<PAGE>
 
                                 UNITED STATES

                      SECURITIES AND EXCHANGE COMMISSION

                             Washington D.C. 20549
                                   ---------

                                  FORM 10-QSB

               Quarterly Report Pursuant to Section 13 or 15(d)
                    of the Securities Exchange Act of 1934

  For the quarter ended December 31, 1998    Commission File Number  0-21079

                          PERRY'S MAJESTIC BEER, INC.
            (Exact name of registrant as specified in its charter)

                    Delaware                                11-3314168
            (State or other jurisdiction of              (I.R.S. Employer
            incorporation or organization)              Identification No.)

            100 Plaza Drive, Second Floor
            Secaucus, New Jersey                                  07094
            (Address of principal executive offices)           (Zip code)

Registrant's telephone number, including area code:        (201) 866-1300
                                                        ---------------------

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.

                                Yes   X      No


Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of December 31, 1998: 11,333,335.
<PAGE>
 
PERRY'S MAJESTIC BEER, INC. AND SUBSIDIARIES

INDEX
----------------------------------------------------------------------
PART I FINANCIAL INFORMATION

 Item 1.  Financial Statements

   Consolidated Balance Sheet as of December 31, 1998
   [Unaudited].................................................   3-4

   Consolidated Statements of Operations for the three and
   nine months ended December 31, 1998.........................     5

   Consolidated Statements of Cash Flows for the nine months
   ended December 31, 1998 and 1997 [Unaudited]................   7-9

   Notes to Consolidated Financial Statements [Unaudited]...... 10-23

Item 2.  Managements Discussion and Analysis of the Financial
         Condition and Results of Operations................... 24-29


SIGNATURES                                                         29

Exhibit 27: Financial Data

                                       2
<PAGE>

Item 1:

PERRY'S MAJESTIC BEER, INC. AND SUBSIDIARIES 

CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1998
[UNAUDITED]

<TABLE> 
------------------------------------------------------------------------------
<S>                                                          <C> 
Assets:
Current Assets:
  Cash                                                       $    77,338
  Accounts Receivable - Net                                      157,211
  Inventory                                                      310,070
  Prepaid Insurance                                               17,038
  Note Receivable                                                 70,002
                                                             ----------- 
  Total Current Assets                                           631,659

Furniture, Fixtures and Equipment - Net                           76,581
                                                             -----------

Other Assets:
  Goodwill - [Net of Accumulated Amortization of $91,692]        964,172
  Other Assets                                                   460,375
  Note Receivable                                                245,592

  Total Other Assets                                           1,670,139
                                                             -----------
  Total Assets                                               $ 2,378,379
                                                             ===========

Liabilities and Stockholders' Equity:
Current Liabilities:
  Accounts Payable                                           $   998,951
  Accrued Expenses                                               241,128
  Payroll Taxes Payable                                          321,727
  Note Payable                                                 1,502,500
                                                            ------------

  Total Current Liabilities                                    3,064,306
                                                            ------------
Note Payable                                                      18,661

Commitments and Contingencies [15]                                    --

Stockholders' Equity:
  Preferred Stock, $.001 Par Value Per Share, 
      15,000,000 Blank Check Shares Authorized, 
      Convertible Class A - Issued and Outstanding, 
      500,000 Shares; Non-Convertible Class B - No Shares
      Issued [Aggregate Liquidation Preferences $100,000]        700,500

  Common Stock - $.0001 Par Value, Authorized 25,000,000 Shares,
   Issued and Outstanding, 11,333,335 Shares                       1,133
  Common Stock- X-Treem                                          296,505
  Additional Paid-in Capital                                   2,593,484
</TABLE> 

                                       3
<PAGE>
 
<TABLE> 
<S>                                                          <C>     
  Retained Earnings [Deficit]                                 (3,877,205)

 Deferred Compensation                                          (122,500)
                                                                
                                                             ----------- 
  Total Stockholders' Equity                                    (704,588)
                                                             ----------- 
  Total Liabilities and Stockholders' Equity                 $ 2,378,379
                                                             ===========
</TABLE> 

The Accompanying Notes are an Integral Part of These Consolidated Financial
Statements.

                                       4
<PAGE>
 
PERRY'S MAJESTIC BEER, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
[UNAUDITED]
------------------------------------------------------------------------------

                            Three months ended        Nine months ended
                               December 31,              December 31,
                              -------------             -------------
                           1 9 9 8      1 9 9 7       1 9 9 8      1 9 9 7   
                           -------      -------       -------      -------   
Sales - Net              $  163,659  $   223,189  $   936,605   $   427,613  
                                                                             
Cost of Goods Sold          166,073      571,622      769,710       724,099  
                         ----------  -----------  -----------   -----------  
                                                                             
Gross Profit               (  2,414)    (348,433)     166,895      (296,486) 
                                                                             
                                                                             
                                                                             
Administrative Expenses     560,601      638,583    1,535,774       822,445  
                         ----------  -----------  -----------   -----------  
                                                                             
Operating Income Loss)     (563,015)    (987,016)  (1,368,879)   (1,118,931) 
                                                                             
Other [Income] Expense:                                                      
                                                                             
  Loss on disposal of                                                        
   assets                         0                   (58,900)               
  Loss on goodwill                                                           
   impairment                     0                  (527,183)               
  Gain on sales of                                                           
   assets                         0                    30,000                
  Interest Expense          (62,764)     (91,701)    (184,105)     (112,649) 
  Interest Income             5,049        9,929       18,082         9,929  
  Licensing Fees                  0                   100,000                
                         ----------  -----------  -----------   -----------  
                                                                             
  Other Expense                                                              
   [Income]-Net             (57,715)     (81,772)    (632,106)     (102,720) 
                         ----------  -----------  -----------   -----------  
                                                                             
  [Loss] Before Income                                                       
   Taxes                   (620,730)  (1,068,788)  (2,000,985)   (1,221,651) 
                                                                             
Provision for Income                                                         
 Taxes                           --           --           --            --  
                          ---------  -----------  -----------   -----------  
                                                                             
  Net [Loss]             $ (620,730) $(1,068,788) $(2,000,985)  $(1,221,651) 
                         ==========   ==========  ===========   ===========  
Weighted Average Number                                                      
 of Shares                6,266,675    3,721,377    4,622,239     3,712,698  
                         ==========   ==========   ==========   ===========  
                                                                             
  Net [Loss] Per Share   $     (.10) $      (.29)        (.43)         (.33) 
                         ==========   ==========   ==========   ===========   

The Accompanying Notes are an Integral Part of These Consolidated Financial
Statements.

                                       5
<PAGE>
 
PERRY'S MAJESTIC BEER, INC. AND SUBSIDIARIES
------------------------------------------------------------------------------


CONSOLIDATED STATEMENTS OF CASH FLOWS
[UNAUDITED]
------------------------------------------------------------------------------

<TABLE> 
<CAPTION> 
                                                 Nine months ended              
                                                 December 31,                   
                                                  1 9 9 8         1 9 9 7       
                                                  -------         -------       
<S>                                            <C>              <C>             
  Net Cash - Operating Activities              $ (2,000,985)    $ (1,221,651)   
                                               ------------     ------------ 
                                                                              
  Adjustments to reconcile net income                                         
  (loss) to net cash used in operating                                        
  activities:                                                                 
         Depreciation and amortization             33,550           13,000    
         Write off of good will                   527,183                0    
         Loss of disposal of assets, net           18,900                0    
(Increase)decrease in operating assets:                                       
         Accounts receivable                       48,816         (139,847)   
         Inventory                                (39,039)        (365,680)   
         Prepaid insurance and expenses           103,908                0    
         Other assets                                   0          (16,615)    

Increase (decrease) in operating liabilities:
         Accounts payable                         524,779          408,581 
         Accrued expenses                         (81,882)         112,649 
         Payroll taxes payable                    321,727           51,189 
         Deferred compensation                   (122,500)               0  
                                                                         
         Net cash used in operating                                      
          activities                             (745,643)      (1,158,374)  

