits industry. In addition, the liquor industry as a whole has shown a remarkable resilience to economic downturns relative to other industries.

Suppliers and Products

NWS represents many of the largest suppliers of wine and spirits in the United States, and offers hundreds of brands and more than 12,000 individual products. The breakdown of sales among wine, spirits and other products distributed by NWS in 2005, 2004 and 2003 is as follows:

In each of the last three fiscal years, sales of wine and spirits accounted for more than seventy five percent of consolidated revenue. The financial statements contained in Item 8 of this Form 10-K set forth the Company revenues from external customers, profit, and total assets for each of the last three fiscal years.

In Michigan, ADA’s have exclusive relationships with suppliers by law, and receive distribution fees from suppliers as set by the state, rather than purchasing from the suppliers for resale to customers. This arrangement has the effect of understating the importance of spirits in

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NWS’ overall product mix. For purposes of illustrating the scale of NWS’ operations in Michigan, the total wholesale prices of products delivered by NWS for Michigan in 2005, 2004 and 2003 was approximately $404.0 million, $389.0 million and $334.0 million, respectively, based on the average fixed wholesale prices of the spirits delivered by NWS.

NWS’ products include many of the leading brands of spirits and wine. The Company represents nine of the top ten brands and distributes products from eight of the top ten suppliers. The following table lists the top ten brands of spirits during 2004 and the NWS business or affiliate that distributes or markets that particular brand.

NWS represents many of the leading domestic and imported wine brands including the following, among many others.

NWS has entered into written distribution agreements with several of its principal suppliers that generally may be extended on an annual basis but are terminable upon 30 days or 60 days written notice to NWS. NWS has entered into various long-term agreements with certain suppliers as disclosed in the consolidated financial statements. In addition, NWS has informal arrangements with many of its suppliers whereby NWS distributes the suppliers’ products pursuant to purchase orders without written distribution agreements. Although the terminable written agreements provide NWS with the non-exclusive right to distribute the suppliers’ products in a particular state, in practice the suppliers have generally selected a distributor to be the exclusive distributor of specified products in each state. In each of Indiana and Michigan, NWS is presently acting as the exclusive distributor with respect to virtually all of the products it distributes.

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NWS has entered into distribution agreements with certain of its suppliers in Indiana, Illinois, Michigan, and USB. The following figures represent approximate aggregate case sales and net sales for fiscal 2005 from suppliers with which the Company entered into such agreements, and brands for which the Company owns the distribution rights:

Related Operations

During 1998 NWS formed a distributorship in Kentucky (Commonwealth Wine & Spirits, LLC) in partnership with two existing Kentucky-based distributors, The Vertner Smith Company (“Vertner”) and Kentucky Wine & Spirits (“Kentucky W&S”). NWS has a 25% interest in the partnership and is reflected in the Company’s recorded equity in income of Commonwealth Wine & Spirits, LLC in the accompanying consolidated statement of operations.

In addition to its core alcohol-based beverage distribution operations, NWS has conducted related beverage operations through a division, Cameron Springs Water Company, and through NWS’ USB operations. Cameron Springs, a bottled water supplier in Indiana, was sold to Perrier Group during June 2000 for approximately $10.4 million in cash, which was in excess of net book value. USB commenced operations as a division of NWS in March 1997 to market and sell malt based products, imported, specialty and microbrewed beers nationally. In select markets, NWS sells and distributes premium cigars primarily as a complement to NWS’ distribution of fine wines and spirits.

Customers

Most states, including Indiana, Illinois and Michigan, require wine and spirits retailers to purchase alcohol-based beverages from licensed distributors. Suppliers in these states may not legally sell directly to retail customers. NWS’ customers fall into two broad categories depending on where the alcohol-based beverage ultimately will be consumed: on-premise and off-premise. Off-premise customers include package liquor stores, grocery stores, drug stores and mass merchandisers. On-premise customers include hotels, restaurants and bars, and similar establishments. NWS currently serves over 32,000 retail locations in Indiana, Illinois and Michigan. No single customer represented more than 3.0% of NWS’ 2005 total revenue. As is customary in the industry, NWS’ products are generally purchased under standard purchase orders and not under long-term supply contracts. As a result, backlog is not meaningful in the wholesale distribution industry.

Industry-wide the percentage of case sales of wine and spirits for off-premise and on-premise in the United States for 2004 were approximately 77.3% and 22.7%, respectively. While the vast majority of case sales are from the off-premise outlets, approximately 54.1% of industry-wide retail wine and spirits dollar sales in the United States during 2004 were from on-premise outlets. The following table summarizes NWS’ customer base for NWS-Illinois, NWS-Indiana, and NWS-Michigan:

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Management believes that the large number and diversity of NWS’ customers and the regulatory nature of NWS’ business strengthens NWS’ liquidity. Indiana has a 15-day credit law beyond which retail customers are restricted from buying alcohol-based beverages from any distributor in the market. Illinois has a similar 30-day credit law. Typically, NWS’ bad debt expenses are incurred less than 30 days after shipment since the credit laws prohibit extension of terms. Average bad debt expense for the past five years has been less than 0.10% of revenue.

Marketing and Sales

Brand Management. NWS was one of the first distributors to recognize the benefits of a dedicated approach to brand management and separating it from sales execution which has contributed to the Company’s success. Suppliers appreciate and depend upon the local expertise and understanding of the intricacies of the market. The Company’s brand managers, through interaction with NWS’ sales teams and analysis of the competitive landscape, adjust suppliers’ national brand strategies to plans that work in the Company’s respective states.

Multiple Sales Divisions. NWS has adapted to industry changes and product portfolio growth through the creation of multiple sales divisions. Under this structure, potentially competitive products are placed in separate sales divisions to gain focus and grow the business. Though NWS has utilized this structure for more than 15 years in Indiana, recent supplier consolidation has led to the creation of separate sales divisions in Michigan, as well as an expanded organization in Indiana.

