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, 1996
                                          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 of              (I.R.S. Employer
     Incorporation or Organization)               Identification No.)

                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. [       ]

     State the aggregate market value of the registrant's shares held by non-
     affiliates at December 27, 1996: $9,209,755.

     State the number of shares outstanding of each of the issuer's classes of
     common equity, as of the latest practicable date:  December 27, 1996
     3,885,052 shares outstanding

     State issuer's revenues for its most recent fiscal year:  $26,439,000

     Transitional Small Business Disclosure Format (check one):  Yes     No  X 
                                                                     ---   ---- 

                         DOCUMENTS INCORPORATED BY REFERENCE

     The definitive proxy statement for the registrant's 1997 Annual Report, 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.

     <PAGE>
     
                                    PART I.

     ITEM 1.   BUSINESS:

     GENERAL

          The Lion Brewery, Inc. ("The 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. In 1996, the Company produced a
     flavored, alcoholic, malt based brew under contract.  The Company also
     produces 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 rapidly expand its production and
     marketing of specialty beers, while maintaining the growth in its non-
     alcoholic beverages.  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, expansion into contiguous regional markets, new
     product introductions, increased marketing efforts and additions to brewing
     and bottling capacity.

          The Company's original specialty beers - 1857 Premium Lager,
     Liebotschaner Cream Ale and Stegmaier Porter - are reminiscent of the
     Company's rich beer brewing heritage.  Since the brewhouse was built at the
     turn of the century in Wilkes-Barre, Pennsylvania, The Lion Brewery is the
     beneficiary of a long brewing tradition.   The Company's flagship line of
     distinctive full-flavored 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. Brewery Hill PennCenntenial Lager
     was recently introduced in November 1996 along with our winter seasonal,
     Brewery Hill Caramel Porter. 

          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 1996, the Company has also received the following awards at the World
     Beer Championships:

          Brewery Hill Black and Tan    1st Place World Champion
          Brewery Hill Cherry Wheat     1st Place World Champion
          Brewery Hill Honey Amber      Silver Medal
          Brewery Hill Raspberry Red    Silver Medal
          1857 Premium Lager            Silver Medal
          Stegmaier Gold Medal Beer     Silver Medal
          Stegmaier Porter              Bronze Medal

          In addition, craft beers and specialty soft drinks brewed by the
     Company under contract have won several awards.

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     <PAGE>

     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 1995, according to industry sources, the craft beer
     segment increased to approximately 3.8 million barrels, representing
     approximately 2.1% of the 180 million barrel, $50 billion retail domestic
     beer market.  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 rapidly 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

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     <PAGE>

          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.

               Expand 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 twelve states, although the majority of its sales remain
          concentrated in Pennsylvania.  The Company intends its penetration in
          existing markets and to enter new markets by increasing the size of
          its sales force and its 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
          in full-flavored craft beers.  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 1996, the Company  introduced Brewery Hill Pale Ale in
          March, Brewery Hill Cherry Wheat; its summer seasonal, in May, Brewery
          Hill PennCenntenial Lager and Brewery Hill Caramel Porter; a winter
          seasonal, in November. The Company is also is developing new soft
          drink products for its contract customers.

               Increase Production Capacity and Efficiency.  The Company is in
          the process of increasing its annual production capacity from 340,000
          to 400,000 barrels based upon its anticipated product mix.  This
          expansion will modify 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 completed an upgrade of a boiler and is in the process of adding
          a malt storage and elevation system. 

               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

          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.

                                     4

     <PAGE>

          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 1996 and 1995, malta constituted
     approximately 68% and 73%, respectively, of the Company's annual barrel
     shipments and 66% and 75%, 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 Beers.  The Company currently produces ten distinctive, full-
     flavored craft beers and continually engages in the research and
     development of new specialty beers. The Company brews its craft 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 craft beers only in glass
     bottles and kegs.  All of the glass bottles are date coded for freshness
     and are pasteurized.

               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.

               Liebotschaner Cream Ale.  Cream ale is brewed with a lager yeast
          at higher fermentation temperature 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.

               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 a Bronze medal at the World Beer Championships in 1996.

               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 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 1996.

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     <PAGE>

               Brewery Hill Raspberry Red.  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 Raspberry Red placed third at the 1995
          Bohager's Brew Review, People's Choice Award and won a Silver medal at
          the World Beer Championships in 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 character.

               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 won first place World  Champion at the World Beer
          Championships in 1996.

               Brewery Hill PennCentennial Lager.  This handcrafted 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).  PennCentennial 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 PennCentennial is a new world of old world brewing traditions.

               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.

          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.

               Tun Tavern.  This company's name refers to the tavern in
          Philadelphia where the Marines were formed in 1775.  The Lion Brewery
          is the sole producer for Tun Tavern.  Tun Tavern premium lager is now
          sold in several states.

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    <PAGE>  

               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 1995 and the Blue Hen Black and Tan won
          the Bronze Medal, Dark Lager category, at the 1995 World Beer
          Championships.  In 1996, the Company began producing Blue Hen
          Chocolate Porter.

               Better Beverage Importers.  This marketer of specialty malt
          beverages located in Delaware sells an alcoholic malt based lemon brew
          called One-Eyed Jack, which is distributed in over 30 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 14% and 10% of its annual barrel shipments and 19% and 12% of
     its net sales in fiscal 1996 and 1995, 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:

               Reed's.  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 Lion is currently the sole brewer of beverages sold
          under the Reed's label.  Sales of this product line grew 48% and 44%
          in fiscal 1996 and 1995, respectively. 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. 
          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
     12% and 10% of the Lion Brewery's barrel shipments and 9% and 8% of its net
     sales in fiscal 1996 and 1995, respectively.