Cash flows from investing activities:
         Purchase of property and equipment       (18,531)        (130,000) 
         Acquisition of goodwill                 (504,172)        (875,000) 
         Acquisition of other tangible                                      
          assets                                 (460,000)               0  
         Net cash used in operating                                         
          activities                             (982,703)      (1,005,000) 
                                                                            
Cash flows from financial activities:                                       
         Cash overdrafts                                0           68,303  
         Payments collected on (issuance)                                   
          of) note payable                       (115,594)        (209,929) 
         Proceeds from (repayments of)                                      
          note payable                           (668,839)       1,600,000  
         Issuance of common stock               2,589,617            5,000  
         Issuance of preferred stock                  500          700,000  
                                                                            
         Net cash from                                                      
         financing activities                   1,805,684        2,163,374   
</TABLE> 

                                       6
<PAGE>
 
Net increase(decrease) in cash/cash equiv.    77,338                0

Cash and cash equivalent - beginning               0                0

Cash and cash equivalent - ending             77,338                0

SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES:

On October 22, 1998, Perry's Majestic Beer, Inc., (the "Company") entered into a
letter of intent to acquire a minimum of 80% of the capital stock of a beverage
company, X-Treem Products Corporation ("X-Treem"), through an exchange with the
shareholders of X-Treem of up to 93% of the issued and outstanding shares of the
Company's capital stock as of the closing of the exchange transaction, whereby
X-Treem will become a subsidiary of the Company. On December 1, the Company
entered into an exclusive licensing agreement with X-Treem whereby the Company
received the exclusive right to sell and distribute the McCoy's line of all
natural beverages and an option to purchase the McCoy's beverage brand and the
intellectual property associated therewith (the "Option"). Pursuant to the plan
to acquire a minimum of 80% of the capital stock of X-Treem, on December 7,
1998, the Company acquired approximately 67% of the capital stock of X-Treem
from the X-Treem shareholders in exchange for approximately 68% of the issued
and outstanding shares of the Company's capital stock. This was accomplished
through the issuance of 8,000,000 shares of common stock to three shareholders
of X-Treem. The Company will complete the stock transaction with the
shareholders of X-Treem through the issuance of additional shares of its capital
stock to X-Treem shareholders in exchange for additional shares of their capital
stock. On December 23, 1998, the Company exercised its Option with respect to
the McCoy's beverage brand by fulfilling the payment and other terms of the
option agreement, including executing a promissory note in the amount of
$300,000 made payable to X-Treem in 2001.

In connection with the acquisition of Leroux Creek Food Corporation, Inc. on
July 2, 1998, the Company executed a note with the Seller in the amount of
$587,500. In addition, the Company agreed to issue options providing for the
purchase of a total of 750,000 shares of common stock at fair market value at
the date of grant. Amortization of goodwill of $68,120 was recorded related to
the acquisition of Leroux Creek Food Corporation for the six months ended
December 31, 1998 [See Notes 7D and 10D].

On May 18, 1998, the Company sold the assets, all rights to licenses, permits
and contracts, and all trademarks, trade names and processes of the Post Road
Beer brand for $330,000. The purchaser executed a promissory note for $320,000,
and the Company has received $248,331 in payments as of December 31, 1998.

In November 1997, the Company issued 25,000 shares of common stock to an
employee of the Company for past services rendered. An expense of $14,060 was
recorded as a result of this transaction which represented the fair market value
of the stock at the time of issuance.

In September 1997, the Company issued 50,000 shares of common stock to an
officer of the Company in connection with the acquisition of Orchard Annie.
Goodwill of $25,000 was recorded as a result of these transactions, which
represents the fair market value of the stock at time of issuance. Related
amortization of $2,500 was recorded for the year ended March 31, 1998. In
December 1998, these shares were surrendered by the officer to the Company.

                                       7
<PAGE>
 
On June 13, 1997, the Company exchanged a $100,000 promissory note receivable
from Bev-Tyme, Inc. ("Bev-Tyme") for 7,000,000 shares of the Company's Series B
Preferred Stock held by Bev-Tyme. Treasury stock of $2,000,000 was recorded and
the unrealized loss and investment in Bev-Tyme eliminated. Bev-Tyme filed for
bankruptcy on April 9, 1998. The Series B Preferred Treasury Stock was canceled
March 31, 1998.

In June 1997, the Company issued options for 200,000 shares of common stock to
consultants and recorded compensation expense of $46,000 for services rendered. 

                                       8
<PAGE>
 
PERRY'S MAJESTIC BEER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[UNAUDITED]

[1]  Basis of Presentation

On October 22, 1998, Perry's Majestic Beer, Inc., a Delaware corporation,(the
"Company") entered into a letter of intent to acquire a minimum of 80% of the
capital stock of a beverage company, X-Treem Products Corporation ("X-Treem")
through an exchange with the shareholders of X-Treem of up to 93% of the issued
and outstanding shares of the Company's capital stock as of the closing of the
exchange transaction, whereby X-Treem will become a subsidiary of the Company.
On December 1, 1998 the Company acquired an option to purchase the McCoy's
beverage brand and the intellectual property associated therewith (the
"Option"). On December 7, 1998, the Company acquired approximately 67% of the
capital stock of X-Treem from X-Treem shareholders in exchange for approximately
68% of the issued and outstanding shares of the Company's capital stock. On
December 23, 1998, the Company exercised its Option with respect to the McCoy's
beverage brand by fulfilling the payment and other terms of the option
agreement, including executing a promissory note in the amount of $300,000 made
payable to X-Treem in 2001. The Company will complete the stock transaction with
the shareholders of X-Treem through the issuance of additional shares of its
stock to X-Treem shareholders in exchange for additional shares of their capital
stock. For accounting purposes only, the transaction was treated as a reverse
acquisition whereby X-Treem was the acquirer. The historical financial
statements prior to April 1, 1998 are those of X-Treem. The statements of
operations for the three months and nine months ended December 31, 1998 include
activities of X-Treem for the entire periods and activities of the Company from
December 7, 1998 through December 31, 1998.

[2]  Organization and Nature of Business

The Company was formed in December 1995. The Company's main office is in
Secaucus, New Jersey. There were no revenue or expense activities through March
31, 1996. The Company became a subsidiary of Bev-Tyme, Inc. ("Bev-Tyme") as of
March 29, 1996. Perry's is no longer a subsidiary of Bev-Tyme, although the two
companies continued to have some common management through July 17, 1997.
However, for accounting purposes Perry's was treated as a subsidiary of Bev-Tyme
through June 30, 1997. As a corporation, the Company was a separate legal entity
even when it was a subsidiary. Bev-Tyme filed for bankruptcy on April 9, 1998.

X-Treem Products Corporation, a Delaware corporation, was formed on April 11,
1997.

The Company has completed its transformation from a microbrew beer company to a
non-alcoholic beverage and natural food company. The Company sold its Post Road
line of ales on May 18,1998. During the second quarter, it ceased brewing the
Perry's Majestic line of organic beers. The Company produces an applesauce
brand, Leroux Creek, through one independent unaffiliated applesauce
manufacturer.

The Company's Leroux Creek applesauce line is produced with apples "grown
without pesticides" and is available in ten flavors in both 24 ounce and 4 ounce
cups sold in a four pack. There are currently eight brokers and 21 distributors
selling the Leroux Creek line of applesauces.

                                       9
<PAGE>
 
The Company has discontinued its Quigley's Orchard six ounce single serve line
of deluxe applesauces to concentrate on its Leroux Creek brand. The Company will
determine in the future whether it will reintroduce the line in a new package
size.

The Company's McCoy's line of all natural microbrewed fruit drinks, lemonades
and ready to drink teas is available in ten flavors and sold in 20 ounce glass
bottles. There are currently 23 distributors selling McCoy's beverages. The
beverages are bottled by an independent unaffiliated bottling company.

