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, 1997

|_|      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 or other jurisdiction of                          (IRS 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
                           --------------------------
                                (Title of class)

                               Redeemable Warrants
                               -------------------
                                (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 X  No
                                                                  ---   ---

     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. $690,648

   
     On April 30, 1998, the aggregate market value of the 1,824,498 shares of
voting stock held by non-affiliates of the issuer was approximately $1,094,693.

     On April 30, 1998, 3,357,078 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
                                                                  ---   ---


<PAGE>



                                     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 17 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, 1997, the Company produced approximately 5,200 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 recently executed a term sheet to license and market a
new product, Nittany Ale, in 1998. The Company anticipates that these
acquisitions will enable the Company to increase its production in 1998 by
approximately 4,500 barrels.

     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. 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. The Company anticipates that the foregoing terms will be incorporated in a
definitive agreement to be effective on or about May 1, 1998.

     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. Based and sold primarily in Delaware since 1998, the Company
intends to market and sell Blue Hen Beer in a much broader market in 1998.

     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. The Company is contemplating the introduction of a "light" beer in
1998 as well as a variety case for summer and winter seasons. The current year
will be the Company's first full year in which it will produce and sell a
complete line of seasonal beers.

     Brewpub Developement

   
     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 in 1998. However, no assurance can be given that the Company
will be sucessful in entering the brewpub market and if so, that this will
result in the anticipated business expansion.
    

<PAGE>


     Increase Distribution Network

     The Company currently distributes its products generally through 17
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, an increase of four representives
over 1996. 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.

     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


                                       -2-

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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 seven 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 sill
     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.


          Independence Thomas's Blonde Bock -- Fall Seasonal Coming in the Fall
     of 1998.

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



                                       -3-

<PAGE>



          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 5,200 barrels in the year ended December 31,
1997, approximately 400 barrels of which 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.


                                       -4-

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     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 lauter tun 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. 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 lauter tun, 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 and increasing production capacity by 300% over
1996. 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
    


                                       -5-

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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 recently
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. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

     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.

     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 accurately to forecast its demand for raw materials. Any failure by
the Company accurately to 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.


                                       -6-

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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 17 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, 1997. Two customers accounted for approximately 12% and 10% of the
Company's sales during the year ended December 31, 1996. 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 April 30, 1998, the Company maintained a sales
and marketing staff of six 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,


                                       -7-

<PAGE>



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. 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.


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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. Approximately 1% and 16% of the Company's
revenues resulted from contract brewing in 1997 and 1996, respectively, In 1998,
the Company expects to produce 2,000 barrels under this private label brewing
contract.

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


                                       -9-

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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.

     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


                                      -10-

<PAGE>



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 filed applications to register "1776" and "FranklinFest"
with the United States Patent and Trademark office. Although the Company expects
"1776" and "FranklinFest" to be registered in due course, there can be no
assurance any such trademarks will be registered, or if registered, there can be
no assurance that they 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


                                      -11-

<PAGE>



   
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. 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.
    

     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 will pay 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

   
     At April 30, 1997 the Company had 16 employees, including six in
production, six in sales and marketing, and four in administration. Of these,
two are part-time employees. 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 $5,866.00 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 $9,333.33 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 1997.


                                      -12-

<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 traded on the Nasdaq
SmallCap Market under the symbols "IBCO" and "IBCOW," respectively.

   
     As of April 30, 1998, there were 51 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 April 30, 1998, there were greater than 300
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.

                                       13
<PAGE>

   
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 Prospectus.

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 1997, gross
sales totaled $690,648 on approximately 5,200 barrels of production, as compared
to gross sales of $540,335 for 1996 on approximately 4,230
    


                                       14


<PAGE>



   
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 believes that the considerable
resources expended by the Company's management in connection with the IPO had an
adverse effect on the Company's operating results in the fourth quarter of 1996
and may have a material adverse effect on the Company's operating results in the
first half of 1997. 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 recently completed
acquisitions of certain existing brands other licensing arrangements and expects
to continue to do so in 1998, 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 1997, approximately 1% of the Company's revenues resulted from its contract
brewing operations.
    

     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 1997, the Company produced approximately 5,200 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


                                       15

<PAGE>



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, 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.

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 the
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 quarter. Excise taxes as a percentage of sales for the
twelve month period ended December 31, 1997 was 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. Cost 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 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 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 G & A
expense 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. Authorization
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
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 were $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.


Years Ended December 31, 1996 and 1995

     Sales. Gross sales increased from $237,644 in 1995 to $540,335 for 1996.
The substantial increase in gross sales was due in part to the Company's
commencing distribution of its beer products in May of 1995 and, to a greater
extent, to the expansion of the Company's third party wholesale distribution
network from four distributors at December 31, 1995 to 17 distributors at
December 31, 1996. This revenue increase reflected an increase in sales volume
from 1,415 barrels in 1995 to 4,235 barrels for 1996, with relatively stable
sales prices.

     Excise taxes. Excise taxes increased from $13,338 in 1995 to $33,375 for
1996, reflecting the increased level of sales volume on which federal and
certain local excise taxes are paid. Excise taxes as a percentage of sales
remained constant at approximately 6% in 1996 and 1995. The Company pays federal
and certain local excise 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. Cost of goods sold increased from $486,229 in 1995 to
$801,482 for 1996, primarily due to the increase in sales volume in 1996. Cost
of goods sold as a percentage of sales declined from approximately 205% in 1995
to approximately 148% in 1996, primarily due to increased sales which reduced
per barrel fixed and semi-variable costs associated with operating the brewery.
Increases in raw materials costs and utility costs from $192,070 in 1995 to
$375,922 in 1996 are associated with increased sales and the utilization of the
production facility from the time the Company commenced brewing in March 1995.
Repairs and maintenance increased from $19,312 for 1995 to $55,055 for 1996 due
primarily to repairs and maintenance related to the Company's bottling line.

     Advertising, promotional and selling expenses. Advertising, promotional and
selling expenses increased from $93,039 in 1995 to $158,015 for 1996.
Advertising, promotional and selling expenses as a percentage of sales declined
from approximately 39% in 1995 to approximately 29% in 1996, primarily due to
initial purchases of promotional items, such as apparel and other retail items
used by third party wholesale distributors, in 1995 which were not made in 1996.


                                       16

<PAGE>



     General and administrative expenses. General and administrative expenses
increased from $278,565 in 1995 to $413,004 for 1996. General and administrative
expenses as a percentage of sales declined from approximately 117% in 1995 to
approximately 76% in 1996. Increases in professional fees from $24,816 for 1995
to $66,501 for 1996 in connection with financing activities and other relatively
small increases in general and administrative expenses as compared to the
increased level of sales represented the primary increases. Also included in
general and administrative expenses for the year ended December 31, 1995 is
$15,000 of non-cash compensation paid to certain individuals who received Common
Stock valued at $3.00 per share in lieu of services rendered to the Company.

     Interest expense. Interest expense increased from $51,729 in 1995 to
$377,551 for 1996, due to the increase in the outstanding principal of
convertible debentures and Preferred Stock from $75,000 and $-0-, respectively,
at December 31, 1995 to $800,000 and $700,000 at December 31, 1996,
respectively, and the amortization of approximately $5,700 deferred financing
costs associated with these obligations, and the write off of approximately
$231,000 of original issue discount associated with such shares in 1996.
Interest expense as a percentage of sales increased from approximately 22% in
1995 to approximately 70% in 1996. The interest incurred in 1995 is 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") and to a
lesser extent with the Company's subordinated convertible notes of $75,000,
which were issued in late December 1995.