     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.  The Company is
     intentionally reducing its production of popular priced beer in conjunction
     with a general decline in market demand for lower priced beer marketed in
     16 oz. returnable bottles and in recognition of the significantly greater
     profitability for the Company using its production capacity for craft beer.
     Popular priced beer accounted for approximately 6% and 7% of barrel
     shipments and 4% and 5% of net sales in fiscal 1996 and 1995, 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

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     components of malta are primarily malted grain, water and supplemental
     sweeteners. Since malta is not fermented, yeast is not used.


                             THE LION BREWERY
                                BREWHOUSE

                                (Diagram)



          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.

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     <PAGE>

          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 16 oz. and 12 oz. bottling and the
     other line handles seven ounce bottling for malta.  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.  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 three full-time
     quality assurance technicians and submits its products for  analysis to the
     Seibel Institute of Technology, an independent laboratory, on a continuous 
     basis.   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.

                                      9

     <PAGE>

     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-three independent distributors in twelve eastern
     states: Connecticut, Delaware, Georgia, 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.  The Company believes that there are sufficient numbers of
     suitable independent distributors in each state to serve the Company's
     needs.  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.  These distributors carry other brands to
     broaden their product offerings and in particular are increasingly seeking
     craft beer brands to satisfy the rising consumer demand for these types of
     products.  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.  The Company has developed these distributor
     relationships primarily in the last 18-24 months.  

     SALES AND MARKETING

          The Lion Brewery's four largest malta customers, Goya Foods, Vitarroz,
     Cerveceria India and 7-Up/RC Puerto Rico, accounted for 95% of the
     Company's total malta sales for fiscal 1996 and 1996.  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.  Distributors often participate in these price discounts.  The
     Company anticipates that it may in the future 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

                                     10

     <PAGE>

     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 its
     existing markets while expanding to other markets.  This strategy will be
     implemented by further developing the existing distributor relationships
     and establishing new distributors in target markets.  The Company
     anticipates significantly  increasing its sales and marketing efforts by
     hiring additional sales personnel and increasing public brand name exposure
     through print, outdoor and electronic advertising on a selective basis.  

     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 contract
     brewers as The Boston Beer Company, Inc. and Pete's Brewing Company, and
     other regional breweries such as Redhook Ale Brewery, Inc., Hart 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 Elk
     Mountain 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.  The specialty beer market in the
     United States is the fastest growing segment in the domestic beer  market. 
     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.

          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. 
     Management expects the rapid growth in the craft beer segment to continue
     and the number of craft beer marketers seeking contract production to
     increase, although there can be no assurance it will do so.  The Company
     believes its contract packaging experience and the quality of its product
     enhance its ability to attract additional craft beer marketers as
     customers.  

                                     11

     <PAGE>

          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.

                                     12

     <PAGE>

          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 projections 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, 1996, the Company had 130 full time employees, including
     10 in production, 5 in sales and marketing, and 11 in administration.  Of
     these, 104 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.  

                                     13

     <PAGE>

     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 brewing capacity based upon the current product
     mix is approximately 340,000 barrels (31 gallons or 13.8 cases of 24 twelve
     oz. bottles equal one barrel) of product per year, assuming two seven-hour
     shifts, six 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 1996 and 1995, the Company
     shipped 329,000 barrels and 325,000 barrels of beverages, of which 68% and
     73% were malta, 20% and 17% were beer and 12% and 10% 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.

     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, 1996.

                                     14

     <PAGE>

                                       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 27 holders of
     record of the Company's common stock at December 27, 1996 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 $4-1/8.

     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 and for the two months ended November
     30, 1996 as reported by Nasdaq: 

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

                       June 30, 1996          6         5-1/8

                       September 30, 1996     5-7/8     5


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

                       November 30, 1996    5-3/8     3-3/4


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

     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.

     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 $17.9
     million, representing 68% of net sales in fiscal 1996. 

          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

                                     15

     <PAGE>

     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 $5.0 million, representing 19% of net sales, in fiscal
     1996.

          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 $2.5 million,
     representing 9% of net sales, in fiscal 1996.  The Company still brews beer
     sold at popular prices in local markets and predominantly packaged in 16
     oz. returnable bottles.  The Company is intentionally reducing its
     production of popular priced beers in conjunction with a general decline in
     market demand for lower priced beer marketed in 16 oz. returnable bottles
     and in recognition of the significantly greater profitability for the
     Company of using its production capacity for craft beer

          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 $127 in fiscal 1996, increasing 15.5% from $110 per
     barrel in fiscal 1995. 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, and an excess of
     production capacity could therefore 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. 
     In general, the Company obtains the highest gross margin on its sale of
     craft beers sold under its own label. 

          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.  

          The Company brews five days per week, 24 hours per day 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 68% malta, 23% beer
     and 9% specialty soft drinks), the Company believes it could produce and
     package approximately 370,000 barrels per year.  The Company is in the
     process of increasing its annual production capacity to 400,000 barrels,
     based upon its anticipated product mix.

          The Company's strategy is to rapidly expand its production and
     marketing of craft beer, while maintaining the growth of its non-alcoholic
     brewed beverages.  To achieve these growth objectives, the Company plans to
     significantly increase its sales and marketing expenditures, which the
     Company anticipates will adversely affect the Company's operating margin,
     at least until sales increase to match such increase in sales and marketing
     expenditures, of which there can be no assurance.

          On October 4, 1993, Lion Partners Company, L.P., in a series of
     related transactions, acquired 81% of the Company's Common Stock.  The
     Company accounted for these transactions as a purchase, writing up the
     assets acquired by $1.8 million.  The excess of the purchase price over the
     fair value of the net assets acquired of approximately $6.5 million has
     been recorded as goodwill and is being amortized over 40 years.  In

                                     16

     <PAGE>

     connection with these transactions, the Company changed its fiscal year end
     from December 31 to September 30. 

