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

                                   FORM 10-KSB

               [X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934
                  For the Fiscal Year Ended: December 31, 2001
                                       OR
             [ ] 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 - 25836

                            PORTLAND BREWING COMPANY
                 (Name of small business issuer in its charter)
                 OREGON                               93-0865997
             (State or other jurisdiction            (I.R.S. Employer
            of incorporation or organization)        Identification No.)

                   2730 NW 31st Avenue, Portland, Oregon 97210
               (Address of principal executive offices) (Zip Code)
                    Issuer's telephone number: (503) 226-7623

       Securities registered under Section 12(b) of the Exchange Act: None
         Securities registered under Section 12(g) of the Exchange Act:
                           Common Stock, no par value
                                (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 the past 90 days:Yes[X] No[]

    Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-B 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.[ ]

     Revenues for the year ended December 31, 2001:   $12,202,588.

    State the aggregate market value of the voting stock held by non-affiliates:
Not Applicable, the Registrant's stock has no established trading market.

    The number of shares outstanding of the Registrant's Common Stock as of
March 18, 2002 was 9,855,822 shares.

Transitional Small Business Disclosure Format (check one):  Yes    X      No
                                                            --------      ----
<PAGE>
                            PORTLAND BREWING COMPANY
                                2001 FORM 10-KSB
                                TABLE OF CONTENTS


                                     Part I
                                                                          Page
                                                                          ----
  Item 6.  Description of Business                                          3

  Item 7.  Description of Property                                         12

  Item 8.  Directors, Executive Officers and Significant Employees         13

  Item 9.  Remuneration of Directors and Officers                          15

  Item 10. Security Ownership of Management and Certain Security Holders   16

  Item 11. Interest of Management and Others in Certain Transactions       19

                                   Part II

  Item 1.  Market Price of and Dividends on the Registrant's Common        21
              Equity and Other Shareholder Matters

  Item 2.  Legal Proceedings                                               22

  Item 3.  Changes in and Disagreements with Accountants                   22

  Item 4.  Submission of Matters to a Vote of Security Holders             22

  Item 5.  Compliance with Section 16(a) of the Exchange Act               22

  Item 6.  Reports on Form 8-K                                             22

                                  Part F/S

           Index to Consolidated Financial Statements                      23

                                  Part III

  Item 1.  Index to Exhibits                                               24

  Item 2.  Description of Exhibits                                         24


                                       2
<PAGE>
                                     Part I
                                     ------
Item 6.  Description of Business
--------------------------------

General

Portland  Brewing Company (the "Company") was incorporated in Oregon on November
14, 1983 and conducts business under the names  "MacTarnahan's  Brewing Company"
and  "Portland  Brewing  Company".  The  Company  was  formed  to brew  and sell
specialty beer (i.e.,  beer which is made in relatively  small batches and which
generally sells at retail in the super or above premium  category at about $7.00
per  six-pack).  Products  produced by the Company fall  primarily  within three
brand families:  MacTarnahan's,  Saxer and Nor'Wester.  The MacTarnahan's  brand
family represents the largest volume and includes  MacTarnahan's  Scottish Style
Amber Ale, MacTarnahan's  Blackwatch Cream Porter, and MacTarnahan's  Highlander
Pale Ale. The Company's  seasonal line,  which carry the  MacTarnahan's  Brewing
Company  logo,  includes  Bobby  Dazzler Old London  Style  Holiday  Ale,  newly
introduced Uncle Otto's WeissBeer,  and Uncle Otto's  Oktoberfest  Maerzen along
with associated  brands including Oregon Honey Beer and Woodstock IPA. The Saxer
brand family is represented by Lemon Lager and Jack Frost and various seasonals.
The  Nor'Wester  product  family  includes  Nor'Wester   HefeWeizen,   Raspberry
HefeWeizen,  Smith Rock Bock and a seasonal line-up. Specialty products are made
periodically  to be served at the  Company's  restaurant,  The TapRoom,  such as
ZigZag River Lager and Benchmark Old Ale as well as certain Saxer and Nor'Wester
products. Cask-conditioned variations of these products are occasionally offered
in The  TapRoom.  The  Company  uses  distributors  to sell  principally  to the
packaged/bottle  market through authorized retail outlets and to the on-premises
draft market through establishments  licensed to serve alcoholic beverages.  The
Company  sells  beer  primarily  in its  home  market  of  Oregon  as well as in
Washington,  California  and other western  states.  In 1996,  the Company began
selling beer in states east of the Rocky  Mountains.  In 2000, the Company began
exporting Saxer Lemon Lager to Japan,  and expects to continue  throughout 2002.
The Company also sells directly to the public from its restaurant and dock sales
facilities.

The Company opened its first brewery in January 1986 at 1339 NW Flanders  Street
in Portland, Oregon and later added a pub. The Company opened its second brewery
in June 1993  located at 2730 NW 31st Avenue in  Portland,  which  substantially
increased  production  capacity  to  approximately  26,000  barrels.   Equipment
additions and expansion has  incrementally  increased  capacity to approximately
135,000 barrels of ales per year. In July 1994, a restaurant,  The TapRoom,  was
constructed at the main brewery and opened to the public.  In November 1998, the
Company sold the Flanders Street facility.

In October 1999, the Company acquired a hand truck manufacturing  company, Harco
Products, Inc. (operated as an Oregon subsidiary), with its principal offices in
Beaverton, Oregon. [See Note 8 of Notes to Consolidated Financial Statements].

Saxer Brewing Company Asset Purchase

On January 31, 2000,  the Company  purchased  brands and certain  equipment from
Saxer Brewing Company for 900,000 shares of the Company's common stock, $150,000
cash and a three year agreement to pay certain  amounts based on barrel sales of
the Saxer and Nor'wester brands, such amount secured by the Saxer and Nor'wester
brands.  In  connection  with  the  purchase,   Steven  C.  Goebel,  a  majority
shareholder of Saxer Brewing Company, was appointed to the board of directors of
the Company.  In February 2001, Mr. Goebel resigned from the Board of Directors.
[See Item 11 - Interest of Management and Others in Certain Transactions - Saxer
Brewing  Company Asset  Purchase and Note 4 of Notes to  Consolidated  Financial
Statements].


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<PAGE>
Industry Overview

National Beer Industry.  Total taxable  domestic  shipments for 2001,  excluding
imports,  declined 0.2%,  falling for the second  consecutive year. The national
malt  beverage  industry  has  experienced  declines  in six out of the last ten
years. (CS First Boston:  Beer and Alcoholic  Beverages,  January 22, 2002). The
three industry giants: Anheuser-Busch, Miller Brewing Company, and Coors Brewing
Co. comprise nearly 80% of the country's  shipments.  (Beer Marketer's Insights,
January 14, 2002).

In 2001,  national  sales were  affected  by gains in the premium  "light"  beer
category,  the success of flavored alcoholic beverages or  "malternatives",  and
continued  growth of imports.  Of equal  significance to the domestic market was
the  consolidation  of  international  brewers  and  the  international  brewers
emphasis on targeting the U.S. market.  These trends are expected to continue in
year 2002. Consolidation has continued both nationally and internationally.

