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                       SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549

                                   FORM 10-KSB

[x] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act
             of 1934. For the Fiscal Year ended December 31, 2000.

[ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange
    Act of 1934. For the transition period from ______ to ______.


Commission file number: 0-32105

                            RED BELL BREWING COMPANY
             (Exact Name of Registrant as Specified in its Charter)

<TABLE>
<S>                                         <C>
        PENNSYLVANIA                                     23-2729103
(State or other jurisdiction                (I.R.S. Employer Identification No.)
      of organization)
</TABLE>

                           3100 WEST JEFFERSON STREET
                      PHILADELPHIA, PENNSYLVANIA 19121-3508
              (Address of principal executive offices and zip code)

                                 (215) 235-2460
                           (Issuer's telephone number)

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

Securities registered under Section 12(g) of the Act:

                           COMMON STOCK, NO PAR VALUE
                              (Title of each Class)

Check whether the issuer (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 such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. YES [x] NO[ ]

Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-B is not contained in this form, and no

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disclosure will be contained, to the best of registrant's knowledge, in a
definitive proxy or information statement incorporated by reference in Part III
of this Form 10-K or amendment to this Form 10-K [X]

Issuer's revenues for its most recent fiscal year: $514,720.

As of March 15, 2001, the aggregate market value of the voting stock held by
non-affiliates computed by reference to the price ($4.50) at which the stock was
sold by the Company in a private placement on February 23, 2001, was
$11,495,695.

                     (APPLICABLE ONLY TO CORPORATE ISSUERS)

As of March 15, 2001, the number of shares outstanding of each class of common
equity was 3,440,831 shares of Common Stock, no par value.


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PART I

ITEM 1. DESCRIPTION OF BUSINESS.

         Red Bell Brewing Company, a Pennsylvania corporation ("Red Bell"), was
founded on June 29, 1993 by James R. Bell, President and Chief Executive
Officer, and James T. Cancro, Director of Brewing Operations. Red Bell's
objective is to operate and continue to open in the future high profile,
strategically located brew pub locations featuring its own beer as well as to
increase awareness for case and keg beer sales to wholesale distributors and
retail locations. Red Bell produces its speciality draft products in its
technically advanced main brewery, in historic Brewerytown, in Philadelphia,
Pennsylvania, as well as in its brew pub.

         Red Bell currently produces ten styles of beer year round, marketed
under distinct brand names. Our flagship brands are Philadelphia Original Lager
and Philadelphia Traditional Irish Amber. Our other principal products include
Philadelphia Black & Tan, Red Bell Cherry Stout, Philadelphia Original Light,
Lemon Hill Wheat, American Pale Ale, Red Bell Heffe-Weizen, Ahopalypse Now
(IPA), and Wee Heavy Scottish Ale. Red Bell markets its hand-crafted ales and
lagers through a third party independent distribution network. We sell beer in
cases and kegs on a wholesale basis.

         In addition to our main brewery, Red Bell, since 1996 has operated
through its wholly-owned subsidiary, the Red Bell Brewery & Pub Company, a
smaller scale micro brewery (known as a brew pub) in the First Union Center in
Philadelphia, Pennsylvania. The brew pub is operated under an agreement with
ARAMARK Leisure Services, Inc. (ARA). The First Union Center location features
high quality, moderately priced food along with 8 styles of our distinctive
micro brewed beer. The brew pub is open during all events (professional hockey,
professional basketball, indoor lacrosse, wrestling, concerts, ice skating,
conventions, etc.)at the First Union Center.

         In addition, we have licensed the Red Bell name to four brew pubs
located at Veteran's Stadium in Philadelphia, Pennsylvania, which feature our
beer. Three of these brew pubs have been operating since 1996 and the other
since 1999. In January 2001, our contracts expired for these locations. We
anticipate that our contracts will be renewed on a year-to-year basis commencing
with the opening of the professional baseball season in April 2001. These
locations were open during all events (professional football,

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professional baseball, soccer, concerts, etc.) held at Veteran's Stadium.

         On January 20, 1999, our subsidiary, Red Bell Brewery and Pub
Company-State College, Inc. ("Red Bell-State College") was incorporated in
Pennsylvania in order to develop and operate a restaurant and brewery in State
College, Pennsylvania, in close proximity to the Pennsylvania State University
("PSU"). In 1999 as we entered into a five year lease agreement for
approximately 9,000 square feet and the lease term commenced June 1999. Although
we have purchased and obtained the Pennsylvania restaurant liquor license
required to operate the proposed brew pub, we have not obtained the additional
financing required to purchase the necessary brewing and restaurant equipment
and to construct improvements. We anticipate that we must obtain financing in
the amount of approximately $1,800,000 in order to open the facility. In October
2000, our landlord commenced a legal action against us in order to recover the
past due rents of $117,703. In December 2000, we agreed that the landlord could
enter a judgment against us in the amount requested. We also agreed that if we
did not satisfy the judgment by February 6, 2001, the landlord could take
possession of the premises. Although we did not satisfy the judgment by this
date, we are currently attempting to have the judgment satisfied or to work out
satisfactory payment arrangements with the landlord. We could lose the site and
would not be able to open the brew pub. In such event, management presently
intends to pursue alternative locations.

         We currently generate substantially all of our revenues through the
sale of keg beer to our high profile brew pubs, and through sales of our keg
beers and cases to wholesalers and retail locations, and through management fees
and commissions earned at our First Union Center and Veteran's Stadium
locations. None of our revenues are attributable to sales of food. During 2000,
we sold a total of 128,278 gallons of beer, and earned the following revenues:


                  * $149,504 from keg beer sales and $14,100 from management
fees in connection with the First Union Center brew pub;

                  * $55,057 from keg beer sales and $62,641 from commissions in
connection with our Veteran's Stadium brew pub locations;

                  * $1,164 from keg beer sales and $20,439 from commissions in
connection with our former brew pub located at the

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Philadelphia International Airport; and

                  * $265,223 from sales of keg beer and cases to wholesalers and
retail locations.

         From inception through December 31, 2000, Red Bell has incurred
cumulative losses of $7,850,970. During the years ended December 31, 1999 and
2000, Red Bell has incurred losses of $1,671,045 and $1,529,795, respectively.
Further, as of December 31, 2000, we had a stockholder's deficit of $2,974,256
and a working capital deficit of $6,125,729. We have not been able to pay our
debts as they become due. As a result, Red Bell's independent auditors have
included an explanatory paragraph in their report on our December 31, 2000
consolidated financial statements raising doubt about our ability to continue as
a going concern.

INDUSTRY BACKGROUND

         Our brewery operations are part of the relatively small craft brewing
segment of the United States brewing industry. The industry includes regional
specialty brewers and brew pubs such as Red Bell, contract brewers, and micro
breweries. Craft beers are distinguishable from other domestically produced
beers by their fuller flavor and adherence to traditional European brewing
styles.

         According to Modern Brewery Age (March 27, 2000 Edition), beer sales
moved up a notch in 1999, the first intimation that the beer industry is on the
cusp of a long awaited demographic upsurge. Domestic barrelage rose 1.24% to an
estimated 179,800,000, and imports rose 9.03% to 17,790,000. Exports dropped
9.73%, to 5,100,000, as United States brewers shifted more volume to licensed
production abroad. According to Modern Brewery Age (September 13, 1999 Edition)
the overall beer market is expected to increase 28% by 2010, but the high-priced
segment is expected to more than double which could take it to 18.9% of the
overall market from just over 11% today. With the combination of overall market
growth the volume of high-priced beers is expected to go from 21.6 million
barrels in 1998 to almost 47 million barrels by 2010.

         The greatest number of breweries in the craft segment is, and will be,
brew pubs. As of December 31, 1999, there were more than 900 of them producing
about 700,000 barrels of beer annually. While the craft segment volume growth
has slowed significantly, the number of craft breweries in the United States has
grown dramatically, from 627 at the end of 1994 to approximately 1,400 as

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of December 31, 1999.

         At the turn of this century, the United States brewing industry was
comprised of nearly 2,000 breweries, most of which were small operations that
produced distinctive beers for local markets. Fewer than 1,000 of these
breweries reopened following Prohibition. During the ensuing decades,
competition in the beer industry has narrowed product offerings. Reasons for the
reduction in the types of beer offered include:

                  * efforts to market to the broadest possible segment of the
population;

                  * economies of scale;

                  * mass production techniques;

                  * lowered costs and lightened flavor profiles which use less
barley and more corn, rice and other adjuncts;

                  * pasteurization processes which prolong shelf-life; and

                  * national marketing of a few major brand names through
mass-media advertising.

         As a result of these competitive factors, extensive industry
consolidation has occurred. Currently, according to industry sources, the five
largest domestic brewers account for approximately 90% of domestic beer
shipments.

         By the early 1980s, annual domestic consumption of beer produced by
United States brewers had plateaued at approximately 180 million barrels. Over
the past decade, per capita annual domestic beer consumption has declined
slightly, due to increasing health and safety consciousness and the changing
tastes, affluence and consumption attitudes of the maturing generation of beer
drinkers born after World War II. A growing number of consumers began to migrate
away from less flavorful mass-marketed beers toward greater taste and broader
variety in their malt beverages, mirroring similar trends in other beverage and
cuisine categories.

         Initially, foreign brewers were the principal beneficiaries of these
evolving consumption patterns. Even though the principal European, Canadian and
Mexican imported beers are also

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mass-produced, many represent a fuller-flavored alternative to the national
brands produced in the United States.

         By the latter half of the 1980s, a substantial new domestic industry
segment had developed in response to the increasing consumer demand for
fuller-flavored beers. Across the country, a proliferation of regional specialty
brewers (annually selling more than 15,000 barrels of craft beer brewed at their
own facilities), contract brewers (selling craft beer brewed by a third party to
the contract brewer's specifications), micro breweries (selling less than 15,000
barrels per year), and brew pubs (combination restaurant-breweries) emerged to
form the craft beer industry. Certain national brewers of mass-produced beers
have also sought to appeal to this growing demand for craft beers by introducing
their own fuller-flavored products. Also, in recent years imported products from
foreign brewers have enjoyed a resurgence in demand and that has contributed to
the reduced volume growth in the craft beer segment.

BUSINESS STRATEGY

         Red Bell's business objective is to become recognized as the premier
brew pub operator along the eastern seaboard. It is our objective to produce the
finest quality craft beers and to serve them with well prepared, moderately
priced food which complement our beer product offerings at strategic, event
driven, high volume, and high profile locations such as arenas, airports,
stadiums, ballparks, and select train stations. We intend to meet this objective
by creating a network of brew pubs. These smaller brewery locations are designed
to aggressively improve the overall marketing awareness of Red Bell and our fine
line of beers.

         Although we currently do not have any agreements to acquire any
additional brew pub locations, we are evaluating several potential brew pub
locations. We anticipate that the average build out cost for a new brew pub,
including the necessary brewing and restaurant equipment, would be approximately
$160 per square foot. Based on an 8,000 square foot new brew pub, Red Bell would
incur build out expenditures of $1,300,000. Although we do not presently have
any available source of financing, we intend to fund our anticipated opening of
new brew pubs through the formation of joint ventures with third party financing
sources as well as from funds generated by us through sales of our securities.
In addition to new locations, we intend where appropriate to expand through the
acquisition of existing brew pubs. We anticipate funding these

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acquisitions through the various alternatives mentioned above as well as by
seller financing or issuance of our securities in payment of the purchase price.

         Our business strategy includes the following key objectives:

                  * Develop strategic distribution locations. We plan to expand
into high profile locations such as arenas, airports, stadiums, ballparks, and
select train stations. These locations would serve high volumes of people and
would generate customer affinity for Red Bell's beers. Our objective is to open
two properties in key strategic locations every 11-14 months to increase
revenue, name recognition and to realize efficiencies in marketing, management,
purchasing and distribution.

                  * Production of High-Quality Craft Beers. Red Bell produces of
a variety of distinctive, flavorful craft beers. We brew our craft beers
according to traditional European brewing styles and methods, using only
high-quality ingredients and technologically advanced brewing equipment. It is
our objective to never pasteurize or homogenize our beer or use adjuncts in
substitute for all grain.

                  * Control of Production in Company-Owned Breweries. Red Bell
built, owns and operates its own brewing facilities to optimize the quality and
consistency of its products and to achieve the greatest control over its
production costs. Red Bell believes its proprietary designs of its brewery
equipment and brew pub aesthetics make it truly unique in the market place.
Management believes that its ability to engage in constant product innovation
and its control over product quality are critical competitive advantages.

                  * Brewery in each brew pub. To the extent there is adequate
space at a particular location and subject to the applicable laws of a location,
we intend to install a brewery in each of our brew pubs. By locating small scale
breweries in each brew pub and restaurant, in direct proximity to our key
customer markets, Red Bell believes it would be able to enjoy distinct
competitive marketing and production advantages, including eliminated or
shortened delivery times which maximize product freshness, reduced shipping
costs, established consumer identification with our brands, and direct marketing
to our customers.

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                  * Hire dedicated, highly-motivated employees. At Red Bell, we
know that a company is only as good as the employees who comprise it. We place a
great deal of emphasis on hiring the right people, and creating an environment
which allows them to thrive. We believe that the quality and training of our
employees are significant factors to our future success.

PRODUCTS

         Red Bell produces a variety of distinctive craft beers ranging in color
from light to dark. All of our beer is brewed in accordance with the German
purity law, Reinheitsgebot, which stipulates that all beer is made from four
traditional ingredients: water, hops, yeast and malted barley. Within this
tradition, each Red Bell beer exhibits unique properties of color, richness,
bitterness, and aroma, creating a special signature for each beer. In order to
maintain full flavor, our beer is not pasteurized or homogenized. We never use
adjuncts in substitute for all grain.

         We currently produce 10 principal brands, each with its own distinctive
combination of flavor, color and clarity:

                  * Philadelphia Original Light. A classic American light lager.
Light bodied, clean tasting pale straw in color with a light crisp finish.

                  * Lemon Hill Wheat. American style wheat brewed with 50
percent wheat malt for a light crisp tangy finish. Low bitterness with a
refreshing citrus flavor.

                  * Philadelphia Original Lager. A golden colored German style
lager. A medium-bodied malt emphasized beer with relatively low bitterness.

                  * Philadelphia Irish Amber. Copper colored English Ale with
strong hop aroma and flavor. This ale is full-bodied with a residual malt
sweetness.

                  * Red Bell Heffe-Weizen. Golden German style wheat beer brewed
with 60% malted wheat and authentic Bavarian yeast. Served unfiltered which
contributes to a spicy and fruity taste with aromas of bananas and cloves.

                  * American Pale Ale. Medium-bodied pale ale with generous
additions of American hops (cascade) to produce a somewhat

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fruity and floral finish.

                  * Black Cherry Stout. Dark, dry full-bodied stout brewed with
six different types of malts and black cherries with overtones of bitter sweet
chocolate and licorice.

                  * Philadelphia Black & Tan. A careful blend of our stout and
Philadelphia Original lager which results in a slightly roasty crisp drinkable
beer not too light, not too heavy.

                  * Wee Heavy Scottish Style Ale. Deep brown colored ale with
intense malt flavors and a bread like aroma boasting over 100 pounds of English,
Scottish and French malts in each barrel. Full bodied with dominant sweet
maltiness with big, rich, robust flavor.

                  * Ahopalypse Now (IPA). A substantial malt character from the
use of five specialty grains resulting in a deep amber color with an intense hop
aroma, complex flavor and a hoppy finish.

         In addition, we are constantly developing new products in order to be
responsive to changing customer tastes. We believe that our continued success
will be affected by our ability to be innovative and attentive to consumer
desires while maintaining consistently high product quality.

BREWING OPERATIONS

THE BREWING PROCESS

         Beer is produced from four main ingredients: malt, hops, yeast and
water. Malt, the main ingredient of beer, is produced when barley is moistened,
allowed to germinate and then dried. The malted barley is then crushed and mixed
with hot water and strained, producing a clear amber liquid called "wort". Wort
is boiled in the brew kettle and hops are added which add bitterness and variety
to the brew. The mixture is then strained and placed in a fermentation vessel
where yeast is added and the beer is allowed to ferment. During fermentation,
yeast metabolizes the sugars in the wort and produces alcohol and carbon
dioxide.

         Upon completion of fermentation, the beer is then transferred to aging
tanks where the flavor is developed and matured. The brewing process, from the
conversion of raw materials to the serving of beer, is typically completed in 14
to 28 days, depending

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on the type of beer being brewed. The production schedule for all of our ale
products requires a fourteen (14) day cycle. Our lager products requires a
twenty-eight (28) day cycle, from brewing through filtration and packaging.