                                     17

     <PAGE>

     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,
                                         -------------------------
                                          1996      1995     1994
                                         ------    -----    -----

      Gross sales                        102.1%    101.5%   101.5%
      Less excise taxes                    2.1       1.5      1.5
                                         -----    ------    -----
           Net sales                     100.0     100.0    100.0
      Cost of sales                       75.4      76.0     80.1
                                         -----    ------    -----
      Gross profit                        24.6      24.0     19.9
                                         -----    ------    -----
      Operating expenses:
           Delivery                        3.1       3.3      3.5
           Selling, advertising and        4.7       3.2      2.7
            promotional 
           General and administrative      5.2       5.4      6.1
                                         -----     -----    -----
                Total operating           13.0      11.9     12.3
                  expenses               -----     -----    -----
      Operating income                    11.6      12.1      7.6
      Interest expense                     2.0       4.2      5.3
                                         -----     -----    -----
      Income before provision of           9.6       7.9      2.3
        income taxes
        and extraordinary item
      Provision for income taxes           4.3       3.7      1.1
                                         -----     -----    -----


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


      Net income                           4.1%      4.2%     1.2%
                                         =====     =====    =====

     Operating Data

                                   Year Ended September 30,
                        ----------------------------------------------
                         Percent of Net Sales     Net Sales Per Barrel
                         --------------------     ---------------------
                        1996    1995     1994     1996     1995    1994
                        ----    ----     ----     ----     ----    ----
      Malta             67.8%   75.0%    78.6%    $ 80     $ 78    $ 73
      Beer:
       Craft:
        Company label    6.7     4.9      1.2      127      110      83
        Contract        12.4     7.4      6.7       99       84      74
                        ----    ----     ----
                        19.1    12.3      7.9
       Popular priced    3.7     5.0      6.8       55       55      54
                        ----    ----     ----
        Total beer      22.8    17.3     14.7
                        ----    ----    -----

      Specialty soft     9.4     7.7      6.7       64       62      59
       drinks           ----    ----     ----

                       100.0%  100.0%   100.0%    $ 80     $ 76    $ 71
                       ======  ======   ======

                                     18

     <PAGE>

     YEARS ENDED SEPTEMBER 30, 1996 AND 1995

          Gross Sales and Excise Taxes

          The Company's gross sales increased 7.2% to $27.0 million in fiscal
     1996 from $25.2 million in fiscal 1995.  Gross sales of craft beer and
     specialty malt beverages increased 63.6% to $5.4 million in fiscal 1996
     from $3.3 million in fiscal 1995.  Gross sales of craft beer and specialty
     malt beverages represented 19.1% of gross sales in fiscal 1996 as compared
     to 13.1% of gross sales in fiscal 1995.  Gross sales of popular priced beer
     decreased 21.4% to $1.1 million in fiscal 1996 from $1.4 million in fiscal
     1995.

          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 increased
     42.4% to $544,000 in fiscal 1996 from $382,000 in fiscal 1995. Excise taxes
     as a percentage of sales increased in fiscal 1996 due to the greater
     percentage of beer sales in the Company's product mix and because excise
     taxes were accrued at an effective annual rate above $7.00 per barrel in
     the expectation that beer production for calendar 1996 will exceed 60,000
     barrels.  As the Company increases its beer production above 60,000
     barrels, federal excise taxes will continue to increase as a percentage of
     sales. During fiscal 1996 and 1995, the Company sold 64,797 barrels and
     55,554 barrels of beer respectively.   The Company records excise tax
     expense based on anticipated barrel shipments.  

          Net Sales

          The Company's net sales increased 6.6% to $26.4 million in fiscal 1996
     from $24.8 million in fiscal 1995.  Malta sales decreased 3.8% to $17.9
     million in fiscal 1996 from $18.6 million in fiscal 1995.  Malta sales
     decreased as a percentage of net sales to 67.8% in fiscal 1996 from 75.0%
     in fiscal 1995.  This decrease resulted from the decrease in Malta sales,
     but more importantly the rapid growth in net sales of craft beer and
     specialty malt beverages and, to a lesser extent, the growth in sales of
     soft drinks.  Craft beer and specialty malt beverage sales increased 65.1%
     to $5.0 million and soft drink sales increased 30.6% to $2.5 million.  

          Gross Margin

          The Company's gross margin (the Company's gross profit as a percentage
     of net sales) was 24.6% in fiscal 1996, compared to 24.0% in fiscal 1995. 
     The increase in gross margin was primarily the result of a 65.1% increase
     in craft beer and specialty malt beverage net sales (both under its own
     labels and under contract for third parties) and a 30.6% increase in soft
     drink net sales, both of which have significantly higher margins than its
     malta and popular priced beers.  The growth in gross margin was
     significantly offset by lower paper recycling income and higher malt
     prices. 

          Delivery Expense

          Delivery expense as a percentage of net sales decreased to 3.1% or
     $824,000 in fiscal 1996 from 3.3% or $827,000 in fiscal 1995.  This
     reduction primarily relates to the decrease in malta sales and higher
     percentage of beer sales.  Substantially all beer sales are shipped F.O.B.
     shipping point.  Malta products are shipped common carrier at the Company's
     expense.

