SECURITY 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, 1997

                                       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 55201
              (Address of principal executive offices and zip code)

       REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (612) 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 MARCH 26, 1998, THE COMPANY HAD 3,389,211 SHARES OF COMMON STOCK, $.01 PAR
VALUE, OUTSTANDING.

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 $2.69 PER SHARE ON MARCH 26, 1998 WAS APPROXIMATELY
$4,946,685.

DOCUMENTS INCORPORATED BY REFERENCE: THE COMPANY'S PROXY STATEMENT FOR ITS 1998
ANNUAL MEETING OF SHAREHOLDERS IS INCORPORATED BY REFERENCE INTO PART III OF
THIS FORM 10-K.

<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, 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, Minnesota Brew, Yellow Belly, Yellow
Belly Margarita, Yellow Belly Iced Tea, Brewers Cave Black Barley, Brewers Cave
Amber Wheat and Brewer's Cave Golden Caramel.

            The Company's Grain Belt product line is its 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 Golden and GBX Malt Liquor 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 and since that
time the product has become popular in its market. 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. The Company created Yellow Belly
in 1996 as an alcoholic alternative beverage with a distinct lemon flavoring.
and has extended the line with a margarita and a long island tea product 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 while under private label contracts the
Company packages its proprietary beers for sale by third parties under a name
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
its proprietary labels and another beverage company. The Company also produces
under contract premium soft drinks along with other non-alcoholic beverages.

            The Company leases its brewing facilities and related equipment from
Minnesota Brewing Limited Partnership (the "Partnership") which owns
approximately 45.5 percent of the Company's Common Stock. The Partnership
acquired the former Jacob Schmidt Brewery in Saint Paul in October 1991 from G.
Heileman Brewing Company ("Heileman") which was in bankruptcy at the time. The
Company generated net sales of $24.9 million in 1996 and net sales of $18.1
million in 1997, 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 461,000 barrels in 1996 and 298,000 barrels in 1997,
which were equal to 21.0 percent and 13.5 percent, respectively, of total
capacity. The Company believes that the existence of the additional brewing
capacity has enabled and will continue to enable 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 1997,
approximately 53 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.

<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 well to take advantage of growth opportunities
existing in the beverage 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 93.0% of 1997 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:

                                             Percent of Sales/Barrelage
                                 -----------------------------------------------
                                  National (Sales)(1)   Minnesota (Barrelage)(2)
                                 --------------------   ------------------------
                                   1997        1996       1997            1996
                                 --------    --------   --------        --------

Anheuser-Busch Companies, Inc.    47.4%       45.8%        40.7%           32.6%
Miller Brewing Co.                22.1        22.1         29.3            31.9
Adolph Coors Co.                  10.7        10.1          3.0             3.2
Stroh Brewing Co.                 10.2        11.6         12.0            15.7
Pabst Brewing Co.                  2.6         2.9          3.3             3.5
                                 -----      ------        -----          ------
                                  93.0%       92.5%        88.3%           86.9%

Minnesota Brewing Company(3)       0.1%        0.1%         3.4%            3.8%


(1)         Information from Modern Brewery Age.
(2)         Information from Minnesota Beer Wholesalers Association.
(3)         Includes only the Company's proprietary beers.

            During 1997, approximately 51.4% 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, they include the quality, taste and
freshness of the products, packaging, price, advertising, distribution and
service to customers.

<PAGE>


            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 regional 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 which 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. The Company has new products in
various stages of development at the present time.

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

            GRAIN BELT PREMIUM. 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.

            GRAIN BELT GOLDEN. A full-bodied pilsner with an above average
alcohol content. This product is for the consumer who wants a big taste at a
regular price.

<PAGE>


            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.

            YELLOW BELLY. An alcoholic alternative beverage, Yellow Belly is a
quality malt beverage with select lemon flavoring that provides 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. The Company
also brews Yellow Belly Margarita and Yellow Belly Long Island Ice Teas.

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. One of the liquids is shipped out prior to
fermentation and dried by a customer for use by home brewers. The second liquid
is fermented and shipped out for use as a base for "wine cooler" type products.
The brewed malt liquids are finished and sold to others by third parties.

            Approximately 21.1% of the Company's 1997 net sales are derived from
contract brewing and private label sales.

EXPORT SALES

            The Company also ships some of its beers overseas. (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 for
specific foreign countries to enhance the distribution of its products. During
1997, export sales were approximately 15.5% of net sales.

<PAGE>


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 must 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 1997, the Company's three largest distributors accounted for
23.3% 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 they are
picked up by distributors.

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

1996
----

First Quarter             34,184            37,389         24,539       96,112
Second Quarter            43,534            64,130         38,245      145,909
Third Quarter             45,682            43,632         13,139      102,453
Fourth Quarter            34,397            41,957          8,491       84,845
                        --------          --------        -------     --------
  Yearly Total           157,797           187,108         84,414      429,319

Percent of Total           36.8%             43.5%          19.7%       100.0%


1997
----

First Quarter             28,80l            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%


            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.

<PAGE>


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
1997, 51% of the Company's total production (in barrels) was packaged in
aluminum cans, and 41.7% 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 fiber board 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 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 restrict 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.

<PAGE>


TRADEMARKS

            The Company's trademarks "Grain Belt" and "Pig's Eye Pilsner" have
been registered with the United States Patent and Trademark Office and with the
office of the Secretary of State in a number of individual states. The Company
believes its trademarks are important to its business and intends to renew them.
Although the Company has been unable to register its "Landmark" trademark with
the United States Patent and Trademark Office because of a similar registered
trademark for a wine producer, it has obtained label approval for use of the
"Landmark" name by the Bureau of Alcohol, Tobacco and Firearms. The Company has
registered the Landmark trade name with the office of the Secretary of State in
the States of Minnesota and North Dakota and intends to continue to use the
name. The Company has also applied for trademark protection for certain of its
trademarks in foreign jurisdictions.

MARKETING

            The Company's primary marketing strategy focuses 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. Press
coverage by both the electronic and print media has been considerable and this
planned exposure will continue to be a key marketing element of the Company.
General marketing plans call for continued 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 into which 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. 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 attractiveness 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. The Company spent less than $50,000 on
research activities in 1997 and expects to spend less than $50,000 in 1998.

EMPLOYEES

            As of March 26, 1998, the Company has approximately 136 full-time
equivalent employees. The Company has 115 employees that work in production,
including brewing, bottling, packaging, warehouse, engineering and equipment
maintenance, 10 employees in sales and marketing and 11 employees in
administration. Of the Company's employees, 103 work pursuant to five separate
union contracts, all of which expired on June 30, 1997. Members have agreed to
continue working under the previous contracts until new contract agreements have
been negotiated. To date, three of the unions have reached an agreement with the
Company. The Company believes its employee relationship to be good. 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.

