FORM 10-KSB

                          U.S. SECURITIES AND EXCHANGE COMMISSION

                                  WASHINGTON, D.C. 20549

          (Mark One)
          [  X  ]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                   SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]

          For the fiscal year ended September 30, 1997
                                             OR

          [     ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                   SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

          For the transition period from ............... to...............

          Commission File No. 0-28282

                                   THE LION BREWERY, INC.
             (Exact Name of Small Business Issuer as Specified in Its
          Charter)

                    PENNSYLVANIA                    24-0645190
          (State or Other Jurisdiction    (I.R.S. Employer Identification No.)
           of Incorporation or Organization) 

                      700 NORTH PENNSYLVANIA AVENUE, WILKES-BARRE, PA
                                           18703
                         (Address of Principal Executive Offices)

          Registrant's telephone number, including area code  (717)
          823-8801

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

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

          Indicate by check whether the registrant: (1) has filed all
          reports required to be filed by Section 13 or 15(d) of the
          Exchange Act during the past 12 months (or for such shorter
          period that the registrant was required to file such reports),
          and (2) has been subject to such filing requirements for the past
          90 days. Yes __X__ No _____

          Indicate by check if disclosure of delinquent filers pursuant to
          Item 405 of Regulation S-B is not contained herein, and will not
          be contained, to the best of registrant's knowledge, in
          definitive proxy or information statements incorporated by
          reference in Part III of this Form 10-KSB or any amendment to
          this Form 10-KSB. [X]

          State the aggregate market value of the registrant's shares held
          by non-affiliates at December 22, 1997: $8,164,338.

          State the number of shares outstanding of each of the issuer's
          classes of common equity, as of the latest practicable date:
          December 22, 1997: 3,885,052 shares outstanding

          State issuer's revenues for its most recent fiscal year:
          $26,869,000

          Transitional Small Business Disclosure Format (check one): 
          Yes _____No __X__



          <PAGE>





                            DOCUMENTS INCORPORATED BY REFERENCE

          The definitive proxy statement for the registrant's 1997 Annual
          Meeting, to be filed with the Commission no later than 120 days
          after the close of the registrant's fiscal year has been
          incorporated by reference, in whole or in part for Part III of
          this Annual Report.

                                          PART I.

          ITEM 1. BUSINESS:

          GENERAL

               The Lion Brewery, Inc. ("Lion Brewery" or the "Company") is
          a producer and bottler of brewed beverages, including malta,
          specialty beers and specialty soft drinks. The Lion Brewery was
          incorporated in Pennsylvania on April 5, 1933. The Company is the
          dominant producer of malta in the continental United States.
          Specialty beers, generally known as craft beers, are brewed by
          the Company both for sale under its own label and on a contract
          basis. Craft beers are distinguishable from other domestically
          produced beers by their fuller flavor and adherence to
          traditional European brewing styles. The Company produces
          flavored alcoholic malt beverages and specialty soft drinks,
          including all-natural brewed ginger beverages, on a contract
          basis for third parties. The Lion Brewery also brews beer for
          sale under traditional Company owned labels for the local market
          at popular prices.

               The Company's growth strategy is to expand its production
          and marketing of specialty beverages, which includes
          Company-owned labels and labels produced under contract. By
          owning and operating its own brewery and with its significant
          brewing and packaging experience, the Company believes it is well
          positioned to optimize the quality and consistency of its
          products as well as to formulate new products. The Company plans
          to increase sales of its specialty beer labels through increased
          penetration of these brands in its existing markets, through a
          more focused and cost effective approach in its sales and
          marketing efforts.

               The Company's traditional beers - Stegmaier Gold Medal, 1857
          Premium Lager, Liebotschaner Cream Ale and Stegmaier Porter - are
          reminiscent of the Company's rich beer brewing heritage. The Lion
          Brewery is the beneficiary of a long brewing tradition. The
          brewhouse was built at the turn of the century in Wilkes-Barre,
          Pennsylvania. The Company's flagship line of specialty craft
          beers are marketed under the Brewery Hill name. The Company
          currently produces seven styles of beer under the Brewery Hill
          label, two of which are seasonal flavors.

               The Company established its reputation as a quality leader
          in the rapidly growing craft beer market by winning three Gold
          Medals at the Great American Beer Festival. The Lion Brewery's
          1857 Premium Lager was voted Best American Premium Lager in 1994
          and Liebotschaner Cream Ale won back to back gold medals in the
          American Lager Cream Ale Category in 1994 and 1995. In 1997, the
          Company has also received the following awards at the World Beer
          Championships:

                      Brewery Hill Caramel Porter         Gold Medal
                      Stegmaier Porter                    Gold Medal
                      Brewery Hill Centennial Lager       Silver Medal
                      Brewery Hill Honey Amber            Silver Medal
                      Brewery Hill Pocono Raspberry       Silver Medal
                      Stegmaier 1857 Premium Lager        Silver Medal
                      Liebotschaner Cream Ale             Silver Medal
                      Brewery Hill Pale Ale               Bronze Medal




          <PAGE>





          Brewery Hill Caramel Porter and Stegmaier Porter were also
          awarded Gold medals by Beer Connoisseur Magazine. In addition,
          craft beers and specialty soft drinks brewed by the Company under
          contract have won several awards.

          COMPANY HISTORY AND INDUSTRY BACKGROUND

               The brewhouse in which the Company continues to brew its
          products was built at the turn of the century in Wilkes-Barre,
          Pennsylvania. At that time, the U.S. brewing industry comprised
          nearly 2,000 breweries, most of which were small operations that
          produced distinctive beers for local markets. The Company was
          incorporated as The Lion, Inc. in April 1933 to operate the
          brewery, which was one of the fewer than 1,000 breweries to
          reopen following Prohibition. Over the ensuing decades, lighter,
          less distinctively flavored beers appealing to broad segments of
          the population and supported by national advertising programs
          became prevalent. These beers use lower cost ingredients and are
          mass produced to take advantage of economies of scale. This shift
          toward mass produced beers coincided with extreme consolidation
          in the beer industry. In keeping with this consolidation trend,
          the Company purchased other labels including the Stegmaier
          brands, which had been produced on Brewery Hill in Wilkes-Barre
          since 1857. Of the more than 60 breweries existing in eastern
          Pennsylvania 50 years ago, only two, including the Lion Brewery,
          remain. Today, according to industry sources, approximately 90%
          of all domestic beer shipments come from the four largest
          domestic brewers.

               Beginning in the mid 1980s and continuing in the 1990s, a
          number of domestic craft brewers began selling higher quality,
          more full-flavored beers, usually in local markets, as a growing
          number of consumers began to migrate away from less flavorful
          mass-marketed beers towards greater taste and broader variety,
          mirroring similar-trends in other beverage and food categories.
          As an established regional specialty brewer, the Lion Brewery
          believes it is well-positioned to benefit from this shift in
          consumer preferences. In 1996, according to industry sources, the
          craft beer segment increased to approximately 4.8 million
          barrels, representing approximately 2.5% of the 190 million
          barrel, $50 billion retail domestic beer market. In 1996, craft
          beer shipments grew 28%; over the five year period ended December
          31, 1995, craft beer shipments increased at a compound annual
          rate of approximately 40%, while shipments in the total U.S. beer
          industry remained relatively flat. Industry analysts have
          attributed this flat over-all beer consumption to a variety of
          factors, including increased concerns about the health
          consequences of consuming alcoholic beverages, safety
          consciousness and concerns about drinking and driving; a trend
          toward a diet including lighter, lower calorie beverages such as
          diet soft drinks, juices and sparkling water products; the
          increased activity of anti-alcohol consumer protection groups; an
          increase in the minimum drinking age from 18 to 21 years in all
          states; the general aging of the population; and increased
          federal and state excise taxes. Today the top three national
          brewers have entered into this fast growing craft segment by
          introducing their own specialty beers and/or by acquiring or
          investing in smaller regional craft brewers.

               Before the emergence of the market opportunity in specialty
          beer, the Lion Brewery diversified into other products to sustain
          operations and continue to utilize its brewhouse and bottling
          facility. The Company's strategic entry into malta production in
          1982 has resulted in the Company becoming the dominant producer
          of malta in the continental United States. Malta was originally
          developed many years ago by German brewers operating in the
          Caribbean area. The brewers developed malta by blending the
          excess molasses production from sugar with grain mash. Malta is
          still popular throughout the Caribbean and South America. In
          addition to malta, the Company also diversified into producing
          premium soft drinks in 1991.

          BUSINESS STRATEGY

               The Company intends to enhance its position as a leading
          producer of specialty brewed beverages by expanding production
          and marketing of craft beers and other malt based premium
          products, while maintaining the growth of its nonalcoholic brewed
          beverages. Key elements of the Company's business strategy are
          to:

                         Produce High Quality Brewed Beverages. The Company
                    is    committed to producing a variety of full-flavored
                    brewed     beverages. The Company employs a Head
                    Brewmaster, an assistant brewmaster and a brewing
                    assistant and retains a world recognized brewing
                    authority to ensure the high quality and consistency of
                    its products. To monitor the quality of its products,
                    the Company maintains its own quality control
                    laboratory staffed with two full-time quality control
                    technicians and submits its products for analysis to
                    the Seibel Institute of Technology, an independent
                    laboratory, on a continuous basis. To monitor
                    freshness, the Company dates each bottle and case with
                    the date and time of its bottling. The Company brews
                    its craft beers according to traditional styles and
                    methods, selecting and using only high quality
                    ingredients.

                          Brew Products in Company-Owned and Operated
                    Facilities. The Company owns and operates its own
                    brewing facility, which enables the Company to optimize
                    the quality and consistency of its products, to achieve
                    the greatest control over its production costs and to
                    formulate new brewed products. The Company believes
                    that its ability to engage in new product development
                    through onsite experimentation in its brewhouse and to
                    continuously monitor and control product quality in its
                    own facilities are competitive advantages.

                         Focused Distribution of Craft Beers. The Company
                    distributes craft beer under its own labels through a
                    network of wholesale distributor relationships.
                    Currently the Company distributes its products in
                    eleven states, although the majority of its sales
                    remain concentrated in Pennsylvania. The Company
                    intends to further penetrate its existing markets with
                    a targeted, cost effective approach in its sales and
                    marketing efforts. The Company chooses wholesaler
                    distributors that the Company believes will best
                    promote and sell the brands. The Company, through on
                    site tours and presentations, actively educates its
                    distributors in the total brewing process and the
                    growing craft beer industry.

                         Introduce New Products. The Company is committed
                    to developing and introducing new products to appeal to
                    the strong consumer interest under its own labels and
                    for its contract customers. The Company's diversified
                    product mix and brewing expertise enhance its ability
                    to create successful new products.  The Company
                    believes that new product introductions have helped the
                    Company gain consumer awareness in its existing
                    markets. Currently, the Company markets seven craft
                    beers under the Brewery Hill label. In 1997, the
                    Company introduced Brewery Hill Centennial Lager and
                    Brewery Hill Caramel Porter, its winter seasonal. The
                    Company also entered the specialty soft drink arena
                    with the introduction of Lion Brewery Root Beer and
                    developed several new soft drink products for its
                    contract customers.

                         Flexible Production Capacity and Increased
                    Efficiency. The Company has increased its annual
                    production capacity from 340,000 to 400,000 barrels
                    based upon its anticipated product mix. This expansion
                    included the modification of its existing seven ounce
                    bottling line to also accommodate 12 oz. bottles, the
                    bottle size for most of the Company's products. In
                    addition, The Company has increased its fermentation
                    and lagering capacity with the relining of nine storage
                    tanks. The Company also installed automated malt
                    storage and elevation system and is in the process of
                    automating a portion of the brewing process.

                         Provide a High Level of Customer Service. The
                    Company, through its high quality brewing standards and
                    timely availability of product, believes it provides a
                    high level of customer service to its malta, contract
                    craft beer and specialty soft drink customers. The
                    Company believes its emphasis on customer service has
                    enabled the Company to increase sales to these
                    customers.

          PRODUCTS


          <PAGE>



               The Lion Brewery's diversified product portfolio consists of
          a variety of styles of malta, craft beers and specialty brewed
          beverages and soft drinks, including all-natural brewed ginger
          beverages, and popularly priced beer sold under traditional
          Company-owned labels. The Company distributes its products in
          glass bottles and kegs and its products are dated to monitor
          freshness. 

               Malta. Malta is a non-alcoholic brewed beverage popular with
          the Caribbean and certain other segments of the Hispanic
          population, which the Company produces for distribution by major
          Hispanic food distribution companies primarily in the eastern
          United States. The leading malta brands have varying taste
          characteristics based on different formulations provided to the
          Lion Brewery by the distribution companies under whose labels the
          product is sold. 