     Other income (expense), net. Other income (expense), net decreased from
$38,450 in 1995 to $19,965 for 1996, due primarily to reduced event income
received from Company sponsored events held in 1996. Other income (expense), net
as a percentage of sales, decreased from approximately 16% in 1995 to
approximately 4% in 1996.

Liquidity and Capital Resources

     Cash flows used in operation 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 increase in 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.


   
     To date, the Company has funded its operations and capital requirements
through the issuance of Common Stock, the SBA Loan, the PIDC Notes and the
issuance of certain subordinated convertible notes in 1995 and during 1996. In
February 1997, the Company completed its 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.
    

       


                                       17

<PAGE>


       

     In anticipation of the closing of the financing transactions described
below (the "Private Placements"), the Company was advanced an aggregate of
$200,000 on May 6, 1996 and July 16, 1996 by Winfield Capital Corp. ("Winfield")
to fund short term operations. This advance was repaid in connection with the
closing of the Private Placements.

     To fund operations, on August 12, 1996, September 13, 1996 and September
20, 1996, the Company sold an aggregate of $800,000 of debentures convertible
into shares of Series A Preferred Stock of the Company (the "Debentures") to
Winfield and certain shareholders of the Company (collectively referred to as
the "Purchasers"). To the extent that such shareholders did not so participate,
Winfield agreed to act as "standby" purchaser for the entire $800,000 in
Debentures being offered.

     In consideration of the purchase by the Purchasers of the Debentures, the
Purchasers received warrants which entitled them to purchase 415,275 shares of
Common Stock for the aggregate exercise price of $2,081 (the "Series A
Warrants"). All of the Series A Warrants were exercised by the Purchasers on
September 13, 1996 and September 20, 1996. The Company assigned a deferred
interest charge of $3.00 per share, totaling $1,245,825, to these shares and is
amortizing it over the term of the Debentures. In addition, in consideration of
the purchase by Winfield of the Debentures, Winfield received (i) a warrant (the
"Preferred Warrant") that entitled Winfield to purchase 70,000 shares of Series
B Preferred Stock of the Company, par value $10.00 (the "Series B Preferred
Stock"), exercisable immediately for an aggregate exercise price of $700,000 and
(ii) a warrant (the "Series C Warrant") that entitles Winfield to purchase
622,913 shares of Common Stock for the aggregate exercise price of $3,115. The
Preferred Warrant and the Series C Warrant were exercised by Winfield on
September 13, 1996. The Company assigned a deferred interest charge of $3.00 per
share, totaling $1,868,739, to these shares and is amortizing it over the term
of the Series B Preferred Stock.

   
     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 all of the qualified shareholders of the Company to participate in the
purchase of the Debentures, Winfield received a warrant (the "Series B Warrant")
which entitles Winfield to purchase 3.5 million shares of Common Stock of the
Company at a price of $6.00 per share. The Series B Warrant is immediately
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.


     In connection with the Private Placements, Winfield received a $15,000
processing fee and a $45,000 commitment fee. The Debentures and the Series B
Preferred Stock were repaid from the net proceeds of the IPO. In connection with
the issuance and repayment of the Debentures and the Series B Preferred Stock
from the net proceeds of the IPO, the Company wrote off (i) unamortized original
issue discount of $1,159,129 and $1,757,127, respectively, and (ii) deferred
financing costs of $29,528 and $26,328 relating to the Debentures and the Series
B Preferred Stock, respectively. See Note M of the Company's Financial
Statements.
    


                                       18

<PAGE>


   
     The Company believes that cash flow from the Private Placements and the IPO
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.
    

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 $6,312,000
as of December 31, 1997.
    


                                       19

<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
Licence 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.

     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


                                       20

<PAGE>



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 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 President and
Chief Executive Officer, Robert W. Connor, Jr., the Company's Brewmaster and
Vice President, William Moore.


                                       21

<PAGE>


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.

     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.


                                       22

<PAGE>



     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.

Item 7. Financial Statements


                                       23


                       FINANCIAL STATEMENTS AND REPORT OF
                    INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

                          INDEPENDENCE BREWING COMPANY

                           December 31, 1997 and 1996

<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, 1997 and 1996, and the related statements of
operations, changes in shareholders' equity and cash flows for each of the two
years in the period 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, 1997 and 1996, and the results of its operations and
cash flows for each of the two years in the period then ended in conformity with
generally accepted accounting principles.




/s/GRANT THORNTON LLP

Philadelphia, Pennsylvania
April 6, 1998

                                        24
<PAGE>


                          INDEPENDENCE BREWING COMPANY

                                 BALANCE SHEETS



<TABLE>
<CAPTION>

                                                                                                     December 31,
                                                                                             ----------------------------
          ASSETS                                                                                1997             1996
                                                                                             -----------     ------------
<S>                                                                                          <C>             <C>
Current assets
    Cash and cash equivalents                                                                $ 1,229,209     $    363,484
    Accounts receivable                                                                           34,211           17,126
    Inventories                                                                                  164,787          134,816
    Advances to officer                                                                              -             10,000
                                                                                             -----------     ------------

          Total current assets                                                                 1,428,207          525,426

Equipment and leasehold improvements, net                                                      2,154,541        1,395,875
Deferred charges                                                                                  90,820        2,981,931
Deferred stock issuance costs                                                                        -            338,910
Other                                                                                             48,941           25,902
                                                                                             -----------     ------------

                                                                                             $ 3,722,509     $  5,268,044
                                                                                             ===========     ============

          LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities
    Current portion of long-term debt                                                        $   108,000     $    100,264
    Accounts payable                                                                             283,655          690,059
    Accrued expenses                                                                              11,916           67,716
                                                                                             -----------     ------------

          Total current liabilities                                                              403,571          858,039

Long-term liabilities
    Deferred rent                                                                                 46,579           35,436
    Convertible debentures                                                                           -            800,000
    Long-term debt                                                                               406,670          517,497
                                                                                             -----------     ------------

          Total liabilities                                                                      856,820        2,210,972
                                                                                             -----------     ------------

Series B preferred stock, $10.00 par value - authorized, 500,000 shares;
    issued and outstanding, 70,000 shares                                                            -            700,000
                                                                                             -----------     ------------

Shareholders' equity
    Common stock, no par value - authorized, 19,000,000 shares; issued and
       outstanding, 3,207,078 and 2,307,078 shares in 1997 and
       1996, respectively                                                                      8,976,634        3,691,428
    Accumulated deficit                                                                       (6,110,945)      (1,334,356)
                                                                                             -----------     ------------

          Total shareholders' equity                                                           2,865,689        2,357,072
                                                                                             -----------     ------------

                                                                                             $ 3,722,509     $  5,268,044
                                                                                             ===========     ============

</TABLE>


The accompanying notes are an integral part of these statements.

