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                                    UNITED STATES
                          SECURITIES AND EXCHANGE COMMISSION
                                WASHINGTON, D.C. 20549

                                     FORM 1O-KSB

[X] ANNUAL REPORT UNDER  SECTION 13 OR 15(d) OF THE
               SECURITIES EXCHANGE ACT OF 1934
               For the fiscal year ended December 31, 1996

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OF 15(d) OF THE
               SECURITIES EXCHANGE ACT OF 1934
               For the transition period from ________ to ________

                         Commission File Number : 33-81536-LA
                                  AVIATOR ALES, INC.
                    (Name of small business issuer in its charter)
                DELAWARE                                    91-1633491
      (State or other jurisdiction                       (I.R.S. Employer
    of incorporation or organization)                   Identification No.)
                                14316 NE 203RD STREET
                            WOODINVILLE, WASHINGTON  98072
                 (Address of principal executive offices and zip code)
                                    (206) 487-0717
                              (Issuer's telephone number)

        SECURITIES REGISTERED UNDER SECTION 12(b) OF THE EXCHANGE ACT:   NONE
            SECURITIES REGISTERED UNDER SECTION 12(g) OF THE EXCHANGE ACT:
                              COMMON STOCK, NO PAR VALUE
                                   (Title of Class)

Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the Registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days:
Yes [ X ]    No [   ]

Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of the Form 10-KSB or any
amendment to this Form 10-KSB.  [ X ]

Issuer's revenues for its most recent fiscal year were $1,905,511.

The aggregate market value of voting stock held by non-affiliates of the
registrant:  Not applicable

The number of shares outstanding of the Registrants Common Stock as of
February 28, 1997 was 5,331,775 shares.

The index to exhibits appears on page 21 of this document.

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

                         DOCUMENTS INCORPORATED BY REFERENCE
None.

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                              AVIATOR ALES, INC.
                              FORM 10-KSB  INDEX





                                    PART I
                                    ------

                                                                            Page
                                                                            ----

Item 1.       Description of Business                                         2

Item 2.       Description of Property                                         6

Item 3.       Legal Proceedings                                               7

Item 4.       Submission of Matters to a Vote of Security Holders             7

                                   PART II
                                   -------

Item 5.       Market for Common Equity and Related Stockholder Matters        7

Item 6.       Management's Discussion and Analysis or Plan of Operation       7

Item 7.       Financial Statements                                           13

Item 8.       Changes in and Disagreements with Accountants on Accounting
              and Financial Disclosure                                       13

                                   PART III
                                   --------

Item 9.       Directors, Executive Officers, Promoters and Control Persons;
              Compliance with Section 16(a) of the Exchange Act              14

Item 10.      Executive Compensation                                         16

Item 11.      Security Ownership of Certain Beneficial Owners and Management 17

Item 12.      Certain Relationships and Related Transactions                 18

Item 13.      Exhibits and Reports on Form 8-K                               21

              Signatures                                                     22

<PAGE>
                                    PART I

ITEM 1.  DESCRIPTION OF BUSINESS

GENERAL
Aviator Ales, Inc. (formerly Seattle Brewing Company) (the "Company" or "Aviator
Ales") was formed in February 1994 for the purpose of developing and operating
one or more breweries in Washington for the production of high quality,
hand-crafted ales for sale in bottles and draft.  The Company has built a
brewery (the "Brewery") in a leased industrial building in Woodinville,
Washington.  Woodinville is a city of approximately 6,000 people located
20 miles northeast of Seattle.  In recent years, Woodinville has developed a
cottage industry of local mircobrewers and vintners, including Silver Lake
Sparkling Cellars, Paul Thomas Winery, Columbia Winery, Chateau Ste. Michelle
Winery, Facelli Winery and Redhook Brewery.

The Company's parent, Willamette Valley, Inc. Microbreweries Across America
("WVI") currently holds the following ownership interests in the Company and
affiliated breweries: Aviator Ales -- 51%; Mile High Brewing Company, Inc.
("Mile High Brewing") -- 51%;  Bayhawk Ales, Inc. ("Bayhawk Ales") -- 57%; and
North Country Brewing Company, Inc. ("North Country") -- 100%.   The breweries
are, at times, referred to herein collectively, without North Country, as the
"Microbreweries".  See also "Management's Discussion and Analysis - Subsequent
Events."

STRATEGY
In January 1996, the Company and the Company's affiliates, WVI, Mile High
Brewing and Bayhawk Ales, established a strategic alliance (the "Alliance") with
Nor'Wester Brewing Company, Inc. ("Nor'Wester").  The Alliance is created
through a Strategic Alliance Agreement among the Alliance members, a General
Services Agreement between WVI and Nor'Wester and separate Cooperative Brewing
Agreements between Nor'Wester and each of Aviator Ales, Mile High Brewing and
Bayhawk Ales (the "Cooperative Brewers"). For a more complete description of the
agreements under the Alliance, see Item 12 "Certain Relationships and Related
Transactions."

The initial purpose of the Alliance was to develop a national market for the
Nor'Wester brand.  As Nor'Wester and some of its competitors attempted to
expand their brands nationally, Nor'Wester learned that a national marketing
strategy for the Nor'Wester brand is currently not cost effective.  Consumers
have shown strong support for craft beers brewed in or near their local markets
and the Company believes the appropriate strategy is to develop and protect
strong local craft beer brands.  The Company further believes that this strategy
can be strengthened through the Affiliated Companies' ability to build a network
of breweries each producing their own brand with local appeal while benefiting
from operating efficiencies, the decrease in production, marketing and
distribution costs and the increase in the ability of the Affiliated Companies
to finance growth and provide shareholders with a liquid market for their
shares.  Once these local brands are established, the Affiliated Companies may
expand the distribution of one or more of their beer styles into additional
selected markets.

To implement this new strategy, the Boards of Directors of the Affiliated
Companies have elected to consolidate their entities under a single entity,
United Craft Breweries, Inc. ("UCB").  Furthermore, on January 30, 1997 the
Affiliated Companies entered into a


                                       2
<PAGE>

definitive investment agreement with United Breweries of America, Inc.
("UBA") for the purpose of funding operations until the consolidation is
completed and provide for future growth thereafter.  For additional
information, see "Management's Discussion and Analysis - Subsequent Events."

Should the proposed consolidation occur, the Cooperative Brewing Agreements, the
Strategic Alliance Agreement and the General Services Agreement will terminate.

THE INDUSTRY
The craft brewing segment of the United States brewing industry is comprised of
regional craft brewers such as the Company (i.e. brewers that produces between
15,000 and 1,000,000 barrels a year), contract brewers (i.e. companies that
formulate and market products brewed by third-party mass-production brewers),
microbrewers (i.e. brewers that produce under 15,000 barrels of craft beer a
year) and brewpubs (i.e. a combination restaurant and brewery which produces
principally for on-site consumption).  Craft beers are full-flavored beers,
brewed in traditional European brewing styles with quality hops, malted barley,
yeast and water.

Beginning in California, Oregon and Washington and more recently in the New
England states, Colorado and other regions across the country, regional craft
brewers, contract brewers, microbrewers, and brewpubs emerged to form the craft
beer industry.  Certain craft brewers, such as the Company, have been able to
grow from microbrewers into regional craft brewers by increasing the size of
their breweries, while maintaining traditional European brewing methods.
Contract brewers, who generally do not have their own brewing facilities, have
taken advantage of demand by retaining industrial brewers to perform contract
brewing at otherwise underutilized industrial brewing facilities.  Industrial
brewers have also sought to appeal to this demand for craft beers by introducing
their own fuller-flavored specialty beers or by acquiring or forming
partnerships with existing craft brewers.

PRODUCTION AND PRODUCTS
The maximum annual production capacity and the current annual brewing capacity
of the Company is 125,000 barrels and 57,000 barrels, respectively.  The
Company's Seattle Brewery is designed to brew selected, high quality grains and
hops into ales and/or lager beers.  The particular beer styles produced by
Seattle Brewery are dependent on local taste, climate, ethnic influences and
lifestyles. Quality in the ingredients and the brewing process is the primary
guiding principle in the development and production of the Seattle Brewery's
products.  The Seattle Brewery is equipped with a superior and efficient
brewhouse that utilizes modern electronic temperature controls in the
fermentation and conditioning tanks, and employs a brewmaster experienced in
producing high quality microbrewed beer.

The Company currently sells the following products under the Aviator brand:
Amber Ale, India Pale Ale, Honey Brown Ale, Hefe Weizen, Porter and a variety of
seasonal ales.

RAW MATERIALS
Raw materials used by the microbrewery consist primarily of malted grains, hops,
brewers' yeast and water filtered through activated charcoal filters. The
microbrewery typically purchases all of its malted barley and wheat from a
single supplier, Great Western Malting


                                       3
<PAGE>

Co., although several comparable, alternative suppliers exist. The
microbrewery typically selects the variety and grower of its high-quality
Pacific Northwest hops, and purchases them through two major brokers.  The
Seattle Brewery currently cultivates its own yeast supply and multiple
competitive sources of supply for most packaging materials, such as bottles,
labels, six-pack carriers, crowns and shipping cases are available to the
Seattle Brewery.

DISTRIBUTION
The Company markets its products under the Aviator brand name using
locally-based style names developed specifically for the Seattle Brewery.  The
Company sells its draft beers directly to consumers visiting the Seattle Brewery
and through wholesale distribution to pubs, taverns, and restaurants.  Products
from the Seattle Brewery are also purchased by consumers in bottles at
supermarkets, warehouse clubs, convenience stores and liquor stores, depending
on state and local laws.  The products are delivered to these retail outlets
through a network of over 40 independent distributors.

The Seattle Brewery products are sold to distributors who serve multiple states,
including Washington, Oregon, Idaho, Alaska, California, Colorado and Montana.
Two distributors, K&L Distributing and Cabo Distributing, accounted for
approximately 29 percent and 12 percent, respectively, of the Seattle Brewery's
sales in 1996.  No other customer accounted for more than 10 percent of the
Seattle Brewery's sales in 1996.  The loss, without replacement, of either of
these distributors could have a material adverse effect on the Company's
business, financial condition and results of operation.

The Company's distributors also represent competing specialty beer brands, as
well as national beer brands, and are to varying degrees influenced by their
continued business relationships with other brewers.  The Company's independent
distributors may be influenced by a large brewer if they rely on that brewer for
a significant portion of their sales.  While the Company believes that its
relationships with its distributors are generally good, these relationships are
relatively new and untested and there can be no assurance that the Company's
distributors will continue to effectively market and distribute the Company's
beer.

Each of the Company's distribution agreements covers a specific geographic area,
and appoints the distributor as the exclusive distributor in that geographic
area, subject in certain cases to the Company's rights to engage in certain
limited retailing activities.  The distribution agreements provide that payment
shall be made in full not more than 30 days after the date of delivery.  The
distribution agreements also provide for general cooperation among the
distributors and the Company in marketing, merchandising and promotional
efforts.  Each distribution agreement may be terminated by either party 60 days
after written notice of dissatisfaction with performance specifying the grounds
for such dissatisfaction if the specified deficiencies have not been cured by
the end of the 60-day period.