<PAGE>


POSSIBLE FUTURE PRODUCTION OF ETHANOL

            Ethanol is made primarily from corn and is used as an additive to
gasoline. It is marketed in nearly every state. Nationwide, ethanol blends of
gasoline are approximately 10% of total gasoline sales.

            The Company has applied and received permits from the State of
Minnesota to convert a portion of its facilities into the production of ethanol.
It is the Company's intention to pursue the production of ethanol if it
determines that it is possible to do so on a commercially reasonable basis.
Although the Company believes that it has commitments for financing in an amount
sufficient to convert a portion of its facilities to ethanol production, the
Company does not intend to convert its facilities until it is able to arrange
definitive contracts or otherwise determine that it can operate the project in a
commercially reasonable manner. There can be no assurance that the Company will
be able to successfully complete the ethanol project.

<PAGE>


ITEM 2.     PROPERTY

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

            The 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
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, employing a staff of seventeen
technicians to achieve this objective.

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 per batch.

            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. returnable bottles
            and one is designed to fill non-returnable bottles of various sizes.

            KEGGING LINE: The Company's kegging 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 and Northwestern 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.

<PAGE>


            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.

            The Partnership has retained ownership of all of the Company's real
property, buildings, water wells, and equipment used in the brewing process. The
Partnership leases the real property to the Company at the rate of $25,000 per
month under terms of a lease expiring in November 2003. The Partnership also
leases a significant portion of all the equipment used in the brewing process to
the Company at the rate of $1.00 per barrel of production. This Lease also
expires in 2003.

            The lease agreements give 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,
1997, amounted to approximately $4.9 million. The agreements also allow the
Partnership to 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.

ITEM 3.     LEGAL PROCEEDINGS

            None

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

            None.

<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 1996 and 1997.

                                         LOW            HIGH
                                         ---            ----
1996

First Quarter                         $  4.25        $  6.25
Second Quarter                           4.25           8.75
Third Quarter                            4.25           6.00
Fourth Quarter                           3.00           5.25

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

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

            At April 3, 1998, the Company had 270 holders of record of its
Common Stock. In addition, on that date one depository company held
approximately 1,627,495 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.

<PAGE>


ITEM 6.     SELECTED FINANCIAL DATA

                             SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>
                                                                      Year Ended December 31,
                                              1997             1996             1995             1994              1993
                                          ------------     ------------     ------------     ------------     ------------
<S>                                       <C>              <C>              <C>              <C>              <C>         
STATEMENT OF OPERATIONS DATA:
     Net sales .......................    $ 18,100,532     $ 24,875,349     $ 31,383,508     $ 25,221,588     $ 16,471,396
     Cost of goods sold ..............      18,555,849       23,331,116       28,199,229       21,525,720       14,147,351
                                          ------------     ------------     ------------     ------------     ------------
     Gross profit (loss) .............        (455,317)       1,544,233        3,184,279        3,695,868        2,324,045
                                          ------------     ------------     ------------     ------------     ------------
     Operating expenses:
       Advertising ...................       1,193,348        1,123,996        1,594,267        1,728,073        1,108,605
       Sales and marketing ...........         718,764          747,809          719,659          598,727          461,936
       Administrative ................       1,057,241          855,255          714,050          615,631          517,562
       Provision for doubtful accounts         492,000          601,000           25,000           55,000           13,000
                                          ------------     ------------     ------------     ------------     ------------
           Total operating expenses ..       3,461,353        3,328,060        3,052,976        2,997,431        2,101,103
                                          ------------     ------------     ------------     ------------     ------------
     Operating income (loss) .........      (3,916,670)      (1,783,827)         131,303          698,437          222,942
     Other income (expense), net .....        (100,386)         (78,641)        (105,341)         (93,204)         (71,349)
                                          ------------     ------------     ------------     ------------     ------------
     Net income (loss) before
       income tax benefit ............      (4,017,056)      (1,862,468)          25,962          605,233          151,593
     Income tax (benefit) ............         293,000             --               --           (222,000)            --
                                          ------------     ------------     ------------     ------------     ------------
     Net income (loss) ...............      (4,310,056)    $ (1,862,468)    $     25,962     $    827,233     $    151,593
                                          ============     ============     ============     ============     ============

     Basic and diluted income (loss)
       per common share (1) ..........    $      (1.27)    $      (0.55)    $       0.01     $       0.25     $       0.08

Weighted average common shares
  outstanding (basic) ................       3,389,211        3,374,155        3,351,308        3,330,088        1,923,722

OPERATING DATA (in barrels sold):
     Domestic ........................         143,699          157,797          145,809          140,199          144,730
     Contract ........................         119,576          187,108          348,840          290,187          104,837
     Export ..........................          68,823           84,414          106,983           73,667           45,906
                                          ------------     ------------     ------------     ------------     ------------
     Total ...........................         332,098          429,319          601,632          504,053          295,473
                                          ============     ============     ============     ============     ============


                                                                            December 3l,
                                              1997             1996             1995             1994              1993
                                          ------------     ------------     ------------     ------------     ------------

BALANCE SHEET DATA
     Working capital .................    $  1,044,938     $  4,342,653     $  6,327,913     $  6,788,661     $  6,273,365
     Total assets ....................       8,275,426       10,775,228       12,189,503       13,363,949       11,767,667
     Long-term debt, net .............       2,391,081        1,753,454        1,982,428        2,194,380        2,390,576
     Shareholders' equity ............       2,787,910        7,097,966        8,787,484        8,658,022        7,777,034

</TABLE>

(1)  The Company adopted FASB Statement No. 128 for the year ended December 31,
     1997, and as required restated all per share information for the prior
     years to conform to the statement. The net income (loss) per share were the
     same under the basic and diluted methods for calculation in each period
     presented.

<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 Brewer's 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:

                                              YEAR ENDED DECEMBER 31,
                                       1997           1996            1995
                                     --------       --------        --------

Net sales...........................  100.0%         100.0%          100.0%
Cost of goods sold..................   102.5           93.8            89.9
                                      ------         ------          ------
Gross profit (loss).................    (2.5)           6.2            10.1
Advertising.........................     6.6            4.5             5.1
Sales and marketing.................     4.0            3.0             2.3
Administrative......................     5.8            3.4             2.3
Provision for doubtful accounts.....     2.7            2.4             0.1
Operating income (loss).............   (21.6)          (7.2)            0.4
Interest (expense)..................    (0.8)          (0.6)           (0.6)
Income tax expense..................     1.6             --              --
Net income (loss)...................   (23.8)          (7.5)            0.1
                                       ======         ======          =====

            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. The Company anticipates that in 1998 sales of its proprietary products
will increase, supported by its marketing efforts and bolstered by the increased
sales of its products introduced in 1996 (Yellow Belly and Brewer's Cave) and
additional new products being brought to the market in 1998.