         The production cycle includes the following steps:

                  * Day 1. Mashing. Weighed amounts of milled, malted barley, a
cereal grain that provides the body and color to the beer, are mixed and steeped
with hot water in a Mash Tun. This serves to extract fermentable and
non-fermentable sugars, thus creating a mash. At the end of the mashing process,
the sweet, fermentable liquid from the mash, called wort, is run off through
screened plates and then transferred into the brew kettle. While the wort is
running off, the grain is sprayed with hot water again, a process called
"sparing". (This is a process similar to making coffee.)

         Once the wort run off is completed, the spent grains are given to local
farmers for cattle feed or to local mushroom growers.

                  * Day 1. Brewing. When the sweet liquid wort transfer is
completed, we start the boil, then add fresh hops that provide bitterness and
aroma, thus creating the balance and flavor of our beer.


                  * Day 1. Clarification. After approximately an hour and one
half of boiling, the wort and the spent hops are transferred into a whirlpool. A
centrifugal force is created inside the vessel during whirlpooling. This force
separates the malt proteins and the spent hops from the wort.

                  * Day 1. Cooling. The wort is pumped from the whirlpool
through a heat exchanger which rapidly cools the wort. The cool wort is
transferred into a fermenter.

                  * Day 1. Inoculation. Pure culture lager yeast or ale yeast is
added to the wort in the fermenter and the tank is closed up.

                  * Days 2-7. Fermentation. Within three to five days, the yeast
has metabolized and utilized the sugars from the wort, creating alcohol and
carbon dioxide. Our ales are made with a top fermenting ale strain that actually
floats to the top of the

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fermenter. Our lagers are made with a bottom fermenting lager strain that
settles during fermentation.

         When the yeast completely settles it is collected from the tank and
used in the next lager or ale brew cycle.

                  * Days 5-27. Cooling and Conditioning. At the end of the
fermentation cycle, our beer is cooled from its fermentation temperature
(between 65-70-F for ales and 58-55-F for lagers) to 32- Fahrenheit. Beer
flavors mature during this stage. Our beer is then stored for seven to fourteen
days. Isinglass finings are added to aid in the clarification process.

                  * Day 14. Filtration for Ales. While under pressure, the beer
is transferred through cellulose sheets in a Filter Press in order to remove
protein haze and yeast while stabilizing and clarifying the beer. The beer is
transferred from the Filter Press into a Serving Tank which is counter
pressured, for service directly to draft taps at each bar.

                  * Day 28. Filtration for Lagers. Our lager beer remains in the
Cellar Tank for an additional fourteen days of fermentation. It is then
processed in the same manner as our ale.

         Each of our Red Bell beers has a brilliant look due to the polish
filtration process which is selective; removing yeast without stripping the
body, flavor or character. All of our beer is processed without preservatives.
It is fresh and unpasteurized.

RED BELL BREW PROCESS AND EQUIPMENT

         Our creed is "We will use only the finest, all natural ingredients
available to brew our products. Our brewing methods will be standardized, with a
rigorous production and quality control program to insure that the product is
consistently of superior quality." Our brewing program is supervised by our
Director of Brewing Operations, James Cancro.

         Brewing Equipment. Red Bell's technologically advanced main brewery
consists of a four step, four vessel, forty barrel brewing system manufactured
by Century Manufactures. We have over 1,100 barrels of monthly storage
capability (also known as fermentation tanks). An equal portion of both ales and
lagers enables us to produce a maximum of 18,000 barrels each year. In addition
to our main brewery, our First Union Center brew pub has the capacity to

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produce approximately 1,900 barrels per year. Our current total production
capacity (not including our contract brewer) is 19,900 barrels and during 2000
we produced 2,862 barrels at these locations and 8,276 barrels at all of our
brewing locations (including 5,415 barrels produced at our contract brewer). We
use our contract brewer to brew substantially all of our most popular beer,
Philadelphia Original Lager, because of our contract brewer's ability to brew
large batches of beer. This results in substantially lower production costs to
us than if we brewed this beer in smaller batches at our main brewery. At all of
our breweries, we strive to ensure that every batch of beer is of the highest
quality and exact consistency. Our agreement with our contract brewer grants us
the right to monitor and review their practices and procedures and to have a
representative present at the brewery during production of our beer. We also
have the right to preapprove brew batches before bottling.

         Bottling and Kegging. Red Bell packages its craft beers in bottles and
kegs which are clearly marked with freshness dates. This is to ensure that our
products are consumed at the height of their flavor. Bottled products utilize
the latest technology in bottle crowns by using the Zapata Company's "pure seal"
cap. This cap prevents oxygen from causing deterioration of the beer's fresh
taste. Our beer is naturally carbonated and pasteurized to insure that customers
enjoy the full, fresh flavor. The shelf life of our bottled beer is 120 days and
the shelf life of our keg beer is 90 days.

         Contract Brewing. In addition to our main brewery, we also utilize a
third party brewery to manufacture and bottle our beer. We believe that contract
brewing gives us economic advantages through lower capital and overhead costs
per barrel. In addition, the contract brewer bottles substantially all of our
beer for us. The contract brewer manufactured approximately sixty-five percent
of our entire beer production during 2000 (5415 barrels).

         We have entered into a Production Agreement with our contract brewer
pursuant to which the contract brewer has agreed to produce up to 10,000 barrels
of our product per year. The agreement is for a one year term and automatically
renews for successive one year terms unless canceled at any time upon six months
notice by either party. While there are no minimum purchase requirements under
the contract, if we do not order at least 5,000 barrels during any calendar
year, our contract brewer has the right to terminate our agreement upon 3
months' notice to us. James R. Bell, our

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President, has personally guaranteed our financial obligations under the
agreement. We believe that our operations would not be adversely affected by the
termination of this agreement because we would be able to obtain another
contract manufacturer, if necessary, to produce our beer on a timely basis and
under acceptable terms.

         Quality Control. Our main brewery and our brew pub at the First Union
Center has an on-site laboratory where our staff supervises on-site yeast
propagation, monitor product quality, test products, measure color and
bitterness, and test for oxidation and unwanted bacteria. We also regularly
utilize independent laboratories for additional product analysis.

         Ingredients and Raw Materials. Red Bell currently obtains all of its
malted barley (grain) from two primary suppliers and its premium-quality select
hops, grown in the California region, from two competitive sources. We
periodically purchase small lots of European hops, which we use to achieve a
special hop character in certain of our beers. Red Bell believes that alternate
sources of malted barley and hops are available at competitive prices. In order
to ensure the supply of the hop varieties used in its products, we enter into
supply contracts for our hop requirements. These contracts do not have any fixed
or minimum purchase requirements. Since inception, we have cultivated our own
yeast supply. We have multiple competitive sources for packing materials, such
as bottles, labels, six-pack carriers, crowns and shipping cases.

DISTRIBUTION

         Red Bell offers the sale of beer primarily in four states and the
District of Columbia. Our products are distributed through a network of import
distributors, as well as by our own personnel in our local markets. Import
distributors are larger distributors that typically supply local distributors as
well as bars, restaurants and tavern accounts. Favorable consumer demand for
micro brewed products and higher profit margins are the two primary factors that
contribute to strong interest from import distributors in handling our regional
micro brewed products. Our success is dependent upon our ability to maintain and
develop our third party distributor, bar and restaurant accounts. In addition to
distribution, we intend to solicit our own customer base through on-site visits,
cold calling, and mailings in addition to our on premise advertising at our
strategic brew pub locations.

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MARKETING

         Red Bell's current marketing activity is concentrated in Pennsylvania
and New Jersey. Our efforts will be focused on bars, restaurants and retailers
of premium beer products in order to obtain shelf and tap space. This will be
accomplished by an aggressive one-on-one campaign to familiarize our customers
thoroughly with our products and our devotion to service. The micro brewers'
market is not for the masses rather it is those consumers searching for
something different, something superior, with more flavor and more character.

         Red Bell has designed slogans, logos and trade names for use in radio,
television and print advertising. To create additional Red Bell name recognition
and customer identification, we will continue to sell t-shirts, sweatshirts and
other merchandise featuring the Red Bell name and logo. Distributors and package
store locations are provided with point of purchase cards, banners, static
stickers and shelf channels. All material will continue to help generate
interest from the consumer.

BREW PUB OPERATIONS

FIRST UNION CENTER MICRO BREWERY, PHILADELPHIA, PENNSYLVANIA

         In 1996, Red Bell Brewery & Pub Company entered into an agreement with
ARAMARK Leisure Services, Inc. (ARA) to build and operate a micro brewery in the
First Union Center, home of the Philadelphia Flyers National Hockey League team
and the Philadelphia Seventy-Sixers National Basketball Association team. Our
micro brewery, the first of its kind in a major indoor arena, opened in August
1996.

         The agreement is for an initial term of ten years and has two five year
renewal terms. ARA has the option to cancel the contract at any time after five
years upon payment of a termination fee. Under our agreement with ARA, we
generate revenues as follows:

                  * From sales of our keg beer to the brew pub for sale to its
customers. Our agreement provides that we shall be the exclusive manufacturer of
beer for the First Union Center location.

                  * From per diem fees paid to us as a management supervisory
fee for each event during which the brew pub is open.

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         We contributed $600,000 towards the development and fit out of the brew
pub. These funds were provided to us by a bank and the outstanding balance bears
interest at one percent in excess of the bank's prime rate, is payable on
demand, and at December 31, 2000 had a balance of $555,000 (exclusive of the
credit of $65,786 of restricted cash reflected on our financial statements).
Under our agreement with ARA, we are to receive the amount of $75,000 per year
during the term of the contract. This payment has been assigned by us to the
bank to repay the loan and the current unapplied portion thereof is reflected as
restricted cash on our financial statements. Upon the termination of the
contract all improvements belong to ARA.

         All non-supervisory personnel at the First Union Center are employees
of Red Bell Brewery & Pub Company and ARA has agreed to pay all personnel and
payroll costs. We are responsible for maintaining all liquor licenses and
manufacturing all beer for the brew pub. ARA has agreed to make all necessary
repairs to the brew pub and to maintain the books and records. Upon the
termination of the contract all improvements belong to ARA. ARA will retain any
operating profits remaining after payment of all operating expenses of the brew
pub. Subject to our supervision, ARA operates the food and beverage business of
the brew pub. ARA has agreed to promote the Red Bell name in a professional and
first class manner.

         Red Bell's First Union Center brew pub provides an on-premise brewery
experience that entertains and satisfies our guests. It also assists local bars,
restaurants and beer distributors in their efforts to sell our product line. Red
Bell's First Union Center brew pub creates consumer affinity for our beers and
capitalizes on the growing consumer interest in higher quality, more flavorful,
fresh brewed beer. Our Red Bell pub offers a selection of eight to ten
distinctive, hand crafted beers ranging in color from light to dark.

VETERAN'S STADIUM, PHILADELPHIA, PENNSYLVANIA

         Beginning in 1996, we have licensed the Red Bell name to Ogden
Entertainment Services, Inc. Ogden operates three Red Bell brew pub locations at
Veteran's Stadium in Philadelphia, Pennsylvania, and we sell keg beer to Ogden
for sale. In addition to the revenues we earn from the sale of our products to
Ogden, we receive a commission equal to 40% of all gross sales less expenses.
Our agreement with Ogden expired in January 2001.

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<PAGE>   17
         In early 1999, Ogden indicated to us that another location was
available in Veteran's Stadium but that we would have to pay $40,000 in
improvements to fit out the brew pub. RBC Capital, of which our Director of
Operations, Robert Huttick, is general partner, agreed to fund these costs. In
March 1999, we licensed our name to RBC and RBC entered into a license agreement
with Ogden. Pursuant to the license agreement with Ogden, Ogden agreed to
operate a Red Bell brew pub and to purchase our beer directly from us at the
same price as our three other Veteran's Stadium locations. In addition, Ogden
agreed to pay to RBC 40% of the gross sales less expenses from this brew pub
location. RBC's contract with Ogden expired in January 2001 and our license
agreement with RBC expired at the same time.

         Although our contract for the three brew pubs expired in January 2001,
we currently believe that our contract will be renewed on a year to year basis
with Ogden commencing in April 2001. RBC also believes that its contract would
be similarly renewed and in such event, we would license our name to RBC in
accordance with past practice. There are no events at Veteran's Stadium during
the period of time commencing upon the expiration of our and RBC's contract (the
final home game of the Philadelphia Eagles in January 2001) and April 2001 (the
commencement of the Philadelphia Phillies home season). Ogden has recently
requested that we and RBC meet with them to negotiate the new contracts which
would commence in April 2001. If these contracts are not renewed, we would lose
substantial revenues and this would have a material adverse affect on our
ability to conduct business. During 2000, our beer keg sales to these four
locations was $39,950 and our commissions earned at the three brew pub locations
was $62,641.

         Veteran's Stadium is the home of the Philadelphia Phillies Major League
Baseball team and the Philadelphia Eagles National League Football team. The
three initial brew pubs opened for business in July of 1996, just prior to the
Major League Baseball all-star game and the fourth brew pub opened in April
1999.

COMPETITION

         Brewing industry. The brewing industry in the United States is both
highly competitive and highly concentrated. Based upon industry figures of beer
sales in 1994, six industrial brewing companies generate approximately 90% of
sales. Sales of imported beer account for approximately 5.6% of sales, and the
remaining 4+%

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<PAGE>   18
is divided among several hundred companies, including Red Bell. Our beer is
distributed and sold in competition with national, regional, foreign and local
brewers. All mass industrial breweries (Budweiser, Miller, Coors, Samuel Adams)
and many regional and local breweries have significantly greater financial,
production, distribution and marketing resources than Red Bell. The principal
methods of competition across all levels are adverting, packaging and price.
Within the craft beer segment of the industry, quality, taste and freshness of
product are the key competitive factors.

         Although we are a small regional brewer of beer, we view our
competition as the larger national domestic beers such as Budweiser, Coors,
Samuel Adams, and Miller. At our First Union Center brew pub and at our
Veteran's Stadium brew pub locations we are primarily competing with these much
larger brewers for the customer's business. We believe that our future growth
will be driven by obtaining market share from customers of these larger domestic
brewers. At the wholesale and retail level, our pricing is comparable with other
high quality, premium brands such as Budweiser and Miller and more attractive
than those such as Samuel Adams.

         Restaurant industry. The restaurant industry is intensely competitive.
Our brew pub located in the First Union Center competes directly with the
Victor's Club restaurant (located in First Union Center) and food vendors
primarily on the basis of quality, price, service and atmosphere. Our business
is largely dependent upon the success of ticket sales in the First Union Center.
In addition, we are affected by changes in consumer tastes, national, regional
or local economic conditions, weather conditions, demographic trends, and the
type, number and location of competing restaurants and food vendors. Our ability
to compete effectively will continue to depend upon our ability to offer high
quality, value priced menu items and superior service in distinctive dining
environments.

REGULATION

         Red Bell's business is highly regulated at federal, state and local
levels. Various permits, licenses and approvals are necessary to manufacture and
distribute beer and to operate brew pubs. We are required to comply with
licensing requirements imposed by 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; the Pennsylvania

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<PAGE>   19
Liquor Control Board; state alcohol regulatory agencies in the states in which
we sell our products; and state and local health, sanitation, safety, fire and
environmental agencies.

         Various federal and state labor laws govern Red Bell's relationship
with its employees, including minimum wage requirements, overtime, working
conditions and immigration requirements. Significant additional
government-imposed increases in minimum wages, paid leaves of absence and
mandated health benefits, or increased tax reporting and tax payment
requirements for employees who receive gratuities could have an adverse effect
on Red Bell's results of operations. Delays or failures in obtaining the
required construction and operating licenses, permits or approvals could delay
or prevent the opening of new restaurants.

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

ALCOHOLIC BEVERAGE REGULATION AND TAXATION

         Our brewery and our brew pub are subject to licensing and regulation by
a number of governmental authorities. We operate our breweries under federal
licensing requirements imposed by the BATF. The BATF requires the filing of a
"Brewer's Notice" upon the establishment of a commercial brewery. In addition,
we are required to file an amended Brewer's Notice 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. Our operations are subject to audit and inspection by
the BATF at any time.

         In addition to the regulations imposed by the BATF, our breweries are
subject to various regulations concerning retail sales, pub operations,
deliveries and selling practices in states in which we sell our products. Our
failure to comply with applicable federal or state regulations could result in
limitations on our ability to conduct our business. The BATF's permits can be

                                       19
<PAGE>   20
revoked for failure to pay taxes, to keep proper accounts, to pay fees, to bond
premises, and to abide by federal alcoholic beverage production and distribution
regulations, or if holders of 10% or more of the Company's equity securities are
found to be of questionable character. Permits from state regulatory agencies
can be revoked for many of the same reasons.