Craft beers generally sell at a price premium relative to domestic industrial
beers, with retail prices for craft beers typically ranging from $4.99 to $7.99
per six pack of 12 ounce bottles versus approximately $2.99 to $3.99 for
industrial beers.  This price premium provides generally higher profit margins
for the distributors and retailers that offer craft beers.  The Company believes
that distributors and retailers are eager to increase their sales of higher


                                       4
<PAGE>

margin craft beers as industrial brewers continue to wage price wars to gain
market share in this flat growth segment thereby decreasing distributor's
margins.

To further promote retail product sales, the Company periodically offers
"post-offs," or price discounts to its distributors.  Distributors and retailers
often participate in these price discounts.

COMPETITION
The craft beer segment is highly fragmented and competitive, especially in the
Pacific Northwest, which the Company believes is one of the most developed craft
beer markets in terms of number of breweries and consumer awareness.  The
Company competes primarily with other craft brewers, contract
brewers, producers of imported beers and mass-market industrial brewers.  The
principal means of competition in the craft beer segment are product quality,
taste, consistency and freshness, brand and product differentiation,
distribution methods and area coverage, promotional methods, packaging,
development of new products and, to a lesser extent, pricing.

The craft beer industry has become saturated with numerous brands each comprised
of several beer styles.  As a result, growth rates are slowing, especially in
the Pacific Northwest where there are many brands vying for available shelf
space and taps.  The industry is also facing a loss of shelf space, and
therefore sales, to the industrial brewers, who have created fuller-flavor
specialty beers and are threatening to withdraw their business from distributors
who also distribute brewery brands.

The Company expects competition among craft brewers to continue to increase,
possibly resulting in decreases in market share, growth rates and product
prices.

Many of the Company's competitors in the craft beer segment, including Pyramid
Breweries, Redhook Ale Brewery, Widmer Brewing, Full Sail Brewing and Boston
Beer Company, have greater financial and other resources than the Company.

RESEARCH AND DEVELOPMENT
To meet varying consumer style and flavor preferences, the Company continually
engages in the development and testing of new products.  The Company pilot brews
small batches of new products for sampling at the Seattle Brewery, as well as in
community tastings.  The Company also performs numerous tastings and surveys
with its distributors and consumers on beer styles and brand imagery.

REGULATION AND DRAM SHOP LIABILITY
The Company's business is highly regulated at federal, state and local levels.
Various permits, licenses and approvals necessary to the Company's brewery
operations and the sale of alcoholic beverages are required from various
agencies, including the U.S. Treasury Department, Bureau of Alcohol, Tobacco and
Firearms (the "BATF"); the United States Department of Agriculture; the United
States Food and Drug Administration; state alcohol regulatory agencies in the
states in which the Company sells its products; and state and local health,
sanitation, safety, fire and environmental agencies.  In addition, the beer
industry is subject to substantial federal and state excise taxes.


                                       5
<PAGE>

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

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.  The Company has
addressed this concern by establishing early closing hours and employee training
and designated-driver programs.  In addition, the Company has obtained host
liquor and legal liquor liability insurance coverage and intends to continue
such coverage if it remains available at a reasonable cost.  Future increases in
premiums could make it prohibitive for the Company to maintain adequate
insurance coverage.  Any large uninsured damage awards against the Company could
have a material adverse affect on the Company's business and financial
condition.

TRADEMARKS
Aviator is a registered trademark of the Company.  The Company has also filed
for federal trademark protection for certain of its flavor styles.  The
Company's policy is to preserve registration of its marks whenever possible and
to oppose vigorously an infringement of its marks.

EMPLOYEES
At December 31, 1996, the Company had a total of 10 full time employees.  None
of the Company's employees are covered by collective bargaining agreements,
there have been no work stoppages and the Company believes that relations with
its employees are adequate.

ITEM 2.  DESCRIPTION OF PROPERTY

In October 1995, the Company opened the Seattle Brewery in a leased industrial
building in Woodinville, Washington.  The Company has executed a 20-year lease
for the Brewery that runs until August 1, 2015, with the right to renew the
lease for two additional terms of ten years each.  The leased facility comprises
approximately 19,000 square feet and the Company also has an option on
additional adjacent space of approximately 10,000 square feet that is
exercisable between years 2 and 5 of the current lease.  The Company has
constructed the Brewery with sufficient leasehold improvements to enable it to
grow to a maximum annual brewing capacity of 125,000 barrels (current brewing
capacity is 57,000 barrels).  To reach maximum capacity, additional brewing
equipment, fermentation and conditioning tanks must be purchased and installed,
and an option to lease additional space adjacent to the Brewery must be
exercised.  The Company also has purchased a high-speed Krones bottling line and
labeler.

In addition to its principal facility, the Company has purchased a 1.3 acre
parcel in the Woodinville Tourist District on which it planned to build a
specialty draft-only brewhouse


                                       6
<PAGE>

and pub/restaurant.   However, the Company does not expect to develop this
site in the foreseeable future.

Under its Cooperative Brewing Agreement with Nor'Wester, Nor'Wester has provided
at its expense, additional equipment at the Brewery, including fermenting and
conditioning tanks, a yeast propagator and a Hop Jack, which was dedicated to
the production of Nor'Wester products.  The addition of this Nor'Wester-owned
equipment gives the Company the capacity to produce up to 23,000 barrels of
Nor'Wester beer annually.  However, no beer is currently being brewed under the
Cooperative Brewing Agreement.

ITEM 3. LEGAL PROCEEDINGS

There are no material pending legal proceedings to which the Company was a
party.  From time to time, the Company becomes involved in ordinary, routine or
regulatory legal proceedings incidental to the business of the Company.

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

No matters were submitted to a vote of the Company's shareholders during the
quarter ended December 31, 1996.


                                    PART II
                                    -------


ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

There is no public trading market for the Company's Common Stock.  The
approximate number of shareholders of record on December 31, 1996  was 3,494.
There were no cash dividends declared or paid in fiscal years 1996 or 1995. The
Company does not anticipate declaring such dividends in the foreseeable future.

The Company issued a total of 1,500 unregistered shares of its Common Stock at
various times throughout 1996 to its distributors.

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

FORWARD-LOOKING STATEMENTS
This Management's Discussion and Analysis of Financial Condition and Results of
Operation and other sections of this Form 10-KSB contain forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995.  These forward-looking statements involve risks and uncertainties that are
based on current expectations, estimates and projections about the Company's
business, management's beliefs and assumptions made by management.  Words such
as "expects," "anticipates," "intends," "plans," "believes," "seeks,"
"estimates" and variations of such words and similar expressions are intended to
identify such forward-looking statements.  Therefore, actual outcomes and
results may differ materially from what is expressed or forecasted in such
forward-looking statements due to numerous factors, including, but not limited
to, availability of financing for operations and payment of past due creditors,
successful


                                       7
<PAGE>

performance of internal operations, impact of competition, changes in
distributor relationship or performance, successful completion of the planned
consolidation of the Affiliated Companies, and other risks detailed below as
well as those discussed elsewhere in this Form 10-KSB and from time to time
in the Company's Securities and Exchange Commission filings and reports,
including but not limited to the Company's Prospectus dated June 18, 1996.
Copies of the Prospectus are available from the Company.  In addition, such
statements could be affected by general industry and market conditions and
growth rates, and general domestic economic conditions.

RESULTS OF OPERATIONS
The following table reflects selected data from the Company's statements of
operations stated as a percentage of net sales:

                                                 YEAR ENDED DECEMBER 31,
                                               ---------------------------
                                                   1996           1995
                                               ------------   ------------
 Gross sales                                         104.5 %        102.7 %
 Less excise taxes                                     4.5            2.7
                                               ------------   ------------
 Net sales                                           100.0          100.0
 Cost of goods sold                                  103.0           90.7
 Selling, general and administrative expenses         46.7          269.6
                                               ------------   ------------
 Operating loss                                      (49.7)        (260.3)
                                               ------------   ------------
 Loss before income taxes                            (63.5)        (216.9)
                                               ------------   ------------
 Net loss                                            (63.5) %      (216.9) %
                                               ------------   ------------
                                               ------------   ------------

GROSS SALES.  The Company began brewing beer in August 1995, with gross revenues
from beer and retail products totaling $1,905,511 for the year ended
December 31, 1996 and $186,818 for the year ended December 31, 1995.  The
increase is primarily attributable to the fact that the Company did not start
brewing and selling beer until late in the third quarter of 1995 and the sale of
$543,799 (29 percent of gross sales) of cooperatively brewed beer under the
Cooperative Brewing Agreement.  During 1996, the Company continued to build its
distribution channels, develop a contingency of loyal customers and promote
enhanced awareness of its line of ales.   The Company is not currently brewing
beer for Nor'Wester under the Cooperative Brewing Agreement.

The Company's facility has a current annual production capacity of 57,000
barrels and sold 9,742 barrels and 574 barrels during 1996 and 1995,
respectively.

EXCISE TAXES.  Excise taxes increased to $81,434 (4.2 percent of gross sales)
for the year ended December 31, 1996 from $4,852 (2.6 percent of gross sales)
for the year ended December 31, 1995.  The increase as a percent of gross sales
is a result of the mix of products sold shifting more to beer and away from
other retail products in 1996, offset in part by the Cooperative Brewing
Agreement with Nor'Wester and a brewing arrangement with Bayhawk Ales, where the
Company was reimbursed for excise taxes paid that were applicable to the
cooperatively brewed beer.

COST OF GOODS SOLD.  Cost of goods sold totaled $1,879,062 (103 percent of net
sales) for the year ended December 31, 1996 compared to $165,006 (91 percent of
net sales) for the year ended December 31, 1995  The cost of goods sold
percentage continues to reflect the disproportionate cost of production for
goods sold during a period when the facility was operating at less than its
maximum designed capacity.  In addition, lower margins were


                                       8
<PAGE>

achieved on products produced and sold under the Cooperative Brewing
Agreement than on the Company's own products and the Company wrote off
approximately $80,000 of spoiled beer and obsolete packaging materials during
1996.

SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
("SG&A") expenses increased to $851,352 (47 percent of net sales) for the year
ended December 31, 1996 from $490,646 (270 percent of net sales) for the year
ended December 31, 1995.  SG&A expenses reflect operating management and
administrative services provided by the Company's parent, WVI, as well as direct
charges such as selling and administrative salaries and advertising expenses.
The increase in SG&A expenses is primarily attributable to a full year of
operations in 1996 as well as increased shipping costs as the Company introduced
its products into surrounding states, offset in part by higher costs incurred
during the first months of the Company's operations in late 1995.  SG&A, as a
percentage of net sales, has decreased primarily as a result of having a full
year of operations in 1996. The Company has restructured sales related
compensation, implemented expense controls and reduced staff in an effort to
reduce SG&A expenses while still increasing sales.

OTHER.  Other expense, net of $249,871 represents the write off of legal and
accounting fees related to the Company's second public stock offering.

NET LOSS.  Net loss increased to $1,157,706 for the year ended December 31, 1996
from $394,640 for the year ended December 31, 1995 as a result of the individual
line items discussed above.

LIQUIDITY AND CAPITAL RESOURCES
In June 1996, the Company embarked upon its second direct public stock offering
to sell up to 820,000 shares of Common Stock at $1.85 per share, generating
estimated net proceeds of approximately $1,289,450.  The offering has failed to
raise the minimum escrow amount of $650,000.  Furthermore, terms of the
Investment Agreement with UBA prohibit the Company from selling any of its
securities without the approval of UBA.  Although the Company has not yet
terminated the offering, it is not actively soliciting investors.

