================================================================================
                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                  FORM 10-QSB


           [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                      THE SECURITIES EXCHANGE ACT OF 1934
               For the quarterly period ended September 30, 1997.

                                       or

            [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                      THE SECURITIES EXCHANGE ACT OF 1934

   For the transition period from _______________ to _______________________



                        Commission File Number: 0-27800

                             Frederick Brewing Co.
                             ---------------------
       (Exact name of small business issuer as specified in its charter)


              Maryland                                    52-1769647
              --------                                    ----------
    (State or other jurisdiction                      (I.R.S. Employer
    of incorporation or organization)                 Identification No.)

 4607 Wedgewood Boulevard, Frederick, Maryland               21703
 ---------------------------------------------               -----
   (Address of principal executive offices)                (Zip Code)


                                 (301) 694-7899
                                 --------------
                (Issuer's telephone number, including area code)

                                 Not Applicable
                                 --------------
              (Former name, former address and former fiscal year,
                          if changed since last report)


Indicate by check mark whether the issuer (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities 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. [ X ] Yes [ ] No


   Common Stock, $0.00004 Par Value                    4,270,881
   --------------------------------                    ---------
     (Title of Each Class)                   (Number of Shares Outstanding
                                               as of  November 3, 1997)


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

================================================================================
<PAGE>

                             FREDERICK BREWING CO.

                              --------------------
                              INDEX TO FORM 10-QSB
                              --------------------


PART I.  FINANCIAL INFORMATION
--------------------------------------------------------------------------------
     ITEM 1.  FINANCIAL STATEMENTS

              BALANCE SHEET (UNAUDITED)
                September 30, 1997                                             1
              STATEMENTS OF OPERATIONS (UNAUDITED)
                Three and Nine Months Ended September 30, 1997 and 1996        2
              STATEMENTS OF CASH FLOWS (UNAUDITED)
                Three and Nine Months Ended September 30, 1997 and 1996        3
              NOTES TO UNAUDITED FINANCIAL STATEMENTS                          4

     ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS                             6

PART II.  OTHER INFORMATION
--------------------------------------------------------------------------------

     ITEM 1. LEGAL PROCEEDINGS                                                13

     ITEM 2. CHANGES IN SECURITIES                                            13

     ITEM 3. DEFAULTS UPON SENIOR SECURITIES                                  13

     ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS              13

     ITEM 5. OTHER INFORMATION                                                14

     ITEM 6. EXHIBITS AND REPORTS ON FORM 10-QSB                              15


SIGNATURES
--------------------------------------------------------------------------------
     SIGNATURE PAGE                                                           16


<PAGE>

                        PART 1. - FINANCIAL INFORMATION

Item 1.  Financial Statements.

                             Frederick Brewing Co.
                                 Balance Sheet

<TABLE>
<CAPTION>
                                                                        September 30, 1997
                                                                        ------------------
                                                                            (Unaudited)
                                ASSETS
-------------------------------------------------------------------------
<S>                                                                         <C>
Current assets:
   Cash and cash equivalents ............................................   $    218,343
   Restricted cash ......................................................         27,112
   Trade receivables, net ...............................................        536,441
   Inventories, net .....................................................        417,729
   Prepaid expenses .....................................................        356,727
                                                                            ------------
      Total current assets ..............................................      1,556,352

Property and equipment, net .............................................      8,838,728
Intangibles, net of accumulated amortization of $ 47,988 ................        193,790
Other assets ............................................................        747,118
                                                                            ------------

      Total assets ......................................................   $ 11,335,988
                                                                            ============


                 LIABILITIES AND STOCKHOLDERS' EQUITY
-------------------------------------------------------------------------
Current liabilities:
   Current maturities of long-term debt .................................   $    314,871
   Current maturities of capital lease obligations ......................        358,520
   Accounts payable .....................................................        537,238
   Accrued liabilities ..................................................         34,273
                                                                            ------------
      Total current liabilities .........................................      1,244,902

Long-term debt ..........................................................      2,219,388
Long-term capital lease obligations .....................................      2,948,582
                                                                            ------------
      Total liabilities .................................................      6,412,872
                                                                            ------------


Stockholders' equity:
   Preferred stock - Series A, 1,848 shares issued and outstanding ......        786,587
   Preferred stock - Series B,  1,280 shares issued and outstanding .....        711,161
   Preferred stock - Series C,  2,100 shares issued and outstanding .....      1,837,500
   Preferred Stock - Series D,  0 shares issued and outstanding .........             --
   Common stock - $0.00004 par value, 9,000,000 shares authorized,
      3,586,991 shares issued and outstanding ...........................            127
   Additional paid-in capital ...........................................      9,723,264
   Accumulated deficit ..................................................     (8,135,523)
                                                                            ------------
      Total stockholders' equity ........................................      4,923,116
                                                                            ------------

      Total liabilities and stockholders' equity ........................   $ 11,335,988
                                                                            ============
</TABLE>


    The accompanying notes are an integral part of these financial statements


                                       1
<PAGE>


                             Frederick Brewing Co.
                            Statements of Operations

<TABLE>
<CAPTION>


                                               Three Months Ended September 30,        Nine Months Ended September 30,
                                               --------------------------------        -------------------------------
                                                  1997                   1996              1997              1996
                                               ------------           ---------         -----------      ----------- 
                                                           (Unaudited)                            (Unaudited)