Specialty Beer Industry--Pacific  Northwest. "As a group, specialty brewers eked
out slight 1-2% gains in 2001 ... so segment stayed at approximately 3% share of
the US market for the sixth straight year ... averaging 2.4% annual growth since
1996." (Beer Marketer's  Insights,  February 11, 2002). Sales of specialty beers
in Oregon  increased  by 1% to 12% in 2001,  compared  to a 7% increase in 1999,
according to Oregon Liquor Control Commission  Statement of Beer Sales in Oregon
for  the  respective  periods.   Paralleling  the  national  industry,  flavored
alternative  beverages  also  affected the Oregon  brewing  industry,  including
specialty brewers.  Oregon and Washington are considered to be mature markets in
the U.S. specialty beer segment.  Consequently, the Company believes that future
growth will be more difficult in these two states.

Products

The Company offers a wide variety of specialty  beers. The complete product line
includes core brands,  which are available  year-round,  a selection of seasonal
brands, and specialty products. Draft product (kegs) accounted for approximately
28% and 30% of the Company's beer shipments in 2001 and 2000, respectively.

Portland Brewing Company products consist of core brands generally incorporating
a reference  to  MacTarnahan(R)  and the assumed  business  name,  MacTarnahan's
Brewing Co., to further  endorse this  branding.  Other brand  families  include
Saxer and Nor'Wester.  From time to time, other specialty beers are produced for
the Company's use, as private label brands, and under contract for customers.

Portland Brewing Company's brands include:

    MacTarnahan's  Scottish Style Amber Ale.  MacTarnahan's Scottish Style Amber
Ale is a complex, copper-colored Scottish style ale of great character made with
pale and caramel  malts and Cascade  hops,  and is  available  in draft,  12 oz.
bottles and a 12 oz. can.

    MacTarnahan's  Blackwatch  Cream Porter.  Blackwatch  Cream Porter is brewed
using a selection of pale and dark malts with the judicious addition of unmalted
grains  and  oatmeal  providing  an  unparalleled  creamy  texture.  The beer is
available on draft and in 12 oz. bottles.

    MacTarnahan's  Highlander  Pale Ale.  Highlander  Pale Ale combines the pale
golden malt  character of a pale beer made with  distilled  hop oil.  This truly
unique  combination  pioneered by Brewmaster  Alan  Kornhauser  is  delightfully
embellished  with highland  heather.  Highlander is available on draft and in 12
oz. bottles.


                                       4
<PAGE>
    Oregon Honey Beer.  Oregon Honey Beer Beer is a pale  light-bodied  ale made
with two-row barley malt,  Oregon clover honey,  and Nugget and Willamette hops,
and is available on draft and in 12 oz. bottles.

    ZigZag River Lager.  ZigZag  River Lager is a full  bodied,  European  style
bottom  fermented  lager with a slight malty  sweetness and subtle hop presence,
available on draft only.

    Woodstock  IPA The Company's  India Pale Ale is aged with natural  untoasted
American oak from the Ozarks that has been air dried for two years and is one of
the few India Pale Ales to marry the hop and oak flavors, available on draft and
in 12 oz. bottles.

The Company's  seasonal  brands (all  available on draft and in 12 oz.  bottles)
currently include:

    Uncle Otto's Oktoberfest Maerzen.  This beer, lagered for a full two months,
is  created  using a blend of pale  and  select  specialty  malts,  spiced  with
Northwest grown Mt. Hood hops, and is offered in September and October.

    Uncle Otto's WeissBeer.  This authentic  sparkling Bavarian style wheat beer
is made with a special yeast that produces  clove/banana  flavors and is offered
in spring and summer.

    BobbyDazzler  Old London Style  Holiday  Ale.  This holiday ale is made with
five malts yielding very rich  character and burgundy color  utilizing a dry hop
process which adds great aroma.  This product is offered from  November  through
January.

Saxer brands include:

    Lemon Lager.  This is a lager beer with special  flavorings  added to make a
unique refreshing taste.

    Saxer Bock.  This beer is a golden  Helles Bock brewed in the true  Bavarian
lager tradition.  It is brewed with 40% more malt than normal lager, giving it a
truly unique malty sweetness and a rich aroma.

    Jack Frost. A fine traditional German style winter doppelbock.

Nor'Wester brands include:

    Nor'Wester  HefeWeizen.  This is an American style  hefe-weizen  brewed with
wheat malt and left unfiltered to preserve all the flavor and aroma.

    Nor'Wester Raspberry HefeWeizen. This is a wheat ale flavored with raspberry
and other natural  flavors left  unfiltered to preserve all the natural  flavors
and aromas.

    Smith Rock Bock. This beer has malty-sweet character and toffee-like flavors
brewed as a traditional pale bock.

Restaurant

The Company operates a restaurant, The TapRoom, which is located at the
Company's brewery, providing a tasting room for the products it manufactures.
The TapRoom restaurant is upscale in comparison to other brewpubs in the


                                       5
<PAGE>
region and features a European  atmosphere,  a wood-burning  fireplace,  outdoor
patio, a terrace with an arbor and seating for over 150 guests.

Marketing and Sales

The Company uses both licensed beer and wine distributors/wholesalers to sell to
and service on- and off-premises  accounts for specific geographic  territories.
These  distributors  maintain broad  distribution in the Company's core markets:
Oregon,  Washington,  and California.  Columbia  Distributing  Company  services
almost all of the major markets in Oregon and  Washington.  In California,  Wine
Warehouse represents the Company on a statewide basis handling most of the sales
to that state. The Company expects that Columbia Distributing and Wine Warehouse
will  continue  to be  large  volume  distributors  of  its  products  in  2002.
Approximately  67 distributors  represent the Company in its western markets and
the Company  employs  eight  salespeople  to service its  primary  markets:  one
national sales representative, one chain sales representative,  four salespeople
in Oregon, one in Washington,  and one in California.  The Company also uses the
services of three  broker/agents  as  independent  contractors:  one in northern
California,  one in the Midwest, and one in the East. Shipments for markets east
of the  Rocky  Mountains  declined  to 6% in 2001  from  9% in  2000.  With  the
continued  consolidation of  manufacturers,  wholesalers and  distributors,  the
Company may be required to adjust its distribution arrangements in the future.

The Company focuses on the MacTarnahan brand, anchored by MacTarnahan's Scottish
Style Amber Ale and emphasizes a family of unique brands that can stand together
or individually.  The Company  continues to enhance consumer  awareness  through
increased  promotional and advertising  activity in selected  sports,  music and
community  activities which offer  opportunities for introduction to the Company
and sampling of its brands.  These  include  opportunities  associated  with the
Seattle Seahawks,  the Portland Trail Blazers,  the Highland Games in Oregon and
California and events such as  Oktoberfest.  Because of the intense  competition
for draft accounts in larger cities,  the Company's  marketing efforts have been
concentrated on increasing packaged authorizations in chain retailers.  However,
in Oregon,  its core market,  the Company  focuses  equally on draft and package
sales.