               The principal ingredients of malta are malt (a germinated
          form of barley grain), several types of fructose syrup, caramel
          coloring and hops in modest quantities. Significant variations
          made by the Company involve the addition of molasses for one
          customer and production with lower malt quantities and higher
          levels of fructose sweetener for another. The Company also brews
          an alcoholic form of malta called Extracto which resembles
          standard malta but also includes some roasted malt and hops
          extract to add bitterness. The Company developed for Goya Foods a
          malta light product using Nutrasweet. In fiscal 1997 and 1996,
          malta constituted approximately 67% and 68%, respectively, of the
          Company's annual barrel shipments and 66% and 68%, respectively,
          of net sales. The Lion Brewery is the dominant producer of malta
          in the continental United States. Malta requires substantially
          less production time than beer or ale. The product remains in
          aging tanks for only a few days, compared to up to 50 days in
          fermentation and lagering tanks for beer. Malta is bottled in
          seven ounce and 12 oz. sizes.

               Craft and Traditional Beers. The Company currently produces
          eleven distinctive, craft and traditional full-flavored beers and
          engages in the research and development of new specialty beers.
          The Company brews its beers using high quality hops, malted
          barley, and other natural ingredients. The Company utilizes both
          a lager and ale yeast in the fermentation of its beers and ales.
          The Company distributes its beers only in glass bottles and kegs.
          All of the glass bottles are date coded for freshness and are
          pasteurized.

                    Stegmaier 1857 Premium Lager. This award winning lager
               is brewed with three different types of malt and four
               different types of hops. The hops are imported German
               Hallertau Hersbrucker, English East Kent Golding and Czech
               Saaz, as well as domestic U.S. Mt. Hood. This lager is
               distinguished by its clean, well balanced and full taste and
               rich golden color. 1857 Premium Lager won the Gold Medal in
               the American Premium Lager category at the 1994 Great
               American Beer Festival. In 1997, Stegmaier 1857 Premium
               Lager was awarded a Silver Medal in the World Beer
               Championships.

                     Stegmaier Gold Medal Beer. This typical American
               Pilsner is brewed with two different types of malt, corn and
               a blend of domestic and imported hops. The hops are imported
               Czech Saaz and domestic U.S. Mt. Hood and Cascade. This
               lager is distinguished by its crisp and clean easy to drink
               taste. Stegmaier Gold Medal Beer won a Silver Medal in the
               1996 World Beer Championships.

                    Stegmaier Porter. This porter, or dark beer, is brewed
               from four different varieties of malt, including two types
               of roasted malt. Stegmaier Porter is brewed with the
               Company's ale yeast and bittered and finished with English
               East Kent Goldings and other hops to give a balanced flavor
               and excellent drinkability for a dark beer. Stegmaier Porter
               won Gold medals at the World Beer Championships and in Beer
               Connoisseur Magazine in 1997.


                    Liebotschaner Cream Ale. Cream ale is brewed with a
               lager yeast at higher fermentation temperatures than typical
               lager, creating an ale-like taste. "Lieb" has a full creamy
               flavor balanced by spicy, fruity characteristics from the
               hop finish. "Lieb" utilizes two different varieties of pale
               malt and three different varieties of hops, including
               imported Czech Saaz.  Liebotschaner Cream Ale won
               consecutive Gold Medals in the American Lager Cream Ale
               category at the Great American Beer Festival in 1994 and
               1995. In 1997, Liebotschaner Cream Ale was awarded a Silver
               Medal in the World Beer Championships.

                    Brewery Hill Black and Tan. This mixture of the Lion
               Brewery's award winning 1857 Premium Lager and Stegmaier
          Porter
               creates a rich, full flavored beer. Brewery hill Black & Tan
          won
               first place--World Champion in 1996 at the World Beer
               Championships.

                    Brewery Hill Caramel Porter. This flavorful beer uses a
               top-fermenting ale yeast. Caramel Porter uses four different
               malts, including an extra generous portion of Caramel and
               Chocolate malts to give Caramel Porter a very pleasant
          caramel
               and chocolate flavor and aroma. Brewery Hill Caramel Porter
          is a
               winter seasonal brew. In 1997, Brewery Hill Caramel Porter
          won
               Gold medals at the World Beer Championships and in Beer
               Connoisseur Magazine.

                    Brewery Hill Centennial Lager. This hand-crafted full
          bodied
               lager features four different barley malts (including
          Roasted
               Barley) and is kettled hopped with three hop varieties
          (including
               imported Hallertau Hersbrucker and Czech Saaz). Centennial
          is
               then dry hopped with Czech Sazz and allowed to slow age to
          impart
               an incredible balance of malt and hops and a wonderful hop
          aroma
               and flavor. Brewery Hill Centennial is a new world of old
          world
               brewing traditions. Brewery Hill Centennial Lager won a
          Silver
               Medal in the 1997 World Beer Championships.

                    Brewery Hill Cherry Wheat. This ale is brewed using
          three
               different malts, including a generous dose of wheat malt.
          Brewery
               Hill Cherry Wheat is blended with pure and natural cherry
          juice
               and flavors to give this brew a delicate cherry flavor.
          Brewery
               Hill Cherry Wheat is a summer seasonal brew. Brewery Hill
          Cherry
               Wheat won first place--World Champion at the World Beer
               Championships in 1996.

                    Brewery Hill Honey Amber. This amber beer is brewed
          with
               three different malts and utilizes English East Kent
          Goldings
               hops. It is finished with pure, locally harvested clover
          honey to
               give a balance of flavor. The result is a rich amber color
          and
               malty bouquet. Brewery Hill Honey Amber won a Sliver medal
          at the
               World Beer Championships in 1997 and 1996.

                    Brewery Hill Pocono Raspberry. This award winning ale
          is
               blended with pure and natural raspberry juices and flavors
          to
               create a balanced flavor that is a delicate blend of the
               sweetness and tartness of raspberries. Brewery Hill Pocono
               Raspberry won a Silver medal at the World Beer Championships
          in
               1997 and 1996.

                    Brewery Hill Pale Ale. This American pale ale is brewed
          with
               two different malts and three different types of hops:
          English
               East Kent Golding, Cascade and domestic U.S. Mt. Hood. This
          ale
               is brewed with the Company's ale yeast and is kettle hopped.
               After a seven day fermentation period the ale then undergoes
          dry
               hopping. Unboiled hop roots are added to give this ale
          additional
               hop aroma. When finished, the pale ale has a clean malty
               fullness, an intense hop bitterness and a highly aromatic
          hop.
               Brewery Hill Pale Ale won a Bronze medal in the 1997 World
          Beer
               Championships.

               The Company also brews many distinctive craft beers and
          other
          specialty malt beverages under contract for other labels. Some of
          these customers are microbreweries and brewpubs that need
          additional
          brewing capacity to meet their production requirements and which
          typically provide their own recipes. In other instances, the
          Company
          formulates beer and specialty malt beverages for customers
          marketing
          their own labels. Most of these contract brewing customers
          provide
          their own packaging and labels. The Company arranges shipment to
          distributors F.O.B. the Company's warehouse and handles invoicing
          as a
          service to these customers. Among the Company's larger craft beer
          and
          specialty malt contract customers are:

                    Stoudt Brewing Company. This microbrewery and
          restaurant is
               located in Adamstown, Pennsylvania. The Lion Brewery
          produces
               Stoudt's Golden Lager, Fest, Honey Double Bock, Mai- Bock
          and
               Scarlet Lady in bottles pursuant to Stoudt's recipes and as
          a
               supplement to Stoudt's own production. Stoudt's beers have
          won
               five awards in the last five years, four at the Great
          American
               Beer Festival and one at the World Beer Championships.

                    Neuweiler Brewing Company. This craft beer marketing
          company
               is located in Allentown, Pennsylvania and sells four
          different
               styles of beer, all of which were formulated by and are
          brewed at
               the Lion Brewery. The Neuweiler Black and Tan won a Bronze
          Medal,
               Dark Lager Category, at the 1992 Great American Beer
          Festival.

                    Valley Forge Brewing Company. This brewpub is located
          in
               Wayne, Pennsylvania. The Lion Brewery produces three
          distinctive
               flavors, Peach Wheat, Stout and Pale Ale in bottles pursuant
          to
               Valley Forge's recipes.

                    Blue Hen Ltd. This marketer of craft beers located in
               Delaware sells three styles of beer formulated and produced
          by
               the Lion Brewery. The Blue Hen Lager won the Silver Medal at
          the
               World Beer Championships in both 1994 and 1996 and the Blue
          Hen
               Black and Tan won the Bronze Medal, Dark Lager category, at
          the
               1996 World Beer Championships. In 1997, the Company began
               producing Blue Hen Chocolate Porter.

                    Better Beverage Importers. This marketer of specialty
          malt
               beverages located in Delaware sells alcoholic malt based
          lemon
               and raspberry brews under the One-Eyed Jack label. These
          products
               are distributed in over 30 states.

                    Bass Beers Americas. This marketer of specialty malt
               beverages located in Atlanta sells an alcoholic malt based
          lemon
               brew called Hooper's Hooch TM. The Lion Brewery, Inc.
          produces
               Hooper's Hooch for distribution in 14 eastern states.

               The Lion Brewery craft beer and specialty malt beverages
          produced
          for sale under its own labels and under contract for others
          accounted
          for approximately 13% and 14% of its annual barrel shipments and
          17%
          and 19% of its net sales in fiscal 1997 and 1996, respectively.

               SPECIALTY SOFT DRINKS. The Lion Brewery first began blending
          and
          bottling specialty soft drinks in 1987. The Company currently
          produces
          specialty soft drinks under contract for five customers
          including:

                    Original Beverage Company. In June 1991, the Lion
          Brewery
               began producing for this customer Reed's All Natural Ginger
          Beer,
               a soft drink based on brewed ginger root. The Company is
               currently the sole brewer of beverages sold under the Reed's
               label. This product was originally developed and produced in
          a
               small microbrewery in Colorado and the Company believes that
               Reed's is the leading brewed soft drink in health food
          stores.
               Ginger roots are processed in the Lion Brewery's brew kettle
          to
               yield this all natural brewed product. The Reed's portfolio
               consists of five all natural flavors of real brewed ginger
               products: Original, Extra, Premium, Spiced Apple and
          Raspberry.
               In 1997, the Company began producing Borgnine's Coffee Soda
          and
               China Cola and Cherry Cola to be marketed by the Original
               Beverage Company. Reed's Original Ginger Brew was named Best
               Imported Food Product-Canadian Fancy Food Association and
          the
               1991 Outstanding Beverage Finalist-National Association for
          the
               Specialty Food Trade. Reed's Spiced Apple Brew won the 1994
               Outstanding Beverage Finalist-National Association for the
               Specialty Food Trade.

                    Mad River. The Company produces eleven varieties of
          premium
               all natural blended soft drinks for Mad River. The product
          is
               sold to consumers primarily in resort locations and in
          upscale
               specialty food stores.

               The Company also produces specialty soft drinks for Goya
          Foods,
          Vitarroz and Virgil's. Specialty soft drinks accounted for
          approximately 16% and 12% of the Lion Brewery's barrel shipments
          and
          14% and 9% of its net sales in fiscal 1997 and 1996,
          respectively.

          <PAGE>



          POPULAR PRICED BEER. The Company brews beer for sale at popular
          prices
          in local markets under several traditional Company-owned brands.
          A
          majority of this beer is bottled in 16 oz. returnable bottles.
          Popular
          priced beer accounted for approximately 4% and 6% of barrel
          shipments
          and 3% and 4% of net sales in fiscal 1997 and 1996, respectively.

          BREWING OPERATIONS

          Beer is made primarily from four natural ingredients: malted
          grain,
          hops, yeast and water. Malt suppliers prepare malt from barley
          grain
          by soaking it in water to initiate germination and then drying
          (kilning) the germinated grain with varying amounts of heat to
          vary
          the final characteristics of the malt (for example, more heat
          yields
          "roasted" malt). Hops grow in many varieties and impart
          bitterness or
          other distinctive flavors to the beer. Yeasts are either
          top-fermenting, used in ale production, or bottom fermenting,
          which
          produce lager style beers. The components of malta are primarily
          malted grain, water and supplemental sweeteners. Since malta is
          not
          fermented, yeast is not used.




          [GRAPHIC OMITTED]



          Brewing Process. The process of brewing beer consists of
          extracting
          fermentable sugar from the malt, brewing the liquid containing
          these
          sugars (wort) in combination with hops and other natural
          flavorings,
          fermenting the brewed liquid and then finishing (maturing) the
          beer in
          tanks for periods ranging from ten to 40 days depending upon the
          beer
          style. The brewing process for malta is substantially similar to
          that
          for beer except that fermentation is not involved. Malta's
          sweetness
          relative to beer is partly attributable to the malt sugars in the
          beverage which would be transformed to alcohol if the beverage
          was
          fermented. The brewed ginger ale made by the Company uses ginger
          root
          rather than malt as the principal ingredient. The entire brewing
          process for the Company's products varies from two days to 50
          days,
          depending on the type of products brewed.