                                        25
<PAGE>


                          INDEPENDENCE BREWING COMPANY

                            STATEMENTS OF OPERATIONS




<TABLE>
<CAPTION>

                                                              Years ended December 31,
                                                            ----------------------------
                                                                1997             1996
                                                            -----------      -----------

<S>                                                         <C>              <C>
Sales                                                       $   690,648      $   540,335

Less excise taxes deficit                                        31,429           33,375
                                                            -----------      -----------

          Net sales                                             659,219          506,960

Cost of goods sold                                            1,021,926          801,482
                                                            -----------      -----------

          Gross loss                                           (362,707)        (294,522)
                                                            -----------      -----------

Advertising, promotional and selling expenses                   678,312          158,015
General and administrative expenses                             866,441          413,004
                                                            -----------      -----------
                                                              1,544,753          571,019
                                                            -----------      -----------

          Operating loss                                     (1,907,460)        (865,541)
                                                            -----------      -----------

Other income (expense)
    Interest expense                                         (2,993,159)        (377,551)
    Other income, net                                           124,030           19,965
                                                            -----------      -----------
                                                             (2,869,129)        (357,586)
                                                            -----------      -----------
          NET LOSS                                          $(4,776,589)     $(1,223,127)
                                                            ===========      ===========

Per share data
    Net loss per common share - basic and diluted           $     (1.54)     $     (1.29)
                                                            ===========      ===========
</TABLE>



The accompanying notes are an integral part of these statements.

                                        26


<PAGE>


                          INDEPENDENCE BREWING COMPANY

                  STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY

                     Years ended December 31, 1997 and 1996



<TABLE>
<CAPTION>

                                                            Common stock
                                                     ---------------------------                               Total
                                                     Number of                          Accumulated        shareholders'
                                                      shares            Amount            deficit             equity
                                                     ---------        ----------        -----------        -------------

<S>                                                  <C>              <C>               <C>                 <C>
Balance at December 31, 1995                         1,166,538        $  266,768        $  (111,229)        $   155,539


Issuance of common stock                             1,140,540         3,424,660                -             3,424,660


Net loss for the year ended
    December 31, 1996                                      -                 -           (1,223,127)         (1,223,127)
                                                     ---------        ----------        -----------         -----------


Balance at December 31, 1996                         2,307,078         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                         3,207,078        $8,976,634        $(6,110,945)        $ 2,865,689
                                                     =========        ==========        ===========         ===========

</TABLE>


The accompanying notes are an integral part of this statement.

                                        27


<PAGE>


                          INDEPENDENCE BREWING COMPANY

                            STATEMENTS OF CASH FLOWS



<TABLE>
<CAPTION>

                                                                             Years ended December 31,
                                                                          ----------------------------
                                                                              1997             1996
                                                                          -----------      -----------
<S>                                                                       <C>              <C>
Operating activities
    Net loss                                                              $(4,776,589)     $(1,223,127)
    Adjustments to reconcile net loss to net cash used in
          operating activities
       Depreciation and amortization                                          134,705           89,243
       Amortization of original issue discount                                    -            237,441
       Write-off of deferred charges                                        2,972,112              -
       Increase in accounts receivable                                        (17,085)          (2,046)
       Increase in inventories                                                (29,971)         (44,461)
       Increase in other                                                      (23,039)          (7,859)
       (Decrease) increase in accounts payable and accrued expenses          (119,268)         241,303
       Increase in deferred rent                                               11,143           13,760
                                                                          -----------      -----------

              Net cash used in operating activities                        (1,847,992)        (695,746)
                                                                          -----------      -----------

Investing activities
    Purchases of property and equipment                                      (884,372)        (528,525)
    Other                                                                     (90,000)         (60,000)
                                                                          -----------      -----------

              Net cash used in investing activities                          (974,372)        (588,525)
                                                                          -----------      -----------

Financing activities
    Proceeds from subordinated convertible notes                                  -            188,300
    Repayments of long-term debt                                             (103,091)         (35,795)
    Proceeds from issuance of preferred stock                                     -            700,000
    Payments to reacquire preferred stock                                    (700,000)             -
    Proceeds from issuance of common stock, net                             5,285,206           10,015
    Payments under capital lease obligations                                   (4,026)          (2,397)
    Repayments from (to) officers, net                                         10,000          (15,150)
    Proceeds from convertible debentures                                          -            800,000
    Repayments of convertible debentures                                     (800,000)             -
                                                                          -----------      -----------

              Net cash provided by financing activities                     3,688,089        1,644,973
                                                                          -----------      -----------

              Net increase in cash and cash equivalents                       865,725          360,702

Cash and cash equivalents at beginning of year                                363,484            2,782
                                                                          -----------      -----------

Cash and cash equivalents at end of year                                  $ 1,229,209      $   363,484
                                                                          ===========      ===========

</TABLE>



The accompanying notes are an integral part of these statements.

                                        28


<PAGE>


                          INDEPENDENCE BREWING COMPANY

                          NOTES TO FINANCIAL STATEMENTS

                           December 31, 1997 and 1996




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 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, 1997 and
    1996 was $122,339 and $93,674, respectively.

    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.

    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.

                                   (Continued)

                                        29


<PAGE>


                          INDEPENDENCE BREWING COMPANY

                    NOTES TO FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1997 and 1996




NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

    Additionally, the Company maintains cash balances in a financial institution
    in Philadelphia. These funds are insured by the Federal Deposit Insurance
    Corporation up to $100,000. Uninsured amounts held at this financial
    institution totalled approximately $1,188,000 at December 31, 1997.

    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. Amortization of intangibles is provided by the straight-line
    method over periods ranging from three to five years.

    The Company adopted, effective January 1, 1996, Statement of Financial
    Accounting Standards (SFAS) No. 121, Accounting for the Impairment of
    Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, which
    provides guidance on when to recognize and how to measure impairment losses
    of long-lived assets and certain identifiable intangibles and how to value
    long-lived assets to be disposed of. The adoption of this new statement did
    not have a material impact on the Company's financial position or results of
    operations.

    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, 1997 and 1996 were
    $678,312 and $158,015, 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)

                                        30


<PAGE>


                          INDEPENDENCE BREWING COMPANY

                    NOTES TO FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1997 and 1996




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, 1997 and 1996.

    10. Related Party Transactions

    The Company has entered into numerous related party transactions involving
    indebtedness, including the guaranteeing of certain indebtedness. These
    transactions are described in notes E, F, G, I, M and N.

    11. Loss Per Common Share

    The Company adopted the provisions of SFAS No. 128, Earnings Per Share,
    which eliminates 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. Prior period EPS calculations have been restated to reflect
    the adoption of SFAS No. 128.

   
    Loss per common share has been restated for the 100% stock dividend,
    effected in the form of a stock split, issued on January 5, 1996 to
    shareholders of record on December 6, 1995 (note J). Warrants were not
    considered because they are antidilutive. In connection with the Private
    Placements (note M), 1,038,188 shares issued have been treated as
    outstanding from the date of issuance in calculating loss per common share
    because such shares were issued for consideration below the Public Offering
    price of $5.00 per share (note J).
    

    12. Reclassification

    Certain 1996 amounts have been reclassified to conform to the 1997 financial
statement presentation.

