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

## FORM 10-K

(Mark One)

|[X] | Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended March 31, 2003.
|--- | ------------------------------------------------------------------------------------------------------------------------------

|[   ] | Transition Report Pursuant to Section 13 or 15(d)  of the Securities
Exchange Act of 1934
|----- | -----------------------------------------------------------------------------------------

Commission File Number:  333-74589

NATIONAL WINE & SPIRITS, INC.(Exact name of registrant as specified in its charter)

|Indiana
(State or other jurisdiction of
incorporation or organization) |  | 35-2064429
(I.R.S. Employer Identification No.)
|---------------------------------------------------------------------- |  | -----------------------------------------------

|700 West Morris Street, P.O. Box 1602Indianapolis, Indiana
(Address of principal executive offices) |  | 46206
(Zip Code)
|--------------------------------------------------------------------------------------------------- |  | ----------------

(317) 636-6092
(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the
Act:        None

Securities registered pursuant to Section 12(g) of the
Act:        None

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 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 by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).    Yes    
[   ]          
No    [X]

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any Amendment to this
Form 10-K.    [X]

The registrant is a privately held corporation. As such, there is no
practicable method to determine the aggregate market value of the voting stock
held by non-affiliates of the registrant.

The number of shares of Common Stock, $.01 par value, of National Wine &
Spirits, Inc. outstanding as of June 20, 2003 was 5,330,521, of which 104,520
were voting stock.
Documents Incorporated by Reference:    None

TABLE OF CONTENTS

|         |                                                                                       | Page
|-------- | ------------------------------------------------------------------------------------- | ----
|Part I   |                                                                                       |     
|Item 1.  | Business                                                                              | 3   
|Item 2.  | Properties                                                                            | 12  
|Item 3.  | Legal Proceedings                                                                     | 12  
|Item 4.  | Submission of Matters to a Vote of Security Holders                                   | 12  
|        
|Part II 
|Item 5.  | Market for Registrant's Common Equity and Related Stockholder Matters                 | 13  
|Item 6.  | Selected Consolidated Financial Data                                                  | 13  
|Item 7.  | Management's Discussion and Analysis of Financial Condition and Results of Operations | 16  
|Item 7a. | Quantitative and Qualitative Disclosures About Market Risk                            | 25  
|Item 8.  | Financial Statements and Supplementary Data                                           | 26  
|Item 9.  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure  | 49  
|        
|Part III
|Item 10. | Directors and Executive Officers of the Registrant                                    | 49  
|Item 11. | Executive Compensation                                                                | 51  
|Item 12. | Security Ownership of Certain Beneficial Owners and Management                        | 53  
|Item 13. | Certain Relationships and Related Transactions                                        | 53  
|Item 14. | Controls and Procedures                                                               | 55  
|Item 15. | Principal Accountant Fees and Services                                                | 55  
|        
|Part IV 
|Item 16. | Exhibits, Financial Statement Schedules and Reports on Form 8-K                       | 56  

PART I

Disclosure Regarding Forward-Looking Statements

This Form 10-K,
including, but not limited to the Managements Discussion and
Analysis of Financial Condition and Results of Operations section,
contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995, which can be identified by the
use of forward-looking terminology, such as may, intend,
will, expect, anticipate,
should, plans to, estimate or
continue or the negative thereof or other variations thereon or
comparable terminology. In particular, any statement, express or implied,
concerning future operating results or the ability to generate revenues, income
or cash flow to service the Companys debt are forward-looking statements.
Such statements are necessarily estimates reflecting the Companys best
judgment and expectations based upon current information. Although the Company
believes that the expectations will prove to have been correct, all
forward-looking statements are expressly qualified by the cautionary statements
set forth on Exhibit 99.1 to this Form 10-K, and the Company undertakes no
obligation to update such forward-looking statements.

Item 1.    Business

General

National Wine & Spirits,
Inc. (NWS) is one of the largest distributors of wine and spirits in the United
States. NWS markets include, among others, Chicago and Detroit, which are
the second largest and the sixth largest metropolitan markets for spirits in the
United States, respectively. NWS is the largest distributor of spirits in
Indiana with 47% market share and Michigan with 48% market share. In Illinois,
NWS was one of the largest distributors in fiscal 2003 with approximately 32%
market share. NWS currently expects market share in Illinois for fiscal 2004 to
be approximately 20% due to changes in its Illinois operations described under
Business  Recent Developments and other circumstances. NWS was
incorporated in the state of Indiana in 1998. NWS conducts its operations
through its wholly owned subsidiaries, National Wine & Spirits Corporation
in Indiana (NWS-Indiana), NWS-Illinois, LLC (NWS-Illinois), NWS Michigan, Inc.
(NWS-Michigan), and United States Beverage, L.L.C. (USB). USB distributes and
markets import and craft beer along with malt based products throughout the
United States.

From 1999 to 2003,
NWS total revenue increased steadily from $553.2 million to $712.9
million, representing a compound annual growth rate of 6.5%. NWS achieved this
performance by successfully integrating several strategic acquisitions, actively
developing new geographic market areas, pursuing new supplier and brand
relationships, implementing advanced product handling technology and proprietary
information systems, and providing high levels of supplier and customer service.

Under
the three-tier regulatory framework established by federal and state law, suppliers of
alcohol-based beverages are generally prohibited from selling their products directly to
retail outlets or consumers, effectively requiring suppliers to use distributors such as
NWS. This regulatory framework effectively insulates distributors from vertical
competition from suppliers or retail customers. In some states, referred to as
control states, state law has historically mandated the state to act as the
exclusive wholesale distributor and/or retailer of alcohol-based beverages. In 1996,
Michigan became the first control state to privatize aspects of the wholesale distribution
of spirits, and NWS has become the leading administrative distribution agent of spirits in
that state.

Recent Developments

The
wine and spirits industry has undergone significant changes in recent months. Rapid
consolidation has occurred in the supplier sector, and distributors have expanded their
operations to cover a larger number of states. In several states, only two major
distributors continue to operate.

Diageo
and Schieffelin & Somerset have undertaken a process of state-by-state consolidation
and realignment of their brands, including the brands which Diageo acquired from Seagram
in 2001. As a result, several changes have occurred in the Companys distribution
relationship with Diageo in the states of Indiana, Illinois and Michigan. The Company has
been selected as Diageos exclusive distributor in Indiana and the exclusive
distributor and authorized distribution agent for Diageo and Schieffelin & Somerset in
Michigan. The Company will no longer act as Diageos distributor in the state of
Illinois.

- 3 -

Many
other suppliers have undertaken a process of reviewing state distribution rights in light
of determinations made by Diageo. As a result, the Company will no longer have
distribution rights in Illinois for Future Brands and Canandaigua Wine Company. The
Company anticipates that suppliers and distributors will continue to consolidate and
realign their brands in the foreseeable future and expects to have the opportunity of
acquiring the representation of competing brands as a result of those consolidations and
realignments. There can be no assurance, however, that the Company will acquire such
representation or that any failure to acquire such representation would not have a
material adverse effect on the Company or its operations.

On
February 27, 2003 and March 25, 2003, NWS entered into two agreements with Glazers
Wholesale Drug Company (Glazer) under which NWS and Glazer will form a
strategic alliance for the purpose of distributing alcohol-based beverages in the state of
Illinois. Under the management services agreement, Glazer will provide management and
consulting services and assistance in Illinois. A separate contribution agreement sets
forth the terms upon which the parties may agree in the future to conduct operations in
Illinois through a new entity to be equally owned by NWS-Illinois and Glazer.

As
consolidations and realignment continue within the Illinois market, NWS continues to
analyze its operations in Illinois and has taken steps to appropriately size its workforce
in relation to its customer needs. Approximately 300 employees in the Illinois operations
are no longer actively employed by NWS. As it adjusts the size and scope of its Illinois
operations, NWS will continue to concentrate on maintaining customer and supplier
relationships and infrastructure necessary to operate its Illinois business with lower
costs and increased efficiencies, until such time as new business supports expanded
operations. NWS has discontinued warehousing operations in its Champaign and Peoria
facilities, but it continues to use those locations as cross-docking facilities and office
space. Continuing efforts are also being made to replace lost revenue in Illinois.

Industry Overview

The
United States alcohol-based beverage industry generated total retail sales of
approximately $137.2 billion in calendar 2002. Sales of wine and spirits, in which NWS
primarily competes, accounted for approximately 15% and 31%, respectively, or $62.8
billion of total retail sales in 2002. In the United States wine and spirits markets,
total consumption has increased since 1994 and 1998, respectively. During 2002, wine and
spirits consumption in the United States grew 3.3% and 1.8% respectively, as compared to
2001, with imported products showing stronger growth than domestics. In both the wine and
spirits industries, consumer preference has been to purchase higher quality and more
expensive products; management believes this trend will continue.

Since
the repeal of Prohibition in 1933, the federal and state governments have regulated the
sale of spirits, wine, and beer. State regulatory frameworks fall into two types: control
and open. In nearly all circumstances, suppliers may not legally sell directly to
retailers. In the 18 control states, the state controls either the distribution or the
retail sale, or both. In open states, including Indiana, Illinois, and Kentucky, the
distributors and retailers are privately owned businesses. In the open-franchise states,
there are laws and regulations that restrict the suppliers ability to change
distributors.

Given
the three tier regulatory structure, the wine and spirits distribution industry varies
greatly from other industries such as food, drugs, non-alcohol-based beverages and paper
products. As suppliers can compete directly with the distributors in these other
industries by shipping directly to retailers, distributor margins can be much lower than
those in the wine and spirits industry. In addition, the liquor industry as a whole has
shown a remarkable resilience to economic downturns relative to other industries.

In
June of 2000, Seagram announced its intention to merge with Vivendi and divest of their
wine and spirits business. Subsequently, Diageo and Pernod Ricard jointly bid and agreed
to purchase the brands with the intention of assigning them to their respective companies.
The most notable Seagram brands that Diageo purchased were Crown Royal, Seagrams V.O., 7
Crown, Captain Morgan and Myerss Rum. The notable brands Pernod purchased include
Chivas Regal, The Glenlivet, Martell Cognacs and Seagrams Gin. The purchase agreement was
approved by the Federal Trade Commission in December, 2001. Absolut Vodka, which had a
marketing arrangement with Seagram, has assigned the U.S. marketing rights to Future
Brands L.L.C., a joint venture with V & S (parent of Absolut) and Jim Beam Brands.
Diageo is in the process of completing its nationwide efforts to consolidate the rights to
distribute the brands it purchased from Seagram. Pernod has consolidated the Seagram
brands it purchased into its existing distribution network. Other suppliers are developing
strategies to deal with the brand sales to Diageo and Pernod Ricard. See Business
 Recent Developments for a description of some of the consequences of these
events for NWS.

- 4 -

Suppliers and Products

NWS represents many of
the largest suppliers of wine and spirits in the United States, and offers
hundreds of brands and more than 12,000 individual products. The breakdown of
sales among wine, spirits and other products distributed by NWS in 2003, 2002
and 2001 is as follows:

|                                    | Wine (in thousands) | Spirits (in thousands) | Other (in thousands)
|----------------------------------- | ------------------- | ---------------------- | --------------------
|
|                                   
|Product sales                       |                     |                        | $                   
|Distribution fees                   |                     |                        |                     
|Percentage of total
Company revenue |                     |                        |                     

In each of the last three
fiscal years, sales of wine and spirits accounted for more than eighty percent
of consolidated revenue. USB was primarily the reason for the growth in the
other category, which includes revenues derived from beer, non-alcoholic and
tobacco products. The financial statements contained in Item 8 of this Form 10-K
set forth the Company revenues from external customers, profit and total assets
for each of the last three fiscal years.

In Michigan, spirits
distributors have exclusive relationships with suppliers by law, and receive
distribution fees from suppliers as set by the state, rather than purchasing
from the suppliers for resale to customers. This arrangement has the effect of
understating the importance of spirits in NWS overall product mix. For
purposes of illustrating the scale of NWS operations in Michigan, the
total wholesale prices of products delivered by NWS for Michigan in 2003, 2002
and 2001 was $334.0 million, $360.0 million and $355.0 million, respectively,
based on the fixed wholesale prices of the spirits delivered by NWS.

NWS products include
the following brands, among many others:

- 5 -

|Product Type                    | Brand Names          
|------------------------------- | ---------------------
|Vodka:                          | Absolut              
|                                | VOX                  
|                                | Grey Goose           
|                                | Gordons              
|                               
|Bourbon and Blended Whiskey:    | Crown Royal          
|                                | Jim Beam             
|                                | Seagram's V.O.       
|                                | Old Grand Dad        
|                               
|Scotch and Single Malt Whiskey: | Chivas Regal         
|                                | Grant's              
|                                | Balvenie             
|                                | Bowmore              
|                                | Glenfiddich          
|                                |                      
|                               
|Gin:                            | Boodles              
|                                | Seagram's            
|                                | Tanqueray            
|                               
|Rum:                            | Captain Morgan       
|                                | Malibu               
|                               
|Tequila:                        | Herradura            
|                                | Jose Cuervo          
|                               
|Cognacs/Brandy:                 | Courvoisier          
|                                | Hine                 
|                                | Remy Martin          
|                                | Hennessey            
|                               
|Specialty Spirits:              | Chambord             
|                                | Bailey's Irish Cream 
|                                | Campari              
|                                | Hiram Walker Cordials
|                                |                      
|                               
|Wine:                           | Kendall Jackson      
|                                | Almaden              
|                                | Banfi                
|                                | Beringer             
|                                | Caymus               
|                                | Chateau Lafite       
|                                | Rothschild           
|                                | Gundlach Bundschu    
|                                | Penfolds             
|                                | Hess Collection      
|                                | Moet & Chandon       
|                                | Dom Perignon         
|                               
|Specialty Beer and Other:       | Goose Island         
|                                | Grolsch              
|                                | K Cider              
|                                |                      
|                               
|Non-Alcohol:                    | Perrier              
|                                | Daily's              
|                                |                      

- 6 -

NWS has entered into written
distribution agreements with several of its principal suppliers that generally
may be extended on an annual basis but are terminable upon 30 days or 60
days written notice to NWS.  NWS has entered into various
long-term agreements with certain suppliers that are disclosed in the financial
statements.  In addition, NWS has
informal arrangements with many of its suppliers whereby NWS distributes the
suppliers products pursuant to purchase orders without written
distribution agreements. Although the written agreements provide NWS with the
non-exclusive right to distribute the suppliers products in a particular
state, in practice the suppliers have generally selected a distributor to be the
exclusive distributor of specified products in each state. In each of Indiana
and Michigan, NWS is presently acting as the exclusive distributor with respect
to virtually all of the products it distributes.

NWS
has entered into binding agreements to purchase products with certain of its suppliers in
Indiana and Michigan. The following figures represent approximate aggregate case sales and
net sales from suppliers with which the Company entered into such agreements in fiscal
2003 and brands for which the Company owns the distribution rights in Illinois:

|            |             
|----------- | ------------
|Case sales: | 11,416,000  
|Net sales:  | $284,000,000

Related Operations

In
addition to its core alcohol-based beverage distribution operations, NWS has conducted
related beverage operations through a division, Cameron Springs Water Company, and through
NWS U.S. Beverage operations. Cameron Springs, a bottled water supplier in Indiana,
was sold to Perrier Group for approximately $10.4 million in cash, which was in excess of
net book value as of June 2000. U.S. Beverage commenced operations as a division of NWS in
March 1997 to market and sell imported, specialty and microbrewed beers and specialty malt
products nationally. The brand distribution contracts related to the U.S. Beverage
operations are held by an entity, in which NWS-Illinois has 100% voting control. In
select markets, NWS sells and distributes premium cigars primarily as a complement to
NWS distribution of fine wines and spirits.

In
April 2000, U.S. Beverage entered into an agreement with the Goose Island Brewing Company
by which U.S. Beverage became the exclusive sales and marketing firm for the Goose Island
brand throughout the United States. On January 2, 2002 U.S. Beverage entered into a
distribution contract with Grolsch International, BV as the exclusive importer, seller and
marketer of Grolsch products within the United States. Commencing April 1, 2002, U.S.
Beverage became the exclusive marketer and distributor of Seagrams Coolers.

- 7 -

Customers

Most
states, including Indiana, Illinois and Michigan, require wine and spirits retailers to
purchase alcohol-based beverages from licensed distributors. Suppliers in these states may
not legally sell directly to retail customers. NWS customers fall into two broad
categories depending on where the alcohol-based beverage ultimately will be consumed:
on-premise and off-premise. Off-premise customers include package liquor stores, grocery
stores, drug stores and mass merchandisers. On-premise customers include hotels,
restaurants and bars, and similar establishments. NWS currently serves over 36,000 retail
locations in Indiana, Illinois and Michigan. No single customer represented more than 5.4%
of NWS 2003 total revenue. As is customary in the industry, NWS products are
generally purchased under standard purchase orders and not under long-term supply
contracts. As a result, backlog is not meaningful in the wholesale distribution industry.

The
following table summarizes NWS customer base for NWS-Illinois, NWS-Indiana, and NWS-Michigan:

|Type of Customer | Percentage ofCompany 2003 Revenue | Representative Customers
|---------------- | --------------------------------- | ------------------------

---

|Off-Premise
|-----------

|Package Stores
        Grocery stores, drug stores and mass merchandisers | 38.2%
26.2 | Gold Standard and Cap'n Cork
Kroger, Dominicks, Marsh,
American Stores (Osco), Walgreens,
CVS, Sam's Club, Meijer
7-Eleven, White Hen, Village
|------------------------------------------------------------------------- | ---------- | ----------------------------------------------------------------------------------------------------------------------------------------------

|Other
            Percent of total | 8.6
73.0% | 
|---------------------------------- | --------- | 

|On-Premise
|----------

|Restaurants and Bars | 21.4 | Charlie Trotter's, Hard RockCafe,
House of Blues, Mortons,
Lettuce Entertain U,
Levy, Ruth's Chris,
|-------------------- | ---- | ---------------------------------------------------------------------------------------------------

|Hotels, Entertainment | 2.5 | Four Seasons, Hyatt, Hilton,
the United Center
|--------------------- | --- | ----------------------------------------------

|Other | 3.1 | Crooked Stick Golf Course,
American Legion
|----- | --- | ------------------------------------------

|Percent of total | 27.0% | 
|---------------- | ----- | 

Management
believes that the number and diversity of NWS customers and the nature of NWS
business strengthens NWS liquidity. Indiana has a 15-day credit law beyond which
retail customers are restricted from buying alcohol-based beverages from any distributor
in the market. Illinois has a similar 30-day credit law. Typically, NWS bad debt
expenses are incurred less than 30 days after shipment since the credit laws prohibit
extension of terms. Average bad debt expense for the past five years has been less than
0.10% of revenue.

Marketing and Sales

Brand
Management.     NWS was one of the first distributors to
recognize the benefits of a dedicated approach to brand management and
separating it from sales execution. Our approach has contributed to our success.
Suppliers appreciate and depend upon the local expertise and understanding of
the intricacies of the market. Our brand managers, through interaction with our
sales teams and analysis of the competitive landscape, adjust suppliers
national brand strategies to plans that work in our respective states.

- 8 -

Sales
Teams.    NWS sales organizational design is predicated
upon category knowledge and expertise, trade channel knowledge and
effectiveness, and geographic coverage. Through its marketing and sales force,
NWS acts as the field marketing and merchandising arm of its suppliers by
maintaining regular contact with NWS off-premise and on-premise customers.
NWS provides its customers with a wide variety of services in addition to order
taking, merchandising, and delivery. These services include item selection and
SKU optimization using space and financial tools, fact-based business
presentations to capitalize on fair share, consumer pull-through marketing
programs and communicating business-building solutions.