Cash and cash equivalents decreased $207,183 to $19,218 at December 31, 1996
from $226,401 at December 31, 1995.   The decrease is primarily a result of
$596,480 used in operations and $229,965 used for the purchase of property and
equipment, offset by $602,901 in proceeds from borrowings and advances from WVI
and affiliated companies.

Working capital deficit was $1,145,814 at December 31, 1996 compared to working
capital of $317,481 at December 31, 1995.  The current ratio decreased to .26:1
at December 31, 1996 from 2.2:1 at December 31, 1995.

Inventories increased $81,905 to $326,178 at December 31, 1996 from $244,273 at
December 31, 1995 primarily as a result of an increase in raw materials
inventory in preparation for higher production and sales in the first half of
1997.

Accounts payable increased $405,258 to $607,570 at December 31, 1996 from
$202,312 at December 31, 1995.  At December 31, 1996 and currently, the Company
was past due on $343,394 and $579,491, respectively, of its accounts payable.


                                       9
<PAGE>

In the first quarter of 1996, WVI, the Company's parent corporation, loaned the
Company $240,000 to fund its working capital needs.  Because of the anticipated
ownership change discussed in "Subsequent Events" below, management does not
expect to repay this loan.  Instead, the loan will be considered in determining
the purchase price and stock conversion ratios being used in the transaction.
As such, the entire balance is considered to be payable currently.

The Company believes that current working capital together with projected income
form operations are not sufficient to meet the Company's cash needs over the
next 12 months.

SUBSEQUENT EVENTS
On January 30, 1997, the Company, WVI, Nor'Wester, Mile High Brewing and Bayhawk
Ales (together the "Affiliated Companies"), entered into a definitive Investment
Agreement (the "Investment Agreement") with United Breweries of America, Inc.
("UBA").  Under the terms of the Investment Agreement, UBA has agreed to invest
$8.63 million in the form of bridge loans and cash at closing in exchange for a
45% equity interest in the consolidated businesses of the Affiliated Companies.
UBA, an affiliate of The UB Group of Bangalore, India, was formed for the
purpose of investing in the U.S. craft beer industry. The UB Group is a
diversified multi-national corporation whose major operations consist of the
production and sale of beer and spirits through affiliated companies which
operate in 20 countries on four continents.

Under the terms of the Investment Agreement, the Affiliated Companies have each
agreed to consolidate under the ownership of a new entity, United Craft Brewers,
Inc. ("UCB").  UCB will serve as a holding company for companies which operate
each of the five affiliated breweries--the Portland Brewery, the Saratoga
Springs Brewery, the Seattle Brewery, the Denver Brewery and the Southern
California Brewery.  The proposed consolidation is a condition to receipt of
UBA's investment which will be made directly in UCB.

CONSOLIDATION.  Under the proposed consolidation each of the Affiliated
Companies will become a wholly-owned subsidiary of UCB pursuant to a merger and
share exchange by which newly registered shares of UCB will be issued in
exchange for outstanding shares of the Affiliated Companies based on the share
exchange rates described below.  The merger and share exchange has been
unanimously approved by the Boards of Directors of each of the Affiliated
Companies but remains subject to approval by shareholders of each Affiliated
Company.  Following completion of the consolidation, shareholders of each
Affiliated Company will hold shares in UCB, which is intended to be listed for
trading on the Nasdaq National Market System under the symbol "ALES".  The
consolidation is primarily an administrative step designed to simplify the
ownership structure of the Affiliated Companies, increase the operating
efficiencies of each brewery, decrease the production, marketing and
distribution costs of each brewery, increase the ability of the combined
breweries to finance operations and possible growth and provide all shareholders
with a liquid market for their shares.


                                      10
<PAGE>

The outstanding shares of each of the Affiliated Companies will be exchanged for
shares in UCB according to the following exchange ratios which are based on the
average closing price of Nor'Wester's Common Stock for the 20 trading days
immediately preceding January 30, 1997, the date of execution of the Investment
Agreement:

 COMPANY                EXCHANGE RATIO
---------------------  ----------------
 Nor'Wester                   1:1
 WVI                       1.99159:1
 Aviator Ales              2.98739:1
 Bayhawk Ales              1.99159:1
 Mile High Brewing         2.98739:1

BRIDGE LOANS.  Under the Investment Agreement, UBA is obligated to provide
Nor'Wester with up to $2.75 million in bridge loans as interim financing during
the consolidation phase.  Advances under the bridge loan are expected to be used
by Nor'Wester to help cover operating expenses and pay existing creditors of the
Affiliated Companies until closing of the investment, at which time the balance
of UBA's $8.6 million investment is expected to be made.  Of the $2.75 million,
$1.5 million has already been advanced and spent as of the date of this report.
All bridge loans are made pursuant to a Credit Agreement between Nor'Wester and
UBA, the principal terms of which are as follows:

     (1)  The bridge loans will be made at times and in amounts mutually
     determined by UBA and Nor'Wester based on a periodic review of the cash
     flow needs and creditor demands of the Affiliated Companies;

     (2)  Interest on the bridge loan accrues at 11.25% per annum and is payable
     to UBA in cash at closing of UBA's investment.

     (3)  All principal and interest is secured by the assets of North Country
     Joint Venture, LLC (owner and operator of the Saratoga Springs Brewery) and
     by Nor'Wester's ownership interest in the joint venture LLC.  Repayment of
     all principal and interest is guaranteed personally by Jim Bernau.

     (4)  As a condition to each advance under the bridge loan, neither Jim
     Bernau nor any of the Affiliated Companies shall be in breach of any
     representation, warranty or covenant under the credit documents or the
     Investment Agreement and there shall not be any "material adverse effect"
     in the businesses of the Affiliated Companies as a whole.

     (5)  Unless converted at closing, all advances under the bridge loan mature
     60 days after termination of the Investment Agreement or the occurrence of
     certain events of default under the credit documents (including the breach
     by an Affiliated Company or Mr. Bernau of any representation, warranty or
     covenant under the Investment Agreement), except that the bridge loan
     becomes due immediately if a "material adverse effect" occurs in the
     businesses of the Affiliated Companies as a whole or there is a breach by
     any Affiliated Company or Mr. Bernau of any representation, warranty or
     covenant under the credit documents.


                                      11
<PAGE>

INVESTMENT.  Following completion of the consolidation and assuming all closing
conditions have been met as required under the Investment Agreement, UBA will
invest an additional $5.88 million in cash combined with the anticipated
conversion of the $2.75 million bridge loan in exchange for a 45 percent equity
interest in UCB.

Closing of the proposed investment remains subject to (i) approval by the
shareholders of each of the Affiliated Companies, (ii) achievement of certain
aggregate operating results by the breweries, (iii) maintenance of certain
operating conditions and covenants, including that there shall be no "material
adverse change" in the businesses of the Affiliated Companies taken as a whole,
(iv) approval by the U.S. Bureau of Alcohol, Tobacco and Fire Arms and
applicable state liquor control commissions, (v) registration with the U.S.
Securities and Exchange Commission of the UCB shares to be exchanged in the
consolidation; (vi) extension of Nor'Wester's $1.0 million line of credit
through September 30, 1997, the bank shall have waived any defaults under the
line of credit agreement and the line of credit shall have been converted to a
term loan and (vii) such other customary conditions for transactions of this
type.

As a further condition to UBA's investment, Jim Bernau has agreed to transfer to
UBA 1,124,195 of the UCB shares he receives in the consolidation (or
approximately 46% of his total UCB shares at consolidation).  This transfer, for
which Mr. Bernau will receive no cash consideration, is being done principally
to provide UBA with the necessary equity interest in UCB (45%) to cause UBA to
make the investment.

Following completion of the consolidation and closing of UBA's investment, the
approximate ownership interests in UCB will be as follows: (i) UBA -- 45.0%,
(ii) Jim Bernau -- 10%, and (iii) the public shareholders of each Affiliated
Company will own the following interests:  Nor'Wester--21.6%, WVI--7.1%, Aviator
Ales--6.7%, Mile High Brewing--5.9%, and Bayhawk Ales--3.7%.  The initial Board
of Directors of UCB will be composed of 7 members consisting of (i) one person
appointed by Jim Bernau, (ii) four persons appointed by UBA (one of whom shall
be Vijay Mallya, Chairman of The UB Group, who shall be chairman) and (iii) two
outside Directors who shall be mutually satisfactory to Jim Bernau and UBA.  The
initial Board will serve until the next regular meeting of shareholders.  At
that time, UBA, with its 45% interest, will be in a position to effectively
elect all members of the Board of Directors and thereby control UCB and in turn
its subsidiary breweries.

Subject to completion or waiver of all closing conditions, closing of UBA's
investment will occur as soon as practicable following approval of the
consolidation by the shareholders of each of the Affiliated Companies which is
currently expected to occur in or about July 1997.  In the event that the
investment is not closed by August 31, 1997, either party may terminate the
transaction and repayment of any outstanding bridge loan is due 60 days
thereafter.

While the Company is dependent upon the receipt of further loans under the
credit facility and closing of the UBA investment, the Company does not control
the business or operations of the other Affiliated Companies and can not assure
that it or another Affiliated Company will not violate one or more covenants in
the Investment Agreement or that a closing condition will not be met.
Accordingly, there can be no assurance that the


                                      12
<PAGE>

Company will receive further bridge loan amounts or that the investment will
ultimately close or will close on the terms set forth in the Investment
Agreement.

RENEGOTIATION OF THE TERMS OF THE UBA INVESTMENT.  In light of lower than
anticipated 1996 results, lower than anticipated first quarter 1997 sales and
other operating results and adverse conditions within the craft beer industry in
general, representatives of UBA and management and the investment bankers of the
Affiliated Companies are in the process of renegotiating the terms of the UBA
investment.  The renegotiation will reflect a significantly lower valuation for
the Affiliated Companies, a reduction in the amount of cash to be invested by
UBA to $5.5 million and a reduction of UBA's percentage ownership position in
UCB to 40% following the consolidation.  It is not anticipated that the $2.75
million bridge loan amount will be reduced.  The existing shareholders in the
Affiliated Companies would retain a 60% interest in UCB.  The exact distribution
of ownership interests among shareholders of the Affiliated Companies has not
yet been determined.  Management will soon seek Board approval by each of the
Affiliated Companies of any renegotiated terms.  Failure of the parties to reach
a mutually agreeable renegotiated Investment Agreement could lead to a loss of
the bridge loans and the remainder of the UBA investment which would materially
and adversely affect the Company's financial condition and results of
operations.

If for any reason, the Company is unable to pay past due creditors and finance
working capital requirements through an investment by UBA, alternative methods
of financing would have to be obtained.  No assurance can be given that
alternative methods of financing would be obtained.  No assurance can be given
that alternative methods of financing would be available on terms acceptable to
the Company, or at all.  Having to develop alternative means of financing would
likely slow development of the existing breweries and such alternative financing
may be costly.  The inability of the Company to obtain additional capital would
adversely affect the Company's business and results of operations.

ITEM 7.  FINANCIAL STATEMENTS

The information required by this item begins on page F-1 of this report.