Sales Teams. NWS sales organizational design is predicated upon category knowledge and expertise, trade channel knowledge and effectiveness, and geographic coverage. Through its marketing and sales force, NWS acts as the field marketing and merchandising arm of its

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suppliers by maintaining regular contact with NWS’ off-premise and on-premise customers. NWS provides its customers with a wide variety of services in addition to order taking, merchandising, and delivery. These services include item selection and SKU optimization using space and financial tools, fact-based business presentations to capitalize on fair share, consumer pull-through marketing programs and communicating business-building solutions.

Sales, Marketing and Information Systems. NWS’ investment in technology in the areas of sales and marketing is a critical factor in its success and customer satisfaction. NWS is generally recognized as an industry innovator and leader in MIS in the wine and spirits distribution tier. NWS’ proprietary sales system manages sales data to the SKU level in all retail accounts that it services and is refreshed nightly based on deliveries. This system provides brand teams the necessary information to develop targeted, effective brand plans. Moreover, the Company’s sales managers depend on the information to monitor and control retail execution within their sales teams. Most recently NWS has moved this information to the Internet to allow for greater speed and accessibility to management, retail, and supplier partners. NWS has also invested resources to significantly improve category management expertise, and this has improved service and effectiveness, particularly in the off-premise national and regional chain accounts.

NWS’ sales force and management is equipped with laptop computers, which expedites order entry and provides instant feedback to customers regarding order activity. NWS provides its customers and suppliers with the ability to directly enter and track orders via electronic data interchange. In addition, NWS’ proprietary information systems provide its sales and marketing personnel, customers and suppliers with access to a database of information regarding the purchase and sale of alcohol-based beverages in specific geographic markets. NWS’ suppliers have immediate access to information regarding product and demographic trends within specific geographic markets and NWS’ customers have access to information regarding popular products or other trends from similarly situated retail locations. Management believes that its management information systems enhance its operating performance and improve its relationships with customers and suppliers.

Warehousing and Distribution

NWS utilizes a series of three master warehouses, three hyper-terminals and six cross-docking facilities strategically located throughout Indiana, Illinois and Michigan to store and ship its products pending sale to customers. NWS’ customers ordinarily receive either next day or second-day delivery. In general, orders are collected during the day for batch routing and order “picking” at night. The Chicago and Detroit master warehouses each use an automated material handling system, including scanners, automated conveyors, dispensers and sorters. Products from the master warehouses are then shuttled nightly to either a hyper-terminal or a cross-docking facility where the orders are consolidated and loaded onto delivery trucks. Cross-docking facilities further extend the service areas of the master warehouses. Orders for delivery out of the various cross-docking facilities are picked in the master warehouses, shipped in during the night, and then transferred onto local delivery trucks for final delivery. NWS owns or leases a total fleet of approximately 307 delivery vehicles, consisting of 229 delivery trucks, 14 tractors, 24 trailers and 40 vans. As a result of a number of factors including state laws and regulations, NWS maintains independent distribution networks in Indiana, Illinois and Michigan.

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Competition

There are significant barriers to entry into the wholesale wine and spirits distribution business. These barriers include established supplier-distributor relationships, specialized distribution equipment such as material handling systems and delivery vehicles, important industry knowledge regarding pricing, inventory management, and distribution logistics. Historically, it is extremely rare for organizations not already engaged as wine and spirits distributors to enter the business. New distributors typically enter existing markets through acquisition.

The wine and spirits wholesale distribution business is highly competitive. NWS’ primary competition in Illinois includes Judge & Dolph and Southern Wine & Spirits. In Indiana, the only significant competitor is Olinger (a partnership of Glazer and Romano). None of the ten largest United States distributors competes with NWS in Michigan. Distributors compete for new suppliers or brands based on reputation, market share, access to customers and ability to satisfy supplier demands.

Environmental Matters

The Company currently owns and leases a number of properties, and historically it has owned and/or leased others. Under applicable environmental laws, the Company may be responsible for remediation of environmental conditions relating to the presence of hazardous substances on such properties. The liability imposed by such laws is often joint and several without regard for whether the property owner or operator knew of, or was responsible for, the presence of such hazardous substances. In addition, the presence of such hazardous substances, or the failure to properly remediate such substances, may adversely affect the property owner’s ability to borrow using the real estate as collateral and to transfer its interest in the real estate. Although the Company is not aware of the presence of hazardous substances requiring remediation, there can be no assurance that releases unknown to the Company have not occurred. The Company does not manufacture any of the wine or spirit products it sells and believes that it has conducted its business in substantial compliance with applicable environmental laws and regulations. Compliance with environmental laws has not had a material effect upon the Company’s capital expenditures, earnings or competitive position.

Employees

As of March 31, 2005, NWS had approximately 1,435 employees. Approximately 164 employees in Michigan and 322 employees in Illinois are represented by labor unions. In Illinois, NWS has relationships with three unions:

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In Michigan, NWS has relationships with four unions:

Employees of NWS in Indiana are not represented by any labor unions.

NWS has not experienced any work stoppages in more than 22 years as a result of labor disputes and considers its employee relations to be good.

Regulatory Considerations

The manufacturing, importation, distribution and sale of alcohol-based beverages are subject to regulation by the federal government through the Alcohol and Tobacco Tax and Trade Bureau, as well as by state and local regulatory agencies. Suppliers, distributors and retailers must be properly licensed in order to sell alcohol-based beverages.

In most states, the alcohol-based beverage industry operates within what is commonly referred to as a three-tier system of distribution. The three tiers are identified as follows:

Under this system, suppliers sell to distributors, distributors sell to retailers, and retailers sell to consumers. For the most part, suppliers may not sell to retailers or consumers and distributors may not sell directly to consumers. All states prohibit suppliers or distributors from having an interest in retail licensees. NWS directly and through its affiliates holds federal basic permits and state permits/licenses as a distributor and importer. Also, NWS-Illinois holds out-of-state shipper permits that allow it to ship products from one state to a licensed distributor in any one of the other states.