         The U.S. federal government currently imposes an excise tax of $18 per
barrel on beer produced for consumption in the United States. However, brewers
like Red Bell with an annual production of less than 2 million barrels per year
instead only pay a federal excise tax in the amount of $7 per barrel on the
first 60,000 barrels of production each year. While we are 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
Red Bell. Individual states also impose excise taxes on alcoholic beverages in
varying amounts, which have also been subject to change. It is possible that
excise taxes will be increased in the future by both the federal government and
states. In addition, increased excise taxes on alcoholic beverages have in the
past been considered in connection with various governmental budget-balancing or
funding proposals. Any such increases in excise taxes, if enacted, could
adversely affect Red Bell.

ENVIRONMENTAL REGULATION OF BREWERY OPERATIONS

         Red Bell's brewery operations are subject to environmental regulations
and local permitting requirements and agreements regarding, among other things,
air emissions, water discharges and the handling and disposal of waste. While we
have no reason to believe the operations of our facilities violate any such
regulation or requirement, if such a violation were to occur, our business may
be adversely affected. In addition, if environmental regulations were to become
more stringent in the future, our operations could be adversely affected.

DRAM SHOP LAWS

         The serving of alcoholic beverages to a person known to be intoxicated
may, under certain circumstances, result in the server being held liable to
third parties for injuries caused by the intoxicated customer. We have
established an employee training program to teach our employees how to identify
and reduce this risk. Large uninsured damage awards against Red Bell could

                                       20
<PAGE>   21
adversely affect our financial condition.

EMPLOYEES

         As of December 31, 2000, Red Bell had 7 employees, 3 of whom were full
time and 4 part time. Of these employees, 2 work in management, 2 work in
accounting, and 3 work in our main brewery. Pursuant to our contract with ARA,
the non-supervisory personnel working at our First Union Center brew pub are
treated as employees of our Red Bell Brewery & Pub Co. subsidiary and ARA pays
all personnel and payroll costs. As of December 31, 2000, there were 39
non-supervisory personnel employed at the First Union Center brew pub.

ITEM 2. DESCRIPTION OF PROPERTY.

         Red Bell's executive offices and main brewery are located at 3100
Jefferson Street, Philadelphia, Pennsylvania 19121. The entire building consists
of approximately 280,000 square feet, of which 1,250 square feet is used for
executive offices, 45,000 square feet for our brewery, 35,000 square feet is
rented to third parties, and 198,750 square feet is unoccupied or used for
storage. The property is an industrial building, was renovated when it was
acquired by Red Bell in 1996, and management believes it is in good condition.
The Company is purchasing the building pursuant to an installment sales
agreement with the Pennsylvania Industrial Development Authority.

         The brewery premises are subject to six mortgages:

                  * A first mortgage in favor of PIDA. The mortgage secures the
installment sales agreement. As of December 31, 2000 the principal amount due
was $379,201 which bears interest at 3.75% per annum. The loan has been
guaranteed by James R. Bell. The loan is payable in equal monthly installments
of $2853 with the final payment due on February 1, 2013.

                  * A second mortgage in favor of the United States Small
Business Administration. The mortgage secures a note with a principal balance on
December 31, 2000 of $398,000 and bears interest at 6.85% per annum. The loan is
payable in equal monthly installments of $3,070 with the final payment due in
January 2019. The loan has been personally guaranteed by James R. Bell.

                  * A third mortgage in favor of the United States

                                       21
<PAGE>   22
Small Business Administration. The mortgage secures a note with a principal
balance as of December 31, 2000 of $522,000 and bears interest at 5.4% per
annum. The loan is payable in equal monthly installments of $6,005 with the
final payment due in January 2009. The loan has been personally guaranteed by
James R. Bell.

                  * A fourth mortgage in favor of Machinery and Equipment Loan
Fund of the Pennsylvania Department of Community and Economic Development. The
mortgage secures a note with a principal balance as of December 31, 2000 of
$456,770 and bears interest at 3.0% per annum. The loan is payable in equal
monthly installments of $6,607 with the final payment due in February 2005. The
loan has been personally guaranteed by James R. Bell and Mr. Bell has granted to
the lender a second mortgage on his residence.

                  * A fifth mortgage in favor of First Union National Bank in
the amount of $393,000. The mortgage secures the installment note to the bank
with a principal balance as of December 31, 2000 of $448,024. The note bears
interest at 9.5% per annum and is payable in monthly installments of $7,593.62
with the final payment due on February 1, 2004. The loan has been personally
guaranteed by James R. Bell.

                  * A sixth mortgage in favor of First Union in the amount of
$500,000 which also secures the above installment note.

         We have entered into a lease agreement for our proposed PSU brewery and
brew pub. The lease covers 9,309 square feet at 116 South Allen Street, State
College, Pennsylvania, located in the first floor of the building in the heart
of the town. The lease has a five year term with four five-year renewal terms.
The initial term commenced on June 1, 1999 and expires on May 31, 2004. The
monthly rental is $10,412 during the initial five year term plus our share of
operating expenses and taxes. Our landlord commenced a legal action against us
for back rent in the amount of $117,703 and we have consented to the entry of a
judgment against us in this amount. In addition, we have agreed that if we do
not satisfy the judgment by February 6, 2001, the landlord can take possession
of the property. Although we did not satisfy the judgment by this date, we are
currently attempting to have the judgment satisfied or to work out satisfactory
payment arrangements with the landlord. We could lose the site and would not be
able to open the brew pub. In such event, management presently intends to pursue
alternative locations.

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<PAGE>   23
         We own a bottling line which is presently located at our brewery. This
bottling line has never been used by us. Our bottling line is subject to a
security interest in favor of Foothill Capital Corporation in order to secure
our note in favor of Foothill. Foothill commenced a legal action against us for
the amount past due of $721,360 and we consented to the entry of a judgment in
this amount. We are attempting to sell our bottling line which secures the debt
due to Foothill. The anticipated net proceeds from the sale would be
substantially less than the amount due to Foothill.

         Our main brewery houses our beer manufacturing equipment. This
equipment is subject to four security interests:

                  * A first security interest in favor of the MELF in order to
secure its loan to Red Bell.

                  * A second security interest in favor of the SBA in order to
secure the $522,000 loan to Red Bell.

                  * A third security interest in favor of the SBA in order to
secure the $398,000 loan to Red Bell.

                  * A fourth security interest in favor of First Union in order
to secure its installment loan to Red Bell in the principal amount of $448,024.

         In the opinion of management all of the above properties are adequately
covered by insurance.

ITEM 3. LEGAL PROCEEDINGS.

         In September 2000, Foothill Capital Corporation commenced a legal
action against us and our Chairman, James R. Bell, in the United States District
Court for the Eastern District of Pennsylvania. The complaint alleges that we
have defaulted under a Promissory Note we made in favor of Foothill and that as
of the date of the filing of the complaint, we owe $721,360 to Foothill.
Foothill seeks to recover the amount due from Mr. Bell pursuant to a guaranty
and surety agreement signed by Mr. Bell. In December 2000, we entered into a
stipulation for entry of a judgment in the above amount against us. The debt of
Foothill is secured by our bottling line and we are attempting to sell our
bottling line. The anticipated net proceeds from the sale would be substantially
less

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<PAGE>   24
than the amount due to Foothill. This bottling line has never been used in
our operations.

         In May 1999, we commenced an action in the Court of Common Pleas of
Philadelphia County, Pennsylvania, against RBGSC Investment Corp., GS Capital,
L.P., Bella's Place, Inc. and an individual for breaches of various agreements
between us regarding a former Red Bell brew pub located at the Philadelphia
International Airport and a then unopened facility at the Reading Terminal
Headhouse. In September 1999, RBGSC filed for voluntary bankruptcy pursuant to
Chapter 11 and our action was removed to the United States Bankruptcy Court for
the Eastern District of Pennsylvania. The bankruptcy court has entered various
orders including the following: affirming RBGSC's rejection of our management
contract for the Headhouse location; holding that our licensing and management
agreement for the Airport brew pub expired in May 1999 and awarding us $20,269
in back licensing fees; denying our claims to seek to have GS Capital held
liable under the contracts pursuant to a piercing the corporate veil theory; and
denying our claim for restitution from the defendants. We have appealed these
orders to the United States District Court for the Eastern District of
Pennsylvania. To date, the District Court has affirmed all of the bankruptcy
court orders except for the orders relating to our restitution claim and
piercing the corporate veil claim which are still pending.

         In September 2000, we filed an action against the law firm of Buchanan
Ingersoll Professional Corporation and one of its partners in the Court of
Common Pleas of Philadelphia County, Pennsylvania. The complaint alleges that
the law firm and its partner wrongfully represented both RBGSC, GS Capital and
their affiliates, and us regarding the various agreements entered into among us
referred to above, and subsequently withdrew from representing us and wrongfully
continued to represent RBGSC, GS Capital and their affiliates. Our complaint
alleges breach of contract, breach of fiduciary duties, negligence, and fraud,
and seeks recovery of various damages including punitive damages and damages for
the value of the lost leasehold interests in the two brew pubs referred to
above. In November 2000, the defendants filed preliminary objections to our
complaint. In March 2001, the Court overruled the preliminary objections except
for the preliminary objection to our breach of contract claim against the
individual partner which was granted.

         In October 2000, the Agostinelli Family Partnership, LLP,

                                       24
<PAGE>   25
our landlord under the lease for our proposed PSU brew pub commenced an action
against us in the Court of Common Pleas of Philadelphia County, Pennsylvania.
The complaint seeks to recover past due rents under the lease for the premises
in the amount of $117,703. In December 2000, we consented to the entry of a
judgment against us in the amount claimed due. We also agreed that if we have
not satisfied the judgment by February 6, 2001, the landlord would be granted
possession of the premises.

         In September 2000, the law firm of White And Williams, LLP entered
judgment by confession against us in the Court of Common Pleas of Philadelphia
County, Pennsylvania, for $59,179.96 representing legal fees owed by us. On
November 28, 2000, the law firm executed on its judgment by among other things,
levying on our furniture, fixtures, equipment, machinery and inventory located
at our 3100 Jefferson Street premises. We are attempting to work out appropriate
payment arrangements with the plaintiff.

         In September 2000, the law firm of Fox Rothschild O'Brien and Frankel,
LLP commenced a legal action against us in the Court of Common Pleas of
Philadelphia County, Pennsylvania, for legal fees owed by us. In October 2000, a
default judgment was entered against us for $49,601. In December 2000, we agreed
to pay the judgment in full on April 26, 2001 and in January 2001, we issued to
the law firm 10,888 shares of our Common Stock in order to secure our obligation
to pay the judgment.

         In November 2000, pursuant to our agreement, the law firm of Cohen
Seglias Pallas & Greenhall entered a judgment against us for $55,227.43 in the
Court of Common Pleas of Philadelphia County, Pennsylvania, representing legal
fees due by us. Pursuant to the agreement, plaintiff will not execute on the
judgment for 100 days.

         In January 2001, the law firm of Post & Schell, P.C., commenced an
action against us in the Court of Common Pleas of Philadelphia County,
Pennsylvania, for approximately $145,000 representing legal fees owed by us. We
have until April 11, 2001 to answer the complaint.

         In January 2001, an action was commenced against us and our Red Bell
Brewery & Pub Company subsidiary as well as other defendants in the Court of
Common Pleas of Philadelphia County, Pennsylvania, for negligence, wrongful
death, and a survival action. The complaint alleges that the decedent was killed
while riding as a passenger in a vehicle driven by an individual who had

                                       25
<PAGE>   26
been drinking at the First Union Center brew pub. The complaint seeks
unspecified damages in excess of $50,000. We have been granted an extension of
time to respond to the complaint. We have been informed by our insurance carrier
that it is denying coverage of this claim.

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

         Not applicable.

PART II

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

         There is presently no public trading market for our Common Stock. Red
Bell intends to have the Common Stock listed for trading on the NASD's OTC
Electronic Bulletin Board under the symbol RDBL as soon as practicable.

         As of December 31, 2000, there were the following options, warrants or
convertible securities outstanding:

                  * Options to acquire up to 999,750 shares of Common Stock at
an exercise price of $.30 per share which expire May 2005, options to acquire up
to 300,000 shares of Common Stock at an exercise price of $2.75 per share
(250,000 of which expire in July 2007 and 50,000 of which expire in November
2009), and options to acquire up to 10,000 shares of Common Stock at $4.50 per
share which expire in June 2008.

                  * Warrants to purchase up to 91,167 shares of Common Stock at
$.30 per share which expire August 2003.

                  * Convertible Subordinated Debentures which are convertible at
the option of the holder into 276,000 shares of Common Stock as well as accrued
interest thereon which entitles the holders to receive 55,200 shares.

                  * Warrants issuable to the holders of the above Debentures
upon conversion thereof to purchase up to 276,000 shares, 230,000 of which are
exercisable at $2.00 per share and expire August 2006, and 46,000 of which are
exercisable at $2.50 per share and expire September 2006.

         These shares when and if issued would constitute restricted

                                       26
<PAGE>   27
securities as such term is defined in Rule 144 under the Securities Act of 1933.
In March 2001, we agreed to register the 1,309,750 shares underlying the above
options and the 91,167 shares underlying the above warrants for resale by the
holders thereof under the 1933 Act. The shares underlying the Convertible
Subordinated Debentures and the related warrants are subject to certain
registration rights but only following the occurrence of an underwritten public
offering of Red Bell's stock or the conversion of the debentures.

         We have also agreed to register for resale under the 1933 Act the
22,000 shares issued to CDB Finance in December 2000.

         All of our issued and outstanding Common Stock as of December 31, 2000
constituted restricted securities within the meaning of Rule 144 under the 1933
Act. Assuming compliance with the requirements of Rule 144 (including those
applicable to affiliates of Red Bell), as of December 31, 2000 a total of
3,99,443 shares are eligible for sale thereunder and the remaining 800 shares
will be eligible in July 2001 and 22,000 shares will be eligible in October
2001.

         On December 31, 2000 there were 399 record holders of our Common Stock.

         The holders of our Common Stock are entitled to receive such dividends
as the Board of Directors of Red Bell may from time to time declare out of funds
legally available for payment of dividends. Through the date hereof, no cash
dividends have been paid on our Common Stock.

         In February 2001, we declared a stock dividend payable to all
shareholders of record on March 9, 2001, provided that such holder does not
transfer any of such holder's shares until after March 8, 2002, and provided
further that such shares remain in the record shareholder's name during such
entire period of time. The dividend shall be equal to that number of shares of
Common Stock as shall equal ten percent of such shareholder's record holdings on
the record date of March 9, 2001. The dividend shall be paid March 31, 2002. In
February 2001, we declared a further stock dividend payable to all shareholders
of record on March 9, 2001, provided that such holder does not transfer any of
such holder's shares until after March 8, 2003, and provided further that such
shares remain in the record shareholder's name during such entire period of
time. The dividend shall be equal to that number of shares of

                                       27
<PAGE>   28
Common Stock as shall equal five percent of such shareholder's record holdings
on the record date of March 9, 2001. The dividend shall be paid March 31, 2003.

         Subsequent to December 31, 2001, we issued to following shares of
Common Stock, options or convertible securities:

                  * In January 2001, we issued 10,888 shares to Fox Rothschild
in order to provide security for the payment of their judgment. We have agreed
to use our best efforts at our cost and expense to register these shares for
resale under the 1933 Act.

                  * In February 2001, we issued 7,000 shares to CDB in
connection with the $57,000 loan made at that time. The $57,000 note evidencing
the loan is also convertible into 19,000 shares ($3.00 per share). We have
agreed to use our best efforts at our cost and expense to register these shares
as well as the shares underlying the note for resale under the 1933 Act.

                  * In February 2001, we sold 700 shares of Common Stock at
$4.50 per share.

                  * In March 2001, we issued fully vested options to purchase
shares of our Common Stock to our management or former employees for services
rendered, as follows: James R. Bell-75,000 shares; Robert Huttick-65,000 shares;
James Cancro-9,992 shares; Francis Ciabattoni-5,000 shares; and Linda
Minchin-9,992 shares. These options are exercisable at $.10 per share at any
time within 3 years. We have agreed to use our best efforts at our cost and
expense to register the shares underlying the options for resale under the 1933
Act.

                  * In March 2001, we issued to James R. Bell fully vested
options to purchase up to 184,348 shares of Common Stock at $.10 per share at
any time within 3 years and to Robert Huttick fully vested options to purchase
up to 125,652 shares of Common Stock at $.10 per share at any time within 3
years. These options were issued as compensation for guaranteeing the loans to
us from CDB. We have agreed to use our best efforts at our cost and expense to
register the shares underlying the options for resale under the 1933 Act.

                  * In March 2001, we issued to each of James R. Bell and Robert
Huttick options to purchase up to 125,000 shares of our

                                       28
<PAGE>   29
Common Stock if we would become in default under our loans to CDB. Each option
is exercisable at $.10 per share at any time within 3 years from vesting. We
have agreed to register these shares for resale under the 1933 Act.

