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                     U.S. SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-KSB

                                   (Mark One)
   [X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
                                     OF 1934

                   For the fiscal year ended December 31, 1998

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

 For the transition period from __________________ to __________________________

                         Commission file number 0-28898

                          INDEPENDENCE BREWING COMPANY
             (Exact name of registrant as specified in its charter)


        PENNSYLVANIA                                             23-2763840
--------------------------------------------------------------------------------
(State of other jurisdiction of                               (I.R S. Employer
 incorporation or organization)                              Identification No.)

1000 East Comly Street, Philadelphia, PA                            19149
--------------------------------------------------------------------------------
(Address of principal executive offices)                         (Zip Code)

                                 (215) 537-2337
                ------------------------------------------------
                (Issuer's Telephone Number, Including Area Code)

         Securities registered under Section 12(b) of the Exchange Act:

Title of each class                    Name of each exchange on which registered
      NONE

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, no par value                                   Redeemable Warrants
     (Title of class)                                          (Title of class)

================================================================================

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

Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]

State issuer's revenues for its most recent fiscal year. $1,141,501

On October 1, 1999, the aggregate market value of the 3,357,077 shares of
voting stock held by non-affiliates of the issuer was approximately $0.

On October 1, 1999, 3,357,077 shares of the issuer's Common Stock, no par value,
and 4,600,000 Redeemable Warrants were outstanding.

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



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                                     PART I

ITEM 1. - BUSINESS

General

     Independence Brewing Company, which was incorporated in Pennsylvania in
1994, is a regional producer of fresh, high-quality, preservative-free
craft-brewed ales, lagers, porters and seasonal beers. The Company's products
are marketed under the "Independence" label. The Company currently produces
seven products: three styles of beer which are offered year-round, Independence
Ale, Independence Gold and Independence Franklinfest; and four which are
seasonal beers: Independence William's Winter Warmer (winter); Independence
Uncle E$B (spring); Independence Betsy's Kristall Wheat (summer); Independence
Thomas' Blonde Bock (fall). The Company brews, kegs and bottles its products at
its brewery in Philadelphia, Pennsylvania for wholesale distribution generally
by 20 independent wholesale distributors in seven states and the District of
Columbia. The Company's brewing equipment currently has the capacity to brew
approximately 40,000 barrels per year, which is in part dependent on the style
of beer produced. In 1997, the Company installed a new bottling line in that it
increased its bottling capacity to 150 bottles per minute. For the year ended
December 31, 1998, the Company produced approximately 9,200 barrels. In addition
to brewing its own products, the Company has entered into a contract brewing
arrangement in which the Company produces beers for a third party which markets
and sells such products under its own label. The Company also recently completed
certain brand acquisitions and intends to develop and operate brewpubs that
offer for sale, in addition to food, the Company's beer brewed on the premises.

Strategy

     The Company's goal is to be one of the leading brewers of craft-brewed
beers in the Middle Atlantic States. To attain this goal, the Company intends to
employ the following strategies:

Brand Acquisitions

     In March and April, 1998, the Company acquired two existing brands with a
niche market and existing customer base, Blue Hen Beer and Gravity Ale. In
addition, the Company executed a term sheet to license and market a new product,
Nittany Ale, in 1998.

     On February 5, 1998, the Company executed a term sheet with Whitetail
Brewing, Inc. in which the parties agreed that the Company would receive an
exclusive license of the trademark and logo for "Nittany Ale", a newly developed
Whitetail Brewing product, for a five (5) year term, in consideration for which
the Company agreed to pay the licensor a royalty for every case of Nittany Ale
sold. The Company paid $10,000 up front and attains brand ownership at the end
of the license term. In addition, the Company agreed to engage Wade E. Keech,
President and founder of Whitetail Brewing, as exclusive sales representative of
the Company in the central and western Pennsylvania regions for which Mr. Keech
will receive commissions from the sales of all of the Company's products,
including Nittany Ale.

     On March 25, 1998, the Company completed the acquisition of certain assets
of America U-Brew, Inc., and its affiliates used in connection with the
manufacture, sales and marketing of Gravity Ale, including trademarks, trade
names, logo, brand names, recipes and formulas, packaging as well as equipment
used in painting the glass bottles used for the Gravity Ale products as well as
certain finished goods inventory. Gravity Ale has been sold solely in the
Philadelphia area since 1996. The Company plans to expand Gravity Ale sales into
a number of additional markets this year.

     On April 6, 1998, the Company completed the purchase of all of the assets
of Blue Hen Beer Company, Ltd., including trademarks, trade names, logo, and
brand names connected with the "Blue Hen" brand, packaging and certain finished
goods inventory.


                                      -2-
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Expand Product Offerings

     The Company has developed and intends to develop new products in order to
introduce beer drinkers to various styles of beer and to promote the Company's
products. These new products allow the Company's customers to try new styles of
beer while remaining loyal to the Independence brand. New products also help the
Company generate increased distribution and retailer focus on the Company's
products.

Brewpub Development

     The Company is continuing to seek and actively negotiate for the
acquisition and/or development of brewpubs as a significant opportunity for
business growth. The Company intends to establish an Independence Brewing
Company brewpub before the end of 1999. However, no assurance can be given that
the Company will be successful in entering the brewpub market and if so, that
this will result in the anticipated business expansion.

Increase Distribution Network

     The Company currently distributes its products generally through 20
independent wholesale distributors for resale in bars, restaurants, liquor
stores and other retail liquor license holders primarily in Pennsylvania, New
Jersey, Delaware, Virginia, Maryland and the District of Columbia, and to a
lesser extent in Florida and Massachusetts. The Company plans to expand its
network of distributors both within its existing markets and may, in the future,
expand to new markets. In order to service an increased distribution network and
build relationships with additional distributors, the Company intends to hire
additional sales representatives to motivate distributors to increase sales of
the Company's products and to stimulate retailer and consumer demand. The
Company intends to implement market penetration and sales goals with each new
distributor, to regularly monitor the achievement of such goals, to establish
effective incentive programs for the distributors and their sales forces, to
train the distributors' sales forces and to hold motivational sessions for them
and accompany distributor sales people on their sales calls.

Develop Consumer Awareness

     The Company intends to supplement its wholesale distributors' marketing
efforts by increasing the public's awareness of the Independence brand in the
territories in which its beers are marketed. A key component of the Company's
marketing strategy is to provide opportunities for potential consumers to learn
about and sample the Company's beers. The Company intends to develop
"Independence" brewpubs which offer for sale, in addition to food, the Company's
beer brewed on the premises. The Company may either own and operate these
brewpubs or enter licensing arrangements with third parties to do so utilizing
the Independence name and products. In addition, the Company anticipates that it
will continue to sponsor beer events throughout the year, such as September's
"Great Barley Fest," , which promotes the Independence product line, and
continue to participate in local events that highlight the Company's products.
Moreover, the Company has built and is currently expanding its database of
customers. The Company utilizes this database in a direct mail program which
conveys information concerning the Company's products and beer events and other
general information about brewery happenings. The Company believes that
consumers will attend such events and will receive such Company literature,
which the Company believes will create a public awareness of the Company's
products.


                                      -3-
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Develop Consumer Loyalty Through High-Quality Products

     The Company believes that it can develop brand loyalty by producing
consistent high-quality products. The Company currently produces its beers under
the supervision of its Brewmaster, Mr. William Moore. The Company received a
gold medal for its Independence Franklinfest at the 1996 Great American Beer
Festival and a bronze medal for its Independence Gold at both the 1996 Great
American Beer Festival and the Association of Brewers' 1996 World Beer Cup
International Competition. In addition, the Company leases and operates its own
brewing facility to optimize the quality and consistency of its products and to
achieve the greatest control over its production costs. The Company uses
high-quality natural ingredients in its brewing process and employs third party
testing laboratories to assure that high-quality standards are maintained.
Management believes that its award-winning Brewmaster, its emphasis on product
quality and its control over its production process are critical competitive
advantages which have resulted in superior quality award winning products. The
Company intends to capitalize on its high-quality products to build brand
loyalty.

Products

     The Company produces a variety of unpasteurized full-flavored craft beers
using traditional European brewing methods which do not employ any cereal
adjuncts, syrups, sugars, additives or preservatives. The Company brews its
beers using high-quality two row malts, specialty roasted malts, imported and
domestic hops, cultured ale or lager yeast strains and other natural
ingredients. All of the Company's product formulas and brewing procedures have
been developed by William Moore. Mr. Moore has extensive experience in product
formulation. The Company received a gold medal for its Independence Franklinfest
brand in the Marzen/Oktoberfest category at the 1996 Great American Beer
Festival and a bronze medal in the Golden Ale/Canadian-Style Ale Category for
its Independence Gold brand at both the 1996 Great American Beer Festival and
the Association of Brewers' 1996 World Beer Cup International Competition. In
addition, while at Stoudt Brewery, a craft-brewer in Adamstown, Pennsylvania,
Mr. Moore produced beers which won seven gold, six silver, and one bronze medal
at the Great American Beer Festival.

     The Company currently produces ten products, four of which are seasonal
brands and each of which has its own distinctive combination of flavor, color
and clarity. The Company's product offerings consist of:

     Independence Ale. A pale ale with both English and American influences,
Independence Ale is light amber in color due to the recipe's specialty malts.
This ale is made from two row malt and four specialty malts, plus a touch of
wheat, and three varieties of hops. It is full-bodied and has a hoppy flavor
with a dry nutty finish.

     Independence Gold. Independence Gold has a golden color and a full-bodied
taste resulting from four distinctive malts. This beer has three different kinds
of hops which results in a clean, crisp finish.

     Independence Franklinfest. Independence Franklinfest, the Company's version
of a traditional Marzen style lager/Octoberfest, is light copper in color and
has a malt sweetness. Rich, creamy and full bodied, Franklinfest is brewed with
seven different malts and three varieties of imported and domestic hops, as well
as authentic Bavarian lager yeast.

     Independence William's Winter Warmer -- Winter Seasonal. This strong
traditional English style ale employs both English & American malt and hops and
has a high alcohol content (6% by weight and 7.2% by volume) to warm you up as
the air turns colder. Even though it is immensely potent it still has a soft,
smooth, taste. The Winter seasonal has a sweet toffee flavor with a malty
texture and a deep bronze color.

     Independence Uncle E$B -- Spring Seasonal. A traditional Extra Special
bitter with two-row English malts and a variety of specialty malts is hopped
with authentic East Kent Goldings and Fuggles. It has a rich, malty flavor with
a sweet finish. The E$B is a robust brew with a sienna copper color and medium
body.

     Independence Betsy's Kristall Wheat -- Summer Seasonal. Betsy's Kristall
Wheat is light in body, has a high carbonation with fruity/spicy overtones, and
hints of clove and banana. The presence of unmalted wheat also improves the head
retention of this flavorful brew.


                                      -4-
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     Independence Thomas's Blonde Bock -- Fall Seasonal. Introduced in the Fall
     of 1998. Traditional style German Bock. It is full bodied and has a
     distinct malt and hop presence with a deep gold color. The alcohol content
     is approximately 6% by weight.

     In addition, the Company produces beer under the Nittnany Ale, Gravity, and
     Blue Hen names.

     All seasonals are available in draft and 12 oz. bottles.

     The Company anticipates modifying its product offerings to produce
additional seasonal beers. In an effort to be responsive to changing consumer
style and flavor preferences, the Company engages continually in the development
and testing of new products. The Company believes that the continued success of
craft brewers will increasingly depend upon their ability to be innovative and
attentive to consumer desires for new and distinctive taste experiences. The
Company's brewing equipment enables it to develop and produce small batches of
experimental beer within 14 to 28 days for tasting, testing and analysis by
management. The Company intends to continue to introduce new and different
seasonal brews from time to time utilizing new ingredients which it hopes will
appeal to its target market.

Brewing Facility

     The Company leases a 32,000 square foot facility on approximately 3.5 acres
in Philadelphia, Pennsylvania and hired brewery engineers to design and install
a brewery to meet its special requirements. Production began in March 1995, and
the Company produced approximately 9,200 barrels in the year ended December 31,
1998, less than 5% of the barrels were produced for third parties pursuant to
contract brewing arrangements. See "-- Contract Brewing Arrangement." The
Company's current brewing equipment has the capacity to brew 40,000 barrels per
year, which is dependent in part on the style of products produced. The Company
has installed a new bottling line in 1997 that increased its bottling capacity
to 150 bottles per minute and an automated keg filling unit which can clean and
fill sankey kegs at the rate of 60 per hour. Additionally, the Company's brewing
capacity has been incrementally expanded by the addition of fermentation tanks,
finishing tanks and refrigeration equipment at the existing facility in 1997.

Brewing Operations

     Brewing Process. Beer is made primarily from four natural ingredients:
malted grain, hops, yeast and water. The grain most commonly used in brewing is
barley, owing to its distinctive germination characteristics, which make it easy
to ferment. The Company believes that it uses the finest barley crops, typically
using strains having two rows of grain in each ear. A wide variety of hops may
be used to add balance to the brew; some varieties best confer bitterness, while
others are chosen for their ability to impart distinctive aromas to the beer.
Nearly all the yeasts used to induce or augment fermentation of beer are of the
species Saccharomyces cerevisiae and Saccharomyces carlesbergenes, the
top-fermenting yeasts used in ale production and the bottom-fermenting yeasts
associated with lager, respectively.

     Prior to the Company receiving the malts, third parties begin the malting
process by placing barley into a maltster which steeps the barley or wheat grain
in water, thereby facilitating germination, and then dries and cures the grain
through roasting. This process breaks down complex carbohydrates and proteins so
that they can be easily extracted. The malting process imparts color and adds
the distinctive flavor characteristic of barley. At this point, the malts are
delivered to the brewery where various malts are milled to a coarse grist and
mixed with warm water. This mixture, or "mash," is heated and stirred in the
mash mixer, a large mixing vessel. Mashing time and temperature affect the
flavor of the beer allowing the simple carbohydrates and proteins to be
converted into fermentable sugars. Naturally occurring enzymes cause this
biochemical conversion. The mash is then moved to the lautertun where it is
strained and sparged (showered with hot water) to produce a liquid, high in
fermentable sugars, called "wort," which then is pumped into a brew kettle to be
boiled, concentrated and clarified. Hops are added during the boil to impart
bitterness, balance, and aroma. The specific blend of hops further affects the
flavor of the beer. After the boil, the wort is transferred to the whirlpool for
clarifying by separating any impurities and solids. Then, the wort is cooled by
heat exchanging.