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

None.

                                      13
<PAGE>

                                   PART III

ITEM 9.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

DIRECTORS
The names and ages of the Company's Directors are as follows:

 NAME                  AGE   POSITION(S) WITH COMPANY             DIRECTOR SINCE
--------------------------------------------------------------------------------
 James W. Bernau        43   Chairman of the Board, President           1994
                             and Secretary
 Dustin Wyant           27   Director, Vice President and               1996
                             General Manager
 Jim Gregory            47   Director                                   1995
 Howard Lovering        59   Director                                   1995
 David McCray           40   Director                                   1995
 Bonnie Pladson         55   Director                                   1995

Mr. Bernau has been the Sole Director, President and Secretary since the
Company's inception in February 1994.  Mr. Bernau is also the President and
Chairperson of the Board of Directors of five other public companies and has
held these positions since the dates indicated: WVV since May 1988, Nor'Wester
since December 1992, WVI, the Company's parent, since December 1993 and two
other majority owned subsidiaries of WVI, Bayhawk Ales since February 1994 and
Mile High Brewing Company since June 1994. Mr. Bernau also serves as one of the
three Managers of the North Country Joint Venture LLC, a wholly owned subsidiary
of Nor'Wester. Mr. Bernau began this alliance of consumer/investor owned
companies by first co-founding WVV in 1988 with Donald Voorhies.  From 1981 to
September 1989, Mr. Bernau was Director of the Oregon Chapter of the National
Federation of Independent Businesses (NFIB), an association of 15,000
independent businesses in Oregon.  While at NFIB, his responsibilities primarily
involved communicating with association members and lobbying the Oregon state
legislature regarding issues impacting the members.

Mr. Wyant has served as Director since 1996 and as Vice President and General
Manager since 1995.  From January 1994 to January 1995, Mr. Wyant served as
Retail Manager for Nor'Wester and WVV.  During 1993, Mr. Wyant was an
independent sales representative for WVV.  From 1990 to 1992, Mr. Wyant was
obtaining his commerce degree at the University of Virginia and Bath University
in England.

Mr. Gregory has served as a Director of the Company since June 1995.  Since
December 1995, Mr. Gregory has served as a manager of Contra Costa Newspapers,
Inc., a group of San Francisco Bay Area newspapers owned by Knight-Ridder
Corporation.  From January 1994 to December 1995, Mr. Gregory was senior partner
of JG Associates, a business he established to provide marketing and management
consulting services.  From 1982 to January 1994, Mr. Gregory was Director of
Marketing and Circulation for THE HERALD, a daily circulation newspaper in
Everett, Washington.


                                      14
<PAGE>

Mr. Lovering has served as a Director of the Company since June 1995.  Since
January 1992, Mr. Lovering has been the owner and president of LOGIC
Incorporated, a museum and visitor attraction consulting company.  From 1977 to
1991, Mr. Lovering was the Executive Director of the Museum of Flight Foundation
in Seattle, Washington.

Mr. McCray has served as a Director of the Company since June 1995.  From 1984
through January 1996, Mr. McCray was vice president and Chief Financial Officer
of Larry's Markets, Inc., a Seattle based supermarket chain.  Currently,
Mr. McCray is a Director of Finance and Management Information Systems for West
Coast Paper Corporation.  Mr. McCray is a certified public accountant and a
certified management accountant.

Ms. Pladson has served as a Director of the Company since June 1995.  Since
August 1995, Ms. Pladson, a lawyer, has been a Senior Trust Officer with Safeco
Trust Company in Seattle, Washington.  Prior to joining Safeco, Ms. Pladson
spent six years as a Vice President with Laird, Norton Trust Company.  Ms.
Pladson is an active Board Member of the Bellevue Community college Foundation,
Chairperson of the Bellevue Arts Commission and a member of the Washington State
Bar Association.

EXECUTIVE OFFICERS AND SIGNIFICANT EMPLOYEES
The names, ages and positions of the Company's executive officers are as
follows:

 NAME                  AGE   POSITION(S) WITH COMPANY                     SINCE
--------------------------------------------------------------------------------
 James W. Bernau        43   Chairperson of the Board, President           1994
                             and Secretary
 Dustin Wyant           27   Director, Vice President and General Manager  1995
 Brendan Smith          38   Lead Brewer                                   1995

For information on the business background of Messrs. Bernau and Wyant see
"Directors" above.

Mr. Smith has served as Lead Brewer for the Company since 1995.  From 1994 to
1995, Mr. Smith was assistant brewmaster at Nor'Wester.  From 1992 to 1994, Mr.
Smith served as a brewer for Portland Brewing Company, and from 1986 to 1992, he
served as a brewer for Yakima Brewing and Malting Company.

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 (the "Exchange Act")
requires the Company's executive officers and Directors, and persons who own
more than ten percent of a registered class of the Company's equity securities
to file reports of ownership and changes in ownership with the Securities and
Exchange Commission ("SEC") and the National Association of Securities Dealers,
Inc. Executive officers, Directors and greater than ten percent stockholders are
required by SEC regulation to furnish the Company with copies of all
Section 16(a) forms they file. Based solely on its review of the copies of such
forms received by it, or written representations from certain reporting persons,
the Company believes that, for the fiscal year ended December 31, 1996, all
executive officers, Directors and greater than 10% shareholders complied with
all applicable filing requirements.


                                      15
<PAGE>

ITEM 10.  EXECUTIVE COMPENSATION

SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION
The following table provides certain summary information concerning compensation
awarded to, earned by or paid to the Company's Chief Executive Officer and other
executive officers of the Company whose total annual salary and bonus exceeded
$100,000 (collectively, the "named executive officers") for fiscal years 1996,
1995 and 1994.
                          SUMMARY COMPENSATION TABLE

                                                          Annual Compensation
                                                       -------------------------
 Name and Principal
 Position (A)              Year    Employer             Salary($)      Bonus($)
-----------------------   ------  -----------------    -----------    ----------
 James W. Bernau (B)       1996    Aviator Ales, Inc.     4,305            --
   Chairperson of the      1996    All affiliated        81,788
   Board, President                and companies
   Secretary                       except Aviator
                                   Ales, Inc.

                           1995    Aviator Ales, Inc.     2,640            --
                           1995    All affiliated        93,360        10,882
                                   companies except
                                   Aviator Ales, Inc.

(A) Other than Mr. Bernau, no other individuals earned more than $100,000 in
    1996, 1995 or 1994.
(B) Mr. Bernau serves as the President of the Company, WVV, WVI, Nor'Wester,
    Bayhawk Ales, Mile High Brewing and North Country.  Each of these companies
    pays a pro rata portion of Mr. Bernau's monthly salary based on the amount
    of time which Mr. Bernau has devoted to the respective company's business
    in that month.

STOCK OPTION GRANTS
No stock options were granted to Mr. Bernau during 1996.

OPTION EXERCISES AND HOLDINGS
No options were exercised by Mr. Bernau during 1996 and no options are held by
Mr. Bernau at December 31, 1996.

COMPENSATION OF DIRECTORS OF THE COMPANY
Directors of the Company are not compensated for acting in such capacity.


                                      16
<PAGE>

ITEM 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth certain information regarding the beneficial
ownership of Common Stock of the Company as of February 28, 1997 as to (i) each
person who is known by the Company to own beneficially 5% or more of the
outstanding shares of Common Stock, (ii) each Director of the Company,
(iii) each of the executive officers named in the Summary Compensation Table
above and (iv) all Directors and executive officers as a group. Except as
otherwise noted, the Company believes the persons listed below have sole
investment and voting power with respect to the Common Stock owned by them.

<TABLE>
<CAPTION>
                                                                 COMMON STOCK
-----------------------------------------------    ----------------------------------------
                                                          SHARES            APPROXIMATE
                                                       BENEFICIALLY          PERCENTAGE
               NAME AND ADDRESS                          OWNED (1)             OWNED
-----------------------------------------------    ----------------------------------------
<S>                                                <C>                      <C>
 Willamette Valley, Inc. Microbreweries Across          2,715,584              50.9%
 America
 66 SE Morrison Street
 Portland, Oregon  97214

 James W. Bernau (2)                                    2,715,584              50.9%
 66 SE Morrison Street
 Portland, Oregon  97214

 Dustin Wyant (3)                                          20,000                  *
 14316 NE 203rd Street
 Woodinville, Washington  98072

 James G. Gregory                                           3,000                  *
 18944 Mount Lassen Drive
 Castro Valley, California  94552

 David M. McCray                                            1,000                  *
 6815 Ripley Lane
 North Renton, Washington  98056

 Bonnie A. Pladson                                            450                  *
 15429 SE 47th Place
 Bellevue, Washington  98006

 Howard Lovering                                               --                 --
 4615 NE 54th Street
 Seattle, Washington  98105

 All Directors and executive officers as a
 group (5 persons) (3)                                  2,740,034              51.2%

</TABLE>
--------------
Less than 1%


                                      17
<PAGE>

(1) Applicable percentage of ownership is based on 5,331,775 shares of Common
    Stock outstanding as of February 28, 1997 together with applicable options
    for such shareholders.  Beneficial ownership is determined in accordance
    with the rules of the Securities and Exchange Commission, and includes
    voting and investment power with respect to such shares.  Shares of Common
    Stock subject to options or warrants currently exercisable or exercisable
    within 60 days after February 28, 1997 are deemed outstanding for computing
    the percentage ownership of the person holding such options or warrants, but
    are not deemed outstanding for computing the percentage of any other person.
(2) Mr. Bernau is deemed to be the beneficial owner of all of the 2,715,584
    shares of the Company's Common Stock owned by WVI as a result of his
    ownership of approximately 62 percent of the outstanding Common Stock of
    WVI.  Mr. Bernau does not own any shares of the Company's Common Stock
    directly.
(3) Includes 20,000 shares subject to options granted pursuant to the Company's
    1994 Stock Incentive Plan and exercisable within 60 days of February 28,
    1997.

ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

GENERAL
Each of Nor'Wester, WVI, Bayhawk Ales and Mile High is affiliated with the
Company in that James W. Bernau, the Company's founder, President and
Chairperson of the Board of Directors, is also President and Chairperson of the
Board of Directors of each such affiliated company.  Mr. Bernau is also a
significant equity owner of each affiliated company either directly, as in the
case of  Nor'Wester, in which Mr. Bernau owns approximately 25% of the
outstanding capital stock, or indirectly through his controlling interest in WVI
(62%), which in turn owns a controlling interest in each of Aviator Ales (51%),
Bayhawk Ales (57%) and Mile High Brewing (51%). As a result of certain
arrangements between the Company and its affiliates, as well as Mr. Bernau's
positions and/or ownership interests in each of these companies, inherent
conflicts of interest exist with respect to the pricing of services, the sharing
of resources and the allocation of the Company's president's time.

TRANSACTIONS WITH WVI
In the first quarter of 1996, WVI, the Company's parent corporation, loaned the
Company $240,000 to fund its working capital needs.  Because of the anticipated
ownership change discussed in "Management's Discussion and Analysis - Subsequent
Events," management does not expect to repay this loan.  Instead, the loan will
be considered in determining the purchase price and stock conversion ratios
being used in the transaction.  As such, the entire balance is considered to be
payable currently.