            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. The Company
is taking steps to replace the lost volume with increased volume from existing
accounts and the addition of new contracts that can meet the Company's new
credit standards.

<PAGE>


              Export sales decreased 18.5% from 84,414 barrels in 1996 to 68,823
barrels in 1997. The Company anticipates that it will experience an increase in
export sales during 1998 based upon its existing accounts and current open
orders. 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 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 a loss of 2.5% in
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 allowance 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 which were below costs, based on
the Company's current production levels. The Company is in the process or
renegotiating or terminating unprofitable contract and export sales agreements.

            Operating expenses were $133,293 greater in 1997 than in 1996 and as
a percentage of net sales they increased from 13.3% 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 relations costs 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.

            During 1996 and 1997, 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. Management believes that the growth of its
proprietary labels offers the best opportunity for achieving operating profits
in the long term and has focused its efforts on the growth of its proprietary
products. An emphasis has been placed on the promotion of these proprietary
labels and the generation 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 1998 will help the Company operate at a significantly higher
level of capacity in 1998.

            YEAR ENDED DECEMBER 31, 1996 COMPARED TO 1995

            Net sales for 1996 were $24,875,349, a 20.7% decrease over the net
sales reported for 1995 of $31,383,508. Total barrels sold in 1996 were 429,319
compared to 601,632 barrels in 1995 resulting in a 28.6% decrease in barrelage
sales. Due to product mix and because the Company's contract customers purchase
all or part of their own packaging materials, the percentage increase in barrels
can vary from the percentage increase in net sales.

            Sales from brewing agreements and contract packaging decreased
161,732 barrels from 348,840 in 1995 to 187,108 in 1996 for a 46.4% decrease.
The decrease was primarily attributable to the loss in 1995 of Pete's Brewing
Company's contract business. Pete's Brewing Company was the Company's largest
contract customer in 1995. The Pete's Brewing Company contract concluded in the
fourth quarter of 1995.

<PAGE>


            Export sales decreased 21.1% from 106,983 barrels in 1995 to 84,414
barrels in 1996. The decrease was primarily attributable to the Company's loss
of business from a Japanese retailer which discontinued its private label beer
program. In 1995 the customer had purchased approximately 37,500 barrels. This
decline in the export sales was partially offset in 1996 by the opening of
several new accounts in the Pacific Rim area. Because the Company sells its
export brands at prices lower than domestic sales, these export sales are a
lower percentage of net sales than the corresponding percentage of barrelage.

            Sales of proprietary brands increased 8.2% from 1995 barrelage of
145,809 to 1996 barrelage sales of 157,797. The improvement was attributable to
a broader acceptance of Company products following receipt of the Gold Medal for
Grain Belt Premium and the Silver Medal for Pig's Eye Ice at the Great American
Beer Festival.

            While net sales decreased 20.7% in 1996, cost of goods sold
decreased by only 17.3% from $28.2 million to $23.3 million. The increase in
cost of goods sold was primarily attributable to increased raw material and
production costs and higher overhead which was under absorbed. In addition, cost
of goods sold in the year ended December 31, 1996 include a $160,000 charge
which represented the Company's current estimate of the valuation reserve
necessary, as it relates to 1996, as a result of the March 5, 1997 Winterbrook
bankruptcy and $230,000 as it relates to problems with William and Scott, Inc.
During 1995 the Company recognized $1,000,000 income from the transition
agreement with Pete's Brewing Company in connection with Pete's movement of its
production to another brewery. This payment was netted against cost of goods
sold and was used by the Company to cover costs incurred in the wind down of the
Pete's contract.

            Operating expenses were $275,084 greater in 1996 than 1995. Of this
amount, advertising expenses were $470,271 less in 1996 than in 1995 reflecting
a restructured advertising campaign for Pig's Eye Beer and a re-focused Grain
Belt Premium campaign to capitalize on receipt of the Gold Medal at the Great
American Beer Festival. As a percentage of sales, advertising expenses decreased
from 5.1% in 1995 to 4.5% in 1996 because of the expansion of contract and
export sales, which do not require significant levels of advertising expense.
Sales and marketing expenses increased $28,150 from 1995 to 1996 while as a
percentage of sales they increased from 2.3% to 3.0% respectively. The increase
in expenditures was attributed to an expansion of the sales staff and an
increase in sales commissions associated with the expansion of export sales and
certain contract agreements. Administrative expenses increased $141,205 from
1995 to 1996, principally from an increase in professional fees and an increase
in shareholder relations costs. As a percentage of sales, however,
administrative expenses increased from 2.3% in 1995 to 3.4% in 1996. The
Provision for doubtful accounts increased $576,000 from 1996 to 1995 as a result
of the bankruptcy of a large customer.

            Interest income increased from $73,057 in 1995 to $84,000 in 1996
reflecting an increase in available investable funds as the Company invested a
portion of the initial public offering proceeds into production equipment.

            The Company's interest expense decreased $15,757 from 1995 to 1996
principally associated with a reduction in principal of the capitalized lease of
the plant and equipment.

LIQUIDITY AND CAPITAL RESOURCES

            Working capital at December 31, 1997 decreased $3.3 million to $1.0
million from $4.3 million at December 31, 1996. The decrease is primarily
attributable to decreases in accounts receivable and inventories totaling
approximately $2,000,000 and an increase in accounts payable of $1.3 million.

            During the year ended December 31, 1997, the Company generated net
cash from operating activities of $859,433. The Company's loss of approximately
$4.3 million was partially offset by non cash charges of depreciation,
amortization, various allowances, and deferred taxes which totaled approximately
$1.3 million. Additionally, working capital components decreased during 1997
providing approximately $3.4 million in cash. Also providing cash was the
increase in amounts due to related party for operating expenses of approximately
$389,000. The Company does not believe it will be able to generate similar cash
flow from changes in certain assets and liabilities in 1998 as achieved in 1997
and in particular through the reduction in trade receivables achieved in 1997
and the increase in trade accounts payable from 1996 to 1997.

<PAGE>


            The Company used net cash of $779,774 for investing activities in
the purchase of $613,491 of property and equipment and $166,283 in the purchase
of intangible assets for branded products.