                                      -5-
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The entire brewing process, from mashing through heat exchanging, is typically
completed in 6 - 9 hours, depending on the formation and style of the product
being brewed. Next, the wort is moved to a fermenting tank, where specially
cultured, sterilized yeast is added to initiate fermentation. During
fermentation, the wort's sugars are metabolized by the yeast cells, producing
carbon dioxide, a natural source of carbonation, alcohol, esters and ketones
along with many other flavor compounds.

After fermentation, the beer is aged at cool temperatures for several weeks, at
which time the beer is clarified and the full flavor develops. Filtration, where
called for by the beer style, is the final step, removing unwanted yeast and
naturally occurring sediment. The beer is then moved to the finishing tank which
is used to hold the finished product for the calculation of tax. At this point,
the beer is in its peak condition and ready for bottling or keg racking.

     Brewing Equipment. The Company uses state of the art brewing equipment,
which was supplied by JV Northwest, one of the United States' leading brewing
equipment manufacturers. The Company's facility contains a four vessel 40 barrel
brewhouse with separate hot and cold liquor tanks. The four vessel system best
utilizes the Company's brewer's time as the flow process is constantly moving
forward from mash-mixer to lautertun, brew kettle and whirlpool to enable
multiple batch brewing in a 10 to 12 hour day. An indoor silo houses 50,000 lbs
of two row malt which enables a lower bulk rate purchase cost. The mill room
features a digitally programmed grist case which weighs the milled malts prior
to auguring into the brewhouse. Current capacity is determined by the Company's
fermentation vessels, which consist of four 80 barrel and three 160 barrel
fermenters. In addition, the Company installed one 80 barrel; two 160 barrel and
two 320 barrel finishing tanks in 1997, thus enabling annual brewing of
approximately 40,000 barrels. Two 160 barrel finishing tanks are used to measure
production and check for proper carbonation. The Company believes that its
brewing methods are cost effective and produce high-quality ales and lagers.

     Bottling and Kegging. Like many other craft-brewed beers, the Company's
products are not pasteurized. Accordingly, they must be kept cool so that
oxidation and heat-induced aging will not adversely affect the original taste.
The Company packages its craft beers in both bottles and kegs. The Company
purchased a new bottling line during 1997. Bottled beer must be polished
filtered to more thoroughly remove undesirable spoiling elements. Twelve ounce
bottles are rinsed through a twist rinser, filled on new 24 valve double
pre-evacuation filler, that lowers the quantity of air in each bottle, thereby
allowing the Company's product to have a shelf-life of up to 120 days. The
Company purchased a new hydraulic micro filter to increase product quality and
attain this increased shelf-life. The bottles are then automatically labeled,
packed and sent to a case sealer before being stored in a 2,000 square foot cold
box. The bottles are freshness-dated for the benefit of consumers. Draft beer is
packaged in new sankey style kegs which are more expensive yet preferred by
retailers for their ease of handling and storage. In 1997, the Company also
installed an automated keg filling unit which can clean and fill 60 kegs per
hour. Draft beer is also stored in the Company's on-site cold storage.

     Product Development and Quality Control. Research and product development
activities are on-going. Opportunities identified by the Company are formulated
and developed by the Company's Brewmaster, Mr. William Moore. Mr. Moore is
responsible for developing new beers, managing raw material selection,
optimizing efficiency and educating Company personnel regarding taste and other
qualities. Since most beer types fall into major categories or subcategories, an
extensive development process is not required to bring new products to market.
Quality control is managed by Mr. Moore who has received quality control
training at the University of California at Davis' specially designed program
for microbiology and quality control. Mr. Moore monitors all major parameters to
ensure compliance with its specifications and the consistency of each brand from
beer to beer. These parameters include gravity, alcohol, bitterness, color, foam
formation and stability, acid, airs, carbon dioxide, and fill levels, in
addition to all the requisite microbiological checks and shelf life stability
measurements. The Company currently uses third party testing laboratories to
assure that high-quality standards are maintained. However, the Company
anticipates adding the capability to do this testing on its own premises in the
future.


                                      -6-
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     Ingredients and Raw Materials. The Company has several sources for the
purchase of ingredients or other raw materials. Malt, specialty malt, hops, and
yeast can be purchased from a number of suppliers whose prices are all
relatively competitive. The Company uses local municipal water supplied by the
City of Philadelphia for the Company's brewing operations, with a carbon
filtration system at the brewery to remove chlorine and other impurities. The
Company's operations also utilize glass bottles, caps, labels, kegs and
corrugated and other paper products, all of which are anticipated to be
available from several sources. As with most agricultural products, the supply
and price of raw materials used to produce the Company's beers can be affected
by a number of factors beyond the control of the Company, such as frosts,
droughts, other weather conditions, economic factors affecting growing
decisions, various plant diseases and pests. If any of the foregoing were to
occur, no assurance can be given that such condition would not have a material
adverse effect on the Company's business, financial condition and results of
operations. In addition, the Company's results of operations are dependent upon
its ability to accurately forecast its demand for raw materials. Any failure by
the Company to accurately forecast its demand for raw materials could result in
the Company either being unable to meet higher than anticipated demand for its
products or producing excess inventory, either of which may materially adversely
affect the Company's business, results of operations and financial condition.

Product Distribution

     The Company's products are available for sale to consumers from kegs or in
bottles at restaurants, taverns, bars, sporting events and liquor stores, as
well as at supermarkets, directly at the brewery and at convenience stores. The
Company's products are generally delivered to these retail outlets through a
network of 20 independent wholesale distributors, whose principal business is
the distribution of beer and, in some cases, other alcoholic beverages, and who
typically have local distribution relationships with one or more national beer
brands. In addition, in two counties in Pennsylvania, the Company exclusively
sells its products directly to retailers. Three wholesale distributors accounted
for approximately 19%, 12% and 12% of the Company's sales for the year ended
December 31, 1998. Two customers, one being the largest in the current year,
accounted for approximately 12% and 10% of the Company's sales during the year
ended December 31, 1997. The loss of any wholesale distributor, if not
immediately replaced, could have a material adverse effect on the Company's
business, financial condition and results of operations. The Company, together
with its distributors, markets its products to retail outlets and generally
relies on its distributors to provide regular delivery to retailers, to maintain
retail shelf space, create demand for its products and to oversee timely
rotation of inventory to ensure the continuing freshness of its products. The
Company will also offer its products directly to consumers at brewpubs if the
Company establishes such operations in the future.

Marketing and Sales

     Sales of the Company's draft beer began in May 1995, with bottle sales
commencing in June 1995. As of October 1, 1999, the Company maintained a sales
and marketing staff of four sales representatives, whose efforts are focused
primarily on assisting the Company's distributors with promotions and product
placements. In addition, the Company has retained two additional sales
representatives on a commission basis, who provide similar services. The Company
has hired an experienced sales manager to manage the growth and productivity of
its sales force. In order to service an increased distribution network and build
relationships with additional distributors, the Company intends to hire
additional sales representatives to motivate distributors to increase sales of
the Company's products and to stimulate retailer and consumer demand. The
Company presently markets its products in a region comprised primarily of
Pennsylvania, New Jersey, Delaware, Virginia, Maryland and the District of
Columbia, and to a lesser extent in Florida and Massachusetts.

     The Company has advertised its products in local newspapers, billboards, on
the radio, and to a lesser extent, T.V., and in specialty beer publications
within these markets. In addition, the Company promotes its products through its
direct mail program, including a quarterly newsletter, advertising in specialty
beer publications, its beer events and the use of point of sale promotional
materials, such as table tents, posters and signs in retail outlets. The
advertising and promotional materials are designed to stress the unique
qualities of the Company's products, such as product freshness and the styles of
beers offered. These advertising and promotional materials also highlight the
Company's Brewmaster and the Company's primary focus on product quality.


                                      -7-
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The Company believes that this promotional campaign will help develop and
maintain a high-quality image for the Company's brewery and its products which
the Company anticipates will result in increased sales of the Company's
products. The Company currently conducts public relations activities internally.
See "-- Strategy -- Develop Consumer Awareness."

     To promote retail product sales, the Company periodically offers
"post-offs," or volume price discounts to distributors. Distributors and
retailers often participate in these price discounts. In addition, the Company
anticipates that it may in the future offer such promotions in additional
markets in response to local competition.

Competition

     The highly fragmented craft beer segment has been one of the fastest
growing segments of the domestic beer industry although in the past year such
growth has lessened somewhat. The Company competes primarily with other
participants in the craft beer segment of the domestic beer market in its region
such as Dock Street Brewing Company, Red Bell Brewing Company, Stoudt's Brewing
Company, Lancaster Malt Brewing Company, Weyerbacher Brewing Company and Victory
Brewing Company, and with imported beers such as Heineken, Amstel, Corona and
Guinness brands and mass-market national brewers such as Yeungling, Miller,
Anheuser-Busch, Coors and Stroh. Competition within the domestic craft beer
segment is based on product quality, taste, consistency and freshness, ability
to differentiate products, promotional methods and product support,
transportation costs, distribution coverage and, to a lesser degree, price.

     As the Company expands its distribution network within the mid-Atlantic
region and beyond, and as other craft brewers expand their distribution
networks, the Company expects to encounter increasing competition from other
regional specialty brewers, as well as from contract brewers. Although certain
of these competitors distribute their products nationally and may have superior
financial or other resources than the Company, management believes that the
Company possesses certain competitive advantages, such as a regional brewing
facility, and its high-quality products produced by the Company's Brewmaster.

     The Company also competes against producers of imported beers. Although
imported beers currently account for a much greater share of the domestic beer
market than craft beers, the Company believes that it possesses significant
competitive advantages over certain importers, including lower transportation
costs, no importation duties, proximity to and familiarity with local consumers,
a high degree of product freshness, eligibility for lower federal excise taxes
and freedom from currency fluctuations.

     In response to the rapid growth of the craft beer segment, several of the
major domestic brewers have introduced fuller-flavored beers, and others may be
expected to do so in the future.

     The Company expects that certain of the major national brewers, with their
superior financial resources, access to raw materials and established national
distribution networks, will seek further participation in the continuing growth
of the craft beer segment through investments in, or the formation of
distribution alliances with, craft brewers. The increasing participation of the
major national brewers will likely increase competition for market share and
increase price competition within the craft beer segment. The Company believes
that the participation by the major national brewers will tend to increase
advertising, distribution and consumer education and awareness of craft beers,
and thus contribute to further rapid growth of this industry segment.

Contract Brewing Arrangement

     The Company has entered into an arrangement to utilize a portion of its
excess production capacity to provide contract brewing services to a third party
which markets and sells beer produced by the Company, under the third party's
own proprietary labels. Although margins for contract brewing are lower compared
to the sale of the Company's own products to wholesale distributors, the Company
expects this business to continue until such time as the Company's own products
fully utilize production capacity. Less than 5% of the Company's revenues
resulted from contract brewing in both 1998 and 1997. In 1999, the Company
expects to decrease production of barrels under this private label brewing
contracts and focus on building its core brands.


                                      -8-
<PAGE>

Government Regulation

     The Company's business is highly regulated at federal, state and local
levels. Various permits, licenses and approvals necessary to the Company's
brewery and pub operations and the sale of alcoholic beverages are required from
various agencies, including the U.S. Treasury Department, Bureau of Alcohol,
Tobacco and Firearms (the "BATF"), state alcohol regulatory agencies in the
states in which the Company sells its products and state and local health,
sanitation, safety, fire and environmental agencies. In addition, the beer
industry is subject to substantial federal excise taxes, although the Company
benefits from favorable treatment granted to brewers producing less than 2
million barrels per year.

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

     Alcoholic Beverage Regulation and Taxation. The Company's brewery is
subject to licensing and regulation by a number of governmental authorities. The
Company operates its brewery under federal licensing requirements imposed by the
BATF. The BATF requires the filing of a "Brewer's Notice" upon the establishment
of a new commercial brewery. In addition, commercial brewers are required to
file an amended Brewer's Notice every time there is a material change in the
brewing process or brewing equipment, change in the brewery's location, change
in the brewery's management or a material change in the brewery's ownership. The
Company's operations are subject to audit and inspection by the BATF at any
time.

     In addition to the regulations imposed by the BATF, the Company's brewery
is subject to various regulations concerning retail sales, deliveries and
selling practices in states in which the Company sells its products. Failure by
the Company to comply with applicable federal or state regulations could result
in limitations on the Company's ability to conduct its business. The BATF's
permits can be revoked for failure to pay taxes, to keep proper accounts, to pay
fees, to bond premises, and to abide by federal alcoholic beverage production
and distribution regulations, or if holders of 10% or more of the Company's
equity securities are found to be of questionable character. Permits from state
regulatory agencies can be revoked for many of the same reasons.

     The Pennsylvania Liquor Control Board ("PLCB") issues operating licenses to
manufacturers of beverages containing alcohol located in the Commonwealth of
Pennsylvania. The PLCB also ensures compliance with state tax provisions. The
PLCB regulations provide certain operating, record-keeping and marketing
requirements for license holders. These requirements include posting of a
$10,000 bond upon issuance of a license, inspections of the brewery by
representatives of the PLCB, maintaining records of the amount of beer produced
and sold, limiting certain promotional activities and prohibiting sales by the
Company on Sunday. Failure by the Company to comply with the PLCB requirements
could result in fines, penalties or sanctions being imposed against the Company
which could range from written warnings to revocation of the Company's license.
The temporary or permanent loss of the Company's PLCB license would have a
material adverse effect on the Company's financial condition and results of
operations. PLCB regulations limit the Company's ability to increase its prices
to distributors within 180 days after a price decrease, except under certain
limited circumstances or with the prior consent of the PLCB. In addition, the
license issued by the PLCB to the Company will not be transferable or assignable
without the approval of the PLCB. As a result, a sale of the Company or its
business would be subject to, and may be delayed by, the required approval by
the PLCB.


                                      -9-
<PAGE>

     The U.S. federal government currently imposes an excise tax of $18 per
barrel on every barrel of beer produced for consumption in the United States.
However, any brewer with production under 2 million barrels per year instead
pays federal excise tax in the amount of $7 per barrel on the first 60,000
barrels it produces annually. While the Company is not aware of any plans by the
federal government to reduce or eliminate this benefit to small brewers, any
such reduction in a material amount could have a material adverse effect on the
Company. In addition, the Company will lose the benefit of this rate structure
if it exceeds the 2 million barrel production threshold, which the Company
believes is not likely in the near future. Individual states also impose excise
taxes on alcoholic beverages in varying amounts, which have also been subject to
change. It is possible that excise taxes will be increased in the future by both
the federal government and several states. In addition, increased excise taxes
on alcoholic beverages have been considered in connection with various
governmental budget-balancing or funding proposals. Any such increases in excise
taxes, if enacted, could materially adversely affect the Company.