On March 4, 1996, WVI, by resolution of its Board of Directors, elected to
reduce its ownership percentage in the Company, from approximately 65 percent to
approximately 51 percent, by returning 2,129,951 shares of the Company's Common
Stock as an additional capital contribution to the Company.

LOANS FROM NOR'WESTER
In 1995 and 1996, Nor'Wester loaned or advanced funds to the Company for
purchases of capital assets and for working capital needs.  Nor'Wester also paid
certain bills on behalf of the Company and provided the Company with services
under the General Services Agreement.  As a result, at December 31, 1996, the
Company owed Nor'Wester $570,090.  This amount is unsecured, does not bear
interest, is payable on


                                      18
<PAGE>

Nor'Wester's demand and is reflected in "payables to affiliated company" on the
Company's balance sheet.

STRATEGIC ALLIANCE
In January 1996, the Company established a strategic alliance with WVI, Mile
High Brewing, Bayhawk Ales and Nor'Wester (the "Alliance").  The Alliance is
created through a Strategic Alliance Agreement among the Alliance members, a
General Services Agreement between WVI and Nor'Wester and separate Cooperative
Brewing Agreements between Nor'Wester and each of Aviator Ales, Mile High
Brewing and Bayhawk Ales (the "Cooperative Brewers").

The terms of the Strategic Alliance Agreement, the Cooperative Brewing
Agreements and the General Services Agreement are four years, unless earlier
terminated under limited circumstances.  However, due to the fact that
Nor'Wester's Portland Brewery is not currently operating at capacity as well as
the fact that Nor'Wester has changed its strategy and is not currently
attempting to develop other regional markets for its products, the Cooperative
Brewing Agreement is not being utilized.  Certain other aspects of the Strategic
Alliance Agreement are also not being utilized due to industry and individual
company circumstances that have changed since the Strategic Alliance Agreement
was put in place.

In addition, should the consolidation occur as described under "Subsequent
Events", all such agreements will terminate.

Details of the agreements are as follows (although, as indicated, many of the
terms are no longer applicable):

STRATEGIC ALLIANCE AGREEMENT.  Under the terms of the Strategic Alliance
Agreement, each Alliance member has agreed to (i) support the expansion of the
Nor'Wester's products into the Alliance member's market by cooperatively brewing
Nor'Wester's beer and facilitating Nor'Wester's access to local distributors;
(ii) employ at least one Nor'Wester trained brewer at all times during the term
of the Agreement; and (iii) use the services, expertise and personnel available
within the Alliance before obtaining such resources from outside sources.  The
Strategic Alliance Agreement does not preclude an Alliance member from promoting
its products in markets served by other Alliance members.  The Agreement
provides that no Alliance member will use the proprietary information or
technology of another Alliance member to produce any beer with a flavor profile
or appearance of such other Alliance member's beer.  With the consent of all
Alliance members, additional entities owning and/or operating brewing facilities
may be added as parties to the Alliance.

COOPERATIVE BREWING AGREEMENTS.  Under the terms of the Cooperative Brewing
Agreements, each of the Cooperative Brewers has agreed to produce Nor'Wester's
beer, in the amounts and packaged as specified in firm orders submitted by the
Nor'Wester on a periodic basis.  All orders made by Nor'Wester are subject to
certain volume limits.  The Cooperative Brewer's production of Nor'Wester beer
must comply with Nor'Wester's specifications concerning recipes, quality control
procedures, flavor profile and appearance.  Nor'Wester has a right to reject
beer not meeting its specifications. Pricing for the purchase of beer produced
under Cooperative Brewing Agreements are at the lesser of cost plus 10% or
Nor'Wester's average cost of production at its Portland Brewery, plus a


                                      19
<PAGE>

mark-up of 10%.  The Agreement provides that no Alliance Member will use the
proprietary information or technology of another Alliance Member to produce any
beer with a flavor profile or appearance that is substantially similar to such
Alliance Member's beer.

GENERAL SERVICES AGREEMENT.  The General Services Agreement requires that WVI
perform for Nor'Wester and WVI's subsidiaries certain services relating to (i)
human resources support; (ii) stock transfer and (iii) investor relations.
Under the General Services Agreement, Nor'Wester is to provide WVI and its
subsidiaries certain services relating to (i) accounting and finance support;
(ii) sales and marketing management; (iii) executive services; and (iv)
production management; (v) point of sale and advertising services; and (vi)
centralization and coordination among the Alliance members of certain
operational and purchasing matters.  Nor'Wester, in turn subcontracts with WVV
for point of sale and advertising services and certain sales and marketing
management support services.

The Company was charged by Nor'Wester and WVI $52,550 and $55,125, respectively
for such services during 1996.

ARMS-LENGTH TRANSACTIONS
The Company believes that the transactions set forth above were made on terms no
less favorable to the Company than could have been obtained from unaffiliated
third parties.  All future transactions between the Company and its officers,
directors, principal shareholders and affiliates will be approved by a majority
of the independent outside members of the Company's Board of Directors who do
not have an interest in the transactions, and will be on terms no less favorable
to the Company than could be obtained from unaffiliated third parties.


                                      20
<PAGE>

ITEM 13.  EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits included herein:


     Exhibit
     Number    Description
     -------   -----------
     3.1       Certificate of Incorporation of the Company and any amendments
               thereto (1)

     3.2       Bylaws of the Company (1)

     10.1      1994 Stock Incentive Plan (1)

     10.2      Form of indemnity Agreement between the Company and each of its
               executive officers and directors (1)

     10.3      Lease Agreement dated May 10, 1995, between the Company and
               Intrawest Properties Partnership (1)

     10.4      Strategic Alliance Agreement between the Company, Nor'Wester
               Brewing Company, Inc., Willamette Valley, Inc. Microbreweries
               Across America, Mile High Brewing Company, Bayhawk Ales, Inc. and
               North Country Joint Venture, LLC (1)

     10.5      Cooperative Brewing Agreement between the Company and Nor'Wester
               Brewing Company, Inc. (1)

     10.6      Management Agreement between the Company and Willamette Valley,
               Inc. (1)

     10.7      Investment Agreement dated as of January 30, 1997 by and among
               Nor'Wester Brewing Company, Inc., North Country Joint Venture,
               LLC, Willamette Valley, Inc. Microbreweries Across America,
               Aviator Ales, Inc., Bayhawk Ales, Inc., Mile High Brewing
               Company, Inc., James W. Bernau and United Breweries of America,
               Inc., which includes the Credit Agreement between Nor'Wester
               Brewing Company, Inc. and United Breweries of America, Inc.

     27        Financial Data Schedule

(1) Incorporated by reference to Exhibits to the Company's Registration
    Statement on Form SB-2, as amended and declared effective by the Securities
    and Exchange Commission in August 1994 (Commission Registration
    No. 33-81536-LA).

(b) Reports on Form 8-K

No reports on Form 8-K were filed by the Company during the quarter ended
December 31, 1996.


                                      21
<PAGE>

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

Dated:   March 25, 1997       AVIATOR ALES, INC.

                              By:/s/ JAMES W. BERNAU
                              ----------------------
                              James W. Bernau
                              Chairperson of the Board, President
                              and Secretary

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 their capacities on March 25, 1997:

Signature                     Title
---------                     -----

/S/ JAMES W. BERNAU           Chairperson of the Board, President
-------------------           and Secretary
James W. Bernau               (Principal Executive Officer Principal and
                              Financial and Accounting Officer)

/s/ JAMES GREGORY             Director
-----------------
James Gregory

/s/ HOWARD LOVERING           Director
-------------------
Howard Lovering

/s/ DAVID M. MCCRAY           Director
-------------------
David M. McCray

/s/ BONNIE A. PLADSON         Director
---------------------
Bonnie A. Pladson

/s/ DUSTIN WYANT              Director, Vice President and General Manager
----------------
Dustin Wyant



                                      22
<PAGE>




AVIATOR ALES, INC.
(A DEVELOPMENT STAGE COMPANY)
REPORT AND FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995

<PAGE>

AVIATOR ALES, INC.
(A DEVELOPMENT STAGE COMPANY)
INDEX TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------


Report of Independent Accountants............................................F-1

Balance Sheet................................................................F-2

Statement of Operations......................................................F-3

Statement of Shareholders' Equity............................................F-4

Statement of Cash Flows......................................................F-5

Notes to Financial Statements................................................F-6




<PAGE>

                          REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Shareholders
of Aviator Ales, Inc.
(A Development Stage Company)

In our opinion, the accompanying balance sheet and the related statements of
operations, of shareholders' equity and of cash flows present fairly, in all
material respects, the financial position of Aviator Ales, Inc. (A Development
Stage Company) at December 31, 1996 and 1995, and the results of its operations
and its cash flows for the years then ended and the period from inception
(February 14, 1994) to December 31, 1996, in conformity with generally accepted
accounting principles.  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 of these
statements in accordance with generally accepted auditing standards which
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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation.  We believe that our audits provide a
reasonable basis for the opinion expressed above.

The accompanying financial statements have been prepared assuming the Company
will continue as a going concern.  As discussed in Note 1 to the financial
statements, the Company is a development stage company which has a limited and
unprofitable operating history, has negative working capital of $1,145,814 and
has limited access to capital with which to fund future operations.  Such
factors, among others, raise substantial doubt about its ability to continue as
a going concern.  Management's plans in regard to these matters are also
described in Note 1.  The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.

As discussed in Note 11 to the financial statements, the Company intends to be
consolidated with other affiliated companies and convert its stock into shares
of a new publicly traded entity.  Certain financial statement components have
been reclassified to reflect this intention.

Aviator Ales, Inc. is a member of a group of affiliated companies and, as
disclosed in the financial statements, has extensive transactions and
relationships with members of the group.  Because of these relationships, it is
possible that the terms of these transactions are not the same as those that
would result from transactions among wholly unrelated parties.


PRICE WATERHOUSE LLP
Portland, Oregon
March 17, 1997, except as to Note 12
   which is as of March 24, 1997
                                         F -1
<PAGE>

AVIATOR ALES, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
--------------------------------------------------------------------------------

                                                             DECEMBER 31,
                                                         1996           1995
                                                      -----------   -----------
ASSETS
Current assets:
    Cash and cash equivalents                         $    19,218   $   226,401
    Accounts receivable, trade                             61,529        48,870
    Inventories (Note 2)                                  326,178       244,273
    Prepaid and other current assets                            -        57,912
                                                      -----------   -----------

         Total current assets                             406,925       577,456

Property and equipment (Notes 3 and 4)                  2,258,392     2,153,851
Other noncurrent assets                                         -        16,361
                                                      -----------   -----------

                                                      $ 2,665,317   $ 2,747,668
                                                      -----------   -----------
                                                      -----------   -----------

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
    Current portion of capital lease obligation       $     4,058   $         -
    Accounts payable                                      607,570       202,312
    Accrued liabilities                                    44,516        29,552
    Container deposits                                     15,583             -
    Payables to parent and affiliated
      companies  (Note 8)                                 881,012        28,111
                                                      -----------   -----------
         Total current liabilities                      1,552,739       259,975

Mortgage note payable and capital lease
  payable (Note 4)                                         57,664        50,000
Advance from affiliate (Note 8)                                 -       250,000
Deferred rent (Note 10)                                    70,103        47,951
                                                      -----------   -----------

                                                        1,680,506       607,926
                                                      -----------   -----------

Commitments and contingencies (Notes 11 and 12)

Shareholders' equity (Notes 6, 7 , 8 , 11 and 12):
    Common stock, $.001 par value, 10,000,000 shares
      authorized, 5,331,775 and 7,460,226 shares
      issued and outstanding                                5,332         7,461
    Additional paid-in capital                          2,582,553     2,577,649
    Deficit accumulated during the development stage   (1,603,074)     (445,368)
                                                       -----------  -----------

          Total shareholders' equity                      984,811     2,139,742
                                                       -----------  -----------

Total liabilities and shareholders' equity             $ 2,665,317  $ 2,747,668
                                                       -----------  -----------
                                                       -----------  -----------


         The accompanying notes are an integral part of this statement.

