SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON D.C. 20549

                                    FORM 10-K

(MARK ONE)
     |X|  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
          EXCHANGE ACT OF 1934

          For the fiscal year ended December 31, 1998

                                       OR

     |_|  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
          EXCHANGE ACT OF 1934

          For the Transition period from ______ to ______

                         COMMISSION FILE NUMBER: 0-23846

                            MINNESOTA BREWING COMPANY
                 (Name of small business issuer in its charter)

                      MINNESOTA                       41-1702599
           (State or other jurisdiction            (I.R.S. Employer
         of incorporation or organization)        Identification No.)

                             882 WEST SEVENTH STREET
                              SAINT PAUL, MN 55102
              (Address of principal executive offices and zip code)

       REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (651) 228-9173

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK, $.01
                                                            PAR VALUE

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 ___

CHECK IF THERE IS NO DISCLOSURE OF DELINQUENT FILERS IN RESPONSE TO ITEM 405 OF
REGULATION S-K IN THIS FORM, AND NO DISCLOSURE WILL BE CONTAINED, TO THE BEST OF
REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K FOR ANY AMENDMENT TO
THIS FORM 10-K. _X_

ON APRIL 13, 1999, THE COMPANY HAD 3,462,711 SHARES OF COMMON STOCK, $.01 PAR
VALUE, OUTSTANDING AND 607,745 SHARES OF CLASS A CONVERTIBLE PREFERRED STOCK.
EACH SHARE OF CLASS A CONVERTIBLE PREFERRED STOCK OUTSTANDING IS CONVERTIBLE
INTO ONE SHARE OF COMMON STOCK.

THE AGGREGATE MARKET VALUE OF THE SHARES OF VOTING STOCK HELD BY NON-AFFILIATES
OF THE COMPANY (PERSONS OTHER THAN DIRECTORS AND OFFICERS) COMPUTED AT THE BASIS
OF THE LAST REPORTED SALE OF $1.50 PER SHARE ON APRIL 13, 1999 WAS APPROXIMATELY
$2,900,000.

DOCUMENTS INCORPORATED BY REFERENCE: THE COMPANY'S PROXY STATEMENT FOR ITS 1999
ANNUAL MEETING OF SHAREHOLDERS TO BE IS INCORPORATED BY REFERENCE INTO PART III
OF THIS FORM 10-K.

<PAGE>


                            MINNESOTA BREWING COMPANY
                             FORM 10-K ANNUAL REPORT
                      FOR THE YEAR ENDED DECEMBER 31, 1998

                                TABLE OF CONTENTS

                                     PART I


ITEM 1.     Business..........................................................
ITEM 2.     Property..........................................................
ITEM 3.     Legal Proceedings.................................................
ITEM 4.     Submission of Matters to a Vote of
              Security Holders................................................

                                     PART II

ITEM 5.     Market for Registrant's Common Equity and
              Related Stockholder Matters.....................................
ITEM 6.     Selected Financial Data...........................................
ITEM 7.     Management's Discussion and Analysis
              Of Financial Condition and Results of Operations ...............
ITEM 7A.    Quantitative and Qualitative Disclosures about Market Risks.......
ITEM 8.     Financial Statements and Supplementary Data.......................
ITEM 9.     Changes In and Disagreements With
              Accountants on Accounting and
              Financial Disclosure............................................

                                    PART III

ITEM 10.    Directors and Executive Officers of the Registrant
ITEM 11     Executive Compensation............................................
ITEM 12.    Security Ownership of Certain
              Beneficial Owners and Management................................
ITEM 13.    Certain Relationships and Related
              Transactions....................................................

                                     PART IV

ITEM 14.    Exhibits, Financial Statement Schedules and Reports on Form 8-K...

SIGNATURES....................................................................


                                        2
<PAGE>


                                     PART I

ITEM 1. BUSINESS

OVERVIEW

            The Company operates a full scale brewery in Saint Paul, Minnesota
producing its proprietary Grain Belt, Pig's Eye, Landmark, Minnesota Brew,
Yellow Belly and Brewers Cave beers and marketing these beers through an
independent distribution network. The Company produces beers under the brand
names Grain Belt, Grain Belt Premium, Grain Belt Light, Grain Belt Premium
Light, Grain Belt Premium Bock, Grain Belt Premium Oktoberfest, GBX Malt Liquor,
Pig's Eye Pilsner, Pig's Eye Lean, Pig's Eye Ice, Pig's Eye Red, Pig's Eye
Non-alcoholic, Landmark, Landmark Light, Landmark Bock, Minnesota Brew,
Minnesota Brew Light, Yellow Belly, Brewers Cave Black Barley, Brewers Cave
Amber Wheat and Brewer's Cave Golden Caramel.

            The Company's Grain Belt product line is the Company's best selling
product. The brand, which the Company acquired and commenced producing in 1991,
is over a hundred years old and is experiencing a resurgence in popularity, in
part, because the Company reintroduced Grain Belt with a style and taste similar
to the product's traditional characteristics when it maintained a significant
share of the Minnesota market. Grain Belt Premium was awarded the Gold Medal in
the American Lager category at the 1994 Great American Beer Festival. The
Company created the Pig's Eye brand in 1992. Pig's Eye Ice Beer won the Silver
Medal in the American Malt Liquor category at the 1994 Great American Beer
Festival. The Company repositioned Landmark from its initial debut in 1991 as a
premium beer to a moderately priced beer and refocused its efforts on the
Landmark product line in 1993 toward specialty beers, including Landmark Boch
and Landmark Oktoberfest. The Company created Yellow Belly in 1996 as an
alcoholic alternative beverage with a distinct lemon flavoring. In 1998, the
Yellow Belly line was extended to include both Margarita and Long Island T malt
beverages. The Company also introduced its Brewers Cave hand crafted
micro-styled line of beers in 1996 including Black Barley, Amber Wheat and
Golden Caramel.

            The Company also produces other beers under contract brewing
arrangements and private label contracts. Under its contract brewing
arrangements, the Company produces beers for separate brewing companies
according to those brewers' formulas. In addition, under private label contracts
the Company packages its proprietary beers for sale by third parties under brand
names owned by the third parties.

            In addition, the Company has the ability to produce other beverages
and in 1993 began the production and packaging of premium sparkling water for
another beverage company. The Company also produces, under contract, premium
soft drinks along with other non-alcoholic beverages.

            Until March 29, 1999 the Company leased its brewing facilities and
related equipment from Minnesota Brewing Limited Partnership (the
"Partnership"). In October of 1991 the Partnership acquired the former Jacob
Schmidt Brewery in Saint Paul from G. Heileman Brewing Company ("Heileman")
which was in bankruptcy at the time. On March 29, 1999, the Partnership
transferred the brewing facility to Gopher State Ethanol, LLC ("Gopher State") a
Delaware Limited Liability Company formed to explore the production of ethanol
at the facility.

            The Company generated net sales of $18.1 million in 1997 and net
sales of $14.8 million in 1998, including the production and sale of sparkling
water. The Company's brewery has a potential annual capacity of 2.2 million
barrels and produced approximately 298,000 barrels in 1997 and 293,000 barrels
in 1998, which were equal to 13.5 and 13.3 percent, respectively, of total
capacity. The Company believes that the existence of the additional brewing
capacity has enabled and will continue to allow the Company to increase its
production without substantial additional capital outlays.

            Substantially all of the Company's proprietary beers are sold
domestically through approximately 150 independent distributors. During 1998,
approximately 61 percent of the Company's proprietary beer sales volume reached
retail channels through its 12 largest distributors. The Company provides local
media advertising, primarily in Minnesota, point-of-sale advertising and sales
promotion programs to help stimulate sales.


                                       3
<PAGE>


            The quality of the Company's products has been attested to through
various beer festivals and taste test mediums but its most significant
recognition came from the following awards it has won during its brief history
at the Great American Beer Festival(TM) which occurs each fall in Denver,
Colorado:

                  Year        Medal Awarded      Product
                  ----        -------------      -------

                  1992        Silver             Landmark Oktoberfest
                  1993        Bronze             McMahons Irish Style Potato Ale
                  1994        Silver             Pig's Eye Ice
                  1994        Gold               Grain Belt Premium
                  1995        Bronze             Pig's Eye Red Amber Ale
                  1997        Silver             Pig's Eye - Non Alcoholic

            In addition to these recognitions for its own products, the Company
has produced beers that have won awards for its contract customers.

            The Company believes that its success in producing and selling its
proprietary beers, and its production of high quality beers pursuant to contract
brewing arrangements position it to take advantage of growth opportunities
existing in the brewing industry.


COMPETITION AND THE BEER INDUSTRY

            Although there are several hundred companies engaged in the highly
competitive brewing industry in the United States, the industry is highly
concentrated, with five companies -- Anheuser-Busch Companies, Inc., Miller
Brewing Co., Adolph Coors Co., Stroh Brewery Co. and Pabst Brewing Co. --
accounting for 91.5% of 1998 sales. In Minnesota, however, local brands have
traditionally had a higher market share than they do nationally. The national
and Minnesota market shares of these companies and of the Company were as
follows:

<TABLE>
<CAPTION>
                                                Percent of Sales/Barrelage
                                  ----------------------------------------------------
                                     National (Sales)(1)      Minnesota (Barrelage)(2)
                                  ------------------------    ------------------------
                                     1998          1997          1998          1997
                                  --------      ----------    ----------    ----------
<S>                                  <C>           <C>           <C>           <C>
Anheuser-Busch Companies, Inc.       48.1%         47.4%         37.0%         40.7%
Miller Brewing Co.                   21.3          22.1          31.5          29.3
Adolph Coors Co.                     10.8          10.7           3.4           3.0
Stroh Brewing Co. (3)                 9.3          10.2          11.3          12.0
Pabst Brewing Co.                     2.0           2.6           2.6           3.3
                                     ----         -----         -----          ----
                                     91.5%         93.0%         85.8%         88.3%

Minnesota Brewing Company(4)          0.1%          0.1%          2.9%          3.4%
</TABLE>

(1)         Information from Modern Brewery Age.
(2)         Information from Minnesota Beer Wholesalers Association.
(3)         Stroh Brewing Co. was acquired during 1999 by Pabst Brewing Co. and
            Miller Brewing Co.
(4)         Includes only the Company's proprietary beers.

            During 1998, approximately 63% of the Company's domestic sales of
proprietary beers were sold in Minnesota. The Company's beers are distributed
and sold in competition with the national brands listed above, as well as other
regional and local brands, many of which have either greater financial resources
and/or greater name recognition than the Company. Although the methods of
competition in the industry vary widely, the principal


                                       4
<PAGE>


methods of competition include the quality, taste and freshness of the products,
packaging, price, advertising, distribution and service to customers.

            Relatively flat sales in the overall beer industry in recent years
have resulted in increased competition among beer producers. Some of this
flatness has been brought about by legislative, social and demographic changes.
Trends in the industry include huge marketing expenditures, discounting of
prices and the growth of micro brewery-type beers.

            During the 1980's, import beers increased their market share and
brought much innovation to the domestic industry, such as ice beers,
non-alcoholic and dry beers, up-scale micro and brew-pub brands, enhanced
package graphics and renewed popularity for long-neck bottles. These changes
have resulted in the industry becoming more oriented to product segmentation. On
a nationwide basis, a number of the small brewers have experienced substantial
growth in the last several years.


BREWING PROCESS AND PRODUCTION

            The process of brewing generally consists of malting, mashing,
boiling and hopping, fermenting and finishing. "Malting" is the preparation of
the basic grain (usually barley) used in the brewing process. The grain is
soaked in water and allowed to germinate. Once small root shoots have sprouted
and are about three-fourths of the length of the grain kernels, the grain is
dried in a large kiln. After drying, the grain (now called "malt") is stored for
four to eight weeks and then milled. The Company purchases regular and specialty
malts from malting companies in North America. The "mashing" process begins when
the ground malt is mixed with water. This mixture is called "mash" and is heated
and stirred. The mash mixture then flows into a lauter tub, which removes
strains and filters the mash to remove the malt husks. After the straining is
complete, clear liquid called "wort" passes to a brewkettle. In this "boiling
and hopping" stage, dried flowers of the hop vine are added to the wort and the
mixture is boiled in the brewkettle for one to two hours. Hops add flavor to the
beer and prevent spoiling. The specific mixture of the grain and the hops, and
the brewing time and temperature affect the flavor and color of the beer. After
the hops are strained off, the wort has its unique flavor and amber color. The
beer is then transferred to the fermenting cellars and yeast is added to the
wort, which then ferments for one to two weeks creating alcohol and carbon
dioxide. The wort is then transferred to the Ruh or resting cellars. The next
step is called "filtration" where yeasts and unwanted proteins are removed to
give beer its brilliant clarity after which it is carbonated using carbon
dioxide that was given off and collected during the fermentation stage. Finally,
the beer is transferred to the "government cellars" or holding tanks where it is
stored before being sent to the production lines where it is packaged in kegs,
bottles or cans.