     State and Federal Environmental Regulation. The Company's brewery
operations are subject to environmental regulations and local permitting
requirements regarding, among other things, air emissions, water discharges and
the handling and disposal of wastes. While the Company has no reason to believe
the operations of its facility violate any such regulation or requirement, if
such a violation were to occur, the Company's business may be materially
adversely affected. In addition, if environmental regulations were to become
more stringent in the future, the Company could be materially adversely
affected.

     Dramshop Laws. The serving of alcoholic beverages to a person known to be
intoxicated may, under certain circumstances, result in the server's being
liable to third parties for injuries caused by the intoxicated customer. If the
Company opens brewpubs, the Company will attempt to address this concern by
implementing employee training and designated-driver programs. The Company has
obtained host liquor and legal liquor liability insurance coverage for its
activities in connection with marketing and promotional events that involve
selling liquor. Future increases in premiums could make it prohibitive for the
Company to obtain adequate insurance coverage or maintain its existing coverage,
and large uninsured damage awards against the Company could have a material
adverse affect on the Company's financial condition and results of operations.

     Trademarks. The Company has registered the trademarks "1776",
"Franklinfest" and "Betsy's Kristal Wheat" with the United States Patent and
Trademark office. The Company has filed an application to register "Uncle ESB"
with the United States Patent and Trademark office. Although the Company expects
"Uncle ESB" to be registered in due course, there can be no assurance any such
trademark will be registered, or if registered, there can be no assurance that
it will not be challenged at some later date. Independence Brewing Company of
Florida, Inc. ("Independence Florida"), a corporation that is currently
operating a brewpub in Ft. Lauderdale, Florida, utilizing the "Independence"
name and logo and the name "Independence Brewery and Restaurant" (the
"Independence Marks"), has filed federal trademark and service mark applications
for "Independence Brewery and Restaurant" (the "Applications"). The Company has
entered into an agreement with Independence Florida (the "Florida Agreement")
whereby (i) Independence Florida transferred and assigned all of its rights,
title and interest in the Independence Marks and the Applications to the
Company, (ii) Independence Florida was granted a perpetual royalty free license
to use the Independence Marks for its one location only, subject to termination
upon certain conditions, and (iii) the Company will not operate a bar or
restaurant in Broward County, Florida, Independence Florida's geographic region,
without the consent of Independence Florida. To date, nothing has been completed
as Independence Florida has been under bankruptcy reorganization. In addition,
the Company recently acquired the Blue Hen Beer and Gravity Ale trademarks and
intends to shortly effect an assignment of the marks to the Company. See Item 1.
Business -- Strategy -- Brand Acquisitions.


                                      -10-
<PAGE>

     The Company has entered into an exclusive license and purchase agreement
with Moosehead Brewing Company ("Moosehead") for use of Moosehead's registration
for "The Taste of Independence" and its pending U.S. trademark application for
the mark "Independence" for brewed alcoholic beverages (the "Moosehead Marks").
This agreement is for a two year license for use of the Moosehead Marks in the
United States whereby the Company paid Moosehead $30,000 per year for such right
and, upon termination of such two-year period, all rights to the use of
"Independence" will be transferred to the Company for an additional payment of
$30,000.

     The Company utilizes a number of recipes in the production of its beers and
protects these recipes as trade secrets. In addition, product packaging,
advertising and promotional design and artwork are important to the Company's
success, and such materials are considered protected by common law copyright.

Employees

     As of October 1, 1999, the Company had fourteen employees, including five
in production, four in sales and marketing, and five in administration. Of the
fourteen employees, six are part time. The Company believes its relations with
its employees to be good.


ITEM 2. - PROPERTIES

     The Company currently leases an approximately 32,000 square foot facility
on approximately 3.5 acres in Philadelphia, Pennsylvania for its executive
offices and its brewery at a current cost of $5,866 per month, plus all
applicable taxes, insurance premiums, expenses for utilities and costs for any
other services assessed against the property. The lease on this facility
terminates on November 30, 2004. The rent expense increases each year of the
lease up to $9,333 per month in the final year of the lease. The Company has an
option to purchase such property for $700,000, increasing each year up to
$800,000 on November 30, 2001, at which time such option expires. The Company
believes it has adequate space to conduct its operations.


ITEM 3. - LEGAL PROCEEDINGS

     The Company is not currently engaged in any legal proceedings that are
expected, individually or in the aggregate, to have a material adverse effect on
the business, results of operations or financial condition of the Company.

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

     There were no matters submitted to a vote of security holders during the
fourth quarter of 1998.


                                      -11-
<PAGE>

                                     PART II


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

     The initial public offering of the Company's common stock and redeemable
warrants was consummated on February 11, 1997 (the "IPO"). The stock and
warrants have been thinly traded since the IPO.

     The Company's common stock and redeemable warrants are not currently traded
on the NASDAQ SmallCap Market under the symbols "IBCOE" and "IBCOWE,"
respectively. On April 28, 1999, the NASDAQ Listing Qualification Panel made the
determination that the Company failed to meet the net tangible asset, market
capitalization and market value public float requirements, as well as the
failure to provide a definitive plan to regain compliance with those
requirements. Accordingly, the Company was delisted from the NASDAQ Stock Market
effective with the close of business on April 28, 1999. The Company has filed an
appeal and has requested to be considered for relisting on the NASDAQ SmallCap
Market. The Company will utilize its best efforts to have the common stock and
redeemable warrants available on the NASDAQ Bulletin Board.

     As of December 31, 1998, there were 849 holders of record of the Company's
common stock and four holders of record of the Company's redeemable warrants.
The Company believes that, as of October 1, 1999, there were greater than 849
beneficial holders of the Company's common stock and redeemable warrants.

     The Company has never paid cash dividends and does not expect to pay any
cash dividends in the foreseeable future with respect to its common stock. The
Company's future dividend policy will depend upon the Company's earnings,
capital requirements, financial condition and other factors considered relevant
by the Board. The Company presently intends to retain any earnings which the
Company may realize in the foreseeable future to finance the growth of the
Company.

ITEM 6. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
          RESULTS OF OPERATIONS

     Management's Discussion and Analysis of Financial Condition and Results of
Operations is intended to assist in understanding the financial condition and
results of operations of the Company. The information contained in this section
should be read in conjunction with the financial statements and accompanying
notes thereto and the other sections contained in this filing.

Overview

     Independence Brewing Company was incorporated in May 1994 and began
distribution of its Independence Ale in kegs and bottles in May 1995 and June
1995, respectively. The Company's brewery, located in Philadelphia,
Pennsylvania, was completed and became operational in late February 1995 and
commenced brewing in March 1995. For the period from June 1994 through February
1995, the Company's principal activities were raising capital, securing third
party financing and completing construction of its brewing facility. The Company
currently produces seven products: Three styles of beer which are offered
year-round, Independence Ale, Independence Gold and Independence Franklinfest
and four which are seasonal beers, Independence William's Winter Warmer (winter)
Independence Uncle U$B (spring) Independence Betsy's Kristall Wheat (summer)
Independence Thomas's Blonde Bock (fall). The Company anticipates modifying its
product offerings to produce additional seasonal beers. The Company's current
brewing equipment has the capacity to brew approximately 40,000 barrels per
year, which is in part dependent on the style of beer produced. In 1998, gross
sales totaled $1,141,501 on approximately 9,200 barrels of production, as
compared to gross sales of $690,648 for 1997 on approximately 5,200 barrels of
production. The Company believes that period-to-period comparisons of its
financial results should not be relied upon as an accurate indicator of future
performance. The Company's revenues are generated predominantly from sales of
beer to independent third party wholesale distributors. In addition, the Company
derives revenues from the sale of its products directly to retailers and from
contract brewing arrangements in which the Company utilizes a portion of its
excess capacity to produce beers for third parties which market and sell such
products under their own label. The Company has completed acquisitions of
certain existing brands other licensing arrangements in 1998, and expects to
continue to do so in 1999, See "Item 1 Business Stategy Brand Acquisition." To
the extent that the Company is not able to utilize this excess capacity, the
Company believes that operating margins will continue to be negatively impacted.
In 1998, this strategy of brand acquisition accounted for approximately 19% of
the Company's revenues.


                                      -12-
<PAGE>

     Until March 1997, the Company operated a refurbished bottling line which
did not include all originally manufactured parts. Incompatibility in
re-manufactured parts resulted in unanticipated machine down-time, decreased
bottling capacity and problems with the adhesion of product labels to bottles.
Under normal circumstances, using originally manufactured parts, the Company's
old bottling line would have the capacity to fill 300 bottles per minute.
However, due to the unanticipated problems, the bottling line was only able to
fill only 35 bottles per minute. In addition, the Company has experienced
problems with product labels falling off during production. As the Company has
grown, demand for the Company's products has at times exceeded its bottling
capacity. In addition, this decreased capacity has resulted in spreading smaller
revenue over existing fixed and semi-variable costs, which has negatively
impacted the Company's operating margins. In March 1997, the Company purchased
and installed a new bottling line. This new bottling line is designed to
increase the Company's bottling capacity and alleviate its labeling problems.

     In addition to the level of consumer demand and the availability of
bottling capacity, the Company's sales are also affected by other factors such
as new product introductions, a limited marketing budget, third party wholesaler
promotions and competitive considerations. Sales in the beer industry generally
reflect a degree of seasonality, with lower sales in the first quarter of the
calendar year generally due to decreased consumption of beer after the holiday
season. The Company operates with little or no backlog of orders because of
distributor demand for immediate inventory and because its ability to predict
sales in future periods has, to date, been limited.

     The Company's capacity utilization has a significant impact on gross
profits. Most capital costs associated with building a brewery and fixed and
semi-variable costs related to operating a brewery are incurred prior to or
beginning upon commencement of production at the brewery. Although the Company's
brewing equipment has the capacity to brew approximately 40,000 barrels per year
in 1998, the Company produced approximately 9,200 barrels due primarily to its
bottling line deficiencies and slower than anticipated sales. Because the
initial production level has been substantially below the brewery's maximum
designed brewing capacity, operating margins have been negatively impacted. The
Company expects this impact to be reduced if and as the brewery's actual
production increases. In addition, the Company expects the incremental costs of
shipping beer from the Company's existing brewery to continue to increase as the
volume of beer supplied to more distant markets increases.

Years Ended December 31, 1998 and 1997

     Gross sales for the quarter ended December 31, 1998, were $310,446, an
increase of 30% when compared to $238,466 for the comparable year-ago quarter.
Gross sales for the year ended December 31, 1998, were $1,141,501, an increase
of 65% when compared with $690,648 for the comparable year-ago period. The
increase in net sales from the comparable periods last year was due to increased
sales volume.

     Excise taxes for the quarter ended December 31, 1998, were $14,454, as
compared with $7,932 for the comparable year-ago quarter. Excise taxes for the
year ended December 31, 1998, were $48,949, as compared with $31,429 for the
comparable year-ago period. Excise taxes as a percentage of sales for the
quarter ended December 31, 1998, were approximately 5%, as compared with 3% for
the comparable year-ago quarter. Excise taxes as a percentage of sales for the
twelve month period ended December 31, 1998, was approximately 4.3%, as compared
with 5% for the comparable year-ago period. The company pays federal and certain
local taxes on sales volume. Accordingly, as sales increase, excise taxes paid
by the Company will increase unless the Company increases shipments to
jurisdictions where local excise taxes are paid by the third party wholesale
distributor rather than the brewer, as is the case in Maryland and the District
of Columbia.


                                      -13-
<PAGE>

     Cost of goods sold for the quarter ended December 31, 1998, was $260,239,
or 84% of sales, as compared to $272,767, or 114% of sales for the comparable
year-ago quarter. Cost of goods sold for the year ended December 31, 1998, was
$1,308,019, or 115% of sales as compared to $1,021,926, or 148% of sales for the
comparable year-ago period. The increase in cost of goods sold from the
comparable periods last year was due to higher raw materials costs as a result
of increased sales volume, as well as increases in depreciation, production
salaries, and production supplies expense. The installation of new bottling and
brewing equipment resulted in increased depreciation costs for the Company. The
increase in production salaries reflects an increase in brewery personnel from
the previous comparable period. The increase in production supplies is due to
costs associated with the operation of the Company's new bottling equipment.

     Advertising, promotional, and selling expenses for the quarter ended
December 31, 1998, were $104,351, or 34% of sales, as compared to $288,451, or
121% of sales for the comparable year-ago quarter. Advertising, promotional and
selling expenses for the year ended December 31, 1998, were $511,688, or 45% of
sales, as compared to $678,312, or 98% of sales for the same period last year.
The increase in advertising expense from the comparable periods of a year-ago
was primarily due to the launching of a major advertising campaign which
included billboard, magazine, radio and cable television advertisements. In
addition, there were increased costs associated with merchandising and direct
mail campaigns.

     General and administrative expenses for the three quarter ended December
31, 1998, were $247,368, or 80% of sales, as compared to $199,671, or 84% of
sales for the comparable year-ago quarter. General and administrative expenses
for the year ended December 31, 1998, were $770,970, or 68% of sales, as
compared to $866,441, or 125% of sales for the same period last year. The
increase in general and administrative expenses from the comparable periods of a
year-ago were primarily due to increased salary, amortization, insurance and
professional fees costs. The Company incurred increased salary expenses in
connection with the addition of new sales representatives and additional
management personnel. Amortization increased as a result of a $60,000 direct
write-off of financing fees. Insurance expense rose in part due to the addition
of a Directors and Officers general liability policy. Professional fees rose as
a result of higher legal and accounting costs associated with expenses related
to the analysis and negotiation of potential acquisition for the Company.

     Interest expense for the quarter ended December 31, 1998, was $11,485, as
compared to $11,754 for the comparable year-ago quarter. Interest expense for
the year ended December 31, 1998, was $39,223, as compared to $2,993,159 for the
comparable year-ago period. Interest expense decreased substantially during 1998
in comparison to 1997 due to the write-off of an unamortized original issue
discount and financing costs aggregating approximately $2,916,256 in connection
with the repayment of the Company's debentures and Series B preferred stock from
the net proceeds of the Company's initial public offering in the first quarter
of 1997. The interest incurred for 1998 is also associated with the Company's
promissory note in favor of CoreStates Bank, N.A. in connection with a Small
Business Administration loan (the "SBA" Loan), the "SBA" Loan was repaid
subsequent to December 31, 1998, see Note G of the financial statements, and
Philadelphia Industrial Development Corporation notes ("PIDC Notes").