NWS is required to have each of its officers, directors and principal stockholders who own 5% or more of the issued and outstanding stock qualified by federal and state governmental agencies to have an interest in a licensed company. NWS’ officers, directors and principal stockholders have been qualified by the Alcohol and Tobacco Tax and Trade Bureau and state regulatory agencies to hold licenses/permits as a wholesaler/importer.

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Distributors like NWS face scrutiny in a number of important areas, including initial licensing or permitting and sales and marketing activities with or on behalf of retail customers. The distributors may not give or transfer anything of value to their customers in exchange for business or other consideration. The definition of “value” differs from state to state. NWS participates in significant promotional activities for suppliers and customers. Suppliers also are increasingly asking distributors to be responsible for activities and related costs formerly undertaken by suppliers as suppliers pursue ways to reduce their operating costs. These increased demands will likely challenge distributors, including NWS, which desire to meet the wishes of their suppliers and customers. As a result, NWS regularly provides training and education programming for its sales and marketing personnel.

NWS believes that it is in compliance with applicable regulations in all material respects. Consistent with industry practice, the sales and marketing activities permitted by distributors for the benefit of tier one suppliers are generally regulated by state licensing authorities, which authorize various trade practice activities by statute, regulation or administrative bulletin. NWS relies on such enforcement guidance, which is subject to change at the discretion of the regulatory authorities, in determining the scope of its permitted sales and marketing activities.

As part of its regulatory compliance program, NWS is in frequent contact with regulatory agencies so that NWS can: (1) be kept current on regulatory developments affecting NWS; (2) obtain answers from the agencies to questions from company personnel regarding compliance issues; (3) encourage enforcement of applicable laws and regulations on a consistent basis throughout its markets. NWS believes that prompt and consistent enforcement by the regulatory agencies is important and benefits NWS.

The Company files reports with the SEC and the public can read and copy any materials filed with the SEC at the SEC’s Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet site that contains all of the Company’s reports at http://www.sec.gov. The Company maintains an Internet site at http://www.nwscorp.com which contains reports that were filed with the SEC.

Item 2. Properties

NWS’ distribution facilities consist of three master warehouses, three hyper-terminals and six cross-docking facilities. NWS’ corporate headquarters are located in Indianapolis, Indiana.

The master warehouses, located in Indianapolis, Chicago, and Detroit, serve as the primary storage facilities and regional offices for NWS. The Chicago warehouse contains approximately 650,000 square feet of warehousing space, including a designated temperature controlled area for temperature-sensitive products. The Indianapolis warehouse contains approximately 351,000 square feet of warehousing space, including a designated temperature controlled area for temperature-sensitive products. The Detroit warehouse consists of approximately 238,000 square feet of warehousing space.

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The following chart lists NWS’ warehouses and delivery, production and office facilities:

NWS’ lease agreements for the Detroit master warehouse and the Grand Rapids hyper-terminal each have a ten-year term, expiring April 20, 2007 and January 31, 2007, respectively, and provide NWS with an option to purchase the properties. The facilities in Michigan are used to operate the Company’s distribution fee business.

Item 3. Legal Proceedings

The Company is a party to various lawsuits and claims arising in the normal course of business. While the ultimate resolution of lawsuits or claims against the Company cannot be predicted with certainty, management is vigorously defending all claims and does not expect that these matters will have a material adverse effect on the financial position or results of operations of the Company.

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

On October 8, 2004, the shareholders of National Wine & Spirits, Inc. voted unanimously, via written consent, to remove J. Smoke Wallin from the Board of Directors, effective October 8, 2004.

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Part II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market Information. There is no established trading market for the common stock of NWS.

Holders. As of June 8, 2005, the number of record holders of each of the classes of the Company’s common stock were as follows:

Dividends. The ability of the Company to pay dividends to its shareholders is restricted by certain covenants contained in its credit facility as well as certain restrictions contained in the Company’s indentures relating to its senior notes. Subject to these limitations, the Company has historically paid dividends to its shareholders for tax liabilities and for limited other purposes. In fiscal 2005 and 2004, the amounts of the dividends totaled $0.2 million and $6.0 million, respectively, in the aggregate.

Equity Compensation Plans. The Company does not have any equity compensation plans.

Item 6. Selected Consolidated Financial Data

The following summary historical financial information should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, the consolidated financial statements and notes thereto included in Item 8 and the schedules accompanying this report.

Distribution fees include the per case distribution and brokerage fees for cases of spirits delivered in and on behalf of the State of Michigan, and as such, NWS does not take title to or finance inventory as part of its distribution and brokerage fee business. Please also note that NWS has elected “S” corporation status under the Internal Revenue Code and consequently, it does not incur liability for federal and state income taxes.

For purposes of calculating earnings to fixed charges, earnings consist of net income plus fixed charges. Fixed charges consist of interest expense, amortization of debt issue cost and discount or premium relating to indebtedness and the portion (30%) of rental expense on operating leases which NWS estimates to be representative of the interest factor attributable to rental expense.

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NOTES TO SELECTED CONSOLIDATED FINANCIAL DATA

The most comparable GAAP measure for EBITDA is net income (loss). Following is a reconciliation between net income (loss) and EBITDA for the fiscal years 2001 through 2005:

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Item 7. Management’s Discussion And Analysis Of Financial Condition And Results Of Operations

The following discussion should be read in conjunction with “Selected Consolidated Financial Data” and NWS’ historical consolidated financial statements and the accompanying notes included elsewhere in this Form 10-K. Unless otherwise indicated, all references to years are to NWS’ fiscal year ended March 31.

Disclosure Regarding Forward-Looking Statements

This Form 10-K, including, but not limited to the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business” sections, contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, which can be identified by the use of forward-looking terminology, such as “may,” “intend,” “will,” “expect,” “anticipate,” “should,” “plans to,” “estimate” or “continue” or the negative thereof or other variations thereon or comparable terminology. In particular, any statement, express or implied, concerning future operating results or the ability to generate revenues, income or cash flow to service the Company’s debt are forward-looking statements. Although the Company believes that the expectations will prove to be correct, all forward-looking statements are expressly qualified by such cautionary statements, and the Company undertakes no obligation to update such forward-looking statements.