Sales, Marketing and
Information Systems.    Our investment in technology in
the areas of sales and marketing is a critical factor in our success and
customer satisfaction. NWS is generally recognized as an industry innovator and
leader in MIS in the wine and spirits distribution tier. Our proprietary sales
system manages sales data to the SKU level in all retail accounts we service
(approximately 36,000) and is refreshed nightly based on deliveries. This system
provides our brand teams the necessary information to develop targeted,
effective brand plans. Moreover, our sales managers depend on the information to
monitor and control retail execution within their sales teams. Most recently we
have moved this information to the Internet to allow for greater speed and
accessibility to management, retail, and supplier partners. We have also
invested resources to significantly improve our category management expertise,
and this has improved our service and effectiveness particularly in the
off-premise national and regional chain accounts.

NWS
sales force and management is equipped with laptop computers, which expedites order entry
and provides instant feedback to customers regarding order activity. NWS provides its
customers and suppliers with the ability to directly enter and track orders via electronic
data interchange. In addition, NWS proprietary information systems provide its sales
and marketing personnel, customers and suppliers with access to a database of information
regarding the purchase and sale of alcohol-based beverages in specific geographic markets.
NWS suppliers have immediate access to information regarding product and demographic
trends within specific geographic markets and NWS customers have access to
information regarding popular products or other trends from similarly situated retail
locations. Management believes that its management information systems enhance its
operating performance and improve its relationships with customers and suppliers.

Warehousing and Distribution

NWS
utilizes a series of three master warehouses, two hyper-terminals and seven cross-docking
facilities strategically located throughout Indiana, Illinois and Michigan to store and
ship its products pending sale to customers. NWS uses common carriers to transport
products from suppliers to its master warehouses. Master warehouses located in Chicago,
Indianapolis and Detroit serve as the primary storage facilities for NWS inventory.
Upon receipt of the product at one of the master warehouses, the products are inspected
and stored on pallets or in racks. Temperature-sensitive products, such as fine wines, are
stored in temperature-controlled areas of the warehouses. Hyper-terminals located in South
Bend, Indiana and Grand Rapids, Michigan stock only high volume products and provide an
extension of the master warehouses. NWS strives to optimize inventory levels, taking into
account minimum out-of-stock percentages, projected sales, including seasonal demands,
periodic supplier shipments to meet supplier sales requirements and working capital
requirements.

NWS
customers ordinarily receive either next day or second-day delivery. In general, orders
are collected during the day for batch routing and order picking at night. The
Chicago and Detroit master warehouses each use an automated material handling system,
including scanners, automated conveyors, dispensers and sorters. Products from the master
warehouses are then shuttled nightly to either a hyper-terminal or a cross-docking
facility where the orders are consolidated and loaded onto delivery trucks. Cross-docking
facilities located in Collinsville, Illinois, Champaign, Illinois, Peoria, Illinois,
Evansville, Indiana, and Traverse City, Saginaw and Escanaba, Michigan further extend the
service areas of the master warehouses. Orders for delivery out of the various
cross-docking facilities are picked in the master warehouses, shipped in during the night,
and then transferred onto local delivery trucks for final delivery. NWS owns or leases a
total fleet of approximately 322 delivery trucks, consisting of 238 delivery trucks, 15
tractors, 21 trailers, 44 vans and 4 pick-up trucks. To maximize prompt and efficient
product delivery, NWS fleet is allocated among NWS master warehouses,
hyper-terminals and cross-docking facilities located throughout Indiana, Illinois and
Michigan.

As
a result of a number of factors including state laws and regulations, NWS maintains
independent distribution networks in Indiana, Illinois and Michigan. The Indiana
distribution network operates with the Indianapolis master warehouse feeding the South
Bend hyper-terminal and the Evansville cross-docking facility. The Michigan distribution
network operates with the Detroit master warehouse feeding the Grand Rapids hyper-terminal
and the cross-docking facilities located in Escanaba, Saginaw and Traverse City. The
Illinois distribution network is separated into the metropolitan Chicago area, and all
other service areas. The Chicago area is serviced out of the Chicago master warehouse,
while the downstate areas are serviced by the smaller cross docking facilities in
Champaign, Peoria and Collinsville.

- 9 -

Competition

There
are significant barriers to entry into the wholesale wine and spirits distribution
business. These barriers include established supplier-distributor relationships,
specialized distribution equipment such as material handling systems and delivery
vehicles, important industry knowledge regarding pricing, inventory management, and
distribution logistics. Historically, it is extremely rare for organizations not already
engaged as wine and spirits distributors to enter the business. New distributors typically
enter existing markets through acquisition.

The
wine and spirits wholesale distribution business is highly competitive. NWS primary
competition in Illinois includes Judge & Dolph and Southern Wine & Spirits. In
Indiana, the only significant competitor is Olinger (a partnership of Glazer and Romano).
None of the ten largest United States distributors competes with NWS in Michigan.
Distributors compete for new suppliers or brands based on reputation, market share, access
to customers and ability to satisfy supplier demands. Competition from larger distributors
will likely increase in the future as consolidation among suppliers and distributors
continues.

Environmental Matters

NWS
currently owns and leases a number of properties, and historically it has owned and/or
leased others. Under applicable environmental laws, NWS may be responsible for remediation
of environmental conditions relating to the presence of hazardous substances on such
properties. The liability imposed by such laws is often joint and several without regard
for whether the property owner or operator knew of, or was responsible for, the presence
of such hazardous substances. In addition, the presence of such hazardous substances, or
the failure to properly remediate such substances, may adversely affect the property
owners ability to borrow using the real estate as collateral and to transfer its
interest in the real estate. Although NWS is not aware of the presence of hazardous
substances requiring remediation, there can be no assurance that releases unknown to NWS
have not occurred. Except for blending and bottling of a few of its own brands, NWS does
not manufacture any of the wine or spirit products it sells and believes that it has
conducted its business in substantial compliance with applicable environmental laws and
regulations. Compliance with environmental laws has not had a material effect upon
NWS capital expenditures, earnings or competitive position.

Employees

As
of March 31, 2003, NWS had approximately 1,430 employees. As indicated in
Business  Recent Developments, NWS has recently lost business in
Illinois but added business in Indiana and Michigan. These developments will likely
continue to effect the Companys workforce in the future. Approximately 148 employees
in Michigan and 302 employees in Illinois are represented by labor unions. In Illinois,
NWS has relationships with three unions:

| | (1)         Teamsters Union
               Local 744, annual agreements expiring March 30, 2004 and March 30,
               2005;
| | ----------------------------------------------------------------------------------------------------------------------------------

| | (2)         Liquor and Allied Workers
               Union Local 3, annual agreements expiring September 30, 2004 and October
               31, 2004; and
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------

| | (3)         Teamsters,
               Chauffeurs & Helpers Union Local 50, expiring August 31,
               2004.
| | -------------------------------------------------------------------------------------------------------------------

In Michigan, NWS has relationships with four unions:

| | (1)        
           Teamsters Union Local 337, expiring March 4, 2005;
| | -------------------------------------------------------------------------

| | (2)        
           Teamsters Union Local 406, expiring March 1, 2005;
| | -------------------------------------------------------------------------

| | (3)        
           Teamsters Union Local 299, expiring March 2, 2004; and
| | -----------------------------------------------------------------------------

| | (4)        
           Teamsters Union Local 486, expiring March 5, 2004.
| | -------------------------------------------------------------------------

- 10 -

Employees
     of NWS in Indiana are not represented by any labor unions.

NWS has not experienced any
work stoppages in more than 20 years as a result of labor disputes and
considers its employee relations to be good.

Regulatory Considerations

The
manufacturing, importation, distribution and sale of alcohol-based beverages is subject to
regulation by the federal government through the Department of the Treasury, Bureau of
Alcohol, Tobacco and Firearms (BATF), as well as by state and local regulatory agencies.
Suppliers, distributors and retailers must be properly licensed in order to sell
alcohol-based beverages.

In
most states, the alcohol-based beverage industry operates within what is commonly referred
to as a three-tier system of distribution. The three tiers are identified as follows:

| | (1) | Tier one is comprised of
               suppliers that produce alcohol-based beverages and/or importers of alcohol-based
               beverages.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | Tier two is comprised of
               distributors, such as NWS.
| | --- | ------------------------------------------------------------------

| | (3) | Tier three is comprised of
               retail licensees.
| | --- | -----------------------------------------------------------

Under this system, suppliers sell to distributors, distributors sell to
retailers, and retailers sell to consumers. For the most part, suppliers may not
sell to retailers or consumers and distributors may not sell directly to
consumers. All states prohibit suppliers or distributors from having an interest
in retail licensees. NWS directly and through its affiliates holds federal basic
permits and state permits/licenses as a distributor and importer. Also,
NWS-Illinois holds out-of-state shipper permits that allow it to ship products
from one state to a licensed distributor in any one of the other
states.

NWS
is required to have each of its officers, directors and principal stockholders who owns 5%
or more of the issued and outstanding stock qualified by federal and state governmental
agencies to have an interest in a licensed company. NWS officers, directors and
principal stockholders have been qualified by BATF and state regulatory agencies to hold
licenses/permits as a wholesaler/importer.

Distributors
like NWS face scrutiny in a number of important areas, including initial licensing or
permitting and sales and marketing activities with or on behalf of retail customers. The
distributors may not give or transfer anything of value to their customers in exchange for
business or other consideration. The definition of value differs from state to
state. NWS participates in significant promotional activities for suppliers and customers.
Suppliers also are increasingly asking distributors to be responsible for activities and
related costs formerly undertaken by suppliers as suppliers pursue ways to reduce their
operating costs. These increased demands will likely challenge distributors, including
NWS, which desire to meet the wishes of their suppliers and customers. As a result, NWS
regularly provides training and education programming for its sales and marketing
personnel.

NWS
believes that it is in compliance with applicable regulations in all material respects.
Consistent with industry practice, the sales and marketing activities permitted by
distributors for the benefit of tier one suppliers are generally regulated by state
licensing authorities, which authorize various trade practice activities by statute,
regulation or administrative bulletin. NWS relies on such enforcement guidance, which is
subject to change at the discretion of the regulatory authorities, in determining the
scope of its permitted sales and marketing activities.

As
part of its regulatory compliance program, NWS is in frequent contact with regulatory
agencies so that NWS can: (1) be kept current on regulatory developments affecting NWS;
(2) obtain answers from the agencies to questions from company personnel regarding
compliance issues; (3) encourage enforcement of applicable laws and regulations on a
consistent basis throughout its markets. NWS believes that prompt and consistent
enforcement by the regulatory agencies is important and benefits NWS.

- 11 -

Item 2.    Properties

NWS
distribution facilities consist of three warehouses, two hyper-terminals and seven
cross-docking facilities. NWS corporate headquarters are located in Indianapolis,
Indiana.

The
master warehouses, located in Indianapolis, Chicago, and Detroit, serve as the primary
storage facilities and regional offices for NWS. The Chicago warehouse contains
approximately 650,000 square feet of warehousing space, including a designated temperature
controlled area for temperature-sensitive products. The Indianapolis warehouse contains
approximately 351,000 square feet of warehousing space, including a designated temperature
controlled area for temperature-sensitive products. The Detroit warehouse consists of
approximately 238,000 square feet of warehousing space, including a material handling
system and eight shipping docks.

The following chart lists NWS warehouses and delivery, production and
office facilities:

|            | Location             | Owned/Leased | TotalSquareFeet | Principal Function              
|----------- | -------------------- | ------------ | --------------- | --------------------------------
|Indiana     | Indianapolis         | Owned        | 351,000         | Master Warehouse/Office         
|            | South Bend           | Owned        | 76,900          | Hyper-Terminal/Office           
|            | Evansville           | Owned        | 5,800           | Cross-Docking Facility          
|            | Evansville           | Owned        | 2,400           | Office                          
|            | Ft. Wayne            | Leased       | 5,500           | Office                          
|            | Crown Point          | Leased       | 7,900           | Office                          
|            | Indianapolis         | Owned        | 3,500           | Office - Leased to Perrier      
|            | Indianapolis         | Owned        | 15,000          | Warehouse - Leased to Perrier   
|            | Indianapolis         | Owned        | 19,500          | Partially leased Office Property
|           
|Connecticut | Stamford             | Leased       | 5,700           | Office                          
|           
|Illinois    | Chicago              | Owned        | 650,000         | Master Warehouse/Office         
|            | Chicago              | Leased       | 1,840           | Leased Office Property          
|            | Champaign            | Leased       | 50,000          | Cross-Docking Facility/Office   
|            | Peoria               | Leased       | 56,000          | Cross-Docking Facility/Office   
|            | Collinsville         | Leased       | 14,200          | Cross-Docking Facility/Office   
|            | Rockford             | Leased       | 5,000           | Office                          
|            | Springfield          | Leased       | 1,000           | Office                          
|           
|Michigan    | Detroit (Brownstown) | Leased       | 238,000         | Master Warehouse/Office         
|            | Grand Rapids         | Leased       | 100,000         | Hyper-Terminal/Office           
|            | Escanaba             | Leased       | 7,500           | Cross-Docking Facility/Office   
|            | Saginaw              | Leased       | 1,000           | Cross-Docking Facility          
|            | Traverse City        | Leased       | 5,000           | Cross-Docking Facility          

NWS
lease agreements for the Detroit master warehouse and the Grand Rapids hyper-terminal each
have a ten-year term, expiring April 20, 2007 and January 31, 2007,
respectively, and provide NWS with an option to purchase the properties.

Item 3.    Legal Proceedings

The
Company is a party to various lawsuits and claims arising in the normal course of
business. While the ultimate resolution of lawsuits or claims against the Company cannot
be predicted with certainty, management is vigorously defending all claims and does not
expect that these matters will have a material adverse effect on the financial position or
results of operations of the Company.

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

None.

- 12 -

Part II

Item 5.    Market for Registrants Common
Equity and Related Stockholder Matters

Market Information.    
There is no established trading market for the common stock of NWS.

Holders.    
As of June 20, 2003, the number of record holders of each of the classes of the
Companys common stock were as follows:

|                        |  
|----------------------- | -
|Voting common stock     | 2
|Non-voting common stock | 3

Dividends.
        The ability of the Company to pay
dividends to its shareholders is restricted by certain covenants contained in
the new credit facility as well as certain restrictions contained in the
Companys indentures relating to its senior notes. Subject to these
limitations, the Company has historically paid dividends to its shareholders for
tax liabilities and for limited other purposes.

Equity Compensation Plans.    The Company does
not have any equity compensation plans.

Item 6.    Selected Consolidated Financial Data

You
should read the following summary historical financial information in conjunction with
Managements Discussion and Analysis of Financial Condition and Results of
Operations and the consolidated financial statements and notes thereto included in
Item 8 and the schedules accompanying this report.

Distribution
fees include the per case distribution fee for cases of spirits delivered in and on behalf
of the State of Michigan, and as such, NWS does not take title to or finance inventory as
part of its distribution fee business. Please also note that NWS has elected S
corporation status under the Internal Revenue Code and consequently, it does not incur
liability for federal and state income taxes.

For
purposes of calculating earnings to fixed charges, earnings consist of net income plus
fixed charges. Fixed charges consist of interest expense, amortization of debt expense and
discount or premium relating to indebtedness and the portion (30%) of rental expense on
operating leases which we estimate to be representative of the interest factor
attributable to rental expense.

- 13 -

|                              | Years Ended March 31,
(Dollars and cases in thousands, except per case amount)
|----------------------------- | ------------------------------------------------------------------------------
|
|Statement of Income Data:     |                                                                               
|Net product sales             |                                                                               
|Distribution fees             |                                                                               
|                              |                                                                               
|Total revenue                 |                                                                               
|Cost of products sold         |                                                                               
|                              |                                                                               
|Gross profit                  |                                                                               
|Selling, general and          |                                                                               
|administrative expenses       |                                                                               
|                              |                                                                               
|Income from operations        |                                                                               
|Interest expense              |                                                                               
|Other income (expense) (1)    |                                                                               
|                              |                                                                               
|Net income                    |                                                                               
|                              |                                                                               
|Other Financial Data:         |                                                                               
|EBITDA (2)                    |                                                                               
|EBITDA margin                 |                                                                               
|Net income margin             |                                                                               
|Cash provided by              |                                                                               
|operating activities          |                                                                               
|Cash provided (used)          |                                                                               
|by investing activities       |                                                                               
|Cash provided (used)          |                                                                               
|by financing activities       |                                                                               
|Depreciation and amortization |                                                                               
|Capital expenditures (3)      |                                                                               
|Ratio of earnings to          |                                                                               
|fixed charges                 |                                                                               
|Operating Statistics:         |                                                                               
|Product Sales Operations      |                                                                               
|Cases shipped (spirits        |                                                                               
|and wine)                     |                                                                               
|Gross profit margin           |                                                                               
|Fee Operations                |                                                                               
|Cases shipped (spirits)       |                                                                               
|Distribution fee per case     |                                                                               

|                     |  |  |   |         |  |   |         |  |   |         |  |   |         |  |   |         |  |  |  | 
|-------------------- |  |  | - | ------- |  | - | ------- |  | - | ------- |  | - | ------- |  | - | ------- |  |  |  | 
|
|
|Balance Sheet Data   |  | 
|Cash                 |  |  | $ | 5,820   |  | $ | 11,735  |  | $ | 4,094   |  | $ | 3,559   |  | $ | 1,908   | 
|Total assets         |  |  |   | 203,708 |  |   | 201,405 |  |   | 192,290 |  |   | 188,197 |  |   | 178,868 | 
|Total debt           |  |  |   | 98,303  |  |   | 109,805 |  |   | 110,571 |  |   | 112,471 |  |   | 117,222 | 
|Total long-term      |  | 
|liabilities          |  |  |   | 110,677 |  |   | 111,678 |  |   | 110,487 |  |   | 111,571 |  |   | 116,559 | 
|Stockholders' equity |  |  |   | 27,854  |  |   | 23,095  |  |   | 24,669  |  |   | 18,183  |  |   | 16,266  | 

- 14 -

NOTES TO SELECTED CONSOLIDATED FINANCIAL DATA

| | (1) | The increase in Other income (expense) in 2003 and 2001 resulted from Vendor
settlement income and Gain on sale of bottled water division,
respectively.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | EBITDA is defined as net
income plus interest expense, depreciation and amortization.
| | --- | -------------------------------------------------------------------------------------

| | EBITDA is a non-GAAP financial measure within the meaning of Regulation G. EBITDA is presented
because it is a widely accepted financial indicator used by investors and analysts to
analyze and compare companies on the basis of debt service capability. Management uses EBITDA to set targets and monitor and assess financial performance. EBITDA is not
intended to represent cash flows for the periods presented, nor has it been presented as
an alternative to net income as an indicator of operating performance and should not be
considered in isolation or as a substitute for measures of performance and cash flow
prepared in accordance with generally accepted accounting principles.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The most comparable GAAP measure for EBITDA is net income. Following is a reconciliation
between net income and EBITDA for the fiscal years 1999 through 2003:
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------

|                 | Years Ended March 31
(in thousands)
|---------------- | -----------------------------------
|
|Net Income       |                                    
|Interest expense |                                    
|Depreciation     |                                    
|Amortization     |                                    
|                 |                                    
|EBITDA           |                                    
|                 |                                    

| | The EBITDA information reflected herein may not be comparable to similarly
titled measures used by other companies.
| | -------------------------------------------------------------------------------------------------------------------

| | (3)        The breakdown of our capital
expenditures by significant project is set forth below.
| | -----------------------------------------------------------------------------------------------

|                    | Years Ended March 31
(in thousands)
|------------------- | -----------------------------------
|
|Business expansion  |                                    
|Information systems |                                    
|Equipment           |                                    
|                    |                                    
|                    |                                    
|                    |                                    

- 15 -

Item 7.    Management's Discussion And Analysis Of
Financial Condition And Results Of Operations

You
should read the following discussion in conjunction with Selected Consolidated
Financial Data and NWS historical consolidated financial statements and the
accompanying notes included elsewhere in this Form 10-K. Unless otherwise indicated, all
references to years are to NWS fiscal year ended March 31.