                  *In March 2001, we granted to CDB the right to convert its
$197,000 Note and unpaid interest due thereunder relating to the October 2000
loan to us into shares of Common Stock at the rate of $4.25 per share at any
time prior to maturity. We have agreed to use our best efforts at our cost and
expense to register the 46,534 shares underlying the note for resale under the
1933 Act.

                  *In March 2001, we issued to Michael Farrell, Esquire, for
legal services rendered and to be rendered to us, warrants to purchase up to
30,000 shares at $1.50, up to 10,000 shares at $.30. per share, and up to 26,000
shares at $1.25 per share. The warrants exercisable at $1.50 can be exercised at
any time for 2 years and the other warrants at any time for 1 year. We have
agreed to use our best efforts at our cost and expense to register the shares
underlying the warrants for resale under the 1933 Act.

                  * In March 2001, we issued to Union Atlantic Capital, L.C.,
for consulting services to be rendered, options to purchase up to 100,000 shares
at $5.00 per share. The options vest as follows: 50,000 immediately, 25,000 in 3
months; and 25,000 in 6 months. We also issued to Union Atlantic 3,000 shares of
our stock for services to be rendered. The warrants are exercisable for 3 years
after vesting. We have agreed to use our best efforts at our cost and expense to
register these shares as well as the shares underlying these warrants for resale
under the 1933 Act.

                  * In March 2001, we issued to Timmy James, for consulting
services to be rendered, warrants to purchase shares as follows: 5,000 at $6.875
per share; 7,500 at $8.25 per share; and 7,500 at $11.00 per share. We also
agreed to issue to him during each of the 9 months starting March 2001 warrants
to purchase up to 5,000 shares of our stock at $5.00 per share. The warrants are
exercisable at any time for 3 years after issuance. We have agreed to use our
best efforts at our cost and expense to register the shares underlying these
warrants for resale under the 1933 Act.

                  * In March 2001, we issued to First Level Capital, Inc. for
consulting services to be rendered, 50,000 shares of

                                       29
<PAGE>   30
Common Stock. We have agreed to use our best efforts at our cost and expense to
register these shares for resale under the 1933 Act.

                  * In March 2001, we issued 103,066 shares to Gerald Holtz.
These shares are to be sold by him and the net proceeds applied towards the
balance due to him under the Note from Red Bell State College in the current
amount of $395,000. We also agreed to issue to him additional shares if
necessary which would be sold by him and the net proceeds applied towards
satisfaction of the amount due. We have agreed to use our best efforts at our
cost and expense to register the 103,066 shares as well as an additional 103,066
shares (to have available for issuance to him if necessary) for resale under the
1933 Act.

                  *In March 2001, we issued 46,000 shares to Villars I, L.P. in
payment of interest due on the Convertible Note through August 1, 2000. We have
agreed to use our best efforts at our cost and expense to register these shares
for resale under the 1933 Act.

                  * In March 2001, we issued 9,200 shares to Villars II, L.P. in
payment of interest due on the Convertible Note through September 1, 2000. We
have agreed to use our best efforts at our cost and expense to register these
shares for resale under the 1933 Act.

                  * In March 2001, we issued to Douglas M. Lurio, Esquire, for
legal services rendered to us, warrants to purchase up to 9,000 shares at $.10,
up to 7,500 shares at $.75 per share, and up to 23,500 shares at $1.50 per
share. The warrants are exercisable at any time for 3 years. We have agreed to
use our best efforts at our cost and expense to register the shares underlying
the warrants for resale under the 1933 Act.

         Many of the warrants or options issued by us to non-employees in March
2001 are exercisable at a price less than the fair market value of our shares on
the date of the grant. As a result, we will have to record a compensation charge
on our financial statements for the first quarter of 2001 in an amount equal to
the difference between the exercise prices and the fair market value of our
stock. We will also record a charge for the stock issued to our consultants
during the quarter.

         In March 2001, the record holders of 2,409,903 shares of our Common
Stock agreed not to sell or transfer their shares until September 2, 2001. These
holders include James R. Bell (675,002

                                       30
<PAGE>   31
shares), Robert Huttick (43,777 shares), and James Cancro (142,003 shares).

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS.

Forward Looking Statements

         Certain statements contained in this Form 10-KSB, including, without
limitation, statements containing the words "believes," "anticipates,"
"intends," "expects" and words of similar import, constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Such forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause the actual results, performance
or achievements of Red Bell or industry results to be materially different from
any future results, performance or achievements expressed or implied by such
forward-looking statements. Such factors include, among others, the following:

                  * the ability of Red Bell to maintain and/or renew its
existing contracts and licensing agreements;

                  * the ability of Red Bell to open additional brew pubs
including its proposed PSU location;

                  * the ability of Red Bell to obtain financing for the
development and acquisition of any its future brew pubs;

                  * existing governmental regulations;

                  * legislative proposals for reform of the regulation and
taxation of the manufacture and sale of alcohol;

                  * competition;

                  * the loss of any significant ability to attract and retain
qualified personnel;

                  * the availability and terms of capital to fund acquisitions
or the development of new business;

                  * the ability of Red Bell to refinance its existing long- term
debt which is currently not being paid when due;

                  * the ability of Red Bell to satisfy the existing

                                       31
<PAGE>   32
judgments against it as well as the outstanding executions on its properties by
these judgment holders;

                  * the ability of Red Bell to restructure its debt and/or
satisfy its creditors in the event it is not successful in its refinancing
efforts.

OVERVIEW

         In 1996, Red Bell entered into an agreement with ARA to build and
operate a Red Bell brew pub located in the First Union Center. The brew pub
opened in 1996. Our agreement with ARA is for a ten year term with two five year
renewal terms. At any time following five years after the commencement of
operations of the brew pub, ARA may terminate the agreement upon 60-days notice.
In 1996, Red Bell licensed its name to Ogden pursuant to which Ogden operated
three brew pubs in Veteran's Stadium through January 2001. In 1999, we licensed
our name to RBC Capital. Pursuant to an agreement, commencing April 1999, RBC
and Ogden operated another brew pub in Veteran's Stadium through January 2001.
The general partner of RBC is Robert Huttick, our director of operations. RBC
received 40% of all gross sales at the brew pub less expenses and we sold our
beer to Ogden at the same price as the other Veteran's Stadium brew pubs. Our
license agreement with RBC expired upon the termination of RBC's agreement with
Ogden in January 2001. In 1998, we licensed our name to the tenant who operated
a Red Bell brew pub at the Philadelphia International Airport. In May 1999, our
license agreement for the Philadelphia International Airport brew pub was
terminated by the tenant. In 1998, we licensed our name to the operator of a
proposed brew pub to be located at the Reading Terminal Headhouse located in
Philadelphia, Pennsylvania. In September 1999, the operator filed for bankruptcy
protection and our license agreement was terminated by the operator pursuant to
bankruptcy court approval. In 1999, we formed Red Bell Brewery & Pub Co. - State
College to develop and operate a proposed restaurant and brew pub in State
College, Pennsylvania.

         During the 2000 and 1999 calendar years, substantially all of our
revenues were attributable to the following:

                  * sales of keg beer to our First Union Center brew pub.

                  * sales of keg beer to our licensed brew pubs at Veteran's
Stadium.

                                       32
<PAGE>   33
                  * sales of keg beer to our former licensed brew pub at the
Philadelphia International Airport.

                  * sales of keg beer and cases to wholesalers and retail
locations.

                  * Commissions and management fees earned at our Veteran's
Stadium, First Union Center, and former Philadelphia International Airport
locations.

RESULTS OF OPERATIONS

YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999

         We incurred a net loss of $1,529,795 during the year ended December 31,
2000, and a net loss of $1,671,045 during the year ended December 31, 1999.

         Net sales of $486,709 during the year ended December 31, 2000, were
similar to those of $510,913 during the corresponding period of 1999.

         Cost of sales expressed as a percentage of net sales remained similar
in 1999 and 2000. This is a result of continued efficiencies in our purchasing
procedures and efficiencies in our workforce.

         Advertising and marketing expenses were $16,944, reflecting the
reduction in providing free products and personnel at charity events. We do not
believe that the reduction in our advertising expenses will adversely impact our
business expansion plans to open additional brew pubs. At the present time, we
believe that so long as our brew pubs continue to be located at strategic, high
impact locations, our beers and brand name would be widely exposed to the
public.

         General and administrative expenses declined 37% to $727,968 in 2000 as
compared to $1,152,363 in 1999 attributable to the decrease in accounting,
consulting, and legal expenses which were incurred during the year in connection
with the various legal proceedings involving our former Philadelphia
International Airport brew pub and proposed Reading Terminal Headhouse brew pub.

                                       33
<PAGE>   34
         During 1999, we recorded an impairment loss of $242,794 in connection
with the reduction to net realizable value of our bottling line which we are
attempting to sell. During 2000, we further reduced the net realizable value of
the bottling line and recorded another impairment loss of $400,000.

         Interest income remained relatively the same at $25,258 in 2000 as
compared to $33,666 in 1999. Interest expense was $490,559 in 2000 as compared
to $394,799 in 1999 reflecting our debt obligations. Other income decreased 21%
in 2000 to $44,247 compared to $55,775 in 1999, reflecting the reduction of
equipment sales income. Our other income in 2000 consisted of rental income
received from tenants in our main brewery building and in 1999 consisted of
rental income and equipment sales income.

         Our selling, general, and administrative expenses have been greater
than our sales and gross profits resulting in operating losses. We do not
believe that we can further reduce our cost structure. In order to generate
operating profits, we are attempting to increase revenues and gross profits
through various means. These include attempting to locate additional tenants to
lease the vacant space at our main brewery, procuring additional wholesale
distributors for our beer in additional geographic areas, and to opening
additional brew pub locations.

YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998

         We incurred a net loss of $1,671,045 during the year ended December 31,
1999. Net sales decreased 29% to $510,913 in 1999, compared to $717,594 in 1998,
primarily as a result of the reduction of keg beer sales to a former Red Bell
pub located in the Philadelphia International Airport. Our license contract for
this location expired in May 1999.

         Excise taxes decreased from $23,912 in 1998 to $18,686 in 1999 as a
result of decreases in our beer production from 3,420 barrels in 1998 to 2,670
barrels in 1999.

         Cost of sales decreased as a percentage of net sales from 99% in 1998
to 91% in 1999. This is a result of cost cutting measures taken by management
which included reductions in pay taken by employees as well as reduction in our
workforce.

         Advertising and marketing expenses decreased to $14,212 in

                                       34
<PAGE>   35
1999, compared to $53,815 in 1998, primarily as a result of our reducing the
supply of our product and personnel at no charge to various charity events.

         General and administrative expense increased 21% to $1,152,363 in 1999
as compared to $955,346 in 1998, primarily attributable to the increase in
accounting, consulting, and legal expenses which were incurred during the year
in connection with the various legal proceedings involving our former
Philadelphia International Airport brew pub and proposed Reading Terminal
Headhouse brew pub.

         Interest income remained relatively the same at $33,666 in 1999 as
compared to $27,687 in 1998 reflecting imputed interest of 9.5% attributed to
the repayment of the advance to customer. Interest expense was $394,799 in 1999
as compared to $333,747 in 1998 reflecting the accrual of interest on our debt
obligations. Other income decreased 65% in 1999 to $55,775 compared to $161,311
in 1998, reflecting the receipt in 1998 of $115,000 payment in settlement of a
lawsuit. Other income for the period consisted primarily of rental income from
tenants in our main brewery building and equipment sales.

LIQUIDITY AND CAPITAL RESOURCES

         The Company had cash of $86,049 and $16,110 at December 31, 1999 and
2000, respectively. Red Bell had a working capital deficit of $5,002,937 at
December 31, 1999, and $6,125,729 at December 31, 2000. Due to our failure to
make payments on our long-term debt, all of our long-term debt was reflected as
a current liability on our balance sheet. Our accounts payable was $919,370 as
of December 31, 1999 and $794,644 on December 31, 2000, and our accrued
liabilities increased from $770,615 on December 31, 1999 to $1,462,398 on
December 31, 2000 which includes an increase of $377,166 of accrued interest.

         During 1999 net cash of $448,071 was used by operating activities
primarily due to the net loss of $1,671,045 offset by the non-cash impairment
loss of $242,754 attributable to our bottling line held for sale and non-cash
increase in accounts payable and overdrafts of $590,229. The net cash provided
by financing activities of $484,760 was attributable primarily to proceeds from
term loans of $1,370,632 and $188,630 for preferred stock and $30,623 for sales
of common stock offset by the repayment of notes payable of $1,045,459.

                                       35
<PAGE>   36
         During 2000, net cash of $640,793 was used by operating activities
primarily due to the net loss of $1,529,795 offset by the non-cash impairment
loss of $400,000 attributable to our bottling line held for sale and non-cash
increase in accounts payable and overdrafts of $691,783 and accrued liabilities
of $691,783. The increase of other assets was primarily attributable to the
purchase of our liquor license for our proposed PSU brew pub location. The net
cash provided by financing activities of $524,592 was attributable primarily to
cash received through sales of securities.

         Red Bell has not been able to pay its long-term debt obligations as
they become due, and has not made any significant payment thereon from 1998 to
through the date hereof. Management is currently attempting to refinance our
long-term debt, accounts payable, and our accrued liabilities. We are currently
in discussions with various potential lending sources. Management also believes
that our debt obligations could be satisfied through funds generated by the
sales of our equity securities. There can be no assurance that we will be able
to obtain any funds from sales of equity securities or debt refinancing from any
source. If we are unsuccessful in our efforts, our ability to continue in
business will be in large part dependent on the willingness of our creditors to
restructure their debt and our repayment obligations. In this regard, we are
currently in discussions with several of our creditors regarding exchanging
their debt for our equity securities and structuring alternative repayment
plans. We believe that we have reduced our operating costs as far as feasible
and that future operating profits, if any, will result from increased revenues.
If we fail in our efforts to raise additional capital or to refinance our
existing debt, our creditors could take appropriate legal action to put us out
of business. In such event, any investment in our stock would become worthless.

         With the exception of Foothill Capital, none of our secured lenders
have commenced legal action against us to collect the amount due to them. We are
attempting to sell our bottling line which secures the debt due to Foothill. The
anticipated net proceeds from the sale would be substantially less than the
amount due to Foothill. Because this bottling line has never been used in our
operations, the sale would not affect our operations.

         Our cash flow enables us to finance our day to day business operations.
Our cash flow is not sufficient for us to

                                       36
<PAGE>   37
repay our loans or any interest thereon. Our past due accounts payable and
accrued liabilities are being paid by us on a case by case basis pursuant to
various repayment arrangements. We communicate with our lenders on a regular
basis. So long as our creditors do not take legal action against us which could
have the effect of putting us out of business, we believe that we can continue
to operate for the foreseeable future with the cash generated from our
operations.

         In order to partially finance our operations and to pay certain current
liabilities, we obtained a loan on October 23, 2000 from CDB Finance Corporation
in the amount of $194,000.The loan is payable in five monthly installments of
$4,000 with the final payment of $197,766 due on April 23, 2001. The loan bears
interest at the rate of 2% per month and has been personally guaranteed by James
R. Bell and Robert T. Huttick. Additionally, as part of the loan, the Company
issued 22,000 shares to CDB. The value of these shares of $99,000 based upon the
fair market value of the stock will be recorded as additional interest expense
over the loan period. The effective interest rate on this loan is 61%. We intend
to repay the CDB loan from the proceeds from our refinancing efforts. If we fail
to generate sufficient funds from our refinancing efforts, CDB could look to the
guarantors, Mr. Bell or Mr. Huttick, to obtain repayment and could foreclose on
the stock pledged to CDB by each of them. During March 2001, we granted to CDB
the right to convert the note and unpaid interest thereon into shares of our
Common Stock at the rate of $4.25 per share at any time prior to maturity.

         In February 2001, we obtained another loan from CDB in the amount of
$57,000. The loan is payable in five monthly installments of $1,150 with the
final payment of $58,192.30 due on August 5, 2001. The loan bears interest at
the rate of 2% per month and has been personally guaranteed by James R. Bell and
Robert T. Huttick. Messrs. Bell and Huttick have also pledged their stock
referred to above as security for this additional loan. As part of the loan, the
Company issued 7,000 shares to CDB. We intend to repay the CDB loan from the
proceeds from our refinancing efforts. If we fail to generate sufficient funds
from our refinancing efforts, CDB could look to the guarantors, Mr. Bell or Mr.
Huttick, to obtain repayment and could foreclose on the stock pledged to CDB by
each of them. CDB has the right to convert the note into shares of our Common
Stock at the rate of $3.00 per share at any time prior to maturity.