The Company  embarked  upon  importing a "top class,"  pure  Highland 15 yr. old
single  malt  Scotch  Whisky,   "The   MacTarnahan(R)",   to  cross-promote  the
MacTarnahan  family of beers and emphasize  their  uniqueness and  authenticity.
This strategy also serves to enhance the quality image of both malt beverages as
well as their  heritage.  Furthermore,  using the whisky as a  cross-promotional
tool creates a novel,  yet very  effective  way to approach  existing as well as
potential  customers.  Exemplifying  this concept is the "Scotch  Box," a unique
pairing of beer and Scotch,  available at certain retail  outlets.  In addition,
the Company presents the products  side-by-side to enhance their  association in
educational tasting and promotions.


Trademarks

The Company has developed brand  recognition  with several  trademarks and trade
names.  The Company  has  protected  those  trademarks  and trade names  through
obtaining and maintaining federal and state trademark  registrations and assumed
business name registrations. Federally registered trademarks for key brand names
for malt beverages  include the names Portland Brewing,  Portland,  and Portland
Brewing label design.  In connection with the  MacTarnahan's  brand, the Company
has federally  registered  MacTarnahan's,  "Mac's", the running Mac design icon,
and MacTarnahan's label design.  Other federally  registered  trademarks include
BobbyDazzler Ale and the Oregon Honey Beer label design. In addition the Company
has obtained federal  registration for The MacTarnahan(R) in connection with its
Whisky trade name.  The Company has applied for  registration  of  MacTarnahan's
Highlander as well. To the best of the Company's knowledge,  it has the right to
use these marks on a nationwide


                                       6
<PAGE>
basis in connection with malt beverages,  and to use "The  MacTarnahan(R)"  on a
nationwide basis in connection with Whisky.

The Company also has federally  registered  trademarks for the names Nor'Wester,
Saxer,  and  Saxer's  Lemon  Lager;  and the  design  marks for Lemon  Lager and
Nor'Wester.  To the best of the  Company's  knowledge,  it has the  right to use
these marks on a nationwide basis in connection with malt beverages.

The Company has also  registering  its brand names as trademarks in the State of
Oregon, California,  Washington,  Idaho and Colorado for key brand names. It has
registered  numerous  marks in those states,  including the brand names Haystack
Black, Uncle Otto's Oktoberfest,  and MacTarnahan's BlackWatch. In addition, the
Company has registered the assumed  business name  MacTarnahan's  Brewing Co. To
the best of the Company's  knowledge,  it has the right to use the brand name of
each of its  current  products  in areas  where  those  products  are  currently
distributed.

Competition


The domestic specialty brewing industry represents approximately 3% of the total
national  market (Beer  Marketer's  Insights,  February 11, 2002) and 12% of the
Oregon  market  (Oregon  Liquor  Control  Commission  Statement of Beer Sales in
Oregon,  2001).  Growth rates have slowed for the majority of craft  brewers and
distribution  opportunities  continue to diminish. The national brewers continue
to develop brands to compete  directly with specialty  brands and these national
competitors  have advantages such as lower  production  costs,  larger marketing
budgets,  greater  financial  and  other  resources,  and a more  developed  and
extensive  distribution  network than the Company. In addition,  new players and
the  "spirits"  industry  have  entered  the market  place.  Growing  demand for
imported beer continues to have a negative impact on sales of domestic specialty
beer. The Company  believes that continued  saturation in the specialty  brewing
category,   the  growth  of  imports,  and  the  success  of  malternatives  are
constraining growth for specialty brewers, including the Company. In 2001, three
of the top five Oregon brewers,  including the Company,  lost barrel  shipments,
primarily because of a new entrant in the amber category.


The Company  competes within the specialty beer market based on product quality,
taste,  consistency,  freshness,  distribution,  price, ability to differentiate
products,  promotional methods and other product support. Like the Company, most
specialty  brewers sell their product at retail on the brewery premise or market
their product through similar channels. Distributors continue to consolidate and
national brewers continue to influence  distributors to limit competing product.
These factors,  coupled with legal  restrictions on  distribution  terminations,
could have the effect of reducing  the  distribution  options for the  Company's
products. The Company believes that price discounting, solidifying distribution,
maintaining  shelf space,  and  increasing  sales and  marketing  efforts,  will
continue to be essential.


Governmental Regulation

The  production  and  sale  of  alcoholic  beverages  is  subject  to  extensive
regulation  by  the  Federal  Bureau  of  Alcohol,  Tobacco  and  Firearms,  and
individual states' alcoholic beverage regulatory  agencies.  The Company holds a
warehouse  license and a distillery  license issued by the Oregon Liquor Control
Commission solely to import and store Whisky. In 2001, the Company established a
U.S. Customs bonded  warehouse within its existing  warehouse to facilitate the
import of Scotch Whisky.


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<PAGE>
License  Description.  The Company operates under a Brewery Public House license
which allow sales off-premises as well as through up to two retail outlets.  The
Company operates one restaurant at its brewery.

Taxes.  The Company  pays a federal  excise tax (FET) of $7.00 per barrel on all
production.  This tax increases to $18.00 per barrel on production  above 60,000
barrels per year.  In addition,  the Company pays an Oregon  excise tax of $2.60
per barrel.  Beginning in 2001,  payment of the Washington excise tax (which was
$4.68  per  barrel in 2000)  became  the  direct  responsibility  of  Washington
distributors.   In  other  states,  similar  excise  taxes  are  levied  on  the
distributor.  Increases  in either  the  federal  or state  excise  taxes  would
inevitably raise the price of beer, which may adversely affect sales.

Dram Shop  Liability.  The  Oregon  Supreme  Court has held that the  serving of
alcoholic  beverages  to a person known to be  intoxicated  may,  under  certain
circumstances,  result in the server  being  held  liable to third  parties  for
injuries caused by the intoxicated customer. The Company serves beer and wine to
its customers at its  restaurant.  If an intoxicated  customer is served wine or
beer and subsequently commits a tort such as causing an automobile accident, the
Company may be held liable for  damages to the  injured  person or persons.  The
Company has  obtained  liquor law legal  liability  insurance  coverage and will
continue  such  coverage if  available  at a reasonable  cost.  However,  future
increases  in  insurance  premiums  may make it  prohibitive  for the Company to
maintain adequate insurance coverage.  A large damage award against the Company,
not  adequately  covered by  insurance,  would  adversely  affect the  Company's
financial position.

Research and Development

The Company had minimal research and development  expenditures in 2001 and 2000.
However,  in 2001,  the Company  conducted  focus group  research in the form of
consumer  tastings  of a broad  range of  products  to  formulate  MacTarnahan's
Blackwatch  Cream  Porter  and  embarked  on  a  marketing  database  collection
strategy.  The Company has from time to time,  developed  new  products and will
continue to do so in the future. Such products are sold to retail customers, and
accordingly, associated development costs are expensed as cost of goods sold.