     Other income, net for the quarter ended December 31, 1997, was $(3,151), as
compared to $33,150 for the comparable year-ago quarter. Other income, net for
the year ended December 31, 1998, was $20,780 as compared to $124,030 for the
comparable year-ago period. The decrease in other income, net from comparable
year-ago periods was primarily due to interest earned on excess funds resulting
from the Company's initial public offering in 1997.

Years Ended December 31, 1997 and 1996

     Gross sales for the quarter ended December 31, 1997, were $238,466, an
increase of 114% when compared to $111,500 for the comparable year-ago quarter.
Gross sales for the twelve months ended December 31, 1997, were $690,648, an
increase of 28% when compared with $540,335 for the comparable year-ago period.
The increase in net sales from the comparable periods last year was due to
increased sales volume.


                                      -14-
<PAGE>

     Excise taxes for the quarter ended December 31, 1997, were $7,932, as
compared with $9,162 for the comparable year-ago quarter. Excise taxes for the
twelve months ended December 31, 1997, were $31,429, as compared with $33,375
for thc comparable year-ago period. Excise taxes as a percentage of sales for
the quarter ended December 31, 1997, were approximately 3%, as compared with 8%
for the comparable year-ago period. Excise taxes as a percentage of sales for
the twelve month period ended December 31, 1997, were approximately 5%, as
compared with 6% for the comparable year-ago period. The company pays federal
and certain local taxes on sales volume. Accordingly, as sales increase, excise
taxes paid by the Company will increase unless the Company increases shipments
to jurisdictions where local excise taxes are paid by the third party wholesale
distributor rather than the brewer, as is the case in Maryland and the District
of Columbia.

     Cost of goods sold for the quarter ended December 31, 1997, were $272,767,
or 114% of sales, as compared to $219,384, or 197% of sales for the comparable
year-ago quarter. Costs of goods sold for the twelve months ended December 31,
1997, were $1,021,926, or 148% of sales as compared to $801,482, or 148% of
sales for the comparable year-ago period. The increase in cost of goods sold
from the comparable periods last year was due to higher raw materials costs as a
result of increased sales volume, as well as increases in depreciation,
production salaries and production supplies expense. The installation of new
bottling and brewing equipment resulted in increased depreciation costs for the
Company. The increase in production salaries reflects an increase in brewery
personnel from the previous comparable period. The increase in production
supplies is due to costs associated with the operation of the Company's new
bottling equipment.

     Advertising, promotional and selling expenses for the quarter ended
December 31, 1997, were $288,451, or 121% of sales, as compared to $56,547, or
51% of sales for the comparable year-ago quarter. Advertising, promotional and
selling expenses for the twelve months ended December 31, 1997, were $678,312,
or 98% of sales, as compared to $158,105, or 29% of sales for the same period
last year. The increase in advertising expense from the comparable periods of a
year-ago was primarily due to the launching of a major advertising campaign that
included billboard, magazine, radio and cable television advertisements. In
addition, there were increased costs associated with merchandising and direct
mail campaigns.

     General and administrative expenses for the three months ended December 31,
1997, were $199,671, or 84% of sales, as compared to $135,994, or 122% of sales
for the comparable year-ago quarter. General and administrative expenses for the
twelve months ended December 31, 1997, were $866,441, or 125% of sales, as
compared to $413,004, or 76% of sales for the same period last year. The
increase in general and administrative expense from the comparable periods of a
year-ago was primarily due to increased salary, amortization, insurance and
professional fees costs. The Company incurred increased salary expenses in
connection with the addition of new sales representatives and additional
management personnel. Amortization increased as a result of a $60,000 direct
write-off of financing fees. Insurance expense rose partly due to the addition
of a Directors and Officers general policy. Professional fees rose as a result
of higher legal and accounting costs associated with the Company's initial
public offering, as well as expenses related to the analysis and negotiation of
potential acquisition for the Company.

     Interest expense for the quarter ended December 31, 1997, was $11,754 as
compared to $225,633 for the comparable year-ago quarter. Interest expense for
the twelve months ended December 31, 1997, was $2,993,159, as compared to
$377,551 for the comparable year-ago period. Interest expense increased
substantially during 1997, in comparison to 1996, due to the write-off of an
unamortized original issue discount and financing costs aggregating
approximately $2,916,256, in connection with the repayment of the Company's
debentures and Series B preferred stock from the net proceeds of the Company's
initial public offering in the first quarter of 1997. The interest incurred for
1997 is also associated with the Company's promissory note in favor of
CoreStates Bank, N.A. in connection with a Small Business Administration loan
(the SBA Loan) and Philadelphia Industrial Development Corporation notes (PIDC
Notes).

     Other income, net for the quarter ended December 31, 1997, was $33,150, as
compared to $98 for the comparable year-ago quarter. Other income, net for the
twelve months ended December 31, 1997, was $124,030, as compared to $19,965 for
the comparable year-ago period. The increase in other income, net from
comparable year-ago periods was primarily due to interest earned on excess funds
resulting from the Company's initial public offering in 1997.


                                      -15-
<PAGE>

Years ended December 31, 1998 and 1997

     Cash flows used in operating activities for the year ended December 31,
1998, decreased to $1,043,017, from $1,847,992 for the comparable year-ago
period. The decrease in cash used was primarily due to the reduction in the
Company's operating loss from $4,776,589 in 1997 to $1,516,568 in 1998, and
increases in accounts payable.

     Cash used in investing activities for the year ended December 31, 1998,
decreased to $25,393, from $974,372 for last year. The decrease in cash used was
primarily the result of reductions in the purchase of property and equipment.

    Cash used in financing activities for the year ended December 31, 1998,
totaled $125,238, as compared to cash provided by financing activities of
$3,688,089 for the comparable year-ago period. This decrease was due to inflow
of the net proceeds of $5,285,206 as a result of the Company's initial public
offering in 1997. During 1998, the Company used cash to repay outstanding debt.

     The Company believes that cash flow from operations alone will not be
sufficient. The Company has undertaken and identified an investment group to
purchase $2,000,000 of the Company's common stock under the terms of a private
placement memorandum. will be sufficient to meet short-term liquidity needs. The
Company may also seek other long term financing. No assurance can be given that
such long term financing will be obtained on commercially reasonable terms or at
all.

Years ended December 31, 1997 and 1996

     Cash flows used in operating activities for the twelve months ended
December 31, 1997, totaled $1,847,992, as compared to $695,746 for the
comparable year-ago period. The increased use of cash is primarily due to the
Company's operating loss for 1997 and a significant decrease in accounts
payable.

     Cash used in investing activities for the twelve months ended December 31,
1997, totaled $974,372, as compared to $588,525 for the same period last year.
The increase in the use of cash was the result of the purchase of new bottling
and brewing equipment and the cost of acquiring a trademark.

     Cash provided by financing activities for the twelve months ended December
31, 1997, totaled $3,688,089, as compared to $1,644,973 for the comparable
year-ago period. This increase was due to net proceeds of $5,285,206 as a result
of the Company's initial public offering, which was only partially offset by the
repayment of debentures, preferred stock and other outstanding debt.

     In February 1997, the Company completed its initial public offering (IPO).
The Company received approximately $5,896,000 of net proceeds (including the
purchase of 600,000 redeemable warrants upon partial exercise of the
Underwriter's overallotment option and after deducting the Underwriter's
discount and offering expenses) from the IPO.

Impact of Inflation

     Although the Company has not attempted to calculate the effect of
inflation, management does not believe inflation has had a material effect to
date on its results of operations. However, production and raw material costs
are expected to increase over time as a result of general economic inflation,
and there can be no assurance that the Company will be able to offset the
resulting negative effects on its business through increasing the sale prices of
its product.

Net Operating Loss Carryovers

     The Company has net operating loss (NOL) carryovers as deductions against
future taxable income, under federal income tax law, of approximately $8,000,000
as of December 31, 1998.


                                      -16-
<PAGE>

Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995

     The Company cautions that any forward-looking statements (as such term is
defined in the Private Securities Litigation Reform Act of 1995) contained in
Item 1 -- Business and Item 6 -- Management's Discussion and Analysis or Plan of
Operation, of this Report or made from time to time by management of the Company
involve risks and uncertainties, and are subject to change based on various
important factors. The following factors, among others, in some cases have
affected and in the future could affect the Company's financial performance and
actual results and could cause actual results for 1998 and beyond to differ
materially from those expressed or implied in any such forward-looking
statements:

     Limited Operating History; Past and Possible Future Operating Losses. The
Company has had significant losses since inception. Although the Company has
experienced sales growth, such growth should not be considered indicative of
future sales growth, if any, or of future operating results. Furthermore, there
can be no assurance that the Company's sales will grow or be sustained in future
periods or that the Company will become or remain profitable in any future
period.

     Capacity Utilization. The Company has incurred substantial capital costs
associated with building its facility and commencing its brewing operations. As
a result, production levels below capacity have negatively impacted gross
margins. There can be no assurance that the Company will reach full capacity
based on the new bottling line or that the loss of a contract brewing client
will not negatively impact capacity utilization.

     Conflict of Interest and Trademark Conflict. Although the Company has
entered into the Florida Agreement, the Company is subject to risk associated
with a potential conflict of interest that may arise out of the relationship
between the Company and Independence Florida.

     Risk of Third Party Claims of Infringement of Intellectual Property;
Uncertainty of Trademark Protection. The Company has entered into the Moosehead
License concerning the Moosehead Marks. If the Moosehead License is terminated
in the future, the Company may find it necessary to change the brand name of its
products, thereby losing any existing brand recognition in its markets. The
Company relies and will continue to rely on a combination of trade secret,
copyright and trademark laws, non-disclosure and other arrangements to protect
its proprietary rights, including its beer recipes, product packaging,
advertising, promotional designs and artwork. There can be no assurance that the
steps taken by the Company to protect its proprietary information will prevent
the misappropriation and the unauthorized use of the Company's proprietary
information and such protections may not preclude competitors from developing
confusingly similar brand names or promotional materials or developing products
with taste and other qualities similar to the Company's products.


                                      -17-
<PAGE>

     Possible Need For Additional Financing. There can be no assurance that the
Company will not require additional financing or, if required, that such
additional financing will be available to the Company on acceptable terms or at
all. Substantially all of the Company's assets are currently pledged as
collateral securing certain indebtedness. This may materially adversely affect
the Company's ability to obtain additional financing in the future. Factors that
may lead to a need for additional financing include delays in market acceptance
of the Company's products, the need for the Company to expand production to meet
market demand and the acquisition and the development of brewpubs.

     Ability to Manage Growth; Expansion into New Markets. The Company's future
success depends in part on its ability to manage growth as it increases its
production, broadens the distribution of its products to both existing and new
markets, expands its product offerings and, possibly, enters the brewpub
business. There can be no assurance that the Company will be able to hire new
employees when needed or on favorable terms or that any such new employees will
be successfully integrated into the Company's management.

     Competition. The Company competes primarily with other participants in the
craft-brewing segment of the domestic beer market in its region, with producers
of imported beers and with mass-market national brewers. The Company anticipates
intensifying competition in the craft-brewing segment, and believes that, as a
result, prices may fluctuate and could decline. The Company competes with other
beer and beverage companies not only for consumer acceptance and loyalty but
also for shelf and tap space in retail establishments and for marketing focus by
the Company's third party wholesale distributors and their customers, many of
which also distribute and sell other beverage products. Many of the Company's
competitors possess marketing, financial and other resources substantially
greater than those of the Company, and there can be no assurance that the
Company will be able to achieve continued success in the face of intensified
competition from within the craft-brewing segment, from other segments of the
beer market and from beverages in general.

     Entrance into the Brewpub Business. The Company intends to enter into the
brewpub business in 1998 as it is actively seeking opportunities for brewpub
acquisitions and/or development. Success will depend upon a variety of factors,
including the availability and cost of suitable acquisition candidates and/or
building sites, the employment and training of management, brewpub staff and
other personnel, regulatory limitations regarding common ownership of breweries
and restaurants in certain states, acceptable leasing or financing terms of
equipment, cost effective and timely construction of new brewpubs (which
construction can be delayed due to, among other reasons, labor disputes, local
zoning and licensing matters and weather conditions) and securing required
governmental permits and approvals. There can be no assurance that the Company
will be successful in acquiring or opening new brewpubs, that those brewpubs
will be opened in a timely manner, or that, if opened, those brewpubs will be
operated profitably. New brewpubs typically operate with below normal
profitability and incur certain additional costs in the process of achieving
operational efficiencies during the first several months of operation. In
addition, the Company may either own or operate these brewpubs or enter into
licensing arrangements for others to do so utilizing the Independence name.
Accordingly, the Company may be subject to risks of licensing its name to third
party entities.

     Dependence on Key Personnel; Inexperience of Management. The Company's new
success substantially depends upon the efforts of the Company's Chief Executive
Officer, Robert Connor and the Company's Brewmaster and President, William
Moore.

     The loss of these individuals could have a material adverse effect on the
Company's financial condition and results of operations.

     Dependence on Distributors. The Company largely relies on third party
wholesale distributors. The Company's distributors often represent competing
craft-brewed brands, as well as economy and import brands. There can be no
assurance that the Company's distributors will continue to sell the Company's
products or may devote sufficient resources to provide effective sales and
promotion support to the Company or continue to distribute the Company's
products.


                                      -18-
<PAGE>

     Dependence on Suppliers. If the Company were unable to obtain sufficient
quantities of ingredients and materials, delays or reductions in product
shipments could occur which would have a material adverse effect on the
Company's financial condition and results of operations.

     Shortages of Supply. The supply, quality and price of raw materials used to
produce the Company's products can be affected by factors beyond the control of
the Company, such as drought, frost, other weather conditions, economic factors
affecting growing decisions, various plant diseases and pests.

     Limited Product Line. The sale of a limited number of styles of beer has
accounted for substantially all revenue of the Company since the Company's
inception. The Company believes that the sale of these beers will continue to
account for a significant portion of the Company's sales for the foreseeable
future. Therefore, the Company's future operating results, particularly in the
near term, are significantly dependent upon the market acceptance of these
limited products.

     Single-Site Manufacturing Facility. In the event the Company's brewing and
bottling facility were damaged by fire or other casualty, the Company's
production would be substantially interrupted.

     Sales Fluctuations Due to Seasonality. Since the Company has continued to
expand its wholesale distributors network, fluctuations in the Company's sales
due to seasonality may become evident in the future.

     Control By Existing Shareholders. Mr. Connor and Winfield own an aggregate
of approximately 47% of the outstanding Common Stock. Consequently, Mr. Connor
and Winfield are able to elect the Company's directors, to determine the outcome
of corporate actions requiring shareholder approval and otherwise to control the
business affairs of the Company.