COMPANY PRODUCTS

            In December 1991, the Company commenced its product sales by
introducing Landmark and reintroducing both the Grain Belt and Grain Belt
Premium labels that had been acquired from Heileman. The Company followed with
the introduction of "Pig's Eye Pilsner" and Pig's Eye Lean, in 1992. The Company
introduced Pigs Eye Ice and Pig's Eye Non-alcoholic beer in December 1993 and
Pig's Eye Red in February of 1995. Minnesota Brew entered the market in April of
1995. Yellow Belly was brought to the market in April of 1996 and Brewers Cave
products were introduced in October of 1996. In 1998, Yellow Belly Margarita and
Long Island T were introduced. The Company has new products in various stages of
testing at the present time.


                                       5
<PAGE>


            A brief description of the Company's various brands follows:

            GRAIN BELT. Grain Belt, the Company's leading product, is a very old
established product, originally brewed in Minneapolis with a 100-year history,
now brewed by the Company, using similar recipes. Grain Belt Premium has above
average alcohol content and richer taste while regular Grain Belt has average
alcohol content and a lighter taste. The brands are Grain Belt, Grain Belt
Premium, Grain Belt Golden, Grain Belt Light, Grain Belt Premium Light and GBX
Malt Liquor.

            PIG'S EYE. Pig's Eye Pilsner is a medium bodied pilsner with average
alcohol content created for a taste and price conscious consumer. The Company
also sells Pig's Eye Lean, Pig's Eye Ice, Pig's Eye Red Amber Ale and Pig's Eye
NA.

            LANDMARK. A full-bodied lager, Landmark is amber colored and has a
slightly higher alcohol content than most American beers. This brand includes
Landmark and Landmark Light.

            MINNESOTA BREW. A pilsner style medium bodied beer with average
alcohol content using domestic hops and grains and brewed for the budget
conscious consumer. The Company also sells this product in Canada under the name
Northern Brew.

            GRAIN BELT BOCH. A rich dark amber beer brewed according to the
traditional German "Reinheitsgebot" (all natural) with a full body taste and
dark hue that comes from a brewing formula using specialty malt and imported
hops. This beer is also sold under the name Landmark Boch.

            GRAIN BELT OKTOBERFEST. A German-type lager beer brewed according to
the traditional German Reinheitsgebot. This product is very flavorful,
full-bodied and copper colored, due to special malts and German hops. This beer
is also sold under the name Landmark Oktoberfest.

            YELLOW BELLY. An alcoholic alternative beverage, Yellow Belly is a
quality malt beverage with select lemon, Margarita and Long Island T flavors
that provide a distinctive refreshing taste.

            BREWERS CAVE. A hand crafted micro-style beer crafted in small
batches using specialty mixtures of barley, malts and hops to create the
distinctive Black Barley, Amber Wheat and Golden Caramel products.


CONTRACT BREWING AND PRODUCTION

            Beginning in the second quarter of 1992, the Company began to
produce and package beer on a contract basis for various customers according to
their specifications.

            In addition to sales of its proprietary beers and contract brewing,
the Company also produces beer for sale under private label agreements. Under
these agreements, the Company's beers are given the customers' label for resale
by the customer. Private label customers include restaurants, exporters and
marketing organizations selling their own brands.

            The Company also began to produce brewed malt liquids under contract
production arrangements in 1995. MBC brews the liquid, then the liquid is
shipped out prior to fermentation and dried by the customer for use by home
brewers. The brewed malt liquids are finished and sold to others by third
parties.

            At the end of 1997, the Company began producing malt extract for a
third party. This production can be done by the Company at a significantly lower
cost per barrel, and as a result less revenue per barrel than other products it
produces. During 1998 the Company produced 94,000 barrels under this
arrangement.


                                       6
<PAGE>


            In 1998, the Company became certified to brew organic beer. The
Company began producing this product for a contract customer during the year.


EXPORT SALES

            The Company also ships to Korea, Japan and China. (See Note 6 of
Notes to Financial Statements for Export Sales Information.) Substantially all
export sales are made through brokers and are marketed and sold primarily on the
basis of price. Although the Company intends to pursue this market as
opportunities present themselves, export sales may vary significantly from year
to year. The Company has granted exclusive brands to various brokers to enhance
the distribution of its products. During 1998, export sales were approximately
18% of net sales. See Note 6 to the financial statements for sales by major
product line.


SALES AND MARKETING

            The Company's beverages are sold on an "on sale" basis in
restaurants, bars and sports arenas and on an "off sale" basis primarily through
liquor stores, convenience stores and supermarkets. The product is marketed and
delivered to these retailers by independent beverage distributors. Although the
Company generally grants its distributors exclusive rights to sell its
proprietary products within a defined territory, most of the Company's
distributors carry products of other beer producers. Written agreements with the
Company's distributors vary, but are generally perpetual or multi-year
agreements and terminable by either party for breach of the contract or upon
specified notice periods. If the Company terminates an agreement without cause,
however, it maybe required to pay the distributor an amount equal to the
distributor's net earnings from sales of the Company's products during the most
recently completed fiscal year. The Company has written agreements with all of
its largest distributors and with all but a few of its smaller distributors.

            During 1998, the Company's three largest distributors accounted for
26.0% of the Company's total sales. The Company believes that as its sales
increase, sales by any one distributor will account for a decreasing percentage
of total revenues.

            Distributors place product orders directly with the Company. The
process of brewing generally takes three to five weeks, after which the products
are packaged for sale in returnable bottles, non-returnable bottles, cans or
kegs. Finished products are stored in the Company's warehouse until distributors
pick them up.


                                       7
<PAGE>


                            PRODUCT SHIPPING ACTIVITY

            The following table indicates, for the periods shown, the Company's
total sales in barrelage by product line.

                       Proprietary      Contracts and
                         Brands         Private Label       Export       Total
                         ------         -------------       ------       -----

1997
----

First Quarter            28,801            29,280           12,223        70,304
Second Quarter           45,042            29,797           38,757       113,596
Third Quarter            40,148            33,396            9,932        83,476
Fourth Quarter           29,708            27,103            7,911        64,722
                        -------           -------           ------       -------
  Yearly Total          143,699           119,576           68,823       332,098

Percent of Total          43.3%             36.0%            20.7%        100.0%


1998
----

First Quarter            25,434            31,935            5,869        63,238
Second Quarter           34,376            30,578           17,969        82,923
Third Quarter            32,381            29,190           14,039        75,610
Fourth Quarter           25,725            45,450           16,173        87,348
                        -------           -------           ------       -------
  Yearly total          117,916           137,153           54,050       309,119

Percent of Total          38.1%             44.4%            17.5%        100.0%


            Sales of beer are customarily at their lowest levels in the first
and fourth quarters of each year and at their highest levels in the second and
third quarters. The 1998 fourth quarter sales for the Company were higher than
normal due to an increase in contracts and private label arrangements.
This is primarily due to the Company's production of malt extract for a food
products company.


PACKAGING AND RAW MATERIALS

            The malted barley, hops and yeast used to produce the Company's beer
are readily available from several alternative sources in North America. Because
the Company is not dependent on any one supplier for these ingredients, the
Company believes a continuous supply of raw materials will be readily available
for its brewing operations.

            The Company's products are packaged in bottles, cans or kegs. In
1998, 63.2% of the Company's total production was packaged in aluminum cans, and
36.7% was packed in returnable and non-returnable glass bottles. The remainder
of the beer sold was packaged in quarter-barrel and half-barrel stainless steel
kegs.

            The Company uses corrugated cardboard boxes and fiberboard boxes for
the shipping of its bottles and cans. Although the Company buys all of its
aluminum cans from a single source and most of its non-returnable glass bottles
and cartons from a single source, the Company has not experienced any
difficulties in obtaining supply in the past and does not anticipate any
shortages in the future. Although the Company is required to provide its can and
bottle producer with advance orders regarding the number and types of
containers, the Company believes that it


                                       8
<PAGE>


would be able to obtain comparable products elsewhere at competitive prices if
it were unable to continue to obtain cans, bottles or cardboard containers from
any of its current suppliers.


GOVERNMENTAL REGULATION, LICENSING AND ENVIRONMENTAL REGULATION

            The business of the Company is highly regulated by federal, state
and local laws. The Company was required to obtain a federal permit from the
Bureau of Alcohol, Tobacco and Firearms and a state permit from the Minnesota
Department of Public Safety prior to commencement of production and sale of
beer. Prior to the commencement of operations, the Company was required to
become licensed by the Department of Agriculture, which license is issued
following a satisfactory inspection by the Food and Drug Administration. Also
prior to beginning operations, the Company was required to obtain approval of
its facilities, improvements and sanitary conditions from the Minnesota
Department of Health and the City of Saint Paul Building Department, and be
issued a discharge permit from the Metropolitan Waste Control Commission.
Although the Company believes that it has complied with all applicable laws, no
assurance can be made that the Company will be able to remain in compliance. In
addition, the Company is subject to regulation by the air and water pollution
control divisions of the Minnesota Pollution Control Agency. The Company has
obtained all regulatory permits and licenses necessary to operate its brewery
and to sell its products in the states where they are currently being
distributed. Failure on the part of the Company to comply with federal, state or
local regulations could cause the Company's licenses to be revoked and force it
to cease operations.

            The Company's brewery is subject to federal, state and local
environmental protection laws and regulations and the Company is operating
within existing laws and regulations or is taking action aimed at assuring
compliance therewith. Various strategies are utilized to help assure this
compliance. The Company does not expect compliance with such laws and
regulations to materially affect the Company's capital expenditures, earnings or
competitive position.

            Certain states and local jurisdictions have adopted restrictive
packaging laws and regulations for beverages that generally require deposits or
advanced disposal fees on packages or restricts certain packaging options.
Because the most significant portion of the Company's sales are in Minnesota
(which does not have such laws), these laws have not had a significant effect on
the Company's sales. The federal government and a number of additional states
and local jurisdictions continue to consider similar legislation or regulations,
the adoption of which might require the Company to incur significant capital
expenditures.


TRADEMARKS

            The Company has obtained federal or state registration for a number
of its trademarks including "Grain Belt", "Pig's Eye", "Yellow Belly", "Mount
Simon" and "Minnesota Brew". The Company has also applied for trademark
protection for certain of its trademarks in foreign jurisdictions, and has
received protection in some of these jurisdictions.


MARKETING

            The Company's primary marketing strategy focused on sales in
Minnesota, particularly the Twin Cities of Minneapolis and Saint Paul. The
Company has utilized the media in the Twin Cities market by issuing press
releases on a timely basis regarding the Company and its products. General
marketing plans call for use of radio, outdoor billboards and print advertising
in Minnesota. The Company also intends to use one or more of these methods in
additional markets as it expands.

            The Company also engages in a number of promotional activities. The
Company currently gives tours of its brewery and operates a gift shop for the
purchase of promotional items. The Company also sells promotional


                                       9
<PAGE>


items through a third party mail order company. Point-of-sale advertising in the
form of floor display, banners, shelf and cooler labels and neon signs are
employed to stimulate sales in liquor stores, bars and restaurants.

            The Company focuses its marketing expenditures in markets where it
believes its efforts will be most effective in increasing sales. Current
marketing expenditures focus on the redesign of its products packaging or other
steps that improve the attractive shelf appeal of its products.


RESEARCH AND DEVELOPMENT

            The Company conducts a limited amount of research activities
relating to the development of new products and the improvement of existing
products. The dollar amounts expended by the Company since inception on such
research activities and the number of employees engaged in these activities
during such period, however, are not considered to be material in relation to
the total business of the Company.