               Extracting the fermentable sugars begins with milling the
          dried
          malt. Milling consists of crushing (not grinding) the malt
          between
          pairs of rollers in the malt mill. This causes a separation of
          the
          husk from the body and also breaks the body and exposes the
          internal
          components of the barley malt for the mashing process.

               The crushed malt is then combined with specially treated
          brewing
          water at a specific temperature in the mash tub to create the
          mash.
          The Company uses the traditional upward infusion mashing system
          that
          uses three precisely controlled temperature and time plateaus to
          create the resultant sugar liquid called "wort." The completed
          mash is
          then filtered by gravity in the lauter tub. The filtration media
          is
          the crushed grain itself. The wort is collected and transferred
          to the
          brew kettle

               The wort is boiled in the brew kettle for 90 to 120 minutes.
          During this boiling process, the precise amount of the hop
          varietals
          are added at specified time intervals to create the desired
          bitterness
          and aroma. The boiled wort is then transferred to the hot wort
          tank
          (whirlpool) where the proteins from the malt and the tannins from
          the
          hops are allowed to settle out and are removed. The wort is then
          rapidly cooled to the desired temperature and infused with air.

               The aerated wort is then transferred to fermentation tanks
          to
          which a precisely monitored amount of yeast of a specific type at
          a
          specific temperature is added. Air in the wort allows the yeast
          to
          remain flexible and enables it to begin a rapid and complete
          fermentation. After several hours, the air is depleted and the
          fermentation continues in an anaerobic (without air) process. The
          Company uses two types of yeast, a lager yeast (bottom
          fermenting) and
          an ale yeast (top fermenting). Fermentation takes seven days, and
          during this time the yeast will multiply dramatically. At the end
          of
          the fermentation, the yeast will be recovered for a new
          fermentation
          and the beer is transferred to a storage (lager/ruh) tank.

               The storing of beer at cold temperatures is called
          "lagering"
          and/or "ruh." The amount of time that the beer is allowed to
          lager
          varies with the type of beer, with ales having a shorter lager
          period
          than lagers. This storage period allows for the reduction of
          harsh
          flavors created during the fermentation process. It also allows
          for
          the clarification and maturing of the fine beer flavor. After
          lagering, the beer is filtered to remove any yeast and other
          insoluble
          materials. The beer's carbonation results from a combination of
          natural absorption of carbon dioxide byproduct from the
          fermentation
          process and carbonation after filtering.

               Bottling and Kegging. The Company packages its products in
          bottles and in the case of beer, and to a limited extent, ginger
          beer,
          in kegs. The bottling house has two automated bottling lines,
          each
          containing bottle filling and sealing machines, pasteurizing
          lines,
          bottle labeling equipment, bottle casing and uncasing machines
          and
          packing equipment. One line also contains capacity for bottle
          soaking
          and washing and a Majonnier flow mixer for soft drinks. Areas are
          set
          aside for packaging supplies and short term holding of finished
          cases
          pending shipment to the warehouse. Currently one bottling line
          handles
          recycled 16 oz. and 12 oz. bottling and the other line handles
          new 12
          oz. bottling and seven ounce bottling. The Company estimates that
          its
          current annual 12 oz. bottling capacity is approximately 3.7
          million
          cases (270,000 barrels) and its current seven ounce bottling
          annual
          capacity is approximately 4.0 million cases (174,000 barrels).

               For most of the Company's output of 12 oz. bottled products,
          the
          Company uses recycled bottles from states that impose a bottle
          deposit
          at purchase, principally New York and Massachusetts. The
          inability of
          the Company to continue to obtain a sufficient supply of recycled
          bottles could have an adverse affect on the Company's results of
          operations. The Company anticipates a change in the availability
          of
          certain styles of recycled glass from its current sources. This
          reduction in availability would result in an increased cost of
          glass;
          reducing future gross margins. The Company will make all efforts
          to
          mitigate the effect on gross margins, but no assurances can be
          made
          that the Company will be successful in this regard. This type of
          glass is used for both the Lion Brewery's own labels and for
          contract
          packaged production. All seven ounce bottles are purchased new.
          The
          Company's 16 oz. returnable bottles are subject to deposit and
          return
          arrangements at the brewery.

               Quality Assurance. The Lion Brewery employs a Head
          Brewmaster, an
          assistant brewmaster and a brewing supervisor and retains the
          services
          of a world recognized brewing authority to ensure the high
          quality and
          consistency of its products. To monitor the quality of its
          products,
          the Company maintains its own quality assurance lab, employs two
          full-time quality control technicians and submits its products
          for
          analysis to the Seibel Institute of Technology, an independent
          laboratory, on a continuous basis. To further enhance the
          consistency
          of its products, the Company is in the process of automating
          several
          steps in the brewing process. The Company brews it craft beers
          according to traditional styles and methods, and precisely
          maintains
          and assures the highest quality and consistency within each
          brewing
          step. In order to maintain product quality for the consumer, the
          Company pasteurizes its bottled products. To monitor freshness,
          the
          Company dates each bottle and case with the date and time of
          bottling.
          Product is brewed in small batches which allows for a thorough
          analysis of each step. Each brew is carefully monitored and
          tasted to
          ensure the highest quality to the consumer. This high quality
          standard
          has allowed the Company to win three Gold Medals at the Great
          American
          Beer Festival and numerous medals at World Beer Championships.

          PRODUCT DISTRIBUTION

               The distribution of products which the Company makes under
          contract, including malta, specialty beers sold under other craft
          beer
          labels and brewed and blended soft drinks, is managed entirely by
          the
          contracting customer. In the case of malta and soft drinks, the
          customer typically distributes the product to supermarkets,
          specialty
          food markets, food service establishments and other retailers
          through
          independent or company employed sales personnel with occasional
          involvement of wholesalers or distributors as middlemen.

               The Company distributes its beers and ales marketed under
          its own
          brands through a network of independent distributors whose
          principal
          business is the distribution of beer and other alcoholic
          beverages.
          The Company's contract beer customers are likely to employ this
          independent distributor channel as well. These independent
          distributors resell the products to retailers which sell the
          beers to
          the consumer. Currently the Company's craft and traditional beer
          products are primarily being distributed through fifty- two
          independent distributors in 10 eastern states (Connecticut,
          Delaware,
          Maryland, Massachusetts, New Jersey, New York, North Carolina,
          Ohio,
          Pennsylvania, Virginia) and Washington, D.C. The Company selects
          distributors in each market that it believes will devote
          attention and
          resources to the promotion and sales of its products. Most of its
          distributors also represent a national beer brand and have
          established
          significant retail penetration in their territory to make that
          brand
          widely available. Management believes that both the brewing of
          beer in
          Company-owned facilities and a corresponding regional identity
          are
          viewed positively by independent distributors in deciding whether
          to
          carry the Lion Brewery's products. The appointment of
          distributors is
          also governed by beverage laws in some states which stipulate a
          specific territory for each distributor.

          SALES AND MARKETING

               The Lion Brewery's four largest malta customers, Goya Foods,
          Vitarroz, Cerveceria India and 7- Up/RC Puerto Rico, accounted
          for 94%
          and 95% of the Company's total malta sales for fiscal 1997 and
          1996,
          respectively. Mr. Lawson, the Company's Chief Executive Officer,
          is
          primarily responsible for selling and marketing these and the
          Company's other contract accounts. The Head Brewmaster and the
          Vice
          President of Logistics are also actively involved with these
          customer
          relationships in discussing product recipes, new product
          formulations,
          production scheduling and delivery.

               The Company's craft and traditional beers are sold to
          independent
          distributors by five full-time salespeople. The Company is
          primarily
          focused on building relationships through personal contact with
          its
          existing and new distributors to broaden the market presence of
          the
          Company's craft beer. Since the Company's beers are only a
          portion of
          its distributors' expanding portfolio of product offerings and
          compete
          with other beers, it is becoming more important for the Company
          to
          elevate its brand awareness with each distributor. This is
          accomplished by on-site training of distributors' staff and, in
          some
          cases, offering educational tours of the brewery. Several of the
          Company's largest distributors and their sales forces have
          visited the
          brewery to enhance their knowledge of the Company's products. The
          Company's sales representatives also arrange taste testings of
          Company
          beers for its distributors and supply informational literature
          for
          circulation among distributors' retail customers. To further
          promote
          its product sales, the Company periodically offers price
          discounts to
          distributors in certain markets. The Company anticipates that it
          may
          continue to offer such promotions in response to competitive
          conditions.

               The Company believes that in order to stimulate consumer
          demand
          it must educate not only its distributors but also the retailer
          and
          consumer about the freshness and quality of its products. The
          Lion
          Brewery sales force travels with distributor sales personnel to
          retail
          accounts to familiarize new accounts with Company products and to
          increase sales at existing accounts. The Company has participated
          in
          on- premise marketing such as product sampling and beer dinners.
          In
          addition, on premise marketing is also supported with point of
          sale
          material such as tap handles, table tents and, in some cases,
          neon
          signs.

               The Company's strategy is to increase its penetration into
          existing markets with a targeted, cost effective approach in its
          sales
          and marketing efforts. This strategy will be implemented by
          further
          developing the existing distributor relationships and/or
          establishing
          new distributors in target markets.

          COMPETITION

               The Company competes with other breweries in the production
          and
          marketing of malta and beer. Management believes that the Company
          is
          the dominant brewer of malta in the continental United States
          because
          of the high quality of its products, customer service and
          location in
          the eastern United States where the consumption of malta is
          concentrated. Although foreign competition has recently entered
          the
          malta market, the Company's customer service and proximity to the
          market has enabled it to maintain its customer base.

               In the craft beer market, the Company competes against such
          craft
          brewers as The Boston Beer Company, Inc. and Pete's Brewing
          Company,
          and other regional breweries such as Redhook Ale Brewery, Inc.,
          Pyramid Brewing, Inc., Genesee Brewing Company, Inc., Pittsburgh
          Brewing Company, Latrobe Brewing, F. X. Matt Brewing Company and
          D. G.
          Yuengling and Son, Inc. as well the companies for which the
          Company
          performs contract brewing. The Company also faces competition
          from
          import specialty beer companies such as Bass PLC, Cerveceria
          Modelo,
          S.A. (brewer of Corona Extra), Cerveceria Moctezuma, S.A. (brewer
          of
          Dos Equis) and Heineken N.V., which currently produce premium
          beer.
          Imported beer accounts for a greater share of the domestic beer
          market
          than craft beers. The Company also competes with niche beers
          produced
          by affiliates of certain major domestic brewers as well as with
          craft
          beers produced for its contract brewing customers. For example,
          Anheuser-Busch, Miller Brewing Co. and Adolph Coors market
          Pacific
          Ridge Ale, Leinenkeugel and Killian's Red, respectively. In
          addition,
          the Company expects that the major national brewers, with their
          superior financial resources and established distribution
          networks,
          will seek further participation in the continuing growth of the
          specialty beer market through the investment in, or formation of
          distribution alliances with, smaller specialty brewers. The
          increased
          participation of the major national brewers will likely increase
          competition for market share and heighten price sensitivity
          within the
          craft beer market. The Company also expects competition to
          increase as
          new craft brewers emerge and existing craft brewers expand their
          capacity. Access to capital and other resources is a prerequisite
          to
          increasing sales and production in order to benefit from this
          market
          opportunity. Many of the Lion Brewery's competitors have
          significantly
          greater financial, production, product distribution and marketing
          resources than the Company.




          <PAGE>

               The Company's products also compete generally with other
          alcoholic beverages, including products offered in other segments
          of
          the beer industry and low alcohol products. The Company competes
          with
          other beer and beverage companies not only for consumer
          acceptance and
          loyalty but also for shelf and tap space in retail establishments
          and
          for marketing focus by the Company's distributors and their
          customers,
          all of which distribute and sell other beer and alcoholic
          beverage
          products.

               As an element of its craft beer business, the Company
          currently
          produces and will continue to produce specialty beer products
          under
          contract for certain breweries and marketers of craft beer. The
          Company's competition for this segment are breweries with excess
          capacity. The Company believes its contract packaging experience
          and
          the quality of its product enhance its ability to attract
          additional
          craft beer marketers as customers.

               The Company's soft drinks are produced under contract for
          niche
          marketers. Specialty soft drinks using natural ingredients
          require
          pasteurization. The Company believes its principal competitors
          for
          this business are bottlers with specialized equipment such as
          pasteurizers not generally used in mass market soft drink
          production.

          CUSTOMER CONTRACTS

               The Company's contracts with its malta and contract brewing
          customers vary; however, they generally provide for initial terms
          of
          two to five years, subject to renewal, exclusive rights for the
          Lion
          Brewery to produce the product, price and payment terms and
          brewing
          and packaging specifications. The contracts may be terminated by
          either party under certain circumstances, including the failure
          to
          reach minimum annual purchase levels in the case of its contract
          beer
          customers, and generally provide for no minimum purchases.