Employees

As of December 31, 2001, the Company had 82 employees (66 full time),  including
26 in brewing,  bottling and shipping operations, 35 in retail operations, 16 in
sales,  marketing,  and  administration,  and  5 in  the  Company's  hand  truck
business.  None of the Company's employees are covered by collective  bargaining
agreements. The Company provides its full-time employees with health, dental and
life insurance,  short and long term disability,  and a 401(k) plan. The Company
made no  contributions  to the 401(k) plan in 2001 or 2000. The Company believes
its employee relations are good, and believes its employee practices comply with
all Federal and State laws and  regulations.  The Company does carry  employment
practices  liability  insurance.  There can be no assurance  that such insurance
will continue to be available at a price or on other terms  satisfactory  to the
Company.

Concentrations of Risk

Distributor Concentration.  In 2001, wholesale distributors accounted for 85% of
the Company's shipments, of which 46% were to Oregon distributors. The Company's
largest  distributor,  Columbia  Distributing  Company,  which  distributes  the
Company's products in Oregon and Washington,  accounted for approximately 32% of
the Company's net sales in 2001. The next largest  distributor,  Wine Warehouse,
accounted for  approximately 13% of the Company's net sales for the same period.
Distribution  agreements generally grant exclusive  territories to distributors.
The Company's  distributors also market and distribute  competing brands.  While
the Company believes it has good  relationships  with most of its  distributors,
the Company can give no assurance that each of its distributors will continue to
effectively


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market and distribute the Company's beer. State laws and/or standard contractual
provisions  limit the Company's  ability to terminate a distribution  agreement,
therefore  the Company can give no assurance  that a  distributor  for any given
geographic area could be replaced without cost or replaced  immediately,  either
temporarily or permanently,  in the event the distributor was performing  poorly
in its efforts to distribute the Company's  products or was otherwise  unable to
perform  (e.g.  as a result of an  employee  strike or damage  caused by fire or
natural disaster). The Company's inability to replace a non-performing or poorly
performing  distributor in a timely fashion and/or with minimal cost, could have
a  significant   adverse   effect  on  the  Company's   results  of  operations,
particularly  if the  distributor  were  Columbia  Distributing  Company or Wine
Warehouse, the Company's largest distributors.

Increased  Competition and Saturation in the Beer Industry - Specialty  Segment.
[See  "Industry  Overview"  and  "Competition"  above].  Increased  competition,
proliferation  of specialty  brands,  strong  imports  sales and the  increasing
number of entrants in the "malternative"  category have and may continue to have
an adverse effect on the Company's business,  financial condition and results of
operations.  The  economic  downturn in the Pacific  Northwest  and  anticipated
industry  consolidations  may further  serve to affect  growth for the  Company.
There can be no assurance  that the  specialty  beer  industry  will  experience
growth,  that it will not experience  further downturn or that any downturn will
not be more severe.

Operating  Hazards.  The  Company's  operations,  and the  brewing  industry  in
general,  are  subject  to certain  hazards  such as  contamination  of brews by
micro-organisms  and risk of equipment  failure.  The Company's products are not
heat  pasteurized,  irradiated  or chemically  treated.  The Company has product
liability  insurance  that it  believes  is adequate to cover risks of injury or
contamination  to  third-parties.  There can be no assurance that such insurance
will continue to be available at a price or on other terms  satisfactory  to the
Company.  The Company  carries first party  property  insurance to cover against
insured  losses  to  equipment  from  direct  physical   damage,   and  business
interruption  insurance to cover loss of income and extra  expenses in the event
of an insured direct damage loss.

Environmental Matters

The  Company's  compliance  with federal,  state and local laws and  regulations
regulating  the  discharge of materials  into the  environment,  had no material
effect upon  capital  expenditures,  earnings,  or  competitive  position of the
Company during the year ended December 31, 2001.

Sources of Liquidity

The Company requires capital  principally to fund its working capital needs. The
Company has met its capital requirements through cash flow from operations, bank
borrowings,  loans from  shareholders  and the  private  and public  sale of its
Common Stock.

Effective as of July 31, 2001,  the board of directors  ratified,  confirmed and
adopted a  recapitalization/reorganization  plan for the Company which included
the following elements: (a) re-forecasting and re-sizing the current operations;
(b) refinancing and increasing the revolving loan with Western Bank; (c) issuing
common stock for the  contribution of certain real property;  (d) issuing common
stock for the contribution of the brewery land,  building and related equipment,
and  assumption  of  debt  related  to the  brewery;  and (e)  re-financing  the
Company's  term debt. The purposes of the  recapitalization/reorganization  plan
were to obtain and stabilize short-term and long-term financing, lower operating
costs and acquire  capital  assets  which  could be sold or used as  collateral.
Since the various transactions  involved affiliates of the Company, the plan and
certain  transactions  were  approved  by the  board  of  directors  after  full
disclosure of the material facts and  determinations  that the transactions were
fair to the Company. [See Item 11 - Interest of Management and Others in Certain
Transactions  -  Recapitalization/PBB,  LLC  Lease,  and  Note  3  of  Notes  to
Consolidated Financial Statements].


                                       9
<PAGE>
The  Company   re-forecasted   and  re-sized  the  current   operations  by  (a)
discontinuing  certain  brands  while  continuing  to increase  its focus on its
flagship  "MacTarnahan's  Scottish  Style  Amber  Ale" and its  family of unique
brands;  (b) down-sizing and implementing  cost reductions;  (c) outsourcing its
accounting functions to Greenstead = Accounting Resource ("Greenstead"); and (d)
restructuring  its  marketing  and  sales  department.  Greenstead  is  owned by
affiliates of Charles A. Adams and Peter F. Adams.

Effective  August 1, 2001, the Company entered into a $1,200,000  revolving line
of credit  ("Revolving  Line") with Western Bank which expires on August 1, 2002
and replaced the  existing  $1,000,000  revolving  line with  Western  Bank.  At
December 31, 2001 and December 31, 2000, $617,300 and $750,752 were outstanding,
respectively.  The  Revolving  Line is secured by a first lien on the  Company's
accounts  receivable  and inventory  and is guaranteed by certain  shareholders.
Interest is payable  monthly at a floating  per annum rate of 1% above the prime
rate published in the Wall Street Journal  (Western  Edition) (5.75% at December
31, 2001). The Revolving Line contains certain covenants including  restrictions
on additional  indebtedness  and payment of dividends  without the permission of
the lender.  The Company was in  compliance  with all  covenants at December 31,
2001.