[3] Summary of Significant Accounting Policies

[A] Basis of Reporting - The accompanying unaudited financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-QSB and
Item 310(b)of Regulation S-B. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, such statements
include all adjustments which are considered necessary in order to make the
interim financial statements not misleading. The results of operations for any
interim period are not necessarily indicative of the results for the full year.
These financial statements should be read in conjunction with the financial
statements and notes thereto, contained in the annual report on Form 10-KSB for
the year ended March 31, 1998.

[B] Principles of Consolidation - The consolidated financial statements include
the accounts of Perry's and its wholly-owned subsidiaries and of X-Treem.
Material intercompany transactions and balances have been eliminated in
consolidation.

[C] Use of Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.

[D] Cash and Cash Equivalents - The Company's policy is to classify all highly
liquid investments with a maturity of three months or less when purchased as
cash equivalents. Neither the Company nor X-Treem had cash equivalents at
December 31, 1998.

[E] Goodwill - Amounts paid in excess of the estimated value of net assets
acquired of Riverosa, Old Marlborough, Orchard Annie, Inc., Leroux Creek Food,
Inc. and X-Treem were charged to goodwill. Goodwill relates to revenues the
Company anticipates realizing in future years. The Company decided to amortize
its goodwill over a period of up to five years under the straight-line method.
The Company's policy is to evaluate the periods of goodwill amortization to
determine whether later events and circumstances warrant revised estimates of
useful lives. The Company will also evaluate whether the carrying value of
goodwill has become impaired by comparing the carrying value of goodwill to the
value of projected undiscounted cash flows from acquired assets or businesses.
Impairment is recognized if the carrying value of goodwill is less than the
projected undiscounted cash flow from the acquired assets or business [See Note
18].

[F] Inventories - Inventories are stated at the lower of cost or market. Cost,
which includes purchases, freight and packaging, raw materials, packing fees,
and 

                                       10
<PAGE>
 
finished products is determined on the first-in, first-out basis.

[G] Furniture, Fixtures and Equipment - Furniture, fixtures and equipment are
stated at cost and are depreciated over its estimated useful life of 5 to 7
years. Leasehold improvements are amortized over the lesser of the useful life
of the improvements or the lease term. Depreciation and amortization are
calculated using the straight-line method.

[H] Advertising Expense - Advertising costs are expensed as incurred.

[I] Risk Concentrations - Financial instruments that potentially subject the
Company to concentrations of credit risk include cash and cash equivalents and
accounts receivable arising from its normal business activities. The Company
places its cash and cash equivalents with high credit quality financial
institutions located in the New York metropolitan area.

The Company maintains cash and cash equivalent balances at a financial
institution in New York. Accounts at this institution are insured by the Federal
Deposit Insurance Corporation up to $100,000. At December 31, 1998, the Company
had no uninsured cash balance.

The Company performs certain credit evaluation procedures and does not require
collateral. The Company believes that credit risk is limited because the Company
routinely assesses the financial strength of its customers, and based upon
factors surrounding the credit risk of its customers, establishes an allowance
for uncollectable accounts and, as a consequence, believes that its accounts
receivable credit risk exposure beyond such allowances is limited. The Company
established an allowance for doubtful accounts at December 31, 1998 of $66,628.
The Company believes any credit risk beyond this amount would be negligible.

The Company sells its applesauce brand through a system of independent
unaffiliated brokers and distributors. Food brokers act as agents for the
Company within designated territories or specific channels of trade. The Company
has 8 brokers and 21 distributors for its Leroux Creek brand. It is continuing
to attempt to expand the brokerage and distribution systems.

The Company sells its McCoy's line of all natural beverages through a system of
independent regional beverage distributors and food distributors. As of December
31, 1998 the Company had 23 beverage distributors. It is continuing to attempt
to expand the distribution system.

[J] Stock Issued to Employees - The Company adopted Statement of Financial
Accounting Standards ["SFAS"] No. 123, "Accounting for Stock-Based Compensation"
on April 1, 1996 for financial note disclosure purposes and will continue to
apply the intrinsic value method of Accounting Principles Board ["APB"] Opinion
No. 25, "Accounting for Stock Issued to Employees" for financial reporting
purposes.

[K] Revenue Recognition - Revenue is recognized at the time products are shipped
and title passes.

[L] Net [Loss] Per Share -The FASB issued SFAS No. 128, "Earnings Per Share," in
February 1997. SFAS No. 128 simplifies the earnings per share ["EPS"]
calculations required by Accounting Principles Board ["APB"] Opinion No. 15, and
related interpretations, by replacing the presentation of primary EPS with a
presentation of basic EPS. SFAS No. 128 requires dual presentation of basic and
diluted EPS by entities with complex capital structures. Basic EPS includes no

                                       11
<PAGE>
 
dilution and is computed by dividing income available to common stockholders by
the weighted-average number of common shares outstanding for the period. Diluted
EPS reflects the potential dilution of securities that could share in the
earnings of an entity, similar to the fully diluted EPS of APB Opinion No. 15.
SFAS No. 128 is effective for financial statements issued for periods ending
after December 15, 1997, including interim periods; earlier application is not
permitted. The Company has adopted SFAS No. 128 and prior period EPS data have
been restated. Basic EPS is based on average common shares outstanding and
diluted EPS include the effects of potential common stock, such as, options and
warrants, if dilutive. The Company has potentially dilutive securities that were
not included in the computation of diluted earnings per share because to do so
would have been anti-dilutive for the periods presented. Such securities may
dilute EPS in future years.

[M] Impairment - Certain long-term assets of the Company are reviewed at least
annually as to whether their carrying value has become impaired, pursuant to
guidance established in Statement of Financial Standards ["SFAS"] No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of." Management considers assets to be impaired if the carrying
value exceeds the future projected cash flows from related operations
[undiscounted and without interest charges]. If impairment is deemed to exist,
the assets will be written down to fair value or projected discounted cash flows
from related operations. Management also re-evaluates the periods of
amortization to determine whether subsequent events and circumstances warrant
revised estimates of useful lives. During the year ending March 31, 1998, the
Company determined an impairment of goodwill and intangibles existed [See Note
18].

[N] Income Taxes - The Company accounts for income tax expense and liabilities
under the asset and liability method. Deferred income taxes are provided for
temporary differences between financial and income tax reporting, relating
principally to depreciation, deferred compensation and amortization.

[4] Going Concern

The financial statements presented herein have been prepared in conformity with
generally accepted accounting principles, which contemplates continuation of the
Company as a going concern and realization of assets and settlement of
liabilities and commitments in the normal course of business.

The Company incurred a net loss of $2,341,181 and utilized cash of approximately
$1,085,000 for operations for the year ended March 31, 1998. The inability of
the Company to generate projected cash needed for operations, considering
currently available funds, creates an uncertainty about the Company's ability to
continue as a going concern. The financial statements do not include any
adjustments that might be necessary if the Company is unable to continue as a
going concern. The Company is conducting an additional financing which it
expects to close in March, 1999. The continuation of the Company as a going
concern is dependent upon the success of this financing.

There can be no assurances that management's plans to reduce operating losses
and to obtain additional financing to fund operations will be successful. The
financial statements do not include any adjustments relating to the
recoverability and classification of recorded assets, or the amounts and
classification of liabilities that might be necessary in the event the Company
cannot continue in existence.

                                       12
<PAGE>
 
[5] Inventories

The Company's inventory consists of raw materials, packaging and finished
products of $310,070.

[6] Furniture, Fixtures and Equipment and Depreciation

Furniture, fixtures and equipment and accumulated depreciation as of December
31, 1998 are as follows:

Furniture and Fixtures                         $   47,796
Transportation Equipment                           23,425
Kegs                                                8,395
Storage Equipment                                  22,810
                                               ----------
Total - At Cost                                   102,426
Less:  Accumulated Depreciation                    25,845

  Net                                          $   76,581
                                               ==========

Depreciation expense for the nine months ended December 31, 1998 and 1997 was
$11,673 and $12,921, respectively.