            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 is being amortized over
10 years at a 7.75% interest rate. The Company has the option to acquire the
property at eight times the trailing twelve months rent any time after December
1, 1995. As indicated in the Company's 1997 annual report, based upon 1997 lease
payments, the purchase price would be approximately $4.9 million at December 31,
1997. Should the Company decide to exercise its option it would propose to
finance the acquisition with debt or equity financing or some combination
thereof. The Company will monitor the exercise price going forward and will
select the most beneficial time to exercise the option based upon existing facts
and circumstances and the availability of financing.

            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. For accounting purposes, however, this credit is allocated throughout
the year based upon projected taxable sales per quarter.

            The Company is a party to collective bargaining agreements with five
union organizations which ran for a three-year term, ended June 30, 1997 as
noted in Item 1 - Business, the Company has reached agreement with three of the
unions. Contract negotiation with the union organization representatives are
ongoing and members have agreed to continue working under the previous contract
until a new contract has been negotiated

            The Company incurred losses in 1991 and 1992, its first two years of
operations, totaling approximately $2.5 million. These losses were used, in
part, to offset 1993, 1994 and 1995 taxable income. The Company has
carryforwards which expire as follows:

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

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

            To the extent the Company generates taxable income during the
periods in which this net operating loss carryforward is available, the
Company's cash requirements for payment of income tax will be reduced.

            The Company will require additional funds in 1998 from equity or
debt to meet its working capital and capital resource needs. During 1997, the
Partnership deferred required lease payments on the production facility and
equipment and has agreed to defer past due 1997 payments and 1998 lease payments
through at least January 1, 1999 which will provide a portion of the Company's
working capital needs. Due to the seasonal nature of its business, the 

<PAGE>


Company's year end working capital position is not indicative of its needs
during its peak selling and production season. The Company does not currently
have a credit facility, but is working to establish a line of credit with a bank
to supplement its short-term working capital needs. At present, except for the
lease of its production facility and certain of its production equipment, the
Company's assets are unsecured. The Company anticipates that any line of credit
would be secured by certain of its assets. In connection with the $475,000
advance by the Partnership descussed below, the Company agreed to grant the
Partnership a security interest in certin of its assets, including its
trademarks. If the Company is unable to obtain a working line of credit with a
bank, the Company will be required to seek another source of working capital. In
that event, the Partnership has agreed to make available to the Company a line
of credit of up to $2,500,000 to meet its working capital needs during 1998.
This availability is in addition to $475,000 the Partnership advanced the
Company subsequent to December 31, 1997 to secure the purchase of a Treasury
Bond required by the Bureau of Alcohol Tobacco and Firearms. The Company
believes that the Partnership's funding commitment, along with a possible bank
line of credit, will be sufficient to meet its working capital needs during
1998, exclusive of financing needed in the event the Company were to decide to
pursue production of ethanol as discussed in Item 1 - Business.


YEAR 2000

            Historically, most computer systems (including microprocessors
embedded into plant equipment and other machinery) utilized software that
processed transactions using two digits to represent the year of the transaction
(i.e., 98 represents the year 1998). This software (including software built
into embedded microprocessors) requires modification to properly process dates
beyond December 31, 1999 (the "Year 2000 Issue").

            The accounting Software used by the Company has been certified by
the software developer as being Year 2000 Compliant. All internally developed
applications were developed to be Year 2000 Compliant. The Company presently
believes that the Year 2000 Issue will not have a material adverse effect on the
Company's operations.

            The Company intends to initiate formal communications with all of
its significant suppliers and large customers to determine the extent to which
the Company is vulnerable to those third parties' potential failure to remediate
their own Year 2000 Issue. However, there can be no guarantee that the systems
of other companies, on which the Company's systems rely, will be timely
converted, or that a failure to convert by another company, or a conversion that
is incompatible with the Company's system, would not have a material adverse
effect on the Company.


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 continued 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

            In 1997 the FASB issued Statement No. 128, EARNING PER SHARE, which
supersedes APB Opinion No. 15. Statement No. 128 requires the presentation of
earnings per share by all entities that have common stock or potential common
stock, such as options, warrants, and convertible securities, outstanding that
trade in a public market. 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

<PAGE>


potential common stock instruments unless the effect is anti-dilutive, thereby
reducing the loss or increasing the income per common share. The Company
initially applied Statement No. 128 for the year ended December 31, 1997, and,
as required by the statement, has restated all per-share information for the
prior years to conform to the statement.


ITEM 7a.    DISCLOSURE ABOUT MARKET RISK

            None.

ITEM 8.     FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

            The following financial statements of the Company are set forth at
the end of the Form 10-K.

<TABLE>
<CAPTION>
                                                                                             Page
                                                                                             ----
<S>                                                                                           <C>
            Report of Independent Auditor
            McGladrey & Pullen, LLP.........................................................  F-1

            Balance Sheets as of December 31, 1997 and 1996.................................  F-2

            Statements of Operations for the years ended December 31, 1997, 1996 and 1995...  F-4

            Statements of Shareholders' Equity for
            the years ended December 31, 1997, 1996 and 1995................................  F-5

            Statements of Cash Flows for the years
            ended December 31, 1997, 1996 and 1995..........................................  F-6

            Notes to Financial Statements for the years.....................................  F-7

            Schedule II..................................................................... F-17
</TABLE>

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

            None.

<PAGE>


                                    PART III

ITEM 10.    DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

            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 to be held in May 1998 (the "1998 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 1998 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 1998 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 1998 Proxy Statement and is
incorporated herein by reference.

                                     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.

                  Schedule II  Valuation and Qualifying Accounts ..... Page F-17

(b)         REPORTS ON FORM 8-K
            The Company filed no reports on Form 8-K during the quarter ended
            December 31, 1997.