     Operating Hazards. The Company's operations are subject to certain hazards
and liability risks, such as potential contamination of ingredients or products
by bacteria or other external agents that may be wrongfully or accidentally
introduced into products or packaging. The occurrence of such a problem could
result in a costly product recall and serious damage to the Company's reputation
for product quality, as well as claims for product liability. In addition, the
Company's products are not pasteurized and have a limited shelf-life. The
Company may incur cost in connection with product returns.

     Government Regulation. The manufacture and sale of alcoholic beverages is a
business that is highly regulated and taxed at the federal, state and local
levels which could change and become more restrictive. Violation of such
regulations can result in the loss, revocation or suspension of existing
licenses by the wholesaler, retailer and/or supplier. The loss, revocation or
suspension of any existing licenses, permits or approvals could have a material
adverse effect on the Company's business.

     Public Attitudes and Consumer Demand. The possibility exists that
advertising by beer producers could be restricted, that additional cautionary
labeling or packaging requirements might be imposed or that there may be renewed
efforts to impose increased excise or other taxes on beer sold in the United
States. In addition, consumer tastes may change over time or may vary in the
markets which the Company currently operates and new markets in which the
Company intends to enter and there is no assurance that the same level of sales
and operating margins can be maintained in the Company's existing market or
achieved in new markets. The Company's success also depends upon a number of
factors related to the level of discretionary consumer spending, including the
general state of the economy, federal and state tax laws and consumer confidence
in future economic conditions.


                                      -19-
<PAGE>

ITEM 7. - FINANCIAL STATEMENTS










                                TABLE OF CONTENTS

                                                                            Page
                                                                            ----

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS                           21


FINANCIAL STATEMENTS

    BALANCE SHEETS                                                           22

    STATEMENTS OF OPERATIONS                                                 23

    STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY                            24

    STATEMENTS OF CASH FLOWS                                                 25

    NOTES TO FINANCIAL STATEMENTS                                            26


                                      -20-
<PAGE>

               Report of Independent Certified Public Accountants


Board of Directors and Shareholders
Independence Brewing Company


         We have audited the accompanying balance sheets of Independence Brewing
Company as of December 31, 1998 and 1997, and the related statements of
operations, changes in shareholders' equity and cash flows for the years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

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

         In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Independence Brewing
Company as of December 31, 1998 and 1997, and the results of its operations and
cash flows for the years then ended in conformity with generally accepted
accounting principles.

         The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in note B to the
financial statements, the Company is experiencing difficulty in generating
sufficient cash flow to meet its obigations and sustain operations, which raises
substantial doubt about its ability to continue as a going concern. Management's
plans in regard to these matters are also described in note B. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.



/s/ Grant Thornton LLP


Philadelphia, Pennsylvania
April 7, 1999, except for
Note O, as to which the
date is August 5, 1999


                                      -21-
<PAGE>

                          INDEPENDENCE BREWING COMPANY

                                 BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                             December 31,
                                                                                     ---------------------------
          ASSETS                                                                        1998              1997
                                                                                     ----------       ----------
<S>                                                                                      <C>              <C>
Current assets
    Cash and cash equivalents                                                        $   35,561       $1,229,209
    Accounts receivable                                                                  55,416           34,211
    Inventories                                                                         288,708          164,787
                                                                                     ----------       ----------

          Total current assets                                                          379,685        1,428,207

Equipment and leasehold improvements, net                                             2,047,026        2,154,541
Intangible assets                                                                       233,537           90,820
Other                                                                                    13,904           48,941
                                                                                     ----------       ----------

                                                                                     $2,674,152       $3,722,509
                                                                                     ==========       ==========

          LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities
    Current portion of long-term debt                                                $  359,181       $  108,000
    Accounts payable                                                                    599,046          283,655
    Accrued salaries                                                                     82,101              -
    Accrued expenses                                                                      2,346            1,073
    Customer deposits                                                                    20,865           10,843
                                                                                     ----------       ----------

          Total current liabilities                                                   1,063,539          403,571

Long-term liabilities
    Deferred rent                                                                        57,127           46,579
    Long-term debt                                                                      111,251          406,670
                                                                                     ----------       ----------

          Total liabilities                                                           1,231,917          856,820
                                                                                     ----------       ----------

Shareholders' equity
    Preferred stock, Series A, $10.00 par value -- authorized 500,000
       shares; none outstanding                                                             --               --
    Preferred stock, Series B, $10.00 par value -- authorized 500,000
       shares; none outstanding                                                             --               --
    Common stock, no par value - authorized, 19,000,000 shares; issued
       and outstanding, 3,357,077 and 3,207,077 shares in 1998 and
       1997, respectively                                                             9,069,748        8,976,634
    Accumulated deficit                                                              (7,627,513)      (6,110,945)
                                                                                     ----------       ----------

          Total shareholders' equity                                                  1,442,235        2,865,689
                                                                                     ----------       ----------

                                                                                     $2,674,152       $3,722,509
                                                                                     ==========       ==========

</TABLE>




The accompanying notes are an integral part of these statements.


                                      -22-
<PAGE>

                          INDEPENDENCE BREWING COMPANY

                            STATEMENTS OF OPERATIONS






<TABLE>
<CAPTION>
                                                                                       Year ended December 31,
                                                                                     ---------------------------
                                                                                        1998             1997
                                                                                     ----------      -----------
<S>                                                                                      <C>             <C>
Sales                                                                               $ 1,141,501      $   690,648

Less excise taxes deficit                                                               (48,949)         (31,429)
                                                                                    -----------      -----------

          Net sales                                                                   1,092,552          659,219

Cost of goods sold                                                                    1,308,019        1,021,926
                                                                                    -----------      -----------

          Gross loss                                                                   (215,467)        (362,707)
                                                                                    -----------      -----------

Advertising, promotional and selling expenses                                           511,688          678,312
General and administrative expenses                                                     770,970          866,441
                                                                                    -----------      -----------
                                                                                      1,282,658        1,544,753

          Operating loss                                                             (1,498,125)      (1,907,460)
                                                                                    -----------      -----------

Other income (expense)
    Interest expense                                                                    (39,223)      (2,993,159)
    Other income, net                                                                    20,780          124,030
                                                                                    -----------      -----------
                                                                                        (18,443)      (2,869,129)
                                                                                    -----------      -----------

          NET LOSS                                                                  $(1,516,568)     $(4,776,589)
                                                                                    ===========      ===========

Per share data
    Net loss per common share - basic and diluted                                   $     (0.46)     $     (1.54)
                                                                                    ===========      ===========

</TABLE>










The accompanying notes are an integral part of these statements.


                                      -23-
<PAGE>

                          INDEPENDENCE BREWING COMPANY

                  STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY

                     Years ended December 31, 1998 and 1997



<TABLE>
<CAPTION>
                                                          Common stock
                                                  ---------------------------                           Total
                                                  Number of                         Accumulated      shareholders'
                                                    shares          Amount            deficit          equity
                                                  ----------       ----------       ------------     -------------
<S>                <C>                            <C>              <C>              <C>               <C>
Balance at January 1, 1997                        2,307,077        $3,691,428       $(1,334,356)      $2,357,072


Issuance of common stock                            900,000         5,285,206               -          5,285,206


Net loss for the year ended
    December 31, 1997                                     -                 -        (4,776,589)      (4,776,589)
                                                  ---------        ----------       -----------       ----------


Balance at December 31, 1997                      3,207,077         8,976,634        (6,110,945)       2,865,689


Issuance of common stock                            150,000            93,114                 -           93,114


Net loss for the year ended
    December 31, 1998                                   -                 -          (1,516,568)      (1,516,568)
                                                  ---------        ----------       -----------       ----------


Balance at December 31, 1998                      3,357,077        $9,069,748       $(7,627,513)      $1,442,235
                                                 ==========        ==========       ===========       ==========

</TABLE>













The accompanying notes are an integral part of this statement.


                                      -24-
<PAGE>

                          INDEPENDENCE BREWING COMPANY

                            STATEMENTS OF CASH FLOWS


<TABLE>
<CAPTION>
                                                                                        Year ended December 31,
                                                                                    -----------------------------
                                                                                         1998             1997
                                                                                    ------------     ------------
<S>                                                                                       <C>             <C>
Operating activities
    Net loss                                                                        $(1,516,568)     $(4,776,589)
    Adjustments to reconcile net loss to net cash used in operating activities
       Depreciation and amortization                                                    154,102          134,705
       Write-off of deferred charges                                                        -          2,972,112
       Increase in accounts receivable                                                  (21,205)         (17,085)
       Increase in inventories                                                         (120,921)         (29,971)
       Decrease (increase) in other                                                      35,037          (23,039)
       Increase (decrease) in accounts payable and accrued expenses                     407,340         (119,268)
       Increase (decrease) in customer deposit                                           10,022              -
       Increase in other                                                                  9,176           11,143
                                                                                    -----------      -----------

              Net cash used in operating activities                                  (1,043,017)      (1,847,992)
                                                                                    -----------      -----------

Investing activities
    Purchases of property and equipment                                                 (43,718)        (884,372)
    Other                                                                                18,325          (90,000)
                                                                                    -----------      -----------

              Net cash used in investing activities                                     (25,393)        (974,372)
                                                                                    -----------      -----------

Financing activities
    Payments of notes payable                                                           (34,347)             -
    Repayments of long-term debt                                                        (90,891)        (103,091)
    Payments to reacquire preferred stock                                                   -           (700,000)
    Proceeds from issuance of common stock, net                                             -          5,285,206
    Payments under capital lease obligations                                                -             (4,026)
    Repayments from (to) officers, net                                                      -             10,000
    Repayments of convertible debentures                                                    -           (800,000)
                                                                                    -----------      -----------

              Net cash (used in) provided by financing activities                      (125,238)       3,688,089
                                                                                    -----------      -----------

              Net (decrease) increase in cash and cash equivalents                   (1,193,648)         865,725

Cash and cash equivalents at beginning of year                                        1,229,209          363,484
                                                                                    -----------      -----------

Cash and cash equivalents at end of year                                            $    35,561      $ 1,229,209
                                                                                    ===========      ===========
</TABLE>









The accompanying notes are an integral part of these statements.


                                      -25-
<PAGE>

                          INDEPENDENCE BREWING COMPANY

                          NOTES TO FINANCIAL STATEMENTS

                           December 31, 1998 and 1997




NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

    Independence Brewing Company (the Company) is a regional producer of fresh,
    high-quality, preservative-free, craft brewed ales, lagers, porters,
    pilsners and seasonal beers. The Company competes with other beer and
    beverage companies not only for consumer acceptance and loyalty but also for
    shelf and tap space in retail establishments and for marketing focus by the
    Company's third-party wholesale distributors and their customers, all of
    which also distribute and sell other beers and alcoholic beverage products.

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

    1.  Basis of Financial Statement Presentation

    The accounting and reporting policies of the Company conform with generally
    accepted accounting principles and predominant practices within the brewing
    industry.

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

    2.  Supplemental Cash Flow Information

    Cash and cash equivalents include cash on hand and short-term, highly liquid
    investments with original maturities at the time of purchase of three months
    or less. Cash paid for interest for the years ended December 31, 1998 and
    1997 was $36,822 and $122,339 , respectively.

    The Company purchased equipment with a short term note payable of $21,000.
    The Company exchanged equipment for forgiveness of an $8,575 trade debt. In
    addition, the Company issued 100,000 shares of stock valued at $65,000 and a
    $40,000 note payable in exchange for miscellaneous inventory and $102,000 of
    goodwill. The Company also issued 50,000 shares of common stock valued at
    $28,114 and a 10,000 note payable in exchange for intangible assets.

    3.  Inventories

    Inventories, which consist principally of hops, bottles and packaging, are
    stated at the lower of cost or market determined on the first-in, first-out
    basis.






                                   (Continued)


                                      -26-
<PAGE>

                          INDEPENDENCE BREWING COMPANY

                    NOTES TO FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1998 and 1997




NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

    4.  Concentrations of Credit Risk

    Financial instruments which potentially subject the Company to
    concentrations of credit risk consist principally of temporary cash
    investments and trade receivables. The Company places its temporary cash
    investments with high credit quality financial institutions. The Company
    sells primarily to independent beer and ale distributors primarily in the
    Mid-Atlantic area. Receivables arising from these sales are not
    collateralized; however; credit risk is minimized as a result of the diverse
    nature of the Company's customer base.

    5.  Revenue Recognition

    The Company recognizes revenue when goods are shipped to its customers. The
    Company records bad debt expense at the time it is judged that an account
    receivable is uncollectible.

    6.  Depreciation and Amortization

    Equipment and leasehold improvements are carried at cost. Depreciation of
    equipment and amortization of leasehold improvements is computed using the
    straight-line method over the estimated useful lives of the assets or the
    term, if less, over periods ranging from five to twenty years. Amortization
    of intangibles is provided by the straight-line method over periods ranging
    from five to forty years.

    Each year, the Company assesses the impairment of goodwill and property,
    plant and equipment under Statement of Financial Accounting Standards (SFAS)
    No. 121, and when events or changes in circumstances indicate that the
    carrying value may not be recoverable, a determination of impairment is made
    based upon estimates of future cash flow.

    7.  Advertising, Promotional and Selling Expenses

    Advertising, promotional and selling expenses are charged to expense during
    the period in which they are incurred. Total advertising, promotional and
    selling expenses for the years ended December 31, 1998 and 1997 were
    $511,688 and $678,312, respectively.

    8.  Income Taxes

    The Company accounts for its income taxes in accordance with SFAS No. 109,
    Accounting for Income Taxes. Under the liability method specified by SFAS
    No. 109, deferred tax assets and liabilities are determined based on the
    difference between the financial statement and tax bases of assets and
    liabilities as measured by the enacted tax rates which will be in effect
    when these differences reverse. Deferred tax expense is the result of
    changes in deferred tax assets and liabilities.





                                   (Continued)


                                      -27-
<PAGE>

                          INDEPENDENCE BREWING COMPANY

                    NOTES TO FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1998 and 1997




NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

    9.  Fair Value of Financial Instruments

    SFAS No. 107, Disclosures about Fair Value of Financial Instruments,
    requires entities to disclose the estimated fair value of their assets and
    liabilities considered to be financial instruments. The Company's financial
    instruments consist primarily of cash and cash equivalents, accounts
    receivable and long-term debt. Based on the borrowing rates currently
    available to the Company, long-term debt approximates fair value at December
    31, 1998 and 1997.