[7] Acquisitions

[A] Riverosa Company, Inc. - On March 29, 1996, the Company entered into an
agreement to acquire all of the stock of Riverosa Company, Inc. for $250,000, of
which $150,000 in cash was put into escrow as of March 31, 1996 and for which
the Company issued a note payable for $100,000. The note provided for interest
of 8% and was paid in full in August of 1996 with proceeds from the Company's
initial public offering. The combination was accounted for by the purchase
method. Goodwill of $246,000 was recorded and was to be amortized over five
years under the straight-line method. Amortization of goodwill of $12,300 was
recorded for the three months ended June 30, 1997. As of March 31, 1998, the
unamortized balance of $147,600 was written off [See Note 18].

[B] Old  Marlborough  Brewing Co., Inc.("Old Marlborough") - In September of
1996, the Company acquired Old Marlborough's Post Road microbeer brand and other
assets. The Company paid $172,213, of which $35,513 was allocated for the
purchase of inventory and equipment and $86,700 was allocated for the repurchase
of distribution rights. In February 1997, the Company issued 25,000 shares of
common stock valued at approximately $214,000 as additional consideration for
the acquisition of Old Marlborough. Goodwill of $264,062 was recorded and was
amortized over five years under the straight-line method. For the three months
ended June 30, 1997, amortization of goodwill was approximately $13,203. As of
March 31, 1998, the unamortized balance of goodwill of $184,844 and the
unamortized balance of distribution rights of $60,690 were written-off [See Note
18].

[C] Orchard Annie, Inc. - In March 1997, the Company entered into an agreement
to acquire all of the stock of Orchard Annie, Inc., an all natural apple sauce
company from an officer of the Company for approximately $67,000 in cash and
recorded goodwill for the full value. Additionally, in September of 1997,
Perry's issued 50,000 shares of common stock to the same officer in connection
with the sale. The fair value of these shares of $25,000 is allocated to

                                       13
<PAGE>
 
goodwill. The combination is accounted for by the purchase method. Amortization
of goodwill of $9,236 was recorded for the six months ended September 30, 1998.
In addition, the Company agreed to pay an officer of the Company, who was also
the sole shareholder of Orchard Annie, Inc., a royalty payment of $.25 per case
of 12 units for the first 500,000 cases and $.125 per case of 12 units
thereafter for a period of fifteen years. For the nine months ended December 31,
1998 and 1997, royalty expense was $946 and $1,797, respectively.

[D]  Acquisition of Leroux Creek Food Corporation, Inc. - On July 2, 1998, the
Company acquired the rights, title and interest, customer lists, distribution
rights and related recipes for applesauce and applesauce blends of Leroux Creek
applesauce brand for the sum of $650,000 from the Leroux Creek Food Corporation
and recorded the full amount as goodwill to be amortized over 5 years. On July
2, 1998, the Company paid $62,500 and was the maker of a note to the favor of
the seller in the amount of $587,500 with interest at a rate of 9%, with the
outstanding balance of principal and interest payable on or before January 2,
1999. Subsequently, the parties agreed to extend the note payment term to May
31, 1999, subject to the Company making certain monthly payments toward the
principal. The parties agreed that the $62,500 would be liquidated damages in
the event the Company does not make the payment when due. In the event of such
non-payment, the ownership of the Leroux Creek brand will revert to the seller.
The Company does not presently have funds available to pay the note, and the
Company's ability to pay the note and retain ownership of the Leroux Creek brand
will be dependent upon its success in identifying sources for such financing, on
a timely basis, and on terms acceptable to the Company. The Company also agreed
to issue options to the seller to purchase 250,000 shares of common stock at
fair market value at the date of the grant valued at $31,200. Amortization of
goodwill of $68,120 was recorded related to the acquisition of the Leroux Creek
brand for the six months ended December 31, 1998.

[E]  Capital Stock of X-Treem - On October 22, 1998, the Company entered into a
letter of intent to acquire a minimum of 80% of the capital stock of X-Treem
through an exchange with the shareholders of X-Treem of up to 93% of the issued
and outstanding shares of the Company's capital stock as of the closing of the
exchange transaction, whereby X-Treem will become a subsidiary of the Company.
On December 1, the Company entered into an exclusive licensing agreement with
X-Treem whereby the Company received the exclusive right to sell and distribute
the McCoy's line of all natural beverages and an option to purchase the McCoy's
beverage brand and the intellectual property associated therewith (the
"Option"). Pursuant to the plan to acquire a minimum of 80% of the capital stock
of X-Treem, on December 7, 1998, the Company acquired approximately 67% of the
capital stock of X-Treem from X-Treem shareholders in exchange for approximately
68% of the issued and outstanding shares of the Company's capital stock. The
Company will complete the stock exchange transaction with the shareholders of
X-Treem through the issuance of additional shares of its capital stock to
X-Treem shareholders in exchange for additional shares of their capital stock.
On December 23, 1998, the Company exercised its Option with respect to the
McCoy's beverage brand by fulfilling the payment and other terms of the option
agreement, including executing a promissory note in the amount of $300,000 made
payable to X-Treem in 2001.

Prior to the license of such rights to the Company, X-Treem produced and
marketed McCoy's beverages, a line of "microbrewed" fruit drinks, lemonades and
ready to drink teas available in ten flavors and sold in 20 ounce bottles.

                                       14
<PAGE>
 
[8] Related Party Transactions

[A]  Investment - On March 29, 1996, the Company issued to Bev-Tyme (a public
corporation) 500,000 shares of convertible Class A Preferred Stock and 7,000,000
shares of non-convertible Class B Preferred Stock for 400,000 shares of Series C
Preferred Stock of Bev-Tyme, Inc. (valued at $2,000,000 at March 31, 1996) and
$150,000. Each share of Series C Preferred Stock paid an annual dividend of
$0.50 per share and was convertible at the option of the holder into 1.8 shares
of Bev-Tyme common stock. On April 9, 1998, Bev-Tyme filed for bankruptcy and no
dividends were received for the year ended March 31, 1998. As of March 31, 1996,
the Company had received $75,000 of the cash payment due from Bev-Tyme and the
balance of $75,000 was received on April 4, 1996. Each share of Class A
Preferred Stock may be converted by the holder into one (1) share of Common
Stock. Each share of Class A Preferred Stock entitles the holder thereof to vote
on all matters submitted to the shareholders of the Company.

In January 1997, Perry's received a dividend of 524,000 shares of Bev-Tyme
common stock on the investment of 400,000 shares of Bev-Tyme Series C Preferred
Stock.

On April 17, 1997, the Company loaned $100,00 to Bev-Tyme in exchange for which
Bev-Tyme issued a promissory note to the Company. Bev-Tyme was required to repay
the entire principal plus interest on or before April 16, 1998. The Company
retained the right to exchange the promissory note for the 7,000,000 shares of
the Company's Series B Preferred Stock held by Bev-Tyme. On June 13, 1997, the
Company exchanged the $100,000 promissory note from Bev-Tyme for the 7,000,000
shares of the Company's Series B Preferred Stock held by Bev-Tyme. Treasury
stock of $2,000,000 was recorded and the unrealized loss and investment in
Bev-Tyme has been eliminated. The Series B Preferred Treasury Stock was canceled
March 31, 1998. The 400,000 shares of Series C Preferred of Bev-Tyme and the
524,000 shares of Bev-Tyme common stock received as a dividend on the investment
in Bev-Tyme are still held by Perry's and are accounted for with no value on the
financial statements. As a result of the June 13, 1997 transaction, Perry's was
no longer a subsidiary of Bev-Tyme, although the two companies continued to have
some common management through July 7, 1997. However, for accounting purposes
Perry's was treated as a subsidiary of Bev-Tyme through June 30, 1997.

[9] Income Taxes

Income tax at the federal statutory rate reconciled to the Company's effective
rate is as follows:

                                                           March 31,
                                                            1 9 9 8

Federal Statutory Rate                                       (34.0)%
Non-Deductible Expenses                                      (10.4)
Net Operating Loss For  Which No Tax Benefit was Received     44.4

  Effective Rate                                                -- %

The Company has net operating loss carryforwards of approximately $1,600,000 all
of which will expire in 2012 through 2013.