On August 9, 2001,  Portland Brewing  Building,  L.L.C.  ("PBB LLC") and Electra
Partners Inc.  ("Electra")  contributed to the Company  approximately  1.5 acres
consisting of a parking lot and a 16,000 square foot  building  located  between
29th and 30th on  Industrial  Avenue  ("Parking  Lot") in exchange for 3,472,560
shares of its common stock valued at $.25 per share.  The Parking Lot was valued
by using the ad valorum  property tax assessment.  The members of PBB LLC at the
time   of   the   transaction   were   the   MacTarnahan   Limited   Partnership
("MacTarnahan"),  Harmer  Mill & Logging  Supply  Co.  ("Harmer")  and  Electra.
MacTarnahan  and Harmer are owned by affiliates of Robert M.  MacTarnahan and R.
Scott MacTarnahan.  Electra is owned by affiliates of Charles A. Adams and Peter
F. Adams.  On August 16, 2001,  the Company sold the Parking Lot to an unrelated
third  party for  $1,150,000  in cash and a 15-year  easement  to use 25 parking
spaces  without  cost.  The  purchase  price for the Parking Lot was  determined
through  arms-length  negotiations  between the Company and the  purchaser.  The
proceeds of the sale were used to reduce term debt and provide working capital.

On September  14, 2001,  Western Bank and the Company  entered into an unsecured
loan for  $182,741.25.  This loan replaced the loan between Western Bank and PBB
LLC, and was made in  preparation  for a transfer of certain  real  property and
associated personal property (the "Brewery  Property").  This loan is guaranteed
by  several  of the  Company's  shareholders.  On  October  12,  2001,  PBB  LLC
contributed the Brewery Property to the Company in exchange for 1,382,748 shares
of common  stock,  valued at $.25 per share,  and the  Company's  assumption  of
indebtedness  in the  amount of  $1,256,701  (which  consists  of the  unsecured
Western Bank loan described above,  and indebtedness to Capital  Crossings Bank)
and secured by certain real and personal property.  The real property was valued
based on the ad valorum  property tax assessment while the value of the personal
property was determined by using PBB LLC's net book value.  [See Note 3 and Note
6 of Notes to Consolidated Financial Statements].

On November 1, 2001,  the Company  replaced  its Western  Bank term debt (due in
November 2001) with a new term loan of $1,700,000 from MacTarnahan ("MacTarnahan
Term Loan").  The MacTarnahan  Term Loan is a three year facility,  secured with
the  Company's  personal  property  (priority  is  subject to  existing  liens).
Interest  is payable  monthly at a  floating  per annum rate of 1.25%  above the
prime rate  published in the Wall Street  Journal  (Western  Edition)  (6.00% at
December  31,  2001).  Principal  payments of not less than  $15,000 are payable
monthly  and two  additional  principal  payments  of not less than  $35,000 are
payable semi-annually. As such, $250,000 of the term loan has been classified as
a current  liability at December 31, 2001.  The  principal may be prepaid at any
time.  The  MacTarnahan   Term  Loan  contains   certain   covenants   including
restrictions  on additional  encumbrances.  [See Note 6 of Notes to Consolidated
Financial Statements].


                                       10
<PAGE>
As a  result  of  the  recapitalization/reorganization  plan,  (i)  the  Company
down-sized  and  reduced  costs;  (ii)  the  Company's  revolving  facility  was
increased and renewed to August 2002;  (iii) the Company's term debt was reduced
to $1,700,000 and refinanced to mature in 2004; (iv) the Company's brewery lease
payments for the brewery as well as the rent payments for the personal  property
were  eliminated,  and  the  Company  assumed  mortgage  debt  of  approximately
$1,257,000;  and (v) a  long-term  parking  easement  was secured as well as the
rental obligation eliminated.

In 1998,  the  Company  offered  several  of its trade  creditors  the option of
receiving a discounted  amount of cash  immediately or the entire amount owed to
them to be paid over a five-year period.  As a result,  the Company issued notes
in the  aggregate  principal  amount of  $148,065 to trade  creditors,  of which
$31,668 was  outstanding at December 31, 2001. The notes bear interest at 6% per
annum and mature on September 1, 2003. Payments under the notes are due in equal
monthly payments of principal and interest.

The Company's working capital requirements over the next year are expected to be
met  partially  from cash flow through  operations,  funds  available  under the
Revolving Line and, if appropriate and available,  additional  equity  offerings
and/or borrowings from other lenders.

Liquidity Risks

Competition.  The  Company  operates in the  specialty  beer  industry.  Intense
competition  and the  proliferation  of new brands and products have had and may
continue  to  have  an  adverse  effect  on the  Company's  business,  financial
condition and results of operations.  There can be no assurance that the Company
will be able to increase  its sales  volume or be able to  maintain  its selling
prices  in  existing  markets  or new  markets.  [See  "Industry  Overview"  and
"Competition" above].

Operating Losses. The Company  experienced  significant  operating losses during
the years ended December 31, 2001 and 2000, and has continued to incur losses in
the first quarter of 2002. Operating results have fluctuated and may continue to
fluctuate as a result of many factors  including lower sales volumes and selling
prices,  unprecedented increases in transportation,  utility and insurance costs
as well as increased  depreciation  and other fixed operating costs as a percent
of sales  during  periods when the  Company's  brewery is operating at less than
full  capacity.  Changes in product mix and an increase in selling and marketing
costs  incurred as the Company  protects its  business in existing  markets also
contribute to the  fluctuation.  There can be no assurance that the Company will
not continue to experience operating losses.

Purchase  of Assets  from Saxer  Brewing  Company.  In January  2000 the Company
purchased  inventory,  equipment and the Saxer and Nor'wester  brands from Saxer
Brewing  Company.  In March 2000 the Company began production of these brands at
its  Portland  brewery.  The  production  and  distribution  of  the  Saxer  and
Nor'wester brands required  additional working capital.  The Company also agreed
to pay certain amounts based on barrel sales of the Saxer and Nor'wester brands,
subject to a minimum annual  payment.  In 2000,  since barrel sales of the Saxer
and Nor'wester  brands were below the minimum barrel  threshold,  the amount was
the minimum annual payment.  In 2001, payments totaling $67,500 were made. There
can  be  assurance  that  the  production  and  distribution  of the  Saxer  and
Nor'wester  brands  will  provide   sufficient  cash  flow  from  operations  to
accommodate  the increased  working capital needs and repayment of the increased
debt. [See Item 11 - Interest of Management and Others in Certain Transactions -
Saxer  Brewing  Company  Asset  Purchase  and Note 4 of  Notes  to  Consolidated
Financial Statements].

Ability to Refinance  Outstanding  Debt. The Company has a $1,200,000  Revolving
Loan  expiring on August 1, 2002 which the Company  expects to  refinance  under
similar terms. The Company also has long term debt with


                                       11
<PAGE>
substantial  principal  payments in 2003 and 2004. The Company's working capital
requirements  over the next year are expected to be met partially from cash flow
through   operations,   funds  available  under  the  Revolving  Loan,  and,  if
appropriate and available,  additional  equity offerings and/or  borrowings from
other  lenders.  There  can be no  assurance  that the  Company  will be able to
refinance  the  Revolving  Loan or other  term  debt on terms  favorable  to the
Company.  [See Item 6 - Sources of Liquidity and Note 6 of Notes to Consolidated
Financial Statements].