<S>                                            <C>                    <C>               <C>              <C>        
Gross sales ................................   $  1,072,961           $ 515,376         $ 2,214,191      $ 1,390,119
Less returns and allowances ................         (3,617)            (48,690)            (38,805)         (84,576)
Less excise taxes ..........................        (51,794)            (32,156)           (112,022)         (73,643)
                                               ------------           ---------         -----------      ----------- 
   Net sales ...............................      1,017,550             434,530           2,063,364        1,231,900

Cost of sales ..............................        949,904             475,644           2,077,723        1,353,843
                                               ------------           ---------         -----------      ----------- 
   Gross profit (loss) .....................         67,646             (41,114)            (14,359)        (121,943)

Selling, general and administrative
   expenses ................................      1,183,310             439,913           2,681,205          996,472
                                               ------------           ---------         -----------      ----------- 
   Loss from operations ....................     (1,115,664)           (481,027)         (2,695,564)      (1,118,415)

Interest (income) expense, net .............         95,927              (6,009)            204,294           (1,101)
Other income ...............................              -                   -            (135,523)               -
                                               ------------           ---------         -----------      ----------- 
   Loss before income taxes ................     (1,211,591)           (475,018)         (2,764,335)      (1,117,314)

Provision for income taxes .................              -                   -                   -                -
                                               ------------           ---------         -----------      ----------- 

   Net loss ................................   $ (1,211,591)          $(475,018)        $(2,764,335)     $(1,117,314)
                                               ------------           ---------         -----------      ----------- 

Preferred stock dividend requirements.......       (928,626)                  0          (2,283,080)               0
                                               ------------           ---------         -----------      ----------- 
   Net loss attributable to common
     shareholders ..........................     (2,140,217)          $(475,018)         (5,047,415)      (1,117,314)
                                               ============           =========         ===========      =========== 

Per common share
   Net loss.................................         ($0.44)             ($0.24)             ($1.01)          ($0.64)  
                                               ------------           ---------         -----------      ----------- 

   Preferred stock dividend requirements....        ($0.34)             ($0.00)             ($0.83)           $0.00  
                                               ------------           ---------         -----------      ----------- 

   Net loss attributable to common 
     shareholders...........................         ($0.78)             ($0.24)             ($1.84)           (0.64)           
                                               ============           =========         ===========       ==========            


Weighted average common shares and common
   share equivalents outstanding ...........      2,736,333           1,954,876           2,239,173        1,754,013
                                               ============           =========         ===========      =========== 

</TABLE>




The accompanying notes are an integral part of these financial statements

                                       2
<PAGE>

                             Frederick Brewing Co.
                            Statements of Cash Flows
<TABLE>
<CAPTION>

                                                 Three Months Ended September 30,  Nine Months Ended September 30,
                                                 --------------------------------  -------------------------------
                                                      1997             1996          1997            1996
                                                    -----------    -----------    -----------    -----------
                                                            (Unaudited)                  (Unaudited)

<S>                                                 <C>            <C>            <C>            <C>
Cash flows from operating activities:
   Net (loss) ...................................   $(1,211,591)   $  (475,018)   $(2,764,335)   $(1,117,314)
   Adjustments to reconcile net (loss)
     to net cash used for operating activities:
     Depreciation and amortization ..............       197,330         54,202        462,716        151,490
     Changes in operating assets and liabilities:
       Trade receivables ........................      (105,985)       (81,573)      (297,028)      (119,015)
       Inventories ..............................      (110,762)       163,648       (207,166)        11,112
       Prepaid expenses .........................        82,332        (16,150)      (274,315)        64,454
       Other assets .............................       (41,604)             -       (676,118)             -
       Accounts payable and accrued expenses ....       (61,325)       (15,522)      (223,243)      (366,579)
                                                    -----------    -----------    -----------    -----------
     Net cash used for operating activities .....    (1,251,605)      (370,413)    (3,979,489)    (1,375,852)
                                                    -----------    -----------    -----------    -----------

Cash flows from investing activities
   Deposits on equipment ........................             -       (710,261)             -     (1,681,924)
   Purchase of property and equipment ...........      (489,165)         2,299     (1,969,064)      (169,892)
   Proceeds from sale of equipment ..............             -              -        154,600              0
   Purchase of intangibles ......................       (16,002)       (48,754)      (142,896)      (131,843)
                                                    -----------    -----------    -----------    -----------
     Net cash used for investing activities .....      (505,167)      (756,716)    (1,957,360)    (1,983,659)
                                                    -----------    -----------    -----------    -----------

Cash flows from financing activities
   Proceeds from long-term debt .................             -        939,754      1,636,485      1,020,070
   Payments on long-term debt ...................      (162,353)       (14,835)    (1,858,589)      (446,884)
   Payments on capital leases ...................       (62,128)        (3,315)       (77,828)        (9,559)
   Proceeds from common stock issuance,
     net of issuance costs.......................             -              -              -      3,857,679
   Proceeds from preferred stock issuance,
     net of issuance costs.......................     1,768,245              -      5,793,246              -
   Restricted cash ..............................        (4,439)             -        612,888              -
                                                    -----------    -----------    -----------    -----------
     Net cash provided by financing activities ..     1,539,325        921,604      6,106,202      4,421,306
                                                    -----------    -----------    -----------    -----------

Net increase (decrease) in cash and cash
  equivalents....................................      (217,447)      (205,525)       169,353      1,061,795

Cash and cash equivalents, beginning of period ..       435,790      1,267,320         48,990              -
                                                    -----------    -----------    -----------    -----------

Cash and cash equivalents, ending of period .....   $   218,343    $ 1,061,795    $   218,343    $ 1,061,795
                                                    ===========    ===========    ===========    ===========
</TABLE>



   The accompanying notes are an integral part of these financial statements

                                       3

<PAGE>


                             FREDERICK BREWING CO.