          Selling, Advertising and Promotional Expenses

          Selling, advertising and promotional expenses increased 58.6% to $1.2
     million in fiscal 1996 from $782,000 in fiscal 1995.  This increase in
     selling, advertising and promotional expenses occurred as the Company began
     to gear 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

                                     19

     <PAGE>

     introduced the Classic Collection in late November 1995, Brewery Hill Pale
     Ale in March 1996 and Brewery Hill Cherry Wheat in late May 1996.  A
     significant portion of the Company's sales and marketing efforts are
     dedicated to the introduction of its new labels and the implementation of
     promotional and advertising programs.  In March 1996, the Company hired a
     Vice President of Sales and Marketing to spearhead the growth of the
     Company label craft beer sales by further developing the Company's
     distribution system in the states it currently services and in the
     additional states the Company is expanding into.  During fiscal 1996, the
     Company increased its distribution area from nine to twelve states, adding
     Connecticut, Ohio and Washington, D.C.  The Company plans to significantly
     increase its selling, advertising and promotional programs on Company label
     craft beers. 

          General and Administrative Expenses

          General and administrative expenses decreased as a percentage of net
     sales to 5.2% in fiscal 1996 from 5.4% in fiscal 1995, as a result of
     controlling growth in salaries, professional fees and general overhead
     costs.

          Operating Income

          Operating income increased 1.6% to $3.1 million, or 11.6% of net
     sales, in fiscal 1996 from $3.0 million, or 12.1% of net sales, in fiscal
     1995.  This decrease, as a percentage of net sales, is attributable to the
     58.6% increase in selling advertising and promotional expenses.   The
     Company plans to continue increasing its selling, advertising and
     promotional expenses to further its strategy of expanding its craft beer
     sales.  

          Interest Expense

          Interest expense decreased 50.1% to $520,000 in fiscal 1996 from $1.0
     million in fiscal 1995.  This decrease interest expense resulted primarily
     from the repayment of the debt outstanding with the proceeds of the initial
     public offering.

          Provision for Income Taxes

          The effective income tax rate was 45% in fiscal 1996 and 47% in fiscal
     1995.  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.

     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.  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.  The repayment of the indebtedness included the Company's
     working capital line of credit, which had an outstanding balance of
     $920,000. In the process of repaying the debt outstanding with the proceeds
     of the offering, the Company incurred extraordinary charges of $550,000,
     before income tax benefit.  The charges consisted 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.

                                     20

     <PAGE>

          The Company is currently negotiating and has a loan agreement for
     review from a lending institution which provides for a $5,000,000 revolving
     line of credit and a $2,500,000 revolving equipment line of credit.  Both
     facilities would be unsecured and interest will be paid monthly based upon
     either the Bank's prime rate minus 1/2%, LIBOR plus 75 basis points or the
     Bank's offered rate.  These lines of credit would 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 lending institution.  The
     Company believes that these facilities will be obtained, although there is
     no assurance in this regard.

          Cash flows provided from operations were $2.7 million and $2.5 million
     in fiscal 1996 and 1995, respectively.  The cash flows from operations have
     been affected by  collections of  accounts  receivable, inventory levels 
     and  income taxes payable.  In fiscal 1995 and 1996, the Company made
     several changes to its credit and collections policies, which resulted in
     faster collection periods.  As a result, accounts receivable decreased by
     $463,000 to $2.0 million at September 30, 1996 as compared to $2.5 million
     at September 30, 1995.   The increased cash flow from operations and the
     repayment of the long-term debt with the proceeds of the initial public
     offering enabled the Company to take advantage of vendor discounts and
     reduce the accounts payable outstanding.  Inventory levels increased by
     $200,000 in fiscal 1996 and $212,000 in fiscal 1995 due to increased
     packaging supplies, primarily recycled bottles.  Income taxes payable
     decreased by $152,000 in fiscal 1996.  Although the Company's income before
     extraordinary items and income taxes increased  29.0% in fiscal 1996 as
     compared to the previous year, income taxes payable decreased primarily as
     a result of the tax benefit of $228,000 generated by the extraordinary
     charge.  In fiscal 1996, the cash provided from operations was used to
     purchase equipment and pay costs related to the initial public offering.  A
     portion of the proceeds from the initial public offering were used to repay
     the Company's working capital line of credit borrowings outstanding.  

          During fiscal 1996, the Company expended $908,000 on capital
     improvements.  The Company is in the process of increasing its annual
     production capacity from 340,000 to 400,000 barrels based upon its
     anticipated product mix.  This expansion will modify its existing seven
     ounce bottling line to also accommodate 12 oz. bottles, the bottle size for
     most of the Company products. In addition, the Company has increased its
     fermentation and lagering capacity with the relining of nine storage tanks.
     The Company also completed an upgrade of a boiler and is in the process
     of adding a malt storage and elevation system.      

          The Company believes that the net proceeds from the initial public
     offering, together with cash flow from operations and the anticipated
     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 1997.  There can be no assurance
     that additional financing will be available on favorable terms or at all.

     FACTORS THAT MAY AFFECT FUTURE PERFORMANCE

          This report contains forward looking statements based on current
     expectations that involve a number of risks and uncertainties.  The factors
     that could cause actual results to differ materially include the following:
     general economic conditions and growth rates in the malt beverage, soft
     drink and related industries, competitive factors and pricing pressures,
     changes in the Company's product mix, the timely development and acceptance
     of new products, inventory risks due to shifts in market demands, supply
     constraints and shortages, and the ramp-up and expansion of manufacturing
     capacity.

     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

          In November 1995, the Company's Board of Directors retained Arthur
     Andersen LLP as its independent public accountants and replaced the
     Company's former auditors, Richard A. Eisner & Company LLP.  There were no

                                     21

     <PAGE>

     disagreements with the former auditors on any matter of accounting
     principles or practices, financial statements for the fiscal year ended
     September 30, 1994 or up through the time of replacement which, if not
     resolved to the former auditors' satisfaction, would have caused them to
     make reference to the subject matter of the disagreement in connection with
     their report.  Prior to retaining Arthur Andersen LLP, the Company had not
     consulted with Arthur Andersen LLP regarding accounting principles. 