Overview

National Wine & Spirits, Inc. (the “Company”) is one of the largest distributors of wine and spirits in the United States. Substantially all of the Company’s current operations are in Illinois, Indiana, Michigan, Kentucky (through its investment in an affiliate), and from USB, the Company’s national import, craft and specialty beer marketing and distribution business. The Company’s reported revenues include net product sales in Illinois, Indiana, Michigan, and from USB, with distribution fees from the Michigan distribution and brokerage operation.

The Company evaluates its operations and liquidity upon two reportable segments, which are business units that engage in product sales and all other activities. Product sales operations are conducted in Indiana, Illinois, Michigan, and from the USB distribution business. The majority of other activities relate to distribution and brokerage fee operations in Michigan.

EBITDA is used throughout this Item as a financial indicator. Each reference to EBITDA herein is qualified by reference to, and should be read in conjunction with this paragraph and the following two paragraphs and the reconciliation below. EBITDA, as used herein, is defined as net income or loss plus interest expense, depreciation and amortization. EBITDA should not be construed as an alternative to income or net cash flow from operating activities and should not be construed as an indication of operating performance or as a measure of liquidity.

EBITDA is a non-GAAP financial measure within the meaning of Regulation G. EBITDA is presented because it is a widely accepted financial indicator used by investors and analysts to analyze and compare companies on the basis of debt service capability. Management uses EBITDA to set targets and monitor and assess financial performance. EBITDA is not

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Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

intended to represent cash flows for the periods presented, nor has it been presented as an alternative to net income or loss as an indicator of operating performance and should not be considered in isolation or as a substitute for measures of performance and cash flow prepared in accordance with generally accepted accounting principles.

The most comparable GAAP measure for EBITDA is net income or loss. Following is a reconciliation between net income or loss and EBITDA for the fiscal years 2001 through 2005:

The EBITDA information reflected herein may not be comparable to similarly titled measures used by other companies.

Executive Summary

The Company’s net income and EBITDA increased from the prior year due to greater gross profit on spirits case volume, reduced marketing and administration expense, and increased management fees. Net income and EBITDA increased to $5.4 million and $25.5 million, respectively, for the year ended March 31, 2005. The Company was able to increase net income during the current fiscal year by $14.6 million primarily from increased gross profit of $5.9 million, the strategic alliance with Glazer’s Distributors of Illinois, Inc. (“Glazer”) in Illinois which resulted in greater management fees (as described in footnote 15) of $6.1 million, and reductions in administrative expenses of $2.3 million, as compared to the prior fiscal year.

The Company’s total fiscal 2005 revenue increased by $13.0 million primarily due to increased product sales and distribution fees of $10.8 million and $2.2 million, respectively. Gross profit from product sales for the fiscal year ended March 31, 2005 increased by $3.7 million from the prior fiscal year primarily due to increased spirits volume of $26.4 million and price increases put in place during the fiscal year. An increase in the distribution fees during the current fiscal year of $2.2 million, as compared to the prior fiscal year, were primarily the result of greater brokerage commissions of $1.4 million and an increase in the per-case delivery fee from $7.60 to $7.78 in February 2004.

The Company’s operating expenses during the current fiscal year were primarily reduced by the increased management fees of $6.1 million related to the Company’s Illinois business.

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Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

These increased fees from the prior fiscal year were due to the modification of the agreement during the current fiscal year and the related financial performance of NWS-Illinois in 2005. The Company was able to reduce administrative expenses by $2.3 million during the current fiscal year compared to the prior annual period, including reductions in health costs of $0.8 million, reduced professional fees of $0.6 million, reduced amortization expense of $0.4 million, and lower casualty insurance costs of $0.4 million.

Cash flow from operations for the year ended March 31, 2005 were $12.1 million, a decrease of $3.9 million from the prior fiscal year. This comparative decrease in operating cash flow was primarily the result of a reduction in working capital of $29.5 million from the Company’s Illinois business during the prior fiscal year which did not occur during the current fiscal year. The Company was able to reduce debt by $3.2 million during the current fiscal year while increasing cash balances by $1.5 million from March 31, 2004. Stockholder distributions for the year ended March 31, 2005 were $0.2 million as compared to $6.0 million during the prior fiscal year primarily due to lower income tax obligations of the shareholders.

Results of Operations

The following table includes information regarding total cases shipped by NWS in 2005, 2004 and 2003:

USB’s results are included in the other category for the current and prior years.

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Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

Fiscal 2005 Compared with Fiscal 2004

Revenue

Total revenue increased $13.0 million to $553.7 million for the year ended March 31, 2005 as compared to the prior fiscal year. Product sales case volume in the spirits category increased 6.0%, which resulted in an increase of $26.4 million in product sales revenue, and the case volume in the wine category was stable for the current fiscal year as compared to the prior year. Revenue from wine decreased by $3.5 million, primarily due to the Company not representing certain wine brands in its Illinois business during the last six months of the current fiscal year. Distribution fee revenue increased by $2.2 million for the year ended March 31, 2005, primarily due to greater brokerage commissions of $1.4 million and an increase in the per case distribution fees effective during February 2004. Other case volume declined from the prior year period, which resulted in a decrease of $12.1 million in product sales revenue when compared to the prior year period.

Gross Profit

Gross profit increased $5.9 million to $125.1 million due to the increased product sales revenue resulting from the additional brand representation in certain markets on an exclusive basis and increased distribution and brokerage revenue. Gross profit percentage on product sales of 18.3% for the current fiscal year was above the 17.9% for the prior year, primarily the result of price increases that were enacted in certain product sales markets which offset the effect of competitive conditions in the Company’s Illinois market and the settlement of a purchase commitment of $1.0 million during the Company’s first fiscal quarter. Distribution fees increased by $2.2 million during the current year’s period, primarily due to an increase in the per-case distribution fee and increased brokerage fees of $1.4 million on additional brands that are represented during the current year compared to the prior year’s comparable period.