               The Company's contracts with its beer distributors provide
          for
          assigned territories and the products to be distributed. Delivery
          terms are F.O.B. the Company's brewery or warehouse. In some
          states,
          the terms of the Company's contracts with its distributors may be
          affected by laws that restrict enforceability for some contracts
          terms, especially those related to the Company's right to
          terminate
          the services of its distributors.

          REGULATION

               The Company's beer business is highly regulated at federal,
          state
          and local levels. Various permits, licenses and approvals
          necessary to
          the Company's brewery and the sale of alcoholic beverages are
          required
          from various agencies, including the U.S. Treasury Department,
          Bureau
          of Alcohol, Tobacco and Firearms (the "BATF"); the United States
          Department of Agriculture; the United States Food and Drug
          Administration; state alcohol beverage regulatory agencies in the
          states in which the Company sells its products; and state and
          local
          health, sanitation, safety, fire and environmental agencies. In
          addition, the beer industry is subject to substantial federal
          excise
          taxes, although the Company benefits from favorable treatment
          granted
          to brewers producing less than two million barrels per year.

               Management believes that the Company currently has all
          licenses,
          permits and approvals necessary for its current operations.
          However,
          existing permits or licenses could be revoked if the Company were
          to
          fail to comply with the terms of such permits or licenses, and
          additional permits could in the future be required for the
          Company's
          existing or expanded operations. If licenses, permits or
          approvals
          necessary for the Company's operations were unavailable or unduly
          delayed, or of any such permits or licenses were revoked, the
          Company's ability to conduct its business could be substantially
          and
          adversely affected.

               Alcoholic Beverage Regulation and Taxation. The Company is
          subject to licensing and regulation by a number of governmental
          authorities. The Company operates its brewery under federal
          licensing
          requirements imposed by the BATF. Commercial breweries are
          required to
          file an amended Brewer's Notice with the BATF and certain states
          every
          time there is a material change in the brewing process or brewing
          equipment, change in the brewery's location, change in the
          brewery's
          management or a material change in the brewery's ownership. The
          Company's operations are subject to audit and inspection by the
          BATF
          at any time.

               In addition to the regulations imposed by the BATF, the
          Company
          is subject to various regulations concerning deliveries and
          selling
          practices in states in which the Company sells its products.
          Failure
          by the Company to comply with applicable federal or state
          regulations
          could result in limitations on the Company's ability to conduct
          is
          business. The BATF's permits can be revoked for failure to pay
          taxes,
          to keep proper accounts, to pay fees, to bond premises, and to
          abide
          by federal alcoholic beverage production and distribution
          regulations,
          or if holders of 10% or more of the Company's equity securities
          are
          found to be of questionable character. Permits from state
          regulatory
          agencies can be revoked for many of the same reasons

               The U.S. federal government currently imposes an excise tax
          of
          $18.00 per barrel on every barrel of beer produced for
          consumption in
          the United States. However, any domestic brewer with production
          under
          two million barrels per year pays a federal excise tax in the
          amount
          of $7.00 per barrel on the first 60,000 barrels it produces
          annually.
          While the Company is not aware of any plans by the federal
          government
          to reduce or eliminate this benefit to small brewers, any such
          reduction in a material amount could have an adverse effect on
          the
          Company. Individual states also impose excise taxes on alcoholic
          beverages in varying amounts, which are also been subject to
          change.
          It is possible that excise taxes will be increased in the future
          by
          both the federal and state governments. In addition, increased
          excise
          taxes on alcoholic beverages have been considered in connection
          with
          various governmental budget-balancing or funding proposals. Any
          such
          increases in excise taxes, if enacted, could adversely affect the
          Company's results of operations.

               State and Federal Environmental Regulation. The Company's
          operations are subject to environmental regulations and local
          permitting requirements regarding, among other things, air
          emissions,
          water discharges and the handling and disposal of wastes. While
          the
          Company has no reason to believe its operation violates any such
          regulation or requirements, if such a violation were to occur,
          the
          Company's business may be adversely affected. In addition, if
          environmental regulations were to become more stringent in the
          future,
          the Company could be adversely affected.

          TRADEMARKS

               The Company considers its trademarks, particularly the
          "Brewery
          Hill" brand name, beer recipes and product package, advertising
          and
          promotion design and artwork to be of considerable value to its
          business. The Company relies on a combination of trade secret,
          copyright and trademark laws and nondisclosure and other
          arrangements
          to protect its proprietary rights. Despite the Company's efforts
          to
          protect its proprietary rights, unauthorized parties may attempt
          to
          copy or obtain and use information that the Company regards as
          proprietary. There can be no assurance that the steps taken by
          the
          Company to protect its proprietary information will prevent
          misappropriation of such information and such protections may not
          preclude competitors from developing confusingly similar brand
          names
          or promotional materials or developing products with taste and
          other
          qualities similar to the Company's beers. While the Company
          believes
          that its trademarks, copyrights and recipes do not infringe upon
          the
          proprietary rights of third parties, there can be no assurance
          that
          the Company will not receive future communications from third
          parties
          asserting that the Company's trademarks, copyrights and recipes
          infringe, or may infringe, the proprietary rights of third
          parties.
          The potential for such claims will increase as the Company
          introduces
          new beers, increases distribution in recently entered geographic
          areas
          or enters new geographic regions. Any such claims, with or
          without
          merit, could be time consuming, result in costly litigation and
          diversion of management personnel, cause product distribution
          delays
          or require the Company to enter into royalty or licensing
          agreements.
          Such royalty or licensing agreements, if required, may not be
          available on terms acceptable to the Company or at all. In the
          event
          of a successful claim of infringement against the Company and
          failure
          or inability of the Company to license the infringed or similar
          proprietary information, the Company's business, operating
          results and
          financial condition could be materially adversely affected.

          EMPLOYEES

          At September 30, 1997, the Company had 131 full time employees,
          including 114 in production, 6 in sales and marketing, and 11 in
          administration. Of these, 103 are represented by a labor union.
          The
          collective bargaining agreement with the union expires on May 31,
          2000. The Company believes its relations with its employees to be
          good.

          ITEM 2. PROPERTIES

          BREWING FACILITY

               The Lion Brewery produces and packages its beverages in its
          own
          brewing and bottling facility. By owning and operating its own
          brewery, the Lion Brewery is able to precisely monitor and
          control
          each step of the brewing process. The brewery is a complex of
          brick
          buildings housing a boiler room, an engine room, a brew house,
          three
          storage cellars and keg filling lines. Adjacent to the brew house
          is
          the bottling house, which contains the bottle washing equipment,
          two
          complete bottling lines including pasteurizers and warehousing
          for
          packaging materials. The Company leases two warehouses near the
          brewery aggregating approximately 150,000 square feet. One
          warehouse
          stores glass bottles which will be used in bottling and the other
          warehouse stores finished product and packaging materials. The
          warehouse leases expire in February 1999 and June 2001,
          respectively.
          The Company also leases a third warehouse on an as needed,
          temporary
          basis. The Company believes that its current brewing facilities
          are
          adequate to meet its currently anticipated needs. The Company can
          expand its facilities, if required, to meet increased production
          requirements.

               The brewery has one series of vats and tanks that are used
          to
          produce the Company's brewed products. The Company's brew kettle
          is a
          390 barrel copper Schock-Gusmer. The Lion Brewery's products are
          brewed in small 330 barrel batches. Another major piece of
          brewing
          equipment is a 21 foot diameter Schock-Gusmer combination mash
          and
          lauter tub with knives and rakes. Also located in the brewing
          area is
          a quality control laboratory and various refrigerated rooms for
          storing special brewing ingredients. Located in the basement of
          the
          brewery are special stainless steel tanks and equipment that
          allow the
          Lion Brewery to mix syrups and flavorings for a wide range of
          products. Blended beverages are transported from these tanks
          directly
          to the bottling house through connecting lines. The brewery's
          estimated annual capacity based upon the current product mix is
          approximately 400,000 barrels (31 gallons or 13.8 cases of 24
          twelve
          oz. bottles equal one barrel) of product per year, assuming three
          seven-hour shifts, five days a week. Capacity is a function of
          the
          product being produced because of the varying storage times for
          the
          different types of products. Since beer requires as much as 50
          days in
          tanks to allow for fermentation and finishing as contrasted with
          only
          two days for non-alcoholic brewed beverages such as malta,
          anticipated
          increases in the percentage of total output represented by beer
          production will require capital outlays for additional tanks. In
          fiscal 1997 and 1996, the Company shipped 335,000 barrels and
          329,000
          barrels of beverages, of which 67% and 68% were malta, 17% and
          20%
          were beer and 16% and 12% were soft drinks, respectively.

               The Lion Brewery is located on approximately 5.9 acres of
          Company
          owned land in Wilkes-Barre, Pennsylvania. The property is served
          by
          the Luzerne & Susquehanna Railway Company and carloads of grains
          used
          in brewery production are usually on site.








          <PAGE>






          ITEM 3. LEGAL PROCEEDINGS

          LEGAL PROCEEDINGS

               The Company is not currently involved in any material
          pending
          legal proceedings and is not aware of any material legal
          proceedings
          threatened against it.

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

               There were no matters submitted to a vote of security
          holders
          during the fourth quarter of the year ended September 30, 1997.


                                         PART II.

          ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

               The Company's common stock is traded on the Nasdaq National
          Market System under the symbol "MALT". There were approximately
          33
          holders of record of the Company's common stock at December 22,
          1997
          although the Company believes that there are in excess of 300
          beneficial holders. As of such date, the closing sales price per
          share
          for the Company's common stock was $3-1/2.

          Securities of the Company were first publicly traded in the third
          quarter of fiscal 1996. The high and low closing sale prices
          reflect
          inter-dealer prices, without mark-up, mark-down or commission and
          may
          not necessarily reflect actual transactions. The following table
          sets
          forth the high and low closing sales per share for the Company's
          common stock for the third and fourth quarters of fiscal 1996,
          the
          first, second, third and fourth quarters of 1997 and for the two
          months ended November 30, 1997 as reported by Nasdaq:

                         Quarter ended        High        Low
                         -------------        ----       ----

                      June 30, 1996           6          5-1/8
                      September 30, 1996      5-7/8      5
                      December 31, 1996       5-3/8      3-3/4
                      March  31, 1997         4-3/8      2-5/8
                      June 30, 1997           3-1/8      2-3/8
                      September 30, 1997      4-1/8      3-1/2

                        Two months ended
                        ----------------

                      November 30, 1997       4-1/8 3-1/2

          There were no cash dividends declared on the common stock of the
          Company during the fiscal years ended September 30, 1997 and
          1996.













          <PAGE>





          ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
          CONDITION
                  AND RESULTS OF OPERATIONS

               The following discussion and analysis should be read in
          conjunction with the Company's Financial Statements and related
          Notes
          thereto. All references to fiscal years are references to the
          Company's fiscal year ended September 30. This Annual Report
          includes certain forward-looking statements (as such term is
          defined in the Private Securities Litigation Reform Act) which
          are subject to the occurrence of certain contingencies which may
          not occur in the time frames anticipated or otherwise, and, as a
          result, could cause actual results to differ materially from such
          statements.  These contingencies include the introduction and
          acceptance of new products, the penetration of existing and new
          markets, the availability of recycled bottles and the completion
          of capital improvements.

          OVERVIEW

               The Lion Brewery is a producer and bottler of brewed
          beverages
          for several markets in which it believes its ability to
          formulate,
          brew and package quality products in a consistent manner in a
          Company
          owned and operated facility affords it a competitive advantage.
          The
          Company is the dominant producer of malta in the continental
          United
          States. Malta, a brewed non-alcoholic beverage popular in the
          Caribbean and South America, is sold to food and beverage
          distribution
          companies marketing to these population segments in the United
          States.
          Malta sales have increased from $8.7 million, representing 73% of
          the
          Company's net sales in 1991, to a high of $18.6 million,
          representing
          75% of net sales in fiscal 1996. Net sales of malta were $17.8
          million
          or 66% of net sales in fiscal 1997.

               While the Lion Brewery has been engaged in the production of
          beer
          since repeal of Prohibition in 1933 in facilities in which beer
          was
          first produced at the turn of the century, the Company has
          reemphasized its production of full-flavored craft beers for sale
          under its own labels in the last three years. This emphasis
          complements the Company's production of craft beers on a contract
          basis for other breweries and marketers of craft beer which
          commenced
          nine years ago. Since 1991, craft beer and specialty malt
          beverage
          sales under Company labels or pursuant to contract for other
          breweries
          or marketers have increased from $479,000, representing 3% of net
          sales, to a high of $5.0 million, representing 19% of net sales,
          in
          fiscal 1996. Net sales of craft beer and specialty malt beverage
          sales
          under Company labels or pursuant to contract were $4.6 million or
          17%
          of net sales in fiscal 1997.

               The Company also brews and blends specialty soft drinks for
          beverage marketers and for some of its malta customers. In 1991
          soft
          drink sales totaled $724,000, representing 5% of net sales,
          increasing
          to $3.7 million, representing 14% of net sales, in fiscal 1997.