                                       15
<PAGE>
 
The major components of deferred income tax assets and liabilities are as
follows:

                                                 March 31,
                                                  1 9 9 8
Deferred Tax Liabilities
  Accelerated Depreciation                      $  (2,250)
                                                =========

Deferred Tax Assets:
  Net Operating Loss                            $ 720,311
  Excess Book Amortization Over Tax                27,910
  Reserves                                          6,750
  Book Writedown of Goodwill                      201,452
  Deferred Compensation                           324,900
                                                ---------

  Total                                         $1,281,323


Net Deferred Tax Asset:
  Before Valuation Allowance                    $1,279,073
  Valuation Allowance                            1,279,073

  Net Deferred Income Tax Asset                 $       --
  -----------------------------                 ==========

The Company recorded a valuation allowance of $1,279,073, an increase of
$732,059 over the preceding year, due to the uncertainty that the Company will
generate income in the future sufficient to fully or partially utilize these
carryforwards.

[10] Stock Options

[A] In March 1996, the Board of Directors of the Company adopted, and the
stockholders of the Company approved, the adoption of the 1996 Stock Option
Plan. The maximum number of shares of common stock with respect to which awards
may be granted pursuant to the 1996 Plan is initially 2,000,000 shares. No
options are outstanding under this plan.

[B] In connection with the initial public offering, the Company issued to its
underwriter in July 1996 an option to purchase 58,333 shares of common stock at
a purchase price of $7.20 per share exercisable commencing July 1997 and
expiring July 2001.

[C] During the year ended March 31, 1998, the Company issued a total of
1,550,000 options to purchase common stock with an exercise price equal to fair
market value at time of issuance to certain officers, directors and employees.
The Company recorded compensation expense of $46,000 for 200,000 common stock
options issued to consultants for services rendered during the year.

[D] In July 1998, the Company agreed to issue an option to purchase 250,000
shares of common stock at fair market value at the date of grant in connection
with the acquisition of Leroux Creek applesauce brand. In addition, the Company
entered into a consulting agreement with the former owner of the Leroux Creek
brand for services to be provided to the Company by such former owner over a
three year period. The Company agreed to issue to the former owner an option to
acquire

                                       16
<PAGE>
 
up to 500,000 shares of the Company's common stock, at fair market value as
follows: 200,000 options exercisable immediately, and 100,000 options
exercisable per year for the following three years. This agreement was valued at
$3,000 and recorded as deferred compensation. Amortization of $250 was recorded
for the three months ended September 30, 1998.

[E]  In December, 1999 the Company issued a combined total of 850,000 common
stock options at fair market value to Robert Sipper and Mark Butler in exchange
for the return of 200,000 shares of common stock from Robert J. Sipper and
250,000 shares of common stock from Mark Butler, thereby reducing the amount of
deferred compensation.

There was no stock option activity during the year ended March 31, 1997.

A summary of stock option activity is as follows:
                                                          Weighted Average
                                                Common     Exercise Price
                                                 Stock      Common Stock

Outstanding and Exercisable on March 31, 1998
  Forwarded                                     500,000      $   0.875
                                                300,000           0.50
                                                750,000           0.16

  Granted (Subsequent to 3/31/98)               750,000      $    0.10
                                                850,000           0.05
  Exercised                                          --             --
  Forfeited/Expired                                  --             --
                                             ----------      ---------

  Outstanding on December 31, 1998           $3,150,000      $    0.26
  ---------------------------------          ==========      =========

  Exercisable on December 31, 1998           $2,850,000      $   0.278
  ---------------------------------          ==========      =========

The following table summarizes information about stock options outstanding at
December 31, 1998. The common stock options issued to officers, directors and
employees do not expire and may be exercised at anytime. The 200,000 common
stock options to be issued to consultants at an exercise price of $0.875 have a
weighted average remaining contractual life of 3 years. The 750,000 options
issued with an exercise price of $0.13 have a weighted average remaining
contractual life of 4.75 years. All other options expire in 9.5 years.

                               Common Stock
                         Exercise Price     Shares

                           $    0.05        850,000
                           $    0.10        750,000
                           $    0.16        750,000
                           $    0.50        300,000
                           $   0.875        500,000
                           $    7.20         58,333
                                             ------

                         Total            3,208,333

                                       17
<PAGE>
 
[11] Common Stock

[A] In January 1996, the Company issued 2,500,000 shares of common stock to
seven [7] parties for a total consideration of $50,000.  At March 31, 1996,
$45,200 was collected and the balance of $4,800 was received April 4, 1996.

[B] The Company's registration statement for 583,335 shares of common stock at
$6.00 per share was declared effective in July of 1996 and net proceeds of
approximately $2,475,000 were received in August of 1996.

[C] In September 1997, the Company issued 50,000 shares of common stock to an
officer of the Company in connection with the acquisition of Orchard Annie, Inc.
Goodwill of $25,000 was recorded [See Note 7C].  In December, 1998 the shares
were returned to the Company and retired.

[D] In November 1997, the Company issued 25,000 shares of common stock to an
employee of the Company for past services rendered.  An expense of $14,060 was
recorded as a result of this transaction, which represents the fair market value
of the stock at time of issuance.

[E] In December 1998, as part of the Company's planned acquisition of 80% of the
capital stock of X-Treem, 8,000,000 shares of common stock were issued to three
shareholders of X-Treem.

[12] Bridge Loan

On March 31, 1996, the Company  borrowed an aggregate of $150,000 from seven [7]
unaffiliated lenders [the "Bridge Lenders"]. In exchange for making loans to the
Company, each Bridge Lender received a promissory note [the "Bridge Note"]. Each
of the Bridge Notes bears interest at the rate of eight  percent [8%] per annum.
As of March 31, 1996, $90,000 was received in cash from the bridge loan and
$60,000 was received on April 4, 1996.  The principal balance of $150,000 and
interest for $4,208 was paid August 5, 1996.

[13] Note Payable

Debt as of December 31, 1998 consists of the following:

Note payable - due in October 2002 with interest at
 10.79% per annum                                                   $   18,661
 
Note payable - due on or before January 2, 1999 with
 interest at 9% per annum                                              562,500
 
Notes payable - X-Treem                                                940,000
                                                                    ----------
Total                                                                1,521,161
 
Less:  Current Portion                                               1,352,500
                                                                    ----------
  Non-Current Portion                                               $  168,661
  -------------------                                               ==========

                                       18
<PAGE>
 
Maturities of the notes payable as of December 31, 1998 are as follows:

September 30,
  1999                                    $1,352,500
  2000                                       154,340
  2001                                         5,838
  2002                                         6,392
  2003                                         2,091
  Thereafter                                      --
                                           ---------

  Total                                   $1,521,161
  -----                                    =========

[14] New Authoritative Pronouncements

The FASB has  issued  SFAS  No.  131,  "Disclosures About Segments of an
Enterprise and Related Information." SFAS No. 131 changes how operating segments
are reported in annual financial statements and requires the reporting of
selected information about operating segments in interim financial reports
issued to shareholders.  SFAS No. 131 is effective for periods beginning after
December 15, 1997, and comparative information for earlier years is to be
restated.  SFAS No. 131 need not be applied to interim financial statements in
the initial year of its application. The Company expects to adopt the provisions
of SFAS No. 131 in its annual financial statements.


In February 1998, the FASB issued SFAS No. 132, "Employers Disclosure about
Pension and Other Postretirement  Benefits," which is effective for fiscal years
beginning after December 15,1997. The modified disclosure requirements will not
have a material impact on the Company's results of operations, financial
position or cash flows.

In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging  Activities."  SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging activities. SFAS No. 133
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value.  The accounting for changes in the fair value of a derivative
depends on the intended use of the derivative and how it its designated, for
example, gain or losses related to changes in the fair value of a derivative not
designated as a hedging instrument are recognized in earnings in the period of
the change, while certain types of hedges  may be initially reported as a
component of other comprehensive income (outside earnings) until the
consummation of the underlying transaction.

SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. Initial application of SFAS No. 133 should be as of the
beginning of a fiscal quarter; on that date, hedging relationships must be
designated anew and documented pursuant to the provisions of SFAS No. 133.
Earlier application of all of the provisions of SFAS No. 133 is encouraged, but
it is permitted only as of the beginning of any fiscal quarter.  SFAS No. 133 is
not to be applied  retroactively to financial statements of prior periods. The
Company does not currently have any derivative instruments and is not currently
engaged in any hedging activities.

                                       19
<PAGE>
 
[15] Financial Instruments

Generally accepted accounting principles require disclosing the fair value of
financial instruments to the extent practicable for financial instruments which
are recognized or unrecognized in the balance sheet.  The fair value of the
financial instruments disclosed herein is not necessarily representative of the
amount that could be realized or settled, nor does the fair value amount
consider the tax consequences of realization or settlement.

For certain instruments, including cash and cash equivalents, accounts
receivable  and accounts payable, it was assumed that the carrying amount
approximated fair value because of the short maturities of these instruments.
The fair value of  long-term debt is estimated based on rates at which the
Company could borrow funds with similar remaining maturities. The fair value of
the Company's debt approximates its carrying value.

[16] Commitments and Contingencies

[A]  Employment  Agreements  - As of December 31, 1998, the Company has two
employment agreements with executives of the Company that expire in the year
2001. The annual commitments for compensation are approximately $270,000 each
year. In addition, the Company has agreed to grant to an executive 20,000 common
stock options each year as a bonus for the next three  years,  exercisable  at
$6.00 per share for a period of four years.  No common stock options exercisable
at $6.00 have been issued.  On January 16, 1998, the Company issued 100,000
common stock options exercisable at $0.875 to this same executive.  The Company
also agreed to grant to another executive 100,000 common stock options on each
of March 31, 1998 and March 31, 1999, exercisable at fair market value at the
date of grant.  The options relating to this agreement were issued on January
16, 1998 at fair market value [See Note 10].

During February 1997, Perry's issued a total of 400,000 shares of Perry's common
stock to two officers as consideration for extending their employment agreements
through 2001. As a result of this agreement, deferred compensation of $2,000,000
was recorded and related amortization of $356,250 was expensed for both of the
nine months ended December 31, 1998 and 1997. In December, 1998 both of these
officers returned the 400,000 shares of common stock in exchange for an
aggregate of 850,000 common stock options at fair market value.

[B] Consulting  Agreements - In February 1997, the Company issued 200,000 shares
of common stock to a consultant for services to be performed over a three year
period. On June 4, 1997, this agreement was amended extending the period of
service for one additional year. This agreement was valued at $450,000 and
recorded as deferred compensation. Amortization of $82,500 was recorded as
amortization expense for both the nine months ended December 31, 1998 and 1997.

[C]  Consulting  Agreement  - On  May  23,  1997,  the  Company  entered  into a
consulting agreement whereby the Consultant agrees to provide the Company with
consulting services in connection with financial management and other general
consulting as required by the Company. In consideration for these services, the
Company issued in June of 1997 an option to purchase 100,000 shares of the
Company's common stock at an exercise price of $0.875 per share valued at
$16,000.  In addition, the agreement also calls for a per diem payment of $300,
whenever the consultant's services are requested by the Company.

[D] Royalty  Agreements - In connection with the acquisition of Orchard Annie,
Inc., the Company has agreed to pay a royalty payment of $0.25 per 12 pack

                                       20
<PAGE>
 
case for each of the first 500,000 cases sold and $0.125 per case thereafter for
a period of fifteen years.  Royalty expense of $946 and $1,797 was recorded for
the nine months ended December 31, 1998 and 1997, respectively.

In addition, the Company has agreed to pay to a graphic design firm a royalty of
$0.0125 per 12 pack case sold for design services rendered. Royalty expense of
$442 was recorded for the nine months ended December 31, 1998 under this
agreement.

[E] & [F] Loan Guarantee/Pledged Inventory - The Company purchased the Post Road
brand of ales from Old Marlborough Brewing Co., subject to a lien held by Fleet
Bank on the purchased assets which secured a loan made to the former owner of
the Post Road brand by Fleet Bank. At the time the Company sold the Post Road
brand, it negotiated with Fleet Bank to remove the lien in order to accomplish
the sale, but was required to guarantee payment of the outstanding balance of
the former owner's loan and to secure the guarantee with a lien on the Company's
assets. The outstanding balance of the loan is approximately $66,000 at December
31, 1998.

[17] Leases

[A]  Future minimum payments under non-cancelable operating leases of the
Company for transportation equipment and office space are as follows at December
31, 1998:

1999                                $  18,719
2000                                   12,626
2001                                       --
2002                                       --
2003                                       --
Thereafter                                 --
                                    ---------

 Total Minimum Lease Payments       $  31,345

[B] Rent expense for the nine months ended December 31, 1998 and 1997 was
$11,106 and $9,900, respectively.

[C] Rental Agreement - In May of 1997, the Company entered into a three year
lease for office space with monthly rent of $1,200 for the first year,  $1,248
and $1,297 for each of the two years thereafter.

[18] Impairment of Long-Lived Assets

During the fiscal year ending March 31, 1998, the Company recorded an impairment
loss of $545,764 from the write down of goodwill and other intangibles.  As a
result of the current year's loss and the necessary revisions to the projected
future undiscounted cash flows, there is no longer justification for the
carrying value of the goodwill and intangibles allocated to Riverosa and Old
Marlborough Brewing Co., Inc., including unamortized distribution rights and the
unamortized balance of intangible assets related to design work done for Perry's
and Post Road beer brands.  Fair value of goodwill and  intangibles was based on
the present value of estimated expected future cash flows from the related
assets.  As of June 30, 1998, goodwill of $92,348 and related accumulated
amortization of $20,587 relates to the purchase of Orchard Annie,  Inc.

The following table presents the write down of good will and other intangible
assets at March 31, 1998:

                                       21
<PAGE>
 
                                               Accumulated
                                         Cost  Amortization    Writedown

Goodwill Riverosa                   $  246,000  $   98,400    $  147,600
Goodwill Old Marlborough            $  264,062  $   79,218       184,844
Other Intangible Assets             $  166,264  $   13,634       152,630
Distribution Rights                 $   86,700  $   26,010        60,690
                                                              ----------

  Total                                                       $  545,764
  -----                                                       ==========


[19] Post Road Sale

On May 18, 1998, the Company sold the assets, all rights to licenses, permits
and contracts, and all trademarks, tradenames and processes of the Post Road
beer brand with a net book value of approximately $131,500 to the Brooklyn
Brewery Corporation ["BBC"] for consideration of $330,000 of which $10,000 was
paid in cash. BBC executed a secured promissory note for the balance of
$320,000, and the Company has received payments of $236,667 under this note as
of December 31, 1998.  In addition, BBC put $35,000 into escrow to satisfy the
outstanding tax liability for an executive of Old Marlborough. As of December
31, 1998, $83,333 remains outstanding under the note.

[20] Subsequent Events

In January, 1999, the Company entered into an exclusive license agreement
whereby the Company exclusively licensed for liquids and apple based products a
proprietary advanced delivery technology.  The technology allows the Company to
incorporate functional amounts of nutritional ingredients, selectively directed
to different locations in the body on a sustained release basis for maximum
effect, in clear beverages without compromising the taste, color, mouth-feel,
stability or cost of the products.


                       . . . . . . . . . . . . . . . . .

                                       22
<PAGE>
 
Item 2:

PERRY'S MAJESTIC BEER, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
------------------------------------------------------------------------------


For the nine months ended December 31, 1998, compared with the nine months ended
December 31, 199 7.

The following discussion of the Company's financial condition as of December 31,
1998 and results of operations for the nine months ended December 31, 1998

and 1997 includes the transactions with X-Treem Products Corporation. For
accounting purposes only, the transaction was treated as a reverse acquisition
whereby X-Treem was the acquirer. The historical financial statements prior to
April 1, 1998 are those of X-Treem. The statements of operations for the three
months and nine months ended December 31, 1998 include activities of X-Treem for
the entire periods and activities of the Company from December 7, 1998 through
December 31, 1998.