EMPLOYEES

            As of March 26, 1999, the Company has approximately 131 full-time
equivalent employees. Key areas are summarized below:

            The Company has 115 employees that work in production, including
brewing, bottling, packaging, warehouse, engineering and equipment maintenance,
7 employees in sales and marketing and 9 employees in administration. Of the
Company's employees, 103 work pursuant to five separate union contracts, all of
which expired on March 31, 1999. Negotiations with the bargaining units are
ongoing and management believes that new contract agreements will be negotiated.
There is a possibility, however, that any or all of these units could strike
sometime after April 23, 1999.

            In connection with the formation of the Company in 1991, the Company
established the Minnesota Brewing Company Employee Stock Ownership Plan
("ESOP"), which covers all the Company's employees other than those, covered by
two of the union contracts.


GOPHER STATE ETHANOL

            Beginning in 1997 and throughout 1998 the Company has investigated
and begun to develop a business for the production of ethanol. Ethanol is
principally produced from the processing of corn including its fermentation into
fuel grade alcohol. To date, the Company, along with the Partnership and other
investors are negotiating with third party lenders to finance the construction
of an ethanol facility at the Company's current location. Because of the
significant cost of the facility, the Company has solicited investors to satisfy
lenders request for equity and as a consequence the Company will have a minority
interest in the ethanol operation. There can be no assurance that the ethanol
operation will be implemented as it is subject to lender and investor's final
approval. If the ethanol facility is constructed at the proposed site, it is
expected to reduce the Company's operating expenses and allow for payment of
management fees to the Company.


ITEM 2. PROPERTY

            The Company's offices, brewery and warehouse facilities are located
on approximately 10 acres of property in Saint Paul, Minnesota.

            A prior owner of the facilities, Heileman, acquired the facility in
1972 and invested significant amounts in expanding and modernizing the brewery,
which has been a landmark in Saint Paul since the 1850's. Major


                                       10
<PAGE>


brewhouse and government cellar renovations were completed in 1984, which
increased the brewery's annual production capacity to its present level of
approximately 2.2 million barrels per year. In 1980, the brewery drilled a well
over 1,000 feet to tap a high quality source of water. The Company believes that
the brewery and equipment are in good condition. The brewery operations and
production facility consist of:

            BREWKETTLE: Two kettles, 385 barrels and 410 barrels, to brew each
            batch, are used in the initial stage of product production and
            require up to three hours.

            CELLARS: During the process of beer production, the beer progresses
            through the various beer cellars:

<TABLE>
<CAPTION>
                                                             CAPACITY
TYPE OF CELLAR      PROCESS                                  IN BARRELS     TIME WITHIN CELLAR
--------------      -------                                  ----------     ------------------
<S>                 <C>                                        <C>          <C>
Fermentation        Yeast is added; fermenting begins.         65,000       One to two weeks.

Ruh (Resting)       Beer rests and ages.                       60,000       Two to eight weeks,
                                                                            depending upon style.

Pre-Finishing       Yeasts and unwanted proteins are           22,000       Approximately one week.
                    removed; beer is carbonated.

Government          Beer waits for bottling and packaging.     21,000       Several days to a week.
</TABLE>

            PACKAGING LINES: The Company has three separate packaging lines with
            capacity from 1,500 cases of bottles per hour per line to 2,500
            cases of cans per hour. The three packaging lines have filler speeds
            ranging from 600 bottles a minute per line to 1,050 cans per minute.
            One of the lines is designed to fill 12 oz. and 16 oz. cans, one is
            designed to fill 12 oz, 22 oz, 32 oz. and 40 oz. non-returnable
            bottles and one is designed to fill 12 oz. returnable bottles.

            RACKING LINE: The Company's racking line can fill up to 300 kegs
            (1/2 and 1/4 barrels) in an hour.

            WAREHOUSE: The Company's total warehousing capacity is 137,400
            square feet, with capacity to store up to 850,000 cases in a 123,000
            square foot warehouse and a refrigerated keg storage area of 14,400
            square feet. The warehousing facility opens to 20 shipping docks,
            including 17 devoted to truck-loading and three rail loading docks
            on its rail siding located on the property and served by the Soo
            Line and the Chicago Northwest Railroads.

            OFFICES: The Company's administrative offices consist of
            approximately 9,800 square feet, including a Rathskeller where the
            Company's products are available for sampling after brewery tours.

            Management believes that the brewing facility and administrative
offices are adequate to support production and shipment of the Company's current
and future proprietary product lines, contract brewing agreements and private
label agreements with unaffiliated third parties. These facilities and a
substantial portion of all equipment are leased from the Partnership.

            Until March 29, 1999, the Partnership retained ownership of all of
the Company's real property, buildings, water wells, and equipment used in the
brewing process, and leased the real property to the Company.

            The lease agreement gave the Company the right to purchase the
facility and equipment at any time over the term of the lease after November 30,
1995 for eight times trailing 12-month lease payments, which, as of December 31,
1998, amounted to approximately $4.9 million. The agreements also allowed the
Partnership to


                                       11
<PAGE>


acquire additional equipment or replacement equipment needed by the Company and
lease it to the Company over the taxable depreciable life of the equipment with
an interest rate of two points over the applicable treasury rate.

            On March 29, 1999, the Partnership contributed its interest in the
real estate and equipment that had been previously leased to the Company to
Gopher State, which intends to produce ethanol. Gopher State has obtained
interim financing to proceed with an engineering study to determine the
feasibility of building an ethanol plant. On March 29, 1999, the Company and
Gopher State entered into a new lease agreement for the same land, building and
production equipment that the Company had previously leased from the
Partnership. The new lease agreement provides for rent of $25,000 per month and
has an initial term of 10 years, with a provision for three successive 10 year
renewals.


ITEM 3. LEGAL PROCEEDINGS

            None


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

            None.


                                       12
<PAGE>


                                     PART II

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

            The Company's common stock is traded on the Nasdaq SmallCap system
under the symbol MBRW. The following table sets forth the high and low closing
bid prices for the Company's common stock for 1997 and 1998.

                                              Low              High
                                              ---              ----
1997

First Quarter                               $  3.13          $  5.38
Second Quarter                                 2.63             4.25
Third Quarter                                  2.50             3.75
Fourth Quarter                                 1.38             3.00

1998

First Quarter                               $  1.25          $  3.56
Second Quarter                                 1.75             3.38
Third Quarter                                  1.50             2.75
Fourth Quarter                                 1.75             2.75


These prices indicate interdealer prices without retail markup, markdowns or
commissions.

            At March 23, 1999, the Company had 276 holders of record of its
common stock. In addition, on that date one depository company held
approximately 1,628,000 shares as nominees for an undetermined number of
additional beneficial holders.

            The Company has not paid any dividends on its common stock and does
not anticipate paying any in the foreseeable future. The Company's new line of
credit agreement limits its ability to pay dividends.


RECENT SALE OF UNREGISTERED SECURITIES

            On March 31, 1999, the Company issued 607,745 shares of class A
convertible preferred stock to the Partnership reflecting the conversion of an
aggregate of $1,519,363 in indebtedness. The Company believes the transaction
was exempt under Section 4(2) of the Security Act of 1933.


                                       13
<PAGE>


ITEM 6. SELECTED FINANCIAL DATA

                             SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>
                                                                           Year Ended December 31

                                                     1998            1997            1996            1995            1994
                                                 ------------    ------------    ------------    ------------    ------------
<S>                                              <C>             <C>             <C>             <C>             <C>
STATEMENT OF OPERATIONS DATA:
     Net sales ...............................   $ 14,763,247    $ 18,100,532    $ 24,875,349    $ 31,383,508    $ 25,221,588
     Cost of goods sold ......................     13,614,401      18,555,849      23,331,116      28,199,229      21,525,720
                                                 ------------    ------------    ------------    ------------    ------------
     Gross profit (loss) .....................      1,148,846        (455,317)      1,544,233       3,184,279       3,695,868
                                                 ------------    ------------    ------------    ------------    ------------
     Operating expenses:
       Advertising ...........................        623,853       1,193,348       1,123,996       1,594,267       1,728,073
       Sales and marketing ...................        690,101         718,764         747,809         719,659         598,727
       Administrative ........................        979,484       1,057,241         855,255         714,050         615,631
       Provision for doubtful accounts .......         90,000         492,000         601,000          25,000          55,000
                                                 ------------    ------------    ------------    ------------    ------------
           Total operating expenses ..........      2,383,438       3,461,353       3,328,060       3,052,976       2,997,431
                                                 ------------    ------------    ------------    ------------    ------------
     Operating income (loss) .................     (1,234,592)     (3,916,670)     (1,783,827)        131,303         698,437
     Other income (expense), net .............       (173,286)       (100,386)        (78,641)       (105,341)        (93,204)
                                                 ------------    ------------    ------------    ------------    ------------
     Net income (loss) before
       Income tax benefit ....................     (1,407,878)     (4,017,056)     (1,862,468)         25,962         605,233
     Income tax (benefit) ....................        (28,000)        293,000              --              --        (222,000)
                                                 ------------    ------------    ------------    ------------    ------------
     Net income (loss) .......................     (1,379,878)     (4,310,056)   $ (1,862,468)   $     25,962    $    827,233
                                                 ============    ============    ============    ============    ============

     Net income (loss) per common share (1) ..   $      (0.40)   $      (1.27)   $      (0.55)   $       0.01    $       0.25
     Weighted average common shares
       outstanding (basic) ...................      3,425,961       3,389,211       3,374,155       3,351,308       3,330,088

OPERATING DATA (in barrels sold):
     Domestic ................................        117,916         143,699         157,797         145,809         140,199
     Contract ................................        137,153         119,576         187,108         348,840         290,187
     Export ..................................         54,050          68,823          84,414         106,983          73,667
                                                 ------------    ------------    ------------    ------------    ------------
     Total ...................................        309,119         332,098         429,319         601,632         504,053
                                                 ============    ============    ============    ============    ============

<CAPTION>
                                                 December 31,    December 31,    December 31,    December 31,    December 3l,
                                                     1998            1997            1996            1995            1994
                                                 ------------    ------------    ------------    ------------    ------------

BALANCE SHEET DATA:
     Working capital .........................   $    231,017    $  1,044,938    $  4,342,653    $  6,327,913    $  6,788,661
     Total assets ............................      8,448,579       8,275,426      10,775,228      12,189,503      13,363,949
     Long-term debt, net .....................      1,261,921       2,391,081       1,753,454       1,982,428       2,194,380
     Shareholders' equity ....................      2,934,352       2,787,910       7,097,966       8,787,484       8,658,022
</TABLE>


     (1) The net income (loss) per share were the same under the basic and
         diluted methods for calculation in each period presented.


                                       14
<PAGE>

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATION

GENERAL

            The Company's revenues are derived from the production and sale of
its proprietary Grain Belt, Pig's Eye, Landmark, Yellow Belly, and Brewers Cave
beers, its contract production of beers and other beverages for other companies
and its production of proprietary beers for sale under different brand names by
private label customers.


RESULTS OF OPERATIONS

            The table below sets forth for the periods indicated the percentage
of net sales represented by items included in the Company's Statement of
Operations:

<TABLE>
<CAPTION>
                                              YEAR ENDED        YEAR ENDED        YEAR ENDED
                                             DECEMBER 31,      DECEMBER 31,      DECEMBER 31,
                                                 1998              1997               1996
                                             ------------      -----------       ------------
<S>                                             <C>               <C>               <C>
Net sales..................................     100.0%            100.0%            100.0%
Cost of goods sold.........................      92.2             102.5              93.8
                                                -----             -----             -----
Gross profit (loss)........................       7.8              (2.5)              6.2
Advertising................................       4.2               6.6               4.5
Sales and marketing........................       4.7               4.0               3.0
Administrative.............................       6.6               5.8               3.4
Provision for doubtful accounts............       0.6               2.7               2.4
Operating loss.............................      (8.3)            (21.6)             (7.2)
Other expense, net.........................      (1.2)             (0.6)             (0.3)
Income tax (benefit) expense...............      (0.2)              1.6                --
Net loss...................................      (9.3)            (23.8)             (7.5)
                                                =====             =====             =====
</TABLE>

            YEAR ENDED DECEMBER 31, 1998 COMPARED TO 1997

            Net sales for 1998 were $14,763,247, an 18.4% decrease from the net
sales for 1997 of $18,100,532. Total barrels sold in 1998 were 309,119, a 6.9%
decrease compared to 332,098 barrels sold in 1997. Due to product mix and
because the Company's contract customers purchase all or part of their own
packaging materials, the percentage decrease in barrels can vary from the
percentage decrease in net sales.