Disclosure Regarding Forward-Looking Statements

This
Form 10-K, including, but not limited to the Managements Discussion and
Analysis of Financial Condition and Results of Operations and Business
sections, contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995, which can be identified by the use of
forward-looking terminology, such as may, intend,
will, expect, anticipate, should,
plans to, estimate or continue or the negative thereof
or other variations thereon or comparable terminology. In particular, any statement,
express or implied, concerning future operating results or the ability to generate
revenues, income or cash flow to service the Companys debt are forward-looking
statements. Although the Company believes that the expectations will prove to have been
correct. All forward-looking statements are expressly qualified by such cautionary
statements, and the Company undertakes no obligation to update such forward-looking
statements.

Overview

National
Wine & Sprits, Inc. (the Company) is one of the largest distributors of
wine and spirits in the United States. Substantially all of the Companys current
operations are in Illinois, Indiana, Michigan, Kentucky, and from U.S. Beverage, L.L.C.
(USB), the Companys national import, craft and specialty beer marketing and
distribution business. The Companys reported revenues include net product sales in
Illinois, Indiana, Michigan, and from USB, with distribution fees from the Michigan
distribution operation.

EBITDA
is used throughout this Item as a financial indicator. Each reference to EBITDA herein is
qualified by reference to, and should be read in conjunction with this paragraph and the
following two paragraphs and the reconciliation below. EBITDA, as used herein, is defined
as net income plus interest expense, depreciation and amortization. EBITDA should not be
construed as an alternative to income or net cash flow from operating activities and
should not be construed as an indication of operating performance or as a measure of
liquidity.

EBITDA
is a non-GAAP financial measure within the meaning of Regulation G. EBITDA is presented
because it is a widely accepted financial indicator used by investors and analysts to
analyze and compare companies on the basis of debt service capability. Management uses EBITDA to set targets and monitor and assess financial performance. EBITDA is not
intended to represent cash flows for the periods presented, nor has it been presented as
an alternative to net income as an indicator of operating performance and should not be
considered in isolation or as a substitute for measures of performance and cash flow
prepared in accordance with generally accepted accounting principles.

The
most comparable GAAP measure for EBITDA is net income. Following is a reconciliation
between net income and EBITDA for the fiscal years 1999 through 2003:

|                 | Years Ended March 31
(in thousands)
|---------------- | -----------------------------------
|
|Net Income       |                                    
|Interest expense |                                    
|Depreciation     |                                    
|Amortization     |                                    
|                 |                                    
|EBITDA           |                                    
|                 |                                    

- 16 -

The EBITDA information
reflected herein may not be comparable to similarly titled measures used by
other companies.

For
the year ended March 31, 2003, net income was $15.8 million versus $7.5 million for the
prior year period, while EBITDA was $34.7 million, versus $27.7 million for the prior year
period. The increase in net income was primarily attributable to a vendor settlement
payment of $9.2 million and net gains of $2.0 million from discounted repurchases of the
Companys senior notes. Although the increased volume from the Companys United
States Beverage division contributed to the increased sales for the annual period ended
March 31, 2003, net income and EBITDA were offset by decreased sales volume and lower
profitability due to the loss of the Pernod and Diageo brands in certain markets.

The
Company received a decision from Diageo during the quarter ended March 31, 2003 concerning
distribution rights for Illinois. Diageo and Schieffelin & Somerset (S&S) had been
evaluating distributor proposals since March 2002 as a part of their ongoing
state-by-state effort to consolidate distribution rights of existing brands and brands
they acquired from Seagram in 2001. The Company was informed by Diageo that it was not
chosen as the exclusive Diageo distributor for the State of Illinois and that the
Companys Illinois distribution rights would terminate on February 24, 2003. Revenue
for the affected Diageo brands in Illinois for the year ended March 31, 2003 was
approximately $75 million, and total Diageo cases shipped were approximately 0.5
million.  For the same annual period, distribution of these Diageo brands in Illinois
contributed approximately $14 million to the gross profit of the Company. As part of the
settlement of all claims arising out of the Diageo settlement in Illinois, Diageo paid
$9.2 million to the Company.

The
Company also was notified by two other major suppliers, Future Brands and Canandaigua Wine
Company, that brand distribution rights for the State of Illinois were being terminated.
These decisions represented a continuation of a state-by-state consolidation and
realignment of brands by suppliers following decisions by Diageo. The terminations by
Future Brands and Canandaigua Wine Company were effective April 30, 2003 and March 31,
2003, respectively. Revenue for the affected brands in Illinois for the year ended March
31, 2003 was approximately $113 million, and total cases shipped were approximately 1.6
million. For the same annual period, these two suppliers contributed approximately $22
million to the gross profit of the Company.

On
January 30, 2003, the Company entered into an agreement in principle to form a strategic
alliance with Glazers Wholesale Drug Company (Glazer) for the purpose of
distributing alcohol-based beverages in the State of Illinois. On February 27, 2003, the
Company and Glazer entered into a management services agreement under which Glazer would
provide management assistance and consulting services in Illinois. A separate contribution
agreement was signed on March 25, 2003, which provided that the parties may agree in the
future to conduct operations in Illinois through a new entity to be equally owned by
NWS-Illinois and Glazer.

The
Company was notified on February 18, 2003 that it had been selected as the exclusive
distributor of Diageo spirits and wine brands in Indiana. NWS Indiana currently
distributes Diageo products on an exclusive basis, and this decision extends the
arrangement for seven years. The Company does not currently represent the majority of
S&S products in Indiana. Decisions by S&S concerning distribution rights for
Indiana have not been announced.

The
Company also was chosen as the exclusive broker and distribution agent of Diageo and
S&S spirits brands and as the exclusive distributor of Diageos low proof mixed
spirits drinks in Michigan. This decision provides additional volume for the
Companys Michigan operation since S&S products were not previously distributed
by the Company in Michigan.

Outlook

The
Companys outlook for fiscal 2004 is for lower profit and EBITDA levels due to the
loss of the brands in the Illinois market, as compared to the prior fiscal year. EBITDA
should not be construed as an alternative to operating income or net cash flow from
operating activities and should not be construed as an indication of operating performance
or as a measure of liquidity. See Managements Discussion and Analysis of
Financial Condition and Results of Operations  Overview.

As
consolidations and supplier realignments continue within the Illinois market, the Company
has analyzed its operations in Illinois and has taken steps to appropriately size its
workforce in relation to its customers and suppliers needs. As it adjusts the
size and scope of its Illinois operations, the Company will continue to concentrate on
building customer and supplier relationships and maintaining the infrastructure necessary
to operate its Illinois statewide business with lower costs and increased efficiencies.
The Company has also discontinued warehousing operations in its Champaign, Illinois and
Peoria, Illinois facilities in order to reduce costs, but it continues to use those
locations as cross-docking and office facilities. Continuing efforts are also being made
to replace lost revenue in Illinois.

- 17 -

Stable
to increasing revenue and EBITDA in the Indiana, Michigan, and USB operations are
currently expected to mitigate the loss of revenue in the Illinois market for fiscal 2004.
Additionally, the Company will continue to benefit in the near term from the collection of
accounts receivable and inventory liquidation related to lost distribution rights in
Illinois. Representatives of Glazer and the Company also continue to pursue new business
opportunities in Illinois. At the same time, the size and scope of the Illinois business
will be the subject of on-going analysis. The Company and Glazer are both committed to the
profitability of the Illinois operation given Glazers agreement to fund one-half of
operating losses as defined in the management services agreement between Glazer and the
Company. EBITDA should not be construed as an alternative to operating income or net cash
flow from operating activities and should not be construed as an indication of operating
performance or as a measure of liquidity. See Managements Discussion and
Analysis of Financial Condition and Results of Operations  Overview.

The
Company will utilize the positive cash flow from the downsizing of the Companys
Illinois operations, proceeds from the vendor settlement payment, borrowings under its
line of credit and existing cash to fund operating costs, interest expense, and possibly
further senior note repurchases. By reducing the Companys interest expense through
open market repurchases of senior notes, aggressive cost reduction initiatives in its
Illinois business, and stable to increasing earnings and cash flow from Indiana, Michigan,
and USB businesses, the Company expects to maintain adequate earnings and cash flow to
fund working capital and debt service needs for the year ending March 31, 2004.

Results of Operations

The
following table includes information regarding total cases shipped by NWS in 2003, 2002
and 2001:

|                                      | Years ended March 31,
(Cases in Thousands)
|------------------------------------- | ------------------------------------------
|
|
|Wine (product sales operations)       |                                           
|Spirits (product sales operations)    |                                           
|Spirits (distribution fee operations) |                                           
|                                      |                                           
|Total wine and spirits                |                                           
|Other                                 |                                           
|                                      |                                           
|Total                                 |                                           
|                                      |                                           

Case sales of K Cider were reported as wine case sales through March 31,
2002. Case sales of K Cider subsequent to that date have been recorded as other
case sales. The reclassification of case sales of K Cider reduced wine case
sales and increased other case sales by 174,000 for the 12 months ended March
31, 2002.

U.S. Beverages results are included in the other category for the current
year and prior years.

Fiscal 2003 Compared with Fiscal 2002

Revenue

Total
product revenue increased $30.3 million, or 4.6%, to $689.9 million for the year ended
March 31, 2003 versus $659.6 million for the prior year period. The revenue increase for
the year ended March 31, 2003 as compared to the prior year was primarily due to increased
sales by the Companys USB division. USB commenced nationwide distribution of Grolsch
beers and Seagrams Coolers in January 2002 and April 2002 respectively. Case and
dollar volume of wine in the product sales divisions remained stable; increasing 5.6% and
2.4%, respectively, during the current annual period ended March 31, 2003 over the prior
year period. Spirits case and dollar volume in the product sales divisions declined 1.1%
and 3.8%, respectively, primarily due to the loss of certain distribution rights in the
Illinois market. Fee revenue for the year ended March 31, 2003 increased 4.7% on lower
case sales from the comparable prior annual period. The Company was able to increase fee
revenue due to a $0.16 per case fee increase approved by the State of Michigan for 2002
and greater brokerage fee revenue for the year ended March 31, 2003 as compared to the
prior year period.

- 18 -

Gross Profit

Gross
margin on product sales increased $8.3 million, or 6.5% for the year ended March 31, 2003
over the prior year period. Gross profit percentage on product sales increased to 19.9%
for the year ended March 31, 2003 versus 19.5% for the comparable prior year period. Both
the increase in gross margin dollars and percentage were primarily the result of the USB
operations during the year ended March 31, 2003, which was offset somewhat by declines in
the gross margin dollars and percentage in other product sales markets. The
Companys Illinois and Indiana gross profit margins were under pressure during fiscal
2003 due to the intensified marketing efforts from competing distributors during the
period of uncertainty concerning product line representation.

Operating Expenses

Total
operating expenses increased 10.3% to $144.6 million for the year ended March 31, 2003
from $131.0 million for the prior year period. Increased selling expenses and
administrative support of the USB division were primarily responsible for the total
operating expense increase from the prior year period.

Warehouse
and delivery expenses remained very stable, increasing by $0.2 million during the current
year period over the prior year period. Reduced case volumes in the Illinois and Michigan
markets resulted in stable operational costs. The reduced volume has allowed for savings
in personnel, offset by increases in wage rates and other operational costs.

Selling
expenses increased primarily due to additional advertising, wages, and related travel
expenses incurred by the Companys USB division during the year ended March 31, 2003
from the prior year period. These additional expenditures are directly related to the
additional volume created by the nationwide sales of Grolsch, Seagrams Coolers and a
product launch in the spring of 2003. Wage increases and additional promotional costs in
the Indiana and Illinois markets also contributed to the increased selling expense.

Administrative
expense increased $2.7 million for year ended March 31, 2003 from the prior year period.
Increased administrative costs related to the USB division for wages, benefits, and
amortization of distributor rights were primarily responsible for the increase from the
prior years comparable period. Increased costs for casualty insurance, professional
fees, and health care, across all divisions were responsible for the remaining
administrative expense increase.

Income From Operations

Operating
income was $15.5 million for the year ended March 31, 2003, compared to $19.6 million for
the prior year period. The decline in revenue and resulting decrease in operating income
from the Companys Illinois business was primarily responsible for the decrease in
operating income, which more than offset the increased operating income from the USB
operations.

Interest Expense

Interest expense declined $2.6
million, or 22.0% to $9.3 million for the year ended March 31, 2003 from the
prior year period. Reduced revolving credit balances during the year ended
March, 31, 2003, the decline in the prime rate upon which the Companys
revolving line of credit is based and gains from the discounted repurchases of
the Company's senior notes were primarily responsible for the decreased expense.
As of March 31, 2003 the appicable interest rate on the revolving line of credit
was 4.5%. The Company repurchased $17.9 million of its senior notes on the open
market during the quarter ended March 31, 2003 at 86% of face value and expensed
associated unamortized debt issuance costs resulting in the $2.0 million gain.
The open market repurchases of $17.9 million of senior notes had a minimal
effect on cash interest expense for the year ended March 31, 2003, as the
purchases were completed during March, 2003.

Other Income

Other income increased $9.9
million, primarily from a vendor settlement payment of $9.2 million. The Company
received $6.0 million of the vendor settlement payment as of March 31, 2003, and
received $3.2 million on April 15, 2003. The Companys share of losses from
eSkye Solutions, Inc. was $1.2 million less during the year ended March 31, 2003
than the prior year period.

- 19 -

Net Income

Net
income of $15.8 million for the year ended March 31, 2003 was $8.3 million greater than
the prior year period. The increase in income from the Companys vendor settlement
payment, gain from repurchasing its senior notes, and increased USB profitability, was
partially offset by the decline in income from the Illinois business.

EBITDA

For
financial analysis purposes only, the Companys earnings before interest, taxes,
depreciation, and amortization (EBITDA) for the year ended March 31, 2003 was $34.7
million as compared to $27.7 million for the prior years comparable reporting
period. EBITDA should not be construed as an alternative to operating income or net cash
flow from operating activities and should not be construed as an indication of operating
performance or as a measure of liquidity. See Managements Discussion and
Analysis of Financial Condition and Results of Operations  Overview.

Fiscal 2002 Compared with Fiscal 2001

Revenue.    
The Company reported product sales for the year ended March 31, 2002 of $659.6
million, an increase of $22.7 million, or 3.6% over the prior year period. The
increase was primarily the result of continued consumer preference for
premium-priced goods in both the spirits and wine categories. The revenue growth
was primarily from the spirits category, which experienced a 2.6% increase in
revenue on flat case sales for the current fiscal year as compared to the prior
annual period. Revenue from wine sales remained stable, increasing 0.4% for the
current fiscal year on slightly lower case sales as compared to the prior annual
period. The case sales decline was primarily the result of the Indiana market,
which did not represent the Sutter Home line during the most recent fiscal year,
which adversely affected case sales by 115,000 as compared to the prior annual
period. Distribution fee revenue remained stable at $22.0 million for the year
ended March 31, 2002, compared to $21.6 million for the prior annual period. A
rate increase authorized by the State of Michigan of $0.16 per case was
effective February 1, 2002.

Gross
     Profit.    Gross profit dollars on product sales
increased $5.7 million for the year ended March 31, 2002, an increase of 4.7%
from the prior year period. Gross profit percentage on product sales was 19.5%
for the year ended March 31, 2002 versus 19.3% for the prior year period. The
increase in gross margin dollars were primarily from increased revenue in the
Illinois market and increased margin percentage on stable revenue for the
Indiana market.

Operating
Expenses.    Total operating expenses for the year ended March 31, 2002 increased $6.0
million, or 4.8% over the operating expenses for the year ended March 31, 2001. The
Company had stable warehouse and delivery costs, while experiencing higher costs for
professional fees, sales and marketing wages, and casualty and health insurance.

Warehouse and delivery expenses were essentially even with the prior
years amounts, decreasing 0.1% or $0.1 million for the year ended March
31, 2002. Total warehouse and delivery expenses, as a percentage of total
revenue, declined slightly to 5.8% during the current year period as compared to
6.0% for the prior annual period. The decrease was primarily due to the savings
experienced in the Indiana market from lower case sales of water and
non-alcoholic products, along with construction of more efficient warehousing
facilities.

Selling expenses increased
$1.1 million to $46.8 million for the year ended March 31, 2002 as compared to
the prior year period. Additional sales and marketing costs, including staff and
wage increases were primarily responsible for the greater selling expenses.

Total
administrative expense increased $4.9 million or 12.3% for the year ended March 31, 2002
versus the prior annual period. Increases in health & welfare benefits, casualty and
workmans compensation insurance, and professional fees were primarily responsible
for the increase from the prior annual period. The Company has experienced higher costs
for employees health care throughout the current fiscal year, both in the partially
self funded plan, and by increases in multi-employer fully insured plans that cover
bargaining unit employees. The Company renewed its property and casualty insurance in
December, 2001 and expects to report increased costs for the current policy period due to
increased rates on facilities, and excess liability coverage. Professional fees have
increased from the comparable prior annual period due to costs related to the
implementation of enhanced internal control procedures and the change of auditors from the
prior year.

Income from Operations.    Total operating income increased $0.1 million, or 0.1% for the year ended
March 31, 2002, over the prior annual period. The slight increase in operating income was
primarily due to the increased gross profit dollars and reduced operating expenses by the
Indiana market for the year ended March 31, 2002 as compared to the prior annual period.

- 20 -

Interest Expense.    
Interest expense decreased $1.3 million or 9.7% for the year ended March 31, 2002
compared to the prior year. The Company was able to take advantage of LIBOR pricing, which
reduced the Companys rate relative to prime based pricing on its revolving line of
credit. The Companys reduction in its average borrowings on the revolving line of
credit and the reductions in the prime rate were primarily responsible for the reduced
expense for the year ended March 31, 2002, compared to the prior annual period. The
Companys revolver rate was 4.75% at March 31, 2002 and was 8.5% at March 2001.

Other
Income.    Other income decreased $8.1 million from the comparable annual period, primarily
due to the $7.5 million gain from the sale of the bottled water division in June 2000,
increased equity losses and impairment in value from the investment in eSkye, and reduced
interest income due to reductions in balances of the shareholder notes in NWSC.

Net Income. Net income decreased $6.7 million for the year ended March 31, 2002, as compared
to the prior annual period. The decrease was primarily due to the gain from the sale of
the bottled water division of $7.5 million during the previous annual period. Net income,
excluding the gain from the sale of the bottled water division, increased 13.0% or $0.9
million for the year ended March 31, 2002, as compared to the prior annual period.

For financial analysis purposes
only, the Companys earnings before interest, taxes, depreciation and
amortization (EBITDA) for the year ended March 31, 2002 was $27.7 million, a
decrease of $8.6 million, or 23.6% as compared to the prior annual period. The
decrease was primarily due to the gain from the sale of the bottled water
division of $7.5 million during the previous annual period. EBITDA should not be
construed as an alternative to operating income or net cash flow from operating
activities and should not be construed as an indication of operating performance
or as a measure of liquidity. See Managements Discussion and
Analysis of Financial Condition and Results of Operations  Overview.

Liquidity and Capital Resources

The
Companys primary cash requirements have been to fund accounts receivable and
inventories for the product markets in Illinois, Indiana, Michigan, and its U.S. Beverage
operations. The Company has historically satisfied its cash requirements principally
through cash flow from operations, trade terms, bank borrowings and existing cash
balances.

On
March 31, 2003 the Company entered into a new credit agreement with LaSalle Bank
N.A., as lender and agent, and National City Bank of Indiana, that provides a
revolving line of credit for borrowings of up to $40.0 million, including
standby or commercial letters of credit of up to $5.0 million, through April 1,
2008. The line of credit borrowings are collateralized by and based upon
eligible accounts receivable and inventories, as defined, and are guaranteed by
the Companys subsidiaries. Interest is payable monthly at the LIBOR rate
or the higher of the prime lending rate or the federal funds rate, plus a margin
percentage. The Companys revolver rate of interest was 4.5% at March 31,
2003.