                                      PART III.

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

          Information regarding the Company's directors and executive officers
     is incorporated by reference from the Company's definitive proxy statement
     for its 1996 Annual Meeting of Stockholders (the "1996 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 1996 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 1996 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 1996 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: 

     1.   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.

            
                                     22

     <PAGE>

       Index to Exhibits:

       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*

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

       10.2     Employment Agreement, dated as of October 3, 1994, between the
                Company and Patrick Belardi*

       10.3     Lease dated March 1999 between the Company and Mericle
                Development Corporation*

       10.4     1996 Stock Option Plan*

       10.5     Form of 1996 Stock Option Agreement*

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

       10.7     Agreement dated as of January 3, 1996 between the Company and
                Weston Preidio Offshore Capital C.V.*

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

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

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

       10.11    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.*

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

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

       16       Letter on Change in certifying accountant*

     ----------------------
     *    Incorporated by reference to the Registrant's registration statement
          on Form SB-2 (Registration No. 333-01644).


     2.   No reports on Form 8-K were filed during the fourth quarter of the
          fiscal year ended September 30, 1996.

                                     23

     <PAGE>

                   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, 1996 and 1995                         F-3  

     Statements of Income for the Years Ended September 30, 1996 
       and 1995                                                         F-4

     Statements of Shareholders' Equity for the Years Ended 
       September 30, 1996 and 1995                                      F-5  

     Statements of Cash Flows for the Years Ended 
       September 30, 1996 and 1995                                      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, 1996 and 1995, 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, 1996 and 1995, and the results of its operations and
     its cash flows for the years then ended in conformity with generally
     accepted accounting principles.


                              /s/ Arthur Andersen LLP

                              ARTHUR ANDERSEN LLP



     New York, New York
     November 21, 1996

                      
                                     F-2

     <PAGE>

                             THE LION BREWERY, INC.

                                 BALANCE SHEETS

                          SEPTEMBER 30, 1996 AND 1995

                                                  1996             1995
                                              ----------       -----------
                                   ASSETS
    Current assets:
      Cash and cash equivalents               $1,992,000       $        0
      Accounts receivable, less allowance
        for doubtful accounts of $157,000
        and $129,000 at September 30, 1996
        and 1995, respectively                 2,001,000        2,476,000
      Inventories                              2,128,000        2,003,000
    Prepaid expenses and other assets            190,000          277,000
                                            ------------      -----------

      Total current assets                     6,311,000        4,756,000

    Property, plant & equipment, net of
      accumulated depreciation of $1,684,000
      and $1,122,000 at September 30, 1996
      and 1995, respectively                   3,600,000        3,254,000

    Goodwill, net of accumulated
      amortization of $475,000 and
      $311,000 at September 30, 1996
      and 1995, respectively                   6,039,000        6,203,000


    Deferred financing costs and other
      assets, net of accumulated
      amortization of $144,000                     4,000          228,000
      at September 30, 1995                   ----------      -----------

                                             $15,954,000      $14,441,000
                                             ===========      ===========


                        LIABILITIES AND SHAREHOLDERS' EQUITY

    Current liabilities:
      Current portion of long-term debt      $         0      $ 1,745,000
      Accounts payable                         1,663,000        1,978,000
      Accrued expenses                           839,000          478,000
      Refundable deposits                        205,000          171,000
      Income taxes payable                       178,000          330,000
                                             -----------      -----------
       Total current liabilities               2,885,000        4,702,000

    Long-term debt, less current portion               0        6,131,000

    Net pension liability                        243,000          218,000

    Deferred income taxes                        206,000          351,000
                                             -----------      -----------

           Total liabilities                   3,334,000       11,402,000
                                             -----------     ------------

    Warrants                                           0          722,000
                                             -----------     ------------

    Shareholders' equity:
      Common stock, $.01 par value;
        10,000,000 shares authorized;
        3,885,052 and 1,851,183 shares
        issued and outstanding at September
        30, 1996 and 1995, respectively           39,000           19,000
      Additional paid-in capital              10,612,000        1,304,000
      Adjustment to reflect minimum
        pension liability, net of
        deferred income taxes                    (42,000)         (10,000)
      Retained earnings                        2,011,000        1,004,000
                                             -----------     ------------


           Total shareholders' equity         12,620,000        2,317,000
                                             -----------     ------------

           Total liabilities and            $ 15,954,000     $ 14,441,000
             shareholders' equity           ============     ============

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

                                     F-3

     <PAGE>
                                
                            THE LION BREWERY, INC.

                             STATEMENTS OF INCOME

               FOR THE YEARS ENDED SEPTEMBER 30, 1996 AND 1995


                                              Year ended September 30,
                                              ------------------------
                                                1996            1995
                                             ---------       ---------


     Gross sales                          $26,983,000      $25,175,000
     Less excise taxes                        544,000          382,000
                                           ----------      -----------

     Net sales                             26,439,000       24,793,000

     Cost of sales                         19,939,000       18,834,000
                                          -----------      -----------

          Gross profit                      6,500,000        5,959,000
                                          -----------      -----------

     Operating expenses:
          Delivery                            824,000          827,000
          Selling, advertising and
            promotional expenses            1,240,000          782,000
          General and administrative        1,373,000        1,336,000
                                          -----------      -----------

                                            3,437,000        2,945,000
                                          -----------      -----------

          Operating income                  3,063,000        3,014,000

     Interest expense and amortization        520,000        1,042,000
       of debt discount, net              -----------      -----------