(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

  10.1      Equipment Lease dated November 2, 1993 between the Company and
                  Minnesota Brewing Limited Partnership, incorporated by
                  reference from Exhibit 10.1 to Form 10-KSB filed by the
                  Company for the fiscal year ended December 31, 1993

<PAGE>


  10.2      Facilities Lease dated November 2, 1993 between the Company and 
                  Minnesota Brewing Limited Partnership, incorporated by
                  reference from Exhibit 10.2 to Form 10-KSB filed by the
                  Company for the fiscal year ended December 31, 1993

  10.3      Minnesota Brewing Company 1993 Stock Option Plan, incorporated by 
                  reference from Exhibit 10.10 to form SB-2

  23        Consent of McGladrey & Pullen, LLP

  27.1      Financial Data Schedule

<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 20, 1998          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

<PAGE>



 /s/  John R. Rollwagen                       Director
-----------------------------
John R. Rollwagen


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

<PAGE>


                          CONTENTS
INDEPENDENT AUDITOR'S REPORT                           F-1


FINANCIAL STATEMENTS



     Balance sheets                                F-2 - 3

     Statements of operations                          F-4

     Statements of shareholders' equity                F-5

     Statements of cash flows                          F-6

     Notes to financial statements                F-7 - 16


SUPPLEMENTARY INFORMATION


     Schedule II-Valuation and qualifying accounts    F-17


<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, 1997 and 1996, and the related statements of operations,
shareholders' equity, and cash flows for each of the three years in the period
ended December 31, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our 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, 1997 and 1996, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1997, 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, 1997, 1996, and
1995. 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

St. Paul, Minnesota
April 16, 1998





                                      F-1


<PAGE>




MINNESOTA BREWING COMPANY

BALANCE SHEETS
DECEMBER 31, 1997 AND 1996

<TABLE>
<CAPTION>

ASSETS                                                                     1997         1996
-------------------------------------------------------------------------------------------------
<S>                                                                    <C>           <C>        
Current Assets
     Cash and cash equivalents                                         $   465,984   $   386,325
     Trade accounts receivable, less allowance for doubtful accounts
         of $306,000 in 1997 and $485,000 in 1996 (Note 6)                 729,699     1,034,921
     Other receivables                                                      29,651        91,084
     Inventories                                                         2,765,118     4,532,532
     Prepaid expenses                                                      150,921        71,599
     Deferred income taxes (Note 7)                                           --         150,000
                                                                       -------------------------
                   Total current assets                                  4,141,373     6,266,461
                                                                       -------------------------

Other Assets
     Trademarks, net of accumulated amortization of $73,000
         in 1997 and $40,000 in 1996                                       221,577       221,273
     Deferred income taxes (Note 7)                                           --         143,000
     Other intangible assets, principally packaging design, net of
         accumulated amortization of $315,000 in 1997 and
         $219,000 in 1996                                                  291,209       381,896
                                                                       -------------------------
                                                                           512,786       746,169
                                                                       -------------------------

Property and Equipment (Note 3)
     Land and building under capital lease                               1,899,574     1,899,574
     Display fixtures and equipment                                      1,168,706       939,268
     Production equipment, including capitalized lease                   2,722,960     2,426,707
     Office equipment                                                      172,890        85,090
     Leasehold improvements                                                123,347       123,347
                                                                       -------------------------
                                                                         6,087,477     5,473,986

     Less accumulated depreciation and amortization                      2,466,210     1,711,388
                                                                       -------------------------
                                                                         3,621,267     3,762,598
                                                                       -------------------------
                                                                       $ 8,275,426   $10,775,228
                                                                       =========================
</TABLE>

                       See Notes to Financial Statements.

                                      F-2

<PAGE>

<TABLE>
<CAPTION>

LIABILITIES AND SHAREHOLDERS' EQUITY                                 1997            1996
-----------------------------------------------------------------------------------------------
<S>                                                                <C>             <C>         
Current Liabilities
     Current maturities of capital lease obligations (Note 3)      $       --      $    228,975
     Amounts due to related party (Note 3)                                 --            20,051
     Trade accounts payable                                           2,197,100         902,413
     Accrued expenses:
         Compensation                                                   602,811         474,305
         Beverage tax                                                   126,073         121,976
         Promotional expenses                                            86,325          92,760
         Other                                                           84,126          83,328
                                                                   ----------------------------
                   Total current liabilities                          3,096,435       1,923,808
                                                                   ----------------------------


Long-term debt (Note3)
Due to related party                                                    263,036            --
Capital Lease Obligation, less current maturities                     2,128,045       1,753,454
                                                                   ----------------------------
                                                                      2,391,081       1,753,454




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         33,892          33,892
     Additional paid-in capital                                      10,435,668      10,435,668
     Accumulated deficit                                             (7,681,650)     (3,371,594)
                                                                   ----------------------------
                                                                      2,787,910       7,097,966
                                                                   ----------------------------
                                                                   $  8,275,426    $ 10,775,228
                                                                   ============================
</TABLE>


                                          See Notes to Financial Statements

                                      F-3


<PAGE>


MINNESOTA BREWING COMPANY

STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995

<TABLE>
<CAPTION>

                                                                             1997            1996            1995
                                                                         --------------------------------------------
<S>                                                                         <C>             <C>             <C>      
Sales (Note 6)                                                           $ 20,419,205    $ 27,983,345    $ 33,994,179
Less excise taxes                                                           2,318,673       3,107,996       2,610,671
                                                                         --------------------------------------------
                   Net sales                                               18,100,532      24,875,349      31,383,508
                                                                         --------------------------------------------

Cost of goods sold (Note 3)                                                18,555,849      23,331,116      29,199,229
Less transition agreement cost reimbursement (Note 9)                            --              --        (1,000,000)
                                                                         --------------------------------------------
                   Net cost of goods sold                                  18,555,849      23,331,116      28,199,229
                                                                         --------------------------------------------

                   Gross profit (loss)                                       (455,317)      1,544,233       3,184,279
                                                                         --------------------------------------------

Operating expenses:
     Advertising                                                            1,193,348       1,123,996       1,594,267
     Sales and marketing                                                      718,764         747,809         719,659
     General and administrative (Note 3)                                    1,057,241         855,255         714,050
     Provision for doubtful accounts                                          492,000         601,000          25,000
                                                                         --------------------------------------------
                   Total operating expenses                                 3,461,353       3,328,060       3,052,976
                                                                         --------------------------------------------

                   Operating income (loss)                                 (3,916,670)     (1,783,827)        131,303
                                                                         --------------------------------------------

Other income (expense):
     Interest and other income                                                 46,816          84,000          73,057
     Interest expense (Note 3)                                               (147,202)       (162,641)       (178,398)
                                                                         --------------------------------------------
                                                                             (100,386)        (78,641)       (105,341)

                   Income (loss) before income tax expense                 (4,017,056)     (1,862,468)         25,962

Income tax expense (Note 7)                                                   293,000            --              --
                                                                         --------------------------------------------
                   Net income (loss)                                     $ (4,310,056)   $ (1,862,468)   $     25,962
                                                                         ============================================

                   Net income (loss) per common share
                       Basic                                             $      (1.27)   $      (0.55)   $        .01
                                                                         ============================================
                       Diluted                                                  (1.27)          (0.55)           0.01
                                                                         ============================================

                   Weighted average common and common
                       equivalent shares outstanding
                       Basic                                                3,389,211       3,374,155       3,345,803
                                                                         ============================================
                       Diluted                                              3,389,211       3,374,155       3,351,308
                                                                         ============================================
</TABLE>

                        See Notes to Financial Statements

                                      F-4

<PAGE>


MINNESOTA BREWING COMPANY

STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995

<TABLE>
<CAPTION>
                                                                                          
                                                      Common Stock        Additional      
                                               ---------------------       Paid-In           Accumulated
                                                Shares      Amount         Capital             Deficit          Total
--------------------------------------------------------------------------------------------------------------------------
<S>                                            <C>         <C>          <C>             <C>                <C>            
Balance, December 31, 1994                     3,328,611   $   33,286   $   10,159,824  $      (1,535,088) $     8,658,022
   Exercise of employee stock options             23,000          230          103,270                  -          103,500
   Net income                                          -            -                -             25,962           25,962
                                               ----------------------------------------------------------------------------
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
                                               ============================================================================

</TABLE>


                       See Notes to Financial Statements.