At
March 31, 2003, the Company had $4.0 million of outstanding advances on its $40.0 million
revolving credit facility and $4.5 million of letters of credit outstanding, resulting in
availability of $30.5 million. The Company anticipates that the collateral base for the
revolving credit facility will provide adequate availability to fund operations and
working capital needs during fiscal 2004.

The
Company generated $14.7 million in net cash from operating activities for the year ended
March 31, 2003 as compared to proceeds of $22.0 million for the prior year period. This
$7.4 million variance was primarily due to the Illinois business payment of current
obligations that were not offset by reductions in inventories or receivables. The Company
expects net proceeds from the reduction of these Illinois receivables and inventories of
approximately $20 to $25 million during fiscal 2004, which will offset the temporary
increase in working capital needs that Illinois required during fiscal 2003. Cash provided
by net income and adjustments for depreciation and amortization were $22.9 million for the
year ended March 31, 2003, as compared to $16.6 million for the prior year period.

Net
cash used by investing activities was $2.5 million for the year ended March 31, 2003, a
decrease of $2.8 million from the comparable prior year period. The decreased use of cash,
as compared to the prior years comparable period, was primarily due to reduced
capital expenditures of $2.0 million and increased distributions received from
Commonwealth Wine & Spirits, LLC of $0.9 million. The Company reduced its capital
expenditures during fiscal 2003 due to the uncertainty surrounding supplier
consolidations. The Company intends to continue the reduced level of capital expenditures
during fiscal 2004 at maintenance levels between $2 million and $2.5 million.

- 21 -

Net
cash used by financing activities increased by $9.0 million for the year ended March 31,
2003 as compared to the prior year period. Purchases of the Companys senior notes in
the open market were primarily responsible for the increased use of funds by financing
activities. The Company purchased $17.9 million of its senior notes at approximately 86%
of face during fiscal 2003. The Company may continue to selectively pursue repurchase
opportunities in the open market during fiscal 2004. The revolving credit facility allows
up to $20 million of debt repurchases subsequent to March 31, 2003, if after giving effect
to the purchase, there is $15 million of availability under the $40 million revolving
credit facility. Outstanding advances on the revolving credit facility were $4.0 million
at March 31, 2004, which was used for working capital needs. The Company will utilize the
positive cash flow from the downsizing of Illinois operations, proceeds from the vendor
settlement payment, existing cash and its credit facility to fund operations and possible
additional senior note repurchases during fiscal 2004. The Companys distributions to
stockholders increased by $0.9 million for the year ended March 31, 2003 as compared to
the prior year period. Distributions for the year ended March 31, 2003 were used by the
shareholders for income tax estimates of $5.8 million and to repay the Companys
shareholder receivable of $2.7 million. Other uses of shareholder distributions were to
purchase the equity interests of a subsidiarys minority shareholder for $0.3 million
and provide funds to a minority shareholder of $0.6 million. The Company expects
shareholder distributions to be reduced during fiscal 2004 due to reduced tax liabilities.
Shareholder distributions other than for tax liabilities are limited by the revolving
credit facility and indenture.

Total
assets increased to $203.7 million at March 31, 2003, a $2.3 million increase from March
31, 2002. The increase in assets and other liabilities were primarily due to the
acquisition of distribution rights for brands represented by NWS Indiana and USB.
Distribution rights of $12.6 million were acquired that had deferred payment terms, of
which $1.6 million was paid as of March 31, 2003. Cash balances decreased $5.9 million
during the year ended March 31, 2003 due to funding of working capital and shareholder
distributions. Accounts receivable balances at March 31, 2003 were $5.7 million lower than
the March 31, 2002 balances, primarily from the reduced volume in the Illinois market.
Total debt of $98.3 million at March 31, 2003 as compared to March 31, 2002 decreased due
to the Companys repurchase of $17.9 million of its senior notes on the open market.
Notes payable to stockholders increased by $2.4 million due to the offset of the
shareholder receivable against the shareholder payable at March 31, 2002. Equity increased
to $27.9 million at March 31, 2003 as compared to March 31, 2002 due to net income of
$15.8 million less shareholder distributions of $9.4 million and an increase in
unrecognized net pension loss of $1.6 million.

The
Company expects to maintain adequate cash balances and revolving credit facility
availability to satisfy the Companys anticipated working capital and debt service
requirements during fiscal 2004.

Other

As
a matter of policy, the Company plans to review and evaluate all professional services
firms every three to four years. This review will include but is not limited to legal,
audit and information systems services.

Inflation

Inflation
has not had a significant impact on the Companys operations but there can be no
assurance that inflation will not have a negative effect on the Companys financial
condition, results of operations or debt service capabilities in the future.

Environmental Matters

The Company currently owns and leases a number of properties, and
historically it has owned and/or leased others. Under applicable environmental
laws, the Company may be responsible for remediation of environmental conditions
relating to the presence of certain hazardous substances on such properties. The
liability imposed by such laws is often joint and several without regard for
whether the property owner or operator knew of, or was responsible for, the
presence of such hazardous substances. In addition, the presence of such
hazardous substances, or the failure to properly remediate such substances, may
adversely affect the property owners ability to borrow using the real
estate as collateral and to transfer its interest in the real estate. Although
the Company is not aware of the presence of hazardous substances requiring
remediation, there can be no assurance that releases unknown to the Company have
not occurred. Except for blending and bottling of a few of the Companys
private label brands, the Company does not manufacture any of the wine or spirit
products it sells and believes that it has conducted its business in substantial
compliance with applicable environmental laws and regulations. Compliance with
environmental laws has not had a material effect upon NWS capital
expenditures, earnings or competitive position.

- 22 -

Critical Accounting Policies

The
Companys consolidated financial statements and accompanying notes have been prepared
in accordance with generally accepted accounting principles applied on a consistent
basis.  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, liabilities, revenues, and expenses during the reporting
periods.

The Company continually evaluates its accounting policies and estimates it
uses to prepare the consolidated financial statements.  In general,
managements estimates are based on historical experience, on information
from third party professionals and on various other assumptions that are
believed to be reasonable under the facts and circumstances.  Actual
results could differ from those estimates made by management.

The Company believes its
critical accounting policies and estimates, as reviewed and discussed with the
Audit Committee of the Board of Directors, include accounting for impairment of
long-lived assets, accounts receivable valuation, inventory valuation,
vendor allowances, and pensions.

Impairment of Long-lived
Assets.    The Company evaluates long-lived assets and intangibles subject to amortization whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable.  In performing the review of
recoverability, the Company estimates future cash flows expected to result from
the use of the asset and its eventual disposition.  The estimates of future
cash flows, based on reasonable and supportable assumptions and projections,
require managements subjective judgments.  The time periods for
estimating future cash flows is often lengthy, which increases the sensitivity
to assumptions made.  Depending on the assumptions and estimates used, the
estimated future cash flows projected in the evaluation of long-lived assets can
vary within a wide range of outcomes.  The Company considers the probability
of possible outcomes in determining the best estimate of future cash flows.

Receivables and Credit
Policies.    The carrying amount of accounts receivable
is reduced by an allowance that reflects managements best estimate of the
amounts that will not be collected.  Management individually reviews all
accounts receivable balances and creates an allowance for doubtful accounts
based on the credit worthiness of  specific accounts and an estimate of
other uncollectible accounts based on historical performance.

Vendor Allowances
Received.    The Company records vendor allowances and
discounts in accordance with EITF 02-16: Accounting by a Customer (including
a Reseller) for Certain Consideration Received from a Vendor. The Company
receives allowances from vendors as a result of purchasing and promoting their
products. Vendor allowances provided as a reimbursement of specific,
incremental, and identifiable costs incurred to promote a vendor's products are
recorded as an expense reduction when the cost is incurred. All other vendor
allowances, including vendor allowances received in excess of the Company's cost
to promote a vendor's product, or vendor allowances directly related to purchase
of a vendor's product are initially deferred. The deferred amounts are then
recorded as a reduction of cost of good sold when the related product is sold.

Defined Benefit Pension
Plan.    The most significant element in determining the
Companys pension income (cost) in accordance with SFAS No. 87 is the
expected return on plan assets.  In 2003, the Company assumed that the
expected long-term rate of return on plan assets would be 8.5%.  The
assumed long-term rate of return on assets is applied to a calculated value of
plan assets, which recognizes changes in the fair value of plan assets in a
systematic manner over five years.  This produces the expected return on
plan assets that is included in pension income (cost).  The difference
between this expected return and the actual return on plan assets is
deferred.  The net deferral of past asset gains (losses) affects the
calculated value of plan assets and, ultimately, future pension income (cost).
Over the long term, the Companys pension plan assets have earned in excess
of 9.5%. However, the plan assets have lost an average of 14.9% per year during
the last two years.  Should this trend continue, the Company would be
required to reconsider its assumed expected rate of return on plan assets. 
If the Company were to lower this rate, future pension cost would increase.

At the end of each year,
the Company determines the discount rate to be used to calculate the present
value of plan liabilities.  The discount rate is an estimate of the current
interest rate at which the pension liabilities could be effectively settled at
the end of the year.  In estimating this rate, the Company uses the
preceding Novembers Moodys AA Corporate Bond Index rounded down to
the nearest 1⁄4 of a percentage point.  At March 31, 2003, the Company
determined this rate to be 6.5%, a decrease of 50 basis points from the rate
used at March 31, 2002.  Changes in discount rates over the past three
years have not materially affected pension income (cost), and the net effect of
changes in the discount rate, as well as the net effect of other changes in
actuarial assumptions and experience, have been deferred, in accordance with
SFAS No. 87.

- 23 -

The significant declines in
the financial markets over the past two years coupled with the decline in
interest rates have caused the Companys accumulated pension obligation to
exceed the fair value of the related plan assets.  As a result, in 2003 the
Company recorded an increase to accrued pension liability and a non-cash charge
to equity of approximately $1.1 million.  This charge may be reversed in
future periods if market conditions improve or interest rates rise.

For the year ended March
31, 2003, the Company recognized consolidated pretax pension cost of $0.5
million, up from $0.3 million in 2002.  The Company currently expects that
the consolidated pension cost for 2004 will not be materially different from
2003.  The Companys required minimum amount of 2004 contributions
will not exceed actual contributions made in 2003.  However, the Company
may elect to increase the level of contributions in 2004 over 2003 levels based
on a number of factors, including performance of pension investments, changes in
interest rates, and changes in workforce compensation.

Aggregate Contractual Commitments

The
following table sets forth NWS contractual obligations for the periods set forth as
of March 31, 2003:

|                                          | Payments Due by Period
|----------------------------------------- | ----------------------
|
|Long-term debt obligations                | $  98,303,000         
|Operating lease obligations               | 13,059,000            
|Distribution rights                      
|obligations                               | 12,690,000            
|Guaranteed minimum                        | 2,722,000             
|royalties                                
|Deferred pension and other liabilities(1) | 698,000               
|                                          | $127,472,000          

|(1) | The amounts for deferred
pension and other liabilities include only those amounts due within fiscal 2004,
as future amounts are not estimable at this time.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------

Recently Issued Accounting Pronouncements

In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, Business
Combinations, and No. 142, Goodwill and Other Intangible
Assets, effective for fiscal years beginning after December 15, 2001. Under
the new rules, goodwill (and intangible assets deemed to have indefinite lives)
will no longer be amortized but will be subject to annual impairment tests.
Other intangible assets will continue to be amortized over their useful lives.
The Company adopted the new rules on accounting for goodwill and other
intangible assets effective April 1, 2002. Under SFAS No. 142, goodwill
impairment is deemed to exist if the carrying value of a reporting unit exceeds
its estimated fair value. In calculating the impairment charge, the fair values
of the reporting units were estimated using a discounted cash flow methodology.
The Company performed the required impairment tests of goodwill and indefinite
lived intangibles as of April 1, 2002 and March 31, 2003 and found them not to
be impaired.

In August 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets which requires impairment losses to be recorded on
long-lived assets used in operations when indicators of impairment are present
and the undiscounted cash flows estimated to be generated by those assets are
less than the assets carrying amount. Statement 144 also addresses the
accounting for expected disposals of long-lived assets. The Company adopted
Statement 144 during the first quarter of fiscal 2003 and, based on current
circumstances, it has not had a material effect on the Company's results of
operations or its financial position.

In April 2002 the Financial Accounting Standards Board issued Statement No.
145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections. This Statement amends FASB
Statement No. 13, Accounting for Leases, to eliminate an inconsistency between
the required accounting for sale-leaseback transactions and the required
accounting for certain lease modifications that have economic effects that are
similar to sale-leaseback transactions. This Statement also amends other
existing authoritative pronouncements to make various technical corrections,
clarify meanings, or describe their applicability under changed conditions as
well as addresses the classifications of gains and losses on debt
extinguishment. Accordingly, the Company classified its gains from repurchases
of its long-term debt in interest expense on the Consolidated Statement of
Income.

- 24 -

In June 2002, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 146, Accounting for Costs Associated
with Exit or Disposal Activities, effective for exit or disposal
activities that are initiated after December 31, 2002. This Statement addresses
financial accounting and reporting for costs associated with exit or disposal
activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3,
Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring). Although the Company was engaged in an employee reduction
at March 31, 2003, the associated costs from the adoption of this standard did
not have a material impact on its financial statements.

The Company adopted the Emerging Issues Task Force Issue 02-16: Accounting by
a Customer (Including a Reseller) for Certain Consideration Received from a
Vendor for arrangements either modified or created after December 31, 2002.
This statement reached a consensus that cash consideration represents a
reimbursement of costs incurred by the customer to sell the vendors
products and should be characterized as a reduction of that cost when recognized
in the customers income statement if the cash consideration represents a
reimbursement of a specific, incremental, identifiable cost incurred by the
customer in selling the vendors products or services. If the amount of
cash consideration paid by the vendor exceeds the cost being reimbursed, that
excess amount should be characterized in the customers income statement as
a reduction of cost of sales when recognized in the customers income
statement. The Company has reviewed its accounting policies and methods and
concluded that the recording of cash consideration received from vendors were
recorded in accordance with the statement.

In November 2002, the FASB issued Interpretation No. 45 (FIN 45),
Guarantors Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others. FIN 45 requires
that upon issuance of certain guarantees, a guarantor must recognize a liability
for the fair value of the obligation assumed under the guarantee. FIN 45 also
requires additional disclosures by a guarantor in its interim and annual
financial statements regarding certain guarantees and product warranties. The
recognition provisions of National Wine & Spirits, Inc. FIN 45 is effective
for guarantees issued or modified after December 31, 2002. The Company
implemented the recognition provisions of FIN 45 in January 2003 there has been
no material effect on the Companys financial position or results of
operations.

In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46)
Consolidation of Variable Interest Entities. The term variable
interest is defined in FIN 46 as contractual, ownership or other
pecuniary interest in an entity that change with changes in the entitys
net asset value. Variable interest are investments or other interest that
will absorb a portion of an entitys expected losses if they occur or
receive portions of the entitys expected residual returns if they occur.
The Company does not expect the recognition provisions of FIN 46 to have a
material impact on the Companys financial position or results of
operations.

Item 7A.    Quantitative and Qualitative Disclosures
About Market Risk

Interest Rate Risk

The
Company uses long-term debt as a primary source of capital in its business. The following
table presents the principal cash repayments and related weighted average interest rates
by maturity date for the Companys long-term fixed-rate debt and other types of
long-term debt at March 31, 2003:

|          | 2003     | 2004     | 2005     | 2006     | 2007     | Thereafter     | Total          | Fair Value    
|--------- | -------- | -------- | -------- | -------- | -------- | -------------- | -------------- | --------------
|Fixed     | $    --- | $    --- | $    --- | $    --- | $    --- | $   89,975,000 | $   89,975,000 | $   80,978,000
|Avg. Rate | ---      | ---      | ---      | ---      | ---      | 10.125%        | 10.125%       
|Variable  | $    --- | $    --- | $    --- | $    --- | $    --- | $   8,328,000  | $   8,328,000  | $   8,328,000 
|Avg. Rate | ---      | ---      | ---      | ---      | ---      | 4.38%          | 4.38%         

The Company is exposed to
fluctuations in interest rate risk as a result of its variable rate debt. The
Companys objectives in managing its exposure to changes in interest rates
are to limit the effect of interest rate changes on earnings and cash flows and
to minimize the amount of borrowings under the Companys revolving line of
credit. This approach to managing interest rate risk does not consider the
changes in the Companys competitive environment indirectly related to
changes in interest rates and managements responses to these changes.

- 25 -

Item 8.    Financial Statements and Supplementary Data

INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Stockholders of
National Wine & Spirits, Inc.

We have audited the accompanying consolidated balance sheet of National Wine
& Spirits, Inc. and subsidiaries as of March 31, 2003, and the related
consolidated statements of income, stockholders equity, and cash flows for
the year then ended. Our audit also included the 2003 financial statement
schedule listed in the Index at Item 16. These financial statements and
financial statement schedule are the responsibility of the Companys
management. Our responsibility is to express an opinion on the 2003 financial
statements and financial statement schedules based on our audit. The financial
statements and financial statement schedule as of March 31, 2002, were audited
by other auditors who have ceased operations. Those auditors expressed an
unqualified opinion on those financial statements and stated that such 2002
financial statement schedule, when considered in relation to the 2002 basic
financial statements taken as a whole, presented fairly, in all material
respects, the information set forth therein, in their report dated May 21,
2002.

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

In our opinion, the 2003 consolidated financial statements present fairly, in
all material respects, the financial position of National Wine & Spirits,
Inc. and subsidiaries as of March 31, 2003, and the results of their operations
and their cash flows for the year then ended, in conformity with accounting
principles generally accepted in the United States of America. Also, in our
opinion, the 2003 financial statement schedule, when considered in relation to
the 2003 basic consolidated financial statements taken as a whole, present
fairly, in all material respects, the information set forth therein.

As discussed in Note 1 to the consolidated financial statements, in 2003 the
Company changed its method of accounting for goodwill and other intangible
assets.

As discussed above, the financial statements of National Wine & Spirits, Inc.
and subsidiaries as of March 31, 2002, and for the year then ended, were audited by other
auditors who have ceased operations. As described in Note 8, these financial
statements have been revised to include the transitional disclosures required by
Statement of Financial Accounting Standards No. 142, Goodwill and Other
Intangible Assets (SFAS 142), which was adopted by the Company as of April 1,
2002. Our audit procedures with respect to the disclosures in Note 8 with
respect to 2002 included (1) comparing the previously reported net income to the
previously issued financial statements and the adjustments to reported net
income representing amortization expense recognized in those periods related to
goodwill and intangible assets that are no longer being amortized as a result of
initially applying SFAS 142 to the Company's underlying analysis obtained from
management, and (2) testing the mathematical accuracy of the reconciliation of
adjusted net income to reported net income. In our opinion, the disclosures for
2002 in Note 8 are appropriate. Also, the 2002 financial statements have been
reclassified to include additional disclosures relating to the accounts
receivable vendor and distribution rights obligations as described in Note 1.
Our audit procedures with respect to the 2002 disclosures in Note 1 included (1)
comparing the previously reported prepaid expenses and deferred pension
liability to previously issued financial statements, (2) comparing the accounts
receivable vendor and distribution rights obligations to the Company's
underlying analysis obtained from management, and (3) testing the mathematical
accuracy of the underlying analysis. In our opinion, such  have
been properly applied. However, we were not engaged to audit, review, or apply
any procedures to the 2002 financial statements of the Company other than with
respect to such reclassifications and accordingly, we do not express an opinion
or any form of assurance on the 2002 financial statements taken as a
whole.