                                       37
<PAGE>   38
         In October 2000, our landlord of our proposed PSU brew pub commenced a
legal action against us in order to recover the past due rents of $117,703. In
December 2000, we agreed that the landlord could enter a judgment against us in
the amount requested. We also agreed that if we did not satisfy the judgment by
February 6, 2001, the landlord could take possession of the premises. Although
we did not satisfy the judgment by that date, we are currently attempting to
have the judgment satisfied or to work out satisfactory payment arrangements
with the landlord. We may lose the site and would not be able to open the PSU
brew pub. In such event, management presently intends to pursue alternative
locations.

         Red Bell-State College borrowed $260,000 from Gerald N. Holtz, a Red
Bell shareholder, in March 2000 in order to fund its purchase of the restaurant
liquor license for the proposed brew pub. The loan bears interest at 10% per
annum and is payable on demand. In addition, the note provides that at the time
of repayment Red Bell-State College shall pay an additional $100,000 or a total
principal amount of $360,000. The effective interest rate on this note is 48%.
The loan is secured by a first lien on the liquor license. The loan was due June
3, 2000.

         In March 2001, we entered in to a Subscription Agreement and
Registration Rights Agreement with Holtz pursuant to which we issued to Holtz
103,066 shares of our Common Stock. The net proceeds of the sale of the shares
shall be applied towards the payment of the loan. To the extent that the net
proceeds received by Holtz from these shares does not satisfy the amount due, he
has the right to obtain additional shares from us.

         Red Bell has incurred losses of $1,671,045 and $1,529,795 during the
years ended December 31, 1999 and 2000, respectively, and cumulative losses
since inception through December 31, 2000 amount to $7,850,970. Further, the
Company has a stockholders' deficit of $2,294,256 at December 30, 2000.

         As a result of all these factors, Red Bell's independent auditors have
included an explanatory paragraph in their report on our December 31, 2000
consolidated financial statements raising doubt about our ability to continue as
a going concern. Red Bell believes that funds from additional sales of
securities, refinancing of its existing debt, as well as the ability to defer
payments of existing obligations, debts, and expenditures, if

                                       38
<PAGE>   39
required, will allow Red Bell to continue as a going concern.

ITEM 7 FINANCIAL STATEMENTS.

<TABLE>
<CAPTION>
                                                   Page
<S>                                                <C>
Consolidated Report of Independent Auditors        F-1

Consolidated Balance Sheet                         F-2

Consolidated Statements of Operations              F-3

Consolidated Statement of Changes
in Stockholders' Equity (Deficit)                  F-4

Consolidated Statements of Cash Flows              F-5

Consolidated Notes to Financial Statements         F-6
</TABLE>

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

         Not applicable.

PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS.

         The executive officers and Directors of the Company, as of December 31,
2000, together with their ages and business backgrounds are as follows:

<TABLE>
<CAPTION>
     Name                       Age                  Position
     ----                       ---                  --------
<S>                             <C>                <C>
James R. Bell                   35                 Chairman of the Board of
                                                   Directors, Chief Executive
                                                   Officer, President

Robert T. Huttick               34                 Executive Vice President,
                                                   Chief Operating Officer

James Cancro                    39                 Director, Executive Vice
</TABLE>


                                       39
<PAGE>   40
<TABLE>
<S>                             <C>                <C>
                                                   President, Director of
                                                   Brewing Operations

Stephen J. Bell                 27                 Vice President, Manager of
                                                   Brewing Operations-Head
                                                   Brewer

Robert White                    46                 Executive Vice President,
                                                   Director of Food and
                                                   Beverage Operations
</TABLE>

Each Director is elected for a one year term and holds office until the
expiration of the one year term and until his successor has been elected and
qualified. The following is a summary of the business experience of each
executive officer and Director. Because there are only two directors, pursuant
to our by-laws any action taken by the directors must be unanimous.

         James R. Bell is one of Red Bell's founders and has served as Chief
Executive Officer, President, and Chairman of the Board since its inception in
June 1993. Prior to co-founding Red Bell, Mr. Bell was a First Vice President of
Investments with the firm of Janney Montgomery Scott Inc., a Philadelphia,
Pennsylvania investment banking and brokerage company from April 1994 to
September 1996. From February 1991 to April 1994, Mr. Bell served as Senior
Executive Vice President of First Interregional Equity Corporation, a New Jersey
based investment banking firm. From 1988 to 1991, Mr. Bell was an Associate Vice
President with Dean Witter Reynolds, Inc. in Philadelphia, Pennsylvania. Mr.
Bell received a Bachelor's Degree in Business Administration from Frostburg
State University, Maryland.

         Robert T. Huttick joined Red Bell in 1996 and serves as the Executive
Vice President and Chief Operating Officer. Mr. Huttick is responsible for
overseeing all aspects of operations and management of the main brewery and the
First Union Center Red Bell Brewery and Pub. Mr. Huttick supervises and manages
the design and construction teams on all Red Bell properties. Prior to joining
Red Bell, Mr. Huttick was director of customer service with Lincoln Mercury,
from 1986 through 1996. From 1995 to 1996, Mr. Huttick served as President of
Ford Motor Company's Parts and Service Directors Association.

         James T. Cancro is one of Red Bell's founders and has served as a
Director and as Director of Brewing Operations for our

                                       40
<PAGE>   41
main brewery and our brewpubs since our inception June 1993. Mr. Cancro is
responsible for all aspects of our brewing operations including brewing
equipments designs, specifications, installation, recipe formulation, and
brewing operations. Mr. Cancro has been brewing and formulating recipes for over
12 years and has completed a brewing apprenticeship under Mr. Will Kemper of
Dock Street Brewing Company, Philadelphia, Pennsylvania. Mr. Cancro is a
certified beer judge with the American Brewers Association. Prior to joining Red
Bell, Mr. Cancro served as project manager for Cornell Construction Company, a
Delaware Valley based construction firm. Mr. Cancro received a degree in
Structural Engineering from Villanova University.

         Stephen J. Bell is the brother of founder James R. Bell. Mr. Bell
joined the Company in May 1998, to serve as Vice President and Manager of
Brewing Operations- Head Brewer for both the Red Bell Brewing Company (main
brewery) and the Red Bell Brewery and Pub Company (brew pubs). Mr. Bell is
chiefly responsible for the day today brewing operations of our owned and/or
managed brewery and brew pubs. Since joining Red Bell, Mr. Bell has worked under
the supervision of and been trained by our Director of Brewing Operations, James
Cancro. Prior to joining us in his current capacity, Mr. Bell held various part
time positions with Red Bell for over two years. Mr. Bell holds a Bachelors
degree in Political Science and minor in History and Administration of Justice
from the University of Pittsburgh.

         Robert White joined Red Bell in December 1998 to serve as Executive
Vice President and Director of Food and Beverage Operations for our subsidiary
Red Bell Brewery and Pub Company. Mr. White is responsible for the day to day
operations of Red Bell owned and/or managed restaurants and brew pubs. Prior to
joining us, Mr. White served as the Director of Food and Beverage for Sentry
Hospitality III, Ltd. a New York based hotel and restaurant management
partnership, from 1996 to 1998. From 1994 to 1996, Mr. White served as Director
of Dining Services for Columbia University in New York, where he was responsible
for the supervising of all day to day operations of the University Dining
Halls,Fast Food concepts, and banquet and catering business. From 1990 to 1995,
Mr. White was the owner and operator of the Promenade Restaurant, a high volume
restaurant located in Cape May, New Jersey. Mr. White holds a Bachelors degree
in Educational Studies from West Chester University.

DIRECTORS' COMPENSATION

                                       41
<PAGE>   42
         Members of the Board of Directors of Red Bell do not currently receive
any cash compensation for serving as a Director.

ITEM 10. EXECUTIVE COMPENSATION.

         The following table sets forth the amount of all compensation paid or
accrued by the Company during the calendar years ended December 31, 1998, 1999
and 2000 to the individual acting in the capacity of Chief Executive Officer. No
other individual who was serving as an executive officer at the end of these
calendar years received salary and bonus in excess of $100,000 in such year.

<TABLE>
<CAPTION>
Name and Position          Year    Salary Other    Total Compensation
-----------------          ----    ------------    ------------------
<S>                        <C>     <C>             <C>
James R. Bell
Chief Executive
Officer and President      1998     $89,999 $0          $89,999
                           1999     $89,999 $0          $89,999
                           2000     $89,999 $0          $89,999
</TABLE>

EMPLOYMENT AGREEMENTS

         In August 1996, Red Bell and James R. Bell, our Chief Executive
Officer, entered into an employment agreement. The agreement has a term
commencing September 1, 1996 and extends through December 31, 2001. The
agreement is automatically renewed from year to year thereafter unless canceled
by Mr. Bell or Red Bell. The agreement provided for an annual base salary of
$140,000 per annum. In 1997, Mr. Bell voluntarily agreed to reduce the annual
base salary to $89,999. We are not obligated to pay any salary to Mr. Bell in
excess of $89,999 under his employment agreement. The agreement requires Mr.
Bell to devote his full time and attention to the business and affairs of Red
Bell and obligates him not to engage in any investments or activities which
would compete with Red Bell during the term of the agreement and for two years
thereafter.

         The Company does not have employment agreements with any of its other
executive officers.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

                                       42
<PAGE>   43
         The following table sets forth information concerning the beneficial
ownership of our Common Stock as of December 31, 2000, by each person known by
us to be the beneficial owner of five percent or more of our outstanding common
stock, by each director and executive officer of Red Bell, and all directors and
executive officers as a group.

<TABLE>
<CAPTION>
Name and Address of             Amount                           Beneficially
Beneficial Owner                Beneficially                  Owned Percentage(1)
                                Owned
<S>                             <C>                           <C>
James R. Bell
6490 Woodbine Avenue
Philadelphia, PA 19151          1,590,833(2)                        29.4%


Robert T. Huttick
760 Longstreth Road
Warminster, PA 18974              219,950(3)                        4.06%


James T. Cancro
927B North Hancock Street
Philadelphia, PA 19123            149,670(4)                         2.7%

James W. Kane, III
11 Penn Center
10th Floor
Philadelphia, PA 19103            612,700(5)                        11.2%

All Directors and Officers
As a Group (5 persons)          1,960,453                           36.2%
</TABLE>


(1) Includes all shares beneficially owned as of December 31, 2000, as defined
in Rule 13d-3 promulgated under the Securities Exchange Act of 1934, including:
(i) shares owned by a spouse, minor child or by relatives sharing the same home;
(ii) shares owned by entities owned or controlled by the named person; and (ii)
shares the named person has the right to acquire within 60 days by the exercise
of any right or option. Unless otherwise noted, shares are owned of record and
beneficially by the same person. In accordance with the foregoing, for purposes
of this table, Red Bell had 5,430,360 shares issued and outstanding as of
December 31,

                                       43
<PAGE>   44
2000.

(2) Includes 51,000 shares underlying warrants and 583,000 shares underlying
options.

(3) Includes 100,000 shares issuable upon exercise of stock options, 94,000
shares held with his spouse, 300 shares held as custodian for his minor
children, and 25,000 shares held by Chrisley Investments of which his spouse is
general partner. Mr. Huttick disclaims beneficial ownership of the shares owned
by Chrisley Investments.

(4) Includes 7,667 shares issuable upon exercise of stock options.

(5) Mr. Kane is the general partner of Villars I, L.P., and Villars II., L.P.,
and is the beneficial owner of the 276,000 shares issuable upon conversion of
the Debentures issued to Villars I and II, the 276,000 shares issuable upon
exercise of the warrants issuable upon conversion of the Debentures, and the
55,200 shares issuable to pay the accrued interest on the debentures, and owns
5,500 shares in his individual name.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

         In 1998, James Bell sold to us 75,000 shares of Common Stock at $4.50
per share for $337,500. Red Bell reflected the amount due as a related party
payable on its financial statements and no monies were ever paid to Mr. Bell on
the obligation. In 1999, the shares were returned to Mr. Bell and the
corresponding obligation canceled.

         As a condition of the $194,000 loan to Red Bell by CDB Finance made in
October 2000, Mr. Bell has pledged 500,000 shares of his Common Stock and Mr.
Huttick has pledged 122,777 shares of his Common Stock as security for the loan.
In addition, each of Mr. Bell and Mr. Huttick has agreed to personally guaranty
the loan, provided that Mr. Huttick's liability is limited to $90,000. In
connection with the $57,000 loan to Red Bell by CDB in February 2001, each of
Mr. Bell and Mr. Huttick pledged the shares referred to above as security and
personally guaranteed the loan.

         In early 1999, Ogden indicated to us that another location was
available in Veteran's Stadium but that we would have to pay $40,000 in
improvements to fit out the brew pub. RBC Capital Investments, of which our
Director of Operations Robert Huttick is

                                       44
<PAGE>   45
general partner, agreed to fund these costs. In March 1999, we licensed our name
to RBC and RBC entered into a license agreement with Ogden. Pursuant to the
license agreement between RBC and Ogden, Ogden agreed to operate a Red Bell brew
pub and to purchase our beer directly from us at the same price as our other
Veteran's Stadium locations operated by Ogden. In addition, Ogden agreed to pay
to RBC 40% of the gross sales less expenses from this brew pub location. This is
the same commission arrangement which we have with Ogden in our other three brew
pub locations. RBC's contract with Ogden expired in January 2001 and our license
agreement with RBC expired at the same time.

         As of December 31, 2000, the Company owed Mr. Bell $94,170 and Mr.
Huttick $62,303 on account of accrued and unpaid salary. These amounts are
reflected as related party payables, and were expensed as operating expenses in
the appropriate periods in the financial statements of Red Bell. These related
party payables do not accrue interest.

         As part of the Subscription Agreement and Registration Rights Agreement
entered into between us and Gerald Holtz in March 2001, the existing pledge by
Mr. Bell to Holtz of certain of his Red Bell shares to secure repayment of the
loan was released by Holtz.

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.

(a) Exhibits.

<TABLE>
<CAPTION>
Exhibit
Number                                Description
------                                -----------
<S>      <C>
2.1      Articles of Incorporation of Red Bell Brewing Co., filed in the
         Commonwealth of Pennsylvania on June 29, 1993 (Incorporated by
         reference to Exhibit 2.1 to Form 10-SB, Registration No. 0-3215).

2.1.1    First Amendment of Articles of Incorporation of Red Bell Brewing Co.,
         filed in the Commonwealth of Pennsylvania on August 16, 1993
         (Incorporated by reference to Exhibit 2.2 to Form 10-SB, Registration
         No. 0-3215).

2.1.2    Second Amendment of Articles of Incorporation of Red Bell Brewing Co.,
         filed in the Commonwealth of Pennsylvania on June 12, 1995
         (Incorporated by reference to Exhibit 2.1.2 to Form
</TABLE>

                                       45
<PAGE>   46
<TABLE>
<S>      <C>
         10-SB, Registration No. 0-3215).

2.1.3    Third Amendment of Articles of Incorporation of Red Bell Brewing Co.,
         filed in the Commonwealth of Pennsylvania on April 27, 1998
         (Incorporated by reference to Exhibit 2.1.3 to Form 10-SB, Registration
         No. 0-3215).

2.1.4    Fourth Amendment of Articles of Incorporation of Red Bell Brewing Co.,
         filed in the Commonwealth of Pennsylvania on March 3, 2000
         (Incorporated by reference to Exhibit 2.1.4 to Form 10-SB, Registration
         No. 0-3215).

2.2      Bylaws of Red Bell Brewing Co (Incorporated by reference to Exhibit 2.2
         to Form 10-SB, Registration No. 0-3215).

4.1      Specimen Common Stock Certificate (Incorporated by reference to Exhibit
         4.1 to Form 10-SB, Registration No. 0-3215).

4.2      $455,617.58 Amended, Restated and Consolidated Note of the Company in
         favor of First Union National Bank dated January 21, 1999 (Incorporated
         by reference to Exhibit 4.2 to Form 10-SB, Registration No. 0-3215).

4.3      $600,000.00 Master Demand Note from Red Bell Brewery Pub Company in
         favor of Corestates Bank, N.A. dated August 20, 1996 (Incorporated by
         reference to Exhibit 4.3 to Form 10-SB, Registration No. 0-3215).

4.4      Assignment and Security Agreement between Red Bell Brewery Pub and
         Corestates Bank, N.A. dated August 20, 1996 (Incorporated by reference
         to Exhibit 4.4 to Form 10-SB, Registration No. 0-3215).

4.5      Guaranty of Red Bell in favor of Corestates Bank, N.A. dated August 20,
         1996 (Incorporated by reference to Exhibit 4.5 to Form 10-SB,
         Registration No. 0-3215).

4.6      $398,000.00 Note dated October 12, 1998 of the Company in favor of PIDC
         Local Development Corporation (Incorporated by reference to Exhibit 4.6
         to Form 10-SB, Registration No. 0-3215).