            Sales of proprietary brands decreased 10.6% from 1997 sales of
$12,054,000 to 1998 sales of $10,780,000. The decrease in the sales primarily
relates to a decline in the sales of Pig's Eye products and was partially offset
by the continuing increase in sales of Grain Belt Premium, the Company's leading
brand.

            Sales from brewing agreements and contract packaging decreased
$2,358,000 from $4,495,000 in 1997 to $2,137,000 in 1998 for a 52.5% decease.
Sales of packaged contract products declined due to the continuing policy of
establishing tighter control over customer credit. The Company is taking steps
to increase volume from existing accounts and the addition of new contracts that
can meet the Company's credit standards.

            Export sales decreased 18.5% from $3,276,000 in 1997 to $2,671,000
in 1998. This decline is directly attributable to the economic downturn
experienced by its primary customers in Asia. The Company is hopeful that it
will experience an increase in export sales during 1999 based upon its existing
accounts and new contractual agreements.

            While net sales decreased 18.4% in 1998 when compared to 1997, costs
of goods sold decreased 26.6%. The Company experienced an increase in its gross
margin from a loss of 2.5% in 1997 to a positive 7.8% in 1998. The larger
percentage decrease in cost of goods sold versus the decrease in net sales was
attributable to the large decrease in


                                       15
<PAGE>


the fixed level of plant operating overhead due to plant layoffs, cost
containment measures, and the reduction of certain utilities. The cost of goods
sold in 1997 included a significant cost for the disposition of obsolete and
discontinued inventory items.

            Operating expenses decreased $1,077,915 in 1998 and as a percentage
of net sales they decreased from 19.1% in 1997 to 16.1% in 1998. Of this amount,
advertising expenses decreased $569,495, or 47.7%, from 1997 to 1998 due to
budgeting constraints and the cancellation by the University of Minnesota of the
Company's sponsorship program. Sales and marketing expenses decreased $28,663,
or 4.0% from 1997 to 1998 due to cost containment measures implemented during
1998.

            General and administrative expenses decreased $77,757 from 1997 to
1998, and as a percentage of net sales increased from 5.8% in 1997 to 6.6% in
1998. The provision for doubtful accounts decreased $402,000 from 1997 to 1998.
This decrease can be attributed to tighter credit policies and improved
collection efforts.

            Interest income decreased from $34,583 in 1997 to $15,356 in 1998
reflecting a reduction in available investable funds. The Company's interest
expense increased $163,235 from 1997 to 1998 due primarily to working capital
borrowings during 1998. The Company had a working capital line of credit in
effect with the Partnership in 1998.

            During 1997 and 1998, the Company operated significantly below its
production capacity. Therefore, in order to attain a profitable level of
operations the Company will continue to seek to increase its sales and
production volume. Management continues to pursue opportunities to increase
sales volume at profitable margins. Even though sales of proprietary brands
decreased during 1998, management believes that the growth of its proprietary
labels offers the best opportunity for achieving operating profits in the long
term and has increased its efforts on the growth of its proprietary products. An
emphasis has been placed on the promotion of these proprietary labels and the
generations of additional sales in the Company's core geographic market areas.
In addition, management anticipates growth in both its contract products and
export sales. Management believes these anticipated increases in sales volume
during 1999 will help the Company operate at a significantly higher level of
capacity thereby increasing overall profitability.


            YEAR ENDED DECEMBER 31, 1997 COMPARED TO 1996

            Net sales for 1997 were $18,100,532, a 27.2% decrease from the net
sales for 1996 of $24,875,349. Total barrels sold in 1997 were 332,098, a 22.6%
decrease compared to 429,319 barrels sold in 1996. Due to product mix and
because the Company's contract customers purchase all or part of their own
packaging materials, the percentage decrease in barrels can vary from the
percentage decrease in net sales.

            Sales of proprietary brands decreased 8.9% from 1996 barrelage of
157,797 to 1997 barrelage sales of 143,699. The decrease in the sales primarily
relates to a decline in the sales of Pig's Eye products and was partially offset
by the continuing increase in sales of Grain Belt Premium, the Company's leading
brand.

            Sales from brewing agreements and contract packaging decreased
67,532 barrels from 187,108 in 1996 to 119,576 barrels in 1997 for a 36.1%
decrease. Contract sales decreased due to a decline in water product sales and a
change in policy, establishing tighter control over customer credit.

            Export sales decreased 18.5% from 84,414 barrels in 1996 to 68,823
barrels in 1997. Because the Company sells its export brands at prices lower
than domestic sales, these export sales are a lower percentage of net sales than
a percentage of total barrelage.

            While net sales decreased 27.2% in 1997 when compared to 1996, costs
of goods sold only decreased 20.5%. The smaller percentage decrease in cost of
goods sold versus the decrease in net sales was attributable to the fixed level
of plant operating overhead, which remained relatively stable even though the
sales fell short of the Company's expectations. Therefore, the Company
experienced a decline in its gross margin from 6.2% in 1996 to a loss of 2.5% in


                                       16
<PAGE>


1997 principally from a shortfall in sales. In addition, because of the lower
level of sales than anticipated and the existence of slow moving and dated
products, the Company added $672,000 to its inventory valuation reserve during
1997 with a corresponding unfavorable adjustment to cost of sales.

            In addition to the inventory valuation adjustment, the decline in
gross profit from 1996 to 1997 was attributable to the reduction in sales to a
level that was not sufficient to absorb overhead costs. The decline in gross
profit was also attributable to contract prices that were below costs, based on
the Company's current production levels.

            Operating expenses were $133,293 greater in 1997 than in 1996 and as
a percentage of net sales they increased from 13.4% in 1996 to 19.1% in 1997. Of
this amount, advertising expenses increased $69,352, or 6.2%, from 1996 to 1997
due to the Company's commitments to its new brands. Sales and marketing expenses
decreased $29,045, or 3.9% from 1996 to 1997 due to reduced staffing.

            General and administrative expenses increased $201,986 from 1996 to
1997, and as a percentage of net sales; they increased from 3.4% in 1996 to 5.8%
in 1997. The change was primarily due to the fact that professional fees,
shareholder relation cost, and severance costs exceeded 1996 levels. The
provision for doubtful accounts decreased $109,000 from 1996 to 1997.

            Interest income decreased from $84,000 in 1996 to $46,816 in 1997
reflecting a reduction in available investable funds. The Company's interest
expense decreased $15,439 from 1996 to 1997 principally associated with the
scheduled reduction in principal of the capitalized lease covering plant and
equipment.


LIQUIDITY AND CAPITAL RESOURCES

            Working capital at December 31, 1998 decreased $813,921 from $1.0
million at December 31, 1997. The decrease is primarily attributable to
decreases of $398,618 in cash partially offset by an increase in accounts
receivable of $305,288. Also, a treasury bill and amounts due from a related
party amounted to $777,104 in 1998. A reduction in inventories of $292,079 as a
result of decreased volume during 1998 and an increase in short-term borrowings
of $1,324,961 offset this. These borrowings reflected the only financing
activities for the Company during 1998.

            During the year ended December 31, 1998, the Company used $261,361
of net cash in operating activities, which was due in large part, to the net
loss of $1,379,878. Other factors included decreases in various valuation
allowances totaling $319,000, an increase of $249,288 in accounts receivable, a
decrease in accounts payable and accrued expenses of $277,324. These amounts
were partially offset by depreciation and amortization of $942,912, a decrease
in inventories of $466,079, a decrease in prepaid expenses of $49,745 and
increases in the amounts due to related party of $505,393.

            The Company used net cash of $1,462,218 for investing activities due
to the purchase of $610,542 of property and equipment and $89,185 in the
purchase of intangible assets for branded products. In addition to these normal
capital expenditures, a treasury bill was purchased for $474,961 and $287,530
which was advanced to Gopher State Ethanol. The Company will be a minority-owner
in this company that is scheduled to begin operations in 2000.
See discussion on Gopher State Ethanol below.

            In conjunction with the Company's initial public offering in
November of 1993, the Company's existing operating leases were converted to
capitalized leases and the obligations were reflected as property and equipment
and long-term debt in the financial statements. The debt was being amortized
over 10 years at a 7.75% interest rate.

            The Company had an option to acquire the property at eight times the
trailing twelve months rent any time after December 1, 1995. Based upon 1998
lease payments, the purchase price would be approximately $4.9 million at
December 31, 1998.


                                       17
<PAGE>


            On March 29, 1999, the Company and the Partnership terminated their
lease agreement. The Partnership also contributed its interest in the real
estate and equipment that had been previously leased to the Company to Gopher
State, which will be involved in the production of ethanol. On March 29, 1999,
the Company and Gopher State entered into a new lease agreement for the same
land, building and production equipment that the Company had previously leased
from the Partnership. The new lease agreement provides for rent of $25,000 per
month and has an initial term of 10 years. There are no provisions for
production rent in the new agreement. Management estimates that as a result of
this new arrangement, approximately $300,000 of annual operating expenses will
be eliminated.

            The Company issued 547,614 shares of class A convertible preferred
stock to the Partnership in satisfaction of $1,369,036 owed for deferred rents
and accrued interest at December 31, 1998. The preferred shares have a 9%
cumulative dividend rate and are convertible into common stock at the rate of
one share of common stock per share of preferred stock. On March 31, 1999, the
partnership converted an additional $150,327 of debt into 60,131 additional
shares of class A stock. The dividends can be deferred and if they are not paid,
they accumulates without interest.

            The Company's credit terms to its distributors are generally 10 days
and substantially all customers, except contract brewing accounts, are on
automatic debit to their bank account through electronic funds transfer ("EFT").
This program substantially reduces the credit risk and facilitates the
predictability of cash flows. Amounts from contract brewing production are
generally due 30 days after shipment and in many cases are secured by letters of
credit.

            As a small brewer producing less than 2,000,000 barrels per year,
the Company presently receives an $11.00 per barrel credit against federal
exercise taxes on the first 60,000 barrels of taxable production. The cash
benefit of this $660,000 credit is primarily received in the first quarter of
the year.

            The Company is a party to collective bargaining agreements with five
union organizations, which ran for a three-year term, ended March 31, 1999.
Contract negotiation with the union organization representatives is ongoing and
members have agreed to continue working under the previous contracts until new
contracts have been negotiated. Negotiations with the bargaining units are
ongoing and management believes that new contract agreements will be negotiated.
There is a possibility, however, that any or all of these units could strike
sometime after April 23, 1999.

            As of December 31, 1998, the Company had net operating loss
carryforwards totaling $8.3 million. The carryforwards expires as follows:

                 Year of Expiration           Amount
                 ------------------           ------

                        2007                  $1.3 million
                        2011                  $1.5 million
                        2012                  $3.9 million
                        2018                  $1.6 million


FINANCING

            In 1998, the Company had a $2.5 million line of credit agreement
with the Partnership. Advances under the line of credit accrue interest at the
higher of the prime rate of interest plus 1.0 percent or 9 percent. The line was
secured by substantially all the assets of the Company. This line of credit
agreement expired on January 1, 1999, the Company was unable to pay all amounts
due under the line and as a result the Company was in default under this
agreement. On April 15, 1999, the Partnership committed to amend the line of
credit agreement with the Company thereby curing the default that existed at
that date. The amended line of credit, which expires on April 15, 2002, will
provide borrowings up to $1.5 million.

            In order to achieve its 1999 plans, the Company will require
additional funds from equity or debt to meet its working capital and capital
resource plans. On April 15, 1999, the Company obtained a bank line of credit of
$3.0 million, subject to certain borrowing base restrictions. The line of credit
agreement, which expires on April 15, 2002, contains covenants, which include
prohibiting the Company from paying dividends as well as requiring the Company
to


                                       18
<PAGE>


maintain certain financial requirements. Substantially all of the Company assets
are pledged as collateral under this line of credit.

            Management believes that this bank line of credit along with the
amended line of credit agreement with the Partnership will be sufficient to meet
working capital during 1999.


Y2K ISSUE

            The Company is committed to ensuring that there is no impediment to
its business operation because of internal systems failures associated with the
Y2K date problem. The Y2K issue relates to the inability of certain information
systems to properly recognize and process dates containing the Year 2000 and
beyond and is further committed to control external factors to the extent
possible.