Notes to Financial Statements
September 30, 1997
(Unaudited)

Note 1 - Basis of Presentation
--------------------------------------------------------------------------------
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 Regulation S-B. Accordingly, they
do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. However, in
the opinion of management, all adjustments, consisting of normal recurring
accruals, considered necessary for a fair presentation of the interim financial
position and the interim results of operations of the Company have been
included.

Operating results for the three and nine month periods ended September 30, 1997
are not necessarily indicative of the results that may be expected for the year
ending December 31, 1997, or for any other period. For information relating to
the financial position and the results of operations of the Company as of and
for the year ended December 31, 1996, refer to the financial statements included
in the Company's Annual Report on Form 10-KSB for the year ended December 31,
1996 and in its 1996 Annual Report to shareholders.


Note 2 - Cash and Cash Equivalents
--------------------------------------------------------------------------------
The Company considers its investments with original maturities, at date of
purchase, of 90 days or less to be cash equivalents. At September 30, 1997, the
following cash and cash equivalents were held by the Company:

            Cash in bank and petty cash .................   $218,343
            Securities held under agreement to repurchase     27,112
                                                            --------
                                                            $245,455
                                                            ========

The Company occasionally invests excess funds in reverse repurchase agreements
for U.S. Government securities. Under these agreements, the Company purchases
securities with an agreement to resell them. Generally, such agreements mature
on the next business day following the date of investment. Due to the short-term
nature of the agreements, the Company does not take possession of the
securities, which are instead held at the Company's bank from which it purchases
the securities. The carrying value of the agreements approximates fair value
because of the short maturity of the investments and the Company believes that
it is not exposed to any significant risk on its investments in reverse
repurchase agreements. At September 30, 1997, approximately $27,000 of the
securities was pledged as collateral to guarantee the Company's obligation to
Signet Bank of Maryland ("Signet") for the new brewing facility and was recorded
as restricted cash.

                                       4
<PAGE>

Notes to Financial Statements
September 30, 1997
(Unaudited)

Note 3 - Income Taxes
--------------------------------------------------------------------------------
The Company accounts for income taxes under the liability method. The Company
has not recorded a provision for income taxes for the three and nine month
periods ended September 30, 1997 and 1996, respectively, based on the fact that
the Company has incurred net operating losses during those periods. The Company
has provided a full valuation allowance against its net deferred tax asset as of
September 30, 1997.

Note 4 - Net Loss per Common Share
--------------------------------------------------------------------------------
Net loss per common share is based on the weighted average number of common
shares and common share equivalents outstanding during the periods. Common share
equivalents are comprised of stock options, stock warrants and convertible
securities for which the effective yield is less than two-thirds of the Aa
corporate bond rate at date of issuance. Common share equivalents have not been
included in the calculation for the three and nine months ended September 30,
1997 and 1996 because the effects of such items were anti-dilutive.

In February, 1997 the Financial Accounting Standards Board issued Statement 128,
"Earnings Per Share" (SFAS 128), which specifies the computation, presentation,
and disclosure requirements for earnings per share. SFAS 128 is effective for
periods ending after December 15, 1997. The Company does not expect the adoption
of SFAS 128 to have a material impact on the computation of earnings per share.

The net loss attributable to common shareholders has been adjusted for deemed
dividends. The deemed dividend relates to the discount feature associated with
the Company's Series A and Series B Convertible Preferred Stock, issued in March
of 1997 and the Company's Series C Convertible Preferred Stock, issued in
September of 1997. The discount has been computed in accordance with the SEC's
position on accounting for preferred stock that is convertible at a discount to
the market. The discount amount, which was approximately $114,000, $1,326,000
and $900,000 for Series A, Series B and Series C, respectively, is recognized as
a return to the shareholders over the minimum period in which the shareholders
can realize that return. The Series B and Series C shares are convertible
immediately, thus the dividends related to such shares was recognized
immediately, and the Series A shares are convertible one year from date of
issuance and the dividend related to these shares is being recognized over the
one year period from date of issuance.

Note 5 - Prepaid Expenses
--------------------------------------------------------------------------------
During the first quarter of 1997, over a 60 month contractual period the Company
paid $800,000 for investor relations services to be rendered over a 60 month
contractual period by three affiliated companies: Corporate Relations Group,
Inc. ("CRG"), Arrow Marketing Inc. and Gulf Atlantic Publishing Inc. This
balance is being amortized on a straight-line basis over 60 months beginning in
April 1997. The non-current portion of this balance representing $560,000 is
included in other assets.