                                      F-5

<PAGE>


MINNESOTA BREWING COMPANY

STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995

<TABLE>
<CAPTION>

                                                                        1997           1996           1995
                                                                 -----------------------------------------
<S>                                                              <C>            <C>            <C>        
Cash Flows From Operating Activities
   Net income (loss)                                             $(4,310,056)   $(1,862,468)   $    25,962
   Adjustments to reconcile net income (loss)
     to net cash provided by (used in)
     operating activities:
     Depreciation                                                    754,822        616,695        508,980
     Amortization of intangible assets                               129,666         95,344         84,072
     Deferred income taxes                                           293,000           --             --
     Inventory valuation allowance                                   221,743         73,277        160,000
     Allowance for doubtful accounts                                (179,000)       451,000        (32,000)
     Intangible and other asset valuation allowance                  127,000           --             --
     Changes in assets and liabilities:
       Trade accounts receivable                                     484,222       (238,476)     1,366,889
       Other receivables                                              61,433        768,761       (819,848)
       Inventories                                                 1,545,671       (174,464)       166,232
       Prepaid expenses                                              (79,322)       (10,449)       130,754
       Trade accounts payable and accrued expenses                 1,421,653        488,893       (993,075)
       Amounts due to related party                                  388,601         (1,698)      (114,638)
                                                                 -----------------------------------------
          Net cash provided by operating activities                  859,433        206,415        483,328
                                                                 -----------------------------------------

Cash Flows From Investing Activities
   Purchases of property and equipment                              (613,491)      (571,738)    (1,111,098)
   Purchases of held-to-maturity securities                             --       (1,477,025)    (2,445,157)
   Sales of held-to-maturity securities                                 --        2,474,744      3,201,308
   Purchases of intangible and other assets                         (166,283)      (207,069)      (166,783)
                                                                 -----------------------------------------
          Net cash provided by (used in) investing activities       (779,774)       218,912       (521,730)
                                                                 -----------------------------------------

Cash Flows From Financing Activities
   Principal payments under capital lease obligations                   --         (211,952)      (196,195)
   Proceeds from exercise of employee stock options                     --          172,950        103,500
                                                                 -----------------------------------------
          Net cash used in financing activities                         --          (39,002)       (92,695)
                                                                 -----------------------------------------

          Net increase (decrease) in cash and cash equivalents        79,659        386,325       (131,097)

Cash and Cash Equivalents
   Beginning                                                         386,325           --          131,097
                                                                 -----------------------------------------
   Ending                                                        $   465,984    $   386,325    $      --
                                                                 =========================================

Supplemental Disclosures of Cash Flow Information
   Cash payments for interest                                    $      --      $   162,641    $   178,398
                                                                 =========================================


</TABLE>



                       See Notes to Financial Statements.

                                      F-6



<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 the majority 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 10-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 and
major customer 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 $455,000 and
$233,000 in 1997 and 1996, respectively, consist of the following:


                         December 31
                         -----------
                      1997           1996 
                      ----           ---- 
Raw materials       $134,908       $174,757
Work in progress     357,151        448,663
Finished goods       660,635      1,373,193
Packaging          1,243,705      2,117,881
Other                368,719        418,038
                  ----------     ----------
                  $2,765,118     $4,532,532
                  ==========     ==========


                                      F-7

<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 and
other receivables, accounts payable, and amounts due to related party. At
December 31, 1997 and 1996, 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 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 reviews its long-lived assets periodically to determine potential
impairment by comparing the carrying value of the long-lived assets with the
estimated future net undiscounted cash flows expected to result from the use of
the assets, including cash flows from disposition. Should the sum of the
expected future net cash flows be less than the carrying value, the Company
would recognize an impairment loss at the date. An impairment loss would be
measured by comparing the amount by which the carrying value exceeds the fair
value (estimated discounted future cash flows) of the long-lived assets. To
date, management has determined that no impairment of long-lived assets exists.
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: The Company currently receives an $11 per barrel credit
against federal excise taxes on the first 60,000 barrels of taxable production.
This credit is realized in the first quarter of the year and for accounting
purposes is allocated throughout the year based upon projected taxable sales per
quarter.

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.

                                      F-8

<PAGE>

MINNESOTA BREWING COMPANY

NOTES TO FINANCIAL STATEMENTS

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

NET INCOME (LOSS) PER SHARE: The FASB has issued Statement No. 128, Earning Per
Share, which supersedes APB Opinion No. 15. Statement No. 128 requires the
presentation of earnings per share by all entities that have common stock or
potential common stock, such as options, warrants, and convertible securities,
outstanding that trade in a public market. 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 or
increasing the income per common share.

The Company initially applied statement No. 128 for the year ended December 31,
1997, and, as required by the statement, has restated all per-share information
for the prior years to conform to the statement. As described in Note 5, at
December 31, 1997 and 1996, the Company had options and warrants outstanding to
purchase a total of 192,000 and 216,400 shares of common stock, respectively, at
a weighted-average exercise price of approximately $4.63 and $5.19,
respectively. However, because the Company incurred losses in 1997 and 1996, 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 1997 and 1996. In 1995, the diluted weighted
average common shares outstanding included 5,595 incremental shares assuming the
conversion of in-the-money stock options.

ADVERTISING EXPENSES: The Company expenses advertising costs when the
advertisement occurs.

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. The remaining 1,000,000 shares are
undesignated at December 31, 1997.