    10.  Loss Per Common Share

    The Company follows the provisions of SFAS No. 128, Earnings Per Share,
    which eliminated primary and fully diluted earnings per share (EPS) and
    requires presentation of basic and diluted EPS in conjunction with the
    disclosure of the methodology used in computing such EPS. Basic EPS excludes
    dilution and is computed by dividing income available to common shareholders
    by the weighted average common shares outstanding during the period. Diluted
    EPS takes into account the potential dilution that could occur if securities
    or other contracts to issue common stock were exercised and converted into
    common stock.

    11.  Segment Information

    In 1998, the Company adopted SFAS No. 131, Disclosures About Segments of an
    Enterprise and Related Information. This statement redefines how operating
    segments are determined and requires disclosure of certain financial
    information about the Company's operating segments. The Company operates a
    brewery which manufacturers beer. The Company considers it business to
    consists of one reportable operating segment engaged in the production of
    beer.

    12.  Reclassification

    Certain 1997 amounts have been reclassified to conform to the 1998 financial
    statement presentation.

NOTE B - Going Concern Matters

    The accompanying financial statements have been prepared on a going concern
    basis, which contemplates the realization of assets and the satisfaction of
    liabilities in the normal course of business. As shown in the financial
    statements during the years ended December 31, 1998 and 1997, the Company
    incurred losses of $1,517,000 and $4,777,000, respectively. These factors
    among other may indicate that the Company will be unable to continue as a
    going concern for a reasonable period of time.

    The financial statements do not include any adjustments relating to the
    recoverability and classification of assets and liabilities that might be
    necessary should the Company be unable to continue as a going concern. As
    described in Note G, the Company was not in compliance with the covenants
    under the Philadelphia Industrial Development Corporation (PIDC) agreement
    at December 31, 1998, but a waiver was obtained from the institution for its
    violations. Additionally, the Company was not in compliance with the
    covenants under the mezzanine loan, as discussed in Note O. The Company's
    continuation as a going concern is dependent upon its ability to generate
    sufficient cash flow to meet its obligations on a timely basis, to comply
    with the terms of its financing agreements, to obtain additional equity
    investments, additional debt financing or refinancing as may be required,
    and ultimately to attain profitability. The Company is actively pursuing
    additional equity investments, refinancing of the Mezzanine loan described
    in Note O, licensing transactions/acquisition for the establishment of
    retail Brewpubs for volume and marketing exposure primarily within
    surrounding Philadelphia area, growth in it "non-core" brand sales through
    the recent acquisitions described in Note C, expansion of both product lines
    and geographic distribution network and adding soft drinks to production
    lines.

                                      -28-
<PAGE>

                          INDEPENDENCE BREWING COMPANY

                    NOTES TO FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1998 and 1997




NOTE C - ACQUISITIONS

    On March 25, 1998, the Company acquired certain assets of American U-Brew,
    Inc. and its affiliates (AUB) in exchange for 100,000 shares of common stock
    valued at $65,000 and two notes totalling $40,000, as described in note G.

    The assets were valued at the fair market value on the date of acquisition
    and resulted in goodwill of $102,000.

    If during the first year following the closing date of the agreement the
    Company does not produce an agreed upon amount of barrels, under the brewing
    label acquired, a portion of the debt is forgiven and a portion of the
    Company's common stock issued will be returned to the Company in the form of
    treasury stock. In addition, the Company is required to pay AUB
    consideration, in the form of equity or debt, additional compensation if the
    average stock price of the Company is less than an agreed upon amount.
    Subsequent to year end, approximately $13,000 of the debt was forgiven and
    approximately 41,000 shares of common stock will be required to be returned
    to the Company. Additionally, in accordance with the agreement, the Company
    will be required to pay approximately $25,000 or issue approximately 17,000
    shares of additional stock to AUB.

    On April 6, 1998, the Company acquired certain assets of Blue Hen Brewing
    Company, Ltd. (Blue Hen) in exchange for 50,000 shares of common stock
    valued at $28,114, and a $10,000 note payable. The note payable was
    satisfied during 1998. The assets were valued at fair market value and
    resulted in goodwill of approximately $28,000. Under the terms of the
    agreement, the Company is required to pay Blue Hen additional consideration
    in the form of equity or debt, if the average stock price of the Company is
    less than an agreed upon amount during the first year following the closing
    date of the agreement. Subsequent to year end, the Company will be required
    to pay approximately $11,000 or issue approximately 7,500 shares of common
    stock to Blue Hen.

NOTE D - INVENTORIES

    Inventories consist of the following:
                                                        1998              1997
                                                      --------         --------

       Raw materials                                  $ 59,274         $ 45,903
       Work in process                                  69,410           32,469
       Finished goods                                   80,115           20,272
       Packaging                                       104,413           66,143
                                                      --------         --------
                                                       313,212
       Less reserve for spoilage                       (24,504)               -
                                                      --------         --------

                                                      $288,708         $164,787
                                                      ========         ========


                                      -29-
<PAGE>

                          INDEPENDENCE BREWING COMPANY

                    NOTES TO FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1998 and 1997



NOTE E - EQUIPMENT AND LEASEHOLD IMPROVEMENTS

    Equipment and leasehold improvements consist of the following:

<TABLE>
<CAPTION>
                                                        Estimated useful lives           1998             1997
                                                        ----------------------       ----------       ----------
<S>                                                             <C>                       <C>              <C>
       Brewing equipment                                     5 to 20 years           $2,141,302       $2,103,108
       Leasehold improvements                                10 years                   285,147          285,147
       Transportation equipment                              5 years                          -           15,250
       Computer equipment and software                       5 years                     34,737           26,112
                                                                                     ----------       ----------
                                                                                      2,461,186        2,429,617
       Less accumulated depreciation and amortization                                  (414,160)        (275,076)
                                                                                     ----------       ----------
                                                                                     $2,047,026       $2,154,541
                                                                                     ==========       ==========
</TABLE>

    Depreciation and amortization expense for the years ended December 31, 1998
and 1997 was $145,181 and $125,705, respectively.

NOTE F - INTANGIBLES

    Intangible assets consist of the following:
                                                       1998             1997
                                                     --------         --------

       Goodwill                                      $130,115         $      -
       Financing fees                                  11,221           11,221
       Organizational costs                             2,417            2,417
       Trademark                                      110,000           90,000
                                                     --------         --------
                                                      253,753          103,638
       Less accumulated amortization                  (20,216)         (12,818)
                                                     --------         --------
                                                     $233,537         $ 90,820
                                                     ========         ========

NOTE G - LONG-TERM DEBT

    Long-term debt consists of the following:

<TABLE>
<CAPTION>
                                                                                         1998             1997
                                                                                       --------         --------
<S>                                                                                      <C>              <C>
       Small Business Administration (SBA) Note (1)                                    $264,796         $337,900
       Philadelphia Industrial Development Corporation (PIDC) Note (2)                  163,656          176,770
       Note payable, American U-Brew Note (3) *                                          19,682              -
       Note payable, American U-Brew Note (4) *                                          16,000              -
       Note payable, Other (5) *                                                          6,298              -
                                                                                       --------         --------
                                                                                        470,432          514,670
       Less current portion                                                            (359,181)        (108,000)
                                                                                       --------         --------

                                                                                       $111,251         $406,670
                                                                                       ========         ========
</TABLE>


                                  (Continued)


                                      -30-
<PAGE>

                          INDEPENDENCE BREWING COMPANY

                    NOTES TO FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1998 and 1997


NOTE G - LONG-TERM DEBT - Continued

    (1)  Principal of $6,092 is due monthly plus interest payable at the prime
         rate plus 2% (9.75% and 10.5% at December 31, 1998 and 1997,
         respectively). Interest expense for the years ended December 31, 1998
         and 1997 was $29,381 and $39,824, respectively. The note was secured by
         substantially all of the Company's assets, an annuity and certificate
         of deposit, and personal guarantees of the Company's former President.
         This loan was paid off in March 1999. (NOTE O)

    (2)  Principal and interest payments of $3,389 are due monthly. Interest is
         payable at 3.75%. Interest expense for the years ended December 31,
         1998 and 1997 was $4,167 and $7,971, respectively. The note is secured
         by substantially all of the Company's assets and personal guarantees of
         the Company's President. As of December 31, 1998, the Company was in
         default of all of its covenants under this agreement. Subsequent to
         year-end, the PIDC provided a waiver of these covenants.

    (3)  Principal of $1,000 is due monthly plus interest payable at 6%.
         Interest expense approximated $1,000 for the year ended December 31,
         1998.

    (4)  Principal of $16,000 is due on demand with interest payable at 6%.
         Interest expense approximated $500 for the year ended December 31,
         1998. Subsequent to year-end, $13,000 of this debt was forgiven, see
         Note C.

    (5)  Principal of $2,099 due monthly plus interest payable at 6%. Interest
         expense approximated $400 for the year ended December 31, 1998.

    Principal repayments due on long-term debt at December 31, 1998 are as
follows:

           1999                                                         $359,181
           2000                                                           39,317
           2001                                                           38,624
           2002                                                           33,310
                                                                        --------
                                                                        $470,432
                                                                        ========
NOTE H - SHAREHOLDERS' EQUITY

    The Company closed a public offering on February 14, 1997, of 900,000 shares
    (the Shares) of Common Stock, no par value per share (the Common Stock) and
    4,000,000 redeemable Common Stock purchase warrants (the Redeemable
    Warrants). The Shares and the Redeemable Warrants (collectively, the
    Securities) were purchased separately and are separately tradable. The
    initial public offering prices of the Shares and the Redeemable Warrants
    were $5.00 and $0.50, respectively. In anticipation of this public offering,
    the Company redeemed all its outstanding fractional shares for cash. Each
    Redeemable Warrant entitles the registered holder thereof to purchase one
    share of Common Stock at an exercise price of $6.00 subject to adjustment,
    commencing on the date of the Prospectus until 60 months from the date of
    the Prospectus at which time the Redeemable Warrants shall expire. The
    Redeemable Warrants are redeemable by the Company, with the consent of the
    underwriter, at any time commencing one year, after the offering, at a
    redemption price of $0.10 per Redeemable Warrant, provided that the average
    closing bid price of the Common Stock equals or exceeds $8.00 per share for
    any 20 trading days within a period of 30 consecutive trading days ending on
    the fifth trading day prior to the date of the notice of redemption. The net
    proceeds received by the Company in connection with the public offering was
    approximately $5,225,000.

                                   (Continued)


                                      -31-
<PAGE>

                          INDEPENDENCE BREWING COMPANY

                    NOTES TO FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1998 and 1997




NOTE H - SHAREHOLDERS' EQUITY - Continued

    The Company had granted to the underwriter a 45-day option to purchase up to
    an additional 135,000 shares of Common Stock and/or 600,000 Redeemable
    Warrants on the same terms and conditions as set forth above solely to cover
    overallotments. On February 12, 1998, the underwriter exercised its option
    to purchase 600,000 redeemable warrants. Proceeds to the Company amounted to
    approximately $60,000, net of approximately $40,000 of closing costs.

    In addition, the Company has agreed to sell to the underwriter, for nominal
    consideration, warrants to purchase 90,000 shares of Common Stock and
    400,000 Redeemable Warrants (the Underwriter's Warrants). The Underwriter's
    Warrants are initially exercisable at a price of $6.00 per share of Common
    Stock and $0.60 per Redeemable Warrant for a period of four years commencing
    one year from the date of the Prospectus. The Redeemable Warrants underlying
    the Underwriter's Warrants are exercisable at a price of $7.50 per share of
    Common Stock.

    The Company, in connection with the Private Placements discussed in note I,
    amended and restated its Articles of Incorporation whereby the Company is
    authorized to issue 20,000,000 shares of capital stock, of which 19,000,000
    shares are Common Stock, no par value; 500,000 shares are Series A preferred
    stock, par value $10.00 per share (Series A Preferred Stock); and 500,000
    shares are Series B preferred stock, par value $10.00 per share (Series B
    Preferred Stock).

    Holders of outstanding shares of Series A Preferred Stock were entitled to
    receive cumulative cash dividends at a rate of $1.80 per share per annum.
    Holders of outstanding shares of Series B Preferred Stock shall be entitled
    to receive cumulative cash dividends at a rate of $1.40 per share per annum.
    Both the Series A Preferred Stock and Series B Preferred Stock contain
    mandatory redemption provisions whereby the Company shall redeem all
    outstanding shares on the five-year anniversary date of the date of issuance
    of such shares at $10.00 cash per share on the occurrence of certain events,
    as defined, together with an amount on each redemption date equal to the
    accrued and unpaid dividends on such shares to the redemption date.
    Previously, the Company redeemed the Series B Preferred Stock with a portion
    of the net proceeds from their Public Offering.

NOTE I - PRIVATE PLACEMENTS

    A portion of the net proceeds of the Company's Public Offering in 1997 was
    used to repay certain outstanding debentures from 1996. As a result of this
    repayment, the Company wrote-off the remaining unamortized original issue
    discount of $1,159,129 and deferred financing costs of $29,528. These costs
    are included in interest expense for the year ended December 31, 1997.

    A portion of the net proceeds of the Company's Public Offering in 1997 was
    used to redeem certain Series B preferred stock issued in 1996. As a result
    of this redemption, the Company wrote off the remaining unamortized original
    issue discount of $1,757,127 and deferred financing costs of $26,328. These
    costs are included in interest expense for the year ended December 31, 1997.




                                   (Continued)


                                      -32-
<PAGE>

                          INDEPENDENCE BREWING COMPANY

                    NOTES TO FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1998 and 1997




NOTE I - PRIVATE PLACEMENTS - Continued

    In consideration for agreeing to act as standby purchaser for the balance of
    the Debentures not purchased by the Company shareholders and for agreeing to
    allow certain shareholders of the Company to participate in the purchase of
    certain Debentures in prior years, Winfield Capital Corporation (Winfield)
    received a warrant (the Series B Warrant) which entitles Winfield to
    purchase 3,500,000 shares of Common Stock of the Company at a price of $6.00
    per share. The Series B Warrant is exercisable and expires five years
    following the Company's initial public offering. At December 31, 1997, all
    3,500,000 warrants were still outstanding and unexercised. During 1998, the
    exercise price of these debentures was reduced to $1.50.

NOTE J - INCOME TAXES

    The Company has incurred net operating losses for financial statement and
    income tax reporting purposes since inception. Accordingly, no provision for
    income taxes has been made for 1998 or 1997.