DELOITTE & TOUCHE LLP

Indianapolis, Indiana

June 27, 2003

- 26 -

THE FOLLOWING IS A COPY OF A REPORT PREVIOUSLY ISSUED BY ARTHUR ANDERSEN
LLP AND HAS NOT BEEN REISSUED BY ARTHUR ANDERSEN LLP.

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors and Stockholders of
National Wine & Spirits, Inc.

We have audited the accompanying consolidated balance sheet of National Wine
& Spirits, Inc. (an Indiana Corporation) and subsidiaries as of March 31,
2002 and the related consolidated statement of income, stockholders equity
and cash flows for the year then ended. These consolidated financial statements
and schedule referred to below are the responsibility of the Companys
management. Our responsibility is to express an opinion on these consolidated
financial statements and schedule based on our audit.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
National Wine & Spirits, Inc., as of March 31, 2002 and the consolidated
results of their operations and their cash flows for the year then ended in
conformity with accounting principles generally accepted in the United
States.

Our audit was made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The schedule listed in Item
14(a) is presented for purposes of complying with the Securities and Exchange
Commissions rules and is not a required part of the basic consolidated
financial statements. The information as of and for the year ended March 31,
2002 contained in this schedule has been subjected to the auditing procedures
applied in our audit of the basic consolidated financial statements and, in our
opinion, is fairly stated in all material respects in relation to the basic
consolidated financial statements taken as a whole.

|                                     | ARTHUR ANDERSEN LLP
|------------------------------------ | -------------------
|Indianapolis, Indiana,
May 21, 2002.

- 27 -

REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Stockholders
National Wine & Spirits, Inc.

We have audited the accompanying consolidated statements
of income, stockholders equity and cash flows of National Wine
& Spirits, Inc. for the year ended March 31, 2001. Our audits also included the financial
statement schedule listed in the Index at Item 16 (a) for the year ended March
31, 2001. These financial statements and schedule are the
responsibility of the Companys management. Our responsibility is to
express an opinion on these financial statements and schedule based on our
audit.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated results of
operations and cash flows of National Wine & Spirits, Inc. for the year ended March 31, 2001 in
conformity with accounting principles generally accepted in the United States.
Also, in our opinion, the related financial statement schedule, when considered
in relation to the basic financial statements taken as a whole, presents fairly
in all material respects the information set forth therein for the year ended
March 31, 2001.

|                                                                                                  | Ernst & Young LLP
|------------------------------------------------------------------------------------------------- | -----------------
|Indianapolis, Indiana
June 26, 2001, except for
Note 2 as to which the
date is December 28, 2001.

- 28 -

National Wine & Spirits, Inc.
Consolidated Balance Sheets

|                                                                                  | March 31
|--------------------------------------------------------------------------------- | --------
|
|Assets                                                                            |         
|Current assets:                                                                   |         
|Cash and cash equivalents                                                         |         
|Accounts receivable:                                                              |         
|Trade, less allowance for doubtful accounts                                       |         
|of $1,274,000 and $1,291,000                                                      |         
|Vendor, less allowance for doubtful accounts                                      |         
|of $211,000 and $0                                                                |         
|Inventory                                                                         |         
|Prepaid expenses                                                                  |         
|                                                                                  |         
|Total current assets                                                              |         
|Property and equipment, net                                                       |         
|Other assets:                                                                     |         
|Notes receivable                                                                  |         
|Cash surrender value of life insurance                                            |         
|Investment in Commonwealth Wine & Spirits, LLC                                    |         
|Investment in eSkye Solutions, Inc.                                               |         
|Intangible assets, net of amortization                                            |         
|Goodwill                                                                          |         
|Deferred pension costs                                                            |         
|Deposits and other                                                                |         
|                                                                                  |         
|Total other assets                                                                |         
|                                                                                  |         
|Total assets                                                                      |         
|                                                                                  |         
|                                                                                 
|Liabilities And Stockholders' Equity                                              |         
|Current liabilities:                                                              |         
|Accounts payable                                                                  |         
|Accrued payroll and payroll taxes                                                 |         
|Excise taxes payable                                                              |         
|Other accrued expenses                                                            |         
|Total current liabilities                                                         |         
|Deferred pension liability                                                        |         
|Distribution rights obligations                                                   |         
|Long-term debt                                                                    |         
|                                                                                  |         
|Total liabilities                                                                 |         
|Stockholders' equity:                                                             |         
|Voting common stock, $.01 par value.  200,000 shares                              |         
|authorized, 104,520 shares issued                                                 |         
|and outstanding                                                                   |         
|Nonvoting common stock, $.01 par value                                            |         
|20,000,000 shares authorized, 5,226,001                                           |         
|shares issued and outstanding shares                                              |         
|Additional paid-in capital                                                        |         
|Retained earnings  (deficit)                                                      |         
|Accumulated other comprehensive
             income-unrecognized net pension loss |         
|                                                                                  |         
|                                                                                  |         
|Total stockholders' equity                                                        |         
|                                                                                  |         
|Total liabilities and stockholders' equity                                        |         
|                                                                                  |         

See accompanying notes.

- 29 -

National Wine & Spirits, Inc.
Consolidated Statements of Income

|                                                     | Years Ended March 31
|---------------------------------------------------- | --------------------
|
|Net product sales                                    |                     
|Distribution fees                                    |                     
|                                                     |                     
|Total revenue                                        |                     
|Cost of products sold                                |                     
|                                                     |                     
|Gross profit                                         |                     
|Selling, general and administrative expenses:        |                     
|Warehouse and delivery                               |                     
|Selling                                              |                     
|Administrative                                       |                     
|                                                     |                     
|                                                     |                     
|                                                     |                     
|                                                    
|Income from operations                               |                     
|                                                    
|Interest expense:                                    |                     
|Related parties                                      |                     
|Third parties                                        |                     
|Gain from repurchase of long term debt               |                     
|                                                     |                     
|                                                     |                     
|                                                     |                     
|Vendor settlement income                             |                     
|Gain on sale of bottled water division               |                     
|Interest income                                      |                     
|Rental and other income                              |                     
|Equity in income of Commonwealth Wine & Spirits, LLC |                     
|Equity in losses of eSkye Solutions, Inc.            |                     
|                                                     |                     
|Total other income (expense)                         |                     
|                                                     |                     
|Net income                                           |                     
|                                                     |                     

See accompanying notes.

- 30 -

National Wine & Spirits, Inc.
Consolidated Statements of Stockholders Equity

|                          | $.01 Par ValueCommon StockVoting     Non-Voting | AdditionalPaid-inCapital | RetainedEarnings(AccumulatedDeficit) | AccumulatedOtherComprehensiveIncome | NotesReceivablefromStockholders | TotalStockholders'Equity
|------------------------- | ----------------------------------------------- | ------------------------ | ------------------------------------ | ----------------------------------- | ------------------------------- | ------------------------
|Balance at April 1, 2000  |                                                 |                          | $                                    | 1,000                               |                                 | $                       
|                         
|Net income                |                                                 |                          |                                      | ---                                 |                                 |                         
|Decrease in notes         |                                                 |                         
|receivable from           |                                                 |                         
|stockholders, net         |                                                 |                          |                                      | ---                                 |                                 |                         
|Distributions to          |                                                 |                         
|stockholders              |                                                 |                          |                                      | ---                                 |                                 |                         
|                          |                                                
|Balance at March 31, 2001 |                                                 |                          |                                      | 1,000                               |                                 |                         
|                         
|Net income                |                                                 |                          |                                      | ---                                 |                                 |                         
|Unrecognized net          |                                                 |                         
|pension loss              |                                                 |                          |                                      | ---                                 |                                 |                         
|                          |                                                 |                         
|Comprehensive Income      |                                                 |                          |                                      |                                     |                                 |                         
|Decrease in notes         |                                                 |                         
|receivable from           |                                                 |                         
|stockholders, net         |                                                 |                          |                                      | ---                                 |                                 |                         
|Distributions to          |                                                 |                         
|stockholders              |                                                 |                          |                                      | ---                                 |                                 |                         
|                          |                                                
|Balance at March 31, 2002 |                                                 |                          |                                      | 1,000                               |                                 |                         
|Net income                |                                                 |                          |                                      | ---                                 |                                 |                         
|Unrecognized net          |                                                 |                         
|pension loss              |                                                 |                          |                                      | ---                                 |                                 |                         
|                          |                                                
|                         
|Comprehensive Income      |                                                 |                          |                                      |                                     |                                 |                         
|Distributions to          |                                                 |                         
|stockholders              |                                                 |                          |                                      | ---                                 |                                 |                         
|                          |                                                
|Balance at March 31, 2003 |                                                 |                          | $                                    | 1,000                               |                                 | $                       
|                         
|                          |                                                

See accompanying notes.

- 31 -

National Wine & Spirits, Inc.
Consolidated Statements of Cash Flows

|                                                                          | Year Ended March 31
|------------------------------------------------------------------------- | -------------------
|
|Operating activities:                                                     |                    
|Net income                                                                |                    
|Adjustments to reconcile net income to net cash provided  by              |                    
|operating activities:                                                     |                    
|Depreciation of property and equipment                                    |                    
|Amortization of intangible assets                                         |                    
|Equity in losses  of eSkye  Solutions, Inc.                               |                    
|Equity in earnings of Commonwealth Wine & Spirits, LLC                    |                    
|Provision for bad debt expense                                            |                    
|(Gain) loss on repurchase of long term debt                               |                    
|Gain on sales of assets                                                   |                    
|Increase in cash surrender value of life insurance                        |                    
|Changes in operating assets and liabilities                               |                    
|Accounts receivable                                                       |                    
|Inventories                                                               |                    
|Prepaid expenses                                                          |                    
|Deposits and other                                                        |                    
|Accounts payable                                                          |                    
|Accrued expenses and taxes                                                |                    
|                                                                          |                    
|Net cash and cash equivalents provided by operating                       |                    
|activities                                                                |                    
|                                                                         
|Investing activities:                                                     |                    
|Purchases of property and equipment                                       |                    
|Purchases of intangible assets                                            |                    
|Proceeds from sale of property and equipment                              |                    
|Investment in eSkye Solutions, Inc.                                       |                    
|Distributions from Commonwealth Wine & Spirits, LLC                       |                    
|Collections on notes receivable                                           |                    
|                                                                          |                    
|Net cash and cash equivalents (used) provided by                          |                    
|investing activities                                                      |                    
|                                                                         
|Financing activities:                                                     |                    
|Proceeds from line of credit borrowings                                   |                    
|Principal payments on line of credit borrowings                           |                    
|Principal payments on long-term debt, including purchases of senior notes |                    
|Proceeds of borrowings from stockholder                                   |                    
|Repayments on borrowings from stockholders                                |                    
|Receipts on notes receivable from stockholders and others                 |                    
|Distributions to stockholders                                             |                    
|                                                                          |                    
|Net cash and cash equivalents used by financing activities                |                    
|                                                                          |                    
|Net increase (decrease) in cash and cash equivalents                      |                    
|Cash and cash equivalents, beginning of year                              |                    
|                                                                          |                    
|Cash and cash equivalents, end of year                                    |                    
|                                                                          |                    

See accompanying notes.

- 32 -

National Wine & Spirits, Inc.
Notes to Consolidated Financial Statements
March 31, 2003

1.        
Nature of Business and Summary of Significant Accounting Policies

Nature of Business and Principles of Consolidation

National Wine & Spirits, Inc. (NWS or the Company), an S-Corporation, is a holding company which operates primarily in the wine
and liquor wholesale distribution business. Based in Indianapolis, National Wine
& Spirits Corporation (NWSC) is a wholesale distributor of liquor and wines
throughout Indiana and also operates a division for the distribution of cigars
and accessories. Based in Chicago, NWS-Illinois, LLC (NWS-LLC) is a wholesale
distributor of liquor, wines, and beer throughout Illinois. NWS Michigan, Inc.
(NWSM) and National Wine & Spirits, LLC (NWSM-LLC) are distributors of
liquor and non-alcoholic products throughout Michigan. NWSM distributes products
as an Authorized Distribution Agent (ADA) for the State of Michigan and derives
revenue from distribution fees. Accordingly, NWSMs results represent the
entire All Other segment as described in Note 14. Based in
Connecticut, U.S. Beverage, LLC (USB) distributes and markets import and craft
beer along with malt based products throughout the United States.

The consolidated financial statements include the accounts of NWS, NWSC,
NWS-LLC, NWSM, NWSM-LLC, and USB, all of which NWS wholly owns or owns 100% of
the voting stock. All significant intercompany accounts and transactions have
been eliminated from the consolidated financial statements. Substantially all
revenues result from the sale of liquor, beer and wine or distribution fees
therefrom. NWS performs periodic credit evaluations of its customers
financial condition and generally does not require collateral.

Use of Estimates and Assumptions

The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosures 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.

Fair Value of Financial Instruments

The Companys cash, accounts receivable, accounts payable and certain other
accrued liabilities are all short-term in nature and the carrying amounts
approximate fair value. Long-term notes receivable and payable, except for the
Companys senior notes payable, have primarily variable interest rates,
thus their carrying amounts approximate fair value. The fair value of the
Companys senior notes payable has been determined on the basis of the
specific securities issued and outstanding and is estimated at $80,978,000 at
March 31, 2003.

Cash and Cash Equivalents

For purposes of the Consolidated Statement of Cash Flows, the Company considers
all highly liquid debt instruments purchased with an original maturity of three
months or less to be cash equivalents. The Company maintains its cash balances
in bank deposit accounts which, at times, may exceed federally insured limits.
The Company has experienced no such losses in these accounts.

Receivables and Credit Policies

Accounts receivable are uncollateralized customer obligations due under normal
trade terms requiring payments generally within 15 to 30 days from the invoice
date.

- 33 -

National Wine & Spirits, Inc.
Notes to Consolidated Financial Statements (continued)

1.        
Nature of Business and Summary of Significant Accounting Policies(continued)

The carrying amount of accounts receivable is reduced by an allowance that
reflects managements best estimate of the amounts that will not be
collected. Management individually reviews all accounts receivable balances and
creates an allowance for doubtful accounts based on the credit worthiness of
specific accounts and an estimate of other uncollectible accounts based on
historical performance and current economic conditions.

Inventory

Substantially all inventory is stated at the lower of cost, determined by the
last-in, first-out (LIFO) method, or market and primarily consists of packaged
beer, wine, liquor, cigars and accessories.

Advertising Costs

Advertising costs are charged to operations when incurred. Advertising expense
was $10,602,000, $3,610,000 and $4,767,000 in 2003, 2002 and 2001,
respectively.

Property and Equipment

Property and equipment are recorded at cost and are depreciated using primarily
the straight-line method over their expected useful lives as follows:

|Buildings and improvements | 10-40 years
|-------------------------- | -----------
|Furniture and equipment    | 3-10 years 
|                           |            
|Warehouse equipment        | 7-10 years 
|Automobiles and trucks     | 5-7 years  

Intangible Assets

Intangible assets with definite lives are amortized by the straight-line
method (which, for loan acquisition costs, also approximates the yield method)
over the terms of the agreements or their estimated useful lives, which range
from two to twenty years.

Certain distribution rights are classified as indefinite-lived intangible
assets. Accordingly, effective April 1, 2002, these assets are no longer
amortized but are tested for impairment annually.

Goodwill

Goodwill consists of costs in excess of the net assets acquired in connection
with an acquisition in April, 1999. Prior to April, 2002, goodwill was amortized
using the straight-line method over 15 years. Effective April 1, 2002, the
company adopted Statements of Financial Accounting Standards ("SFAS") No. 142,
Accounting for Goodwill and Other Intangible Assets. As such, the Company no
longer amortizes goodwill, but instead tests for impairment at least
annually.

- 34 -

National Wine & Spirits, Inc.
Notes to Consolidated Financial Statements (continued)

1.        
Nature of Business and Summary of Significant Accounting Policies(continued)

Long-lived Assets

The carrying value of long-lived assets is reviewed by management when
indicators of impairment are present. If this review indicates that the carrying
value may be impaired then the impaired amount will be written off. Impairment
is determined by comparison of the carrying amount of the asset to the net
undiscounted cash flows expected to be generated by the related asset group.  An
impairment loss is measured by the amount which the carrying amount of the asset
group exceeds its fair value.

Income Taxes

There is no provision for federal or state income taxes reflected in the
financial statements because the stockholders have consented to NWS
election to be taxed as an S corporation under the applicable provisions of the
Internal Revenue Code. NWS income is taxable directly to its
stockholders.

Revenue Recognition

NWSC, NWS-LLC, NWSM-LLC, and USB purchase inventory items for resale to
customers and are liable for payment to the suppliers, as well as collecting
payment from customers. NWSM receives a fixed fee per case of liquor distributed
for the State of Michigan (distribution fees) which is also responsible for
payments to suppliers. All revenue is recognized at the time of shipment. All
Michigan shipments are cash on delivery.

Net sales and distribution fees are recognized at the time product is shipped
which is when title passes. Shipping and handling charged to customers is
included in Net Product Sales. For the years ended March 31, 2003, 2002, and
2001, the Company incurred delivery expenses of $16,342,000, $16,533,000, and
$16,474,000, respectively, which are included in warehouse and delivery expenses
in the accompanying Consolidated Statements of Income.

Payments to Customers

The Company records certain payments to customers as a reduction of revenue in
accordance with EITF 01-09: Accounting for Consideration Given by a Vendor to a
Customer (Including a Reseller of the Vendors Product). The Company
recorded $8,925,000, $2,029,000 and $2,361,000 of consideration paid to
customers as a reduction of revenue in the Consolidated Statements of Income for the years
ended March 31, 2003, 2002 and 2001, respectively.

Vendor Allowances Received

The Company records vendor allowances and discounts in the income statement in accordance
with EITF 02-16: Accounting by a Customer (including a Reseller) for Certain
Consideration Received from a Vendor. The Company receives allowances from
vendors as a result of purchasing and promoting their products. Vendor
allowances provided as a reimbursement of specific, incremental and identifiable
costs incurred to promote a vendors products are recorded as an expense
reduction when the cost is incurred. All other vendor allowances, including
vendor allowances received in excess of the Companys cost to promote a
vendors product, or vendor allowances directly related to purchase of a
vendors product are initially deferred. The deferred amounts are then
recorded as a reduction of cost of good sold when the related product is
sold.

- 35 -

National Wine & Spirits, Inc.
Notes to Consolidated Financial Statements (continued)

1.        
Nature of Business and Summary of Significant Accounting Policies(continued)

Recently Issued Accounting Pronouncements

In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, Business
Combinations, and No. 142, Goodwill and Other Intangible
Assets, effective for fiscal years beginning after December 15, 2001. Under
the new rules, goodwill (and intangible assets deemed to have indefinite lives)
will no longer be amortized but will be subject to annual impairment tests.
Other intangible assets will continue to be amortized over their useful lives.
The Company adopted the new rules on accounting for goodwill and other
intangible assets effective April 1, 2002. Under SFAS No. 142, goodwill
impairment is deemed to exist if the carrying value of a reporting unit exceeds
its estimated fair value. In calculating the impairment charge, the fair values
of the reporting units were estimated using a discounted cash flow methodology.
The Company performed the required impairment tests of goodwill and indefinite
lived intangibles as of April 1, 2002 and March 31, 2003 and found them not to
be impaired.

In August 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets which requires impairment losses to be recorded on
long-lived assets used in operations when indicators of impairment are present
and the undiscounted cash flows estimated to be generated by those assets are
less than the assets carrying amount. Statement 144 also addresses the
accounting for expected disposals of long-lived assets. The Company adopted
Statement 144 during the first quarter of fiscal 2003 and, based on current
circumstances, it has not had a material effect on the Company's results of
operations or its financial position.

In April 2002 the Financial Accounting Standards Board issued Statement No.
145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections. This Statement amends FASB
Statement No. 13, Accounting for Leases, to eliminate an inconsistency between
the required accounting for sale-leaseback transactions and the required
accounting for certain lease modifications that have economic effects that are
similar to sale-leaseback transactions. This Statement also amends other
existing authoritative pronouncements to make various technical corrections,
clarify meanings, or describe their applicability under changed conditions as
well as addresses the classifications of gains and losses on debt
extinguishment. Accordingly, the Company classified its gains from repurchases
of its long-term debt in interest expense on the Consolidated Statement of
Income.