            The Company obtained information from its software vendor that was
used in assessing whether or not the Company is Y2K compliant. In addition, the
Company has identified and tested the systems it believes are critical and the
test results indicate that these systems are Y2K compliant or will become Y2K
compliant with additional software upgrades by June 30, 1999. These software
upgrades were identified by the independent verification of its software vendor
and involve embedded microprocessors. The Company will continually test and
establish compliance with respect to all of its existing systems, potential
upgrades and new acquisitions. Regardless of the Y2K compliance of the Company's
systems and products, there can be no assurance that the Company will not be
adversely affected by the failure of third parties to become Y2K compliant.
However, the Company's five largest vendors have represented themselves as being
Y2K compliant. The Company has not currently established contingency plans, but
has established a committee to assess its need for contingency plans during 
1999.

            The Company has not incurred any material expenditures in connection
with identifying or evaluating Y2K compliance issues. The Company estimates that
it will incur approximately $30,000 in software upgrades necessary for Y2K
compliance.


FORWARD-LOOKING STATEMENTS

            Statements included in this Annual Report on Form 10-K that are not
historical or current facts are "forward-looking statements" made pursuant to
the safe harbor provisions of the Private Securities Litigation Reform Act of
1995 and are subject to certain risks and uncertainties that could cause actual
results to differ materially. Among these risks and uncertainties are
information included in this Annual Report on Form 10-K which can be identified
by the use of forward-looking terminology such as "may," "will," "expect,"
"anticipate," "estimate," or "continue" or the negative thereof or other
variations thereon or comparable terminology constitutes forward-looking
information. The following important factors, among others, in some cases have
affected and in the future could affect the Company's actual results and could
cause the Company's actual financial performance to differ materially from that
expressed in any forward-looking statement: (i) competition within the brewing
industry resulting from the increased number of brewers and available beers,
(ii) the Company's ability to continue to achieve and maintain contract brewing
arrangements; (iii) the success of the Company's proprietary brands, including
its reliance upon distributors, and (iv) the Company's continued ability to sell
products for export.




RECENTLY ISSUED ACCOUNTING STANDARDS

SEGMENT INFORMATION: Effective January 1, 1998, the Company adopted Statement of
Financial Accounting Standards (SFAS) No. 131, DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION. SFAS No. 131 superseded


                                       19
<PAGE>


SFAS No. 14, FINANCIAL REPORTING FOR SEGMENTS OF A BUSINESS ENTERPRISE. SFAS No.
131 establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and requires
that those enterprises report selected information about operating segments in
interim financial reports. SFAS No. 131 also establishes standards for related
disclosures about products and services, geographic areas, and major customers.
The adoption of SFAS No. 131 did not affect results of operations or financial
position, but did require the disclosure of sales by major product line. See
Note 6 to the financial statements for disclosures about the Company's operating
segments.

REPORTING COMPREHENSIVE INCOME: As of January 1, 1998, the Company adopted
Statement of Financial Accounting Standards (SFAS) No. 130, REPORTING
COMPREHENSIVE INCOME. SFAS No 130 establishes new rules for the reporting and
display of comprehensive income and its components. SFAS No. 130 requires
unrealized gains or losses on available-for-sale securities and certain other
items, which prior to adoption were reported separately in shareholders' equity,
to be included in other comprehensive income. For the Company, reporting
comprehensive income would be equivalent to reporting operating results in the
statement of operations.


ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

            Not applicable


ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

            The following financial statements of the Company are set forth in
this Form 10-K:

                                                                            Page
             Report of Independent Auditor
             McGladrey & Pullen, LLP.......................................  F-1

             Balance Sheets as of December 31, 1998 and 1997...............  F-2

             Statements of Operations for the years
             ended December 31, 1998, 1997 and 1996........................  F-4

             Statements of Shareholders' Equity for
             the years ended December 31, 1998, 1997 and 1996..............  F-5

             Statements of Cash Flows for the years
             ended December 31, 1998, 1997 and 1996........................  F-6

             Notes to Financial Statements for the years
             ended December 31, 1998, 1997 and 1996........................  F-8


ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE

            None.


                                       20
<PAGE>


                                    PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
         COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT

            Information required under this item with respect to the directors
is contained in the Section "Election of Directors" and "Section 16(a)
Beneficial Ownership Reporting Compliance" in the Company's Proxy Statement for
the Annual Meeting of Shareholders (the "1999 Proxy Statement"), a definitive
copy of which will be filed with the Commission within 120 days of the close of
the past fiscal year and is incorporated herein by reference.


ITEM 11. EXECUTIVE COMPENSATION

            Information required under this item is contained in the Section
entitled "Executive Compensation" in the Company's 1999 Proxy Statement and is
incorporated herein by reference.


ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

            Information required under this item is contained in the Section
entitled "Shareholdings of Principal Shareholders and Management" in the
Company's 1999 Proxy Statement and is incorporated herein by reference.


ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

            Information required under this item is contained in the Section
entitled "Certain Transactions" in the Company's 1999 Proxy Statement and is
incorporated herein by reference.


                                       21
<PAGE>


                                     PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a)         Documents filed as Part of this Report

            (1)      Financial Statements. The financial statements included
                     in this Form 10-K as listed in Item 8.
            (2)      Financial Statement Schedules.

<TABLE>
                    <S>                                                     <C>
                     Independent Auditor's Report on Schedules for Years
                        Ended December 31, 1998, 1997 and 1996 ............ Page F-1
                     Schedule II  Valuation and Qualifying Accounts ....... Page F-20
</TABLE>

(b)         Reports on Form 8-K
            The Company filed no reports on Form 8-K during the quarter ended
            December 31, 1998.

(c)         Lists of Exhibits. Exhibits that cover management contracts or
            compensatory plans or arrangements are marked with an asterisk(*).


Exhibit
   No.                         Description

   3.1      Articles of Incorporation, as amended, of the Company, incorporated
              by reference from Exhibit 3.1 to Form SB-2 Registration Statement
              (File No. 33-69302C)

   3.2      Bylaws of the Company incorporated by reference from Exhibit 3.2 to
              Form SB-2

   3.3      Certificate of Rights and Preferences of Class A Convertible
              Preferred Stock

  10.1      Lease dated March 29, 1999 between Minnesota Brewing Company and
              Gopher State Ethanol, LLC

  10.2      Minnesota Brewing Company 1993 Stock Option Plan

  23        Consent of McGladrey & Pullen, LLP


                                       22
<PAGE>


                                   SIGNATURES

            In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.


Dated April 15, 1999          MINNESOTA BREWING COMPANY



                              By /s/ John J. Lee
                                 -----------------------------------------------
                                 John J. Lee
                                 President, Chief Executive Officer and Director


            In accordance with the Exchange Act, this report has been signed
below by the following persons, on behalf of the registrant and in the
capacities indicated, on the date set forth above.

                               (Power of Attorney)

            Each person whose signature appears below constitutes and appoints
JOHN J. LEE and MICHAEL C. HIME as his true and lawful attorneys-in-fact and
agents, each acting alone, with full power of substitution and resubstitution,
for him and in his name, place and stead, in any and all capacities, to sign any
or all amendments to this Annual Report on Form 10-K and to file the same, with
all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, each acting along, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all said attorneys in-fact and agents,
each acting alone, or his substitute or substitutes, may lawfully do or cause to
be done by virtue thereof.

            Signature                                   Title


 /s/ Bruce E. Hendry                           Chairman of the Board
----------------------------------
Bruce E. Hendry


 /s/ John J. Lee                               President, Chief Executive
----------------------------------             Officer and Director
John J. Lee


 /s/ Michael C. Hime                           Vice President of Finance
----------------------------------             Chief Financial Officer
Michael C. Hime


 /s/ James A. Potter                           Director
----------------------------------
James A. Potter


 /s/  Greg C. Heinemann                        Director
----------------------------------
Greg C. Heinemann


 /s/  Robert Awsumb                            Director
----------------------------------
Robert Awsumb


 /s/ Richard A. Perrine                        Director
----------------------------------
Richard A. Perrine


                                       23

<PAGE>


                          INDEPENDENT AUDITOR'S REPORT

To the Board of Directors
  and Shareholders
Minnesota Brewing Company
St. Paul, Minnesota

We have audited the accompanying balance sheets of Minnesota Brewing Company as
of December 31, 1998 and 1997, and the related statements of operations,
shareholders' equity, and cash flows for each of the three years in the period
ended December 31, 1998. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Minnesota Brewing Company as of
December 31, 1998 and 1997, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1998, in conformity
with generally accepted accounting principles.

Our audit of the financial statements of Minnesota Brewing Company included
Schedule II, contained herein, for the years ended December 31, 1998, 1997, and
1996. In our opinion, such schedule presents fairly the information required to
be set forth therein, in conformity with generally accepted accounting
principles.

                                          McGLADREY & PULLEN, LLP


Minneapolis, Minnesota
February 26, 1999 (April 15, 1999,
  as to Note 2)


                                      F-1
<PAGE>


MINNESOTA BREWING COMPANY

BALANCE SHEETS
DECEMBER 31, 1998 AND 1997

<TABLE>
<CAPTION>

ASSETS                                                                        1998            1997
------------------------------------------------------------------------------------------------------
<S>                                                                       <C>             <C>
Current Assets
       Cash and cash equivalents                                          $    67,366     $   465,984
       Trade accounts receivable, less allowance for doubtful accounts
            of $250,000 in 1998 and $306,000 in 1997 (Note 6)               1,064,638         759,350
       Due from related party (Note 3)                                        302,143              --
       Treasury bill, pledged                                                 474,961              --
       Inventories                                                          2,473,039       2,765,118
       Prepaid expenses                                                       101,176         150,921
                                                                         -----------------------------
                          TOTAL CURRENT ASSETS                              4,483,323       4,141,373
                                                                         -----------------------------

Other Assets
       Trademarks, net of accumulated amortization of $99,000 in 1998
            and $73,000 in 1997                                               263,189         221,577
       Other intangible assets, principally packaging design, net of
            accumulated amortization of $445,000 in 1998 and $315,000
            in 1997                                                           220,418         291,209
                                                                         -----------------------------
                                                                              483,607         512,786
                                                                         -----------------------------

Property and Equipment (Note 3)
       Land and building under capital lease                                1,899,574       1,899,574
       Display fixtures and equipment                                       1,390,537       1,168,706
       Production equipment, including capitalized lease                    3,115,399       2,722,960
       Office equipment                                                       177,465         172,890
       Leasehold improvements                                                 171,740         123,347
                                                                         -----------------------------
                                                                            6,754,715       6,087,477

       Less accumulated depreciation and amortization                      (3,273,066)     (2,466,210)
                                                                         -----------------------------
                                                                            3,481,649       3,621,267
                                                                         -----------------------------
                                                                          $ 8,448,579     $ 8,275,426
                                                                         =============================
</TABLE>

See Notes to Financial Statements.


                                      F-2
<PAGE>


<TABLE>
<CAPTION>

LIABILITIES AND SHAREHOLDERS' EQUITY                                       1998             1997
----------------------------------------------------------------------------------------------------
<S>                                                                   <C>              <C>
Current Liabilities
       Trade accounts payable                                         $  2,002,197     $  2,197,100
       Related-party line of credit (Note 3)                             1,324,961               --
       Current maturities of capital lease obligation (Note 3)             265,517               --
       Accrued expenses:
            Compensation                                                   497,155          602,811
            Beverage tax                                                   113,796          126,073
            Other                                                           48,680          170,451
                                                                     -------------------------------
                                                                         4,252,306        3,096,435
                                                                     -------------------------------


Long-Term Debt (Note 3)
       Due to related party                                                     --          263,036
       Capital lease obligation, less current maturities (Note 3)        1,261,921        2,128,045
                                                                     -------------------------------
                                                                         1,261,921        2,391,081
                                                                     -------------------------------


Commitments and Contingencies (Notes 2, 3, 4, 5, and 8)


Shareholders' Equity (Notes 3, 4, and 5)
       Common stock, $0.01 par value; 10,000,000 shares authorized          34,627           33,892
       Preferred stock, 700,000 shares authorized, 9 percent
            cumulative dividend; 547,614 shares issued                   1,369,036               --
       Additional paid-in capital                                       10,592,217       10,435,668
       Accumulated deficit                                              (9,061,528)      (7,681,650)
                                                                     -------------------------------
                                                                         2,934,352        2,787,910
                                                                     -------------------------------
                                                                      $  8,448,579     $  8,275,426
                                                                     ===============================
</TABLE>

See Notes to Financial Statements.