    The Company's income tax provision can be reconciled to that determined by
    applying the statutory federal income tax rate of 34% to the pretax losses
    for 1998 and 1997 as follows:

                                                     1998             1997
                                                  -----------     ------------

       Expected tax benefit at 34%                $ (490,546)     $(1,624,040)
       Non-deductible offering expenses                     -           22,465
       Deferred tax valuation allowance               490,127        1,619,034
       Other                                              419          (17,459)
                                                  -----------     ------------

       Income taxes                               $        -      $         -
                                                  ===========     ============

    Deferred tax assets and liabilities reflected in other assets and
    liabilities are as follows:

                                                     1998             1997
                                                  -----------     ------------

       Depreciation                               $ (267,699)     $  (180,641)
       Net operating loss carryovers                2,719,794        2,146,092
       Other                                           19,423           15,940
                                                  -----------     ------------
                                                    2,471,518        1,981,391
       Valuation allowance                         (2,471,518)      (1,981,391)
                                                  -----------     ------------

       Net deferred tax asset                     $         -     $          -
                                                  ===========     ============

    In view of the Company's history of net operating losses, management has
    provided a valuation allowance for the full amount of the deferred tax asset
    at December 31, 1998 and 1997.

    The Company has net operating loss carryover deductions of approximately
    $8,000,000 expiring as follows: $57,000 - 2010; $1,295,000 - 2011;
    $4,960,000 - 2012; and $1,687,000 - 2013.


                                      -33-
<PAGE>

                          INDEPENDENCE BREWING COMPANY

                    NOTES TO FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1998 and 1997




NOTE K - LOSS PER SHARE

    The Company's calculation of loss per share in accordance with SFAS No. 128
    is as follows:

<TABLE>
<CAPTION>
                                                                              Year ended December 31, 1998
                                                                  ----------------------------------------------
                                                                      Loss             Shares         Per share
                                                                  (numerator)      (denominator)        amount
                                                                  ------------     -------------      ----------
<S>                                                                    <C>                <C>             <C>
       Basic loss per share
          Net loss                                                $(1,516,568)        3,323,516        $ (0.46)

       Effect of dilutive securities
          Options                                                           -            11,691              -
                                                                  -----------         ---------        -------

       Diluted loss per share
          Net loss plus assumed conversions                       $(1,516,568)        3,335,207        $ (0.46)
                                                                  ===========         =========        =======
</TABLE>

    Of the total options outstanding, options to purchase 95,000 shares of
    common stock, ranging from $0.81 to $3.63 per share, were outstanding during
    the year. They were not included in the computation of diluted EPS because
    the option exercise price was greater than the average market price.

<TABLE>
<CAPTION>
                                                                              Year ended December 31, 1997
                                                                  ----------------------------------------------
                                                                      Loss             Shares         Per share
                                                                  (numerator)      (denominator)        amount
                                                                  ------------     -------------      ----------
<S>                                                                    <C>                <C>             <C>
       Basic loss per share
          Net loss                                                $(4,776,589)        3,105,982        $ (1.54)

       Effect of dilutive securities
          Options                                                           -                 -              -
                                                                  -----------         ---------        -------

       Diluted loss per share
          Net loss plus assumed conversions                       $(4,776,589)        3,105,982        $ (1.54)
                                                                  ===========         =========        =======
</TABLE>

    Of the total options outstanding, options to purchase 65,000 shares of
    common stock, ranging from $1.50 to $3.63 per share, were outstanding during
    the year. They were not included in the computation of diluted EPS because
    the option exercise price was greater than the average market price.


                                      -34-
<PAGE>

                          INDEPENDENCE BREWING COMPANY

                    NOTES TO FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1998 and 1997




NOTE L - STOCK OPTION PLAN

    The Company adopted a nonqualified stock option plan under which it may
    grant up to 300,000 shares of Common Stock. The Company may not grant any
    incentive stock options with a purchase price of less than fair market value
    of the Common Stock as of the date of the grant.

    The Company follows the provisions of SFAS No. 123, Accounting for
    Stock-Based Compensation which contains a fair value-based method for
    valuing stock-based compensation that entities may use, which measures
    compensation cost at the grant date based on the fair value of the award.
    Compensation is then recognized over the service period, which is usually
    the vesting period. Alternatively, the standard permits entities to continue
    accounting for employee stock options and similar equity instruments under
    Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock
    Issued to Employees. Entities that continue to account for stock options
    using APB Opinion No. 25 are required to make pro forma disclosures of net
    income and earnings per share, as if the fair value-based method of
    accounting defined in SFAS No. 123 had been applied. The Company's stock
    options are accounted for under APB Opinion No. 25.

    Had compensation cost for the plans been determined based on the fair value
    of the options at the grant dates consistent with SFAS No. 123, the
    Company's net income and loss per share would have been reduced to the pro
    forma amounts indicated below.

<TABLE>
<CAPTION>
                                                                                         1998             1997
                                                                                    ------------     ------------
<S>                                                               <C>                    <C>              <C>
       Net loss                                               As reported           $(1,516,568)     $(4,776,589)
                                                              Pro forma             $(1,551,768)     $(4,838,055)
       Loss per share - basic and diluted                     As reported           $     (0.46)     $     (1.54)
                                                              Pro forma             $     (0.47)     $     (1.56)
</TABLE>

    These pro forma amounts may not be representative of future disclosures
    because they do not take into effect pro forma compensation expense related
    to grants before 1995, of which there were none.

    The fair value of each option grant is estimated on the date of grant using
    the Black-Scholes options-pricing model with the following weighted average
    assumptions used for grants in 1998 and 1997: expected volatility of 90.0%
    in 1998 and 77.5% in 1997, risk-free interest rate of 5.36% in 1998 and
    6.73% in 1997, and expected life of 10 years for both years.











                                   (Continued)


                                      -35-
<PAGE>

                          INDEPENDENCE BREWING COMPANY

                    NOTES TO FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1998 and 1997




NOTE L - STOCK OPTION PLAN - Continued

    A summary of the status of the Company's option plans as of December 31,
    1998 and 1997, the changes during the year ending on these dates is
    represented below:

<TABLE>
<CAPTION>
                                                                1998                             1997
                                                      -----------------------          -----------------------
                                                                     Weighted                         Weighted
                                                                      average                          average
                                                                     exercise                         exercise
                                                       Shares          price           Shares           price
                                                      --------       --------          -------        --------
<S>                                                    <C>            <C>                <C>              <C>
       Outstanding, beginning of year                  65,000         $  1.96               -         $     -
       Granted                                        100,000            0.75          65,000            1.96
       Cancelled                                      (30,000)           1.00               -               -
                                                      -------         -------          ------         -------
       Outstanding, end of year                       135,000         $  1.17          65,000         $  1.96
                                                      =======         =======          ======         =======
       Weighted average fair value of options
           granted during the year                                    $  0.67                         $  1.65
                                                                      =======                         =======
</TABLE>

    The following table summarizes information about options outstanding at
December 31, 1998:

<TABLE>
<CAPTION>
                                Options outstanding                                         Options exercisable
        ---------------------------------------------------------------------           ----------------------------
                                                   Weighted
                                  Number            average          Weighted               Number          Weighted
                              outstanding at       remaining          average           outstanding at       average
             Range of          December 31,       contractual        exercise            December 31,       exercise
         exercise prices           1998               life             price                 1998             price
        ----------------      ---------------     -----------        --------           --------------      --------
<S>             <C>               <C>              <C>                 <C>                  <C>              <C>
        $0.50 - $0.5625           40,000           9.9 years           $0.52                40,000           $0.52
        $0.8125 - $1.00           60,000           9.6 years            0.91                60,000            0.91
             $1.50                21,000           8.6 years            1.50                19,000            1.50
             $3.625               14,000           8.3 years            3.625               14,000            3.625
                                 -------                                                  --------
                                 135,000           9.4 years                              $133,000
                                 =======                                                  =======

</TABLE>






                                   (Continued)


                                      -36-
<PAGE>

                          INDEPENDENCE BREWING COMPANY

                    NOTES TO FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1998 and 1997




NOTE M - COMMITMENTS AND CONTINGENCIES

    1.  Operating Leases

    The Company has entered into noncancellable agreements for the purposes of
    renting its manufacturing facility and leasing certain office and
    manufacturing-related equipment. In connection with the lease on the
    manufacturing facility, the Company has the option to purchase the building
    beginning after the second year of the lease for terms, as defined therein.
    The following is a schedule by year of approximate future minimum payments
    for such agreements with terms in excess of one year:

       Year ending December 31,
                1999                                              $100,000
                2000                                                94,000
                2001                                                93,000
                2002                                                96,000
                2003                                               103,000
                Thereafter                                         111,000
                                                                  --------
                                                                  $597,000
                                                                  ========

    The Company has entered into a sublease agreement for a portion of its
    rented manufacturing facility. This sublease is on a month-to-month basis
    and has provided approximately $9,300 of rental income for each of the years
    ended December 31, 1998 and 1997. Rent expense for the years ended December
    31, 1998 and 1997 was $82,344 and $81,704, respectively.

    2.  Other

    In the normal course of business, the Company has been named as a defendant
    in certain lawsuits. Although the ultimate outcome of these suits cannot be
    ascertained at this time, it is the opinion of management that the
    resolution of such suits will not have a material adverse effect on the
    financial position or results of operations of the Company.

    3.  Employment Agreements

    The Company entered into an employment agreement with the Brewmaster
    expiring on December 31, 1999. Compensation under this agreement is $45,000
    per year, plus annual increases and bonuses as determined by the Board. The
    agreement provides a covenant not to compete with the Company during the
    term of employment and for a two-year period after employment ends. Finally,
    if terminated for any reason, other than "cause," "disability" or "death,"
    each as defined therein, the Company shall pay salary accrued through the
    date of termination and for two years thereafter.

    Previously, the Company had entered into three separate employment
    agreements with certain executive officers and senior management. Subsequent
    to year end, these contracts were cancelled. Current management believes
    they have no further liability under these contracts.




                                   (Continued)


                                      -37-
<PAGE>

                          INDEPENDENCE BREWING COMPANY

                    NOTES TO FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1998 and 1997



NOTE M - COMMITMENTS AND CONTINGENCIES - Continued



    4.  Consulting Agreement

    The Company entered into a consulting agreement with a Board Member on
    December 17, 1998, whereby the Company will pay this Board Member an initial
    $5,000 plus a monthly fee of $3,000 for 12 months. On December 17, 1998, the
    Company also agreed to grant the Board Member 25,000 non-registered common
    shares, which would have approximated $9,375 in compensation expense as of
    December 31, 1998. As of December 31, 1998, the Company has not yet granted
    these shares to the Board Member. Accordingly, no compensation expense has
    been recorded during the year ended December 31, 1998.

    5.  Trademarks

    The Company has registered the trademarks "1776","Franklinfest" and "Betsy's
    Kristal Wheat" with the United States Patent and Trademark office. The
    Company has filed an application to register "Uncle ESB" with the United
    States Patent and Trademark office. Although the Company expects "Uncle ESB"
    to be registered in due course, there can be no assurance any such trademark
    will be registered, or if registered, there can be no assurance that it will
    not be challenged at some later date. Independence Brewing Company of
    Florida, Inc. (Independence Florida), a corporation that is currently
    operating under bankruptcy reorganization a brewpub in Ft. Laurderdale,
    Florida, utilizing the "Independence" name and logo and the name
    "Independence Brewery and Restaurant" (the Independence Marks), has filed
    federal trademark and service mark applications for "Independence Brewery
    and Restaurant" (the Applications). The Company has entered into an
    agreement with Independence Florida (the Florida Agreement) whereby (i)
    Independence Florida transferred and assigned all of its rights, title and
    interest in the Independence Marks and the Applications to the Company, (ii)
    Independence Florida was granted a perpetual royalty-free license to use the
    Independence Marks for its one location only, subject to termination upon
    certain conditions, and (iii) the Company will not operate a bar or
    restaurant in Broward County, Florida, Independence Florida's geographic
    region, without the consent of Independence Florida.

    On February 5, 1998, the Company executed a term sheet with Whitetail
    Brewing, Inc. in which the parties agreed that the Company would receive an
    exclusive license of the trademark and logo for "Nittany Ale", a newly
    developed Whitetail Brewing product, for a five (5) year term, in
    consideration for which the Company agreed to pay the licensor a royalty for
    every case of Nittany Ale sold. The Company paid $10,000 up front and
    attains brand ownership at the end of the license term. In addition, the
    Company agreed to engage Wade E. Keech, President and founder of Whitetail
    Brewing, as exclusive sales representative of the Company in the central and
    western Pennsylvania regions for which Mr. Keech will receive commissions
    from the sales of all of the Company's products, including Nittany Ale.

                                   (Continued)


                                      -38-
<PAGE>

                          INDEPENDENCE BREWING COMPANY

                    NOTES TO FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1998 and 1997




NOTE M - COMMITMENTS AND CONTINGENCIES - Continued

    The Company has entered into an exclusive license and purchase agreement
    with Moosehead Brewing Company (Moosehead) for use of Moosehead's
    registration for "The Taste of Independence" and its pending U.S. trademark
    application for the mark "Independence" for brewed alcoholic beverages (the
    Moosehead Marks). This agreement is for a two-year license for use of the
    Moosehead Marks in the United States whereby the Company paid Moosehead
    $30,000 per year for such right and, upon termination of such two-year
    period, all rights to the use of "Independence" will be transferred to the
    Company for an additional payment of $30,000.

    The Company utilizes a number of recipes in the production of its beers and
    protects these recipes as trade secrets. In addition, product packaging,
    advertising and promotional design, and artwork are important to the
    Company's success, and such materials are considered protected by common law
    copyright.

    6.  Florida Agreement

    From April 1997 until January 1998, Robert W. Connor, Jr., President and
    Chief Executive Officer of the Company, was a director, officer and a
    shareholder of Independence Florida, a corporation that is currently
    operating a brewpub in Ft. Lauderdale, Florida, utilizing the Independence
    Marks. In addition, Independence Florida has filed federal trademark and
    service mark applications for "Independence Brewery and Restaurant." The
    Company has entered into an agreement with Independence Florida. In
    addition, pursuant to Mr. Connor's former employment agreement with the
    Company, Mr. Connor will offer to transfer his shares of Common Stock of
    Independence Florida to the Company if such transfer is permitted pursuant
    to an existing agreement among Independence Florida and its shareholders. If
    such shares are not transferred, the Company and Mr. Connor have agreed that
    the Company will receive any economic benefit from Mr. Connor's shares of
    Common Stock of Independence Florida, including dividends and sale proceeds
    in excess of Mr. Connor's original purchase price of such shares. To date,
    nothing has been completed as Independent Florida has been under bankruptcy
    reorganization.

NOTE N - CUSTOMER INFORMATION

    1.  Major Customers

    Three customers accounted for approximately 19%, 12% and 12% of the
    Company's sales during the year ended December 31, 1998. Two customers, one
    being the largest in the current year, accounted for approximately 12% and
    10% of the Company's sales during the year ended December 31, 1997.