Item 7.  Description of Property

The  Company's  brewery,  located at 2730 and 2750 NW 31st  Avenue in  Portland,
showcases the copper  brewing  vessels and  equipment  acquired in 1991 from the
Sixenbrau brewery in Nordlingen,  Germany.  The brewery opened in 1993 and has a
present annual production capacity of approximately  135,000 barrels of ale. The
brewery has 27,000 square feet of  manufacturing,  shipping and warehouse  space
with a 1,000 square foot, three-story brewhouse (to house and display the copper
brewing  vessels),  and 3,000 square feet of offices.  Also  included is a 3,000
square foot restaurant,  The TapRoom, complete with an outdoor seating area. The
Company purchased a portion of the Brewery Property  including the real property
located  at  2730  NW  31st  Ave  from  PBB LLC on  October  12,  2001,  thereby
terminating  the  existing  lease with them.  A portion of this office  space is
leased  to  Greenstead  =  Accounting  Resource.  [See  Item  11 -  Interest  of
Management and Others in Certain Transactions - Recapitalization/PBB, LLC Lease,
and Note 8 of Notes to Consolidated Financial Statements].

In 1999, the Company entered into a lease for  approximately  30,100 square feet
of space in a building  adjacent to the main  brewery  (2750 NW 31st Ave) with a
related  party,  L & L Land Company ("L & L"). The term of the lease is 5 years,
with one option to extend the term until June 14, 2008.  Rent under the lease is
$12,000 per month.  In  addition,  the Company  agreed to pay the real  property
taxes on the building,  provide  insurance and to make various  maintenance  and
repairs.  The lease  contains  a first  opportunity  to  purchase  the  adjacent
building. The lease is guaranteed by two shareholders of the Company. In 1999, L
& L  reimbursed  the  Company  $218,000  for costs  incurred  in prior years for
constructing  the shipping dock at this property.  In connection with the lease,
the Company entered into a sublease with another party for approximately  13,000
square feet of office and warehouse  space and a portion of the parking lot. The
term of the  sublease is month to month and rent is $4,974 per month,  plus $365
per month for real  property  taxes,  plus payment of  utilities,  insurance and
interior maintenance. In 2000, the Company reduced the amount of subleased space
to  approximately  8,000  square  feet on a month to month  basis for $3,168 per
month. [See Item 11- Interest of Management and Others in Certain Transactions -
Lease  Agreement  with L & L Land Company,  and Note 8 of Notes to  Consolidated
Financial Statements].

In October  1999,  in  connection  with the  purchase  of Harco  Products,  Inc.
("Harco"),   the  Company  entered  into  a  lease  with  a  related  party  for
approximately 5,600 square feet of space in which Harco operates. Rent under the
lease is $2,500  per month and the term of the lease is five  years,  and can be
terminated  upon 60 days  notice  by the  Company.  [See  Item 11 - Interest  of
Management  and  Others in Certain  Transactions  - Lease  Agreement  with Harco
Products, Inc., and Note 8 of Notes to Consolidated Financial Statements].

Item 8.  Directors, Executive Officers and Significant Employees

Directors.  The following lists the persons currently serving as directors.  The
term of office for each person  elected as a director  continues  until the next
Annual  Meeting of  Shareholders  and until a  successor  has been  elected  and
qualified.

                     Name of Director                             Age
                     ----------------                             ---

                     Charles A. (Tony) Adams                      55

                                       12
<PAGE>
                     Frederick L. Bowman                          57
                     Robert M. MacTarnahan                        86
                     R. Scott MacTarnahan                         55
                     William J. Prenger                           55
                     Howard M. Wall, Jr.                          56
                     Peter F. Adams                               57

Charles A. (Tony)  Adams.  Mr. Adams has been Chairman of the Board of Directors
and President and Chief Executive Officer of the Company since February 1992. He
has been a Director of the Company since October 1988. Mr. Adams is president of
Electra  Partners,  Inc., a private  investment  holding company.  Mr. Adams was
active in the real  estate  business  beginning  in 1973,  including  owning and
operating  his own  real  estate  company  until  1983,  when he  became a sales
associate at CB Commercial Real Estate Group,  Inc., where he was employed until
1992. He holds a B.A. in Geology from the University of Virginia and has studied
graduate level  economics and business  administration  at the University of San
Francisco,  Portland State  University and Stanford  University.  Mr. Adams is a
director of Portco  Corporation,  a company  which Howard M. Wall,  Jr., a board
member of the Company,  is president and chief executive  officer.  Mr. Peter F.
Adams is his brother.

Frederick  L. Bowman.  Mr.  Bowman is a founder of the Company and has been Vice
President  since  February  1992.  In July  1997 Mr.  Bowman  was  also  elected
Treasurer and Secretary,  and in September 1998, Mr. Bowman was appointed to the
Board of Directors.  Mr. Bowman serves as corporate liaison to the beer industry
and assists in marketing  efforts  including  public relations and the Company's
distributor  support program.  He designed the Company's  original  products and
brewery.  Previous to founding Portland Brewing Company, Mr. Bowman was involved
in the  wholesale  automotive  industry  as a  technical  and  district  service
manager. Mr. Bowman has attended Portland State University, University of Oregon
and Oregon  State  University.  In  addition,  Mr.  Bowman  attended the Brewing
Microbiology  and  Microscopy  course at the Siebel  Institute in 1988. He was a
member of the  founding  board of the  Oregon  Brewer's  Guild.  Mr.  Bowman was
elected to the Board of Directors of the Brewer's Association of America in 1993
and has continued to serve on the board and various  national  committees  since
then. Mr. Bowman is also a member of the Board of Directors and Treasurer of the
Metropolitan Business Association of Portland.

Robert M. MacTarnahan.  Mr. MacTarnahan has been a Director since July 1985. Mr.
MacTarnahan has been a principal in Harmer Company for more than six years,  and
is a member  of Black  Lake  Investments,  LLC.  Until  October  31,  1999,  Mr.
MacTarnahan  was  the  president  of  Honeyman  Aluminum  Products  Company,   a
manufacturer of hand trucks for the beverage  industry,  for more than 10 years.
He is also active in the promotion of the Company and the Company's  MacTarnahan
brand  products are named after him. [See Item 11-  "Interest of Management  and
Others in Certain Transactions"]. Mr. R. Scott MacTarnahan is his son.

R. Scott MacTarnahan. Mr. MacTarnahan has been a Director since July 1985. Until
October 31,  1999,  he was the vice  president  and general  manager of Honeyman
Aluminum Products Company and has been the vice president and general manager of
Harmer  Company  for more than 11 years.  Mr.  MacTarnahan  received  a B.S.  in
Business  Administration  from Portland State  University in 1968. Mr. Robert M.
MacTarnahan is his father.

William J. Prenger. Mr. Prenger was appointed to the Board of Directors in April
2000.  He is Vice  President  of Durham and Bates  Agencies,  a  Portland  based
regional  insurance  brokerage  firm.  Previously,  Mr.  Prenger was Senior Vice
President  and  Principal of a major  international  insurance  brokerage  firm,
having held senior  management  positions in Honolulu and Portland.  Mr. Prenger
received a B.S. in Business Administration from the University of Oregon in 1968
and completed Stanford  University's  Executive Program for Smaller Companies in
1989.