               The Company still brews beer sold at popular prices in local
          markets and predominantly packaged in 16 oz. returnable bottles.

               The Company obtains the highest net sales dollar per barrel
          from
          the sale of craft beer under its own labels, which had an average
          net
          selling price of approximately $119 in fiscal 1997 and $127 per
          barrel
          in fiscal 1996. This decline in the average net selling price is
          due
          to line pricing of the Company's Brewery Hill product portfolio,
          product sales mix and the concentration of sales in the local
          markets.
          The Company's average selling price per barrel for craft beer
          produced
          under contract is lower than for the Company's own brands, but
          most
          contract customers bear the cost of labels and packaging so that
          gross
          margins remain favorable.

               The Company's gross margin has historically been, and is
          anticipated to be, affected by several factors, including product
          mix,
          sales prices, cost of ingredients, bottles and other packaging
          materials, labor productivity, overhead utilization and equipment
          utilization. Due to its reliance on a Company-owned production
          facility, a significant portion of the Company's overhead is not
          susceptible to short term adjustment in response to sales below
          management's expectations, thus an excess of production capacity
          could
          have a significant negative impact on the Company's operating
          results.
          A variety of other factors may also lead to significant
          fluctuations
          in the Company's quarterly results of operations, including
          timing of
          new product introductions, seasonality of demand, changes in
          consumer
          preferences and general economic conditions.

               The Company sells approximately 85% of its beer in bottles
          and
          the remainder in kegs. All other products are sold in bottles
          except
          for Reed's premium brewed soft drinks, which are also available
          in
          kegs. Malta is packaged in 12 oz. and seven ounce bottles, craft
          beer
          and soft drinks are packaged in 12 oz. bottles and popular priced
          beer
          is packaged in both 12 oz. bottles and 16 oz. returnable bottles.
          A
          substantial portion of the Company's bottled products are bottled
          in
          recycled bottles which have a lower cost than new bottles.
          However in
          fiscal 1997, the Company purchased a significant amount of new 12
          oz.
          bottles which were required for several new products produced
          under
          contract. As a result the gross margin on these products was
          substantially lower than that of similar products packaged in
          recycled
          bottles.

               The Company anticipates a change in the availability of
          certain
          styles of recycled glass from its current sources. This reduction
          in
          availability would result in an increased cost of glass; reducing
          future
          gross margins and could have a significant impact on overall
          profitability.
          The Company will make all efforts to mitigate the effects on
          gross margins
          and overall profitability, but no assurances can be made that the
          Company
          will be successful in this regard.

               The Company brews five days per week, 24 hours per day, as
          demand
          requires, and packages production five days per week in two
          seven-hour
          shifts. During peak demand, the Company lengthens each packaging
          shift
          by two hours per shift. At its present capacity and product mix
          (approximately 67% malta, 17% beer and 16% specialty soft
          drinks), the
          Company believes it could produce and package approximately
          400,000
          barrels per year.

               The Company's strategy is to expand its production and
          marketing
          of specialty beverages, which includes Company-owned labels and
          labels
          produced under contract. The Company plans to increase sales of
          its
          specialty beer labels through increased penetration of these
          brands in
          its existing markets, through a more focused and cost effective
          approach in its sales and marketing efforts.

          RESULTS OF OPERATIONS

               The following tables set forth for the periods indicated
          certain
          income statement data expressed as a percentage of net sales, and
          certain operating data expressed as a percentage of net sales and
          net
          sales per barrel.

          Income Statement Data

                                                 Year Ended September 30,
                                                 ------------------------
                                                         1997        1996   
              1995
                                                        ------      ------  
             -----
          Gross sales                                    101.9%    102.1%  
          101.5%
          Less excise taxes                                1.9       2.1    
           1.5
                                                         -----     -----   
          -----
              Net sales                                  100.0     100.0   
          100.0
          Cost of sales                                   74.8      75.4    
          76.0
                                                         -----     -----   
          -----
          Gross profit                                    25.2      24.6    
          24.0
                                                         -----     -----   
          -----
          Operating expenses:
            Delivery                                       3.1       3.1    
           3.3
            Selling, advertising and promotional           5.4       4.7    
           3.2
            General and administrative                     5.2       5.2    
           5.4                                           -----     -----   
          -----
                   Total operating expenses               13.7      13.0    
          11.9
                                                         -----     -----   
          -----
          Operating income                                11.5      11.6    
          12.1
          Interest (income) expense, net                  (0.5)      2.0    
           4.2
                                                         -----     -----   
          -----
          Income before provision of income taxes
              and extraordinary item                      12.0       9.6    
           7.9
          Provision for income taxes                       5.2       4.3    
           3.7
                                                         -----     -----   
          -----

          Income before extraordinary item                 6.8       5.3    
           4.2
          Extraordinary item                               0.0       1.2    
           0.0
                                                         -----     -----   
          -----

          Net income                                       6.8%      4.1%   
           4.2%





          <PAGE>






          Operating data

                                                  Year Ended September 30,
                                       Percent of Net Sales          Net
          Sales Per Barrel
                                      ----------------------       
          ----------------------
                                      1997     1996     1995        1997   
          1996     1995
                                      ----     ----     ----        ----   
          ----     ----

          Malta                       66.2%    67.8%    75.0%       $ 80   
          $ 80    $ 78.
          Beer:
              Craft:
                  Company label        4.8      6.7      4.9         119    
          127     110.
                  Contract            12.4     12.4      7.4         100    
           99      84.
                                      ----     ----    -----        ----
                                      17.2     19.1     12.3
                  Popular priced       2.9      3.7      5.0          57    
           55      54.
                      Total beer      20.1     22.8     17.3

          Specialty soft drinks       13.7      9.4      7.7          68    
           64      62.

                                     100.0%   100.0%   100.0%       $ 80   
          $ 80    $ 76.
                                     =====    =====    =====


          YEARS ENDED SEPTEMBER 30, 1997 AND 1996

               Gross Sales and Excise Taxes

               The Company's gross sales increased 1.4% to $27.4 million in
          fiscal 1997 from $27.0 million in fiscal 1996. Gross sales of
          craft
          beer and specialty malt beverages decreased 7.4% to $5.0 million
          in
          fiscal 1997 from $5.4 million in fiscal 1996. Gross sales of
          craft
          beer and specialty malt beverages represented 18.3% of gross
          sales in
          fiscal 1997 as compared to 20.2% of gross sales in fiscal 1996.
          Gross
          sales of popular priced beer decreased 18.2% to $0.9 million in
          fiscal
          1997 from $1.1 million in fiscal 1996.

               The Company is required to pay federal and state excise
          taxes on
          sales of its beer. The federal excise tax increases from $7.00 to
          $18.00 per barrel on production over 60,000 barrels. Total excise
          taxes decreased 8.5% to $498,000 in fiscal 1997 from $544,000 in
          fiscal 1996. Excise taxes as a percentage of sales decreased in
          fiscal
          1997 due to beer sales comprising a lesser percentage of the
          Company's
          product mix. As the Company increases its beer production above
          60,000
          barrels, federal excise taxes will increase as a percentage of
          sales.

          During fiscal 1997 and 1996, the Company sold 57,761 barrels and
          64,797 barrels of beer respectively. The Company records excise
          tax
          expense based on anticipated barrel shipments during the calendar
          year.

               Net Sales

               The Company's net sales increased 1.6% to $26.9 million in
          fiscal
          1997 from $26.4 million in fiscal 1996. Malta sales decreased
          1.0% to
          $17.8 million in fiscal 1997 from $17.9 million in fiscal 1996.
          Malta
          sales decreased as a percentage of net sales to 66.2% in fiscal
          1997
          from 67.8% in fiscal 1996. This decrease resulted from the
          decrease in
          Malta sales and the growth in sales of soft drinks. Specialty
          soft
          drink sales increased 48.0% to $3.7 million in fiscal 1997 from
          $2.5
          million in fiscal 1996.

               Gross Margin

               The Company's gross margin (the Company's gross profit as a
          percentage of net sales) was 25.2% in fiscal 1997, compared to
          24.6%
          in fiscal 1996. The increase in gross margin was primarily the
          result
          of production efficiencies.




          <PAGE>






               Delivery Expense

               Delivery expense as a percentage of net sales remained at
          3.1% or
          $831,000 in fiscal 1997 and $824,000 in fiscal 1996.
          Substantially all
          beer sales are shipped F.O.B. shipping point. Malta and specialty
          soft
          drinks produced for the Company's malta customers are shipped
          common
          carrier at the Company's expense.

               Selling, Advertising and Promotional Expenses

          Selling, advertising and promotional expenses increased 16.0% to
          $1.4
          million in fiscal 1997 from $1.2 million in fiscal 1996. This
          increase
          in selling, advertising and promotional expenses occurred as the
          Company geared up its Company label craft beer packaging and
          sales and
          marketing efforts. This increase results from an increase in
          promotional activities, advertising, point of sale materials and
          package design. The Company introduced Brewery Hill Brewer's
          Choice, a
          variety package, Centennial Lager and Caramel Porter and Lion
          Brewery
          Root Beer in fiscal 1997. A significant portion of the Company's
          sales
          and marketing efforts are dedicated to the introduction and
          promotion
          of its new labels and the implementation of promotional and
          advertising programs. In March 1997, the Company began to
          strategically reduce its sales and marketing expenditures for
          Company
          label craft beers due to the softening of the craft beer category
          and
          the intense competition from both large and small brewers.

               General and Administrative Expenses

               General and administrative expenses remained at $1.4 million
          or
          5.2% of net sales in fiscal 1997 and 1996.

               Operating Income

          Operating income remained at $3.1 million in fiscal 1997 and
          1996,
          despite a 16.0% increase in selling advertising and promotional
          expenses. The Company has implemented a more focused and cost
          effective approach to marketing its Company label craft beers,
          concentrating on its local and contiguous markets.

               Interest (Income) Expense

               Interest income in fiscal 1997 was $124,000 as compared to
          interest expense of $520,000 in fiscal 1996. Interest income is
          primarily the result of increases in cash and cash equivalents
          through
          cash provided from operations. The decrease in interest expense
          results from the repayment of the debt outstanding with the
          proceeds
          of the 1996 initial public offering.

               Provision for Income Taxes

               The effective income tax rate was 43% in fiscal 1997 and 45%
          in
          fiscal 1996. State income taxes and nondeductible goodwill
          amortization impact the effective tax rates.

               Extraordinary Item

               The extraordinary item recorded in 1996 consists of
          prepayment
          penalties of $160,000, unamortized debt discounts of $213,000 and
          the
          write-off of unamortized deferred financing costs of $177,000
          related
          to the early extinguishment of debt, net of an income tax benefit
          of
          $228,000.










          <PAGE>





          LIQUIDITY AND CAPITAL RESOURCES

               The Company has historically funded operations primarily
          through
          cash generated from operations and bank and other debt. On May 2,
          1996, the Company completed an initial public offering of equity
          securities. A portion of the proceeds of the initial public
          offering
          were used to repay indebtedness of the Company.

               In February 1997, the Company obtained a $5,000,000
          revolving
          line of credit and a $2,500,000 revolving equipment line of
          credit
          from a financial institution. Both facilities are unsecured and
          interest is payable monthly based upon either the bank's prime
          rate
          minus 1/2%, LIBOR plus 75 basis points or the bank's offered
          rate. The
          line of credit agreements require, among other things, the
          maintenance
          of certain financial ratios. These lines of credit mature in 3
          years,
          and the Company, at its option, may convert the principal
          outstanding
          on the revolving equipment line to a term loan of either 3 or 5
          years
          at the same rates or at a fixed rate to be determined by the
          financial
          institution. There were no borrowings under these line of credit
          facilities in 1997.

               Cash flows provided from operations were $2.7 million in
          fiscal
          1997 and in 1996. The cash flows from operations have been
          affected by
          collections of accounts receivable, inventory levels and accounts
          and
          income taxes payable. In fiscal 1997, the timing of sales to
          malta
          customers and certain contract customers was primarily
          responsible for
          an increase in accounts receivable of $455,000 to $2.4 million at
          September 30, 1997 as compared to $2.0 million at September 30,
          1996.
          The increase in accounts receivable can also be attributable to
          several contract customers receiving more traditional terms, in
          lieu
          of advanced payments. Inventory levels increased by $167,000 in
          fiscal
          1997 due to increased finished goods inventory. Accounts payable,
          accrued expenses and refundable security deposits increased
          $598,000,
          primarily as a result of increased new 12 oz. bottle and other
          raw
          material purchases, an increase in accrued payroll and customer
          deposits. Income taxes payable increased by $202,000 in fiscal
          1997 as
          a result of the increase in income before taxes and the timing of
          tax
          payments. In fiscal 1997, the cash provided from operations was
          used
          to purchase equipment and increase the Company's cash reserves.