4.7      Mortgage Subordination and Lien Priority Agreement dated October 12,
         1998 (Incorporated by reference to
</TABLE>

                                       46
<PAGE>   47
<TABLE>
<S>      <C>
         Exhibit 4.7 to Form 10-SB, Registration No. 0-3215).

4.8      $522,000 Note of the Company in favor of PIDC Local Development
         Corporation October 12, 1998 (Incorporated by reference to
         Exhibit 4.8 to Form 10-SB, Registration No. 0-3215).

4.9      $500,000 Note from the Company to the Commonwealth of Pennsylvania
         dated January 29, 1998 (Incorporated by reference to Exhibit 4.9 to
         Form 10-SB, Registration No. 0-3215).

4.10     Loan Agreement dated January 29, 1998 between the Company and
         Commonwealth of Pennsylvania (Incorporated by reference to Exhibit 4.10
         to Form 10-SB, Registration No. 0-3215).

4.11     Installment Sale Agreement dated January 29, 1998 between PIDC
         Financing Corporation and the Company (Incorporated by reference to
         Exhibit 4.11 to Form 10-SB, Registration No. 0-3215).

4.12     Assignment of Installment Sale Agreement dated January 26, 1998 between
         PIDC Financing Corporation, the Company and the Pennsylvania Industrial
         Development Authority (Incorporated by reference to Exhibit 4.12 to
         Form 10-SB, Registration No. 0-3215).

4.13     Registration Rights Agreement between Red Bell and CDB Finance
         Corporation dated October 23, 2000 (Incorporated by reference to
         Exhibit 4.13 to Form 10-SB, Registration No. 0-3215).

4.14     Subscription Agreement between CDB Finance Corporation and Red Bell
         dated October 23, 2000 (Incorporated by reference to Exhibit 4.14 to
         Form 10-SB, Registration No. 0-3215).

**4.15   Registration Rights Agreement dated February 5, 2001 between CDB
         Finance Corporation and Red Bell.

**4.16   Subscription Agreement between CDB Finance Corporation and Red Bell
         dated February 5, 2001.

**4.17   Conversion Rights Agreement between Red Bell and CDB Finance
         Corporation dated February 5, 2001.

**4.18   Registration Rights Agreement dated March 20, 2001 between Gerald Holtz
         and Red Bell.
</TABLE>

                                       47
<PAGE>   48
<TABLE>
<S>      <C>
**4.19   Subscription Agreement between Gerald Holtz, Red Bell, and James R.
         Bell dated March 20, 2001.

10.1     Debenture Purchase Agreement dated August 12, 1996 by and between Red
         Bell and Red Bell Partners, L.P. (Incorporated by reference to Exhibit
         10.1 to Form 10-SB, Registration No. 0-3215).

10.2     5% Convertible Subordinated Debenture dated August 12, 1996
         (Incorporated by reference to Exhibit 10.2 to Form 10-SB, Registration
         No. 0-3215).

10.3     Employment Agreement dated August 12, 1996 between James R. Bell and
         Red Bell (Incorporated by reference to Exhibit 10.3 to Form 10-SB,
         Registration No. 0-3215).

10.4     Debenture Purchase Agreement dated September 27, 1996 by and between
         Red Bell and Villars II, L.P. (Incorporated by reference to Exhibit
         10.4 to Form 10-SB, Registration No. 0-3215).

10.5     5% Convertible Subordinated Debenture dated September 27, 1996
         (Incorporated by reference to Exhibit 10.5 to Form 10-SB, Registration
         No. 0-3215).

10.6     Agreement dated August 1, 1996 by and between ARAMARK Leisure Services,
         Inc. and Red Bell Brewery & Pub Company (Incorporated by reference to
         Exhibit 10.6 to Form 10-SB, Registration No. 0-3215).

10.7     Agreement of Lease dated November 20, 1998 by and between Red Bell and
         Agostinelli Family Partnership (Incorporated by reference to Exhibit
         10.7 to Form 10-SB, Registration No. 0-3215).

10.7.1   First Amendment to Lease Agreement dated December 20, 1998 between Red
         Bell and Agostinelli Family Partnership (Incorporated by reference to
         Exhibit 10.7.1 to Form 10-SB, Registration No. 0-3215).

10.8     Non-Qualified Stock Option Agreement dated May 16, 1995 between Red
         Bell and James R. Bell (Incorporated by reference to Exhibit 10.8 to
         Form 10-SB, Registration No. 0-3215).

10.9     Incentive Stock Option Agreement dated May
</TABLE>


                                       48
<PAGE>   49
<TABLE>
<S>      <C>
         16, 1995 between Red Bell and Francis J. Ciabattoni (Incorporated by
         reference to Exhibit 10.9 to Form 10-SB, Registration No. 0-3215).

10.10    Production Agreement dated as of March 1, 1999 between Red Bell and
         Matt Brewing Co., Inc. (Incorporated by reference to Exhibit 10.10 to
         Form 10-SB, Registration No. 0-3215).

**10.11  Option Certificate No. RB-1 dated March 20, 2001 in the name of James
         R. Bell.

**10.12  Option Certificate No. RB-4 dated March 20, 2001 in the name of Robert
         Huttick.

**10.13  Option Certificate No. RB-2 dated March 20, 2001 in the name of James
         Cancro.

**10.14  Option Certificate No. RB-6 dated March 20, 2001 in the name of James
         R. Bell.

**10.15  Option Certificate No. RB-7 dated March 20, 2001 in the name of Robert
         Huttick.

**10.16  Option Certificate No. RB-8 dated March 20, 2001 in the name of James
         R. Bell.

**10.17  Option Certificate No. RB-9 dated March 20, 2001 in the name of Robert
         Huttick.

**10.18  Option Certificate No. RB-10 dated July 1, 1997 in the name of Robert
         Huttick.

21       Subsidiaries (Incorporated by reference to Exhibit 21 to Form 10-SB,
         Registration No. 0-3215).
</TABLE>

----------
**- Filed herewith.

(b) Reports on Form 8-K.

         None.


                                       49
<PAGE>   50
                                   SIGNATURES

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

                                                     RED BELL BREWING COMPANY

                                                     By: /s/ James R. Bell
                                                        -------------------
                                                        James R. Bell,
                                                        President

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

<TABLE>
<CAPTION>
Signatures                                         Title                            Date
----------                                         -----                            ----
<S>                                     <C>                                     <C>
 /s/ James R. Bell                      President and Director                  March 21, 2001
-------------------                     (Principal Executive Officer)
James R. Bell

/s/ Robert Huttick                      Vice President                          March 21,2001
-------------------
Robert Huttick                          (Principal Accounting Officer)

/s/ James T. Cancro                     Director                                March 21,2001
-------------------
James T. Cancro
</TABLE>


                                       50


<PAGE>   51
                          INDEPENDENT AUDITOR'S REPORT


Board of Directors

Red Bell Brewing Company and Subsidiaries:


We have audited the accompanying consolidated balance sheet of Red Bell Brewing
Company and Subsidiaries (the "Company") as of December 31, 2000, and the
related consolidated statements of operations, changes in stockholders' equity
(deficit) and cash flows for each of the two years in the period ended December
31, 2000. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Company as of December 31,
2000, and the results of its operations and its cash flows for each of the two
years in the period ended December 31, 2000, in conformity with generally
accepted accounting principles.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As more fully described in Note 2, the
Company has incurred recurring operating losses, has not complied with certain
covenants of loan agreements with banks, and has been unable to satisfy its
obligations to certain creditors. These conditions raise substantial doubt about
the Company's ability to continue as a going concern. Management's plans
relating to these matters are also described in Note 2. The financial statements
do not include any adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amounts and classification of
liabilities that may result from the outcome of this uncertainty.

March 8, 2001
Toms River, New Jersey


                                                                             F-1
<PAGE>   52
                    RED BELL BREWING COMPANY AND SUBSIDIARIES

                           Consolidated Balance Sheet

                                December 31, 2000


<TABLE>
<CAPTION>
<S>                                                                 <C>
                                Assets
Current Assets:
  Cash                                                              $   16,110
  Cash-restricted                                                       65,786
  Trade receivables                                                     10,489
  Inventories                                                           54,025
  Advance to customer, current portion-net                              56,281
  Prepaid expenses                                                      65,906
                                                                    ----------
            Total current assets                                       268,597
                                                                    ----------

Property, Plant and Equipment-net                                    3,133,297
Assets held for sale                                                   200,000
Advance to customer, long-term-net                                     166,369
Other assets                                                           444,016
                                                                    ----------

         Total Assets                                               $4,212,279
                                                                    ==========

            Liabilities and Stockholders' Equity (Deficit)

Current liabilities:
  Notes payable                                                     $1,164,000
  Current portion of long-term debt                                  2,719,545

  Accounts payable                                                     794,644

  Accrued liabilities                                                1,462,398
  Related party payable                                                253,739
                                                                    ----------

         Total current liabilities                                   6,394,326
                                                                    ----------

Subordinated convertible notes                                         569,827
Other liabilities                                                       12,500

Redeemable Preferred stock $1.72 stated
value, $2.15 redemption amount
Authorized shares 1,000,000
Issued and outstanding shares 112,670                                  209,882

Stockholders' Equity (Deficit):
  Common stock, no par value:
  Authorized shares, 25,000,000
  Issued and outstanding shares 3,422,243                            4,876,714

  Accumulated deficit                                               (7,850,970)
                                                                    ----------
            Total Stockholders'
             Equity (Deficit)                                       (2,974,256)
                                                                    ----------

         Total Liabilities and Stockholders' Equity (Deficit)       $4,212,279
                                                                    ==========
</TABLE>

See Accompanying Notes to Financial Statements.
                                                                             F-2
<PAGE>   53
                    RED BELL BREWING COMPANY AND SUBSIDIARIES

                      Consolidated Statements of Operations

<TABLE>
<CAPTION>
                                              For the years ended
                                                  December 31,
                                         -----------------------------
                                                2000              1999
<S>                                      <C>                   <C>
Gross sales                              $   514,720           538,851
 Less: returns and allowances                  2,918             9,252
 Less: excise taxes                           25,093            18,686
                                         -----------       -----------

Net sales                                    486,709           510,913
Cost of sales                                450,548           467,271
                                         -----------       -----------

            Gross profit                      36,161            43,642
                                         -----------       -----------

Advertising and marketing expenses            16,934            14,212
General and administrative expenses          727,968         1,152,363
Impairment loss                              400,000           242,754
                                         -----------       -----------

         Operating loss                   (1,108,741)       (1,365,687)

Interest income                               25,258            33,666
Interest expense                            (490,559)         (394,799)
Other income                                  44,247            55,775
                                         -----------       -----------

            Net loss                     $(1,529,795)       (1,671,045)
                                         -----------       -----------

Net loss per common shares -
 basic and diluted                       $      (.46)             (.49)
                                         ===========       ===========

Weighted average common shares
 basic and diluted                         3,401,743         3,383,513
                                         ===========       ===========
</TABLE>


See Accompanying Notes to Financial Statements.
                                                                             F-3
<PAGE>   54
                    RED BELL BREWING COMPANY AND SUBSIDIARIES

      Consolidated Statements of Changes in Stockholders' Equity (Deficit)

                 For the years ended December 31, 2000 and 1999

<TABLE>
<CAPTION>
                                                                                         Total
                                          Common Stock               Accumulated        Treasury        Stockholders'
                                     Shares           Amount           Deficit            Stock        Equity (deficit)
                                  -----------      -----------       -----------       -----------     ---------------
<S>                               <C>              <C>               <C>               <C>             <C>
Balance, December 31, 1998          3,317,638      $ 4,759,583        (4,632,229)         (337,500)         (210,146)
Issuance of common stock-net
  of issuance costs                     6,805           30,623                --                --            30,623

Accretion of preferred
  stock value                              --           (4,603)               --                --            (4,603)

Issuance of Treasury stock             75,000               --                --           337,500           337,500

Net loss                                   --               --        (1,671,045)               --        (1,671,045)
                                  -----------      -----------       -----------       -----------       -----------

Balance, December 31, 1999          3,399,443        4,785,603        (6,303,274)               --        (1,517,671)

Issuance of common stock
  net of issuance cost                 22,800          102,600                --                --           102,600

Preferred stock dividend                   --               --           (17,901)               --           (17,901)

Accretion of preferred
  stock value                              --          (11,489)               --                --           (11,489)

Net loss                                   --               --        (1,529,795)               --        (1,529,795)
                                  -----------      -----------       -----------       -----------       -----------

Balance December 31, 2000           3,422,243      $ 4,876,714        (7,850,970)               --        (2,974,256)
                                  ===========      ===========       ===========       ===========       ===========
</TABLE>


See Accompanying Notes to Financial Statements.
                                                                             F-4
<PAGE>   55
                    RED BELL BREWING COMPANY AND SUBSIDIARIES

                      Consolidated Statements of Cash Flows

<TABLE>
                                                           For the years ended
                                                               December 31,
                                                           2000          1999
<S>                                                    <C>           <C>
Cash Flows from operating activities:
Net loss                                               $(1,529,795)  (1,671,045)
Adjustments to reconcile net loss to
     net cash used for operating
     activities:
      Depreciation and amortization                        202,804      202,815
      Accretion of convertible
       debt discount                                        15,520       30,649
      Interest on issue of common stock                     39,600           --
      Impairment loss                                      400,000      242,754
      Loss on disposal assets                                  878           --

Changes in operating assets and liabilities:

         (Increase) decrease in trade receivables           (9,825)       2,348
         (Increase)decrease in inventories                 (12,559)       6,308
          Decrease (increase) in prepaid
           expenses and other current
           assets                                            7,255      (25,630)
         (Increase) in other assets                       (296,500)      (3,817)
         (Decrease) increase in accounts payable
           and cash overdrafts                            (124,726)     590,299
         Increase in accrued liabilities                   691,783       74,781
         Increase in related party payable                  71,272      102,467
         Increase in other liabilities                       2,500           --
                                                       -----------   ----------

Net cash used for operating activities                    (541,793)    (448,071)
                                                       -----------   ----------

Cash Flows from investing activities:

 Capital expenditures                                      (13,420)      (5,000)
 Proceeds from sale of assets                                8,483           --
 Repayment of advance to customer                           75,000       87,500
 Amortization of discount on
  advance to customer                                      (23,801)     (33,590)
                                                       -----------   ----------

Net cash provided for Investing Activities                  46,262       48,910
                                                       -----------   ----------

Cash Flows from Financing Activities:
 Proceeds from borrowings                                  454,000    1,370,632
 Payments of debt obligations                                   --   (1,045,459)
 Payments of capital lease                                  (1,540)     (12,500)
 Preferred dividends paid to stockholders                  (17,901)          --
 Increase (decrease) in restricted cash                    (17,727)     (47,166)
 Proceeds from issuance of preferred stock                   5,160      188,630
 Proceeds from issuance of common stock                      3,600       30,623
                                                       -----------   ----------

Net cash provided by financing activities                  425,592      484,760
                                                       -----------   ----------

Net (decrease) increase in cash
  and cash equivalents                                     (69,939)      85,599

Cash beginning of year                                      86,049          450
                                                       -----------   ----------

Cash end of year                                       $    16,110       86,049
                                                       ===========   ==========

Supplemental disclosure of cash flow information:
Interest payments (net of amounts
  capitalized)                                         $    15,520      311,238
                                                       ===========   ==========

Debt repaid with Treasury stock                        $        --      337,500
                                                       ===========   ==========
License paid with short term note                      $   260,000           --
                                                       ===========   ==========
Issue of Common Stock                                  $    99,000           --
                                                       ===========   ==========
</TABLE>

See Accompanying Notes to Financial Statements.
                                                                             F-5
<PAGE>   56
                    RED BELL BREWING COMPANY AND SUBSIDIARIES

                   Consolidated Notes to Financial Statements

                           December 31, 2000 and 1999



1.   Business

     Red Bell Brewing Company and Subsidiaries consist of the parent, Red Bell
     Brewing Company and its wholly owned subsidiaries, Red Bell Brewing and Pub
     Company and Red Bell Brewing and Pub Company - State College (Red Bell -
     State College).

     Red Bell Brewing Company, a Pennsylvania corporation ("the Company") was
     incorporated in July, 1993, The Company engages in the manufacture,
     bottling, distribution and sale of beer, primarily in the Mid-Atlantic
     region. The Company generates its revenues by the sale of its beer to
     wholesalers, retailers, beer distributors and through royalty and
     management agreements with brew pubs.

     Red Bell Brewing and Pub Company operates a brewing and brew pub in the
     First Union Center under an arrangement with Aramark Leisure Services (see
     note 3). Red Bell - State College was incorporated on January 20, 1999 in
     Pennsylvania in order to develop and operate a restaurant and brewing in
     State College, Pennsylvania. All intercompany transactions have been
     eliminated in consolidations.