Note 6 - Property and Equipment
--------------------------------------------------------------------------------
Property and equipment at September 30, 1997 consisted of the following:

      Brewing equipment ...................     $4,757,738
      Capital lease - building ............      3,088,103
      Leasehold improvements ..............      1,343,741
      Automobiles and trucks ..............        201,499
      Furniture and fixtures ..............        192,095
                                                ----------

         Total ............... ............     $9,583,176
      Less accumulated depreciation 
        and amortization ..................       (744,448)
                                                ---------- 

      Property and equipment, net .........     $8,838,728
                                                ==========


                                       5
<PAGE>

Notes to Financial Statements
September 30, 1997
(Unaudited)


The portion of property and equipment classified as "capital lease - building"
relates to the Company's agreement with Blue II, LLC ("Blue II") which built the
new brewery for the Company to its specifications and is leasing it back to the
Company. The lease has a twenty year term with monthly payments due to Blue II
as set forth in the agreement. The building has been reflected in property and
equipment at its estimated fair value at the inception of the lease term, which
was equal to the present value of the future minimum lease payments, and is
being amortized on a straight line basis over the lease term.


                                       6

<PAGE>


                        PART I. - FINANCIAL INFORMATION

Item 2. Management's Discussion and Analysis of Financial Condition and
        Results of Operations For the Three and Nine Months Ended September 30,
        1997 and 1996


Overview of Significant Activities and Expenses
--------------------------------------------------------------------------------
A net loss of ($1,211,591) or ($0.44) per share, was incurred during the third
quarter of 1997 compared to net loss of ($475,018), or ($0.24) per share, for
the corresponding quarter of 1996. Year-to-date 1997 losses increased to
($2,764,335) or ($1.01) per share, compared to losses of ($1,117,314) or ($0.64)
per share, for the similar period of 1996.

Weighted average common shares outstanding were 2,736,333 during the third
quarter of 1997 and 1,954,876 for the three months ended September 30, 1996. For
the year to date, weighted average shares outstanding were 2,239,173 for 1997,
compared to 1,754,013 in the similar period of 1996. The increase in the shares
outstanding for the three and nine months ending September 30, 1997 relates
primarily to the conversion of certain of the Company's Preferred shares into
Common Stock during the third quarter of 1997.

During the third quarter of 1997, record levels of revenues were achieved. The
Company's sales increased 108.3% to $1,072,961 during the third quarter of 1997
over the similar period of 1996. These record levels were associated with
increases in production that were made possible through the operation of the
Company's new facility coupled with a concentrated marketing and promotional
effort, including a line extension of the Hempen brand, all of which created a
strong demand for the Company's product. In 1997, July sales were 1,723 barrels
(on packaged production of 1,871 barrels). August sales increased to 2,039
barrels (on packaged production of 2,497 barrels) and September sales leveled
off at 1,975 barrels (on packaged production of 2,026 barrels).

Sales increases during the third quarter were generated largely within
territories where the Company had been distributing its products for a least one
year. Sales in these territories increased to 4,113 barrels in the third quarter
of 1997 from 2,999 barrels in the comparable period of 1996, a 37.1% increase.
During the third quarter, sales of 1,624 barrels were sold in new territories
entered within the past 12 months. Management intends to pursue new territorial
markets as production capacity permits.

In response to the increased demand for new hemp products, the Company added
Hempen Gold( to its family of beers in September, 1997. During the third
quarter, the Company sold 2,869 barrels of its Hempen products, which
represented 50% of the Company's total sales during the period. Sales in barrels
of the Company's "Blue Ridge[TM]" line remained level for the same period
although sales dollars increased slightly.


                                       7
<PAGE>

Management's Discussion and Analysis
For the Three and Nine Months Ended September 30, 1997 and 1996

The performance of the Company's new packaging materials handling equipment
continued to improve throughout the quarter. Management believes packaging
efficiency has reached an acceptable level of production and will continue to
improve through the fourth quarter of 1997, as the equipment becomes fully
functional and the training of operating employees is completed. This should
continue to reduce production costs and improve operating margins.

Also, during the quarter, the Company continued to pursue geographical expansion
of its channels of distribution. The Company began shipping to seven (7) new
states during the third quarter of 1997. The states added were Kentucky,
Arizona, Kansas and limited portions of North Carolina, Missouri, California and
New York. In addition, the Company reentered portions of the Massachusetts and
Ohio markets during this period. During the third quarter, the Company added
twenty-nine (29) new distributors including completion of a full distribution
network throughout the state of Washington. As of September 30, 1997 the Company
has a total of 68 distributors throughout its current distribution network.