                                       13
<PAGE>
Howard M. Wall,  Jr. Mr. Wall has been a Director of the Company  since  October
1992. Since 1984 he has been the president and chief executive officer of Portco
Corporation, a Vancouver,  Washington manufacturer of paper and plastic flexible
packaging  for the  produce,  fish,  and roofing  industries.  He has had a long
association with the Northwest hop industry as Portco developed the world's only
biodegradable  paper hop string.  Mr. Wall  received a B.A. in English  from the
University of Oregon in 1973.

Peter F. Adams Mr. Adams was  appointed  to the Board of Directors in 2001.  Mr.
Adams is an owner and operating member of Farmington Landfill,  L.L.C., a quarry
reclamation business. As a private investor,  Mr. Adams is an owner and director
of companies  doing business in several  fields  including  wine-grape  vineyard
management,  wine  production  and marketing,  emergency-vehicle  manufacturing,
steel  casting of  construction,  mining and  aerospace  turbine  products,  and
outsourced back office  services.  Mr. Adams holds an MBA from the University of
Oregon.  Mr.  Adams is a director  of ESCO  Corporation  and is a trustee of the
River View Cemetery Association. Mr. Charles A. Adams is his brother.

Executive  Officers.  The following  lists the names,  ages and positions of the
Company's current executive officers, along with certain other information.  The
Company's  officers are elected by the Board of Directors at its annual meeting,
and hold office  until the next  annual  meeting of the Board of  Directors  and
until their successors are elected and qualified.


     Name                      Age    Position(s) with Company
     ----                      ---    ------------------------
     Charles A. (Tony) Adams    55    Chairman of the Board, President and Chief
                                      Executive Officer
     Jerome M. Chicvara         50    Executive Vice President
     Frederick L. Bowman        57    Vice President, Secretary and Treasurer
     Mark L. Carver             48    Vice President, Sales

For  information  on the business  background of Mr. Adams and Mr.  Bowman,  see
"Directors" above.

Mark L. Carver. Mr. Carver has been Vice President,  Sales since September 1999,
and served as National  Off-Premise  Sales Manager and National  Account Manager
from 1995 until September 1999. Mr. Carver joined the Company in 1991.  Prior to
that,  Mr. Carver worked at the  wholesale  distributor  level for 13 years with
Pepsi Cola and Columbia Distributing in the Portland,  Oregon market. Mr. Carver
received his Bachelor of Science Degree in 1975 from the University of Oregon.

Jerome M.  Chicvara.  Mr.  Chicvara was appointed as Executive Vice President in
February  2001 and was a  director  from June  2001 to  February  2001.  He is a
twenty-year  veteran  of the beer  and wine  industry,  and has  delivered  many
keynote  speeches to the industry in his role as industry pioneer and visionary.
He spent the first seven years of his beverage  career  learning  the  wholesale
trade as a Sales  Executive.  In 1987,  Mr.  Chicvara  co-founded  the Full Sail
Brewing  Company  and served as  Director  of Sales &  Marketing.  His  guidance
assisted the company as it pioneered  Oregon's first microbeer in a bottle.  Mr.
Chicvara was founding  President of the Oregon  Brewer's  Guild,  an association
committed to quality brewing techniques in Oregon's vast microbrew industry.  In
1999,   Mr.   Chicvara   sold  his  equity  in  Full  Sail  and   joined   Saxer
Brewing/Nor'Wester  Beer as VP Marketing & Sales.  Mr.  Chicvara joined Portland
Brewing Co. in April 2000. He holds a Bachelor of Communications  from Evergreen
State College.

                                       14
<PAGE>
Item 9.  Remuneration of Directors and Officers
-------  --------------------------------------

a. Director and Officer Remuneration

Directors  receive no cash  compensation  for serving on the Board of Directors.
Robert  M.  MacTarnahan,  R.  Scott  MacTarnahan,  and  Howard M. Wall have been
granted options under the Company's  Non-Qualified  Stock Option Plan ("NQSOP").
As of December  31, 2000,  options to purchase  13,500  shares of the  Company's
Common Stock at $5.3333 per share are  outstanding  under the NQSOP.  No options
were granted under the NQSOP in 2001.

The  following  table sets forth  information  regarding  all cash  compensation
earned by each of the three most highly compensated officers and all officers as
a group for the year ended December 31, 2001.

                           Capacities in Which Aggregate
  Name                    Remuneration Was Received                 Remuneration
  ----                    -------------------------                 ------------
  Frederick L. Bowman     Vice President, Secretary and Treasurer   $     69,322
  Mark L. Carver          Vice President, Sales                     $     86,912
  Jerome M. Chicvara      Executive Vice President                  $     70,822
  All officers as a group                                           $    266,556
  (4 persons)



b. Remuneration Plans

Incentive  Stock Option Plan. In October 1992, the  shareholders  of the Company
approved  the  Company's  Incentive  Stock  Option  Plan  ("ISOP").  The ISOP is
administered  by the  Company's  Board of  Directors  and provides for grants to
officers and  employees  of options to acquire  shares of the  Company's  Common
Stock, subject to the limitations set forth in the ISOP. The ISOP was amended in
December 1998 to increase the number of shares available for issuance thereunder
from 163,500 to 400,000. Pursuant to the ISOP, the granting of options is at the
discretion of the Board of Directors,  and it has the authority to set the terms
and conditions of the options granted, including the option exercise price which
must be a price equal to at least 100% of the fair  market  value of the subject
shares of Common  Stock at the time the option is granted.  As of  December  31,
2001,  options  covering  228,550  shares of the  Company's  Common  Stock  were
outstanding under the ISOP.

Incentive  Stock Option  Repricing.  The Company  maintains  its ISOP to provide
incentives  to the Company's key employees to exert their best efforts on behalf
of the  Company.  In 1999,  the  Company  noted  that  there  was a  significant
difference  between the exercise  prices of stock  options held by its employees
and the market value of the underlying stock, which results in options providing
little  incentive.  The Board of Directors  determined  that  establishing  new,
shorter  term  options,  based  on  pricing  which  more  closely  reflects  the
underlying  stock price,  was crucial to obtaining and retaining its  personnel.
Accordingly,  in May 1999, options to purchase 118,800 shares of Common Stock at
prices  ranging  from $3.33 to $7.00 per share were  repriced  and  regranted on
different  terms,  of which  options  to  purchase  72,000  shares  were held by
executive  officers of the Company.  Repriced  options to purchase 82,800 shares
were issued at an exercise price of $0.54 per share and repriced options granted
to Mr.  Adams to purchase  36,000  shares  were  issued at an exercise  price of
$0.594 per share.  All of the repriced  options  became  exercisable  on May 20,
2000. In 2001,  options to purchase 73,000 shares at $0.59 per share were issued
to certain officers of the Company.

Restated Cash Incentive  Plan. The Company may award its officers and employees,
under its Restated Cash Incentive Plan ("the Plan"),  bonuses in an amount up to
10 percent (10%) of net operating profits before taxes. Awards under the

                                       15
<PAGE>
Plan will be allocated  among the officers and employees in accordance  with the
provisions of the Plan at the  discretion of the Board of Directors.  No amounts
were awarded in 2001 or 2000 under the Plan.