                                     F-2
<PAGE>

AVIATOR ALES, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF OPERATIONS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                            CUMULATIVE
                                                                           AMOUNTS FROM
                                                                             INCEPTION
                                                                           (FEBRUARY 14,
                                                      YEAR ENDED              1994) TO
                                                      DECEMBER 31,          DECEMBER 31,
                                                  1996           1995           1996
                                              ------------     ----------   --------------
<S>                                           <C>              <C>          <C>
Gross sales (Note 9)                          $  1,905,511     $  186,818   $    2,136,027
Less excise taxes                                  (81,434)        (4,852)         (86,286)
                                              ------------     ----------   --------------

Net sales                                        1,824,077        181,966        2,049,741

Cost of goods sold                               1,879,062        165,006        2,067,555
                                              ------------     ----------   --------------

Gross margin                                       (54,985)        16,960          (17,814)

Selling, general and administrative expenses
  (Notes 6 and 8)                                  851,352        490,646        1,452,228
                                              ------------     ----------   --------------

Loss from operations                              (906,337)      (473,686)      (1,470,042)

Other income (expense):
    Interest (expense) income                       (1,498)        79,046          116,839
    Other expense                                 (249,871)             -         (249,871)
                                              ------------     ----------   --------------

Loss before income taxes                        (1,157,706)      (394,640)      (1,603,074)

Income taxes (Note 5)                                    -              -                -
                                              ------------     ----------   --------------

Net loss as a development stage company       $ (1,157,706)    $ (394,640)      (1,603,074)
                                              ------------     ----------   --------------
                                              ------------     ----------   --------------

Net loss per common share (Note 1)            $      (0.20)    $    (0.07)  $         (.34)
                                              ------------     ----------   --------------
                                              ------------     ----------   --------------

Weighted average number of
  common shares outstanding (Note 1)             5,685,642      5,326,209        4,766,959
                                              ------------     ----------   --------------
                                              ------------     ----------   --------------
</TABLE>



        The accompanying notes are an integral part of this statement.

                                     F-3
<PAGE>

AVIATOR ALES, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF SHAREHOLDERS' EQUITY
PERIOD FROM INCEPTION (FEBRUARY 14, 1994) TO DECEMBER 31, 1996
--------------------------------------------------------------------------------
<TABLE>
                                                                                          DEFICIT
                                                                                        ACCUMULATED
                                                                         ADDITIONAL      DURING THE
                                               COMMON STOCK               PAID-IN       DEVELOPMENT
                                          SHARES          AMOUNT          CAPITAL           STAGE          TOTAL
                                        ----------      ----------       ----------     -----------     -----------
<S>                                     <C>             <C>              <C>            <C>             <C>
Balances, February 14, 1994                      -      $        -       $        -     $         -     $         -

Stock issued to
  Willamette Valley, Inc.                4,845,455           4,846           95,154               -         100,000

Proceeds from stock offering             2,609,091           2,609        2,471,631               -       2,474,240

Net loss                                         -               -                -         (50,728)        (50,728)
                                        ----------      ----------       ----------     -----------     -----------

Balances, December 31, 1994              7,454,546           7,455        2,566,785         (50,728)      2,523,512

Shares granted to distributors
  (Note 6)                                   5,680               6           10,864               -          10,870

Net loss                                         -               -                -        (394,640)       (394,640)
                                        ----------      ----------       ----------     -----------     -----------

Balances, December 31, 1995              7,460,226           7,461        2,577,649        (445,368)      2,139,742

Shares granted to employees                  1,500               1            2,774                           2,775

Shares retired (Note 6)                 (2,129,951)         (2,130)           2,130               -               -

Net loss                                         -               -                -      (1,157,706)     (1,157,706)
                                        ----------      ----------       ----------     -----------     -----------

Balances, December 31, 1996              5,331,775      $    5,332       $2,582,553     $(1,603,074)    $   984,811
                                        ----------      ----------       ----------     -----------     -----------
                                        ----------      ----------       ----------     -----------     -----------
</TABLE>



         The accompanying notes are an integral part of this statement.

                                     F-4
<PAGE>

AVIATOR ALES, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CASH FLOWS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                                            CUMULATIVE
                                                                                           AMOUNTS FROM
                                                                                             INCEPTION
                                                                                           (FEBRUARY 14,
                                                                     YEAR ENDED              1994) TO
                                                                     DECEMBER 31,          DECEMBER 31,
                                                                 1996           1995           1996
                                                             ------------     ----------   --------------
<S>                                                          <C>              <C>          <C>
Cash flows from operating activities:
    Net loss as a development stage company                  $ (1,157,706)    $ (394,640)  $   (1,603,074)
    Reconciliation of net loss to cash used
      by operating activities:
         Shares granted to employees and distributors               2,775         10,870           13,645
         Depreciation and amortization                            137,146         45,580          182,726
         Deferred rent                                             22,152         47,951           70,103
         Changes in current assets and current liabilities:
           Accounts receivable                                    (12,659)       (48,870)         (61,529)
           Inventories                                            (81,905)      (233,788)        (326,178)
           Prepaid and other assets                                57,912        (25,142)               -
           Accounts payable                                       405,258        179,758          607,570
           Accrued liabilities and container deposits              30,547         29,552           60,099
                                                             ------------     ----------   --------------

Net cash used by operating activities                            (596,480)      (388,729)      (1,056,638)
                                                             ------------     ----------   --------------

Cash flows from investing activities:
    Capital expenditures                                         (229,965)    (2,096,559)      (2,379,161)
    Decrease (increase) in other non-current assets                16,361        (15,587)            (235)
                                                             ------------     ----------   --------------

Net cash used by investing activities                            (213,604)    (2,112,146)      (2,379,396)
                                                             ------------     ----------   --------------

Cash flows from financing activities:
    Sale of common stock to parent company                                             -          100,000
    Net proceeds from common stock offering                                            -        2,474,240
    Net borrowings and advances from parent
      and affiliated companies                                    602,901        236,499          881,012
                                                             ------------     ----------   --------------
Net cash provided by financing activities                         602,901        236,499        3,455,252
                                                             ------------     ----------   --------------

Net decrease in cash                                             (207,183)    (2,264,376)          19,218
Cash and cash equivalents, beginning of period                    226,401      2,490,777                -
                                                             ------------     ----------   --------------

Cash and cash equivalents, end of period                     $     19,218     $  226,401   $       19,218
                                                             ------------     ----------   --------------
                                                             ------------     ----------   --------------
</TABLE>

        The accompanying notes are an integral part of this statement.

                                     F-5
<PAGE>

AVIATOR ALES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

1.  SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES

    ORGANIZATION, OPERATIONS AND BASIS OF PRESENTATION
    Aviator Ales, Inc. (the Company) is a development stage company established
    to produce and sell hand-crafted ales in the State of Washington. The
    Company was organized under the laws of the State of Delaware.  Prior to
    January 1996, the Company's name was Seattle Brewing Company.  From the
    date of inception (February 14, 1994) through December 31, 1996, the
    Company's efforts have been directed primarily toward organizing and
    issuing a public offering of shares of its common stock and building,
    equipping its brewery, and developing a marketable beer.  The brewery began
    producing and selling beer in September 1995; however, in 1996 was brewing
    at only 19% of its expected capacity.  The Company is one of four majority
    or wholly owned subsidiaries of Willamette Valley, Inc. Microbreweries
    across America (WVI), a company located in Oregon, organized to establish
    microbreweries throughout the United States.  At December 31, 1996 and
    1995, WVI owned approximately 51% and 65%, respectively, of the Company's
    common stock; see also Note 6.

    The Company is a development stage company which has a limited and
    unprofitable operating history, has negative working capital of $1,145,814
    and has limited access to capital to fund future operations.  There can be
    no assurance that the Company will produce and sell its products on a
    profitable basis to sustain operations.  Such factors, among others, raise
    substantial doubt as to the Company's ability to continue as a going
    concern.  Management expects the Company to be merged with its affiliate
    breweries during 1997, and for all of the Company's common stock to be
    converted into shares of a new public company (see Note 11).

    USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
    The accompanying financial statements have been prepared in accordance with
    generally accepted accounting principles which require management to make
    certain estimates and assumptions. These estimates and assumptions affect
    the reported amounts of assets and liabilities, the disclosure of
    contingent assets and liabilities as of the date of the financial
    statements, and the reported amounts of revenues and expenses during the
    reporting period.  Actual results could differ from those estimates.

    INVENTORIES
    Inventories are stated at the lower of cost (first-in, first-out basis) or
    market.

    PROPERTY AND EQUIPMENT
    Property and equipment are stated at cost and are depreciated over their
    estimated useful lives estimated to be 5-15 years using the straight-line
    method, beginning at the time the assets are placed in operation.

    Expenditures for repairs and maintenance are charged to expense as
    incurred, and expenditures for additions and betterments are capitalized.
    Leasehold improvements are depreciated over the shorter of the life of the
    asset or the lease.


                                     F-6
<PAGE>

AVIATOR ALES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

1.  SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

    PROPERTY AND EQUIPMENT (CONTINUED)
    In March 1995, the Financial Accounting Standards Board issued the
    Statement of Financial Accounting Standards No. 121, "Accounting for the
    Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
    Of."  The Company adopted the statement in fiscal 1996; however, the
    adoption has not had a significant impact on the Company's financial
    statements.  Note that management expects all of the Company's long-lived
    assets to be used by the newly formed public Company (see Note 11).

    OTHER NONCURRENT ASSETS
    In 1995, the Company capitalized the fees and related legal costs of
    organization which are included in other noncurrent assets in the
    accompanying balance sheet.  These items were written off in 1996 based on
    management's intention of being sold as these intangible assets no longer
    have future value.

    INCOME TAXES
    The Company accounts for income taxes using the asset and liability
    approach prescribed by Statement of Financial Accounting Standards No. 109,
    "Accounting for Income Taxes."  Under this approach, deferred income taxes
    are calculated for the expected future tax consequences of temporary
    differences between the book basis and tax basis of the Company's assets
    and liabilities.  The Company files a stand-alone federal income tax
    return.

    REVENUE RECOGNITION
    The Company recognizes revenue upon the delivery of its products to its
    customers.  Sales are recorded as trade accounts receivable and no
    collateral is required.

    NET LOSS PER COMMON SHARE
    Net loss per common share is calculated based on the weighted average
    number of common shares outstanding after giving effect to the shares
    retired in March 1996 and shares granted to employees throughout the
    periods presented.  No common stock equivalents with a dilutive effect were
    outstanding during the periods presented.  Shares held in escrow are
    included in the weighted average number of common shares outstanding.