- 36 -

National Wine & Spirits, Inc.
Notes to Consolidated Financial Statements (continued)

1.        
Nature of Business and Summary of Significant Accounting Policies(continued)

In June 2002, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 146, Accounting for Costs Associated
with Exit or Disposal Activities, effective for exit or disposal
activities that are initiated after December 31, 2002. This Statement addresses
financial accounting and reporting for costs associated with exit or disposal
activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3,
Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring). Although the Company was engaged in an employee reduction
at March 31, 2003, the associated costs from the adoption of this standard did
not have a material impact on its financial statements.

The Company adopted the Emerging Issues Task Force Issue 02-16: Accounting by
a Customer (Including a Reseller) for Certain Consideration Received from a
Vendor for arrangements either modified or created after December 31, 2002.
This statement reached a consensus that cash consideration represents a
reimbursement of costs incurred by the customer to sell the vendors
products and should be characterized as a reduction of that cost when recognized
in the customers income statement if the cash consideration represents a
reimbursement of a specific, incremental, identifiable cost incurred by the
customer in selling the vendors products or services. If the amount of
cash consideration paid by the vendor exceeds the cost being reimbursed, that
excess amount should be characterized in the customers income statement as
a reduction of cost of sales when recognized in the customers income
statement. The Company has reviewed its accounting policies and methods and
concluded that the recording of cash consideration received from vendors were
recorded in accordance with the statement.

In November 2002, the FASB issued Interpretation No. 45 (FIN 45),
Guarantors Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others. FIN 45 requires
that upon issuance of certain guarantees, a guarantor must recognize a liability
for the fair value of the obligation assumed under the guarantee. FIN 45 also
requires additional disclosures by a guarantor in its interim and annual
financial statements regarding certain guarantees and product warranties. The
recognition provisions of National Wine & Spirits, Inc. FIN 45 is effective
for guarantees issued or modified after December 31, 2002. The Company
implemented the recognition provisions of FIN 45 in January 2003 there has been
no material effect on the Companys financial position or results of
operations.

In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46)
Consolidation of Variable Interest Entities. The term variable
interest is defined in FIN 46 as contractual, ownership or other
pecuniary interest in an entity that change with changes in the entitys
net asset value. Variable interest are investments or other interest that
will absorb a portion of an entitys expected losses if they occur or
receive portions of the entitys expected residual returns if they occur.
The Company does not expect the recognition provisions of FIN 46 to have a
material impact on the Companys financial position or results of
operations.

Reclassifications

Certain amounts from prior year's financial statement have been reclassified to
conform to the current year presentation. The Financial Statements have been
reclassified to include additional disclosure relating to accounts receivable
vendor and distribution rights obligations.

- 37 -

National Wine & Spirits, Inc.
Notes to Consolidated Financial Statements (continued)

2.        
Investment in Unconsolidated Subsidiaries

eSkye Solutions, Inc.

Prior to December 28, 2001, the Company has been accounting for its investment
in eSkye Solutions, Inc. (eSkye) on the cost method. On December 28, 2001 eSkye
redeemed a significant portion of its outstanding preferred stock at a
significant discount. Since the Company elected not to participate in this
redemption, its voting control increased to over 20% of voting stock. In
accordance with Accounting Principles Board Opinion No. 18 The Equity Method of
Accounting for Investments in Common Stock (APB 18), the Company adopted
retroactively the equity method of accounting. At December 28, 2001, prior
period financial information was adjusted to reflect this adoption. In addition,
APB 18 also requires the Company to evaluate whether or not an other than
temporary decline in value of an investment has occurred. As a result of
this evaluation, the Company recorded an impairment charge of $530,000 for the
year ended March 31, 2002, which is included in Equity in losses of eSkye
Solutions, Inc. in the Consolidated Statements of Income. In addition,
losses applying the equity method were $781,000 for the year ended March 31,
2002, which were included in Equity in losses of eSkye Solutions,
Inc. in the Consolidated Statements of Income. Losses under the equity
method for the year ended March 31, 2003 were in excess of the remaining book
value of the investment in eSkye. The Company recorded $160,000 in losses for
the year ended March 31, 2003, reducing its investment to $0. At March 31, 2003,
the Company's share of eSkye's voting stock was 20.5%.

Commonwealth Wine & Spirits, LLC

In December 1998, NWSC formed a new distributorship in Kentucky (Commonwealth
Wine & Spirits, LLC) in partnership with two existing Kentucky-based
distributors, The Vertner Smith Company (Vertner) and Kentucky Wine
& Spirits (Kentucky W&S). NWSC has accounted for its
investment in Commonwealth Wine & Spirits, LLC using the equity method.
Under the terms, NWSC invested $7,500,000 in exchange for a 25% interest in the
new company. Vertner and Kentucky W&S equally own the remaining 75%. A
portion of NWSCs initial investment related to a franchise fee paid by
NWSC on behalf of the new distributorship. As part of the operating agreement,
NWSCs initial cash distributions from the new distributorship are treated
as return of NWSCs original investment. As a result, the amortization of
this franchise fee is allocated 100% to NWSC and is reflected in the
Companys recorded equity in income of Commonwealth Wine & Spirits, LLC
in the accompanying consolidated income statement. The Company received
distributions of $1,286,000, $405,000 and $778,000 and recorded equity in
earnings of $312,000, $407,000 and $315,000 from Commonwealth Wine &
Spirits, LLC in 2003, 2002 and 2001 respectively.

Summary financial information for eSkye Solutions, Inc. and Commonwealth Wine
& Spirits, LLC is as follows:

|               | Years Ended March 31,
|-------------- | ---------------------
|
|Sales          |                      
|Operating loss |                      
|Net loss       |                      

|                        | March 31,
|----------------------- | ---------
|
|Current assets          |          
|Non-current assets      |          
|Current liabilities     |          
|Non-current liabilities |          
|Minority interest       |          
|Redeemable stock        |          

- 38 -

National Wine & Spirits, Inc.
Notes to Consolidated Financial Statements (continued)

3.        Sale of Bottled Water Division

Effective June 5, 2000, NWSC sold certain of its licensed brands, trademarks and
trade names of its bottled water division for approximately $10,440,000. NWSC
received $9,960,000 for the sale of the assets at the sale date, and the balance
of $480,000 was received in September 2000. NWSC recognized a gain of $7,524,000
from the sales of the related assets and liabilities.

4.        Inventory

Inventory at March 31 is comprised of the following:

|                   | 2003 | 2002
|------------------ | ---- | ----
|Inventory at FIFO  |      |     
|Less: LIFO reserve |      |     
|                   |     
|                   |      |     
|                   |     

If the Company had used the first-in, first-out (FIFO) inventory method, net
income would have been $256,000, $896,000 and $1,276,000 greater in 2003, 2002
and 2001, respectively.

5.        Property and Equipment

Property and equipment at March 31 is comprised of the
following:

|                               | 2003 | 2002
|------------------------------ | ---- | ----
|Land and improvements          |      |     
|Buildings and improvements     |      |     
|Furniture and equipment        |      |     
|Warehouse equipment            |      |     
|Automobiles and trucks         |      |     
|                               |     
|                               |      |     
|Less: Accumulated depreciation |      |     
|                               |     
|                               |      |     
|                               |     

6.        Supplemental Cash Flow Information

During the year ended March 31, 2003, the Company purchased intangible assets,
principally distribution rights, and incurred other liabilities of
$12,629,000.

Cash paid for interest was $11,657,000, $11,754,000 and $13,212,000 in 2003,
2002 and 2001, respectively.

- 39 -

National Wine & Spirits, Inc.
Notes to Consolidated Financial Statements (continued)

7.        Intangible Assets

Intangible assets at March 31, is comprised of the following:

|                                        | 2003                 | 2002               
|--------------------------------------- | -------------------- | -------------------
|Intangible AssetsSubject toAmortization | WeightedAverage Life | GrossCarryingAmount
|Distribution rights                     |                      |                    
|Loan acquisition costs                  |                      |                    
|Non-compete agreements                  |                      |                    
|                                        |                      |                    
|Total                                   |                      |                    
|                                        |                      |                    
|Intangible AssetsSubject toAmortization |                      | CarryingAmount     
|Distribution rights                     |                      |                    
|                                        |                      |                    

Consolidated amortization expense related to intangible assets, excluding
goodwill and other intangible assets with indefinite lives for 2003, 2002, and
2001 was $2,419,000, $1,374,000 and $1,492,000, respectively.

The estimated amortization expense for each of the next five years is as
follows:

|    
|----
|2004
|2005
|2006
|2007
|2008
|    
|    
|    

8.        Goodwill

The following is a summary of the changes in goodwill during the years ended
March 31:

|                             | 2003 | 2002
|---------------------------- | ---- | ----
|Goodwill, beginning of year  |      |     
|Less:  Amortization          |      |     
|Less:  Write-off of goodwill |      |     
|Goodwill, end of year        |      |     
|                             |     

- 40 -

National Wine & Spirits, Inc.
Notes to Consolidated Financial Statements (continued)

8.        
Goodwill(continued)

The following financial data illustrates pro forma earnings if goodwill and
distribution rights with indefinite lives had not been amortized for 2003, 2002
and 2001:

|                                           | Year ending March 31
|------------------------------------------ | --------------------
|
|Net income, as reported                    |                     
|Addback amortization from distribution     |                     
|rights with indefinite lives               |                     
|Addback goodwill amortization              |                     
|                                           |                     
|Adjusted net income, excluding goodwill    |                     
|amortization and amortization from         |                     
|distribution rights  with indefinite lives |                     
|                                           |                     

9.        Debt

Long-term debt at March 31 is comprised of the following:

|                                                 | 2003 | 2002
|------------------------------------------------ | ---- | ----
|Senior notes payable (A)                         |      |     
|Bank revolving line of credit (B)                |      |     
|Notes payable to stockholders, net (see Note 13) |      |     
|                                                 |     
|                                                 |      |     
|Less:  current maturities                        |      |     
|                                                 |      |     
|                                                 |     

|(A) | On January 25, 1999, the Company issued $110,000,000 of unsecured senior notes
with a maturity of January 15, 2009. Interest on the senior notes is 10.125% and
is payable semiannually. These senior notes are guaranteed by the Companys
subsidiaries. The guarantors are either wholly owned or the Company owns 100% of
the voting stock and there are no non-guarantor subsidiaries. The guarantees are
full, unconditional and joint and several. NWS is a holding company and has no
independent assets or operations.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The bond indenture restricts the ability of the Company and its subsidiaries to
incur additional indebtedness, pay dividends, engage in mergers or
consolidations, make capital expenditures and otherwise restricts corporate
activities.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On or after January 15, 2004, the Company may redeem some or all of the senior notes at any
time at stated redemption prices plus accrued interest and liquidated damages.
Notwithstanding the foregoing, during the first 36 months after January 20, 1999, the
Company may redeem up to 33% of the aggregate principal amount of the senior notes at a
redemption price of 110.125%, plus accrued interest and liquidated damages, with the net
cash proceeds of one or more public offerings of common stock of the Company.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

- 41 -

National Wine & Spirits, Inc.
Notes to Consolidated Financial Statements (continued)

9.        
Debt(continued)

| | The Company purchased $2,125,000 of its senior notes on the open market on September 28, 2001.
The notes were purchased for $2,082,500 plus accrued interest of $46,617. Related
unamortized issuance costs of $74,391 were written off due to the purchase of the senior
notes. The Company initially utilized its revolving credit facility to fund the purchase
of the senior notes. The net loss on the purchase was insignificant.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The Company purchased $17,900,000 of its senior notes on the open market in the
fourth quarter of fiscal year 2003. The notes were purchased for $15,317,000
plus accrued interest of $275,000. Related unamortized issuance costs of
$584,000 were written off due to the purchase of the senior notes. The net gain
on the purchase of $1,999,000 is included in interest expense.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The Company purchased $9,646,000 of its senior notes on the open market during the quarter ended June 30, 2003. The
notes were purchased for $8,681,000 plus accrued interest of $305,000.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(B) | On March 31, 2003, NWS entered into a credit agreement with LaSalle Bank
National Association, as lender and agent, and National City Bank of Indiana,
that provides a revolving line of credit for borrowings of up to $40 million,
including standby or commercial letters of credit of up to $5 million, through
April 1, 2008. As of March 31, 2003 the applicable interest rate on the
revolving line of credit was 4.5%. Commercial letters of credit of $4.5 million
were issued for the self insured portion of NWS casualty insurance
policies. Line of credit borrowings are collaterialized by and based upon
eligible accounts receivable and inventories, as defined, and are guaranteed by
NWS subsidiaries. Interest is payable monthly at the LIBOR rate or the
higher of the prime lending rate or the federal funds rate, plus a margin
percentage. As of March 31, 2003 the applicable interest rate on the revolving
line of credit was 4.5%.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In addition, the agreement places restrictions on the Company and its
subsidiaries regarding additional indebtedness, dividends, mergers or
consolidations and capital expenditures. Further, the Company must maintain
certain interest coverage and funded debt coverage ratios, with which the
Company was in compliance at March 31, 2003.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Principal payments due on debt at March 31, 2003 are as follows:

|2004       |  |  | $ | ---        | 
|---------- |  |  | - | ---------- | 
|2005       |  |  |   | ---        | 
|2006       |  |  |   | ---        | 
|2007       |  |  |   | ---        | 
|2008       |  |  |   | ---        | 
|Thereafter |  |  |   | 98,303,000 | 
|           | 
|           |  |  | $ | 98,303,000 | 
|           | 

10.        Common Stock

The Company has two authorized classes of capital stock: voting $0.01 par value
common shares and nonvoting $0.01 par value common shares. Both classes of stock
have the same relative rights, performance limitations and restrictions, except
that nonvoting shares are not entitled to vote on any matters submitted to a
vote of the stockholders, except as provided by law.

- 42 -

National Wine & Spirits, Inc.
Notes to Consolidated Financial Statements (continued)

11.        Commitments

The Company leases office and warehouse space under noncancellable operating
leases ranging from two to ten years, some of which include renewal and purchase
options and escalation clauses, expiring on various dates through 2011. The
Company also leases certain trucks and equipment pursuant to noncancellable
operating leases with terms ranging from three to seven years. Future minimum
rent payments as of March 31, 2003 are as follows:

|           | 
|---------- | 
|
|2004       | 
|2005       | 
|2006       | 
|2007       | 
|2008       | 
|Thereafter | 
|           | 
|           | 
|           | 

Rent expense was $4,747,000, $4,800,000 and $4,738,000 in 2003, 2002 and 2001,
respectively.

The Company has future obligations for guaranteed minimum royalty payments
related to certain distribution contracts. Existing agreements require minimum
royalty payments of approximately $2,700,000 for fiscal year 2004. Because the
Company believes that actual royalty payments will exceed the guaranteed
minimum, royalty payments are recorded in cost of sales as royalties become
payable. As of March 31, 2003, the minimum royalty payment of $3,100,000 for
fiscal year 2003 had been satisfied.

12.        Employee Benefit Plans

The Company sponsors a defined benefit pension plan covering substantially all
of its warehousemen and drivers. The Company makes contributions to the plan
based on amounts permitted by law.

The components of net periodic pension cost of the defined benefit plan are as
follows for the years ended March 31:

|                                                  | 2003 | 2002 | 2001
|------------------------------------------------- | ---- | ---- | ----
|Service cost-benefits earned during the year      |      |      | $   
|Interest on projected benefit obligation          |      |      |     
|Expected return on plan assets                    |      |      |     
|Amortization of unrecognized net transition asset |      |      |     
|Amortization of loss (gain)                       |      |      |     
|Amortization of prior service cost                |      |      |     
|                                                  |     
|Net periodic pension cost                         |      |      | $   
|                                                  |     

- 43 -

National Wine & Spirits, Inc.
Notes to Consolidated Financial Statements (continued)

12.        
Employee Benefit Plans(continued)

The change in the projected benefit obligation, plan assets, funded status and
amounts recognized in the accompanying consolidated balance sheets at
March 31, 2003 and 2002 for the defined benefit pension plan are as
follows:

|                                        | 2003 | 2002
|--------------------------------------- | ---- | ----
|Change in projected benefit obligation: |      |     
|Benefit obligation at beginning of year |      |     
|Service cost                            |      |     
|Interest cost                           |      |     
|Actuarial changes                       |      |     
|Benefits paid                           |      |     
|                                        |     
|Benefit obligation at end of year       |      |     
|                                        |     

|Change in plan assets:                         |  |  |   |           |   |   |           |  
|---------------------------------------------- |  |  | - | --------- | - | - | --------- | -
|Fair value of plan assets at beginning of year |  |  | $ | 3,587,000 |   | $ | 3,552,000 |  
|Actual loss on plan assets                     |  |  |   | (347,000  | ) |   | (345,000  | )
|Company contributions                          |  |  |   | 747,000   |   |   | 578,000   |  
|Benefits paid                                  |  |  |   | (214,000  | ) |   | (198,000  | )
|                                               | 
|Fair value of plan assets at end of year       |  |  | $ | 3,773,000 |   | $ | 3,587,000 |  
|                                               | 

|                                          |  | 
|----------------------------------------- |  | 
|
|Funded status of the plan (under-funded)  |  | 
|Unrecognized net actuarial gain           |  | 
|Unrecognized prior service cost           |  | 
|Unrecognized transition obligation        |  | 
|                                          | 
|Prepaid benefit cost                      |  | 
|                                          | 
|Weighted-average assumptions:             |  | 
|Discount rate                             |  | 
|Expected return on plan assets            |  | 
|Balance Sheet Classification:             |  | 
|Prepaid benefit cost                      |  | 
|Noncurrent deferred additional liability  |  | 
|                                          | 
|Minimum liability                         |  | 
|                                          | 
|                                          |  | 
|Deferred pension costs (intangible asset) |  | 
|Accumulated other comprehensive income -  |  | 
|unrecognized net pension loss             |  | 

- 44 -

National Wine & Spirits, Inc.
Notes to Consolidated Financial Statements (continued)

12.        
Employee Benefit Plans(continued)

As of March 31, 2003 and 2002, the Company has reflected in their financial
statements an additional minimum pension liability of $3,005,000 and $1,873,000,
respectively. This minimum liability represents the excess of the unfunded
accumulated benefit obligation over the fair market value of plan assets as of
the measurement date. As the additional liability exceeded the intangible asset,
the excess is held in the financial statements in Accumulated Other
Comprehensive Income at $2,290,000 and $675,000 as of March 31, 2003 and 2002,
respectively. An intangible asset of $715,000 and $1,198,000 was reflected in
the Companys consolidated balance sheet at March 31, 2003 and 2002,
respectively. The change in the pension liability at March 31, 2003 as compared to the
liability at March 31, 2002 was primarily caused by the difference in the actual
return on assets compared to the expected return on assets and the 0.50%
decrease in the discount rate assumption.

It is the Companys policy to make contributions to the plan sufficient to
meet the funding requirements of applicable laws and regulations, plus such
additional amounts as deemed appropriate.

The Company also sponsors a defined contribution benefit plan for substantially
all employees not covered by the defined benefit plan. Contributions to the plan
are made at the discretion of the Company and may not exceed 5% of a
participants compensation. The Company recorded $1,598,000, $1,411,000 and
$1,215,000 of expense for the defined contribution plan in 2003, 2002 and 2001,
respectively.