     The manufacturing and sale of alcoholic beverages is a business that is
     regulated and taxed at the federal, state and local levels. The operations
     may be subject to more restrictive regulations and taxation by federal,
     state and local governmental agencies than are other non-alcohol related
     businesses.

2.   Summary of Significant Accounting Policies

     Basis of Financial Statement Presentation

     The financial statements of the Company have been prepared assuming that
     the Company will continue as a going concern, which contemplates the
     realization of assets and the satisfaction of liabilities in the normal
     course of business. Accordingly, the financial statements do not include
     any adjustments that might be necessary should the Company be unable to
     continue in existence.

     The Company had been in the development stage since its inception in 1993
     to 1996 and has incurred substantial cumulative losses from its inception
     through December 31, 2000 amounting to $7,833,069. The Company's ability to
     meet its future obligations is dependent upon the success of its products
     in the marketplace and its ability to raise capital until the Company's
     products can generate sufficient operating revenues. These factors raise
     doubt about the Company's ability to continue as a going concern.
     Management believes that actions presently taken and currently being
     contemplated will provide for the Company to continue as a going concern.
     Such actions include the generation of revenues from operations, raising
     capital through debt issuance and additional sales of Company common stock.


                                                                             F-6
<PAGE>   57
                    RED BELL BREWING COMPANY AND SUBSIDIARIES

                   Consolidated Notes to Financial Statements

                           December 31, 2000 and 1999



2.   Summary of Significant Accounting Policies (continued)

     Cash

     Restricted cash represents collections of an advance to a customer that is
     restricted to repayment of a bank loan.

     Concentration of Credit Risk

     The Company's unsecured advance to a customer ($222,650 at December 31,
     2000) represents a significant concentration of credit risk.

     Inventory

     Inventory is valued at the lower of cost or market, with cost being based
     on a moving average method.

     Property, Plant and Equipment

     Property, Plant and Equipment are stated at cost. Depreciation is computed
     using the straight-line method over the estimated useful lives if the
     assets. All significant additions and improvements are capitalized and
     repairs and maintenance charges are expensed as incurred.

     Estimated useful lives for the assets are as follows:

<TABLE>
<S>                                                         <C>
                  Building and improvements                 30 years
                  Brewing equipment                         13 years
                  Automobiles and trucks                    5 years
                  Furniture and fixtures                    3-7 years
</TABLE>

     Deferred Funding Costs

     Deferred costs consist primarily of financing costs associated with debt
     financing which are stated at cost. Amortization is provided on a
     straight-line basis over the life of the associated debt agreement, which
     approximates the interest method of amortization.

     Excise Taxes

     The U.S. federal government currently imposes an excise tax of $18 per
     barrel of beer produced for consumption in the United States. However, any
     brewer with production under 2 million barrels per year, which includes the
     Company, 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-7
<PAGE>   58
                    RED BELL BREWING COMPANY AND SUBSIDIARIES

                   Consolidated Notes to Financial Statements

                           December 31, 2000 and 1999


2.   Summary of Significant Accounting Policies (continued)

     Net Loss Per Common Share

     Basic earnings per share is based on the net loss adjusted for the
     preferred stock dividends divided by the weighted average number of
     outstanding common shares for the period. Diluted earnings per share
     adjusts the weighted average for the potential dilution that could occur if
     stock options, warrants, or subordinated convertible notes were exercised
     or converted into common stock. Diluted earnings per share equals basic
     earnings per share because the effects of such items were anti-dilutive.
     The impact on adjusted net loss for the years ended December 31, 2000 and
     1999 associated with the preferred stock dividends and accretion of value
     for purposes of computing net loss per common share was an increased loss
     of $29,390 and $4,603 in total, an $.01 and $0 a share, respectively.

     Long-Lived Assets

     The Company evaluates the carrying value of long-lived assets in accordance
     with the provisions of Statement of Financial Accounting Standards No. 121,
     "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets
     to be Disposed of." Historical performance and anticipated future results
     are considered in assessing potential impairment. When indicators of
     impairment are present, the recoverability of the carrying value of the
     assets in question is assessed based on the future undiscounted cash flows
     expected to result from their use. If the carrying value cannot be
     recovered, impairment losses would be recognized to the extent the carrying
     value exceeds fair value. There was an impairment loss in 2000 and 1999 of
     $400,000 and $242,754, respectively.

     Revenue Recognition

     Revenue from beer sales is recognized upon shipment of product to
     customers. Sales returns are recorded as a reduction of gross sales. Sales
     to distributors are COD and inventory is picked up by the distributors at
     the Company Brewery. Return of product in exchange for like product is
     available for a short time period. Revenue from commission and management
     agreements is recognized in accordance with contract terms, which are when
     the commission is earned on beer sales and when the managed event occurs.

     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 reported amount of assets and liabilities and
     disclosure of contingent assets and liabilities at the date of the
     financial statements and the reported amounts of revenue and expenses
     during the reporting period. Actual results could differ from those
     estimates.


                                                                             F-8
<PAGE>   59
                    RED BELL BREWING COMPANY AND SUBSIDIARIES

                   Consolidated Notes to Financial Statements

                           December 31, 2000 and 1999


2.   Summary of Significant Accounting Policies (continued)

     Stock-Based Compensation

     The Company has elected to account for stock-based compensation using the
     intrinsic value method prescribed in Accounting Principles Board Opinion
     No. 25, "Accounting for Stock Issued to Employees", and related
     Interpretations for issuance of stock options to employees. Accordingly,
     compensation costs for stock options is measured as the excess, if any, of
     the fair market value of the stock at the date of the grant over the amount
     an employee must pay to acquire the stock. The Company has adopted the
     disclosure-only provisions of Statement of Financial Accounting Standards
     No. 123, "Accounting for Stock-Based Compensation", for employees. The
     Company has adopted the full provisions of Statement of Financial
     Accounting Standards No. 123 and related interpretations for issuance of
     stock and stock options to non-employees.

     Advertising Costs

     The Company expenses advertising costs as they are incurred.

     Impact of Recent Pronouncements

     In fiscal 1999, the Statement of Financial Accounting Standards (SFAS)
     Board issued Statement No. 133, Accounting for Derivative Instruments and
     Hedging Activities. SFAS No. 133 is effective beginning July 1, 2000 for
     the Company. The Company does not currently utilize any derivative
     instruments covered by SFAS No. 133 nor does it hedge any transaction,
     therefore, no material financial statement impact is expected from the
     adoption of SFAS No. 133.

3.   Brew Pubs

     During 1996, the Company entered into an agreement with Aramark Leisure
     services, Inc. ("Aramark") to open and operate a brewery and brew pub in
     facilities leased by Aramark at the First Union Center entertainment
     complex in Philadelphia, Pennsylvania. Under the agreement, the Company
     contributed $600,000 to Aramark to fund construction of the brew pub and
     receives $75,000 per year from the brew pub's revenues as repayment of the
     advance. The agreement provides that Aramark has title to the leasehold
     improvements. Amounts received by the Company under the agreement are
     restricted to the payment of principal and interest of a related note
     payable to First Union National Bank. Under the agreement, the Company is
     required, among other things, to maintain the brew pub's license and
     supplemental liability insurance and to manufacture and supply beer to the
     brew pub.

     The agreement has an initial term of ten years and provides the Company
     with two successive five-year renewal options. However, the agreements
     would automatically terminate upon termination of Aramark's lease of the
     facilities or upon other events of default by Aramark. Also, Aramark may
     terminate the agreement at any time after five years without cause. Upon
     any of these events, Aramark would be required to pay the Company a
     termination fee equal to any unamortized balance of the $600,000
     contribution (amortized on a straight-line basis over eight years). In the
     event of default by the Company under the agreement, the Company would
     receive from Aramark only an amount equal to the fair market value of the
     brewing equipment located at the brew pub.


                                                                             F-9
<PAGE>   60
                    RED BELL BREWING COMPANY AND SUBSIDIARIES

                   Consolidated Notes to Financial Statements

                           December 31, 2000 and 1999


3.   Brew Pubs (continued)

     The Company recorded the contribution to Aramark as an advance to customer
     in the amount of $422,500, based on the brew pub distributions over the
     eight year contractual amortization period of the contribution discounted
     at 9.5%. The discount of $177,500 was recognized as a marketing expense in
     1996. The unamortized amount of the discount at December 31, 2000 was
     $39,851. Interest income of $23,800 and $33,580 related to the advance was
     recognized during the year ended December 31, 2000 and 1999, inclusive of
     amortization of the discount.

     The Company also has mobile brew pubs at the Veterans' Stadium
     entertainment complex in Philadelphia, Pennsylvania. The Company owns the
     fixed assets, however, the pubs are operated by the vendor who has the
     concession contract at the stadium. The Company sells beer to the vendor
     and receives a commission on the retail beer sales from the vendor. There
     is no contractual commitment by either party subsequent to January 2001,
     however, the Company anticipates that the vendor will continue the
     arrangement.

4.   Inventories

     Inventories consists of the following at December 31, 2000:

<TABLE>
<S>                                                                 <C>
           Raw Materials and supplies                               $36,197
           Work in Process                                            3,782
           Finished Goods                                            14,046
                                                                    -------
           Total                                                    $54,025
                                                                    =======
</TABLE>

5.   Property, Plant and Equipment

     Property, plant and equipment consists of the following at December 31,
2000:

<TABLE>
<S>                                                           <C>
              Land                                            $  100,328
              Building                                           401,312
              Building improvements                            2,446,646
              Brewing equipment                                  897,743
              Automobiles and trucks                              25,896
              Furniture and fixtures                              71,046
                                                              ----------
                    Total                                      3,942,971
                  Less Accumulated Depreciation                 (809,674)
                                                              ----------
                  Property, Plant and
                     Equipment, net                           $3,133,297
                                                              ==========
</TABLE>

     Included in property, plant, and equipment as of December 31, 2000 was
     $23,000 in assets held under capital lease. Accumulated amortization as of
     December 31, 2000 related to these assets was $5,947.


                                                                            F-10
<PAGE>   61
                    RED BELL BREWING COMPANY AND SUBSIDIARIES

                   Consolidated Notes to Financial Statements

                           December 31, 2000 and 1999



5.   Property, Plant and Equipment (continued)

     Assets Held for Sale

     Assets held for sale consists of bottling equipment purchased in 1998 and
     1997, which was previously recorded as construction in progress. The
     equipment was never placed in service as the Company determined that
     bottling could be performed more efficiently by a third party. The Company
     has a plan to sell this equipment. The net realizable value after
     consideration of the cost associated with the sale is $600,000 based upon
     an independent appraisal. Therefore, an impairment loss of $242,754 was
     recorded in 1999. In December of 2000, the Company engaged a broker
     specializing in bottling equipment. The Company anticipates disposal of the
     equipment in February of 2001 and expects to realize $200,000 net of
     disposal cost. As a result of this revised value, the Company has recorded
     an additional impairment loss of $400,000 for the year ended December 31,
     2000. Included in long-term debt is a loan of $488,323 as of December 31,
     2000, which is secured by the bottling line. Additionally, there is
     approximately $225,000 of unpaid interest included in accrued liabilities
     as of December 31, 2000. The creditor filed a claim of $721,000 against the
     Company in December of 2000 for principal, interest and legal costs.

6.   Other assets

     Other assets consist of the following at December 31, 2000:

<TABLE>
<S>                                                                 <C>
         Deferred funding cost                                      $  142,819
         Less:  accumulated amortization                               (59,703)
                                                                    ----------
         Net deferred funding costs                                     83,116

         Deferred stock issue costs                                     59,400
         License                                                       300,000
         Security deposits                                               1,500
                                                                    ----------
                                                                    $  444,016
                                                                    ----------
</TABLE>

7.   Accrued Liabilities

     Accrued liabilities consist of the following at December 31, 2000:

<TABLE>
<S>                                                                 <C>
         Independent contractor                                     $  217,500
         Interest                                                      750,146
         Taxes other than income taxes                                 216,228
         Other                                                         278,524
                                                                    ----------
                       Total                                        $1,462,398
                                                                    ==========
</TABLE>


                                                                            F-11
<PAGE>   62
                    RED BELL BREWING COMPANY AND SUBSIDIARIES

                   Consolidated Notes to Financial Statements

                           December 31, 2000 and 1999


8.   Related Party Payable

   Related party payables are as follows at December 31, 2000:

<TABLE>
<S>                                                               <C>
         Officer loans and deferred salaries                      $  173,473
         Stockholder loans                                            80,266
                                                                  ----------
                       Total                                      $  253,739
                                                                  ==========
</TABLE>

     The above payables to related parties bear no interest and have no specific
repayment terms.

9.   Subordinated Convertible Notes

   Subordinate convertible notes are as follows at December 31, 2000:

<TABLE>
<S>                                                               <C>
     5% convertible subordinated note due
     August 2006, net of discount of $5,173.                      $454,827

     5% convertible subordinated note due
     September 2006.                                               115,000
                                                                  --------
                                                                  $569,827
                                                                  ========
</TABLE>

     5% convertible subordinated notes of $460,000 and $115,000 were borrowed
     from a partnership group during 1996. These obligations are subordinate to
     the Company's notes payable. The notes, or a portion of the notes not less
     than 25% of the outstanding balance, are convertible after the first
     anniversary of the notes, at the discretion of the note holders, into units
     at $2.00 and $2.50 per unit, respectively. Each unit consists of a share of
     common stock and a warrant to purchase one share of common stock at $2.00
     and $2.50 per share, respectively.

     The warrants expire August 1, 2006 and September 1, 2006, respectively.
     Interest is to be paid with shares of common stock at the conversion price
     until August 1, 2000 and September 1, 2000, respectively, after which
     interest is payable in cash. Accrued interest, payable in common stock, at
     December 31, 2000 and 1999 was $115,000 and $96,711, respectively.

     The Company can repay any portion of the notes after the fourth anniversary
     of the notes. These two obligations also contain certain "piggyback" and
     other registration rights related to the stock underlying the convertible
     notes under certain terms and conditions in their respective agreements.
     The $460,000 subordinated convertible note has been discounted to reflect
     the beneficial conversion feature of the debt and the related warrants. The
     discount is being amortized over the anticipated life of the debt of four
     years. The carrying value of this debt approximates its fair value.


                                                                            F-12
<PAGE>   63
                    RED BELL BREWING COMPANY AND SUBSIDIARIES

                   Consolidated Notes to Financial Statements

                           December 31, 2000 and 1999



10.  Notes Payable

     Notes payable consist of the following at December 31, 2000:

<TABLE>
<S>                                                           <C>
     First Union National Bank credit line                    $  555,000
     Villars Partnership Demand Note                             155,000
     Shareholder note payable                                    260,000
     CDB Finance                                                 194,000
                                                              ----------

              Total                                           $1,164,000
                                                              ==========
</TABLE>

     All of the notes are payable on demand. The First Union note is senior to
     the Company's subordinated notes and bears interest at 1% above the bank's
     prime rate (8.5% at December 31, 2000). The Villars note is senior to the
     Company's subordinated notes and bears interest of 10%. The weighted
     average interest rate on notes payable outstanding as of December 31, 2000
     and 1999 was 8% and 9%, respectively. The Company is in violation of
     covenants related to these notes, and the Villars note has been called.

     The shareholder note was loaned directly to the subsidiary Red Bell - State
     College to fund the purchase of a liquor license for the proposed brew pub.
     The loan bears interest at 10% per annum, plus $100,000 on demand. The
     $100,000 has been included in accrued liabilities at December 31, 2000. The
     effective interest rate on this note approximates 48%.

     In October of 2000, CDB Finance loaned the Company $194,000. The loan is
     repayable in five monthly installments of $4,000 with the final payment of
     $197,776, which includes interest due on April 23, 2000. The interest rate
     is 2% per month and the loan has been personally guaranteed by two officers
     of the Company, and is secured by 622,777 shares of Company stock owned by
     the two officers. Additionally, as part of the loan the Company issued
     22,000 shares to CDB Finance. The value of these shares of $99,000 based
     upon the fair market value of the stock will be recorded as additional
     interest expense over the loan period. The effective interest rate on this
     loan approximates 61%.