                                       8

<PAGE>

Management's Discussion and Analysis
For the Three and Nine Months Ended September 30, 1997 and 1996

Review of Operations
--------------------------------------------------------------------------------
The following table sets forth certain items derived from the Company's
Statements of Operations, expressed as a percentage of net sales, for the three
and nine month periods ended September 30, 1997 and 1996.
<TABLE>
<CAPTION>

                                             Percentage of Sales for the Periods Ended Sept. 30,
                                             ---------------------------------------------------
                                                  Three Months                Nine Months
                                                1997         1996          1997         1996
                                                ----         ----          ----         ----
                                                  (Unaudited)                  (Unaudited)

<S>                                             <C>          <C>           <C>          <C>   
Gross sales ..................................  105.1%       107.4%        105.4%       106.0%
Less excise taxes ............................    5.1          7.4           5.4          6.0
                                                -----        -----         -----        -----
Net sales ....................................  100.0        100.0         100.0        100.0
Cost of sales ................................   93.4        109.5         100.7        109.9
                                                -----        -----         -----        -----
Gross profit (loss)  .........................    6.6         (9.5)         (0.7)        (9.9)
Selling, general, and admin. expenses ........  101.5        101.2         122.6         80.9
                                                -----        -----         -----        -----
Loss from operations .........................  (94.9)      (110.7)       (123.3)       (90.8)
Interest (income), net .......................    9.4         (1.4)          9.9         (0.1)
Other (income) ...............................    0.0          0.0          (6.6)         0.0
                                                -----        -----         -----        -----
Net loss ..................................... (104.3)      (109.3)       (126.6)       (90.7)
                                                -----        -----         -----        -----
</TABLE>


Sales 
--------------------------------------------------------------------------------
Gross sales for the 1997 and 1996 third quarters were $1,072,961 and $515,376,
respectively, an increase of $557,585 or 108.2%, in 1997 compared to 1996.
Year-to-date gross sales for 1997 and 1996 were $2,214,191 and $1,390,119,
respectively, an increase of $ 824,072 or 59.3%.

Third quarter volumes were 5,737 and 2,998 barrels for 1997 and 1996,
respectively, an increase of 2,739 barrels, or 91.4%. Year-to-date volumes in
1997 and 1996 were 12,277 and 7,975, respectively, an increase of 4,302 barrels
or 53.9%. Revenues per barrel for the third quarters of 1997 and 1996 were $187
and $172 per barrel, respectively, an increase of $15 per barrel, while such
revenues were $180 and $174 for the year-to-date periods in 1997 and 1996. The
increase in the revenues per barrel for the quarter reflects a change in the
sales mix of the Company's products from kegs to cases, which contributed a
higher revenue per barrel revenue contribution.


Excise Taxes
--------------------------------------------------------------------------------
Federal and state excise taxes were $51,793 and $32,156, or 5.1% and 7.4% of net
sales, during the third quarters of 1997 and 1996, respectively. For the
year-to-date periods of 1997 and 1996 such taxes were $112,022 and $73,643, or
5.4% and 6.0%, of net sales, respectively. The decrease as a percentage of net
sales for the third quarter of 1997 and nine months ending September 30, 1997
reflects the reduction of the Company's sales in states where the Company is
levied state excise tax as a percentage of total sales. The Federal Government
and some state governments impose excise taxes on all beer sold. These taxes are
levied on volume, regardless of the price or revenue generated from those sales.
Each state in which the Company distributes its product has different beer
excise tax rates and regulations, including some states which require the
distributor to pay such taxes instead of the Company.

Cost of Sales
--------------------------------------------------------------------------------
Third quarter cost of sales for 1997 and 1996 was $949,904 and $475,644, or
93.4% and 109.5% of net sales, respectively, an increase of $474,260 or 99.7%
over 1996. Year-to-date cost of sales for 1997 and 1996 was $2,077,723 and
$1,353,843, or 100.7% and 109.9% of net sales, respectively, an increase of
$723,880 or 53.5% over 1996.


                                       9

<PAGE>



Management's Discussion and Analysis
For the Three and Nine Months Ended September 30, 1997 and 1996

Two main factors caused the increase in the cost of sales for the third quarter
of 1997 over the same period of 1996: (1) the substantial increase in sales
volume, and (2) the increased fixed costs (rent, utilities and depreciation)
associated with operating the Company's new brewing facility.

Due to bulk purchasing, primarily of malted barley, glass bottles and paper
packaging materials and improved labor productivity made possible by larger
batch sizes and a higher degree of automation in the new brewery, direct
variable costs of production principally raw ingredients, packaging materials
and labor were $487,399 ($85 per barrel sold) for the third quarter of 1997
compared to $376,652 ($126 per barrel sold) in the similar period of 1996, when
the Company's beers were still being produced at its original facility. These
amounts represent a 29.4% increase in variable cost of sales compared to a
108.2% increase in sales.

This improvement was offset, however, by increased fixed production overhead
expenses associated with owning, maintaining and operating the larger new
brewery. Production overhead expenses principally management and supervisory
salaries, depreciation, utilities and equipment rentals were $462,505 ($81 per
barrel) for the third quarter of 1997 compared to $98,992 ($33 per barrel) for
the third quarter of 1996. This represents a 367.2% increase compared to a
108.2% increase in sales.

Management believes the current level of fixed production overhead expenses can
be maintained with only small increases even if production and sales volumes
increase by three to five times current levels. This would have the effect of
reducing the cost of sales as a percentage of total sales. However, while
management believes production and sales will continue to increase in future
periods, no assurances can be given that such increases of that magnitude will
occur.

Selling, General and Administrative Expenses
--------------------------------------------------------------------------------
Selling, general and administrative ("SG&A") expenses were $1,183,310 and
$439,913 in the third quarters of 1997 and 1996, respectively, an increase of
$743,397, or 169.0%. SG&A expenses were $2,681,205 and $996,472 in the
year-to-date periods of 1997 and 1996, respectively, an increase of $1,684,733
or 169.1%.