               During fiscal 1997, the Company expended $1.5 million on
          capital
          improvements. The Company completed the modification of its
          existing
          seven ounce bottling line to also accommodate 12 oz. new bottles,
          the
          bottle size for most of the Company products and relining of nine
          storage tanks increasing its fermentation and lagering capacity.
          The
          Company also reconditioned its combination mash / lauter tub,
          installed a malt storage and elevation system, purchased two
          rebuilt
          fillers and began upgrading its ammonia refrigeration system.

               The Company believes that the cash flow provided from
          operations
          and its borrowing availability under revolving credit facilities
          will
          be sufficient to support the Company's capital expenditure and
          working
          capital requirements through the end of fiscal 1998. There can be
          no
          assurance that additional financing will be available on
          favorable
          terms or at all.

          ITEM 7. FINANCIAL STATEMENTS

               The response to this item is submitted in a separate section
          of
          this report commencing on Page F - 1.

          ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
          ACCOUNTING
                  AND FINANCIAL DISCLOSURE

               None.


                                         PART III.

          ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
          PERSONS;
                  COMPLIANCE WITH SECTIONS 16(C) OF THE EXCHANGE ACT.



          <PAGE>






               Information regarding the Company's directors and executive
          officers is incorporated by reference from the Company's
          definitive
          proxy statement for its 1997 Annual Meeting of Stockholders (the
          "1997
          Proxy Statement") under the captions "Board of Directors" or
          "Executive Compensation."

          ITEM 10. EXECUTIVE COMPENSATION

               Information regarding executive compensation is incorporated
          by
          reference from the 1997 Proxy Statement under the caption
          "Executive
          Compensation."

          ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
                   MANAGEMENT

               Information regarding security ownership of certain
          beneficial
          owners and management is incorporated by reference from the 1997
          Proxy
          Statement under the caption "Security Ownership of Certain
          Beneficial
          Owners and Management."

          ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

               Information regarding certain relationships and related
          transactions is incorporated by reference from the 1997 Proxy
          Statement under the caption "Certain Relationships and Related
          Transactions."

                                         PART IV.

          ITEM 13. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K

          The following documents are filed as part of this report:

          Financial Statements and Financial Statement Schedules. See Index
          to
               Financial Statements at Item 7 on pages F - 1 through F - 15
          of
               this report. All other financial statement schedules are
          omitted
               because they are not required or the required information is
               included in the Financial Statement or Notes thereto.

          Exhibit Index is included in the Form 10-KSB filed with the
          Securities
               and Exchange Commission.

          No   reports on Form 8-K were filed during the fourth quarter of
          the
               fiscal year ended September 30, 1997.

          Index to Exhibits:

               Exhibits incorporated by reference to the registrant's
               registration statement on Form SB-2 (Registration No.
          333-01644).

                   Exhibit

                     No.                 Description


                    1.1**     Underwriting Agreement

                    3.1**     Amendment and Restated Articles of
          Incorporation
                              filed with the Secretary of the Commonwealth
          of
                              Pennsylvania on January 23, 1996

                    3.2**     By-Laws of the Company

                    4.1**     Specimen Stock Certificate




          <PAGE>





                Exhibit
                  No.                               Description



                    10.1**    Employment Agreement, dated as of January 3,
          1996,
                              between the Company and Charles Lawson

                    10.2*     Employment Agreement, dated as of October 1,
          1996,
                              between the Company and Patrick Belardi

                    10.3**    Lease dated March 1989 between the Company
          and
                              Mericle Development Corporation

                    10.5**    1996 Stock Option Plan

                    10.6**    Form of 1996 Stock Option Agreement

                    10.7**    Agreement dated as of January 3, 1996 between
          the
                              Company and The Marlborough Capital
          Investment
                              Fund, L.P.

                    10.8**    Agreement dated as of January 3, 1996 between
          the

                              Company and Weston Presidio Offshore Capital
          C.V.

                    10.9**    Credit and Security Agreement dated as of
          October
                              6, 1993 between the Company and Norwest Bank
                              Minnesota, National Association

                    10.10*    Mortgage and Security Agreement dated as of
                              October 6, 1993 between the Company and
          William J.
                              Smulowitz

                    10.11*    Mortgage and Security Agreement dated as of
                              October 6, 1993 between the Company and
          Norwest
                              Bank Minnesota, National Association

                    10.12*    Mortgage and Security Agreement dated as of
                              October 6, 1993 between the Marlborough
          Capital
                              Investment Fund, L.P. and Weston Presidio
          Offshore
                              Capital C.V.

                    10.13**   Securities Purchase Agreement dated as of
          October
                              6, 1993

                    10.14*    Letter Agreement dated as of March 29, 1996
                              between the Company and Lester Smulowitz and
          Lynn
                              Muchnick

                    10.15*    Loan Agreement between the Company and
          Corestates
                              Bank, N.A. dated February 6, 1997








          *    Filed herewith

          **   Incorporated by reference to the Company's registration
          statement
               on Form S-1, File No. 333-01644



          <PAGE>

                                         SIGNATURE

               Pursuant to the requirements of Section 13 or 15(d) of the
          Exchange Act, the Registrant has duly caused this Report to be
          signed
          on its behalf by the undersigned, thereunto duly authorized, in
          the
          City of Wilkes- Barre, State of Pennsylvania, on December 29,
          1997

                                              THE LION BREWERY, INC.


                                              By /s/ Charles E. Lawson, Jr.
                                               
          ------------------------------------
                                                   Charles E. Lawson, Jr.
                                                    President, Chief
          Executive
          Officer and Director


               Pursuant to the requirements of Securities Exchange Act of
          1934,
          this Report has been signed by the following persons on its
          behalf of
          the Registrant and in the capacities and on the dates indicated.




                                        President, Chief Executive
          /s/ Charles E. Lawson, Jr.    Officer and Director          
          December 29, 1997
          --------------------------
          Charles E. Lawson, Jr.
                                        Vice President,
                                        Chief Financial Officer
          /s/ Patrick E. Belardi        Treasurer and Director        
          December 29, 1997
          --------------------------
          Patrick E. Belardi

          /s/ Donald J. Sutherland      Chairman of the Board         
          December 29, 1997
          --------------------------
          Donald J. Sutherland


          /s/Thomas S, Ablum            Director                      
          December 29, 1997
          --------------------------
          Thomas S. Ablum

          /s/ George W. Peck, IV        Director                      
          December 29, 1997
          --------------------------
          George W. Peck, IV

          /s/ Carlo A. von Schroeter    Director                      
          December 29, 1997
          --------------------------
          Carlo A. von Schroeter

          /s/ Henry T. Wilson           Director                      
          December 29, 1997
          --------------------------
          Henry T. Wilson










          <PAGE>






          ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                                  THE LION BREWERY, INC.

                               INDEX TO FINANCIAL STATEMENTS


                                                                       
          Page No.

          Report of Independent Public Accountants                       F
          - 2

          Financial Statements:

          Balance Sheets - September 30, 1997 and 1996                   F
          - 3

          Statements of Income for the Years Ended September 30, 1997
             and 1996                                                    F
          - 4

          Statements of Shareholders' Equity for the Years Ended 
             September 30, 1997 and 1996                                 F
          - 5

          Statements of Cash Flows for the Years Ended 
             September 30, 1997 and 1996                                 F
          - 6

          Notes to Financial Statements                                  F
          - 7
































                                           F-1

          <PAGE>


                         REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS






          To the Shareholders of
              The Lion Brewery, Inc.:



          We have audited the accompanying balance sheets of The Lion
          Brewery,
          Inc. (a Pennsylvania corporation) as of September 30, 1997 and
          1996,
          and the related statements of income, shareholders' equity and
          cash
          flows for the years then ended. These financial statements are
          the
          responsibility of the Company's management. Our responsibility is
          to
          express an opinion on these financial statements based upon 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 The
          Lion
          Brewery, Inc. as of September 30, 1997 and 1996, and the results
          of
          its operations and its cash flows for the years then ended in
          conformity with generally accepted accounting principles.


                                              ARTHUR ANDERSEN LLP




          Roseland, New Jersey
          November 21, 1997



                                            F-2

          <PAGE>




                                THE LION BREWERY, INC.

                                    BALANCE SHEETS

                             SEPTEMBER 30, 1997 AND 1996

                                                      1997            1996
                                                 -------------   -------------


                                        ASSETS
      Current assets:
        Cash and cash equivalents                $   3,184,000   $   1,992,000

        Accounts receivable, less allowance
        for doubtful accounts of $186,000 and
        $157,000 at September 30, 1997 and
        1996, respectively                           2,444,000       2,001,000

        Inventories                                  2,271,000       2,128,000
                                                       209,000         190,000
        Prepaid expenses and other assets         ------------    ------------

           Total current assets                      8,108,000       6,311,000


      Property, plant & equipment, net of
      accumulated depreciation of $2,352,000
        and $1,684,000 at September 30, 1997
        and 1996, respectively                       4,481,000       3,600,000

      Goodwill, net of accumulated
      amortization of $640,000 and $475,000 at
        September 30, 1997 and 1996,
        respectively                                 5,874,000       6,039,000
                                                         4,000           4,000
      Other assets                                ------------    ------------


                                                  $ 18,467,000    $ 15,954,000
                                                  ============    ============




                         LIABILITIES AND SHAREHOLDERS' EQUITY

      Current liabilities:                           1,986,000       1,663,000
        Accounts payable                             1,069,000         839,000
        Accrued expenses                               250,000         205,000
        Refundable deposits                            380,000         178,000
        Income taxes payable                      ------------    ------------
           Total current liabilities                 3,685,000       2,885,000

      Net pension liability                            341,000         243,000

                                                        67,000         206,000
      Deferred income taxes                       ------------    ------------
                                                     4,093,000       3,334,000
           Total liabilities                      ------------    ------------

      Shareholders' equity:
        Common stock, $.01 par value;
        10,000,000 shares authorized;
        $3,885,052
          shares issued and outstanding                 39,000          39,000
        Preferred stock, $.01 par value;
        1,000,000 shares authorized;
          0 shares issued and outstanding                    0               0

        Additional paid-in capital                  10,612,000      10,612,000

        Adjustment to reflect minimum pension
        liability, net of deferred                    (120,000)        (42,000)
          income taxes                               3,843,000       2,011,000
        Retained earnings                         ------------    ------------
                                                    14,374,000      12,620,000
           Total shareholders' equity             ------------    ------------

           Total liabilities and shareholders'    $ 18,467,000    $ 15,954,000
           equity                                 ============    ============


        The accompanying notes to financial statements are an integral part of
      these balance sheets.


                                THE LION BREWERY, INC.

                                 STATEMENTS OF INCOME

                   FOR THE YEARS ENDED SEPTEMBER 30, 1997 AND 1996

                                                1997              1996
                                           --------------   ----------------

      Gross sales                          $ 27,367,000       $ 26,983,000
      Less excise taxes                         498,000            544,000
                                           ------------       ------------

      Net sales                              26,869,000         26,439,000
      Cost of sales                          20,099,000         19,939,000
                                           ------------       ------------

        Gross profit                          6,770,000          6,500,000
                                           ------------       ------------
      Operating expenses:                       831,000            824,000
        Delivery
        Selling, advertising and              1,439,000          1,240,000
        promotional expenses                  1,410,000          1,373,000
        General and administrative         ------------       ------------

                                              3,680,000          3,437,000
                                           ------------       ------------

        Operating income                      3,090,000          3,063,000
      Interest (income) expense and            (124,000)           520,000
      amortization of debt discount, net   ------------       ------------

      Income before provision for income      3,214,000          2,543,000
      taxes and extraordinary item            1,382,000          1,125,000
      Provision for income taxes           ------------       ------------
        Income before extraordinary           1,832,000          1,418,000
        item

      Extraordinary item, net of income               0                  0
      tax benefit of $228,000              ------------       ------------

        Net income                            1,832,000          1,096,000
      Warrant accretion                               0                  0
                                           ------------       ------------

      Net income available to common          1,832,000          1,007,000
      shareholders                         ============       ============

      Income per share before              $       0.47       $       0.47
      extraordinary item
      Extraordinary item - loss per                0.00              (0.11)
      share                                ------------       ------------
      Net income per share                 $       0.47       $       0.36
                                           ------------       ------------



      Shares used in per share                3,923,000          2,835,000
      calculation                          ============       ============


      The accompanying notes to financial statements are an integral part of
      these balance sheets.



                                THE LION BREWERY, INC.

                                 STATEMENTS OF INCOME

                   FOR THE YEARS ENDED SEPTEMBER 30, 1997 AND 1996


                                                Common Stock

                                             Shares       Amount       Total
                                           ---------     -------    ----------


      Balance, September 30, 1995           1,851,183     $19,000   $2,317,000

        Accretion of warrants                                          (89,000)
        Conversion of warrants                291,565       3,000      812,000

        Proceeds of Initial Public          1,875,000      18,000    9,466,000
          Offering, net of costs

        Repurchase of common stock           (132,696)     (1,000)    (950,000)
        Adjustment to reflect minimum                                  (32,000)
          pension liability, net of
          deferred taxes

        Net income                         __________   _________    1,096,000
      Balance, September 30, 1996           3,885,052      39,000   12,620,000

        Adjustment to reflect minimum                                  (78,000)
          pension liability net of
          deferred taxes

        Net income                          _________   _________    1,832,000
                                                                   -----------

      Balance, September 30, 1997           3,885,052     $39,000  $14,374,000
                                            =========   =========  ===========


      The accompanying notes to financial statements are an integral part of
      these statements.