                                        31


<PAGE>


                          INDEPENDENCE BREWING COMPANY

                    NOTES TO FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1997 and 1996




NOTE B - INVENTORIES

    Inventories consist of the following:
<TABLE>
<CAPTION>

                                                                                                 1997             1996
                                                                                             -----------      -----------
<S>                                                                                          <C>              <C>
       Raw materials                                                                         $    45,903      $    11,513
       Work in process                                                                            32,469           21,703
       Finished goods                                                                             20,272           30,410
       Packaging                                                                                  66,143           71,190
                                                                                             -----------      -----------

                                                                                             $   164,787      $   134,816
                                                                                             ===========      ===========

NOTE C - EQUIPMENT AND LEASEHOLD IMPROVEMENTS

    Equipment and leasehold improvements consist of the following:

                                                              Estimated useful lives             1997             1996
                                                              ----------------------         -----------      -----------
       Brewing equipment                                           5 to 20 years             $ 2,103,108      $ 1,336,315
       Leasehold improvements                                      10 years                      285,147          193,681
       Transportation equipment                                    5 years                        15,250           15,250
       Computer equipment and software                             3 to 5 years                   26,112           15,250
                                                                                             -----------      -----------
                                                                                               2,429,617        1,545,246
       Less accumulated depreciation and amortization                                            275,076          149,371
                                                                                             -----------      -----------
                                                                                             $ 2,154,541      $ 1,395,875
                                                                                             ===========      ===========

    Depreciation  and  amortization  expense for the years ended  December 31, 1997 and 1996 was $125,705 and $89,243,
    respectively.

NOTE D - DEFERRED CHARGES

    Deferred charges consist of the following:

                                                                                                 1997             1996
                                                                                             -----------      -----------
       Deferred interest (original issue discount)                                           $         -      $ 3,147,471
       Financing fees                                                                             11,221           71,221
       Organizational costs                                                                        2,417            2,417
       Trademark                                                                                  90,000              -
                                                                                             -----------      -----------
                                                                                                 103,638        3,221,109
       Less accumulated amortization                                                              12,818          239,178
                                                                                             -----------      -----------
                                                                                             $    90,820      $ 2,981,931
                                                                                             ===========      ===========
</TABLE>

                                       32


<PAGE>


                          INDEPENDENCE BREWING COMPANY

                    NOTES TO FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1997 and 1996




NOTE E - SUBORDINATED CONVERTIBLE NOTES

    During December 1995, $75,000 was loaned to the Company from certain
    shareholders of the Company. These notes accrued interest at a rate of 10%
    per annum and were payable within one year of origination. These notes were
    convertible at maturity, at the discretion of the noteholders, into shares
    of Common Stock at $3.00 per share. As a condition to the extension of
    credit, the Company agreed to issue to the holders Common Stock valued at
    $3.00 per share in an amount equal to 12.5% of the principal amount borrowed
    on the date the obligation became due or the date of repayment of the
    principal and interest, whichever was earlier. Accordingly, the Company
    issued a total of 3,124 shares of Common Stock associated with these notes.
    These obligations are subordinated to the Company's long-term debt. A
    deferred interest charge of $3.00 per share was assigned to these shares and
    is being amortized over the terms of the notes to which they relate. At
    December 31, 1995, a deferred interest charge of $9,372 was recorded. No
    amortization was taken for the year ended December 31, 1995 due to the
    origination dates of the notes. Amortization expense for the year ended
    December 31, 1996 was $5,728.

    In 1996, another $188,300 was loaned to the Company from certain
    shareholders and directors of the Company. These notes accrued interest at a
    rate of 10% per annum and were payable within one year of origination. These
    notes were convertible at maturity, at the discretion of the noteholders,
    into shares of Common Stock at $3.00 per share. As a condition to the
    extension of credit, the Company issued to the noteholders Common Stock
    valued at $3.00 per share in an amount equal to 12.5% of the respective
    notes. Accordingly, the Company has issued a total of 7,844 shares of Common
    Stock associated with these notes. In 1996, a deferred interest charge of
    $23,532, or $3.00 per share, was assigned to these shares and is being
    amortized over the terms of the notes to which they relate. These notes are
    subordinated to the Company's long-term debt. Amortization expense for the
    year ended December 31, 1996 was $9,468.

    On August 12, 1996, all of the foregoing notes, including accrued interest
    of $13,246, were converted into 92,182 shares of Common Stock. Additionally,
    aggregate unamortized deferred interest charges of $17,708 were written off
    as of August 12, 1996 (note J).

NOTE F - LONG-TERM DEBT

    Long-term debt consists of the following:
<TABLE>
<CAPTION>

                                                                                                 1997            1996
                                                                                             -----------      -----------
<S>                                             <C>                                          <C>              <C>
       Small Business Administration (SBA) Note (1)                                          $   337,900      $   404,912
       Philadelphia Industrial Development Corporation (PIDC) Note (2)                           176,770          212,849
                                                                                             -----------      -----------
                                                                                                 514,670          617,761
       Less current portion                                                                      108,000          100,264
                                                                                             -----------      -----------

                                                                                             $   406,670      $   517,497
                                                                                             ===========      ===========
</TABLE>


                                   (Continued)

                                       33


<PAGE>


                          INDEPENDENCE BREWING COMPANY

                    NOTES TO FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1997 and 1996




NOTE F - LONG-TERM DEBT - Continued

    (1)  Principal of $6,092 is due monthly plus interest payable at the prime
         rate plus 2% (10.5% and 10.25% at December 31, 1997 and 1996,
         respectively). Interest expense for the years ended December 31, 1997
         and 1996 was $39,824 and $43,369, respectively. The note is secured by
         substantially all of the Company's assets, an annuity and certificate
         of deposit, and personal guarantees of the Company's President.

    (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,
         1997 and 1996 was $7,971 and $8,550, respectively. The note is secured
         by substantially all of the Company's assets and personal guarantees of
         the Company's President.

    Principal repayments due on long-term debt at December 31, 1997 are as
follows:

           1998                               $   108,000
           1999                                   108,941
           2000                                   110,309
           2001                                   111,728
           2002                                    75,692
                                              -----------

                                              $   514,670
                                              ===========

NOTE G - ADVANCES TO OFFICER

    Advances to the President totalled $10,000 at December 31, 1996. These
    advances, bearing interest at a rate equal to the prime rate (effectively
    8.25%), including accrued interest, were paid back to the Company during
    1997.

NOTE H - 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 1997 or 1996.

    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 1997 and 1996 as follows:
<TABLE>
<CAPTION>

                                                                1997             1996
                                                            -----------      -----------
<S>                                                         <C>              <C>
       Expected tax benefit at 34%                          $(1,924,040)     $  (401,662)
       Non-deductible offering expenses                          22,465           11,305
       Deferred tax valuation allowance                       1,521,937          362,357
       Other                                                     79,368           39,305
                                                            -----------      -----------

       Income taxes                                         $        -       $        -
                                                            ===========      ===========
</TABLE>

                                   (Continued)

                                       34


<PAGE>


                          INDEPENDENCE BREWING COMPANY

                    NOTES TO FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1997 and 1996


NOTE H - INCOME TAXES - Continued

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

                                                   1997             1996
                                               -----------     ------------
       Depreciation                            $  (180,641)    $    (90,098)
       Net operating loss carryovers             1,686,638          440,407
       Other                                        15,940           12,048
                                               -----------     -------------
                                                 1,521,937          362,357
       Valuation allowance                      (1,521,937)        (362,357)
                                               -----------     ------------

       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, 1997 and 1996.