                                                                            F-13
<PAGE>   64
                    RED BELL BREWING COMPANY AND SUBSIDIARIES

                   Consolidated Notes to Financial Statements

                           December 31, 2000 and 1999

11.  Long-term debt

<TABLE>
<S>                                                                                     <C>
     Long-term debt consists of the following at December 31, 2000:

     Mortgage payable in monthly installments of $2,853, including principal and
     interest 3.75% per annum through February, 2013. Secured by a first lien on
     the brewery premises and a personal guarantee by an officer of the Company.        $ 379,201

     Mortgage payable in monthly installments of $6,607, including principal and
     interest at 3% per annum through February, 2005. Secured by a junior lien
     on the brewery premises, a personal guarantee by an officer of the Company,
     and a $254,000 lien on the personal residence of the officer.                        456,770

     Installment note in monthly installments of $14,286 plus interest at 2%
     above the reference rate, as defined (18.7% at December 31, 2000) through
     August 2001. Secured by bottling equipment.                                          488,323

     9% installment note payable in monthly installments of $491 including
     principal and interest through December, 2000. Secured by transportation
     equipment.                                                                            13,158

     9.30% installment note payable in monthly installments of $5,538.55
     including principal and interest through April 1999 secured by
     equipment.                                                                            14,069

     Installment note payable in monthly installments of $7,594 plus interest at
     1% above prime rate (8.5% at December 31, 2000), through December, 2003.
     This note is senior to the Company's subordinated notes.                             448,024
</TABLE>


                                                                            F-14
<PAGE>   65
                    RED BELL BREWING COMPANY AND SUBSIDIARIES

                   Consolidated Notes to Financial Statements

                           December 31, 2000 and 1999


11.  Long-term debt (continued)


<TABLE>
<S>                                                          <C>
     5.4% SBA Note payable in monthly
     installments of $6,005, including
     principal and interest through
     January, 2009.                                             522,000

     6.85% SBA Note payable in monthly
     installments of $3,070 including
     principal and interest through
     January, 2019.                                             398,000
                                                             ----------
                                                             $2,719,545
                                                             ==========
</TABLE>

     The Company is in default on all of the above long-term debt, therefore, it
has been classified as current liabilities in its entirety.

     Future annual maturities under these obligations pursuant to the loan
agreements are:

<TABLE>
<S>                                                            <C>
     Year ending December 31, 2001                             $  881,081
                              2002                                360,011
                              2003                                247,178
                              2004                                253,780
                              2005                                184,733
                              2006 and thereafter                 792,762
                                                               ----------
                                                               $2,719,545
                                                               ==========
</TABLE>

12.  Redeemable Preferred Stock

     From March 1999 through December 2000, the subsidiary Red Bell - Penn State
     sold 112,670 shares of Class A Preferred Stock to 23 investors at $1.72 per
     share for a total of $193,792. The shares were offered and sold pursuant to
     the exemption from registration set forth in Section 4(2) of the Act. The
     shares earn a cumulative dividend of 10.5% per annum, are entitled to one
     vote per share, and must be redeemed four years after issuance at $2.15 per
     share. Based upon this redemption price, using the interest method, there
     was an accretion of value in the preferred stock of $11,489 and $4,603 for
     the years ended December 31, 2000 and 1999, respectively. A total of
     $235,791 and $6,450 would be required to redeem these stocks for the years
     ending December 31, 2003 and 2004, respectively.The Company may, solely at
     their option, redeem the stock earlier at the full redemption price under
     certain circumstances within the control of the Company.

13.  Stockholders' Equity (Deficit)

     The Company's Articles of Incorporation, (as amended February 24, 2000)
     authorize the issuance of 25,000,000 shares of capital stock without par
     value.

     Each Common share is entitled to one vote except in elections of directors,
     when cumulative voting applies. Cumulative voting entitles each stockholder
     to a number of votes equal to the shares owned multiplied by the number of
     directors to be elected. The common shares do not have preemptive rights,
     are redeemable, do not have any conversion rights, and are not liable for
     assessments or further calls.

     The holders of common shares are entitled to dividends when and as declared
     by the Board of Directors from funds legally available. There are certain
     restrictions on the transfer of shares.


                                                                            F-15
<PAGE>   66
                    RED BELL BREWING COMPANY AND SUBSIDIARIES

                   Consolidated Notes to Financial Statements

                           December 31, 2000 and 1999



13.  Stockholders' Equity (Deficit)(continued)

     Warrants

     In addition to warrants issuable upon conversion of the subordinated
     convertible notes, the Company has 91,167 Common Stock purchase warrants
     outstanding. Each warrant entitles its holder to purchase one common share
     on or prior to August 11, 2003, at a purchase of $.30 per share. Warrant
     holders do not have the rights and privileges of stockholders. Warrants are
     not transferable separately from the common stock to which they relate.

     The following summarizes the capital shares reserved for future issuance by
     the Company at December 31, 2000:

<TABLE>
<S>                                                                 <C>
       Employee Stock Options                                       1,099,750
       Independent Contractor Stock Options                           210,000
       Warrants issued with initial
         stock sales                                                   91,167
       Shares reserved for conversion
         of subordinated convertible
         debentures principal and interest                            331,200
       Shares reserved for non-detachable
         warrants related to convertible debentures                   276,000
                                                                    ---------
                                                                    2,008,117
                                                                    =========
</TABLE>

14.  Stock-Based Compensation

     The Company's 1995 Employee Stock Option Plan ("the Plan") permits the
     granting of options to purchase one million shares to directors and
     employees of the Company. The plan is administered by 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
     granted, including the number of shares covered by the option, the type of
     options (incentive stock option or non-qualified stock option) and the
     exercise price (which must be equal to at least the fair market value of
     the related common stock on the date of grant). All options vest over a
     period of 5 years and have an overall option term of 10 years from the date
     of grant.


                                                                            F-16
<PAGE>   67
                    RED BELL BREWING COMPANY AND SUBSIDIARIES

                   Consolidated Notes to Financial Statements

                           December 31, 2000 and 1999


14.  Stock-Based Compensation (continued)

     On May 16, 1995 the Company's Board of Directors granted options to
     purchase an aggregate of 583,000 and 416,750 shares of common stock of the
     Company to the President and CFO, respectively at $ .30 per share (the
     estimated fair market value on the date of grant).

     On May 21, 1999 the Board of Directors approved an incentive stock option
     plan to issue stock of the Company to key employees and managers, who had
     payroll reductions, at the opening of a registration of the Company's
     common stock.

     The Long-Term Debt Incentive Plan permits grants of options or equity
     awards of 250,000 shares. In 1996, the Company agreed to grant one current
     employee and an independent contractor, who is a stockholder, 100,000 and
     150,000 stock options, respectively, at $2.75 per share. In 1999, the
     Company agreed to grant two independent contractors, who are stockholders,
     25,000 stock options each at $2.75 per share, and the landlord of a future
     brew pub 10,000 stock options at $4.50 per share. Compensation expense of
     $130,000 and $106,000 was recorded in 1996 and 1999, respectively for the
     independent contractors and is included in accrued liabilities as of
     December 31, 2000 based on the fair value of the services rendered to the
     Company.

     These options vested fully at date of grant and expire after ten years of
     the grant date.

     A summary of the status of the Company's employees stock options are as
     follows as of December 31, 2000:

<TABLE>
<CAPTION>
                                                 Weighted-average
                                            Shares       Exercise Price
<S>                                         <C>          <C>
     Options outstanding
      at beginning of period                1,099,750         $.52
     Options granted                               -             -
                                            ---------
     Options outstanding
      at end of period                      1,099,750         $.52
                                            =========
     Options exercisable at
      end of period                         1,099,750         $.52
                                            =========
</TABLE>

     As of December 31, 2000, the weighted average remaining contractual life of
     the options is approximately 5 years. The options outstanding consists of
     999,750 at an exercise price of $.30 and 100,000 at an exercise price of
     $2.75.

     Pro forma information regarding net income and earnings per share is
     required by FASB Statement 123, and has been determined as if the Company
     had accounted for its employee stock options under the fair value method of
     that Statement. The fair value for these options were established at the
     date of grant using the Black-Scholes option pricing model with the
     following weighted average assumptions for 2000 and 1999, respectively:
     risk-free interest rates of 6%, a weighted average expected life of the
     options of 6 and 5 years, respectively, and no dividends.


                                                                            F-17
<PAGE>   68
                    RED BELL BREWING COMPANY AND SUBSIDIARIES

                   Consolidated Notes to Financial Statements

                           December 31, 2000 and 1999


14.  Stock-Based Compensation (continued)

     For purposes of the pro forma disclosures, the estimated fair value of the
     options is amortized to expense over the options vesting period. The
     Company's pro forma net loss and net loss per share were as follows:

   Net loss attributable to common shareholders for the years ended December 31:

<TABLE>
<CAPTION>
                                                          2000          1999
                                                      ------------   -----------
<S>                                                   <C>            <C>
      As reported                                     $(1,529,795)   (1,671,045)
      Pro forma                                        (1,574,595)   (1,713,035)

     Net loss per common share (basic and diluted)
        As reported                                   $      (.46)         (.49)
        Pro forma                                            (.47)         (.51)
</TABLE>

     As of December 31, 2000 and 1999, the pro forma tax effects under SFAS 109
     would not have had a material impact.

15.  Commitments And Contingencies

     The brewery purchased by the Company in November 1995 may be subjected to
     liens related to obligations of the seller in the amount of $360,000. In
     connection with a refinancing, the title insurance company obtained an
     indemnification from the Company, but not a release from civil liability,
     with regard to such liens. No action has been asserted with respect to the
     possible liens, and the Company believes that its interest in the property
     is superior to any such liens.

     The Company is engaged in certain legal and administrative proceedings
     related primarily to unpaid liabilities totaling approximately $1,175,000.
     These liabilities are recorded in the financial statements. The ability of
     the Company to pay these liabilities is dependent upon its ability to
     continue as a going concern as described in note 2.

     The Company leases certain office equipment under an operating lease with
     monthly payments of $154 through September, 2003. The Company subsidiary,
     Red Bell-State College leases space for a future brew pub. The lease is for
     a five-year term beginning June 1, 1999, with renewal options for four
     additional five-year periods. In addition to the base lease payments, the
     Company has to pay a proportionate share of common area maintenance
     charges. Rent expense was $124,302 and $94,498 in 2000 and 1999,
     respectively. The following represents the minimum lease payments over the
     remaining life of the lease.

<TABLE>
<S>                                                    <C>
     For the year ending December 31, 2001             $114,000
                                      2002              121,772
                                      2003              132,998
                                      2004               69,954
                                                        -------
                                                       $438,724
                                                        =======
</TABLE>


                                                                            F-18
<PAGE>   69
                    RED BELL BREWING COMPANY AND SUBSIDIARIES

                   Consolidated Notes to Financial Statements

                           December 31, 2000 and 1999


16.  Significant Customers

     The Company distributes its products through a distribution network to
     retailers and wholesalers such as liquor, wine and beer stores,
     restaurants, taverns, pubs, bars and sports arenas/complexes. The Company
     is dependant upon the brew pubs at the sports arenas to sell the Company's
     beers and to assist the Company in creating demand for, and promoting
     market acceptance of the Company's products. If a significant contract or
     arrangement were to be terminated or discounted, or decrease the level of
     orders for the Company's products, the Company's business would be
     adversely affected until the Company retained replacements. Three customers
     accounted for 18%, 17% and 10% and 22%, 12% and 11% of the Company's gross
     sales for the years ended December 31, 2000 and 1999, respectively.

17.  Income Taxes

     At December 31, 2000, the Company has net operating loss carryforwards
     (NOL)'s of approximately $7,500,000 for federal and state income tax
     purposes that begin to expire in 2010 for federal tax purposes and 2005 for
     state tax purposes.

     Realization of the net deferred tax asset at the balance sheet date is
     dependent on future earnings, which are uncertain. Accordingly, a valuation
     allowance of $2,775,000 has been established to offset the net deferred tax
     assets related to the NOL carryforward and other items as realization of
     such amounts is not reasonably assured. During the year ended December 31,
     2000 and 1999, the valuation allowance increase was primarily related to
     the increase in the net operating loss carryforwards.

     Deferred income taxes reflect the net tax effect of temporary differences
     between the carrying amounts of the assets and liabilities for financial
     reporting purposes and the basis used for income tax reporting purposes.
     Significant components of the Company's tax assets and liabilities are as
     follows at December 31, 2000:

     Deferred tax assets:

<TABLE>
<S>                                                      <C>
         Net operating loss carryforwards                $2,840,000
         Accruals                                            79,000
                                                         ----------

     Total deferred assets                                2,919,000
     Less valuation allowance                            (2,775,000)
                                                         ----------

         Net deferred tax assets                            144,000

     Deferred tax liability
       tax in excess of book depreciation                  (144,000)
                                                         ----------

                                                         $     -
                                                         ==========
</TABLE>


                                                                            F-19
<PAGE>   70
                    RED BELL BREWING COMPANY AND SUBSIDIARIES

                   Consolidated Notes to Financial Statements

                           December 31, 2000 and 1999


17.  Income Taxes (continued)

     A reconciliation of the income tax benefit computed at the normal statutory
     Federal and State income tax rates with the Company's provision for unpaid
     taxes are as follows for the years ended December 31, 2000 and 1999:

<TABLE>
<CAPTION>
                                                        2000              1999
<S>                                                  <C>               <C>
     Statutory Federal income tax benefit            $415,600           568,000
     State tax benefit                                150,000           167,000
     Permanent difference
       non deductible expense                            (600)             (900)
       deductible expense                               5,000             6,500

     Increase in valuation allowance                 (570,000)         (740,600)
                                                     --------          --------

         Income tax benefit                          $     -                 -
                                                     ========          ========
</TABLE>

18.  Subsequent Events

     In January of 2001, the Company issued 10,888 shares to a vendor in order
     to provide security for payment of a judgment of approximately $49,600,
     which is included in accounts payable at December 31, 2000.

     In February of 2001, CDB Finance loaned the Company $57,000. The loan is
     repayable in five monthly installments of $1,150 with the final payment of
     $58,192, which includes interest due on August 5, 2001. The interest rate
     is 2% per month, and the loan has been personally guaranteed by two
     officers of the Company. Additionally, the Company issued 7,000 shares of
     common stock to CDB Finance. The value of these shares of $31,500 will be
     recorded as additional interest expense over the loan period. The effective
     interest rate on this loan would approximate 67%. This loan is also
     convertible into 19,000 shares of common stock at $3.00 per share.

     In March of 2001, the Company granted CDB Finance the right to convert its
     $194,000 note and unpaid interest into 46,534 shares of common stock at the
     rate of $4.25 per share.

     In March of 2001, the Company issued 103,066 shares to the individual who
     is the holder of the shareholder note payable of $260,000. Proceeds from
     the sale of these shares are to be applied towards satisfaction of this
     loan together with unpaid interest on the loan. Additional shares may
     subsequently be issued if required in order to satisfy total amounts due.

     In March of 2001, the Company issued 46,000 shares of common stock as
     payment of interest accrued through August 1, 2000 on the Villars I
     convertible note and 9,200 shares of common stock as payment of interest
     accrued through September 1, 2000 on the Villars II convertible note in
     accordance with these loan agreements.

     In March of 2001, the Company issued options to three employees to purchase
     a total of 709,992 shares at $.10 per share. The Company also issued
     options to two ex employees to purchase a total of 14,992 shares at $.10
     per share. The options are exercisable at any time within three years from
     vesting. A total of 474,984 options vest immediately and the remaining
     250,000 options vest if and when the Company becomes in default under the
     loans to CDB Finance.


                                                                            F-20
<PAGE>   71
                    RED BELL BREWING COMPANY AND SUBSIDIARIES

                   Consolidated Notes to Financial Statements

                           December 31, 2000 and 1999


18.  Subsequent Events (continued)

     In March of 2001, the Company issued 50,000 and 3,000 shares of common
     stock to two independent contractors for consulting services. Additionally,
     the Company issued options to purchase 100,000 shares of common stock to
     one of these independent contractors at $5.00 per share, 50,000 of which
     vest immediately, 25,000 of which vest in three months and the remaining
     25,000 of which vest in six months. All options are exercisable for three
     years after vesting. The Company also issued a third independent contractor
     warrants to purchase 20,000 shares of common stock for consulting services.
     The warrants are priced at $6.875 per share for 5,000 shares, $8.25 per
     share for 7,500 shares and $11.00 per share for 7,500 shares. Additionally,
     the Company has agreed to issue warrants to purchase 5,000 shares of common
     stock during each of nine months beginning in March of 2001 at $5.00 per
     share. All of these warrants are exercisable for three years after
     issuance. Additionally, the Company issued warrants to purchase 30,000
     shares at $1.50 per share exercisable for two years, warrants to purchase
     10,000 shares at $.10 per share and 26,000 shares at $1.25 per share
     exercisable for one year, to an attorney for legal services, and the
     Company issued warrants to purchase 9,000 shares at $.10 per share, 7,500
     shares at $.75 per share and 23,500 shares at $1.50 per share, exercisable
     for three years to another attorney in exchange for legal services.
     Compensation expense of approximately $595,000 will be recognized in the
     first quarter of 2001, related to the issuance of these equity instruments.

     In March of 2001, the Company declared stock dividends of ten percent and
     five percent to all shareholders of record on March 9, 2001, provided that
     such holders retain their shares until after March 8, 2002 and March 8,
     2003, respectively. The dividends shall be paid on March 31, 2002 and March
     31, 2003.


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