Operating Expenses

Total operating expenses declined by $7.3 million from the prior year, primarily from increased management fees related to the Company’s Illinois business of $6.1 million and reduced administrative costs of approximately $2.3 million, which more than offset increased expenses in the Company’s sales area of $1.0 million. Excluding management fees, operating expenses in the product sales segment during the current fiscal year decreased $2.7 million from the prior year, primarily from reduced administrative expenses of $2.6 million and reduced sales expenses of approximately $0.5 million. Operating expenses in the Company’s fee operations for the current year increased by approximately $1.6 million primarily due to greater sales expense of $1.6 million during the current fiscal year as compared to the prior fiscal year.

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Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

Warehouse and delivery expenses were flat during the current fiscal year as compared to the prior year. Reductions in depreciation expense of $1.1 million offset increased costs of wages of $0.6 million and greater fuel costs of $0.4 million.

Selling expenses for the product sales segment decreased $0.5 million from the prior fiscal year, primarily due to reductions in brand promotion costs of $2.8 million which offset increased wages of approximately $2.1 million. Sales salaries and associated travel expenses for the fee operations increased during the current fiscal year by approximately $1.3 million due to the addition of the Moet Hennessy brands and expansion of the Fortune and Diageo brokerage fee operations as compared to the prior fiscal year.

Administrative expenses decreased by $2.3 million from the prior fiscal year. The decrease was primarily from reduced health care costs of $0.8 million, lowered professional fees of $0.6 million, reduced casualty insurance of $0.4, and reduced expenses for information services of $0.4 million.

Management fees from Glazer, as part of the management services agreement, were $18.7 million for the fiscal year, as compared to $12.6 million for the prior fiscal year. These increased fees from the prior year’s annual period were due to the modification of the agreement during September 2004 and the impact of NWS-Illinois’ financial performance.

Income From Operations

Operating income increased by $13.2 million for the fiscal year ended March 31, 2005 to $12.1 versus the prior year fiscal year. The Company’s increased gross profit by $5.9 million, reduced administrative expenses by $2.3 million, and greater management fees of $6.1 million were the primary reasons for the increase in operating income as compared to the prior fiscal year. Operating income for the fee operations segment increased $0.6 million for the current fiscal year, primarily due to the increased distribution and brokerage fees of $2.2 million that more than offset increased selling costs of $1.6 million.

Interest Expense

Interest expense increased $0.7 million to $9.5 million for the fiscal year ended March 31, 2005 as compared to the prior fiscal year, primarily due to gains from the repurchase of the Company’s senior notes of $0.7 million which occurred during the prior year period. The Company repurchased $1.95 million of its senior notes during the current fiscal year for $1.8 million, which resulted in a gain of $0.1 million after the write-off of unamortized debt issuance costs.

Other Income or Expense

The receipt of an arbitration award of $2.3 million was primarily responsible for the Company’s increase in Other income for the fiscal year ended March 31, 2005 as compared to the prior fiscal year.

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Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

Net Income or Loss

Net income was $5.4 million for current fiscal year ended March 31, 2005, which increased by $14.6 million from the prior fiscal year. Improvement in the net income from the product sales segment of $13.7 million was primarily the reason for the increase in net income for the current fiscal year as compared to the prior fiscal year.

EBITDA

For financial analysis purposes only, the Company’s earnings before interest, taxes, depreciation, and amortization (EBITDA) for the fiscal year ended March 31, 2005 was $25.5 million as compared to $11.8 million for the prior fiscal year. Please see the discussion and reconciliation regarding EBITDA as a non-GAAP financial measure set forth in “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Overview”. EBITDA should not be construed as an alternative to operating income or loss, or net cash flow from operating activities and should not be construed as an indication of operating performance or as a measure of liquidity.

Fiscal 2004 Compared with Fiscal 2003

Revenue

Total revenue decreased $172.2 million to $540.7 million as a result of decreased product sales revenue, partially offset by an increase in fee revenue. Total product sales revenue decreased $176.2 million to $513.6 million for the year ended March 31, 2004. The decrease in product sales segment revenue for the year ended March 31, 2004 as compared to the prior year’s annual period was primarily due to the reduced sales volume in the Company’s Illinois market. Spirits, wine, and other product sales in all of the Company’s other operations were up due to growth of existing brands and the addition of the Diageo and S&S brands. Product sales revenue in the other operations increased approximately $30 million from the prior annual period due to acquisition or expansion of the Diageo and S&S brands, as well as increased sales of existing brands. Product sales revenue decreased approximately $206 million from the prior annual period due to the termination of certain brand distribution rights in the product sales segment. The addition of the S&S, Fortune, and expansion of the Diageo brands in the fee operations segment were primarily responsible for the $4.0 million, or 17.6%, increase from the prior year’s annual period.

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Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

Gross Profit

Gross profit decreased $40.8 million to $119.2 million as a result of decreased product sales, partially offset by an increase in distribution fees. Gross margin on product sales decreased $44.9 million for the year ended March 31, 2004 as compared to the prior annual period. The sales volume decline in the Company’s Illinois business was primarily responsible for the drop in gross margin dollars during the year ended March 31, 2004, as compared to the prior year’s annual period. Gross profit percentage on product sales of 17.9% was below the prior year’s comparable period of 19.9% primarily due to increased brand support by USB of approximately $5.1 million, amortization of distribution rights of approximately $3.6 million, and competitive pricing in the Company’s Illinois operations due to the reduced brand representation. Incremental gross margin from the fee operations segment of $4.0 million was primarily due to the addition of the S&S, Fortune and increased volume of the Diageo and Allied Domecq brands.

Operating Expenses

Operating expenses for the product sales segment decreased $26.8 million to $95.1 million, or 22.0% for the year ended March 31, 2004 as compared to the prior year’s annual period. Management fees received from Glazer in the Company’s Illinois business, staffing adjustments, and cost reduction initiatives were primarily responsible for the reduction in product sales operating expenses during the year ended March 31, 2004 as compared to the prior year’s annual period. Operating expenses in the Company’s fee operations increased by approximately $2.5 million due to the increased case volume over the year ended March 31, 2004 as compared to the prior year’s annual period.