    The Company has net operating loss carryover deductions of $6,312,045
expiring as follows:
                                                                  Amount
                 Year                                            expiring
                 ----                                          -----------
                 2010                                          $    57,110
                 2011                                            1,294,784
                 2012                                            4,960,151
                                                               -----------

                                                               $ 6,312,045
                                                               ===========

NOTE I - 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,
       ------------------------
                1998                                           $    93,000
                1999                                                96,000
                2000                                                90,000
                2001                                                89,000
                2002                                                95,000
                Thereafter                                         215,000
                                                               -----------
                                                               $   678,000
                                                               ===========
                                   (Continued)

                                       35


<PAGE>


                          INDEPENDENCE BREWING COMPANY

                    NOTES TO FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1997 and 1996




NOTE I - COMMITMENTS AND CONTINGENCIES - Continued

    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, 1997 and 1996. Rent expense for the years ended December
    31, 1997 and 1996 was $81,704 and $80,964, 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

    On August 12, 1996, the Company entered into a three-year employment
    agreement with the President and Chief Executive Officer expiring on August
    12, 1999. Compensation under this agreement is $50,000 per year, such salary
    was increased to $100,000 effective February 14, 1997, plus annual increases
    of not less than 10% of the prior year's salary for the first two years
    after February 14, 1997 and annual 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.

    Additionally, on August 12, 1996, 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.


                                   (Continued)

                                       36


<PAGE>


                          INDEPENDENCE BREWING COMPANY

                    NOTES TO FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1997 and 1996




NOTE I - COMMITMENTS AND CONTINGENCIES - Continued

    4. Trademarks Protection

   
    The Company filed applications to register "1776" and "FranklinFest" with
    the United States Patent and Trademark office in 1996. Although the Company
    expects "1776" and "FranklinFest" to be registered in due course, there can
    be no assurance any such trademarks will be registered, or if registered,
    there can be no assurance that they 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. 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. 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 (Note P).

    The Company 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) in 1996. This agreement is for a two-year license for use of the
    Moosehead Marks in the United States whereby the Company will pay 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.

    5. Florida Agreement

    From April 1996 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 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.

                                   (Continued)

                                       37


<PAGE>


                          INDEPENDENCE BREWING COMPANY

                    NOTES TO FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1997 and 1996



NOTE I - COMMITMENTS AND CONTINGENCIES - Continued

    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.

NOTE J - 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 this 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
    proceed received by the Company in connection with the public offering was
    approximately $5,225,000.

    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, 1997, 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.

    During the year ended December 31, 1996, the Company sold 2,332 shares of
    its Common Stock priced at $3.00 per share through private offerings
    aggregating $6,996. Additionally, 7,844 shares of Common Stock valued at
    $3.00 per share were issued to holders of the subordinated convertible notes
    discussed in note E.


                                   (Continued)

                                       38


<PAGE>


                          INDEPENDENCE BREWING COMPANY

                    NOTES TO FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1997 and 1996




NOTE J - SHAREHOLDERS' EQUITY - Continued

    The Company, in connection with the Private Placements discussed in note M,
    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. The
    Company redeemed the Series B Preferred Stock with a portion of the net
    proceeds from their Public Offering.

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, 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>


                                   (Continued)

                                       39


<PAGE>


                          INDEPENDENCE BREWING COMPANY

                    NOTES TO FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1997 and 1996




NOTE K - LOSS PER SHARE - Continued

    Options to purchase 65,000 shares of common stock at an average exercise
    price of $1.96 per share were outstanding during the year. They were not
    included in the computation of diluted loss per share because the option
    exercise price was greater than the average market price.
<TABLE>
<CAPTION>

                                                                    Year ended December 31, 1996
                                                           -----------------------------------------
                                                               Loss             Shares       Per share
                                                           (numerator)      (denominator)     amount
                                                           -----------      -------------    ---------
<S>                                                        <C>                <C>             <C>
       Basic loss per share
          Net loss                                         $(1,223,127)       1,573,894       $(1.29)

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

       Diluted loss per share
          Net loss plus assumed conversions                $(1,223,127)       1,573,894       $(1.29)
                                                           ===========        =========       ======
</TABLE>

NOTE L - 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, 1997. 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, 1996.

    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, but marketed by the third party under such party's own proprietary
    labels. Approximately 1% and 16% of the Company's revenues resulted from
    contract brewing in 1997 and 1996, respectively.

NOTE M - PRIVATE PLACEMENTS

    In anticipation of the closing of the financing transactions described
    below, the Company was advanced $100,000 on each of May 6, 1996 and July 16,
    1996, respectively, from Winfield Capital Corporation (Winfield). These
    notes accrued interest at a rate of 12.75% per annum and were due no later
    than August 15, 1996. The Company's President personally guaranteed each of
    the notes. The entire principal amount of each note was repaid in connection
    with the closing of the Private Placements, and the personal guarantees were
    released.


                                   (Continued)

                                       40


<PAGE>


                          INDEPENDENCE BREWING COMPANY

                    NOTES TO FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1997 and 1996




NOTE M - PRIVATE PLACEMENTS - Continued

    On August 12, 1996, September 13, 1996 and September 20, 1996, the Company
    sold $800,000 of debentures convertible into shares of Series A Preferred
    Stock of the Company (the Debentures) to Winfield and certain shareholders
    of the Company (collectively, the Purchasers). To the extent that such
    shareholders did not so participate, Winfield acted as a "standby" purchaser
    for the entire $800,000 in Debentures being offered. The Debentures bear
    interest at a rate of 12.75% per annum, provided that if the Debentures are
    prepaid, as otherwise permitted, the Debentures will bear interest at a rate
    of 14% per annum from the date of issuance. The Debentures are due five
    years from date of issuance. The Company is obligated to make monthly
    principal payments aggregating $22,222 along with accrued interest,
    commencing 24 months after the sale of the Debentures.

    In consideration of the purchase by the Purchasers of the Debentures, the
    Purchasers received warrants which entitled them to purchase 415,275 shares
    of Common Stock for the aggregate exercise price of $2,081 (the Series A
    Warrants). All of the Series A Warrants were exercised by the Purchasers on
    September 13, 1996 and September 20, 1997. A deferred interest charge of
    $3.00 per share, totalling $1,245,825, was assigned to these shares and is
    being amortized over the terms of the Debentures. The Company repaid these
    Debentures with a portion of the net proceeds from the Public Offering (note
    J). 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.

    In addition, in consideration of the purchase by Winfield of the Debentures,
    Winfield received (i) a warrant (the Preferred Warrant) that entitled
    Winfield to purchase 70,000 shares of Series B Preferred Stock of the
    Company, par value $10.00, exercisable immediately for an aggregate exercise
    price of $700,000 and (ii) a warrant (the Series C Warrant) that entitled
    Winfield to purchase 622,913 shares of Common Stock for the aggregate
    exercise price of $3,115. Winfield exercised the Preferred Warrant and the
    Series C Warrant on September 13, 1996. The Company had an obligation to
    redeem all outstanding shares of Series B Preferred Stock five years from
    the date of issuance or upon the consummation of the Public Offering (note
    J), including dividends payable to date. A deferred charge of $3.00 per
    share, totalling $1,868,739, was assigned to these shares and was being
    amortized over the terms of the Series B Preferred Stock. The Company repaid
    the Series B Preferred Stock with a portion of the net proceeds from the
    Public Offering (note J). As a result of this repayment, 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
    the Debentures, 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 (note
    J). At December 31, 1997, all 3,500,000 warrants were still outstanding and
    unexercised.