    2.  Contract Brewing Arrangements

    The Company has entered into arrangements to provide contract brewing
    services to third parties which market and sell beer produced by the Company
    under such party's own proprietary labels. Less than 5% of the Company's
    revenues resulted from contract brewing in both 1998 and 1997.


                                      -39-
<PAGE>

                          INDEPENDENCE BREWING COMPANY

                    NOTES TO FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1998 and 1997




NOTE O - SUBSEQUENT EVENTS

    On March 4, 1999, the Company obtained a $500,000 note from a third party
    which it used to pay off the SBA loan (NOTE G), service fees and other
    payables. The note was a five-month demand note, payable on August 4, 1999.
    This note was not repaid subsequent to year-end and the Company is in
    default of the arrangements under this agreement. Interest, not less than
    $2,500 per month, is due monthly, calculated at 1/15 of 1% of the average
    daily balance due, and adjusted monthly for prime rate increases. All the
    assets of the Company secure the note.


                                      -40-
<PAGE>

                                    PART III

ITEM 9. - DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
          COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT

MANAGEMENT

Directors and Officers

     Set forth below is certain information regarding the Company's directors
and executive officers:

<TABLE>
<CAPTION>

                Name                        Age                           Position
                ----                        ---                           --------
<S>                                         <C>                             <C>
         Robert W. Connor, Jr. ..............37            Chairman of the Board, Chief Executive
                                                           Officer and Treasurer
         William Moore.......................42            President and Brewmaster
         K. Ray Ellis........................40            Director
</TABLE>

     Robert W Connor, Jr. Mr. Connor, founder of the Company, has held numerous
positions with the Company since 1994. He is currently Chairman of the Board,
Chief Executive Officer and Treasurer of the Company since May 1994. From 1991
to 1994, Mr. Connor was an Investment Consultant with Pennsylvania Merchant
Group Ltd. Mr. Connor was also the Vice President, Secretary and a member of the
Board of Directors of Independence Florida from April 1995 until January 1997.

     William Moore. Mr. Moore has been the Company's Brewmaster and Secretary
since May 1994. He is currently Brewmaster and President. From 1990 to 1994, Mr.
Moore was the head brewer for Stoudt's Brewery in Adamstown, Pennsylvania.

     K. Ray Ellis. Mr. Ellis attended the Ohio State University and was Co.
Capt. Of the 1980 Ohio State Football team. He was drafted in 1981 by the
Philadelphia Eagles. In 1986 he joined the Cleveland Browns but had to retire in
1989 due to a neck injury. Ray served on the Board of Directors for the Red Bell
Brewing Company in Philadelphia, Pennsylvania. Mr. Ellis is the President and
CEO of Ray Ellis and Associates, a sales, marketing and business development
consulting firm.


                                      -41-
<PAGE>

ITEM 10. - EXECUTIVE COMPENSATION

     The following table sets forth the compensation paid to the Company's Chief
Executive Officer for the year ended December 31, 1998 (the Named Executive
Officer). No other executive officer of the Company received total annual salary
and bonus in excess of $100,000 during the year ended December 31, 1998.

                           Summary Compensation Table

<TABLE>
<CAPTION>
                                                                                         Annual Compensation
                  Name and Principal Position                                           Salary         Bonus
                                                                                        ------         -----
<S>                                                                                    <C>               <C>
           Robert W. Connor, Jr...............................................  1998   $ 62,301           -
             Chairman of the Board, President,                                  1997     90,000
             Chief Executive Officer and Treasurer                              1996     36,581

</TABLE>
-------

Employment Arrangements


     Mr. Moore entered into an employment agreement (the Moore Agreement) with
the Company effective as of August 12, 1996, and terminating on December 31,
1999. Mr. Moore will serve as the Brewmaster of the Company and will receive a
base salary of $45,000 per year, plus annual increases based upon the salary
policies of the Company and Mr. Moore's contributions to the Company.

     Previously, the Company had entered into three separate employment
agreements with certain executive officers and senior management. Subsequent to
year end, these contracts were cancelled. Current management believes they have
no further liability under these contracts.


Committees of the Board of Directors

     In January 1997, the Board formed an Audit Committee and a Compensation
Committee. The Audit Committee will review the engagement of the independent
accountants, will review and approve the scope of the annual audit undertaken by
the independent accountants and will review the independence of the accounting
firm. The Audit Committee will also review the audit and non-audit fees of the
independent accountants and the adequacy of the Company's internal control
procedures. The members of the Audit Committee are Messrs. Connor and Moore. The
Compensation Committee will review all salary and executive compensation issues
for the Company's employees and directors. The members of the Compensation
Committee are Messrs. Connor and Ellis. Neither of the above committees met
during the year ended December 31, 1998.


                                      -42-
<PAGE>

Stock Plan

     The Company has adopted the Independence Brewing Company Omnibus Stock Plan
(the Stock Plan) which provides for the grant of stock options to purchase up to
an aggregate of 300,000 shares of the Common Stock, stock appreciation rights
(including free-standing, tandem and limited stock appreciation rights) (SARs),
restricted or unrestricted share awards, phantom stock, performance awards, or
any combination of the foregoing (collectively, Awards). Participation in the
Stock Plan is open to all employees, directors and consultants of the Company
(the Participants). The Company believes that the Stock Plan will promote the
long-term growth and profitability of the Company by providing key people
associated with the Company with incentives to improve shareholder value and to
contribute to the growth and financial success of the Company. Moreover, the
Company believes that the Stock Plan will enable the Company to attract, retain
and reward the best available persons for positions of substantial
responsibility.

     The Stock Plan is administered by the Board, or in the alternative, a
committee appointed by the Board whose members are deemed to be "Non-Employee
Directors", as that term is defined in Rule 16b-3 under the Exchange Act of 1934
(the Exchange Act) (such group administering the Stock Plan will be referred to
as the Committee). The persons eligible to receive Awards under the Stock Plan
are those Participants selected by the Committee in its discretion from time to
time.

     All terms and conditions of Awards granted under the Stock Plan are
determined by the Committee, including the selection of Participants to whom
Awards will be granted, the types of Awards to be granted, the number of shares
to be covered by or used for reference purposes for each Award, the exercise
price or base price, respectively, of each stock option or SAR granted (price
may not be less than 100% of the fair market value for incentive stock (ISO),
the expiration date of each stock option and SAR granted (subject to a maximum
of 10 year from the date of the grant), the vesting schedule and any other
material provisions.

     In the event of any stock dividend, stock split, recapitalization,
reclassification, combination of shares, or other similar event, appropriate
proportional adjustments will be made in the number of shares reserved for
issuance under the Stock Plan, the number, kind and price of shares covered by
outstanding Awards, and any other matters which relate to Awards and are
affected by the changes set forth above. The Stock Plan also provides for the
ability of the Committee to accelerate or change the exercise date of Awards and
provides discretion to the Committee to take whatever other actions it deems
necessary or desirable with respect to all outstanding Awards upon the
occurrence of a "Change of Control," as such term is defined in the Stock Plan.
Stock options and SARs may not be exercised more than 10 years after the date of
grant (five years after the date of grant with respect to an ISO granted to any
person who owns stock of the Company possessing 10% or more of the total voting
power of all the Company's stock), and Awards granted under the Stock Plan are
not transferable other than by will or the laws of descent and distribution.

     The Committee has the discretion to award stock options to Participants as
either ISOs (employees only) or as non-qualified stock options (NQSOs). Stock
options awarded to Participants who are not employees are NQSOs. The exercise
price of an ISO must be not less than the fair market value of the Common Stock
on the date the option is granted (110% of fair market value with respect to an
ISO granted to any person who owns stock of the Company possessing 10% or more
of the total voting power of all the Company's stock), and is payable upon the
exercise of the option. The exercise price of a NQSO may be less than the fair
market value of the Common Stock on the date the option is granted. The number
of shares covered by ISOs granted to any optionee is limited such that the
aggregate fair market value of stock (determined as of the date of the grant)
with respect to which ISOs are exercisable for the first time by such optionee
in any calendar year shall not exceed $100,000. The excess ISOs, if any, will be
treated as NQSOs.

     In 1998, the Board awarded stock options totaling 100,000 shares to various
sales, operations and administrative personnel.


                                      -43-
<PAGE>

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


Principal Shareholders

     The following table sets forth certain information regarding the beneficial
ownership of the Common Stock at April 30, 1998, including the effect of the
exercise of any outstanding warrants, by (i) each person known to the Company to
beneficially own more than 5% of the Common Stock, (ii) each director and the
Named Executive Officer of the Company and (iii) all directors and the Named
Executive Officer as a group.

<TABLE>
<CAPTION>
                                                                       Number of            Percentage of
                                                                      Beneficially      Outstanding Shares
         Name and Address of Beneficial Owner                          Owned (1)          of Common Stock
         ------------------------------------                        -------------      -------------------
<S>                                                                       <C>                   <C>
              Robert W. Connor, Jr....................................    574,166               17.9%
              7510 McCallum Street
              Philadelphia, PA  19118

              Winfield Capital Corp.(2) ..............................  4,449,941               66.3%
              237 Mamaroneck Avenue
              White Plains, NY  10605

              William Moore...........................................     50,000                1.6%
              274 Diamond Street
              Pottstown, PA  19464

</TABLE>


-------
(1)  As used in this table, "beneficial ownership" means the sole or shared
     power to vote or direct the voting of a security, or the sole or shared
     investment power with respect to a security (i.e., the power to dispose, or
     direct the disposition of a security). A person is deemed as of any date to
     have "beneficial ownership" of any security that such person has the right
     to acquire within 60 days after such date.


                                      -44-
<PAGE>

(2)  Includes 3,500,000 shares of Common Stock issuable upon the exercise of the
     Series B Warrant granted to Winfield, which is exercisable immediately at
     an exercise price of $6.00 per share. During 1998, the exercise price of
     these debentures was reduced to $1.50. See "Certain Transactions - Private
     Placements."


ITEM 12. - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Private Placements

     A portion of the net proceeds of the Company's Public Offering in 1997 was
used to repay certain outstanding debentures from 1996. As a result of this
repayment, the Company wrote-off the remaining unamortized original issue
discount of $1,159,129 and deferred financing costs of $29,528. These costs are
included in interest expense for the year ended December 31, 1997.

     A portion of the net proceeds of the Company's Public Offering in 1997 was
used to redeem certain Series B preferred stock issued in 1996. As a result of
this redemption, the Company wrote off the remaining unamortized original issue
discount of $1,757,127 and deferred financing costs of $26,328. These costs are
included in interest expense for the year ended December 31, 1997.

     In consideration for agreeing to act as standby purchaser for the balance
of the Debentures not purchased by the Company shareholders and for agreeing to
allow certain shareholders of the Company to participate in the purchase of
certain Debentures in 1996 and 1995, Winfield Capital Corporation (Winfield)
received a warrant (the Series B Warrant) which entitles Winfield to purchase
3,500,000 shares of Common Stock of the Company at a price of $6.00 per share.
The Series B Warrant is exercisable and expires five years following the
Company's initial public offering. At December 31, 1997, all 3,500,000 warrants
were still outstanding and unexercised. During 1998, the exercise price of these
debentures was reduced to $1.50.

                                      -45-
<PAGE>

Guaranties

     On January 18, 1995, the Company borrowed $430,000 pursuant to the SBA
Loan. The SBA Loan is evidenced by a promissory note bearing interest at the
prime rate plus 2% (effective rate of 10.25% at September 30, 1996). Principal
and interest are payable monthly through January 18, 2002, when all unpaid
interest and principal are due in full. Robert W. Connor, Jr. personally
guaranteed the SBA Loan.

     On February 1, 1995, the Company borrowed $250,000 pursuant to a
Philadelphia Industrial Development Corporation loan. The loan is evidenced by a
promissory note bearing annual interest at 3.75%. Principal and interest are
payable monthly through July 1, 2002. Robert W. Connor, Jr. personally
guaranteed this loan.

Florida Agreement

     From April 1995 until January 1997, Robert W. Connor, Jr., President and
Chief Executive Officer of the Company, was a director, officer and a
shareholder of Independence Florida, a corporation that is currently operating a
brewpub in Ft. Lauderdale, Florida, utilizing the Independence Marks. In
addition, Independence Florida has filed federal trademark and service mark
applications for "Independence Brewery and Restaurant." The Company has entered
into an agreement with Independence Florida. In addition, pursuant to Mr.
Connor's former employment agreement with the Company, Mr. Connor will offer to
transfer his shares of common stock of Independence Florida to the Company if
such transfer is permitted pursuant to an existing agreement among Independence
Florida and its shareholders. If such shares are not transferred, the Company
and Mr. Connor have agreed that the Company will receive any economic benefit
from Mr. Connor's shares of Common Stock of Independence Florida, including
dividends and sale proceeds in excess of Mr. Connor's original purchase price of
such shares. To date, nothing has been completed as Independence Florida has
been under bankruptcy reorganization.

     All future transactions between the Company and its officers, directors and
principal shareholders and their affiliates will be approved by a majority of
the non-employee members of the Board, and will be on terms no less favorable to
the Company than could be obtained from unaffiliated third parties.

Use of Proceeds

     The Company has utilized $5,285,000 of the net proceeds from the Offering.
The funds were utilized as follows: 1) the repayment of indebtedness of
$1,550,000; 2) purchase and install machinery and equipment of $731,000 and 3)
working capital purposes of $3,004,000.

                                      -46-
<PAGE>

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

<TABLE>
<CAPTION>
         (a)      Exhibit No.                               Description
                  -----------                               -----------
<S>                                                              <C>
                     27             Financial Data Schedule for year ended December 31, 1998.

</TABLE>











                                      -47-
<PAGE>

                                   SIGNATURES

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


                                INDEPENDENCE BREWING COMPANY

                                By: /s/ Robert W. Connor, Jr.
                                    --------------------------------------------
                                    Name:  Robert W. Connor, Jr.
                                    Title: Chief Executive Officer

Date: October 4, 1999

     In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the date indicated.

<TABLE>
<CAPTION>
<S>                           <C>                                                                 <C>
/s/ Robert W. Connor, Jr.    Chairman of the Board, Chief Executive Officer and Treasurer        October 4, 1999
-------------------------
   Robert W. Connor, Jr.


/s/ William Moore            President, Brewmaster                                               October 4, 1999
-------------------------
   William Moore

/s/ K. Ray Ellis             Director                                                            October 4, 1999
-------------------------
   K. Ray Ellis

</TABLE>

                                      -48-