    STATEMENT OF CASH FLOWS
    The Company considers short-term investments which are highly liquid, are
    readily convertible into cash, and have original maturities of fewer than
    three months to be cash equivalents for the purposes of cash flows.  For
    the year ended December 31, 1996, the Company paid no income taxes and paid
    interest of $1,498.  For the year ended December 30, 1995, the Company paid
    no income taxes and paid interest of $4,500.  In 1996, the Company
    purchased equipment valued at $11,722 under a capital lease.  This non-cash
    transaction has also been excluded from the accompanying statement of cash
    flows.


                                     F-7
<PAGE>

AVIATOR ALES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

1.  SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

    FAIR MARKET VALUE OF FINANCIAL INSTRUMENTS
    Except as discussed in Note 8 under advances from affiliates, the fair
    market value of the Company's recorded financial instruments materially
    approximate their respective recorded balances, as the recorded assets and
    liabilities are stated at amounts expected to be realized or paid, or carry
    interest rates commensurate with current rates for instruments with a
    similar duration and degree of risk.

    STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 123
    The Company adopted Statement of Financial Accounting Standards No. 123
    (SFAS 123), "Accounting for Stock-Based Compensation," for its year ended
    December 31, 1996.  SFAS 123 was issued by the Financial Accounting
    Standards Board in October 1995, and allows companies to choose whether to
    account for stock-based compensation under the current intrinsic method as
    prescribed in Accounting Principles Board Opinion Number 25 (APB 25) or use
    the fair value method prescribed in SFAS 123.  The Company continues to
    follow the provisions of APB 25.  The impact of adoption does not have a
    significant effect on the Company's financial position or results of
    operations (see Note 7).

    RECLASSIFICATIONS
    Certain reclassifications have been made to the 1995 financial statements
    to conform with 1996 presentation.  These reclassifications have no impact
    on previously reported results of operations or shareholders' equity.


2.  INVENTORIES

    Inventories consist of:
                                                    DECEMBER 31,
                                                  1996        1995
                                                --------    --------
         Raw materials                          $180,145    $ 48,589
         Work-in-process                          35,414      30,100
         Finished goods                           72,186     147,992
         Retail inventory                         38,433      17,592
                                                --------    --------

                                                $326,178    $244,273
                                                --------    --------
                                                --------    --------


                                     F-8
<PAGE>

AVIATOR ALES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

3.  PROPERTY AND EQUIPMENT

    Property and equipment consist of:
                                                    DECEMBER 31,
                                                  1996        1995
                                               ----------  ----------
         Land and improvements                 $  695,486  $  642,275
         Brewery equipment                      1,708,998   1,527,269
         Office furniture and equipment            16,910      10,162
         Vehicles                                  19,490      19,490
                                               ----------  ----------
                                                2,440,884   2,199,196

         Less accumulated depreciation           (182,492)    (45,345)
                                               ----------  ----------

                                               $2,258,392  $2,153,851
                                               ----------  ----------
                                               ----------  ----------

4.  MORTGAGE NOTE PAYABLE AND CAPITAL LEASE PAYABLE

    Long-term debt consists of a $50,000 note payable to an individual, issued
    in connection with the purchase of land, and a capital lease liability
    relating to equipment.  The note bears interest at 9.0% and requires
    quarterly interest payments.  The note is secured by the land and is
    payable in a lump sum in June 1999.  The capital lease bears interest at
    9.4% and is payable in equal instalments of $416 per month through August
    1999.  Future minimum payments on the capital lease are as follows:

                                 PRINCIPAL     INTEREST     TOTAL
                                 ---------     --------    -------
              1997               $   4,058     $    933    $ 4,991
              1998                   4,457          534      4,991
              1999                   3,207          115      3,322
                                 ---------     --------    -------

                                 $  11,722     $  1,582    $13,304
                                 ---------     --------    -------
                                 ---------     --------    -------

5.  INCOME TAXES

    Pre-tax loss was attributable to operations entirely within the United
    States.  For the periods ended December 31, 1996 and 1995, there was no
    current or deferred provision for income taxes.


                                     F-9
<PAGE>

AVIATOR ALES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

5.  INCOME TAXES (CONTINUED)

    The benefit for income taxes differs from the amount of income taxes
    determined by applying the U.S. statutory graduated federal rate due to the
    following:
                                                                 YEAR ENDED
                                                                DECEMBER 31,
                                                              1996        1995
                                                            --------    --------
         Statutory graduated federal rate                      34.0%       34.0%
         Reserve of net operating loss carryforward assets    (34.0)      (34.0)
                                                            --------    --------

                                                                  -%          -%
                                                            --------    --------
                                                            --------    --------

    Deferred tax assets (liabilities) consist of:
                                                              DECEMBER 31,
                                                            1996        1995
                                                          ---------   ---------
         Federal net operating loss carryforwards         $ 679,000   $ 175,000
         Expenses not currently deductible                   24,000      15,000
         Fixed assets                                      (163,000)    (60,000)
         Deferred tax asset valuation allowance            (540,000)   (130,000)
                                                          ---------   ---------
                                                          $       -   $       -
                                                          ---------   ---------
                                                          ---------   ---------

    As of December 31, 1996, the Company had a net operating loss carryforward
    aggregating approximately $2,002,000 for federal purposes, which may be
    used to offset future taxable income, if any.  The annual utilization of
    this carryforward may be limited after the Company undergoes the ownership
    change anticipated by management or fails to meet the continuity of
    business requirements defined by the Internal Revenue Code.  The Company's
    net operating loss carryforwards begin expiring in 2010.


6.  SHAREHOLDERS' EQUITY

    The Company is authorized to issue 10,000,000 shares of its common stock.
    Each share of common stock entitles the holder to one vote.  In February
    1994, the Company received $100,000 cash from WVI in exchange for 4,845,455
    shares of unregistered common stock.

    In connection with the Company's initial stock offering under Oregon
    securities laws, WVI agreed to place in escrow its 4,845,455 shares of the
    Company's common stock.  These shares were to be released from escrow to
    WVI when the Company satisfied one or more certain earnings requirements or
    established a bona fide over-the-counter trading market for its common
    stock and maintained a bid price equal to or greater than a stipulated
    benchmark price for 26 or more consecutive weeks.  Unless released pursuant
    to these conditions, the 4,845,455 shares were to remain in escrow until
    unconditionally released in 25% increments on April 5, 2001, 2002, 2003 and
    2004.  Based on the


                                    F-10
<PAGE>

AVIATOR ALES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

6.  SHAREHOLDERS' EQUITY (CONTINUED)

    ownership change anticipated by management described in Note 11, the shares
    will not be released from escrow, and all shares will be converted to
    shares of the new Company.  The shares, while in escrow, entitle WVI to the
    same rights and privileges as all other shareholders of common stock,
    except for certain rights relating to transferability and liquidation.

    During 1994, the Company sold 2,609,091 shares of its common stock at $1.10
    per share pursuant to a Form SB-2 public offering filed with the U.S.
    Securities Exchange Commission (SEC).  Cash proceeds from this offering,
    net of offering expenses of $395,760, aggregated $2,474,240.

    During 1996 and 1995, the Company granted a total of 1,500 and 5,680
    shares, respectively, to employees and/or third-party distributors of the
    Company's products.  The Company recorded $2,775 and $10,870 of expense
    related to these grants which is included in selling, general and
    administrative expenses in the accompanying financial statements for the
    years ended December 31, 1996 and 1995, respectively.

    On March 4, 1996, the board of directors of WVI authorized WVI to
    contribute 2,129,871 of its 4,845,455 shares in the Company to the Company
    for no consideration in contemplation of the stock offering discussed in
    the following paragraph; the Company has retired these shares.  This
    transaction reduced WVI's ownership in the Company from approximately 65%
    to approximately 51%.  Also in 1996, an additional 80 shares were retired.

    See Note 11 for additional discussion of the planned ownership change.


7.  STOCK INCENTIVE PLAN

    The Company adopted a 1994 Stock Incentive Plan (the "Plan") and has
    reserved 250,000 shares of the Company's common stock thereunder.  The Plan
    provides for the grant of incentive stock options to employees of the
    Company and non-qualified stock options, stock sales, and stock grants to
    employees, directors, and consultants of the Company.  In January 1995, the
    Company granted 55,000 options to employees under the Plan.  The options
    are exercisable over a ten-year period at an exercise price of $1.10 per
    share, which approximated fair market value at the date of grant.  The
    options vest ratably over the ten-year term beginning one year from the
    date of grant.  In 1996, the Company granted 89,000 options to employees
    under the Plan.  Of these, 78,000 options vest over a ten-year term, 5,000
    vest over a five-year term, and 6,000 were canceled.  These options have an
    exercise price of $1.85 per share, which approximated the fair market value
    at the date of grant.  As of December 31, 1996, options exercised were 0,
    vested options were 14,300, and options outstanding were 138,000.


                                    F-11
<PAGE>

AVIATOR ALES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

7.  STOCK INCENTIVE PLAN (CONTINUED)

    The Company has elected to account for its stock-based compensation under
    Accounting Principles Board Opinion No. 25.  The Company has determined
    that the pro forma effects of applying SFAS 123 would not have a material
    effect on the results of operations for 1996 and 1995.  This determination
    was made using the Black-Scholes option pricing model.  The weighted
    average assumptions used for stock option grants for 1996 and 1995 were a
    risk-free interest rate of 5.61% and 7.87%, respectively, an expected
    dividend yield of 0% and 0%, respectively, an expected life of 9.77 years
    and 10 years, respectively, and an expected volatility of 57% and 54%,
    respectively.  The weighted average fair value of stock options granted in
    1996 and 1995 was $1.33 and $0.82, respectively.

    Options were assumed to be exercised upon vesting for purposes of this
    valuation.  Adjustments are made for options forfeited prior to vesting.
    For the years ended December 31, 1996 and 1995, the total value of the
    options granted was computed to be $110,242 and $45,230, respectively,
    which would be amortized on a straight-line basis over the vesting period
    of the options.

    Note that all options granted by the Company are expected to be converted
    to options of the new company expected to be formed at the same conversion
    rate as the conversion of common stock as discussed in Note 11.


8.  RELATED PARTIES

    NATURE OF RELATED PARTIES
    The Company's president partially owns and controls Willamette Valley
    Vineyards (WVV), a winery in Oregon; and Nor'Wester Brewing Company Inc.
    (Nor'Wester), a microbrewery in Oregon; as well as WVI.  Additionally, WVI
    is the majority owner of Mile High Brewing Company (MHBC) and Bayhawk Ales,
    Inc. (BAI), and fully owns North Country Brewing Company, Inc. (NCBCI),
    companies located in Colorado, California, and New York, respectively.  As
    a result of certain arrangements between the Company and its affiliates, as
    well as the Company president's positions with and/or ownership interests
    in each of these companies, inherent conflicts of interest exist with
    respect to the pricing of services, the sharing of resources and the
    allocation of the Company president's time.