                                   (Continued)

                                       41


<PAGE>


                          INDEPENDENCE BREWING COMPANY

                    NOTES TO FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1997 and 1996




NOTE M - PRIVATE PLACEMENTS - Continued

    The holders of the shares of stock that were issued upon exercise of the
    Series A Warrants, the Series C Warrant and the holders of shares of Common
    Stock that were issued upon exercise of the holders of the Series B Warrant
    are entitled to certain rights with respect to the registration under the
    Securities Act, for resale to the public, of the shares of Common Stock
    underlying the Series A Warrants and the Series C Warrant and of the Series
    B Warrant, respectively. Winfield has agreed unconditionally that it will
    not offer to sell, pledge, contract or sell or otherwise attempt to transfer
    or dispose of any beneficial interest in any shares of Common Stock it
    received in connection with the Private Placements for a period of 36 months
    from the date of purchase.

NOTE N - RESCISSION OFFER

    During the period from June 25, 1994 through December 1, 1995, the Company
    offered for sale and sold to investors a total of 207,914 shares of the
    Company's Common Stock (the Original Shares). During the period from
    December 1996 through May 1996, the Company offered and sold to investors
    notes, convertible into shares of Common Stock at maturity in the aggregate
    principal amount of $263,300 (together with the Original Shares, the
    Rescission Securities). Because certain of the applicable provisions of
    federal and state securities laws relating to the registration of securities
    for offer and sale may not have been complied with in connection with the
    offer or sale of the Rescission Securities, the Company offered to
    repurchase the Rescission Securities for cash in an amount equal to the
    original purchase price plus interest from the date of purchase, less any
    dividends, interest payments or cash distributions in respect to the
    Rescission Securities. The Company received rescission acceptances from five
    shareholders whose investment totalled $24,750 for 18,000 shares of Common
    Stock. On September 27, 1996, the Company repurchased such shares of Common
    Stock for an aggregate purchase price, including interest, of $26,927. The
    Company subsequently sold 18,000 shares of Common Stock to four shareholders
    for an aggregate purchase price of $24,750. No underwriters were involved
    and no commissions were paid.

    The investors to which various notes were sold rejected the Rescission
    Offer, and on August 12, 1996, these investors converted these notes into
    Common Stock.

NOTE O - 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. Through December 31, 1996,
    the Company has not granted any options under the Plan.



                                   (Continued)

                                       42


<PAGE>


                          INDEPENDENCE BREWING COMPANY

                    NOTES TO FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1997 and 1996




NOTE O - STOCK OPTION PLAN - Continued

    The Company adopted SFAS No. 123, Accounting for Stock-Based Compensation,
    on January 1, 1996, 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>

                                                                                              1997
                                                                                          ------------
<S>                                                         <C>                           <C>
       Net loss                                             As reported                   $(4,776,589)
                                                            Pro forma                     $(4,838,055)

       Loss per share - basic and diluted                   As reported                       $ (1.54)
                                                            Pro forma                         $ (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.

    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 1997: expected volatility of 77.5%, risk-free
    interest rate of 6.73%, and expected life of 10 years.



                                   (Continued)

                                       43


<PAGE>


                          INDEPENDENCE BREWING COMPANY

                    NOTES TO FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1997 and 1996




NOTE O - STOCK OPTION PLAN - Continued

    A summary of the status of the Company's option plans as of December 31,
    1997 and the changes during the year ending on this date is represented
    below:
<TABLE>
<CAPTION>

                                                                                                    Weighted
                                                                                                     average
                                                                                                    exercise
                                                                                    Shares           price
                                                                                    ------          --------
<S>                                                                                 <C>              <C>
       Outstanding, beginning of year                                                   -            $   -
       Granted                                                                      65,000             1.96
                                                                                    ------           ------

       Outstanding, end of year                                                     65,000           $ 1.96
                                                                                    ======           ======

       Weighted average fair value of options granted
           during the year                                                                           $ 1.65
                                                                                                     ======
</TABLE>

    The following table summarizes information about options outstanding at
December 31, 1997:

<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            1997            life              price                 1997           price
        ---------------       --------------    -----------        ---------          --------------     --------
        <S>                       <C>            <C>                <C>                   <C>             <C>
            $ 1.50                51,000         9.3 years          $ 1.50                17,000          $ 1.50
            $ 3.625               14,000         9.6 years          $ 3.625                  -            $   -
                                  ------                                                  ------

                                  65,000         9.6 years          $ 1.96                17,000          $ 1.50
                                  ======                                                  ======
</TABLE>

NOTE P - AQUISTIONS
       

1.   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. 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. Wade will receive commissions from the
     sales of all of the Company's products, including Nittany Ale. The Company
     anticipates that the foregoing terms will be incorporated in a definitive
     agreement to be effective on or about May 1, 1998.
       


   
2.   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.

3.   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. Based and sold primarily in Delaware since 1988,
     the Company intends to market and sell Blue Hen Beer in a much broader
     market in 1998.
    
                                       44

<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:


   
           Name                      Age             Position
           ----                      ---             --------
Robert W. Connor, Jr..............   35    Chairman of the Board, President,
                                           Chief Executive Officer and Treasurer
William Moore.....................   41    Director, Brewmaster and Secretary
Stefan Karnavas...................   35    Director
Michael R. Thompson...............   45    Director
Dominic S. Liberi.................   49    Director
Stuart Winkler....................   45    Director
    

     Robert W. Connor, Jr. Mr. Connor, founder of the Company, has been the
Chairman of the Board, President, 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. From 1990 to 1994, Mr. Moore was the head brewer for Stoudt's
Brewery in Adamstown, Pennsylvania.

     Stefan Karnavas. Mr. Karnavas has been a director of the Company since July
1996. Mr. Karnavas has been the Chief Financial Officer of the Cobblestone Golf
Group, Inc. since April


                                       45

<PAGE>



1996. From 1990 to 1996, Mr. Karnavas was the Treasurer of Horizon Cellular
Telephone Company.

     Michael R. Thompson. Mr. Thompson has been a director of the Company since
December 1996. Since April 1991, Mr. Thompson has been employed by Turner
Investments Partners, Inc. ("TIP") and is responsible for new business
activities and client services. TIP provides investment management services
primarily to institutional investors.

     Stuart Winkler. Mr. Winkler has been a director of the Company since June
18, 1997. Since July, 1988, Mr. Winkler has been employed by A.S. Goldmen & Co.,
Inc., as Vice President.

     Dominic S. Liberi. Mr Liberi has been a director since July 23, 1997. He is
a practicing attorney and has operated a solo practice since May, 1995. From
April, 1994 to May, 1995 Mr. Liberi was Of Counsel with the Firm of Clark,
Ladner, Fortenbaugh and Young; from March, 1993 to April, 1994, Mr. Liberi was a
shareholder and Managing Partner of Mannino Griffitts, P.C., from September,
1991 to March. 1993 Mr. Liberi was Senior Associate with the firm of Rawle and
Henderson and from August 1984 to September, 1991, Mr. Liberi was an Associate
with the firm of Dilworth Paxson, LLP.

     On May 28, 1997, director, Jacques de Saint Phalle resigned from the Board.
He was succeeded by Mr. Winkler.

   
     One June 18, 1997, Mr. Winkler was appointed to the Board pursuant to the
request of the Company's underwriter, A.S. Goldmen & Co., Inc. The Company had
agreed to appoint a representative of the underwriter to the Board of Directors
under the terms of the Underwriting Agreement between the parties.
    