Warehouse and delivery expenses in the product sales segment were reduced by $3.6 million during the year ended March 31, 2004 as compared to the prior annual period, due to reductions in personnel and case volume in the Company’s Illinois business. Warehouse and delivery expenses for the Company’s fee operations increased by approximately $1.0 million, primarily from increased labor expense, equipment repair and supplies that resulted from the increased case volume.

Selling expenses for the product sales segment decreased $9.2 million from the prior year’s annual period, primarily as a result of significant cost reductions in the Company’s Illinois operation. The Company’s Illinois expense reduction for sales salaries, commissions, travel, entertainment, and promotion costs of approximately $9.7 million was the result of the reduced sales volume. Sales salaries and associated travel expenses for the fee operations increased by approximately $1.4 million due to the addition of the S&S brands and expansion of the Fortune and Diageo brokerage operations.

Administrative expenses for the product sales segment decreased by $2.2 million for the year ended March 31, 2004 as compared to the prior year’s annual period. The decrease was primarily the result of expense reductions in the MIS area of $0.7 million, office wages and taxes of $0.8 million, property taxes of $0.6 million, and reduced depreciation expense of $0.3 million.

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Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

Management fees from Glazer as part of the management services agreement were $12.6 million for the year ended March 31, 2004. These payments were $11.7 million greater than the fees during the prior fiscal year because the agreement was put in place near the end of 2003.

Loss From Operations

Operating income for the product sales segment declined $18.1 million for the year ended March 31, 2004, to an operating loss of $3.0 million, versus $15.1 million of operating income for the prior annual period. The decline in revenue and gross profit from the Company’s Illinois division, and the increased brand promotion costs in the Company’s USB division, were primarily responsible for the decrease in operating income. Fee operations experienced an increase of $1.5 million in operating income during the year ended March 31, 2004 as compared to the prior annual period, primarily due to the increased fee revenue of $4.0 million with an operating expense increase of $2.5 million. The Company was able to achieve fee revenue increases prior to the addition of the incremental sales staffing and brand promotion costs associated with the newly acquired brands.

Interest Expense

Interest expense declined $0.5 million to $8.8 million for the year ended March 31, 2004 as compared to the prior annual period. Reduced debt levels due to the repurchase of $28.8 million of the Company’s senior notes during fiscal years 2003 and 2004 reduced interest expense by approximately $1.7 million. Gains from the discounted repurchases of the Company’s senior notes during the year ended March 31, 2004 were $0.7 million versus $2.0 million during fiscal 2003. The Company expects the fiscal 2005 interest expense to be approximately $10.0 million for all long term obligations, including the senior notes, revolving credit facility, and imputed interest on the distribution rights obligations.

Other Income

The reduction in other income for the year ended March 31, 2004 was primarily due to the one time payments of $9.2 million received during fiscal 2003. Equity in income from Commonwealth Wine & Spirits, LLC increased $0.4 million during the year ended March 31, 2004 as compared to the prior annual period.

Net Loss

Net income declined from $15.8 million during the prior year’s annual period to a net loss of $9.1 million for the year ended March 31, 2004. Net losses in the product sales segment from the Company’s Illinois and USB operations as compared to the prior annual period, and the one time payments of $9.2 million during fiscal 2003 were the primary reasons for the decrease in income during the current fiscal year.

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Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

EBITDA

For financial analysis purposes only, the Company’s earnings before interest, taxes, depreciation, and amortization (EBITDA) for the year ended March 31, 2004 was $11.8 million as compared to $34.7 million for the prior year’s annual reporting period. Please see the discussion and reconciliation regarding EBITDA as a non-GAAP financial measure set forth in “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Overview”. EBITDA should not be construed as an alternative to operating income or loss, or net cash flow from operating activities and should not be construed as an indication of operating performance or as a measure of liquidity.

Liquidity and Capital Resources

The Company’s primary cash requirements have been to fund accounts receivable, inventories, and payment of distribution rights obligations for the product markets in Illinois, Indiana, Michigan, and USB. The Company has historically satisfied its cash requirements principally through cash flow from operations, trade terms, bank borrowings and existing cash balances.

The Company amended its $40 million revolving credit facility as of June 30, 2004. The amendment permits the Company to repurchase up to $10.0 million of its senior notes subject to certain availability levels. The Company repurchased $1.95 million of its senior notes during the fiscal year ended March 31, 2005 for $1.8 million, which resulted in a gain of $0.1 million after the write-off of unamortized debt issuance costs.

At March 31, 2005, the Company had $1.8 million of outstanding advances on its $40.0 million revolving line of credit facility and also had $4.0 million in letters of credit outstanding, resulting in availability of $34.2 million. Interest is payable monthly at the LIBOR rate or the higher of the prime lending rate or the federal funds rate, plus a margin percentage. The Company did not have any advances priced at the LIBOR based rate at March 31, 2005 and the Company’s prime based revolver rate of interest on March 31, 2005 was 5.75%. The line of credit borrowings are collateralized by and based upon eligible accounts receivable and inventories, as defined, and are guaranteed by the Company’s subsidiaries. The Company must maintain certain interest coverage and funded debt coverage ratios, with which the Company was in compliance at March 31, 2005. The Company anticipates that the collateral base for the revolving credit facility will provide adequate availability to fund operations and working capital needs during fiscal 2006.

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Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

Cash provided by operating activities was $12.1 million for the fiscal year ended March 31, 2005 versus cash provided of $15.9 million for the prior fiscal year. This comparative decrease in operating cash flow was primarily the result of a reduction in working capital of $29.5 million from the Company’s Illinois business during the prior fiscal year which did not occur during the current year. Cash used by working capital for the fiscal year ended March 31, 2005 was approximately $3.0 million, primarily due to the funding of accounts receivable for the product sales segment of $3.0 million. Cash provided by net income (loss) and adjustments for depreciation and amortization were $16.0 million for the current fiscal year and $3.0 million for the prior fiscal year.