    RELATED PARTY TRANSACTIONS
    For the period from inception through December 31, 1996, WVI and WVV
    provided secretarial, accounting, marketing, and administrative services
    related to the Company's initial stock offering and for general and
    administrative purposes.  Beginning in 1996, the Company began contracting
    certain of these services from Nor'Wester under a general services
    agreement between Nor'Wester, WVI and WVV.  During 1996 and 1995, the
    Company purchased these services at an approximate cost of $128,000 and
    $169,000, respectively, which is included in selling, general and
    administrative expenses in the accompanying financial statements.
    Additionally, WVI has allowed the Company to utilize certain proprietary
    concepts for no cash consideration.  As a result of these and certain other
    transactions, the Company owed approximately $881,000 and $278,000, at
    December 31, 1996 and 1995, respectively, to affiliated companies.


                                    F-12
<PAGE>

AVIATOR ALES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

8.  RELATED PARTIES (CONTINUED)

    Additionally, in 1996, WVI advanced the Company $240,000 to be used for
    short-term financing purposes.  Because of the anticipated ownership change
    discussed in Note 11, management does not expect to repay this advance.
    Instead the advances are being considered in determining the purchase price
    and stock conversion ratios being used in the transaction.  These advances
    are included in payables to parent and affiliated companies balance at
    December 31, 1996.

    STRATEGIC ALLIANCE AND COOPERATIVE BREWING AGREEMENTS
    The Company has entered into a Strategic Alliance (the "Alliance") with
    Nor'Wester, MHBC, BAI, NCBCI, and WVI.  The Company, Nor'Wester, MHBC, BAI,
    NCBCI, and WVI are collectively referred to as "Alliance members," and the
    Company, MHBC, and BAI are collectively referred to as the "Cooperative
    Brewers," and individually referred to as a "Cooperative Brewer."  The
    purpose of the Alliance is to promote and support the growth of all of the
    Alliance members by increasing production at each Cooperative Brewer's
    facility and supporting the entry of Nor'Wester products into new markets.
    To achieve this goal, each Cooperative Brewer has agreed to cooperatively
    brew Nor'Wester's products, and to support the entry of these products into
    new markets by facilitating Nor'Wester's access to the Cooperative Brewer's
    network of distributors.

    The Alliance is created through a Strategic Alliance Agreement between
    Nor'Wester and each of the Company, MHBC, and BAI.  The terms of the
    Strategic Alliance Agreement and the Cooperative Brewing Agreements are
    four years, unless earlier terminated under limited circumstances, which
    include material breach in the case of the Cooperative Brewing Agreements.
    The Agreements are subject to renewal.  Pricing for the purchase of beer
    produced under the Cooperative Brewing Agreement is at the lesser of cost
    plus 10% or Nor'Wester's average cost of production at its Nor'Wester
    Brewery, plus a mark-up of 10%.  The Agreement provides that no Alliance
    member will use the proprietary information or technology of another
    Alliance member to produce any beer with a flavor profile or appearance
    that is substantially similar to such Alliance member's beer.  With the
    consent of all Alliance members, additional parties may be added to the
    Alliance.

    Under the terms of the Cooperative Brewing Agreements, the Company will
    produce Nor'Wester beer, in the amounts and packaging as specified in firm
    orders submitted by Nor'Wester on a periodic basis.  The Company's
    production of Nor'Wester beer must comply with specifications concerning
    recipes, quality control procedures, flavor profile and appearance.
    Nor'Wester has a right to reject beer not meeting its specifications.

    Nor'Wester has acquired certain specified brewing equipment for Aviator's
    use in producing Nor'Wester's beer.  To the extent that this equipment is
    not needed for the production of Nor'Wester beers, Aviator may, upon notice
    to Nor'Wester, use this equipment to produce its own beer subject to the
    payment of an agreed-upon lease fee.

    The Cooperative Brewing Agreement requires that the Cooperative Brewer
    maintain the equipment supplied by Nor'Wester, that Nor'Wester insure this
    equipment, and that the Cooperative Brewer and Nor'Wester each indemnify
    the other for damages and losses in connection with the Agreement.
    Nor'Wester may at its cost remove or replace its equipment at any time if
    market conditions or other circumstances make such action desirable to
    Nor'Wester.


                                    F-13
<PAGE>

AVIATOR ALES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

8.  RELATED PARTIES (CONTINUED)

    Cooperative brewing revenues totaled $544,000, which is 30% of the
    Company's net revenues.  Because of the pricing terms surrounding
    cooperative brewing discussed above and the fact that the Company's costs
    to produce beer were higher than Nor'Wester's costs to produce beer,
    cooperative brewing sales resulted in significant negative gross margins
    for the Company.  In addition, a significant portion of the beer brewed by
    the Company and sold to Nor'Wester was determined to be unusable.
    Accordingly, the Company ceased its cooperative brewing of Nor'Wester beers
    in January 1997.

    Subsequent to December 31, 1996, the cooperative brewing agreement was
    canceled with the consent of all Alliance members.

    ADVANCES FROM AFFILIATE
    In connection with the Cooperative Brewing Agreement with Nor'Wester
    described above, Nor'Wester advanced $350,000 and $250,000 to the Company
    in 1996 and 1995, respectively, for the purchase of ingredients and
    packaging materials for the Company's initial and continued production of
    Nor'Wester's products.  The advances received in 1996 were also used for
    the Company's production of its own beers.  These advances are unsecured
    and do not bear interest.  Because of the anticipated ownership change
    discussed in Note 11, management does not expect to repay these advances.
    Instead, the advances are being considered in determining the purchase
    price and stock conversion ratios being used in the transaction.


9.  SIGNIFICANT CUSTOMERS

    Approximately 45% and 58% of the Company's sales were to wholesale
    distributors located in the Pacific Northwest for the years ended
    December 31, 1996 and 1995, respectively.  Sales to the Company's largest
    customer (excluding cooperative brewing) represented approximately 29% and
    30% of gross sales for the years ended December 31, 1996 and 1995,
    respectively.


10. COMMITMENTS

    The Company has entered into agreements with several independent
    distributors for the distribution of the Company's products in Washington.
    These agreements contain normal distribution provisions and are cancelable
    by either the Company or the distributors.

    During 1995, the Company entered into a twenty-year operating lease
    arrangement with optional renewal terms for its production facility in
    Woodinville, Washington.  Approximate minimum lease payments are  as
    follows:



                                    F-14
<PAGE>

AVIATOR ALES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

10. COMMITMENTS (CONTINUED)

          YEAR ENDING
         DECEMBER 31,
         ------------
             1997                               $   117,000
             1998                                   117,000
             1999                                   117,000
             2000                                   119,000
             2001                                   127,000
             Thereafter                           2,068,000
                                                -----------
                                                $ 2,665,000
                                                -----------
                                                -----------

    The terms of this lease allowed for no lease payments to be made during the
    initial five months of the lease term, and contain escalating payments
    beginning in 2000.  The Company is recording lease expense on the
    straight-line method over the lease term; accordingly, deferred rent has
    been recorded in the accompanying balance sheet.  Rent expense including
    common area charges during 1996 and 1995 related to this lease aggregated
    approximately $174,000 and $67,000, respectively, and is allocated between
    cost of sales and selling, general and administrative expenses in the
    accompanying statement of operations.


11. PROPOSED MERGER AND INVESTMENT FROM UBA

    Subsequent to December 31, 1996, the Company along with its parent (WVI)
    and its affiliates (Nor'Wester, MHBC and BAI) entered into an investment
    agreement with United Breweries of America, Inc. (UBA), an entity
    controlled by the UB Group of Bangalore, India. The agreement provides for
    Nor'Wester, WVI, AAI, MHBC and BAI to consolidate into a company to be
    known as United Craft Brewers, Inc. (UCB).  This merger will result in the
    issuance of newly registered shares of UCB common stock in exchange for
    shares of Nor'Wester, WVI and its subsidiaries.  The merger and share
    exchange will require approval by the Boards of Directors and shareholders
    of each of the entities.  Following consolidation, all shareholders in the
    Nor'Wester/WVI alliance will hold shares in UCB, a company which is
    intended to be listed for trading on the Nasdaq National Market system
    under the symbol ALES. Proposed exchange ratios for each of the entities
    are as follows, based on an average closing price of $2.63 for Nor'Wester's
    common stock for the 20 trading days immediately preceding execution of the
    merger:

           COMPANY                           EXCHANGE RATIO
         -----------                         --------------
         Nor'Wester                                     1:1
         WVI                                      1.99159:1
         AAI                                      2.98739:1
         BAI                                      1.99159:1
         MHBC                                     2.98739:1


                                    F-15
<PAGE>

AVIATOR ALES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

11. PROPOSED MERGER AND INVESTMENT FROM UBA (CONTINUED)

    Following the merger, UBA has proposed to invest $8.63 million in exchange
    for a 45% equity interest in the new entity, UCB.  Of the $8.63 million
    proposed investment by UBA, $2.75 million is in the form of bridge loans
    conditionally available to Nor'Wester during the consolidation phase.  As
    of March 21, 1997, $1,500,000 has already been loaned to Nor'Wester, the
    majority of which has been advanced to North Country.  At closing, it is
    anticipated that the bridge loans will be converted into shares of UCB and
    the remaining $5.88 million cash investment will be made directly in shares
    of UCB.

    The closing of the proposed investment remains subject to (i) approval by
    the shareholders of each of the companies, (ii) achievement of certain
    operating results at each of the breweries, (iii) maintenance of certain
    operating conditions and covenants, including that there shall be no
    material adverse change in the businesses of the affiliated breweries taken
    as a whole, (iv) approval by federal and state liquor control agencies, (v)
    registration with the U.S. Securities and Exchange Commission of UCB shares
    to be exchanged in the merger, (vi) extension of the Company's $1 million
    revolving line of credit through September 30, 1997 (see Note 4); and the
    lender shall have waived any defaults under the line of credit agreement
    and the line of credit shall have been converted to a term loan (see
    Note 5), and (vii) such other customary conditions for transactions of this
    type.

    Immediately following the proposed investment by UBA, UBA would own 45% and
    the Company's president would own 10% of UCB.  The public shareholders of
    Nor'Wester, WVI, and WVI's subsidiaries would own the remaining 45% of UCB.


12. SUBSEQUENT EVENTS

    In light of lower than anticipated 1996 results, lower than anticipated
    first quarter 1997 sales and other operating results and adverse conditions
    within the craft beer industry in general, representatives of UBA and
    management and the investment bankers of the affiliated companies are in
    the process of renegotiating the terms of the UBA investment discussed in
    Note 11.  The renegotiation will reflect a significantly lower valuation
    for the affiliate companies, a reduction in the total amount of cash to be
    invested by UBA to $5.5 million and a reduction of UBA's percentage
    ownership position in UCB to 40% following the consolidation.  It is
    anticipated that the $2.75 million bridge loan amount will not be reduced.
    The existing shareholders in the affiliated Companies would retain a 60%
    interest in UCB.  The exact distribution of ownership interests among
    shareholders of the affiliated companies has not yet been determined.
    Management will soon seek Board approval by each of the affiliated
    companies of any renegotiated terms.  Failure of the parties to reach a
    mutually agreeable renegotiated investment agreement could lead to a loss
    of the bridge loans and the remainder of the UBA investment which would
    materially and adversely affect the Company's financial condition and
    results of operations.  There can be no assurance that the proposed merger
    will be completed or that the Company will obtain the capital needed to
    sustain operations.


                                    F-16