The Company's SG&A expenses increased over the comparable period in 1996 due to
several factors. Payroll and payroll related costs increased during this period
as new sales and administrative staff were added to handle the increased work
load. In addition, the Company continued to use several outside professionals
which included investor relations services, outside legal and accounting
services. These services included an expense of $310,000 for investor relations
services, a $151,000 expense for Morgan-Keller, Inc., the general contractor of
the new brewery, pursuant to a contracted obligation acquiring the Company to
reimburse any loss on the sale of Series A Preferred Stock previously issued as
partial payment for construction services and $20,000 for financial consulting
services which represented 32% of the Company's quarterly SG&A expenditures.

Other Income
--------------------------------------------------------------------------------
Other income of $135,523 for the nine months ended September 30, 1997 relates to
gains recognized on the sale of brewing equipment.


                                       10

<PAGE>

Management's Discussion and Analysis
For the Three and Nine Months Ended September 30, 1997 and 1996

Interest (income) expense, net
--------------------------------------------------------------------------------
Interest (income) expense, net during the third quarter in 1997 was $95,517 in
comparison to ($6,009) during the comparable period in 1996. Year-to-date
interest (income) expense was $204,294 and ($1,101) during comparable periods of
1997 and 1996, respectively. Interest expense was partially offset by interest
income from excess cash invested until required for operating and investment
purposes. A substantial portion of the interest expense incurred relates to the
debt obligations the Company has with Signet for the building, equipment and
bridge financing for the new brewery.

Income Tax Provision
--------------------------------------------------------------------------------
The Company has incurred net operating losses during both 1997 and 1996 and,
accordingly, no provisions for income taxes have been provided on the Statements
of Operations. The Company has recorded a full valuation allowance against the
net deferred tax asset.

Liquidity and Capital Resources
--------------------------------------------------------------------------------
Due to losses experienced during the start-up and expansion of the Company,
operations to date have been funded primarily from private and public placements
of common and preferred stock and by loans from stockholders and financial
institutions. As of September 30, 1997, the Company had working capital of
approximately $311,000. This balance is principally the result of the sale of
Series A, Series B and Series C preferred stock, during the first and third
quarters of 1997. As of September 30, 1996, the Company had working capital of
approximately $1.6 million primarily a result of the closing of the Company's
IPO in March, 1996.

Net cash used in investing activities during the three and nine months ended
September 30, 1997 were, $505,167 and $1,957,360, respectively, which amounts
primarily represent purchases of capital assets (approximately $440,000 and $1.9
million, respectively). In the three months and nine months ended September 30,
1996, net cash used in investing activities was $756,716 and $1,983,659,
respectively, which primarily represented deposits made with vendors for new
brewery equipment. The Company purchased and installed additional fermentation
vessels to increase its production capacity from approximately 3,300 barrels per
month (39,600 barrels per year) to approximately 6,700 barrels per month (80,000
barrels per year) and purchased other equipment to improve production efficiency
and reduce production costs, during the last half of the third quarter of 1997.

Net cash provided by financing activities during the three months and nine
months ended September 30, 1997 were approximately $1,539,325 and $6,106,202
million consisting of $5,793,246 in proceeds from preferred stock proceeds from
Series A, B, C, net of $1,106,754 issuance costs; $1,636,485 from secured debt;
minus payments and restricted cash totalling $1,323,529.

The Company does not currently have a working capital line of credit or any
other revolving credit.

During the third quarter, the Company authorized the issuance of Series D
Convertible Preferred Stock. See Part II, Item 2 for details.

                                       11
<PAGE>

Management's Discussion and Analysis
For the Three and Nine Months Ended September 30, 1997 and 1996

The Company's current liquid assets are inadequate to cover the cost of the new
equipment to be purchased. In addition, the Company's current level of liquidity
may be inadequate to fund the Company's operations or to provide a prudent level
of cash reserves in the event cash flow from operations does not improve as the
result of increasing sales and reduced production costs as quickly as management
has anticipated. The Company's agreements with its senior lenders do not permit
the Company to incur additional debt obligations. Consequently, management
intends to arrange for a net capital infusion of approximately $600,000 during
the fourth quarter of 1997. This capital may be obtained in the form of equity
or as a combination of equity and long-term lease financing. Additional capital
infusions will be necessary in the future until the Company is able to generate
positive cash flow from operations.

For the fourth quarter of 1997, ending December 31, 1997, The Company's loan and
financing agreements with Signet Bank for a $1.5 million equipment loan and a
$3.0 million loan to Blue II, LLC for the brewery land and building require that
certain new financial ratios be met. In particular, a covenant requiring that
the Company's ratio of cash flow to debt service for the quarter equal 1.5:1 or
greater. There is significant likelihood that the Company will be unable to
demonstrate compliance with this and, perhaps, other financial covenants, which
creates the risk that the Company will enter into technical default of both loan
financing agreements. If this occurs, the Company will be required to
renegotiate the terms of the loan and financing agreements with Signet Bank or
its successor (Signet Bank and First Union Bank have announced that First Union
will acquire Signet on or about November 13, 1997), find alternate debt
financing, raise additional equity to repay the loans or otherwise replace the
existing plant and equipment financing. While management is confident that one
of these options will be achievable, no assurances can be given as to such a
result and a failure to renegotiate or refinance the senior debt could make the
Company unable to continue its business.