Net cash used by investing activities was $3.1 million for the fiscal year ended March 31, 2005 compared to cash provided of $0.1 million during the prior fiscal year. Purchases of intangibles were $3.3 million greater during the current fiscal year that the prior year, and were primarily related to an agreement with a supplier to receive certain future contractual benefits. The Company’s capital expenditures during the current fiscal year were approximately $0.2 million greater than the prior fiscal year, but were below the spending level of previous fiscal years.

Net cash used by financing activities was $7.4 million for the fiscal year ended March 31, 2005, a decrease of $12.9 million from the prior fiscal year. The Company repurchased approximately $9.9 million of its senior notes during the prior fiscal year while repurchasing $1.8 million during the current fiscal year. Additionally, distributions to stockholders during the current fiscal year were $0.2 million, while distributions to stockholders were $6.0 million during the prior fiscal year. Stockholder distributions other than for tax liabilities are limited by the revolving credit facility and indenture.

During 1998 Mr. LaCrosse, Chairman of the Company, transferred substantially all of his non-voting stock to a family trust, as part of an estate-planning plan, in exchange for a note. As part of that transfer, the Company has distributed funds to Mr. LaCrosse, the family trust, and Mrs. Johnston during the prior fiscal years and were made within the terms and conditions contained in the Company’s indenture governing its senior notes (including the limitation on restricted payments) and the revolving credit facility. As of March 31, 2005 there was approximately $2.5 million owed to Mr. LaCrosse by the family trust related to the 1998 transfer and sale of the non-voting stock.

The Company’s total assets of $193.8 million at March 31, 2005 increased by $6.7 million from March 31, 2004. The increase in assets was primarily due to an increase in distribution rights of approximately $5.7 million, greater accounts receivable of $3.1 million and additional cash balances of $1.5 million, which were offset by a decrease in net property and equipment of $3.8 million. The increase in accounts receivable balances was primarily in the product sales segment and due to an increase in net sales of $8.0 million during the last quarter of the current fiscal year as compared to the prior year’s comparable period. Total debt of $83.2 million at March 31, 2005 was $3.2 million lower than at March 31, 2004, primarily from the repurchase of the Company’s senior notes of $1.9 million during the fiscal year ended March 31, 2005. Equity increased by $5.1 million during the current fiscal year to $17.7 million at March 31, 2005 primarily due to net income of $5.4 million.

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Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

The Company expects to maintain adequate cash balances, collateral, and revolving credit facility availability to satisfy the Company’s anticipated working capital and debt service requirements during fiscal 2006.

Aggregate Contractual Commitments

The following table sets forth NWS’ contractual obligations for the periods set forth as of March 31, 2005:

Other

As a matter of policy, the Company plans to review and evaluate all professional services firms every three to four years. This review will include but is not limited to legal, audit and information systems services.

Inflation

Inflation has not had a significant impact on the Company’s operations but there can be no assurance that inflation will not have a negative effect on the Company’s financial condition, results of operations or debt service capabilities in the future.

Environmental Matters

The Company currently owns and leases a number of properties, and historically it has owned and/or leased others. Under applicable environmental laws, the Company may be responsible for remediation of environmental conditions relating to the presence of certain

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Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

hazardous substances on such properties. The liability imposed by such laws is often joint and several without regard for whether the property owner or operator knew of, or was responsible for, the presence of such hazardous substances. In addition, the presence of such hazardous substances, or the failure to properly remediate such substances, may adversely affect the property owner’s ability to borrow using the real estate as collateral and to transfer its interest in the real estate. Although the Company is not aware of the presence of hazardous substances requiring remediation, there can be no assurance that releases unknown to the Company have not occurred. Except for blending and bottling of a few of the Company’s private label brands, the Company does not manufacture any of the wine or spirit products it sells and believes that it has conducted its business in substantial compliance with applicable environmental laws and regulations. Compliance with environmental laws has not had a material effect upon NWS’ capital expenditures, earnings or competitive position.

Critical Accounting Policies

The Company’s consolidated financial statements and accompanying notes have been prepared in accordance with generally accepted accounting principles applied on a consistent basis. 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, liabilities, revenues, and expenses during the reporting periods.

The Company continually evaluates its accounting policies and estimates it uses to prepare the consolidated financial statements. In general, management’s estimates are based on historical experience, on information from third party professionals and on various other assumptions that are believed to be reasonable under the facts and circumstances. Actual results could differ from those estimates made by management.

The Company believes its critical accounting policies and estimates, as reviewed and discussed with the audit committee of the Board of Directors, include accounting for impairment of long-lived assets, accounts receivable valuation, inventory valuation, vendor allowances, and pensions.

Impairment of Long-lived Assets. The Company evaluates long-lived assets, intangibles subject to amortization, and goodwill whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In performing the review of recoverability, the Company estimates future cash flows expected to result from the use of the asset and its eventual disposition. The estimates of future cash flows, based on reasonable and supportable assumptions and projections, require management’s subjective judgments. The time periods for estimating future cash flows is often lengthy, which increases the sensitivity to assumptions made. Depending on the assumptions and estimates used, the estimated future cash flows projected in the evaluation of long-lived assets can vary within a wide range of outcomes. The Company considers the probability of possible outcomes in determining the best estimate of future cash flows.

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Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

Receivables and Credit Policies. The carrying amount of accounts receivable is reduced by an allowance that reflects management’s best estimate of the amounts that will not be collected. Management individually reviews all accounts receivable balances and creates an allowance for doubtful accounts based on the credit worthiness of specific accounts and an estimate of other uncollectible accounts based on historical performance.

Inventory Valuation. The carrying amount of inventories is reduced by an allowance that reflects management’s best estimate of inventory at net realizable value. Management reviews inventory turnover, sales activity, individual product spoilage, and historical destruction data to calculate an allowance for obsolescence.