                          Additional
                           Paid-in       Pension      Retained
                           Capital      Liability     Earnings        Total
                         -----------    ---------    ----------    -----------


      Balance,           $1,304,000     $(10,000)   $1,004,000     $2,317,000
        September 30,
        1995

        Accretion of                                   (89,000)       (89,000)
          warrants
        Conversion of      8092,000                                   812,000
          warrants

        Proceeds of       9,448,000                                 9,466,000
          Initial
          Public
          Offering,
          net of costs
        Repurchase of      (949,000)                                 (950,000)
          common stock

        Adjustment to                    (32,000)                     (32,000)
          reflect
          minimum
          pension
          liability,
          net of
          deferred
          taxes

        Net income             0000         0000     1,096,000      1,096,000
      Balance,           10,612,000      (42,000)    2,011,000     12,620,000
      September 30,
      1996

        Adjustment to
          reflect
          minimum
          pension
          liability
          net of
          deferred
          taxes                          (78,000)                     (78,000)

        Net income             0000         0000     1,832,000      1,832,000
                        -----------  -----------   -----------    -----------
      Balance,          $10,612,000    $(120,000)   $3,843,000    $14,374,000
        September 30,   ===========  ===========   ===========    ===========
        1997



      The accompanying notes to financial statements are an integral part of
      these statements.



                                THE LION BREWERY, INC.

                                 STATEMENTS OF INCOME

                   FOR THE YEARS ENDED SEPTEMBER 30, 1997 AND 1996


                                            Year ended September 30,
                                           --------------------------

                                               1997          1996
                                           -----------    -----------
      Cash flows from operating
      activities:

      Net income                           $1,832,000     $1,096,000

      Adjustments to reconcile net
      income to net cash provided by
        operating activities
           Extraordinary item                       0        550,000

           Depreciation and amortization      833,000        830,000
           Provision for bad debt
           reserve                             12,000         12,000

           Provision for inventory
           reserve                             24,000         75,000

           Benefit for deferred income
           taxes                             (139,000)      (145,000)

        Changes in assets and
        liabilities:
           (Increase) decrease in:

             Accounts receivable             (455,000)       463,000
             Inventories                     (167,000)      (200,000)

             Prepaid expenses and other
             assets                           (19,000)        87,000

        Increase (decrease) in:
             Accounts payable, accrued
             expenses and refundable
             deposits                         598,000         80,000

             Income taxes payable             202,000       (152,000)
                                               20,000         (7,000)
             Pension liability             ----------     ----------



        Net cash provided by operating      2,741,000      2,689,000
        activities                         ----------     ----------
      Cash flows from investing
      activities:

        Purchase of equipment              (1,549,000)      (908,000)
                                           ----------     ----------
      Cash flows from financing
      activities:

        Net proceeds from sale of common
        stock                                       0      9,466,000

        Repurchase of common stock                  0       (950,000)
        Net reduction in line of credit             0       (721,000)

        Repayment of long term debt                 0     (7,584,000)
          Net cash provided by financing            0        211,000
            activities                     ----------     ----------

          Net increase in cash and cash
            equivalents                     1,192,000      1,992,000

      Cash and cash equivalents,            1,192,000              0
      beginning of year                    ----------     ----------
      Cash and cash equivalents, end of    $3,184,000     $1,992,000
      year                                 ==========     ==========

      Supplementary disclosure of cash
      flow information:
        Cash paid for:
           Interest                        $        0     $  516,000
                                           ==========     ==========

           Income taxes                    $1,282,000     $1,183,000
                                           ==========     ==========
       The accompanying notes to financial statements are an integral
                         part of these statements.






                                  THE LION BREWERY, INC.

                               NOTES TO FINANCIAL STATEMENTS


          1.   BASIS OF PRESENTATION AND DESCRIPTION OF THE BUSINESS

          The Lion Brewery, Inc. ("the Company") formerly The Lion, Inc.,
          was
          incorporated in Pennsylvania on April 5, 1933. The Company is a
          brewer
          and bottler of brewed beverages, including malta, specialty beers
          and
          specialty soft drinks. Malta is a non-alcoholic brewed beverage
          which
          the Company produces for major Hispanic food distribution
          companies
          primarily for sale in the eastern United States. Specialty beers,
          generally known as craft beers, are brewed by the Company both
          for
          sale under its own labels and on a contract basis for other
          marketers
          of craft beer brands. Craft beers are distinguishable from other
          domestically produced beers by their fuller flavor and adherence
          to
          traditional European brewing styles. The Company also produces
          specialty soft drinks, including all-natural brewed ginger
          beverages,
          on a contract basis for third parties. The Lion Brewery, Inc.
          also
          brews beer for sale under traditional Company-owned labels for
          the
          local market at popular prices.

          2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

          Use of Estimates

          The preparation of financial statements in conformity with
          generally
          accepted accounting principles requires management to make
          estimates
          and assumptions that affect the recorded amounts of 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.

          Revenue Recognition

          Revenue is generally recognized upon shipment. For products
          brewed
          under beer and soft drink contracts, revenue is generally
          recognized
          upon completion of production.

          Cash and Cash Equivalents

          The Company considers all highly liquid investments with
          maturities at
          the purchase date of three months or less to be cash equivalents.
          The
          carrying amount of cash equivalents approximates fair value.

          Inventories

          Inventories are stated at the lower of cost or market determined
          on a
          first-in, first-out method (FIFO).

          Property, Plant and Equipment

          Property, plant and equipment are recorded at cost and are
          depreciated
          using the straight-line method over the useful lives of the
          assets.
          All significant additions and improvements are capitalized and
          repairs
          and maintenance charges are expensed as incurred. Estimated
          useful
          lives for the assets are as follows:

                                                            Years
                                                            -----
                            Buildings                        20
                            Machinery and equipment         3 - 10
                            Kegs and bottles                3 -  7



                                            F-3

          <PAGE>






                                  THE LION BREWERY, INC.

                        NOTES TO FINANCIAL STATEMENTS - (CONTINUED)


          2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

          Income Taxes

          The Company recognizes deferred tax assets and liabilities for
          the
          estimated future tax effects of events based on temporary
          differences
          between financial statement and tax basis of assets and
          liabilities
          using enacted tax rates in effect in the years the differences
          are
          expected to be reversed. Valuation allowances are established
          when
          necessary to reduce deferred tax assets to the amounts expected
          to be
          realized. Income tax expense is comprised of current taxes
          payable and
          the change in deferred tax assets and liabilities during the
          year.

          Intangible Assets

          The excess of the cost of the acquired assets over their fair
          values
          is being amortized using the straight-line method over forty
          years.

          Product, Customer and Supply Concentrations

          The sale of malta, beer and soft drinks has accounted for all of
          the
          Company's sales, with malta accounting for 66% and 68% for the
          years
          ended September 30, 1997 and 1996. The Company's top three
          customers
          accounted for 66% and 60% of sales in fiscal 1997 and 1996.
          Accounts
          receivable from these three customers totaled $1,984,000 and
          $1,712,000 at September 30, 1997 and 1996. The Company's largest
          customer accounted for 32% and 27% of sales in fiscal 1997 and
          1996.
          The Company does maintain contracts with several of its top
          customers;
          however there are no minimum purchase requirements. The Company
          does
          not have a contract with its largest customer. The length of such
          contracts range from two to four years. The decision by a major
          customer to switch production of its contract beverages from the
          Company to another brewer, or to build facilities to brew its own
          product, could have a materially adverse effect on the Company's
          financial results.

          The Company anticipates a change in the availability of certain
          styles
          of recycled glass from its current sources. This reduction in
          availability would result in an increased cost of glass; reducing
          future gross margins and could have a significant impact on
          overall
          profitability. The Company will make all efforts to mitigate the
          effects on gross margins and overall profitability, but no
          assurances
          can be made that the Company will be successful in this regard.

          Excise Taxes

          The U.S. federal government currently imposes an excise tax of
          $18 per
          barrel on every barrel of beer produced for consumption in the
          United
          States. However, any brewer with production under 2 million
          barrels
          per year pays a federal excise tax of $7 per barrel on the first
          60,000 barrels it produces annually. Individual states also
          impose
          excise taxes on alcoholic beverages in varying amounts. The
          Company
          records the excise tax as a reduction of gross sales in the
          accompanying financial statements.


                                           F-4

          <PAGE>






                                  THE LION BREWERY, INC.

                        NOTES TO FINANCIAL STATEMENTS - (CONTINUED)


          2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

          Net Income Per Share

          Net income per share is computed using the weighted average
          number of
          common and dilutive common equivalent shares outstanding during
          the
          period. Common equivalent shares consist of stock options and
          warrants
          (using the treasury stock method for all periods presented).
          Accretion
          relating to the Company's warrants (see Note 11) is deducted in
          computing income applicable to common stock.

          On March 31, 1997, the Financial Accounting Standards Board
          issued
          SFAS No. 128, "Earnings Per Share" ("SFAS 128"). SFAS 128 is
          effective
          for fiscal years ending after December 15, 1997, and, when
          adopted, it
          will require the restatement of prior years' earnings per share.
          If
          the Company had adopted SFAS 128 for the year ended September 30,
          1997, there would have been no effect on net income per share, on
          either the basic or diluted basis.


          Financial Instruments

          Financial instruments that potentially subject the Company to
          credit
          risk consist principally of trade receivables. The fair value of
          accounts receivable approximates carrying value.

          Long-Lived Assets

          During 1996, the Company adopted the provisions of Statement of
          Financial Accounting Standards No. 121, "Accounting for the
          Impairment
          of Long-Lived Assets" ("SFAS 121"). SFAS 121 requires, among
          other
          things, that an entity review its long-lived assets and certain
          related intangibles for impairment whenever changes in
          circumstances
          indicate that the carrying amount of an asset may not be fully
          recoverable. The Company does not believe that any impairment
          exists
          in the recoverability of its long- lived assets.


          Stock Based Compensation

          In October 1995, the Financial Accounting Standards Board issued
          Statement No. 123, "Accounting for Stock-Based Compensation"
          ("SFAS
          123"), which requires companies to measure employee stock
          compensation
          plans based on the fair value method using an option pricing
          model or
          to continue to apply APB No. 25, "Accounting for Stock Issued to
          Employees," and provide pro forma footnote disclosures under the
          fair
          value method. The Company continues to apply APB No. 25 and will
          provide pro forma footnote disclosures (see Note 11).









                                           F-5

          <PAGE>






                                  THE LION BREWERY, INC.

                      NOTES TO FINANCIAL STATEMENTS - (CONTINUED)

          3.   INVENTORIES

          Inventories consist of the following:


                                                     1997           1996
                                                     ----           ----

              Raw materials                      $  195,000      $  163,000
              Finished goods                        854,000         673,000
              Supplies                            1,222,000       1,292,000
                                                 ----------      ----------

                                                 $2,271,000      $2,128,000


          4.   PROPERTY, PLANT AND EQUIPMENT

          Property, plant and equipment consist of the following:


                                                     1997            1996
                                                     ----            ----

              Land and building                  $1,084,000      $1,024,000
              Machinery and equipment             5,534,000       4,038,000
              Kegs and bottles                      215,000         222,000
                                                  6,833,000       5,284,000
              Less accumulated depreciation       2,352,000       1,684,000
                                                 ----------      ----------

                                                 $4,481,000      $3,600,000
                                                 ==========      ==========



          5.   ACCRUED EXPENSES

          Accrued expenses consist of the following:


                                                     1997            1996
                                                     ----            ----

              Payroll and related accruals       $  535,000      $  427,000
               Other accruals                       534,000         412,000
                                                 ----------      ----------

                                                 $1,069,000      $  839,000
                                                 ==========      ==========


                                            F-6

          <PAGE>





                                  THE LION BREWERY, INC.