Impact of Inflation
--------------------------------------------------------------------------------
Although the Company has not attempted to calculate the effect of inflation,
management does not believe inflation has had a material effect on its results
of operations. Material increases in costs and expenses, particularly packaging,
raw material and labor costs, in the future, could have a significant impact on
the Company's operating results to the extent that the effect of such increases
cannot be transferred to its customers.

Forward-Looking Information
--------------------------------------------------------------------------------
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for certain forward-looking statements made by the Company in its disclosures to
the public. There is certain information contained herein, in the Company's
press releases and in oral statements made by authorized officers of the Company
which are forward-looking statements, as defined by such Act. When used herein,
in the Company's press releases and in such oral statements, the words
"estimate," "project," "anticipate," "expect," "intend," "believe," "plans," and
similar expressions are intended to identify forward-looking statements. Because
such forward-looking statements involve risks and uncertainties, there are
important factors that could cause actual results to differ materially from
those expressed or implied by such forward-looking statements. Factors, all of
which are difficult to predict and many of which are beyond the control of the
Company, that could cause actual results to differ materially include, but are
not limited to, those which are set forth in Exhibit 99, attached hereto and
made a part hereof.

--------------------------------------------------------------------------------
                                       12

<PAGE>
--------------------------------------------------------------------------------

                          PART II. - OTHER INFORMATION
        For the Three and Nine Months Ended September 30, 1997 and 1996


                             FREDERICK BREWING CO.


Item 1. Legal Proceedings
--------------------------------------------------------------------------------
On June 17, 1997, the Company, as plaintiff, filed suit in the Circuit Court for
Frederick County, Maryland, Case No. 97-1300CV, against Intertrade Package
Machinery Corporation, an Ohio corporation ("IPMC"), Salh F. Khan, the Chief
Executive Officer of IPMC ("Khan") and John B. Brannen, the President of IPMC
("Brannen"), (IPMC, Khan, and Brannen being collectively referred to herein as
the "Defendants") for breach of express and implied warranties, fraud and
negligent misrepresentation. Upon motion by the defendants, the case was removed
to the Federal District Court for District of Maryland (case #MJG-97-2388). The
Company's complaint arose out of the Defendants' failure to provide, as promised
in the contract dated May 2, 1996, a "turn-key" state-of-the-art bottling and
packaging line system consisting of manufactured and remanufactured equipment,
conveyor controls necessary for integration of the equipment, and the
installation and start-up assistance necessary to commence operating the system
at the Company's new brewery on or before March 3, 1997. The Company is seeking
compensatory damages from all Defendants of $1.0 million and $3.0 million in
punitive damages from Khan and Brannen. At the same time, the Company filed a
motion for partial summary judgment against IPMC, alleging that there is no
genuine dispute of material fact, relating to damages of $206,181 for the
equipment paid for by the Company but never delivered by IPMC. This motion was
denied on October 24, 1997. As of November 7, 1997, the parties are currently
conducting discovery and settlement negotiations have been held. If the Company
cannot obtain a fair and reasonable settlement, it intends to vigorously
prosecute this action.

Item 2. Changes in Securities 
--------------------------------------------------------------------------------
Effective as of July 24, 1997, The Company's Board of Directors authorized
raising up to $2,500,000 by the issuance and private sale of up to 2,500 shares
of its Series C Convertible Preferred Stock ("Series C Preferred Stock") to
"non-United States persons" as that term is defined by Regulation S promulgated
under the Securities Act of 1933, and "accredited investors" as that term is
defined by Regulation D, as amended. The following is a brief description of the
terms of the Series C Preferred Stock: (I) the number of shares of Series C
Preferred Stock offered was 2,500 shares;(ii) the Series C Preferred Stock will
rank senior to the Common Stock and to the Series A and Series B Preferred
Stocks with respect to liquidation rights; (iii) dividends on the Series C
Preferred Stock may be declared and paid if and when and to the extent
determined from time to time by the Company's Board of Directors, provided that
such dividends shall be declared with respect to the Series C Preferred Stock on
par with dividends declared with respect to the Company's Common Stock; (iv) a
30% discount to bid price for Common Stock average bid price over 5 days prior
to date of conversion; and (v) the Series C Preferred Stock is immediately
convertible to Common Stock. The Company does not expect to declare or pay such
dividends in the foreseeable future. The Company closed the first sale of the
Series C Preferred Stock on August 11, 1997. All offers and sales of the Series
C Preferred Stock were, in fact, made under Regulation D and gross proceeds of
the offering were $2,100,000 on the sale of 2,100 shares. The Company has filed
a registration statement on form S-3 with the Securities Exchange Commission
with respect to the Common Shares into which the Series C Convertible Preferred
Stock are Convertible.
--------------------------------------------------------------------------------


                                       13
<PAGE>

--------------------------------------------------------------------------------



Other Information
For the Three and Nine Months Ended September 30, 1997 and 1996