     Income before provision for income
       taxes and extraordinary item         2,543,000        1,972,000
     Provision for income taxes             1,125,000          921,000
                                          -----------      -----------

          Income before extraordinary 
            item                            1,418,000        1,051,000

     Extraordinary item, net of income       (322,000)            (  0)
       tax benefit of $228,000            -----------      -----------

          Net income                        1,096,000        1,051,000

     Warrant accretion                         89,000          300,000
                                          -----------      -----------

     Net income available to common       $ 1,007,000      $   751,000
       shareholders                       ===========      ===========

     Income per share before extraordinary
       item                               $      0.47      $      0.40
     Extraordinary item - loss per share        (0.11)           (0.00)
                                          -----------      -----------

     Net income per share                 $      0.36      $      0.40
                                          ===========      ===========


     Shares used in per share calculation   2,835,000        1,898,000
                                          ===========      ===========


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

                                     F-4 
                                     
     <PAGE>

                            THE LION BREWERY, INC.

                     STATEMENTS OF SHAREHOLDERS' EQUITY

               FOR THE YEARS ENDED SEPTEMBER 30, 1996 AND 1995



                                                      Common Stock
                                           -----------------------------------
                                               Shares             Amount
                                             ---------        --------------


      Balance, September 30, 1994.....       1,851,183         $  19,000

       Accretion of warrants..........

       Adjustment to reflect
         minimum pension liability,
         net of deferred taxes........


       Net income.....................                               
                                             ---------         ---------


      Balance, September 30, 1995.....       1,851,183            19,000

       Accretion of warrants..........

       Conversion of warrants.........         291,565             3,000

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

       Repurchase of common stock.....        (132,696)           (1,000)

       Adjustment to reflect
         minimum pension liability,
         net of deferred taxes........

       Net income.....................                              
                                             ---------         ---------

      Balance, September 30, 1996.....       3,885,052         $  39,000
                                             =========         =========




                                            Additional
                                             Paid-in             Pension  
                                             Capital            Liability 
                                           -----------         -----------


      Balance, September 30, 1994.....     $ 1,304,000         $ (54,000)

        Accretion of warrants.........

        Adjustment to reflect minimum
          pension liability, net of
          deferred taxes..............                            44,000

        Net income....................
                                           -----------         ---------

      Balance, September 30, 1995.....       1,304,000           (10,000)

        Accretion of warrants.........

        Conversion of warrants........         809,000

        Proceeds of Initial Public
          Offering, net of costs......       9,448,000

        Repurchase of common stock....        (949,000)

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

        Net income...................
                                           -----------         ---------

      Balance, September 30, 1996....      $10,612,000         $ (42,000)
                                           ===========         =========



                                             Retained  
                                             Earnings           Total  
                                           -----------       -----------


      Balance, September 30, 1994.....     $   253,000       $ 1,522,000

        Accretion of warrants.........        (300,000)         (300,000)

        Adjustment to reflect minimum
          pension liability, net of                                           
          deferred taxes..............                            44,000

        Net income....................       1,051,000         1,051,000
                                           -----------       -----------

      Balance, September 30, 1995.....       1,004,000         2,317,000

        Accretion of warrants.........         (89,000)          (89,000)

        Conversion of warrants........                           812,000

        Proceeds of Initial Public
          Offering, net of costs......                         9,466,000

        Repurchase of common stock....                          (950,000)

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

        Net income....................       1,096,000         1,096,000
                                           -----------       -----------

      Balance, September 30, 1996.....     $ 2,011,000       $12,620,000
                                           ===========       ===========

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

                                     F-5

    <PAGE>

                            THE LION BREWERY, INC.

                           STATEMENTS OF CASH FLOWS

               FOR THE YEARS ENDED SEPTEMBER 30, 1996 AND 1995


                                                      Year ended September 30,
                                                     -------------------------
                                                         1996          1995
                                                     ----------    -----------


      Cash flows from operating activities: 
      Net income..............................       $1,096,000    $1,051,000
      Adjustments to reconcile net income
       to net cash provided by operating
       activities
        Extraordinary item....................          550,000             0
        Depreciation and amortization.........          830,000       947,000
        Bad debt expense......................           12,000        36,000
        Provision for inventory reserve.......           75,000        45,000
        Benefit for deferred income taxes.....         (145,000)     (132,000)
        Loss on disposal of equipment.........                0         2,000
      Changes in assets and liabilities:
        (Increase) decrease in:
          Accounts receivable.................          463,000       153,000
          Inventories.........................         (200,000)     (212,000)
          Prepaid expenses and other assets...           87,000        23,000
        Increase (decrease) in:
          Accounts payable, accrued expenses and
           refundable deposits................           80,000       248,000
          Income taxes payable................         (152,000)      330,000
          Pension liability...................           (7,000)      (16,000)
                                                     ----------    ----------

         Net cash provided by operating               2,689,000     2,475,000
          activities..........................       ----------    ----------

      Cash flows from investing activities:
        Proceeds from sale of equipment.......                0        12,000
        Purchase of equipment.................         (908,000)     (319,000)
                                                     ----------    ----------

         Net cash used in investing activities         (908,000)     (307,000)
                                                     ----------    ----------

      Cash flows from financing activities:
        Net proceeds from sale of common stock        9,466,000             0
        Repurchase of common stock............         (950,000)            0
        Deferred financing costs..............                0       (25,000)
        Issuance of long term debt............                0       500,000
        Net reductions in line of credit......         (721,000)   (1,860,000)
        Repayment of long term debt...........       (7,584,000)     (924,000)
                                                     ----------    ----------

         Net cash provided by (used in) financing
          activities..........................          211,000    (2,309,000)
                                                     ----------    ----------

         Net increase (decrease) in cash and cash
          equivalents.........................        1,992,000      (141,000)

      Cash and cash equivalents. beginning of
        year..................................                0       141,000
                                                     ----------    ----------

      Cash and cash equivalents, end of year..       $1,992,000    $        0
                                                     ==========    ==========

      Supplementary disclosure of cash flow information: 
        Cash paid for:
          Interest............................       $  516,000    $  951,000
                                                     ==========    ==========

          Income taxes........................       $1,183,000    $  672,000
                                                     ==========    ==========


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

                                     F-6  

     <PAGE>

                            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., 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
     also brews beer for sale under traditional Company-owned labels for the
     local market at popular prices.