     On July 23, 1997, the Board approved a resolution increasing the size of
the Board from 5 to 7 positions and Mr. Liberi was appointed to fill one of the
vacancies.

     Each member of the Board was elected to hold office for a period of one
year and until his successor is elected and qualified or until such director's
earlier death, resignation or removal. Directors will not receive any
compensation for serving on the Board. The officers are elected by the Board and
serve at the Board's discretion.

Item 10. Executive Compensation

Executive Compensation

     The following table sets forth the compensation paid to the Company's Chief
Executive Officer for the year ended December 31, 1997 (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, 1997.

                           Summary Compensation Table


                                                        Annual Compensation
                                                       ----------------------
      Name and Principal Position                      Salary           Bonus
      ---------------------------                      ------          -----
Robert W. Connor, Jr.............................      $90,000            --
         Chairman of the Board, President,
         Chief Executive Officer and Treasurer

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

(1)  Mr. Connor has entered into an employment agreement which provided for
     certain increases in his annual salary. See "-- Employment Arrangements."

Director Compensation

     Dominic S. Liberi has served as a director of the Company since, July 23,
1997. Throughout 1997, Mr. Liberi provided legal services to the Company and was
paid the sum of $107,061 for his services.



                                       46

<PAGE>



Employment Arrangements

     Mr. Connor entered into a three-year employment agreement (the "Connor
Agreement") with the Company on August 12, 1996. Pursuant to the Connor
Agreement, Mr. Connor serves as President and Chief Executive Officer of the
Company and, as of the closing of the IPO, receives for his services a base
salary of $100,000, plus annual increases of not less than 10% of the prior
year's salary for the first two years after the IPO. Mr. Connor is also eligible
for an annual bonus as determined by the Board. In addition, the Company has
agreed to grant Mr. Connor options to purchase that number of shares of Common
Stock pursuant to the Company's Stock Plan equal to 2.5% of the issued and
outstanding shares of Common Stock as of August 12, 1996 (not including shares
issuable pursuant to any warrants of the Company). The Connor Agreement provides
that Mr. Connor is subject to a covenant not to compete with the Company during
the term of his employment and for a two-year period after his employment with
the Company terminates. If Mr. Connor is terminated for any reason other than
"cause", "total disability", as defined therein, or the death of Mr. Connor, the
Company must pay Mr. Connor his salary as accrued through the date of
termination and for two years thereafter. "Cause" is generally defined as: (i)
failure to fulfill his employment duties; (ii) breach of certain covenants in
the Connor Agreement; (iii) commission of a felony or crime of moral turpitude,
fraud or misrepresentation, whether or not related to the Company; (iv) any
willful act injuring the Company; or (v) the breach of duty of loyalty to the
Company. During the term of the Connor Agreement and at all times after his
termination, Mr. Connor has agreed to retain in confidence and not otherwise use
any confidential or proprietary information of the Company.

     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. Mr. Moore
is also eligible for an annual bonus as determined by the Board. Mr. Moore is
subject to a covenant not to compete with the Company during the term of his
employment and for a two-year period after his employment with the Company
terminates. In addition, if Mr. Moore is terminated for any reason other than
"cause", as defined in the Moore Agreement, "total disability", as defined
therein, or the death of Mr. Moore, the Company must pay Mr. Moore, or his
heirs, his salary as accrued through the date of termination and for two years
thereafter. "Cause" is generally defined as: (i) failure to fulfill his
employment duties; (ii) breach of certain covenants in the Moore Agreement;
(iii) commission of a felony or crime of moral turpitude, fraud or
misrepresentation, whether or not related to the Company; (iv) any willful act
injuring the Company; or (v) the breach of duty of loyalty to the Company.
During the term of the Moore Agreement and at all times after his termination,
Mr. Moore has agreed to retain in confidence and not otherwise use any
confidential or proprietary information of the Company.

   
     Mr. Anderson entered into an employment agreement (the "Anderson
Agreement") with the Company appointing Mr. Anderson as Chief Operating Officer,
effective as of March 19, 1997 and terminating on March 18, 2000, subject to
termination by either party on each anniversary of the agreement upon 90 days
prior notice. The Anderson Agreement provides a base salary of $75,000 per
    


                                       47

<PAGE>


   
year, plus annual increases based upon the salary policies of the Company and
Mr. Anderson's contributions to the Company. Mr. Anderson is also eligible for
an annual bonus as determined by the Board. In addition, the Company has agreed
to grant Mr. Anderson options to purchase 75,000 shares of Common Stock pursuant
to the Company's Stock Plan. Mr. Anderson is subject to a covenant not to
compete with the Company during the term of his employment and for a two-year
period after his employment with the Company terminates. In addition, if Mr.
Anderson is terminated for any reason other than "cause", as defined in the
Anderson Agreement, "total disability", as defined therein, or the death of Mr.
Anderson, the Company must pay Mr. Anderson, or his heirs, his salary as accrued
through the date of termination and for one year thereafter. "Cause" is
generally defined as: (i) failure to fulfill his employment duties; (ii) breach
of certain covenants in the Anderson Agreement; (iii) commission of a felony or
crime of moral turpitude, fraud or misrepresentation, whether or not related to
the Company; (iv) any willful act injuring the Company; or (v) the breach of
duty of loyalty to the Company. During the term of the Anderson Agreement and at
all times after his termination, Mr. Anderson has agreed to retain in confidence
and not otherwise use any confidential or proprietary information of the
Company. On October 21, 1997, Mr. Anderson and the Company entered into a
Settlement Agreement Release and Covenant Not To Sue, terminating the Employment
Agreement and releasing the Company from further obligations thereunder in
consideration of the payment to Mr. Anderson, of $41,500 by the Company. Mr.
Anderson's position has not been continued by the Company.
    

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. Karnavas and
Thompson. 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. Karnavas and Thompson.
    


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


                                       48

<PAGE>



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 options
("ISOs"), the expiration date of each stock option and SAR granted (subject to a
maximum of 10 years 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 which 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 1997, the Board awarded stock options totaling 65,000 shares to various
sales, operations and administrative personnel.
    


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,
    


                                       49

<PAGE>



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
                 Name and Address of          Beneficially       Outstanding Shares of
                  Beneficial Owner              Owned(1)             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
Stefan Karnavas............................       19,220                   *
Cobblestone Golf
5220 Fiore Terrace
Apartment M-304
San Diego, CA 92122
Michael R. Thompson........................       18,194                   *
1 Springton Pointe Drive
Newtown Square, PA 19073
Stuart Winkler.............................         none                  --
219 Peacock Lane
Merchantville, NJ 07751
Dominic S. Liberi.........................         3,000                   *
226 Abbey Lane
Lansdale, PA  19446
All officers and directors as a group
(six persons)..............................      664,580                 19.8%
</TABLE>

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

*    Represents less than 1% of the outstanding shares of Common Stock.

(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.


                                       50

<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. See "Certain Transactions -- Private
     Placements."


Item 12. Certain Relationships and Related Transactions

Private Placements

     In anticipation of the closing of the financing transactions described
below (the "Private Placements"), the Company was advanced an aggregate of
$200,000 on May 6, 1996 and July 16, 1996 from Winfield to fund short term
operations. The Company's President and Chief Executive Officer, Mr. Robert W.
Connor, Jr., personally guaranteed each of the notes. The entire principal
amount of each note was repaid in connection with the closing of the Private
Placements and the personal guarantees were released.