Vendor Allowances Received. The Company records vendor allowances and discounts in accordance with EITF 02-16: Accounting by a Customer (including a Reseller) for Certain Consideration Received from a Vendor. The Company receives allowances from vendors as a result of purchasing and promoting their products. Vendor allowances provided as a reimbursement of specific, incremental, and identifiable costs incurred to promote a vendor’s products are recorded as an expense reduction when the cost is incurred. All other vendor allowances, including vendor allowances received in excess of the Company’s cost to promote a vendor’s product, or vendor allowances directly related to purchase of a vendor’s product are initially deferred. The deferred amounts are then recorded as a reduction of cost of good sold when the related product is sold.

Many of the vendor allowance programs are not part of written contracts and collectibility of amounts owed to NWS under such agreements cannot be assured. Management reviews vendor accounts receivable balances for collectibility and records an allowance for management’s best estimate of uncollectible accounts.

Payments to Customers. The Company records certain payments to customers as a reduction of revenue in accordance with EITF 01-09: Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor’s Product). The company accrues a liability and records a reduction to revenue based on expected payments to be made to customers for specific programs. Management’s estimate of amounts expected to be paid to customers is determined by applying a product’s depletion rate that contemplates customers’ historical sales performance and current customer support programs to the current period’s product sales. Upon receiving an invoice from the customer, the Company then records the payment and reduces the liability accordingly.

Defined Benefit Pension Plan. The most significant element in determining the Company’s pension income (cost) in accordance with SFAS No. 87 is the expected return on plan assets. In 2004, the Company reduced its expected long-term rate of return on plan assets to 7.5% from 8.5% during the prior fiscal year. The assumed long-term rate of return on assets reflects the weighted average rate of earnings expected on the classes of funds invested, or to be invested to provide for the plan benefits. An analysis of the composition of the plan’s investments and investment policy compared against the investment’s expected returns results in

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Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

the expected return on plan assets that is included in pension income (cost). The difference between this expected return and the actual return on plan assets is deferred. The net deferral of past asset gains (losses) can affect future pension income (cost). Over the long term, the Company’s pension plan assets have earned an average annual return of 9.5%. However, the plan assets have lost an average of 2.9% per year during the last four years. The investment return on plan assets has been positive for the previous two years, but should the negative trend continue, the Company will again be required to reconsider its assumed expected rate of return on plan assets. If the Company were to lower this rate, future pension cost would increase.

At the end of each year, the Company determines the discount rate to be used to calculate the present value of plan liabilities. The discount rate is an estimate of the current interest rate at which the pension liabilities could be effectively settled at the end of the year. In estimating this rate, the Company uses the preceding November’s Moody’s AA Corporate Bond Index rounded down to the nearest ¼ of a percentage point. At March 31, 2005, the Company determined this rate to be 5.75%, a decrease of 25 basis points from the rate used at March 31, 2004. Changes in discount rates over the past three years have not materially affected pension income (cost), and the net effect of changes in the discount rate, as well as the net effect of other changes in actuarial assumptions and experience, have been deferred, in accordance with SFAS No. 87.

The Company’s accumulated pension obligation exceeded the fair value of the related plan assets primarily due to the difference in the actual return on assets compared to the expected return on assets and the reduction in the discount rate assumption. As a result, in 2005 the Company recorded an increase to accrued pension liability and a non-cash charge to equity of approximately $0.1 million. This charge may be reversed in future periods if asset returns improve or interest rates rise. For the year ended March 31, 2005, the Company recognized consolidated pretax pension cost of $0.7 million, up from $0.6 million in 2004. The Company currently expects that the consolidated pension cost for 2006 will not be materially different from 2005. The Company’s required minimum amount of 2006 contributions are approximately $1.1 million. However, the Company may elect to increase the minimum level of contributions in 2006 based on a number of factors, including performance of pension investments, changes in interest rates, and the funded percentage of the plan.

Recently Issued Accounting Pronouncements

In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46): Consolidation of Variable Interest Entities and during December 2003 issued Interpretation 46 (FIN 46R), Consolidation of Variable Interest Entities, and Interpretation of ARB 51. The term “variable interest” is defined in FIN 46 as “contractual, ownership or other pecuniary interest in an entity that change with changes in the entity’s net asset value.” Variable interests are investments or other interest that will absorb a portion of an entity’s expected losses if they occur or receive portions of the entity’s expected residual returns if they occur. FIN 46R defers the effective date of FIN 46 for certain entities and makes several other changes to FIN 46. The adoption of FIN 46R did not have a material impact on the Company’s financial position or results of operations.

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Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

In November 2004, the Financial Accounting Standards Board issued SFAS No. 151, Inventory Costs, an amendment of ARB No. 43, Chapter 4, to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted material (spoilage). This statement is effective June 15, 2005. The Company is currently assessing, but has not yet determined the effect of SFAS No. 151 on its financial position, results of operations and cash flows.

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Risk

The Company uses long-term debt as a primary source of capital in its business. The following table presents the principal cash repayments and related weighted average interest rates by maturity date for the Company’s long-term fixed-rate debt and other types of long-term debt at March 31, 2005:

The Company is exposed to fluctuations in interest rate risk as a result of its variable rate debt. A hypothetical 1% change in interest rates applied to the Company’s variable rate debt would not have a material impact on the Company’s earnings or cash flows. The Company’s objectives in managing its exposure to changes in interest rates are to limit the effect of interest rate changes on earnings and cash flows and to minimize the amount of borrowings under the Company’s revolving line of credit. This approach to managing interest rate risk does not consider the changes in the Company’s competitive environment indirectly related to changes in interest rates and management’s responses to these changes.

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Item 8. Financial Statements and Supplementary Data

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

National Wine & Spirits, Inc.

We have audited the accompanying consolidated balance sheets of National Wine & Spirits, Inc. and subsidiaries (the “Company”) as of March 31, 2005 and 2004 and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended March 31, 2005. Our audits also included the financial statement schedule listed in the Index at Item 15. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of National Wine & Spirits, Inc. and subsidiaries as of March 31, 2005 and 2004 and the results of their operations and their cash flows for each of the three years in the period ended March 31, 2005, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.

DELOITTE & TOUCHE LLP

Indianapolis, Indiana

June 14, 2005

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National Wine & Spirits, Inc.

Consolidated Balance Sheets