                        NOTES TO FINANCIAL STATEMENTS - (CONTINUED)


          6.   INCOME TAXES

          The provision for income taxes is as follows:

                                                    1997             1996
                                                    ----             ----

                      Current:
                         Federal                 $1,223,000      $  786,000
                         State                      240,000         256,000
                                                 ----------      ----------
                                                  1,463,000       1,042,000
                                                 ----------      ----------


                      Deferred:
                         Federal                    (69,000)      
          (105,000)
                         State                      (12,000)       (
          40,000)
                                                -----------     -----------
                                                    (81,000)      
          (145,000)
                                                -----------     -----------
                                                 $1,382,000       $ 897,000
                                                 ==========       =========


          The principal items accounting for the difference between income
          taxes
          computed at the statutory rate and the provision for income taxes
          reflected in the statements of income are as follows:

                                                     1997            1996

                United States statutory rate         35%              35%
                State taxes (net of federal
                  tax benefit)                        6                7
                Nondeductible expenses - 
                  goodwill amortization               2                3
                                                     --               --

                                                     43%              45%
                                                     ==               == 

          Components of the Company's deferred income tax balances are as
          follows:

                                                      1997         1996
                                                      ----         ----

                Deferred income tax assets:
              Benefit accruals                   $  332,000      $  235,000
              Accounts receivable                    83,000          71,000
              Inventories                           110,000          96,000
                                                 ----------      ----------
                                                    525,000         402,000

              Deferred income tax liabilities:
              Property, plant and equipment         549,000         559,000
              Other                                  43,000          49,000
                                                 ----------      ----------
                                                    592,000         608,000
                                                 ----------      ----------
                                                 $   67,000      $  206,000
                                                 ==========      ==========


                                           F-7

          <PAGE>






                                  THE LION BREWERY, INC.

                      NOTES TO THE FINANCIAL STATEMENTS - (CONTINUED)


          7.   DEBT

          In February 1997, the Company obtained a $5,000,000 revolving
          line of
          credit and a $2,500,000 revolving equipment line of credit from a
          financial institution. Both facilities are unsecured and interest
          is
          payable monthly based upon either the bank's prime rate minus
          1/2%,
          LIBOR plus 75 basis points or the bank's offered rate. The line
          of
          credit agreements require, among other things, the maintenance of
          certain financial ratios. These lines of credit mature in 3
          years, and
          the Company, at its option, may convert the principal outstanding
          on
          the revolving equipment line to a term loan of either 3 or 5
          years at
          the same rates or at a fixed rate to be determined by the
          financial
          institution.

          On May 2, 1996, the Company completed an initial public offering
          of
          equity securities. A portion of the proceeds were used to repay
          indebtedness of the Company (see Note 12). The extraordinary item
          recorded in 1996 consists of prepayment penalties of $160,000,
          unamortized debt discounts of $213,000 and the write-off of
          unamortized deferred financing costs of $177,000 related to the
          early
          extinguishment of debt, net of an income tax benefit of $228,000.


          8.   PENSION PLANS

          The Company maintains a noncontributory defined benefit pension
          plan
          covering nonunion employees. The plan provides benefits based on
          years
          of service and compensation levels. The Company's funding policy
          for
          these plans is predicted on allowable limits for federal income
          tax
          purposes.

          The components of net periodic pension cost for the defined
          benefit
          plan are as follows:


                                                          1997         1996
                                                          ----         ----

              Service cost - benefits earned
               during the period                     $   45,000      $  
          30,000
              Interest cost on projected benefit
                obligation                               46,000         
          36,000
              Actual return on plan assets              (41,000)       
          (23,000)
              Net amortization and deferral             (43,000)       
          (19,000)
                                                     ----------     
          ---------- 
                 Net pension expense                 $   93,000      $  
          62,000
                                                     ----------     
          ----------



          Assumptions used in the accounting for the defined benefit plan
          are as
          follows:


                                                             1997      
          1996
                                                             ----      
          ----

             Weighted average discount rate                   7.5%     
          8.5%
             Expected long-term rate of return on assets      7.5       9.0
             Average salary increase                          5.0       5.0




                                            F-8

          <PAGE>






                                  THE LION BREWERY, INC.

                        NOTES TO FINANCIAL STATEMENTS - (CONTINUED)


          8.   PENSION PLANS (CONTINUED)

          The following table sets forth the funded status and the net
          pension
          liability included in the balance sheet for the defined benefit
          plan:
          1997 1996

          Actuarial present value of benefit obligation:
            Accumulated benefit obligation (including 
              vested benefits of $515,000 and $392,000)         $ 532,000   
             $ 403,000
                                 ========     ========          =========   
             =========

          Projected benefit obligation                            598,000   
               438,000
          Plan assets at fair value                               191,000   
               160,000
                                                                ---------   
             ---------
            Projected benefit obligation in excess
              of plan assets                                      407,000   
               278,000
            Unrecognized net loss                                (278,000)  
              (111,000)
            Adjustment required to recognize minimum 
              liability                                           212,000   
                76,000
                                                                ---------   
             ---------

          Net pension liability recognized in balance sheet     $ 341,000   
             $ 243,000

          In 1997, the Company established a combined 401(k) / profit
          sharing
          plan, covering substantially all nonunion employees, meeting
          certain
          eligibility requirements. The profit sharing plan is
          noncontributory.
          Under the 401(k) plan, eligible employees may contribute up to
          15% of
          their compensation annually. The Company currently does not match
          employee contributions. Contributions to the profit sharing plan
          are
          determined by the Board of Directors and are discretionary. In
          1997,
          the Company contributed $35,000 to the profit sharing plan.
          Employer
          match, if any, and profit sharing contributions vest over a 6
          year
          period, unless termination is the result of death, disability or
          retirement.

          The Company also participates in a multiemployer pension plan
          which
          provides defined benefits to union employees. Contributions are
          based
          on a fixed amount per hour worked. Pension cost aggregated
          $182,000
          and $162,000 for the years ended September 30, 1997 and 1996,
          respectively.

          9.   COMMITMENTS AND CONTINGENCIES

          The Company leases warehouse facilities and equipment under
          noncancelable operating leases. Future minimum lease payments
          under
          these leases are:

                                  1998         $246,000
                                  1999         187,000
                                  2000         136,000
                                  2001         102,000

          Rent expense for all leased facilities amounted to $332,000 in
          1997
          and $294,000 in 1996.

          The Company has entered into employment agreements with the
          Company's
          President and Chief Financial Officer at annual base salaries
          aggregating $240,000. Bonuses are determined at the discretion of
          the
          Board of Directors. The contracts also provide for up to 2 years
          severance in the case of involuntary termination.



                                            F-9

          <PAGE>






                                  THE LION BREWERY, INC.

                      NOTES TO THE FINANCIAL STATEMENTS - (CONTINUED)


          9.   COMMITMENTS AND CONTINGENCIES (CONTINUED)

          The Company has retained an investment banking firm to act as its
          exclusive financial advisor in connection with a possible sale,
          merger
          or other form of business combination.

          The Company is engaged in certain legal and administrative
          proceedings
          incidental to its normal course of business activities.
          Management
          believes the outcome of these proceedings will not have a
          material
          adverse effect on the Company's financial position or results of
          operations.

          RELATED PARTY TRANSACTIONS

          Quincy Partners, a general partner of Lion Partners Company, L.P.
          had
          a management consulting agreement with the Company providing for
          an
          annual fee of $130,000. This agreement was terminated on May 2,
          1996,
          the effective date of the initial public offering (see Note 12).
          In
          connection with the offering Quincy Partners received a
          consulting fee
          of $80,000. The chairman of the Board of Directors receives
          $50,000
          annually plus stock options for his services in this capacity.

          The Company obtained covenants not to compete from two selling
          employee/shareholders for an aggregate of $600,000 payable in
          annual
          installments of $100,000 over a six year noncompete period, one
          covenant ending in October, 1999 and the other ending in October,
          2000.

          11.  STOCK OPTION PLANS AND WARRANTS

          The Company's 1996 Employee Stock Option Plan (the Plan) permits
          the
          granting of options to directors and employees of the Company.
          The
          Plan is administered by the Compensation Committee of the Board
          of
          Directors, which generally has the authority to select
          individuals who
          are to receive options and to specify the terms and conditions of
          each
          option so granted, including the number of shares covered by the
          option, the type of option (incentive stock option or
          nonqualified
          stock option), the exercise price (which in all cases must be at
          least
          100% of the fair market value of the common stock on the date of
          grant), vesting provisions, and the overall option term. Options
          to
          purchase a total of 400,000 shares of common stock were reserved
          for
          future grants of options under the Plan. In January 1996, the
          Company
          granted options for an aggregate of 268,431 shares of common
          stock to
          a director, certain officers and other key employees of the
          Company.
          All of these options vest over a period of two years and have an
          exercise price of $6 per share and are outstanding as of
          September 30,
          1997.

          For the purpose of supplemental disclosures required by SFAS 123,
          the
          fair value of options granted during 1996 was estimated as of the
          respective date of grant using a Black-Scholes option pricing
          model
          with the following assumptions for 1996; risk free interest rate
          of
          6.5%; volatility factor of the expected market price of the
          common
          stock of 40%; expected life of the options of 8 years and
          expected
          dividend yield of zero. The weighted average fair value of
          options
          granted during 1996 was $3.44. For pro forma purposes, the
          estimated
          fair value of options is amortized to expense over the options'
          vesting period. Net earnings on a pro forma basis, determined as
          if
          the Company had accounted for its stock options under the fair
          value
          method using an option pricing mode, were $1,676,000 and
          $851,000,
          respectively, for the years ended September 30, 1997 and 1996 and
          pro
          forma earnings per share were $0.43 and $0.30, respectively.




                                           F-10

          <PAGE>





                                  THE LION BREWERY, INC.

                      NOTES TO THE FINANCIAL STATEMENTS - (CONTINUED)


          11.  STOCK OPTION PLANS AND WARRANTS (CONTINUED)

          On March 21, 1994, the Company's Board of Directors granted
          options to
          purchase an aggregate of 57,251 shares of common stock of the
          Company
          to the President at $1.40 per share (estimated fair market value
          on
          the date of grant) expiring in 2001. The options vest over three
          years. Vesting accelerated at the initial public offering (see
          Note
          12).

          The senior subordinated noteholders received warrants for the
          purchase
          of 291,565 shares of the Company's common stock having a nominal
          exercise price. The loan agreement provided that the noteholders
          may
          put these warrants to the Company and accordingly, the warrants
          were
          accreted to the estimated redemption price. During fiscal 1996 an
          accretion of $89,000 was recorded and charged to retained
          earnings.
          The warrants were exercised in December 1995. The Company used
          $950,000 of the net proceeds of the initial public offering to
          repurchase 132,696 shares of common stock issued upon the
          exercise of
          the warrants.

          12.  PUBLIC OFFERING AND PREFERRED STOCK AUTHORIZATION

          On May 2, 1996, the Company completed an initial public offering
          of
          1,875,000 shares of common stock for $6.00 per share, including
          the
          partial exercise of the over-allotment option. The proceeds of
          the
          initial public offering, including the partial exercise of the
          over-allotment option, net of the underwriting commissions and
          expenses totaled $9,466,000. A portion of these proceeds were
          used to
          repay indebtedness of the Company of $7,948,000 and to retire
          132,696
          shares of Common Stock, in connection with the termination of a
          loan
          agreement, at a cost of $950,000.

          In connection with this offering, the Company issued warrants to
          the
          underwriters to purchase up to 135,000 shares of common stock at
          an
          exercise price of $7.20, which are exercisable for a period of
          five
          years from the date of the offering. The holders have certain
          rights
          to obtain the registration of these shares under the Securities
          Act.



                                           F-11

         <PAGE>
   


                              Exhibit Index
                  No.                               Description



                    10.1**    Employment Agreement, dated as of January 3,
          1996,
                              between the Company and Charles Lawson

                    10.2*     Employment Agreement, dated as of October 1,
          1996,
                              between the Company and Patrick Belardi

                    10.3**    Lease dated March 1989 between the Company
          and
                              Mericle Development Corporation

                    10.5**    1996 Stock Option Plan

                    10.6**    Form of 1996 Stock Option Agreement

                    10.7**    Agreement dated as of January 3, 1996 between
          the
                              Company and The Marlborough Capital
          Investment
                              Fund, L.P.

                    10.8**    Agreement dated as of January 3, 1996 between
          the

                              Company and Weston Presidio Offshore Capital
          C.V.

                    10.9**    Credit and Security Agreement dated as of
          October
                              6, 1993 between the Company and Norwest Bank
                              Minnesota, National Association

                    10.10*    Mortgage and Security Agreement dated as of
                              October 6, 1993 between the Company and
          William J.
                              Smulowitz

                    10.11*    Mortgage and Security Agreement dated as of
                              October 6, 1993 between the Company and
          Norwest
                              Bank Minnesota, National Association

                    10.12*    Mortgage and Security Agreement dated as of
                              October 6, 1993 between the Marlborough
          Capital
                              Investment Fund, L.P. and Weston Presidio
          Offshore
                              Capital C.V.

                    10.13**   Securities Purchase Agreement dated as of
          October
                              6, 1993

                    10.14*    Letter Agreement dated as of March 29, 1996
                              between the Company and Lester Smulowitz and
          Lynn
                              Muchnick

                    10.15*    Loan Agreement between the Company and
          Corestates
                              Bank, N.A. dated February 6, 1997








          *    Filed herewith

          **   Incorporated by reference to the Company's registration
          statement on Form S-1, File No. 333-01644