     To fund operations, on August 12, 1996, September 13, 1996 and September
20, 1996, the Company sold $800,000 of debentures convertible into shares of
Series A Preferred Stock of the Company (the "Debentures") to Winfield and
certain shareholders of the Company (collectively referred to as the
"Purchasers"). To the extent that such shareholders did not so participate,
Winfield agreed to act as "standby" purchaser for the entire $800,000 in
Debentures being offered.

     In consideration of the purchase by the Purchasers of the Debentures, the
Purchasers received warrants which entitled them to purchase 415,275 shares of
Common Stock for the aggregate exercise price of $2,081 (the "Series A
Warrants"). All of the Series A Warrants were exercised by the Purchasers on
September 13, 1996 and September 20, 1996. The Company assigned a deferred
interest charge of $3.00 per share totaling $1,245,825 to these shares and is
amortizing it over the term of the Debentures.

     In addition, in consideration of the purchase by Winfield of the
Debentures, Winfield received (i) a warrant (the "Preferred Warrant ") that
entitled Winfield to purchase 70,000 shares of Series B Preferred Stock of the
Company, par value $10.00 (the "Series B Preferred Stock"), exercisable
immediately for an aggregate exercise price of $700,000 and (ii) a warrant (the
"Series C Warrant") that entitled Winfield to purchase 622,913 shares of Common
Stock for the aggregate exercise price of $3,115. Winfield exercised the
Preferred Warrant and the Series C Warrant on September 13, 1996. The Company
assigned a deferred interest charge of $3.00 per share, totaling $1,868,739, to
these shares and is amortizing it over the term of the Series B Preferred Stock.
The Company redeemed all outstanding shares of Series B Preferred Stock upon the
consummation of the IPO. Holders of the Series B Preferred Stock were entitled
to receive dividends at the rate of $1.40 per share per year.

     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 the
Debentures, Winfield received a warrant (the "Series B Warrant") which entitles
Winfield to purchase 3.5 million shares of Common Stock of the


                                       51

<PAGE>



Company at a price of $6.00 per share. The Series B Warrant is immediately
exercisable and expires five years following the IPO.

     The holders of the shares of Common Stock that were issued upon exercise of
the Series A Warrants, the holders of the shares of Common Stock that were
issued upon exercise of the Series C Warrant and the holders of the Series B
Warrant are entitled to certain rights with respect to the registration under
the Securities Act, for resale to the public, of (i) the shares of Common Stock
that were issued upon exercise of the Series A Warrants and the Series C Warrant
and (ii) the Series B Warrant, respectively.

     The Company received approximately $1,310,000 of net proceeds from the sale
of the Debentures and the Series B Preferred Stock after accounting for a
$15,000 processing fee and a $45,000 commitment fee paid to Winfield and
approximately $130,000 in professional fees and expenses. Such net proceeds, a
substantial amount of which has already been expended, were allocated, in
approximate amounts, as follows: (i) working capital ($755,000); (ii) new
bottling line deposit ($55,000); (iii) marketing and sales ($200,000); (iv)
trademark and patent expenses ($100,000); (v) kegs and keg equipment ($75,000);
(vi) brewery improvements ($50,000); (vii) packaging materials ($40,000); and
(viii) point of sales equipment ($35,000). The foregoing are estimated
allocations of such proceeds from which the actual use may differ. The Company
repaid the Debentures with a portion of the net proceeds from the IPO.

     In connection with the issuance and anticipated repayment of the Debentures
and the Series B Preferred Stock, the Company will write off (i) unamortized
original issue discount of $1,159,129 and $1,757,127, respectively, and (ii)
deferred financing costs of approximately $29,528 and $26,328, respectively.

     Winfield has agreed unconditionally that it will not sell, offer to sell,
pledge, contract to sell or otherwise attempt to transfer or dispose of any
beneficial interest in any equity or derivative securities it received in
connection with the Private Placements for so long as requested by Nasdaq, not
to exceed a period of thirty-six (36) months from the date of purchase.

     In addition, Mr. Connor has agreed to vote in favor of the election of one
nominee for the Board of Directors of the Company selected by Winfield, as long
as Winfield owns greater than 10% of the outstanding Common Stock.

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.


                                       52

<PAGE>



     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 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 agreed not to operate a bar or restaurant in Broward
County, Florida, Independence Florida's geographic region, without the consent
of Independence Florida. In addition, pursuant to Mr. Connor's 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.

     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.

Subordinated Convertible Notes

     During December 1995, $75,000 was loaned to the Company from certain
shareholders of the Company. These notes accrued interest at a rate of 10% per
annum and were payable within one year of issuance. These notes were convertible
at maturity, at the discretion of the noteholders, into shares of Common Stock
at $3.00 per share. As a condition to the extension of credit, the Company
agreed to issue to each holder a number of shares of Common Stock equal to 12.5%
of the principal amount of such holder's loan. Accordingly, the Company issued a
total of 3,124 shares of Common Stock associated with these notes. These notes
were subordinated to the Company's long-term debt.

     In December 1995 and February, March and May 1996 an aggregate of $188,300
was loaned to the Company from certain shareholders and directors of the
Company. These notes accrued interest at a rate of 10% per annum and were
payable within one year of issuance. These notes were convertible at maturity,
at the discretion of the noteholders, into shares of Common Stock at $3.00


                                       53

<PAGE>



per share. As a condition to the extension of credit, the Company agreed to
issue to each holder a number of shares of Common Stock equal to 12.5% of the
principal amount of such holder's loan. Accordingly, the Company issued a total
of 7,844 shares of Common Stock associated with these notes. These notes were
subordinated to the Company's long-term debt.

     On August 12, 1996, the outstanding principal amount of the foregoing
notes, including accrued interest of $13,246, was converted into 92,182 shares
of Common Stock.

     The Company believes that all prior transactions between the Company, its
officers, directors or other affiliates of the Company have been on terms no
less favorable than could have been obtained from unaffiliated third parties.
Any future transactions with officers, directors, 5% stockholders or affiliates
will be for valid business reasons, be on terms no less favorable to the Company
than could be obtained from unaffiliated third parties, and be approved by a
majority of the independent outside members of the Company's Board of Directors
who do not have an interest in the transaction.

Item 13. Exhibits, List and Reports on Form 8-K

(a)  Exhibit No.                    Description
     -----------                    -----------

       


   
        27   Financial Data Schedule for year ended December 31, 1997.
    

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

(b) Reports filed on Form 8-K during the last quarter of 1997:
     
    None




                                       54

<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: President and Chief Executive Officer


   
Date: April 30, 1998
    

         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,  President           April 30, 1998
-----------------------------       and Chief Executive Officer
Robert W. Connor, Jr.               (principal financial officer and
                                    principal accounting officer)


/s/ Stefan Karnavas                 Director                                    April 30, 1998
-----------------------------
Stefan Karnavas


/s/ William Moore                   Director                                    April 30, 1998
-----------------------------
William Moore


/s/ Michael R. Thompson             Director                                    April 30, 1998
-----------------------------
Michael R. Thompson


/s/ Dominic S. Liberi               Director                                    April 30, 1998
-----------------------------
Dominic S. Liberi


/s/ Stuart Winkler                   Director                                   April 30, 1998
-----------------------------
Stuart Winkler
    

</TABLE>


                                       55