NOTE 2. CORPORATE LIQUIDITY: The Company's plans in 1998 include the continued
emphasis on promoting its core proprietary brands. In order to achieve its 1998
plans, the Company will require additional funds from equity or debt to meet its
working capital and capital resource needs. During 1997, the Partnership
deferred required lease payments on the production facility and equipment and
has agreed to defer past due 1997 payments and 1998 lease payments through at
least January 1, 1999, which will provide a portion of the Company's working
capital needs. Due to the seasonal nature of its business, the Company's year
end working capital position is not indicative of its needs during its peak
selling and production season. At present, except for the lease of its
production facility and certain of its production equipment, the Company's
assets are unsecured. The Company anticipates that any line of credit would be
secured by certain of its assets. In connection with the $475,000 advance by the
Partnership discussed below, the Company agreed to grant the Partnerhip a
security interest in certain of its assets, including its trademarks. If the
Company is unable to obtain a working line of credit with a bank, the Company
will be required to seek another source of working capital. In that event, the
Partnership has agreed to make available to the Company a line of credit of up
to $2,500,000 to meet its working capital needs during 1998. This availability
is in addition to $475,000 the Partnershp advanced the Company subsequent to
December 31, 1997 to secure the purchase of a Treasury Bond required by the
Bureau of Alcohol Tobacco and Firearms (Note 3). The Company believes that the
Partnership's funding commitment, along with a possible bank line of credit will
be sufficient to meet its working capital needs during 1998.


                                      F-9

<PAGE>

MINNESOTA BREWING COMPANY

NOTES TO FINANCIAL STATEMENTS

NOTE 3. RELATED-PARTY TRANSACTIONS

GENERAL: The Minnesota Brewing Limited Partnership owns approximately 45 percent
of the Company's common stock. The Chairman of the Board of the Company is also
the controlling general partner of the Partnership.

RELATED-PARTY CAPITAL LEASES: The Company leases 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 and $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,
1997, the purchase price would be approximately $4,900,000. In addition, the
Company is responsible for all insurance and real estate taxes associated with
this property.

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 1998's annual
production level.

                                                Operating               Capital
                                                   Lease                 Lease
                                Total           Commitment            Obligation
                                -----           ----------            ----------
Years ending December 31:

1998                         $       --         $       --            $       --
1999                          1,708,977            731,000               977,977
2000                            740,000            365,500               374,500
2001                            740,000            365,500               374,500
2002                            740,000            365,500               374,500
Later years                     615,200            303,039               312,161
                                -------            -------               -------
Total estimated future 
  minimum lease payments     $4,544,177         $2,130,539             2,413,638
                             ==========         ==========                


Less amount representing 
  interest (7.75%)                                                       431,209
           -----                                                      ----------
Present value of future 
  minimum payments
  under capital lease 
  obligation at 
  December 31, 1997                                                    1,982,429
Accrued interst on 
  deferred lease payments                                                145,616
                                                                      ----------
                                                                      $2,128,045
                                                                      ==========

                                      F-10

<PAGE>

MINNESOTA BREWING COMPANY

NOTES TO FINANCIAL STATEMENTS

NOTE 3. RELATED-PARTY TRANSACTIONS (CONTINUED)

Total lease payments due under the aforementioned leases were approximately
$618,000, $712,000, and $902,000 for the years ended December 31, 1997, 1996,
and 1995, respectively. The total rent expense relating to the operating lease
portion of the above leases was approximately $243,000, $337,000, and $527,000
for the years ended December 31, 1997, 1996, and 1995, respectively.

AMOUNTS DUE TO RELATED PARTY: The following table summarizes the Company's
outstanding debt (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:
  1997                             $20,051        $148,578       $263,036
  1996                              21,749          69,150         20,051

As of December 31, 1997, the Company was in default on its payment to the
Partnership under the lease agreements. On April 16, 1998, the Partnership
agreed to defer all past due amounts as well as all 1998 payments due under the
leases through January 1, 1999. Additionally, the Partnership agreed to defer
payment of the interest (prime plus one) on any existing or potential 1998
past-due amounts through January 1, 1999.

Subsequent to year-end, the Partnership loaned additional funds of approximately
$475,000 to the Company in order to secure the purchase of a Treasury Bond
required by the Bureau of Alcohol Tabcco and Firearms (BATF). The Partnership
has also agreed not to demand payment of this note before January 1, 1999.
Additionally, the Partnership has agreed to make available to the Company a line
of credit of up to $2,500,000 which will not be due until January 1, 1999.

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


                                   December 31
                                   -----------
                             1997                1996 
                             ----                ---- 
Land and building        $1,899,574          $1,899,574
Production equipment        702,426             702,426
                          ---------           ---------
                          2,602,000           2,602,000


Less accumulated 
  amortization            1,084,121             823,932
                         ----------          ----------
                         $1,517,879          $1,778,068
                         ==========          ==========

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

                                      F-11

<PAGE>

MINNESOTA BREWING COMPANY

NOTES TO FINANCIAL STATEMENTS

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 $136,000, $146,000, and
$156,000 for the years ended December 31, 1997, 1996, and 1995, respectively. At
December 31, 1997 and 1996, there were 146,779 and 138,779 shares, respectively,
of Company common stock held by the Plan.

In the event a terminated plan participant desires to sell shares of the
Company's stock, or for certain employees who elect to diversify their account
balances, the Company may be required to purchase the shares from the
participant at fair market value.

NOTE 5. STOCK OPTIONS AND WARRANT

At December 31, 1997, the Company has a 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
income (loss) and net income (loss) per common share on a pro forma basis as
compared to reported results would have been as follows:



                                             1997           1996          1995
                                             ----           ----          ----
Net income (loss):
  As reported                           $(4,310,000)    $(1,862,000)   $ 26,000
  Pro forma                              (4,382,000)     (1,888,000)    (21,000)
Basic and diluted net income (loss)
  per common share:
  As reported                           $     (1.27)    $     (0.55)   $   0.01
  Pro forma                                   (1.29)          (0.56)      (0.01)

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 1997, 1996
and 1995, respectively: dividend rate of zero for all years; price volatility of
62.0, 39.0 and 39.4 percent; risk-free interest rate of 6.3, 6.1 and 5.7
percent; and expected lives of approximately 3.0, 2.3 and 3.2 years. The
weighted-average fair value per share of options granted in 1997, 1996 and 1995
was $1.30, $1.41 and $1.57, respectively.

EMPLOYEE INCENTIVE STOCK OPTION PLAN: The employee incentive stock option plan
authorizes the granting of options to purchase up to 250,000 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 varying 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.

                                      F-12

<PAGE>

MINNESOTA BREWING COMPANY

NOTES TO FINANCIAL STATEMENTS

NOTE 5. STOCK OPTIONS AND WARRANT (CONTINUED)

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 March 1997.