     The Company was incorporated in Pennsylvania on April 5, 1933.  On October
     4, 1993, Lion Partners Company, L.P. (the Partnership) acquired shares of
     common stock of the Company for $2,100,000.  Prior to this transaction, the
     Partnership had no affiliation with the Company.  The Company then redeemed
     shares of common stock for $6,983,000 (of which $2,500,000 was payable in a
     note), including $1,008,000 of direct acquisition costs.  After these
     transactions, the Partnership owned 81% of the common stock of the Company.

     The Company accounted for these transactions as a purchase by the
     Partnership whereby the cost of acquiring 81% of the Company was pushed
     down to establish a new accounting basis which is reflected in the
     accompanying financial statements.  The Company allocated the cost of the
     acquisition of 81% of the Company to the assets acquired and liabilities
     assumed based on their fair values and carried over 19% of the historical
     cost at the date of the acquisition.  The purchase price was $8,677,000 and
     was allocated to tangible assets ($8,782,000) and liabilities ($6,619,000).
     The excess of the purchase price over net assets acquired of $6,514,000 was
     assigned to goodwill.

     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
     date purchase 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).

                                     F-7

     <PAGE>

                            THE LION BREWERY, INC.

                   NOTES TO FINANCIAL STATEMENTS - (CONTINUED)

     2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

     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. The new accounting
     pronouncement on impairment of long lived assets had no impact on the
     Company's financial statements.  Estimated useful lives for the assets are
     as follows:

                                                     Years
                                                     -----
                       Buildings                      20

                       Machinery and equipment       3-10

                       Kegs and bottles              3-7


     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.  The
     Company continually evaluates the remaining estimated useful lives and the
     recoverability of its intangible assets utilizing the undiscounted cash
     flow method. 

     Product and Customer Concentrations

     The sale of malta, beer and soft drinks has accounted for all of the
     Company's sales, with malta accounting for 68% and 75% for the years ended
     September 30, 1996 and 1995.  The Company's top three customers accounted
     for 60% and 68% of sales in fiscal 1996 and 1995.  Accounts receivable from
     these three customers totaled $1,712,000 and $1,831,000 at September 30,
     1996 and 1995.  The Company's largest customer accounted for 27% and 30% of
     sales in fiscal 1996 and 1995.  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.
     
     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-8

     <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.

     Stock spilt

     In January 1996, the Company's Board of Directors amended the Company's
     Articles of Incorporation to effect a 3,091.33 for 1 stock split.  All
     common shares and per share amounts in the accompanying financial
     statements have been adjusted retroactively to give effect to the stock
     split.

     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.

     Stock Based Compensation

     In October 1995, the Financial Accounting Standards Board issued Statement
     No. 123, "Accounting for Stock-Based Compensation," 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 the pro forma footnote disclosures.

     3.   INVENTORIES

     Inventories consist of the following:

                                             1996         1995
                                          ----------   ----------


                   Raw materials            $163,000    $  176,000

                   Finished goods            673,000       663,000

                   Supplies                1,292,000     1,164,000
                                         -----------    ----------

                                          $2,128,000    $2,003,000
                                          ==========    ==========

                                     F-9

     <PAGE>
                             THE LION BREWERY, INC.

                    NOTES TO FINANCIAL STATEMENTS - (CONTINUED)


     4.   PROPERTY, PLANT AND EQUIPMENT

     Property, plant and equipment consist of the following:


                                         1996             1995
                                      ---------        ----------

           Land and building         $ 1,024,000      $ 1,014,000
           Machinery and equipment     4,038,000        3,167,000
           Kegs and bottles              222,000          195,000
                                     -----------       ----------
                                       5,284,000        4,376,000
           Less accumulated            1,684,000        1,122,000
            depreciation             -----------       ----------
                                     $ 3,600,000       $3,254,000
                                     ===========       ==========

     5.   ACCRUED EXPENSES

     Accrued expenses consist of the following:

                                             1996             1995  
                                         ----------        ---------

         Payroll and related accruals     $ 427,000        $ 346,000
         Other accruals                     412,000          132,000
                                         ----------         --------
                                          $ 839,000        $ 478,000
                                          =========        =========


     6.   INCOME TAXES

     The provision for income taxes is as follows:

                                            1996               1995  
                                         ---------         ----------

                Current:                $  786,000         $  755,000
                  Federal                  256,000            298,000
                                        ----------         ----------
                  State                  1,042,000          1,053,000
                                        ----------         ----------

                Deferred:
                  Federal                (105,000)          (102,000)
                  State                   (40,000)           (30,000)
                                        ----------         ----------
                                         (145,000)          (132,000)
                                        ----------         ----------
                                        $  897,000         $  921,000
                                        ==========         ==========

                                     F-10

     <PAGE>

                             THE LION BREWERY, INC.