The primary purpose of the private offering of the Series C Preferred Stock was
to provide funds for the purchase and installation of additional fermentation
vessels to increase brewing capacity, the purchase and installation of warehouse
and packaging equipment to improve operating efficiency, additional investor
relations efforts, a payment to Morgan-Keller, Inc, the general contractor in
satisfaction of a contractual obligation for brewery construction, the payment
of offering expenses, the payment of the hiring and training of administrative
and sales personnel, and the payment of certain promotional, marketing and
advertising expenses. The balance of the net proceeds were to be used for
working capital and general corporate purposes. This use of funds is summarized
in the following table:


     Placement fees, other offering expenses    $  263,000
     Plant and equipment additions ..........      489,000
     Investor relations services ............      310,000
     Morgan-Keller payment ..................      151,000
     Working capital ........................      887,000
                                                ----------

     Total ..................................   $2,100,000


Effective as of October 30, 1997 The Company's Board of Directors authorized
raising up to $850,000 by the issuance and private sale of up to 850 shares of
its Series D Convertible Preferred Stock ("Series D Preferred Stock) to
"non-United States persons" as that term is defined by Regulation S promulgated
under the Securities Act of 1933 and "accredited investors" as that term is
defined by Regulation D as amended. The following is a brief description of the
terms of the Series D Preferred Stock: (I) the number of shares of Series D
Preferred Stock offered was 850 shares; (ii) The Series D Preferred will rank
senior to the Common Stock and to the Series A, Series B and Series C Preferred
Stocks with respect to liquidation rights; (iii) dividends on the Series D
Preferred Stock may be declared and paid if and when and to the extent
determined from time to time by the Company's Board of Directors, provided that
such dividends shall be declared with respect to the Series D Preferred Stock on
par with dividends declared with respect to the Company's Common Stock (iv) a
30% discount to bid price for Common Stock average bid price over 5 days prior
to date of conversion; and (v) the Series C Preferred Stock is immediately
convertible to Common Stock. The Company does not expect to declare or pay such
dividends in the foreseeable future. The Company closed on the first sale of the
Series D Preferred Stock on November 10, 1997 and all offers and sales of such
shares were, in fact, made under Regulation D. In accordance with the Security
Exchange Commission's position on accounting for Preferred Stock, a net loss
attributable to common shareholders will be adjusted for deemed dividends in the
fourth quarter of 1997.

The primary purpose of the private offering of the Series D Preferred Stock is
to provide working capital for the ongoing operations of the Company during the
fourth quarter of 1997 while efforts to establish a national sales distribution
network is continued. In addition, the funds from Series D Preferred Stock will
cover the payment of offering expenses, investor relations services and the
payment of certain seasonal promotional, marketing and advertising expenses.


--------------------------------------------------------------------------------
                                       14

<PAGE>

Item 3. Defaults Upon Senior Securities
--------------------------------------------------------------------------------
None.

Item 4. Submission of Matters to a Vote of Security Holders
--------------------------------------------------------------------------------
Not applicable.

Item 5. Other Information
--------------------------------------------------------------------------------
Effective September 15, 1997 Craig J. O'Connor was transferred from Vice
President - Finance and Administration to the newly-created position of Director
of Business Development. Mr. O'Connor's compensation will remain unchanged.

On November 11, 1997, the Company hired Leslie P. Harper, age 49, to serve as
Chief Financial Officer. Mr. Harper holds a Bachelor of Science degree in
Accounting from Bentley College (Waltham, Mass.) and a Masters of Business
Administration with an emphasis in Finance from Babson College (Wellesley,
Mass.). From August, 1987 through June, 1996, Mr. Harper served as Chief
Financial Officer and Controller of Racal Guardata, Inc. a $30 million
(revenues) manufacturing, product development and marketing subsidiary of Racal
Electronics, PLC. From January, 1984 through 1987, Mr. Harper served as the
controller of Alcatel, Inc., a publicly-held manufacturer of telecommunication
equipment with $20 million in revenues before its acquisition by ITT Corp. From
March, 1979 through January, 1984, he served in progressively responsible
positions in the finance department of Northern Telecom, Inc. Since June, 1996,
Mr. Harper has worked as an independent financial consultant.

Item 6. Exhibits and Reports on Form 10-QSB
--------------------------------------------------------------------------------
        (a)     Exhibits Filed:

                Index to Exhibits
--------------------------------------------------------------------------------
                
        10              Material Contracts
                (I.)    CRG

        27              Financial Data Schedule

        99.1            Safe Harbor Under the Private Securities Litigation 
                        Reform Act of 1995 /1/

        99.2            Press release, August 4, 1997

        99.3            Press release, September 22, 1997

-------------

/1/   Incorporated by reference to Form 8-K filed with the SEC on 
      February 27, 1997.




                                       15
<PAGE>



                                   SIGNATURES

In accordance with the requirements of the Securities and Exchange Act of 1934,
the Registrant has caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.


                                           Frederick Brewing Co.


    Date November 14, 1997                 /s/ Kevin E. Brannon
         ---------------------             ------------------------------------
                                           Kevin E. Brannon
                                           Chairman of the Board and
                                           Chief Executive Officer


    Date November 14, 1997                 /s/ Marjorie A. McGinnis
         ---------------------             ------------------------------------
                                           Marjorie A. McGinnis
                                           President and Chief Operating Officer


                                       16