NWS-LLC contributes to union-sponsored multi-employer pension plans, which
provide for contributions based on a specified rate per labor hour. Union
employees constitute approximately 53% of NWS-LLCs workforce and 53% of
NWSMs workforce. Contributions charged to expense were $757,000, $665,000
and $588,000 in 2003, 2002 and 2001, respectively. Information as to
NWS-LLCs portion of accumulated plan benefits and plan net assets is not
currently available. Under the Employee Retirement Income Security Act of 1974
as amended, an employer upon withdrawal from a multi-employer plan is required
to continue funding its proportionate share of the plans unfunded vested
benefits. NWS-LLC has no intention of withdrawing from the plans.

13.        Related Party Transactions

NWSC had notes receivable from its two stockholders totaling $2,628,000 at
March 31, 2002. The notes earned interest at the prime lending rate and were
paid in full during September 2002. Interest income earned was $62,000, $222,000
and $635,000 in 2003, 2002, and 2001, respectively. Proceeds of the notes were
used by the stockholders to purchase additional capital stock of NWSC and to
make loans to NWS-LLC.

Effective July 31, 1998, the Company and its stockholders executed new notes
payable to stockholders to provide for a legal right of offset against the notes
receivable from stockholders. The notes payable outstanding as of March 31, 2002
were offset with corresponding notes receivable and reflected in long-term-debt
in the accompanying Consolidated Balance Sheet. The total of the subordinated
notes payable was $4,328,000 and $4,558,000 at March 31, 2003 and 2002,
respectively with the principal balance due in 2009. These notes bear interest
at the prime lending rate. Interest expense on these notes was $197,000,
$258,000 and $405,000 in 2003, 2002, and 2001, respectively. The Company pays
eSkye fees for computer services. NWS paid $150,000, $49,000, and $42,000 during
the years ended March 31, 2003, 2002, and 2001, respectively.

The Company paid $117,000, $218,000 and $230,000 in 2003, 2002, and 2001
respectively for consulting fees to a minority stockholder of
NWS-LLC.

A Director of the Company is the Chairman and Chief Executive Officer of eSkye.
The Company received 6,000,000 shares of common stock in eSkye upon inception,
representing founders stock. The Company accounts for its investment in eSkye
using the equity method. The Company's investment in convertible preferred stock
of eSkye totaled $2,513,000.

NWS leases facilities and certain office equipment to eSkye under the terms of a
three-year operating lease. NWS received rent from eSkye of $137,000, $270,000
and $262,000 during the years ended March 31, 2003, 2002 and 2001, respectively.
The Company pays eSkye fees for computer services. NWS paid $150,000, $49,000,
and, $42,000 during the years ended March 31, 2003, 2002 and 2001,
respectively.

- 45 -

National Wine & Spirits, Inc.
Notes to Consolidated Financial Statements (continued)

14.        Segment Reporting

The Companys reportable segments are business units that engage in product
sales and all other activities. The majority of the all other activities relate
to distribution fee operations. The Company evaluates performance and allocates
resources based on these segments. The accounting policies of the reportable
segments are the same as those described in the summary of significant
accounting policies in Note 1.

|                                                            | 2003 | 2002 | 2001
|----------------------------------------------------------- | ---- | ---- | ----
|Revenue from external customers                             |      |      |     
|Product sales                                               |      |      | $   
|All other                                                   |      |      |     
|Interest expense                                            |      |     
|Product sales                                               |      |      |     
|All other                                                   |      |      |     
|Depreciation expense                                        |      |     
|Product sales                                               |      |      |     
|All other                                                   |      |      |     
|Amortization expense                                        |      |     
|Product sales                                               |      |      |     
|All other                                                   |      |      |     
|Equity  in  earnings  of  Commonwealth  Wine & Spirits, LLC |      |      |     
|Product sales                                               |      |      |     
|All other                                                   |      |      |     
|Equity in losses of eSkye Solutions, Inc.                   |      |     
|Product sales                                               |      |      |     
|All other                                                   |      |      |     
|Segment income (loss)                                       |      |     
|Product sales                                               |      |      |     
|All other                                                   |      |      |     
|Segment assets                                              |      |     
|Product sales                                               |      |      |     
|All other                                                   |      |      |     
|Investments in equity method investees                      |      |     
|Product sales                                               |      |      |     
|All other                                                   |      |      |     
|Expenditures on long-lived assets                           |      |     
|Product sales                                               |      |      |     
|All other                                                   |      |      |     

15.        Concentration of Risk

Products purchased from four suppliers amounted to approximately 59%, 62% and
66% of all purchases in 2003, 2002 and 2001, respectively.

16.        Litigation

The Company is a party to various lawsuits and claims arising in the normal
course of business. While the ultimate resolution of lawsuits or claims against
the Company cannot be predicted with certainty, management is vigorously
defending all claims and does not expect that these matters will have a material
adverse effect on the financial position or results of operations of the
Company.

- 46 -

National Wine & Spirits, Inc.
Notes to Consolidated Financial Statements (continued)

17.        Vendor Distribution Agreements

During the year ended March 31, 2003, NWSC entered into distribution contracts
with two vendors, both on an exclusive basis for their respective products
distributed in Indiana. Total payments of $11,625,000 are required for these
agreements, and $11,375,000 is unpaid as of March 31, 2003. Payments are
required on a quarterly basis through June 30, 2010. NWSC has imputed interest
the obligations at 4.5% and recorded a discount on the obligation
which reduced the related intangible asset by $1,624,000. These assets will be
amortized over the life of their respective contracts.

Future cash payments for all of the Companys distribution rights
obligations for the years ended March 31 are as follows:

|2004                                                  |  |  | $ | 2,079,000  |  
|----------------------------------------------------- |  |  | - | ---------- | -
|2005                                                  |  |  |   | 2,079,000  |  
|2006                                                  |  |  |   | 1,829,000  |  
|2007                                                  |  |  |   | 1,829,000  |  
|2008                                                  |  |  |   | 1,500,000  |  
|Thereafter                                            |  |  |   | 3,374,000  |  
|                                                     
|                                                      | 
|Total distribution rights obligations                 |  |  |   | 12,690,000 |  
|Imputed interest                                      |  |  |   | (1,624,000 | )
|                                                      | 
|Present value of minimum distribution rights payments |  |  |   | 11,066,000 |  
|Current portion                                       |  |  |   | (1,697,000 | )
|                                                      | 
|Long-term distribution rights obligation              |  |  | $ | 9,369,000  |  
|                                                      | 

During the year ended March 31, 2003 the Company was notified by three major
vendors that brand distribution rights for NWS-LLC were terminated. Revenue for
the affected brands for the year ended March 31, 2003 was approximately $188
million. For the same annual period, these three vendors contributed
approximately $36 million to the gross profit of the Company.

The Company, as part of a vendor settlement at NWS-LLC, entered into a
settlement agreement in February 2003 whereby the vendor paid $9.2 million to
the Company for termination of distribution rights.

18.        Management Services Agreement

During the quarter ended March 31, 2003, NWS-LLC entered into a Management
Services Agreement with a nationwide wholesaler of wine and spirits. Both
parties would cooperate in the business of distributing wine and spirits in the
state of Illinois (the Business). As part of that relationship, NWS-LLC and the
other wholesaler would share equally in the profits and losses of the Business.
In addition, the parties entered into a separate Contribution Agreement in which
the parties would agree that, at any time after January 31, 2004, the other
wholesaler would have the right to require the formation of a new company to be
owned fifty percent by NWS-LLC and fifty percent by the other wholesaler. At
that time, the other wholesaler would contribute cash to the new entity in an
amount equal to fifty percent of the net book value.

- 47 -

National Wine & Spirits, Inc.
Notes to Consolidated Financial Statements (continued)

19.        Quarterly Data (Unaudited)

The following table sets forth certain quarterly income statement information of
the Company for the fiscal years ended March 31, 2003, 2002 and 2001:

|                                             | 2003
|-------------------------------------------- | ----
|
|
|Total revenue                                |     
|Gross profit                                 |     
|Selling, general and administrative expenses |     
|Income from operations                       |     
|Interest expense                             |     
|Other income (expense)                       |     
|Net income                                   |     

|                                             | 2002
|-------------------------------------------- | ----
|
|
|Total revenue                                |     
|Gross profit                                 |     
|Selling, general and administrative expenses |     
|Income from operations                       |     
|Interest expense                             |     
|Other income (expense)                       |     
|Net income                                   |     

|                                             | 2001
|-------------------------------------------- | ----
|
|
|Total revenue                                |     
|Gross profit                                 |     
|Selling, general and administrative expenses |     
|Income from operations                       |     
|Interest expense                             |     
|Other income (expense)                       |     
|Net income                                   |     

- 48 -

Item 9.        Changes in and
Disagreements with Accountants on Accounting and Financial Disclosure

On December 10, 2001, the Audit Committee of the Board of Directors of NWS
dismissed Ernst & Young LLP (Ernst & Young), the independent
accountant who was previously engaged to audit NWS financial statements
for fiscal 2001. On June 11, 2002, the Board of Directors of NWS dismissed
Arthur Andersen LLP (Andersen), the independent accountant who was
engaged to audit the Companys financial statements for fiscal 2002. None
of the reports of Ernst & Young or Andersen for the years ended March 31,
2001 and 2002 contained an adverse opinion or a disclaimer of opinion, and they
were not qualified or modified as to uncertainty, audit scope or accounting
principles. During those periods, there were no disagreements with either of
Ernst & Young or Andersen on any matter of accounting principles or
practices, financial statement disclosure or auditing scope or
procedure.

Part III

Item 10.        Directors & Executive Officers of the Registrant

Directors and Executive Officers

The following table sets forth information concerning the directors and
executive officers of NWS as of June 30, 2003:

|Name                  | Age | Position
|--------------------- | --- | --------
|James E. LaCrosse     |     |         
|Catherine M. LaCrosse |     |         
|John J. Baker         |     |         
|Gregory J. Mauloff    |     |         
|J. Smoke Wallin       |     |         
|James R. Beck         |     |         
|Patrick J. Hurrle     |     |         
|Joseph J. Fisch       |     |         
|Mitchell T. Stoltz    |     |         
|Norma M. Johnston     |     |         
|William M. Cockrum    |     |         
|Vaughn D. Bryson      |     |         
|Patrick A. Trefun     |     |         

- 49 -

James E. LaCrosse has served as Chairman, President, Chief Executive Officer and
a Director of NWS since December, 1998. He assumed the responsibilities of Chief
Financial Officer in May, 2000. Previously, Mr. LaCrosse served as Chairman and
Director NWS-Indiana since its formation in 1973, and prior to 1973 was employed
by various companies in a financial capacity. Mr. LaCrosse received an MBA from
Harvard Business School in 1961 and a BA in economics from Wesleyan University
in 1957.

Catherine M. LaCrosse has
served as Director of NWS since December 1998 and is currently Vice President of
Sales of the Indiana Fine Wine Division. Ms. LaCrosse joined NWS in 1991 and has
served in various sales and marketing positions in NWS-Indiana, NWS-Illinois and
NWS-Michigan. Ms. LaCrosse received a BA in history from Indiana University in
1990. She is Mr. LaCrosses daughter.

John J. Baker has served
as Chief Operating Officer and Treasurer since 2001. Mr. Baker joined the
Company in 1993 and has also held positions as Executive Vice President,
Director of Corporate Logistics, Director of Purchasing, and Operations
Specialist. Prior to that, he served as a Financial Analyst for Comdata
Corporation and Freight Forwarding Assistant for A.W. Fenton Company. Mr. Baker
received an MBA in operations from Vanderbilt University-Owen School of
Management in 1994 and a BS in economics and international business from Miami
University in 1992.

Gregory J. Mauloff has
been Corporate Executive Vice President of Sales and Marketing since April 2003.
Prior to that he was President of the Illinois operations and Executive Vice
President of the Beer Division. He joined the company in 1991. Other experience
includes Vice President of Sales, Heublein Spirits, and Division Manager, E.J.
Gallo Wines. He received a BS in business administration from Norbert College in
1973.

J. Smoke Wallin has
served as Executive Vice President and a Director of NWS since December, 1998.
He served as Chief Financial Officer from December 1998 until April 2000. Mr.
Wallin joined NWS in 1988 and served as Executive Vice President, Corporate
Group, from 1993 to 1998. He received an MBA in finance, marketing and
operations from Vanderbilt University-Owen School of Management in 1993 and a BS
in economics from Cornell University in 1989. Mr. Wallin is Mr. LaCrosses
son-in-law.

James R. Beck has served as Director of NWS since December 1998 and as President
of NWS-Indiana from 1992 to July 2002 when he retired. Mr. Beck joined NWS in
1972 and has served in various positions, including Executive Vice President of
Sales for 14 years prior to being named President of NWS-Indiana. He has been a
Director of NWS since December, 1998. Mr. Beck received a BS in education from
Ball State University in 1968.

Patrick J. Hurrle is currently Vice President and General Manager of NWS-Indiana
and joined the company in 1972. Other positions he has held in the Indiana
operation include Vice President of Wine Sales, Wines Sales Manager and
Merchandiser. Mr. Hurrle graduated in 1972 from Indiana University with a BS in
marketing.

Joseph J. Fisch has served as President and CEO of U.S. Beverage, a premium
import/craft and specialty beer marketer and sales company, based in Stamford,
Connecticut, since its inception in 1997. His previous experience with Joseph E.
Seagram Corporation from 1971 through 1996 includes Market Research Analyst;
Vice President and Division Manager, General Wine & Spirits Company; Vice
President/General Manager, eastern region, House of Seagram; Vice
President/General Manager, House of Seagram; President, Seagram Beverage Company
He received a BS in business administration and marketing from Bowling Green
University, Ohio, in 1971.

Mitchell T. Stoltz has served as Director of NWS since December 1998. Mr. Stoltz
served as President of NWS-Illinois from 1995 to April 2001, at which time he
resigned from that position but continues as a Director of NWS. Prior to
becoming President, he served as Executive Vice President of Sales and Marketing
for NWS-Illinois. Before joining NWS in 1992, Mr. Stoltz served as Vice
President and General Manager for Magnolia Marketing Company and as President
for Admiral Wine Company. Mr. Stoltz received an M.M. from Northwestern
University Kellogg Graduate School of Management in 1985 and a BA in business
from Notre Dame University in 1976.

- 50 -

Norma M. Johnston has been a Director of NWS-Indiana since 1976, and a Director
of NWS since December, 1998. Mrs. Johnston served as Secretary of NWS-Indiana
from 1976 to 1998.

William M. Cockrum has
served as Director of NWS since July 1999. He has been an Adjunct Professor of
Finance in the UCLA Anderson School of Business since 1985, teaching
entrepreneurial finance, business ethics and investment management. Mr. Cockrum
was recognized as top entrepreneurial professor in the nation by Business Week
magazine in 1996. Prior to joining UCLA, he spent 25 years in investment
banking, serving as a corporate officer at Becker Paribas, Inc. until it was
acquired by Merrill Lynch in 1984. Mr. Cockrum received an MBA in finance and
marketing from Harvard Business School in 1961 and a BA in economics from DePauw
University in 1959.

Vaughn D. Bryson has
served as Director of NWS since July 1999. He serves on the boards of several
public companies, particularly in the biotech industry. Mr. Bryson retired as
Vice Chairman in 1996 from Vector Securities International (now Prudent Vector).
Prior to that, he worked for Eli Lilly and Company from 1961 to 1993 serving as
President and CEO from 1991 to 1993, Executive Vice President from 1986 to 1990,
and Board Member from 1984 to 1993. Mr. Bryson is a member of the board of
directors of Atherogenics Inc., Amylin Pharmaceuticals Inc., Chiron Corp. and
Quintiles Transnational Corporation. Mr. Bryson is a graduate of the Stanford
Sloan Program, Stanford Graduate School of Business in 1967 and received a BS in
pharmacy from the University of North Carolina in 1960.

Patrick A. Trefun, CPA, has served as Corporate Controller and Treasurer since
2001. Mr. Trefun previously served as controller of NWS-Indiana. He began
working in the industry in 1982 as an accountant and later controller for
General Liquors, Inc., which was purchased by NWS in 1987 at which time he
joined the Company. Mr. Trefun received a BS in business administration with a
concentration in accounting from Indiana University in 1982.

The eight individuals who comprise NWS senior management team have an
average of over 22 years of experience in the alcohol-based beverage industry
and 16.5 years of experience with NWS.

Audit Committee

The audit committee of NWS is
comprised of Mr. William Cockrum and Mr. Vaughn Bryson, each of whom is
independent of NWS.

Item 11.        Executive Compensation

Compensation of Directors

Only outside directors of
NWS receive compensation per year for serving as directors. Each outside
director received $60,000 for the fiscal year ended March 31, 2003 for serving
on the board.

- 51 -

Executive Compensation

The following table sets forth
the compensation paid by NWS to James E. LaCrosse, Chief Executive Officer, and
to each of the four most highly compensated executive officers of NWS for fiscal
2003, 2002 and 2001:

Summary Compensation Table

|Annual Compensation
|-------------------

|Name and Principal Position | Year | Salary | Bonus | Other AnnualCompensation(3) | All OtherCompensation(3)
|--------------------------- | ---- | ------ | ----- | --------------------------- | ------------------------

|James E. LaCrosse                     |  |  | 2003 |  |  | $ | 407,000 |  | $ | -0-     |  | $ | 6,465 |  | $ | 276,073 | (2)
|------------------------------------- |  |  | ---- |  |  | - | ------- |  | - | ------- |  | - | ----- |  | - | ------- | ---
|Chairman, President, Chief            |  |  | 2002 |  |  |   | 407,000 |  |   | 249,000 |  |   | 6,772 |  |   | 219,864 | (2)
|Financial Officer, and CEO            |  |  | 2001 |  |  |   | 407,000 |  |   | 249,000 |  |   | 2,168 |  |   | 233,114 | (2)
|                                     
|Joseph J. Fisch                       |  |  | 2003 |  |  |   | 275,000 |  |   | 117,500 |  |   | -0-   |  |   | 5,481   |    
|President/CEO, U.S. Beverage          |  |  | 2002 |  |  |   | 225,000 |  |   | 60,000  |  |   | -0-   |  |   | 4,500   |    
|                                      |  |  | 2001 |  |  |   | 250,000 |  |   | 35,000  |  |   | -0-   |  |   | 5,000   |    
|                                     
|Gregory Mauloff                       |  |  | 2003 |  |  |   | 234,615 |  |   | 75,000  |  |   | 1,371 |  |   | 31,356  | (5)
|Corporate Executive Vice-President of |  |  | 2002 |  |  |   | 173,327 |  |   | 50,000  |  |   | 738   |  |   | 8,567   |    
|Sales & Marketing                     |  |  | 2001 |  |  |   | 166,922 |  |   | 20,000  |  |   | -0-   |  |   | 8,346   |    
|                                     
|Patrick J. Hurrle                     |  |  | 2003 |  |  |   | 169,550 |  |   | 150,000 |  |   | 1,122 |  |   | 8,497   |    
|President, NWS-Indiana                |  |  | 2002 |  |  |   | 128,750 |  |   | 40,000  |  |   | 997   |  |   | 7,065   |    
|                                      |  |  | 2001 |  |  |   | 125,000 |  |   | 30,000  |  |   | 959   |  |   | 7,142   |    
|                                     
|James R. Beck                         |  |  | 2003 |  |  |   | 233,801 |  |   | -0-     |  |   | 2,332 |  |   | 44,969  | (4)
|Director & Consultant                 |  |  | 2002 |  |  |   | 194,212 |  |   | 275,000 |  |   | 2,407 |  |   | 9,039   |    
|(Formerly President, NWS Indiana)     |  |  | 2001 |  |  |   | 157,627 |  |   | 200,000 |  |   | 1,114 |  |   | 6,940   |    

|(1) | Includes 2003 employer
401(k) Plan contributions in the following amounts: Mr. LaCrosse, $10,000, Mr.
Beck, $4,456, Mr. Mauloff, $11,181; Mr. Hurrle, $8,497; Mr. Fisch, $5,481.
Includes 2002 employer 401(k) Plan contributions in the following amounts: Mr.
LaCrosse, $8,500; Mr. Beck, $9,039; Mr. Mauloff, $8,567; Mr. Hurrle, $7,065; and
Mr. Fisch, $4,500. Includes 2001 employer 401(k) Plan contributions in the
following amounts: Mr. LaCrosse, $8,000; Mr. Beck, $6,940; Mr. Mauloff, $8,346;
Mr. Hurrle, $7,142; and Mr. Fisch, $5,000.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Includes $266,073, $211,364
and $225,114 for fiscal 2003, 2002 and 2001, respectively, of life insurance
premiums paid by NWS on behalf of Mr. LaCrosse and for the benefit of the
LaCrosse family trust for estate planning purposes. NWS expects the premiums
paid on behalf of Mr. LaCrosse in the future will remain at their current annual
rate. Upon the death of Mr. LaCrosse or termination of the life insurance
policies, NWS is entitled to repayment out of the proceeds of the policies of
all premiums paid on behalf of Mr. LaCrosse for the benefit of the LaCrosse
family trust since the inception of the policy in 1994.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Represents personal use of a
company supplied automobile.
|--- | ---------------------------------------------------------

|(4) | Includes $40,000 for fiscal
2003 outside directors fees, and $513 for life insurance premiums paid by
NWS on the behalf of Mr. Beck. Mr. Beck retired from active employment on July
15, 2002, and has remained with the company as a director and consultant.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) | Includes items having a
value of $20,175 received by Mr. Mauloff as sales incentive pay.
|--- | ----------------------------------------------------------------------------------------

Compensation Committee Interlocks and Insider Participation

The compensation committee is
comprised of Mr. Vaughn Bryson, Mr. William Cockrum, Ms. Catherine LaCrosse and
Mr. Jim LaCrosse. There are no interlocking compensation committee relationships
between NWS and any other entity.