A summary of the stock option and warrant activity through December 31, 1997, is
as follows:


                                              Exercise Price      
                                   Warrant     Stock Option         Per Share
                                   ------------------------------------------
Balance, December 31, 1994         137,750        91,000         $4.50 - 5.40
     Granted                             -        30,000          5.00 - 5.75
     Exercised                           -       (23,000)                4.50
                                   ------------------------------------------
Balance, December 31, 1995         137,750        98,000         $4.50 - 5.75 
     Granted                             -        18,500                 4.75 
     Exercised                           -       (37,600)         4.50 - 5.00 
                                   ------------------------------------------
Balance, December 31, 1996         137,750        78,900         $4.50 - 5.75 
     Granted                             -       125,000                 4.50
     Expired/cancelled            (137,750)      (11,900)         4.50 - 5.40
                                   ------------------------------------------
Balance, December 31, 1997               -       192,000         $4.50 - 5.75
                                  ===========================================

At December 31, 1997, 108,667 options outstanding were exercisable.  

A further summary of options outstanding at December 31, 1997, is as follows:

                                                       Remaining       
Exercise                 Number                        Contractual     
Price                    Outstanding                   Life            
-----                    -----------                   -----------            
$  4.50                   151,000                      4.1  years
   4.75                    18,500                      3.8  years
   5.00                    10,000                      2.5  years
   5.75                    12,500                      2.5  years
                          -------                               
                          192,000
                          =======


NOTE 6. SEGMENT DATA, MAJOR CUSTOMERS, 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. Total foreign sales
(excluding freight charges and excise taxes) amounted to approximately
$3,395,000, $4,217,000, and $5,293,000 during the years ended December 31, 1997,
1996, and 1995, respectively. Trade accounts receivable from foreign
distributors were approximately $179,000 and $203,000 at December 31, 1997 and
1996.


                                      F-13


<PAGE>

MINNESOTA BREWING COMPANY

NOTES TO FINANCIAL STATEMENTS

NOTE 6. SEGMENT DATA, MAJOR CUSTOMERS, AND MAJOR SUPPLIERS

MAJOR CUSTOMERS: During 1995, the Company had a major customer which accounted
for 45.6% of net sales. There were no sales to this customer for the years ended
December 31, 1997 or 1996 (see Note 9).

During 1997, 1996 and 1995, respectively, approximately 53, 70 and 71 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  are as follows:


                                        Years Ended December 31
                                        -----------------------
                             1997                1996               1995 
                             ----                ----               ---- 
Current:
     U.S. federal        $         -         $         -         $  75,000
     State                         -                   -            18,000
Benefit of operating loss 
  carryforwards                    -                   -           (93,000)
Deferred                     293,000                   -                 -
                         -----------         -----------         --------- 
                         $   293,000         $         -         $       -
                         ===========         ===========          ======== 


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

                                        Years Ended December 31
                                        -----------------------
                             1997                1996               1995 
                             ----                ----               ---- 
Tax provision (benefit) 
  at federal statutory 
  rate                   $(1,508,000)        $  (652,000)        $   9,000
State income tax 
  (benefit), net of 
  federal tax effect        (169,000)            (56,000)            1,000
Nondeductible expenses         5,000               7,000             9,000
Effect of income taxes at 
  lower rates                142,000              18,000            (6,000)
Change in valuation 
  allowance for deferred
  tax assets               1,835,000             677,000           (15,000)
Other                        (12,000)              6,000             2,000
                          ----------        -----------         --------- 
                          $  293,000        $          -        $        -
                          ==========        ===========         ========= 



                                      F-14

<PAGE>

MINNESOTA BREWING COMPANY

NOTES TO FINANCIAL STATEMENTS

NOTE 7. INCOME TAXES (CONTINUED)

Net deferred tax assets consist of the following:


                                                          December 31
                                                          -----------
                                                   1997               1996 
                                                   ----               ---- 
Deferred tax assets:
  Net operating loss carryforwards           $2,562,000       $   1,067,000
  Vacation accrual                              122,000             109,000
  Inventory valuation reserve                   182,000              89,000
  Allowance for doubtful trade and 
    other accounts receivable                   116,000             184,000
  Other                                          45,000                   -
Deferred tax liabilities-other                 (101,000)            (65,000)
                                            -----------        ------------
                                              2,926,000           1,384,000
Less valuation allowance                     (2,926,000)         (1,091,000)
                                            -----------        ------------
Net deferred tax assets                     $         -        $    293,000
                                            ===========        ============

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 1997 and 1996 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 reduction in the valuation allowance during 1995 was the
result of utilizing NOL carryforwards to reduce current taxable income. The
remaining NOL carryfowards expire as follows: $1,300,000 in 2007, $1,500,000 in
2011, and $3,900,000 in 2012. 

NOTE 8. COMMITMENTS CONTINGENCIES 

PENSION PLANS: The Company belongs to two multi-employer pension plans (Pension
Plans) covering certain employees. Total pension plan expense for 1997, 1996,
and 1995 was approximately $64,000, $42,000, and $54,000, 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


                                      F-15


<PAGE>

MINNESOTA BREWING COMPANY

NOTES TO FINANCIAL STATEMENTS

NOTE 8. COMMITMENTS CONTINGENCIES (CONTINUED)

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 1997, 1996, and 1995, the Company made contributions
of approximately $35,000, $19,000, and $16,000, respectively, to this plan.

NOTE 9. TRANSITION AGREEMENT WITH PETE'S BREWING COMPANY

During August 1995, the Company's major customer at the time, Pete's Brewing
Company, notified the Company that it was ceasing further production of its beer
at the Company's facility. The Company and this customer entered into a
transition agreement which required the customer to reimburse the Company
approximately $1,000,000 to offset costs incurred in connection with and in full
resolution of all issues between the parties with respect to the brewing
agreement and other matters.


                                      F-16


<PAGE>


MINNESOTA BREWING COMPANY                                            SCHEDULE II

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, 1997       $485,000      $492,000        $671,000(4)         $306,000  
     Year ended December 31, 1996         34,000       601,000         150,000(3)          485,000
     Year ended December 31, 1995         66,000        25,000          57,000(1)           34,000
        
Accumulated amortization of 
    intangibles:
     Year ended December 31, 1997       259,000        129,000               -             388,000
     Year ended December 31, 1996       163,000         96,000               -             259,000
     Year ended December 31, 1995        79,000         84,000               -             163,000

Deferred tax asset valuation allowance:
     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
     Year ended December 31, 1995       429,000        (15,000)              -             414,000

Inventory valuation allowance:
     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)         233,000
     Year ended December 31, 1995             -        160,000               -             160,000

</TABLE>

(1)      Uncollectible accounts 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 transer from
         allowance for doubtful accounts to inventory reserve.




                                      F-17