OVERVIEW

Perry's Majestic Beer, Inc. (the "Company") was formed in December of 1995.
There were no operations prior to the formation of Perry's for the period
December 1995 to March 1996 nor any revenue or expense activities for Perry's
through March 31, 1996. The primary activities for Perry's prior to the proposed
acquisition of Riverosa Company, Inc. ["Riverosa"] were investing and financing
activities through March 31, 1996 [See "Liquidity and Capital Resources"]. In
March of 1996, the Company entered into an agreement to acquire Riverosa, which
was formed in November of 1993. Riverosa was engaged in the manufacture and
distribution of microbrewed beers and ales.

The Company has completed its transformation from a microbrew beer company to a
non-alcholic beverage and natural food company. The Company sold its Post Road
line of ales on May 18, 1998. During the second quarter, it ceased brewing the
Perry's Majestic line of organic beers.

The Company produces an applesauce brand, Leroux Creek, through one independent
unaffiliated applesauce manufacturer.

The Company's Leroux Creek applesauce line is produced with apples "grown
without pesticides" and is available in ten flavors in both 24 ounce and 4 ounce
cups sold in a four pack. There are currently eight brokers and 21 distributors
selling the Leroux Creek line of applesauces.

The Company's McCoy's line of all natural microbrewed fruit drinks, lemonades
and ready to drink iced teas are available in ten flavors and sold in 20 ounce
glass bottles. There are currently 23 distributors selling McCoy's beverages.
The beverages are bottled by an independent unaffiliated bottling company. In
January, 1999, the Company entered into an exclusive license agreement whereby
the Company exclusively licensed for all liquids and apple based products a
proprietary advanced delivery technology. The technology allows the Company to
incorporate functional amounts of nutritional ingredients, selectively directed
to different locations in the body on a sustained release basis for maximum
effect, in clear

                                       23
<PAGE>
 
beverages without compromising the taste, color, mouth-feel, stability or cost
of the products.

In September 1996, the Company acquired the Post Road Beer brand and other
assets from the Old Marlborough Brewing Company, Inc. On May 18, 1998, the
Company sold the Post Road brand to the Brooklyn Brewery Corporation for
consideration of $330,000.

In March 1997, the Company acquired all of the outstanding stock of Orchard
Annie, Inc., a manufacturer of natural applesauces. The Company introduced its
first four flavors of applesauce under the brand name Quigleys. The Quigley's
Orchard line has been discontinued by the Company to permit it to concentrate on
its Leroux Creek line of applesauce. The Company will determine in the future
whether it will reintroduce the line in a different package size.

On May 18, 1998, the Company sold the assets, all rights to licenses, permits
and contracts, and all trademarks, tradenames and processes of the Post Road
beer brand with a net book value of approximately $131,500 to the Brooklyn
Brewery Corporation ("BBC") for consideration of $330,000 of which $10,000 was
paid in cash. BBC executed a secured promissory note for the balance of
$320,000. In addition, BBC put $35,000 into escrow to satisfy the outstanding
tax liability for an executive of Old Marlborough.

On July 2, 1998, the Company acquired the rights, title and interest, customer
lists, distribution rights and related recipes for applesauce and applesauce
blends of Leroux Creek applesauce brand for the sum of $650,000 from the Leroux
Creek Food Corporation. On July 2, 1998, the Company paid $62,500 and was the
maker of a note in favor of the seller in the amount of $587,500 with interest
at a rate of 9%, with the outstanding balance of principal and interest payable
on or before January 2, 1999. Subsequently, the parties agreed to extend the
note payment term to May 31, 1999, subject to the Company making certain monthly
payments toward the principal.  The parties agreed that the $62,500 would be
liquidated damages in the event the Company does not make the payment when due.
In the event of such non-payment, the ownership of the Leroux Creek brand will
revert to the seller.  The Company does not presently have funds available to
pay the note, and the Company's ability to pay the note and retain ownership of
the Leroux Creek brand will be dependent upon its success in identifying
sources for such  financing,  on a timely basis, and on terms acceptable to the
Company.  In connection with the foregoing, the Company also agreed to issue to
the seller options to purchase 250,000 shares of common stock at fair market
value at the date of the grant. As of December 31, 1998, the Company has entered
into arrangements with eight brokers and twenty-one distributors to sell the
Leroux Creek brand.

During July 1998, the Company entered into a consulting agreement with Edward
Tuft, the former owner of the Leroux Creek brand. Mr. Tuft's company will
continue to produce Leroux Creek applesauces for the Company. The Consulting
Agreement provides for Mr. Tuft to receive options to acquire up to 500,000
shares of the Company's common stock, at fair market value, as follows: 200,000
options at the time of execution of the Consulting Agreement, and 100,000
options per year for the following three years.

On October 22, 1998, the Company entered into a letter of intent to acquire a
minimum of 80% of the capital stock of a beverage company, X-Treem through an
exchange with the shareholders of X-Treem of up to 93% of the issued and
outstanding shares of the Company's capital stock as of the closing of the
exchange transaction, whereby X-Treem will become a subsidiary of the Company.
On December 1, 1998, the Company entered into an exclusive licensing agreement
with X-Treem 

                                       24
<PAGE>
 
whereby the Company received the exclusive right to sell and distribute the
McCoy's line of all natural beverages and an option to purchase the McCoy's
beverage brand and the intellectual property associated therewith (the
"Option"). Pursuant to the plan to acquire a minimum of 80% of the capital stock
of X-Treem, on December 12, 1998, the Company acquired approximately 68% of the
issued and outstanding shares of the Company's capital stock. The Company will
complete the stock exchange transaction with the shareholders of X-Treem through
the issuance of additional shares of its capital stock to X-Treem shareholders
in exchange for additional shares of their capital stock. On December 23, 1998,
the Company exercised its Option with respect to the McCoy's beverage brand by
fulfilling the payment and other terms of the option agreement, including
executing a promissory note in the amount of $300,000 made payable to X-Treem in
2001.

Prior to the license of such rights to the Company, X-Treem produced and
marketed McCoy's beverages, a line of "microbrewed" fruit drinks, lemonades and
ready to drink teas available in ten flavors and sold in 20 ounce bottles.


RESULTS OF OPERATIONS

The Company incurred a net loss from operations of $2,000,985 for the nine
months ended December 31, 1998 as compared to a net loss from operations of
$1,221,651 for the nine months ended December 31, 1997. The loss from operations
for the nine months ended December 31, 1998 is primarily due to insufficient
sales volume resulting from the Company's inability to produce sufficient
McCoy's beverage products because of insufficient capital resources.  The demand
for the Company's McCoy's beverages materially exceeded the Company's ability to
produce beverages to meet such demand.

The net sales for the Company for the nine months ended December 31, 1998 were
$936,605 as compared to $427,613 for the nine months ended December 31, 1997.
This increase is due to the increased production and sales of the McCoy's
beverage.

The Company had a gross profit of $166,895 or 17.8% as compared to a negative
gross profit of $296,486 or (69.3%) for the nine months ended December 31, 1998
and 1997, respectively.  The increase in the gross profit is due to increased
production and sales of the McCoy's beverages.

The Company's selling, general and administrative expenses for the nine months
ended December 31, 1998 and 1997 were $1,368,879 and $1,118,931, respectively.


LIQUIDITY AND CAPITAL RESOURCES

For the nine months ended December 31, 1998, the Company utilized $2,000,985 in
cash for operating activities as compared to $1,221,651 for the nine months
ended December 31, 1997. The cash balance at December 31, 1998 was $77,338.