                                      F-3
<PAGE>


MINNESOTA BREWING COMPANY

STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996

<TABLE>
<CAPTION>
                                                                   1998             1997             1996
-------------------------------------------------------------------------------------------------------------
<S>                                                           <C>              <C>              <C>
Sales (Note 6)                                                $ 16,366,830     $ 20,419,205     $ 27,983,345
Less excise taxes                                               (1,603,583)      (2,318,673)      (3,107,996)
                                                             ------------------------------------------------
                          NET SALES                             14,763,247       18,100,532       24,875,349

Cost of goods sold (Note 3)                                     13,614,401       18,555,849       23,331,116
                                                             ------------------------------------------------
                                                                 1,148,846         (455,317)       1,544,233
                                                             ------------------------------------------------

Operating expenses:
       Advertising                                                 623,853        1,193,348        1,123,996
       Sales and marketing                                         690,101          718,764          747,809
       General and administrative (Note 3)                         979,484        1,057,241          855,255
       Provision for doubtful accounts                              90,000          492,000          601,000
                                                             ------------------------------------------------
                          TOTAL OPERATING EXPENSES               2,383,438        3,461,353        3,328,060
                                                             ------------------------------------------------

                          OPERATING LOSS                        (1,234,592)      (3,916,670)      (1,783,827)
                                                             ------------------------------------------------

Other income (expense):
       Interest and other income                                   137,151           46,816           84,000
       Interest expense (Note 3)                                  (310,437)        (147,202)        (162,641)
                                                             ------------------------------------------------
                                                                  (173,286)        (100,386)         (78,641)
                                                             ------------------------------------------------

                          LOSS BEFORE INCOME TAX (BENEFIT)
                                  EXPENSE                       (1,407,878)      (4,017,056)      (1,862,468)

Income tax (benefit) expense (Note 7)                              (28,000)         293,000               --
                                                             ------------------------------------------------
                          NET LOSS                            $ (1,379,878)    $ (4,310,056)    $ (1,862,468)
                                                             ================================================

Net loss per common share, basic and diluted                  $      (0.40)    $      (1.27)    $      (0.55)
Weighted-average common and common equivalent
       shares outstanding                                        3,425,961        3,389,211        3,374,155
</TABLE>

See Notes to Financial Statements.


                                      F-4
<PAGE>


MINNESOTA BREWING COMPANY

STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996

<TABLE>
<CAPTION>
                                                   Common Stock                         Additional
                                            ------------------------      Preferred       Paid-In      Accumulated
                                               Shares        Amount         Stock         Capital         Deficit          Total
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                          <C>          <C>            <C>            <C>            <C>             <C>
Balance, December 31, 1995                   3,351,611    $    33,516    $        --    $10,263,094    $(1,509,126)    $ 8,787,484
    Exercise of employee stock options          37,600            376             --        172,574             --         172,950
    Net loss                                        --             --             --             --     (1,862,468)     (1,862,468)
                                            ---------------------------------------------------------------------------------------
Balance, December 31, 1996                   3,389,211         33,892             --     10,435,668     (3,371,594)      7,097,966
    Net loss                                        --             --             --             --     (4,310,056)     (4,310,056)
                                            ---------------------------------------------------------------------------------------
Balance, December 31, 1997                   3,389,211         33,892             --     10,435,668     (7,681,650)      2,787,910
    Stock issued to employee stock
       ownership plan (Note 4)                  73,500            735             --        156,549             --         157,284
    Conversion of related-party debt to
       preferred stock (Note 3)                     --             --      1,369,036             --             --       1,369,036
    Net loss                                        --             --             --             --     (1,379,878)     (1,379,878)
                                            ---------------------------------------------------------------------------------------
Balance, December 31, 1998                   3,462,711    $    34,627    $ 1,369,036    $10,592,217    $(9,061,528)    $ 2,934,352
                                            =======================================================================================
</TABLE>

See Notes to Financial Statements.


                                      F-5
<PAGE>


MINNESOTA BREWING COMPANY

STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996

<TABLE>
<CAPTION>
                                                                     1998            1997            1996
-------------------------------------------------------------------------------------------------------------
<S>                                                              <C>             <C>             <C>
Cash Flows From Operating Activities
       Net loss                                                  $(1,379,878)    $(4,310,056)    $(1,862,468)
       Adjustments to reconcile net loss to net cash
            (used in) provided by operating activities:
            Depreciation                                             788,161         754,822         616,695
            Amortization of intangible assets                        154,751         129,666          95,344
            Deferred income taxes                                         --         293,000              --
            Inventory valuation allowance                           (174,000)        221,743          73,277
            Intangible and other asset valuation allowance           (89,000)        127,000              --
            Changes in assets and liabilities:
                Trade accounts receivable                           (305,288)        366,655         981,285
                Inventories                                          466,079       1,545,671        (174,464)
                Prepaid expenses                                      49,745         (79,322)        (10,449)
                Trade accounts payable and accrued
                     expenses                                       (277,324)      1,421,653         488,893
                Amounts due to related party                         505,393         403,214          (1,698)
                                                                ---------------------------------------------
                          NET CASH (USED IN) PROVIDED BY
                                  OPERATING ACTIVITIES              (261,361)        874,046         206,415
                                                                ---------------------------------------------

Cash Flows From Investing Activities
       Amounts due from related party                               (287,530)        (14,613)             --
       Purchases of property and equipment                          (610,542)       (613,491)       (571,738)
       Purchases of held-to-maturity securities                     (474,961)             --      (1,477,025)
       Sales of held-to-maturity securities                               --              --       2,474,744
       Purchases of intangible and other assets                      (89,185)       (166,283)       (207,069)
                                                                ---------------------------------------------
                          NET CASH (USED IN) PROVIDED BY
                                  INVESTING ACTIVITIES            (1,462,218)       (794,387)        218,912
                                                                ---------------------------------------------
</TABLE>

                                   (Continued)


                                      F-6
<PAGE>


MINNESOTA BREWING COMPANY

STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996

<TABLE>
<CAPTION>
                                                                     1998            1997            1996
-------------------------------------------------------------------------------------------------------------
<S>                                                              <C>             <C>             <C>
Cash Flows From Financing Activities
       Principal payments under capital lease obligations                 --              --        (211,952)
       Net proceeds from borrowings on related-party
            line of credit                                         1,324,961              --              --
       Proceeds from exercise of employee stock options                   --              --         172,950
                                                                ---------------------------------------------
                          NET CASH PROVIDED BY (USED IN)
                                  FINANCING ACTIVITIES             1,324,961              --         (39,002)
                                                                ---------------------------------------------

                          NET (DECREASE) INCREASE IN CASH AND
                                  CASH EQUIVALENTS                  (398,618)         79,659         386,325

Cash and Cash Equivalents
       Beginning                                                     465,984         386,325              --
                                                                ---------------------------------------------
       Ending                                                    $    67,366     $   465,984     $   386,325
                                                                =============================================

Supplemental Disclosures of Cash Flow Information
       Cash payments for interest                                $        --     $        --     $   162,641
                                                                =============================================

Supplemental Disclosures of Noncash Investing and
       Financing Activities
       Conversion of debt to preferred stock                     $ 1,369,036     $        --     $        --
       Common stock issued to employee stock
            ownership plan in satisfaction of accrued
            compensation                                             157,284              --              --
                                                                =============================================
</TABLE>

See Notes to Financial Statements.


                                      F-7
<PAGE>


MINNESOTA BREWING COMPANY

NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

NATURE OF BUSINESS AND CONCENTRATION OF CREDIT RISK: Minnesota Brewing Company
operates a brewery in St. Paul, Minnesota. The Company leases its production
facilities and certain of its equipment from Minnesota Brewing Limited
Partnership (the Partnership), the Company's largest shareholder. See Note 3 for
related-party transactions.

The Company brews and markets beer primarily under the Grain Belt, Pig's Eye,
and Brewer's Cave labels. The Company also packages premium water and brews beer
and other products for third parties under contract brewing arrangements and
private label production agreements. The Company grants credit, normally ten-day
terms, to distributors, the majority of whom are located in Minnesota. Credit
terms in connection with contract brewing, export, and private label
arrangements are negotiated on an individual customer basis. See Note 6 for
segment data information.

BASIS OF PRESENTATION AND ACCOUNTING ESTIMATES: The preparation of the financial
statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.

CASH AND CASH EQUIVALENTS: For purposes of reporting cash flows, cash and cash
equivalents includes all cash accounts which are not subject to withdrawal
restrictions or penalties, and all highly liquid debt instruments purchased with
an original maturity of three months or less.

The Company maintains its cash in bank deposit accounts which, at times, may
exceed federally insured limits. The Company has not experienced any losses in
such accounts.

INVENTORIES: Inventories are valued at the lower of cost (first-in, first-out
method) or market. Inventories, net of a valuation reserve of $281,000 and
$455,000 in 1998 and 1997, respectively, consist of the following:

                                                          December 31
                                              ----------------------------------
                                                    1998              1997
--------------------------------------------------------------------------------
Raw materials                                 $       185,281   $       134,908
Work in progress                                      334,130           357,151
Finished goods                                        840,591           660,635
Packaging                                             753,678         1,243,705
Other                                                 359,359           368,719
                                              ----------------------------------
                                              $     2,473,039   $     2,765,118
                                              ==================================


                                      F-8
<PAGE>


MINNESOTA BREWING COMPANY

NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
        (CONTINUED)

FAIR VALUE OF FINANCIAL INSTRUMENTS: The financial statements include the
following financial instruments: cash and cash equivalents, trade accounts
receivable, investment in Treasury Bill, accounts payable, and amounts due to
and from related party. At December 31, 1998 and 1997, no separate comparison of
fair values versus carrying values is presented for the aforementioned financial
instruments, since their fair values are not significantly different than their
balance sheet carrying amounts. The aggregate fair values of the financial
instruments would not represent the underlying value of the Company.

REVENUE RECOGNITION: Revenue is recognized at the time the inventory is shipped
to or picked up at the Company's warehouse by the independent distributors or,
in a few selected situations, upon completion of production under specific
contractual arrangements.

DEPRECIATION AND AMORTIZATION: Depreciation, including amortization of capital
leases, is computed by the straight-line method over the lesser of the lease
terms or the estimated useful lives as follows: 10 to 15 years for the
production equipment; 5 years for office equipment; 2 to 5 years for display
fixtures and equipment; and 10 to 25 years for building and leasehold
improvements.

The costs of various trademarks and logos are amortized over their expected
useful lives of 5 to 40 years using the straight-line method. The costs of other
assets, principally package design costs, are amortized over their expected
useful lives of 2 to 10 years using the straight-line method.

The Company periodically reviews the carrying amount of its long-lived assets to
determine if circumstances exist indicating an impairment or that depreciation
periods should be modified. If facts or circumstances support the possibility of
impairment, the Company will prepare a projection of the undiscounted future
cash flows, without interest charges, of the specific asset and determine if the
asset is recoverable based on the undiscounted future cash flows. If an
impairment exists based on these projections, an adjustment will be made to the
carrying amount and remaining depreciable life of the specific asset based on
discounted future cash flows. To date, management has determined that no
impairment of long-lived assets exists, and accordingly, no adjustments to the
carrying amounts of its long-lived assets have been made. It is possible that
management's estimate could change as a result of changes in market conditions
or operating results. The effect of a change, if any, could be material to the
financial condition or results of operations.

FEDERAL EXCISE TAX AND PLEDGED TREASURY BILL: The Company currently receives an
$11 per barrel credit against federal excise taxes on the first 60,000 barrels
of taxable production. At December 31, 1998, the Company has pledged a U.S.
Treasury bill to the Bureau of Alcohol, Tobacco, and Firearms (BATF) to
guarantee the payment of federal excise taxes.


                                      F-9
<PAGE>


MINNESOTA BREWING COMPANY

NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
        (CONTINUED)

INCOME TAXES: Deferred taxes are provided on an asset and liability method,
whereby deferred tax assets are recognized for deductible temporary differences
and operating loss or tax credit carryforwards and deferred tax liabilities are
recognized for taxable temporary differences. Temporary differences are the
differences between the amounts of assets and liabilities recorded for income
tax and financial reporting purposes. Deferred tax assets are reduced by a
valuation allowance when management determines that it is more likely than not
that some portion or all of the deferred tax assets will not be realized.
Deferred tax assets and liabilities are adjusted for the effects of changes in
tax laws and rates on the date of enactment. The income tax expense or benefit
is the tax payable or refundable for the year plus or minus the change in
deferred tax assets and liabilities during the year.