- 52 -

Item 12.        Security Ownership of Certain Beneficial Owners and Management

NWS
has two authorized classes of capital stock, voting common stock and non-voting common
stock. The following table sets forth the beneficial ownership of NWS voting common
stock:

| | (1) | By each person known by NWS
to beneficially own 5% or more of NWS voting common stock, and
| | --- | -------------------------------------------------------------------------------------------

| | (2) | By all executive officers and directors of NWS as a group.
| | --- | ----------------------------------------------------------

Except for
Mr. LaCrosse and Mrs. Johnston, who have sole voting and investment
power with respect to their voting common stock, no other executive officer or
director owns any shares of NWS voting common stock.

|Name and Address                                | Number of   Shares | Percent | 
|----------------------------------------------- | ------------------ | ------- | 
|
|James E. LaCrosse                              
|700 West Morris Street                          |                    |        
|Indianapolis, Indiana 46225                     |                    |         | 
|Norma M. Johnston                               |                    |        
|700 West Morris Street                          |                    |        
|Indianapolis, Indiana 46225                     |                    |         | 
|All executive officers and directors as a group |                    |        
|(11 persons)                                    |                    |         | 

The stockholders of NWS have
entered into stockholder agreements with each other and NWS. Such agreements
contain restrictions relating to transfers of stock and provide for rights to
purchase and sell stock of each corporation, among other matters. In particular,
the stockholder agreement with NWS governs the transferability of
Mrs. Johnstons stock in NWS. The LaCrosse family is obligated to
purchase Mrs. Johnstons stock at her death or during her lifetime should
she decide to sell. NWS becomes obligated to purchase only if the LaCrosse
family refuses or fails to purchase. The LaCrosse family and NWS also have the
right to purchase Mrs. Johnstons stock at the death of
Mr. LaCrosse. Any obligation of NWS to purchase the stock owned by
Mrs. Johnston is subject to the terms of the indenture and the new credit
facility. No right to purchase stock owned by Mr. LaCrosse or a trust for
the benefit of his family exists in favor of Mrs. Johnston.

The stockholders have also agreed not to take any action or effect any transfer
that would cause NWS or any of its subsidiaries to fail to qualify as an S
corporation or other pass-through entity for federal income tax purposes. In
addition, the stockholders have entered into a tax indemnification agreement
whereby they have agreed to indemnify NWS and its subsidiaries for any loss that
may arise in the event NWS or any of its subsidiaries should fail to maintain
its pass-through status.

The
LaCrosse family and NWS own life insurance policies on behalf of Mrs. Johnston in face
amount of $4.0 million and $0.5 million, respectively.

Item 13.        Certain Relationships and Related Transactions

J. Smoke Wallin, a Director of the Company, is the Chairman and Chief Executive
Officer of eSkye Solutions, Inc. The Company received 1,500,000 shares of common
stock in eSkye Solutions Inc. upon inception, representing founders stock. eSkye
Solutions, Inc. subsequently issued a 4 to 1 split, thus 6,000,000 shares are
currently held by NWS. The Company accounts for its investment in eSkye
Solutions, Inc. using the equity method. In October, 1999, the Company invested
$500,000 in convertible preferred stock of eSkye Solutions, Inc. The Company
invested an additional $2,012,500 in convertible preferred stock in May
2000.

- 53 -

NWS
leases facilities and certain office equipment to eSkye Solutions, Inc. under
the terms of a three-year operating lease. NWS received rent from eSkye
Solutions, Inc. of $137,000, $270,000 and $262,000 during the years ended March
31, 2003, 2002 and 2001, respectively. The Company pays eSkye fees for computer
services. NWS paid $150,000, $49,000, and $42,000 during the years ended March
31, 2003, 2002, and 2001, respectively. The Company pays eSkye fees for computer
services. NWS paid $150,000, $49,000, and $42,000 for computer services during
the years ended March 31, 2003, 2002, and 2001, respectively.

From
time to time, NWS-Indiana has loaned money to its principal shareholders, James E.
LaCrosse and Norma M. Johnston, the primary purpose of which was to provide the necessary
funds to finance start-up expenses and working capital needs of NWS-Illinois, an
affiliated company owned prior to the reorganization by Mr. LaCrosse, Mrs. Johnston and
Martin H. Bart. As of March 31, 2001, total indebtedness of Mr. LaCrosse and Mrs. Johnston
to NWS-Indiana was $4.7 million. The indebtedness was retired in September 2001 and 2002
through distributions. The proceeds of the loans were provided by Mr. LaCrosse and Mrs.
Johnston to NWS-Illinois in the form of loans or additional capital contributions. This
indebtedness to Mr. LaCrosse and Mrs. Johnston of $4.5 million, which matures in 2009, is
subordinated to the senior notes and the credit facility, and bears interest at 8.0%
(prime rate at March 31, 2001).

On
July 27, 1998, Mr. LaCrosse transferred substantially all of his non-voting stock to a
family trust for estate-planning purposes. As part of this transfer and in addition to
normal distributions for tax purposes, NWS distributed $3.6 million to Mr. LaCrosse, the
family trust, and Mrs. Johnston in the annual period ended March 31, 2001. These
distributions were made within the terms and conditions contained in the Companys
indenture governing its senior notes (including the limitation on restricted payments) and
the credit facility. The family trust remitted these funds to Mr. LaCrosse in repayment of
indebtedness for the non-voting stock that was purchased on July 27, 1998. Mr. LaCrosse
and Mrs. Johnston then remitted $3.6 million to NWS-Indiana to reduce their indebtedness
described above.

NWS-Indiana
and NWS-Illinois have operated as S corporations under the Internal Revenue Code of 1986
(Code), and their respective subsidiaries have all operated as qualified subchapter S
subsidiaries under the Code or other similarly taxed pass-through entities (the S
Corp. Businesses). NWS has elected to be treated as an S corporation under the Code
and has elected or will elect for each of its subsidiaries to be treated as qualified
subchapter S subsidiaries. The S Corp. Businesses have not been subject to tax on their
respective net taxable incomes, and the shareholders of the S Corp. Businesses have been
directly subject to tax on their respective proportionate shares of such net taxable
income. NWS-Indiana and NWS-Illinois have historically made cash distributions to Mr.
LaCrosse, Mrs. Johnston and Mr. Bart in amounts equal to or greater than their respective
tax obligations related to the S Corp. Businesses. The aggregate amount of these
distributions during 2003, 2002 and 2001 were $9.4 million, $8.5 million and $10.6
million, respectively. The terms of the senior notes and the credit facility permit
NWS to make distributions to shareholders with respect to their tax liabilities subject to
certain conditions and limitations.

Mr. Martin Bart is a minority shareholder of NWS-Illinois. NWS-Illinois paid a
company owned by Mr. Bart approximately $0.1 million, $0.2 million and $0.2
million during each of fiscal years 2003, 2002 and 2001, respectively, for
certain consulting services provided by Mr. Bart to NWS-Illinois. In addition,
NWS owns a condominium in which Mr. Bart formerly resided, and he reimbursed NWS
$3,500 per month to reside in the NWS-owned condominium. During 1998,
NWS-Indiana entered into a five-year non-compete agreement with James Beck,
president of NWS-Indiana and a Director of NWS, under which Mr. Beck was paid
$0.3 million by the Company. NWS-Indiana obtained certain inventory and other
property related to the wholesale cigar distribution business previously
operated by Mr. Beck.

NWS
pays split-dollar insurance premiums on seven insurance policies with a fair
value of $15.4 million on the lives of Mr. LaCrosse and Mrs. Johnston. See Item
11-Executive Compensation. NWS is entitled to receive reimbursement for all premiums paid
out of the proceeds of these policies upon the death of Mr. LaCrosse and Mrs. Johnston.
Premiums paid by NWS were $328,000 for each of the annual periods ended March 31, 2003,
2002 and 2001. The LaCrosse Family Trust is the beneficiary of those policies.

- 54 -

Item 14.        Controls and Procedures

Within
90 days prior to the date of this report, the Company carried out an evaluation, under the
supervision and with the participation of the Companys management, including the
Companys Chief Executive Officer and Chief Financial Officer, and the Companys
Corporate Controller, of the effectiveness of the design and operation of the
Companys disclosure controls and procedures. Based upon that evaluation, the
Companys Chief Executive Officer and Chief Financial Officer, and the Companys
Corporate Controller, concluded that the Companys disclosure controls and procedures
are effective in timely alerting them to material information relating to the Company
(including its consolidated subsidiaries) required to be included in the Companys
periodic SEC filings. There have been no significant changes in the Companys
internal controls or in other factors which could significantly affect internal controls
subsequent to the date the Company carried out its evaluation.

Item 15.        Principal
Accountant Fees and Services

Audit Fees  Aggregate fees
billed by Deloitte & Touche in connection with the audit of the 2003
financial statements and review of financial statements included in NWS
Forms 10-Q for 2003 totaled $241,207. Aggregate fees billed by Andersen in
connection with the audit of the 2002 financial statements and review of
financial statements included in NWS Forms 10-Q for 2002 totaled $263,829,
some of which was paid in fiscal 2003.

Audit
Related Fees  The Company has paid no fees to Deloitte & Touche for audit related
services. Aggregate fees billed by Andersen for audit related services in 2002 were
$106,222. Those services consisted of an assessment of NWS internal controls.

The
Company paid no fees to the principal accountant for tax services or other
services in fiscal 2002 or 2003.

- 55 -

PART IV

Item 16.        
Exhibits, Financial Statement Schedules and Reports on Form 8-K

| | (a) | Documents filed as part of this Report.
| | --- | ---------------------------------------

| | 1. | Financial Statements
| | -- | --------------------

| |                                                                                            | Page(s) inthis Report
| | ------------------------------------------------------------------------------------------ | ---------------------
| |                                                                                           
| | Reports of Independent Auditors                                                            | 26-28                
| |                                                                                           
| | Consolidated balance sheets  March 31, 2003 & 2002                                        | 29                   
| |                                                                                           
| | Consolidated statements of income  Years ended March 31, 2003, 2002 & 2001                | 30                   
| |                                                                                           
| | Consolidated statements of stockholders' equity  Years ended March 31, 2003, 2002 &  2001 | 31                   
| |                                                                                           
| | Consolidated statements of cash flows   Years ended March 31, 2003, 2002 &  2001          | 32                   
| |                                                                                           
| | Notes to consolidated financial statements                                                 | 33-48                

| | 2. | Financial Statement Schedule
| | -- | ----------------------------

| | Schedule II - Valuation & Qualifying Accounts & Reserves | 57
| | -------------------------------------------------------- | --

| | Schedules other than those listed above are omitted as they are not required, or not applicable, or
the information is shown in the Notes to the Consolidated Financial Statements.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3. | Exhibits
| | -- | --------

| | See the Index to Exhibits on pages 59 and 60 of this Form 10-K, which is incorporated by
reference herein.
| | ----------------------------------------------------------------------------------------------------------

| | (b) | Reports on Form 8-K.
               
               
               
               
               
Item.
| | --- | ----------------------------------------------------------------------------------------------------------

| |  | Form 8-K dated January 3, 2003   | Item 5
| |  | -------------------------------- | ------
| |  | Form 8-K dated February 3, 2003  | Item 5
| |  | Form 8-K dated February 20, 2003 | Item 5
| |  | Form 8-K dated March 4, 2003     | Item 9

- 56 -

NATIONAL WINE & SPIRITS, INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES

|                                | Additions
|------------------------------- | ---------
|
|Year ended March 31, 2003       |          
|Deducted from asset account:    |          
|Allowance for doubtful accounts |          
|LIFO reserve                    |          
|                                |          
|Total                           |          
|                                |          
|Year ended March 31, 2002       |          
|Deducted from asset account:    |          
|Allowance for doubtful accounts |          
|LIFO reserve                    |          
|                                |          
|Total                           |          
|                                |          
|Year ended March 31, 2001       |          
|Deducted from asset account:    |          
|Allowance for doubtful accounts |          
|LIFO reserve                    |          
|                                |          
|Total                           |          
|                                |          

|(1) | Uncollectible accounts written off, net of recoveries.
|--- | ------------------------------------------------------

(Remainder of page intentionally left blank.)

- 57 -

SIGNATURES

Pursuant to the requirements of
Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized, on July 1, 2003.

| | NATIONAL WINE & SPIRITS, INC.
By:  /s/  James E. LaCrosse
James E. LaCrosse,
Chairman, President,
Chief Executive Officer, and
Chief Financial Officer
| | ------------------------------------------------------------------------------------------------------------------------------------------------------

Pursuant to the requirements of
the Securities Act, this Annual Report on Form 10-K has been signed on the 1st
day of July, 2003 by the following persons in the capacities indicated:

|SIGNATURE |  | TITLE
|--------- |  | -----

|/s/  James E. LaCrosse
James E. LaCrosse |  | Chairman,  President, Chief Executive Officer (Principal Executive Officer),
and Chief Financial Officer
|---------------------------------------- |  | --------------------------------------------------------------------------------------------------------

|/s/  J. Smoke Wallin 
J. Smoke Wallin |  | Director, Executive Vice President, and Secretary
|------------------------------------- |  | -------------------------------------------------

|/s/  James R. Beck 
James R. Beck |  | Director
|--------------------------------- |  | --------

|Mitchell T. Stoltz |  | Director
|------------------ |  | --------

|William Cockrum |  | Director
|--------------- |  | --------

|/s/  Norma M. Johnston
Norma M. Johnston |  | Director
|---------------------------------------- |  | --------

|/s/  Vaughn D. Bryson
Vaughn D. Bryson |  | Director
|-------------------------------------- |  | --------

|/s/  Catherine M. LaCrosse
Catherine M. LaCrosse |  | Director
|------------------------------------------------ |  | --------

- 58 -

INDEX TO EXHIBITS

|Exhibit No. | Description
|----------- | -----------

|3.1 | Amended and Restated Articles of Incorporation of National Wine & Spirits, Inc.
(Incorporated by reference to exhibit 3.1 to the Company's annual report Form 10K
for the year ended March 31, 2000.)
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|3.2 | Amended and Restated Bylaws of National Wine & Spirits, Inc. (Incorporated by
reference to exhibit 3.2 to the Company's annual report Form 10K for the year ended
March 31, 2000.)
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|3.3 | Articles of Incorporation of National Wine & Spirits Corporation (incorporated by
reference Exhibit 3.3 to the Company's Registration Statement no. 333-74589 on Form
S-4, filed May 13, 1999).
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|3.4 | Bylaws of National Wine & Spirits Corporation (incorporated by reference Exhibit
3.4 to the Company's Registration Statement no. 333-74589 on Form S-4, filed May
13, 1999).
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|3.5 | Articles of Incorporation of NWS, Inc. (incorporated by reference Exhibit 3.5 to
the Company's Registration Statement no. 333-74589 on Form S-4, filed May 13, 1999).
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------

|3.6 | Bylaws of NWS, Inc. (incorporated by reference Exhibit 3.6 to the Company's
Registration Statement no. 333-74589 on Form S-4, filed May 13, 1999).
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------

|3.7 | Articles of Incorporation of NWS Michigan, Inc. (incorporated by reference Exhibit
3.7 to the Company's Registration Statement no. 333-74589 on Form S-4, filed May
13, 1999).
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|3.8 | Bylaws of NWS Michigan, Inc. (incorporated by reference Exhibit 3.8 to the
Company's Registration Statement no. 333-74589 on Form S-4, filed May 13, 1999).
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------

|3.9 | Articles of Organization of NWS-Illinois, LLC (incorporated by reference Exhibit
3.9 to the Company's Registration Statement no. 333-74589 on Form S-4, filed May
13, 1999).
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|3.10 | Operating Agreement of NWS-Illinois, LLC (incorporated by reference Exhibit 3.10 to
the Company's Registration Statement no. 333-74589 on Form S-4, filed May 13, 1999).
|---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.1 | Indenture relating to the Exchange Notes, dated as of January 25, 1999 among
National Wine & Spirits, Inc., the Subsidiary Guarantors and Norwest Bank
Minnesota, N.A., as trustee (including cross-reference sheet regarding sections 310
through 318(a) of the Trust Indenture Act) (incorporated by reference Exhibit (4b)
to the Company's Registration Statement no. 333-74589 on Form S-4, filed March 17,
1999).
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.2 | A/B Exchange Registration Rights Agreement, dated as of January 25, 1999, among
National Wine & Spirits, Inc., the Subsidiary Guarantors and the Initial Purchasers
(incorporated by reference Exhibit 4(b) to the Company's Registration Statement no.
333-74589 on Form S-4, filed March 17, 1999).
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.3 | Form of Exchange Notes (including related Subsidiary Guarantors) (incorporated by
reference Exhibit 4(c) to the Company's Registration Statement no. 333-74589 on
Form S-4, filed March 17, 1999).
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.4 | Guaranty entered into as of January 25, 1999 by all Subsidiary Guarantors
(incorporated by reference Exhibit 4(d) to the Company's Registration Statement no.
333-74589 on Form S-4, filed March 17, 1999).
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

- 59 -

|Exhibit No. | Description
|----------- | -----------

|10.1 | Purchase Agreement, dated January 20, 1999, among National Wine & Spirits, Inc.,
the Subsidiary Guarantors and the Initial Purchasers (incorporated by reference to
Exhibit 10(a) to the Company's Registration Statement no. 333-74589 on Form S-4,
filed March 17, 1999).
|---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.2 | Credit Agreement, dated as of March 31, 2003, among National Wine & Spirits, Inc.,
LaSalle Bank National Association, National City Bank of Indiana and LaSalle Bank
National Association, as agent.
|---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|12 | Statement regarding computation of ratios.
|-- | ------------------------------------------

|21 | List of subsidiaries (incorporated by reference Exhibit 21 to the Company's
Registration Statement no. 333-74589 on Form S-4, filed March 17, 1999).
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------

|99.1 | Forward - Looking Statements.
|---- | -----------------------------

|99.2 | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|---- | ------------------------------------------------------------------------

|99.3 | Letter to SEC regarding representations of Arthur Andersen LLP (incorporated by
reference to Exhibit 99.2 to the Company's Annual Report on Form 10-K filed May 24,
2002).
|---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------

- 60 -