As of September 30, 1998, the Company has 2 employment agreements with
executives of the Company that expire in the year 2001.  The annual commitments
for compensation are approximately $270,000 each year. In addition, the Company
has agreed to grant to an executive 20,000 common stock options each year as a
bonus for the next three years, exercisable at $6.00 per share for a period of
four years. To date, the Company has not issued the 20,000 common stock options,
exercisable at $6.00. On January 16, 1998, the Company issued 100,000 common
stock options exercisable at $0.875 to this same executive. The Company also
agreed to grant to another executive 100,000 common stock options on each of
March 31, 1998 

                                       25
<PAGE>
 
and March 31, 1999, exercisable at fair market value at date of grant. The
options relating to this agreement were issued on January 16, 1998 at fair
market value.

During February 1997, Perry's issued a total of 400,000 shares of Perry's common
stock to two officers as consideration for extending their employment agreements
through 2001. As a result of this agreement, deferred compensation of $2,000,000
was recorded and related amortization of $356,250 was expensed for both the nine
months ended December 31, 1998 and 1997. In December 1998 these two officers
returned these shares of common stock in return for an aggregate of 850,000
common stock options at fair market value.

In February 1997, Perry's issued 200,000 shares of Perry's common stock to a
consultant for services to be performed over the next three years. On June 4,
1997, this agreement was amended extending the period of service for one
additional year. This agreement was valued at $450,000 and recorded as deferred
compensation. Amortization of $82,500 was recorded as amortization expense for
both the nine months ended December 31, 1998 and 1997, respectively.

In March 1997, Perry's entered into an agreement to acquire all of the stock of
Orchard Annie, Inc., an all natural apple sauce company from an officer of the
Company for approximately $67,000 in cash and recorded goodwill for the full
value. Additionally, in September of 1997, Perry's issued 50,000 shares of
common stock to the same officer in connection with the sale and the fair value
of these shares of $25,000 is allocated to goodwill. These 50,000 shares of
common stock have been returned to the Company in December 1998. The combination
is accounted for by the purchase method. In addition, the Company agreed to pay
an officer of the Company, ho was also the sole shareholder of Orchard Annie,
Inc., a royalty payment of $.25 per case of 12 units for the first 500,000 Cases
and $.125 per case of 12 units thereafter for a period of fifteen years. For the
nine months ended December 31, 1998 and 1997, royalty expense was $946 and
$1,797, respectively.

On May 23, 1997, the Company entered into a consulting agreement whereby the
Consultant agrees to provide the Company with consulting services in connection
with financial management and other general consulting as required by the
Company.  In consideration, the Company issued in June of 1997 an option to
purchase 100,000 shares of the Company's common stock at an exercise price of
$0.875 per share valued at $16,000. In addition, the agreement also calls for a
per diem payment of $300, whenever the consultant's services are requested by
the Company.

In November 1997, the Company issued 25,000 shares of common stock to an officer
of the Company for past services rendered. An expense of $14,060 was recorded as
a result of this transaction, which represents the fair market value of the
stock at time of issuance.

On July 2, 1998, the Company acquired the rights, title and interest, customer
lists, distribution rights and related recipes for applesauce and applesauce
blends of Leroux Creek applesauce brand for the sum of $650,000 from the Leroux
Creek Food Corporation and recorded the full amount as goodwill to be amortized
over 5 years.  On July 2, 1998, the Company paid $62,500 and was the maker of
a note to the favor of the seller in the amount of $587,500 with interest at a
rate of 9%, with the outstanding balance of principal and interest payable on or
before January 2, 1999. Subsequently, the parties agreed to extend the note
payment term to May 31, 1999, subject to the Company making certain monthly
payments toward the principal. The parties agreed that the $62,500 would be
liquidated damages in the event the Company does not make the payment when due.
In the event of such non-

                                       26
<PAGE>
 
payment, the ownership of the Leroux Creek brand will revert to the seller. The
Company does not presently have funds available to pay the note, and the
Company's ability to pay the note and retain ownership of the Leroux Creek brand
will be dependent upon its success in identifying sources for such financing, on
a timely basis, and on terms acceptable to the Company. In connection with the
foregoing acquisition, the Company also agreed to issue options to the seller to
purchase 250,000 shares of common stock at fair market value at the date of the
grant valued at $31,200. Amortization of goodwill of $68,120 was recorded
related to the acquisition of the Leroux Creek brand for the six months ended
December 31, 1998.

In connection with the acquisition of the Leroux Creek brand, the Company
entered into a consulting agreement with the former owner of the Leroux Creek
brand for services to be provided to the Company by such former owner over a
three year period. The Company agreed to issue to the former owner an option to
acquire 500,000 shares of the Company's common stock, at fair market value as
follows: 200,000 options exercisable upon execution of the consulting agreement,
and 100,000 options exercisable each year for the following three years.
Amortization of $250 was recorded for the three months ended September 30, 1998.

The financial statements do not include any adjustments that might be necessary
if the Company is unable to continue as a going concern. In May 1998, the
Company sold the assets of the Post Road Beer brand and is currently attempting
to successfully close an additional financing. There can be no assurance that
management's plans to reduce operating losses and to obtain additional financing
to fund operations will be successful. The absence of such additional financing
on terms favorable to the Company could have a material adverse effect on the
business and operations of the Company.

YEAR 2000

The Company has evaluated the impact of the year 2000 issue on its business and
does not expect the amounts to be expensed over the next 15 months to be
material. No such costs have been expensed to date, since the Company utilizes
an off the shelf software package which is year 2000 compliant.

Currently, the Company is in the process of communicating with its significant
vendors and customers to determine the extent that year 2000 compliance issues
of such parties may affect the Company. At this time, the Company believes that
there will be no disruption in business due to its customers' or vendors' year
2000 readiness. The Company has not established a contingency plan. There can be
no guarantee that the systems of such other companies will be timely converted
without a material adverse effect on the Company's business, financial condition
or results of operations.


NEW AUTHORITATIVE PRONOUNCEMENTS

The FASB has issued SFAS No. 131, "Disclosures About Segments of an Enterprise
and Related Information." SFAS No. 131 changes how operating segments are
reported in annual financial statements and requires the reporting of selected
information about operating segments in interim financial reports issued to
shareholders. SFAS No. 131 is effective for periods beginning after December 15,
1997, and comparative information for earlier years is to be restated. SFAS No.
131 need not be applied to interim financial statements in the initial year of
its application. The Company expects to adopt the provisions of SFAS No. 131 in
its annual financial statements.

                                       27
<PAGE>
 
In February 1998, the FASB issued SFAS No. 132, "Employers Disclosure about
Pension and Other Postretirement Benefits," which is effective for fiscal years
beginning after December 15,1997. The modified disclosure requirements will not
have a material impact on the Company's results of operations, financial
position or cash flows.

In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging activities. SFAS No. 133
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. The accounting for changes in the fair value of a derivative
depends on the intended use of the derivative and how it its designated, for
example, gain or losses related to changes in the fair value of a derivative not
designated as a hedging instrument is recognized in earnings in the period of
the change, while certain types of hedges may be initially reported as a
component of other comprehensive income (outside earnings) until the
consummation of the underlying transaction.

SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. Initial application of SFAS No. 133 should be as of the
beginning of a fiscal quarter; on that date, hedging relationships must be
designated anew and documented pursuant to the provisions of SFAS No. 133.
Earlier application of all of the provisions of SFAS No. 133 is encouraged, but
it is permitted only as of the beginning of any fiscal quarter. SFAS No. 133 is
not to be applied retroactively to financial statements of prior periods. The
Company does not currently have any derivative instruments and is not currently
engaged in any hedging activities.

IMPACT OF INFLATION

The Company does not believe that inflation has had a material adverse effect on
sales or income during the past periods. Increases in the cost of supplies or
other operating costs could adversely affect the Company's operations; however,
the Company believes it could increase prices to offset increases in costs of
goods sold or other operating costs.

Pursuant to the  requirements  of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report on Form 10-QSB to be signed on its behalf
by the undersigned thereon duly authorized.


                         PERRY'S MAJESTIC BEER, INC.



March 11, 1999           By: /s/ James B. Hovis
                             --------------------------------------
                             James B. Hovis, President & Chief Executive
                             Officer

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