                   NOTES TO FINANCIAL STATEMENTS - (CONTINUED)


     6.   INCOME TAXES (CONTINUED)

     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:

                                             1996       1995
                                             ----      -----
      United States statutory rate            35%        35%
      State taxes (net of federal tax          7          9
        benefit)
      Nondeductible expenses - goodwill        3          3
        amortization                         ---        ---
                                              45%        47%
                                             ===        ===

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


                                                 1996             1995  
                                              ---------        ---------
             Deferred tax assets:
                  Benefit accruals            $  235,00       $  160,000
                  Accounts receivable            71,000           53,000
                  Inventories                    96,000           46,000
                  Other                               -           18,000
                                              ---------         --------
                                                402,000          277,000
                                              ---------         --------

             Deferred tax liabilities:
                  Property, plant and           559,000          628,000
                    equipment
                  Other                          49,000                -
                                               --------       ----------
                                                608,000          628,000
                                               --------       ----------

                                             $  206,000       $  351,000
                                             ==========       ==========

     7.   DEBT

     Debt at September 30, 1995 consists of the following:


                                                          1995  
                                                      ----------

                     Revolving credit loan            $  721,000
                     Term loan                         1,019,000
                     Senior subordinate notes          3,631,000
                     Junior subordinate notes          2,500,000
                     Other                                 5,000
                                                       ---------

                                                       7,876,000
                     Current portion                   1,745,000
                                                      ----------
                                                      $6,131,000
                                                      ==========

                                     F-11

     <PAGE>

                              THE LION BREWERY, INC.

                    NOTES TO FINANCIAL STATEMENTS - (CONTINUED)

     7.   DEBT (CONTINUED)

     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.

     The Company is currently negotiating a $5,000,000 revolving line of credit
     and a $2,500,000 revolving equipment line of credit.  Both facilities would
     be unsecured and interest will be paid monthly based upon either the Bank's
     prime rate minus 1/2%, LIBOR plus 75 basis points or the Bank's offered
     rate.  There can be no assurance that such agreement will be finalized.

     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:


                                                      1996      1995  
                                                    --------  --------

               Service cost - benefits earned       $ 30,000  $ 24,000
                 during the period

               Interest cost on projected             36,000    36,000
                 benefit obligation

               Actual return on plan assets          (23,000)  (39,000)

               Net amortization and deferral          19,000    38,000

               Effect of settlement                        -    15,000
                                                   ---------  --------

                    Net pension expense             $ 62,000  $ 74,000
                                                   =========  ========


     Assumptions used in the accounting for the defined benefit plan are as
     follows as of September 30, 1996 and 1995:

                    Weighted average discount rate         8.5%

                    Expected long-term rate of
                    return on assets                       9.0

                    Average salary increase                5.0


                                     F-12

     <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:

                                                    1996          1995
                                                  ---------     ---------

           Actuarial present value of benefit
           obligation:

                Accumulated benefit
                 obligation (including                 
                 vested benefits of $392,000
                 and $327,000)                    $ 403,000     $ 340,000

           Projected benefit obligation             438,000       413,000

           Plan assets at fair value                160,000       122,000
                                                  ---------     ---------

                Projected benefit obligation
                 in excess of plan assets          (278,000)     (291,000)
                 
                Unrecognized net loss               111,000        87,000

                Adjustment required to          
                 recognize minimum liability        (76,000)      (14,000)
                                                  ---------     ---------


                Net pension liability     
                 recognized in balance sheet      $ 243,000     $ 218,000
                                                  =========     =========


     The Company also participates in a multi-employer pension plan which
     provides defined benefits to union employees. Contributions are based on a
     fixed amount per hour worked. Pension cost aggregated $162,000 and $142,000
     for the years ended September 30, 1996 and 1995, respectively.

     9.   COMMITMENTS AND CONTINGENCIES

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

                                 1997        $234,000
                                 
                                 1998         246,000

                                 1999         187,000
                                 
                                 2000         136,000

                                 2001         102,000


     Rent expense for all leased facilities amounted to $294,000 in 1996 and
     $249,000 in 1995.

     The Company has entered into employment agreements with the Company's
     President and Chief Financial Officer at annual base salaries aggregating
     $235,000.  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.

     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.

                                     F-13

     <PAGE>

                             THE LION BREWERY, INC.

                   NOTES TO FINANCIAL STATEMENTS - (CONTINUED)


     10.  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 238,431 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.

     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 provides that the noteholders may put these
     warrants to the Company and accordingly, the warrants were accreted to the
     estimated redemption price.  During fiscal 1996 and 1995, accretion of
     $89,000 and  $300,000, respectively, 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-14

     <PAGE>

                             THE LION BREWERY, INC.

                 NOTES TO THE FINANCIAL STATEMENTS - (CONTINUED)


     12.  PUBLIC OFFERING AND PREFERRED STOCK AUTHORIZATION (CONTINUED)

     In January 1996, the Company's Board of Directors authorized a change in
     the Company's authorized capitalization to 10,000,000 shares of common
     stock and 1,000,000 shares of undesignated preferred shares.




                                     F-15

     <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, 1996

                                   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
      /s/ Charles E. Lawson, Jr.     Executive           December 29, 1996
      -------------------------      Officer and        
      Charles E. Lawson, Jr.         Director


                                     Vice President,
      /s/ Patrick E. Belardi         Chief Financial     December 29, 1996
      -------------------------      Officer and        
      Patrick E. Belardi             Treasurer


      /s/ Donald J. Sutherland       Chairman of the     December 29, 1996
      -------------------------      Board               
      Donald J. Sutherland


                                     Director            
      -------------------------                       
      Thomas S. Ablum


      /s/ George W. Peck, IV         Director            December 29, 1996
      -------------------------                       
      George W. Peck, IV


      /s/ Carlo A. von Schroeter     Director            December 29, 1996
      -------------------------                       
      Carlo A. von Schroeter


      /s/ Henry T. Wilson            Director            December 29, 1996
      -------------------------                       
      Henry T. Wilson