BASIC AND DILUTED LOSS PER COMMON SHARE: Basic per-share amounts are computed,
generally, by dividing net income or loss, as adjusted for by the
weighted-average number of common shares outstanding. Diluted per-share amounts
assume the conversion, exercise, or issuance of all potential common stock
instruments unless the effect is anti-dilutive, thereby reducing the loss per
common share. At December 31, 1998 and 1997, the Company had options outstanding
to purchase a total of 282,000 and 192,000 shares of common stock, respectively.
However, because the Company has incurred a loss in all periods presented, the
inclusion of those potential common shares in the calculation of diluted loss
per-share would have an anti-dilutive effect. Therefore, basic and diluted loss
per-share amounts are the same in each period presented.

SEGMENT INFORMATION: Effective January 1, 1998, the Company adopted Statement of
Financial Accounting Standards (SFAS) No. 131, DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION. SFAS No. 131 superseded SFAS No. 14,
FINANCIAL REPORTING FOR SEGMENTS OF A BUSINESS ENTERPRISE. SFAS No. 131
establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and requires
that those enterprises report selected information about operating segments in
interim financial reports. SFAS No. 131 also establishes standards for related
disclosures about products and services, geographic areas, and major customers.
The adoption of SFAS No. 131 did not affect results of operations or financial
position, but did require the disclosure of sales by major product line. See
Note 6 for disclosures about the Company's operating segments.

REPORTING COMPREHENSIVE INCOME: As of January 1, 1998, the Company adopted SFAS
No. 130, REPORTING COMPREHENSIVE INCOME. SFAS No. 130 establishes new rules for
the reporting and display of comprehensive income and its components. SFAS No.
130 requires unrealized gains or losses on available-for-sale securities and
certain other items, which prior to adoption were reported separately in
shareholders' equity, to be included in other comprehensive income. For the
Company, reporting comprehensive income would be equivalent to reporting
operating results in the statements of operations.

ADVERTISING EXPENSES: In accordance with SOP 93-7, all advertising costs are
either expensed as incurred or deferred until first use of the advertising. The
nature of these costs include any promotional activity intended to stimulate,
indirectly or directly, the sale of company products.


                                      F-10
<PAGE>


MINNESOTA BREWING COMPANY

NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
        (CONTINUED)

AUTHORIZED SHARES: The Company's Articles of Incorporation provide for an
aggregate of 11,000,000 shares of $0.01 par value stock, of which 10,000,000
shares are designated as common stock. Of the remaining 1,000,000 shares which
were undesignated, 700,000 were designated as preferred stock in connection with
the conversion of related-party debt to preferred stock (see Note 3).


NOTE 2. CORPORATE LIQUIDITY AND SUBSEQUENT EVENTS

The Company's plans in 1999 include the continued emphasis on promoting its core
proprietary brands and increasing the volume of foreign sales. In order to
achieve its 1999 plans, the Company will require additional funds from equity or
debt to meet its working capital and capital resource plans. On April 15, 1999,
the Company obtained a bank line of credit of $3 million, subject to certain
borrowing base restrictions. The line-of-credit agreement, which expires on
April 15, 2002, contains covenants which include limitations on the Company's
ability to pay dividends, as well as requiring the Company to maintain certain
financial requirements, including maintaining a minimum net worth level.
Substantially all of the Company's assets are pledged as collateral under this
line of credit. On April 15, 1999, the Partnership committed to amend the
line-of-credit agreement with the Company, thereby curing the default that
existed at that time (see Note 3). The amended line-of-credit agreement with the
Partnership which expires on April 15, 2002, will provide total borrowings of up
to $1.5 million. Management believes that those lines of credit will be
sufficient to meet working capital needs during 1999.

On March 29, 1999, the Company and the Partnership terminated their lease
agreement, which is described in Note 3. Simultaneous with the lease
termination, the Partnership agreed to convert the January, February, and March
1999 rent payments, which totaled approximately $150,000, into 60,131 shares of
Class A convertible preferred stock (see Note 3). The Partnership also
contributed its interest in the real estate and equipment that had been
previously leased to the Company to a newly formed entity (Gopher State Ethanol,
LLC or "GSE"), which anticipates being involved in the production of ethanol.
GSE has obtained interim financing to proceed with an engineering study to
determine the feasibility of building an ethanol plant. On March 29, 1999, the
Company and GSE entered into a new lease agreement for the same land, building,
and production equipment that the Company had previously leased from the
Partnership. The new lease agreement provides for rent of $25,000 per month and
has an initial term of ten years.


NOTE 3. RELATED-PARTY TRANSACTIONS

GENERAL: The Minnesota Brewing Limited Partnership owns approximately 62 percent
of the Company's voting stock. The Chairman of the Board of the Company is also
the controlling general partner of the Partnership.


                                      F-11
<PAGE>


MINNESOTA BREWING COMPANY

NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 3. RELATED-PARTY TRANSACTIONS (CONTINUED)

AMOUNTS DUE TO RELATED PARTY: The Company has borrowed funds from the
Partnership under the following arrangements:

     RELATED-PARTY LINE OF CREDIT: As of December 31, 1998, the Company had
     borrowings outstanding of $1,324,961 under its line-of-credit agreement
     with the Partnership, which expired on January 1, 1999. As of February 26,
     1999, the Company is in default on this line of credit. (See Note 2 for
     subsequent event). Advances under the line of credit accrue interest at the
     higher of either (i) the prime rate of interest (7.75 percent at December
     31, 1998) plus 1 percent or (ii) 9 percent. The line is secured by
     substantially all the assets of the Company. The Company incurred interest
     expense during 1998 of $122,288 under the line of credit. This accrued
     interest was converted into preferred stock effective December 31, 1998, in
     connection with an agreement with the Partnership (see Preferred stock
     below for more details).

     The following table summarizes the Company's outstanding debt, including
     the related-party line of credit (exclusive of the capital lease
     obligation) to the Partnership:

                                                        Average
                                                         Amount
                                        Balance at     Outstanding     Balance
                                        Beginning        During         at End
                                         of Year        the Year       of Year
     ---------------------------------------------------------------------------
     Years ended December 31:
        1998                         $    263,036    $   794,000    $  1,324,961
        1997                               20,051        148,578         263,036


     DEFERRED RENT PAYMENTS ON RELATED-PARTY LEASES: During 1998, the
     Partnership had agreed to defer all rent payments owed them under the lease
     agreements described below until January 1, 1999. Effective December 31,
     1998, the Company and the Partnership agreed to convert those deferred rent
     payments of $1,246,748 into preferred stock pursuant to an agreement
     described below.

PREFERRED STOCK: As of December 31, 1998, the Company issued 547,614 shares of
Class A convertible preferred stock to the Partnership in satisfaction of
$1,369,036 owed for deferred rents and accrued interest. The preferred shares
have a 9 percent cumulative dividend rate and can be converted at the
Partnership's option into 547,614 shares of the Company's common stock. If it is
not paid, it accumulates without interest.

AMOUNTS DUE FROM RELATED PARTY: During 1997 and 1998, the Company has incurred
costs of approximately $302,000 related to the financing and development of GSE
(see Note 2). During 1999, the Company will be reimbursed for certain of those
costs, with the remaining portion being reimbursed upon the completion of the
construction of the GSE facility.


                                      F-12
<PAGE>


MINNESOTA BREWING COMPANY

NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 3. RELATED-PARTY TRANSACTIONS (CONTINUED)

RELATED-PARTY CAPITAL LEASES: At December 31, 1998, the Company leased its land,
building, and the vast majority of its production equipment from the
Partnership. Prior to November 1993, the Company leased these assets under
operating lease agreements. In November 1993, the Company and the Partnership
entered into new lease agreements which provide for 10-year terms, and options
to purchase the assets based on 8 times the preceding 12 months' lease payments
of $25,000 per month for land and building an $1.00 per barrel of production for
equipment. Beginning on December 1, 1995, and extending through the terms of the
leases, the Company has the right to purchase the assets under lease. At
December 31, 1998, the purchase price would have been approximately $4,900,000.
In addition, the Company was responsible for all insurance and real estate taxes
associated with this property. See Note 2 for the subsequent event regarding
this lease agreement.

The lease agreements have been accounted for as capital leases. The amounts
capitalized for the land, building, and production equipment were limited to the
Partnership's depreciated cost of these assets.

The excess of the periodic lease payments over the amounts necessary to service
the capitalized debt is recognized as additional rent expense over the terms of
the agreements.

The following table presents the estimated future minimum lease payments under
the two agreements and the portion of those payments accounted for as the
capital lease obligation. The future minimum lease payments under the equipment
lease have been presented using management's estimate of 1999's annual
production level.

<TABLE>
<CAPTION>
                                                                     Operating           Capital
                                                                       Lease              Lease
                                                       Total         Commitment        Obligation
----------------------------------------------------------------------------------------------------
<S>                                               <C>              <C>               <C>
Years ending December 31:
   1999                                           $      740,000   $      365,500    $      374,500
   2000                                                  740,000          365,500           374,500
   2001                                                  740,000          365,500           374,500
   2002                                                  740,000          365,500           374,500
   2003                                                  645,800          302,000           343,752
                                                 ---------------------------------------------------
Total estimated future minimum lease
   payments                                       $    3,605,800   $    1,764,000         1,841,752
                                                 =================================

Less amount representing interest (7.75%)                                                   314,314
                                                                                    ---------------
Present value of future minimum payments
  under capital lease obligation at December
  31, 1998                                                                                1,527,438

Less current portion                                                                        265,517
                                                                                    ---------------
                                                                                     $    1,261,921
                                                                                    ===============
</TABLE>


                                      F-13
<PAGE>


MINNESOTA BREWING COMPANY

NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 3. RELATED-PARTY TRANSACTIONS (CONTINUED)

Total lease payments due under the aforementioned leases were approximately
$609,000, $618,000, and $712,000 for the years ended December 31, 1998, 1997,
and 1996, respectively. The total rent expense relating to the operating lease
portion of the above leases was approximately $231,000, $243,000, and $337,000
for the years ended December 31, 1998, 1997, and 1996, respectively.

ASSETS RECORDED UNDER RELATED-PARTY LEASES: The following is a summary of the
assets recorded under capital leases:

                                                           December 31
                                             -----------------------------------
                                                    1998              1997
--------------------------------------------------------------------------------
Land and building                             $     1,899,574   $     1,899,574
Production equipment                                  702,426           702,426
                                             -----------------------------------
                                                    2,602,000         2,602,000

Less accumulated amortization                       1,344,310         1,084,121
                                             -----------------------------------
                                              $     1,257,690   $     1,517,879
                                             ===================================


RELATED-PARTY PAYMENTS: During 1998 and 1997, the Company paid insurance
premiums of approximately $228,000 and $180,000, respectively, to an insurance
agency whose ownership includes a director of the Company.


NOTE 4. EMPLOYEE STOCK OWNERSHIP PLAN

The Company has established an employee stock ownership plan (the Plan) to
provide additional retirement benefits to substantially all employees. Under
agreements with employees, the Company is committed to make cash payments to the
Plan of $0.60 for each hour of paid compensation for eligible employees. Total
compensation expense under the Plan was approximately $76,000, $136,000, and
$146,000 for the years ended December 31, 1998, 1997, and 1996, respectively.
During 1998, the Company contributed 73,500 shares of its common stock with a
fair value of $157,284 in satisfaction of accrued expense under the Plan. At
December 31, 1998 and 1997, there were 220,279 and 146,779 shares, respectively,
of Company common stock held by the Plan. The fair market value of those shares
totaled approximately $427,000 and $258,000 as of December 31, 1998 and 1997,
respectively.


                                      F-14
<PAGE>


MINNESOTA BREWING COMPANY

NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 5. STOCK OPTIONS AND WARRANT

At December 31, 1998, the Company has an employee incentive stock option plan
which is described below. Grants under the plan are accounted for following APB
Opinion No. 25 and related interpretations. Accordingly, no compensation cost
has been recognized for grants under the plan. Had compensation cost for the
plan been determined based on the fair values of options granted, reported net
loss and net loss per common share on a pro forma basis as compared to reported
results would have been as follows:

<TABLE>
<CAPTION>
                                                             1998               1997                 1996
----------------------------------------------------------------------------------------------------------------
<S>                                                    <C>                <C>                  <C>
   Net loss:
      As reported                                      $    (1,380,000)   $    (4,310,000)     $    (1,862,000)
      Pro forma                                             (1,483,000)        (4,382,000)          (1,888,000)
   Basic and diluted net loss per common share:
      As reported                                                (0.40)             (1.27)               (0.55)
      Pro forma                                                  (0.43)             (1.29)               (0.56)
</TABLE>

For purposes of the aforementioned pro forma information, the fair value of each
option is estimated at the grant date using the Black-Scholes option-pricing
model with the following weighted-average assumptions for grants in 1998, 1997,
and 1996, respectively: dividend rate of zero for all years; price volatility of
68.9, 62.0, and 39.0 percent; risk-free interest rate of 5.4, 6.3, and 6.1
percent; and expected lives of approximately 3.0, 3.0, and 2.3 years. The
weighted-average fair value per share of options granted in 1998, 1997, and 1996
was $1.03, $1.30, and $1.41, respectively.

EMPLOYEE INCENTIVE STOCK OPTION PLAN: The employee incentive stock option plan
authorizes the granting of options to purchase up to 450,000 shares of common
stock to officers, directors, and other key employees. These options are granted
at the discretion of the directors. All options must be granted at no less than
100 percent of the fair market value of the stock on the date of grant, or 110
percent for employees owning more than 10 percent of the Company's common stock.
The options expire at varyin dates not to exceed ten years from the grant date
and are not transferable. When exercising options, an employee's payment may be
either cash, shares of the Company's stock valued at the fair market value, or a
combination of the two.

WARRANT: In connection with its initial public offering, the Company issued a
warrant to the underwriter to purchase up to 137,750 shares of the Company's
common stock at an exercise price of $5.40 per share. The warrant became
exercisable in November 1994 and expired in November 1998.


                                      F-15
<PAGE>


MINNESOTA BREWING COMPANY

NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 5. STOCK OPTIONS AND WARRANT (CONTINUED)

A summary of the stock option activity through December 31, 1998, is as follows:

                                           Number
                                             of          Exercise Price
                                           Shares          Per Share
------------------------------------------------------------------------
Balance, December 31, 1995                  98,000      $   4.50 - 5.75
   Granted                                  18,500                 4.75
   Exercised                               (37,600)         4.50 - 5.00
                                     -----------------------------------
Balance, December 31, 1996                  78,900          4.50 - 5.75
   Granted                                 125,000                 4.50
   Exercised/cancelled                     (11,900)         4.50 - 5.40
                                     -----------------------------------
Balance, December 31, 1997                 192,000          4.50 - 5.75
   Granted                                  90,000                 2.00
                                     -----------------------------------
Balance, December 31, 1998                 282,000      $   2.00 - 5.75
                                     ===================================

At December 31, 1997 and 1996, 108,667 and 78,900 options outstanding, with a
weighted-average exercise price per share of $4.85 and $4.88, respectively, were
exercisable.

A further summary of options outstanding at December 31, 1998, is as follows:

<TABLE>
<CAPTION>
      Exercise                 Number                Number               Remaining
       Price                Outstanding            Exercisable        Contractual Life
---------------------------------------------------------------------------------------
<S>                     <C>                     <C>                          <C>
   $        2.00                  75,000                 25,000              3.0 years
            2.50                  15,000                     --              3.0 years
            4.50                 151,000                109,333              3.1 years
            4.75                  18,500                 18,500              2.8 years
            5.00                  10,000                 10,000              1.5 years
            5.75                  12,500                 12,500              1.5 years
                        ----------------        ---------------
                                 282,000                175,333
                        ================        ===============
</TABLE>

At December 31, 1998, options outstanding and options exercisable have a
weighted-average exercise price per share of $3.82 and $4.29, respectively.


NOTE 6. SEGMENT DATA AND MAJOR SUPPLIERS

SEGMENT DATA: The Company operates in one business segment, the brewing and
marketing of beverages, including beer under both proprietary and contract
labels. In addition to domestic distributors, the Company also sells directly to
foreign distributors located mainly in the Far East.


                                      F-16
<PAGE>


MINNESOTA BREWING COMPANY

NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 6. SEGMENT DATA AND MAJOR SUPPLIERS (CONTINUED)

Sales by major product line are as follows:

<TABLE>
<CAPTION>

(in thousands)
                                        1998            1997           1996
--------------------------------------------------------------------------------
<S>                                    <C>             <C>            <C>    
Proprietary                            $10,780         $12,054        $13,637
Contract                                 2,137           4,495          9,744
Foreign                                  2,671           3,276          4,092
Other                                      779             594            510
                                      ------------------------------------------
                                       $16,367         $20,419        $27,983
                                      ==========================================
</TABLE>

Trade accounts receivable from foreign distributors were approximately $439,000
and $179,000 at December 31, 1998 and 1997.

During 1998, 1997, and 1996, respectively, approximately 61, 53, and 70 percent
of the Company's proprietary beer, measured in barrels, reached retail channels,
principally in Minnesota, through its 12 largest distributors.

MAJOR SUPPLIERS: The Company purchases a majority of the cans and bottles used
in its production from two suppliers. Management believes that alternative
sources of supply are available in the event the Company is unable to obtain
products from these suppliers.


NOTE 7. INCOME TAXES

The components of the income tax expense (benefit) are as follows:

<TABLE>
<CAPTION>
                                                       Years Ended December 31
                                       -----------------------------------------------------
                                             1998                1997               1996
--------------------------------------------------------------------------------------------
<S>                                     <C>                  <C>               <C>
Current:
   U.S. federal                         $         --         $         --      $         --
   State                                          --                   --                --
   Benefit of NOL carryback                  (28,000)                  --                --
Deferred                                          --              293,000                --
                                       -----------------------------------------------------
                                        $    (28,000)        $    293,000      $         --
                                       =====================================================
</TABLE>


                                      F-17
<PAGE>


MINNESOTA BREWING COMPANY

NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 7. INCOME TAXES (CONTINUED)

Income tax expense (benefit) differs from the federal statutory rate as follows:

<TABLE>
<CAPTION>
                                                                   Years Ended December 31
                                                    ----------------------------------------------------
                                                           1998               1997              1996
--------------------------------------------------------------------------------------------------------
<S>                                                  <C>               <C>                <C>
Tax provision (benefit) at federal statutory rate    $    (493,000)    $   (1,406,000)    $    (652,000)
State income tax (benefit), net of federal tax
   effect                                                  (62,000)          (169,000)          (56,000)
Nondeductible expenses                                       5,000              5,000             7,000
Effect of income taxes at lower rates                       14,000             40,000            18,000
Effect of net operating loss with no current
   benefit                                                 525,000          1,542,000           677,000
Change in valuation allowance for deferred
   tax assets                                                   --            293,000                --
Other                                                      (17,000)           (12,000)            6,000
                                                    ----------------------------------------------------
                                                     $     (28,000)    $      293,000     $          --
                                                    ====================================================
</TABLE>

Net deferred tax assets consist of the following:

<TABLE>
<CAPTION>
                                                                                  December 31
                                                                      ----------------------------------
                                                                            1998               1997
--------------------------------------------------------------------------------------------------------
<S>                                                                    <C>                <C>
Deferred tax assets:
   Net operating loss carryforwards                                    $    3,231,000     $   2,562,000
   Vacation accrual                                                            98,000           122,000
   Inventory valuation reserve                                                107,000           182,000
   Allowance for doubtful trade and other accounts receivable                 139,000           116,000
   Other                                                                       10,000            45,000
Deferred tax liabilities--other                                              (134,000)         (101,000)
                                                                      ----------------------------------
                                                                            3,451,000         2,926,000

Less valuation allowance                                                   (3,451,000)       (2,926,000)
                                                                      ----------------------------------
Net deferred tax assets                                                $           --     $          --
                                                                      ==================================
</TABLE>

The Company has recorded the valuation allowance on its deferred tax assets to
reduce the total to an amount that management believes is more likely than not
to be realized. Realization of deferred tax assets is dependent upon sufficient
future taxable income during periods when deductible temporary differences and
carryforwards are expected to be available to reduce taxable income. The
increase in the valuation allowance during 1998 and 1997 was primarily the
result of the net operating loss (NOL) carryforward which was generated during
the year. The 1997 increase was also affected as a result of a change in the
conclusion regarding the need for a valuation allowance relative to $293,000 of
deferred tax assets. The remaining NOL carryforwards expire as follows:
$1,300,000 in 2007, $1,500,000 in 2011, $3,900,000 in 2012, and $1,600,000 in
2018.


                                      F-18
<PAGE>


MINNESOTA BREWING COMPANY

NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 8. Commitments and Contingencies

PENSION PLANS: The Company belongs to two multi-employer pension plans (Pension
Plans) covering certain employees. Total pension plan expense for 1998, 1997,
and 1996 was approximately $62,000, $64,000, and $42,000, respectively. The
Company makes annual contributions to the Pension Plans in accordance with
negotiated labor contracts. The Multi-Employer Pension Plan Amendments Act of
1980 (the Act) may, under certain circumstances, cause the Company to become
subject to liabilities in excess of contributions made under collective
bargaining agreements. Under the Act, the Company's proportionate share of the
Pension Plan's unfunded vested benefits, if any, generally are contingent upon
the termination of, withdrawal, or partial withdrawal from the Pension Plans.
The Company has not undertaken to terminate, withdraw, or partially withdraw
from the Pension Plans.

SAVINGS AND RETIREMENT PLAN: The Company has a savings and retirement plan for
eligible employees. The plan was adopted pursuant to Section 401(k) of the
Internal Revenue Code. Contributions to the plan are discretionary for both the
Company and the employees. The Company may make contributions to this 401(k)
plan which match employee contributions, subject to certain limitations. During
1998, 1997, and 1996, the Company made contributions of approximately $47,000,
$35,000, and $19,000, respectively, to this plan.

LABOR RELATIONS: The collective bargaining agreements between the Company and
five of its union bargaining units expire on March 31, 1999. Negotiations with
the bargaining units are ongoing and management believes that new contracts will
be negotiated. However, there is a possibility that any or all of these units
could strike sometime after March 31, 1999. Such an action could have a material
adverse effect on the Company's operations and its ability to execute its 1999
business plan (see Note 2).


                                      F-19
<PAGE>


                                                                     SCHEDULE II

MINNESOTA BREWING COMPANY

VALUATION AND QUALIFYING ACCOUNTS

<TABLE>
<CAPTION>
                                                  Balance at      Changed to                              Balance at
                                                   Beginning       Cost and                                 End of
              Description                          of Period       Expenses          Deductions             Period
--------------------------------------------------------------------------------------------------------------------
<S>                                             <C>              <C>              <C>                 <C>
Deducted in the balance sheet from
   the assets to which it applies:
   Allowance for doubtful accounts:
        Year ended December 31, 1998            $    306,000     $     90,000     $    146,000 (1)    $    250,000
        Year ended December 31, 1997                 485,000          492,000          671,000 (4)         306,000
        Year ended December 31, 1996                  34,000          601,000          150,000 (3)         485,000
   Accumulated amortization of intangibles:
        Year ended December 31, 1998                 388,000          156,000               --             544,000
        Year ended December 31, 1997                 259,000          129,000               --             388,000
        Year ended December 31, 1996                 163,000           96,000               --             259,000
   Deferred tax asset valuation allowance:
        Year ended December 31, 1998               2,926,000          525,000               --           3,451,000
        Year ended December 31, 1997               1,091,000        1,835,000               --           2,926,000
        Year ended December 31, 1996                 414,000          677,000               --           1,091,000
   Inventory valuation allowance:
        Year ended December 31, 1998                 455,000           53,000          227,000 (1)         281,000
        Year ended December 31, 1997                 233,000          672,000          450,000 (5)         455,000
        Year ended December 31, 1996                 160,000          233,000         (160,000)(2)         553,000
</TABLE>

(1)  Uncollectible accounts and inventories written off, net of recoveries.

(2)  Represents a transfer from inventory reserve to allowance for doubtful
     accounts.

(3)  Represents $310,000 of uncollectible accounts written off, net of
     recoveries, less $160,000 of inventory reserve transferred to allowance for
     doubtful accounts.

(4)  Represents $575,000 of uncollectible accounts written off, net of
     recoveries, plus $96,000 of allowance for doubtful accounts transferred to
     inventory reserve.

(5)  Represents $546,000 of inventory written off, less a transfer from
     allowance for doubtful accounts to inventory reserve.


                                      F-20