Non-Qualified  Stock Option Plan. In August 1994, the Board of Directors adopted
the 1994 Non-Qualified Stock Option Plan ("NQSOP"). The NQSOP is administered by
the Board of Directors and provides for grants to officers, employees, directors
and  consultants  of options to  acquire  up to 45,000  shares of the  Company's
Common  Stock at an exercise  price of at least 85% of the fair market  value of
the  subject  shares of Common  Stock at the time the  option  is  granted.  The
granting  of  options  is at the  discretion  of the Board of  Directors.  As of
December 31, 2001 options  covering 13,500 shares of the Company's  Common Stock
were outstanding under the NQSOP.

Item 10. Security Ownership of Management and Certain Security Holders
----------------------------------------------------------------------

The following  table sets forth  certain  information  regarding the  beneficial
ownership of voting equity  securities of the Company as of March 18, 2002 as to
(i) each person who is known by the Company to own  beneficially  10% or more of
the outstanding shares of such class of voting equity securities of the Company,
(ii) each of the three most highly compensated  officers and (iii) all Directors
and officers as a group.  Except as otherwise  noted,  the Company  believes the
persons  listed below have sole  investment and voting power with respect to the
voting equity securities owned by them.
<TABLE>
<CAPTION>

                                                                                             Series A
                                                          Common Stock                     Preferred Stock
                                                   --------------------------      -------------------------------
                                                     Shares        Percent of        Shares        Percent of
         Name of Beneficial Owner or              Beneficially       Shares       Beneficially       Shares
         Number of Persons in Group                 Owned (1)      Outstanding      Owned (1)      Outstanding
         --------------------------                 ---------      -----------      ---------      -----------

     <S>                                           <C>             <C>               <C>            <C>
      Shareholder Group - Voting Trust (5)          7,392,797.5     74.3  %           5,770           100  %

      Shareholder Group - Adams Parties
        And Voting Trust (6)                        7,392,797.5     74.3              5,770           100

      Robert M. MacTarnahan (5) (6)                 7,392,797.5     74.3              5,770           100

      R. Scott MacTarnahan (5) (6)                  7,392,797.5     74.3              5,770           100

      Charles A. (Tony) Adams (2) (5) (6)           7,392,797.5     74.3              5,770           100

      Peter F. Adams (5) (6)                        7,392,797.5     74.3              5,770           100

      Frederick L. Bowman (2) (3)                        95,445        *                  -             -

      Jerome M. Chicvara (2) (7)                         50,000        *                  -             -

      Mark L. Carver (2)                                 29,100        *                  -             -
      (8)

      All Officers and Directors as a group,
      (9 persons)  (4) (5) (6)                      7,577,242.5     75.2  %           5,770           100  %
</TABLE>

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

                                       16
<PAGE>

    (1)  Beneficial  ownership  includes voting power and investment  power with
         respect to shares and  includes  shares  issuable  upon the exercise of
         outstanding stock options and warrants.

    (2)  The  business  address for these  individuals  is 2730 NW 31st  Avenue,
         Portland, Oregon 97210.

    (3)  Includes 44,445 shares owned individually by Mr. Bowman,  28,000 shares
         which may be purchased  for $0.54 per share upon  exercise of incentive
         stock  options  held by Mr.  Bowman,  and  23,000  shares  which may be
         purchased for $0.59 per share upon exercise of incentive  stock options
         granted to Mr.  Bowman on February  22, 2001 and vested on February 22,
         2002.

    (4)  Includes  217,735.5  shares which may be purchased  for prices  ranging
         from $0.54 to $5.33 per  share,  upon  exercise  of stock  options  and
         warrants held by all Directors and officers, as a group.

    (5)  The members of the  MacTarnahan  Portland  Brewing Company Voting Trust
         (the  "Voting  Trust") are members of a "group" as that term is used in
         Section 13(d)(3) of the Securities Exchange Act of 1934 ("34 Act"). The
         members  of  the  Voting  Trust  are:  the  Voting   Trust,   R.  Scott
         MacTarnahan,   Jean  MacTarnahan,   Andrea  J.  MacTarnahan,   Sara  M.
         Whitworth,  Black  Lake  Investments,   LLC,  the  MacTarnahan  Limited
         Partnership,  Harmer Mill & Logging Supply Co., The MacTarnahan  Family
         Trust, the R.M.  MacTarnahan  Trust, and the Ruth A. MacTarnahan Trust.
         The Trustee of the Voting Trust is Robert M. MacTarnahan.  The business
         address for each of the  foregoing  parties is: 11270 SW Lynnridge  Ave
         Portland,  OR 97225.  Pursuant to Rule 13d-5  promulgated  under the 34
         Act, the group is deemed to beneficially  own all shares of the Company
         which are  beneficially  owned by any member of the group and therefore
         the group beneficially owns 4,745,878.75  shares of Common Stock, which
         includes  options and warrants to purchase  55,848.75  shares of Common
         Stock, and 2,885 shares of Series A Preferred Stock, which is the total
         number of shares,  options and warrants deposited into the Voting Trust
         by its  members.   In  addition,  the  Voting  Trust is a  member  of a
         separate  "group" (see footnote 6) and is deemed to beneficially own an
         additional  2,646,918.75  shares  of Common  Stock and 2,885  shares of
         Series A Preferred Stock. Therefore, each member of the Voting Trust is
         deemed to own  7,392,797.5  shares of Common  Stock and 5,770 shares of
         Series A Preferred Stock.

    (6)  The Voting Trust,  Charles A. Adams,  Electra Partners,  Inc. (17675 SW
         Farmington  Road, PMB #470 Aloha,  Oregon 97007),  the Charles A. Adams
         Family Trust (4047 SW Shattuck  Road,  Portland,  OR 97221),  Katherine
         McBride  Adams  (fka  Katherine  Maxwell  Adams)  (2636  NE 11th  Ave.,
         Portland, OR 97212), Charles F. Adams III (4923 SW Lowell, Portland, OR
         97221), and Karban  Development  Corporation (17675 SW Farmington Road,
         PMB #470 Aloha,  Oregon 97007) are parties to a Voting  Agreement dated
         July 27,  2001 and  therefore  are members of a "group" as that term is
         used in  Section  13(d)(3)  of the 34 Act.  Peter F.  Adams  (17675  SW
         Farmington Road, PMB #470 Aloha,  Oregon 97007) is also a member of the
         group.  Pursuant to Rule 13d-5  promulgated under the 34 Act, the group
         is deemed to  beneficially  own all  shares  of the  Company  which are
         beneficially  owned by any member of the group and  therefore the group
         beneficially  owns 7,392,797.5  shares of Common Stock,  which includes
         options and warrants to purchase  88,735.5 shares of Common Stock,  and
         5,770 shares of Series A Preferred Stock.

    (7)  Includes  50,000 shares which may be purchased for $0.59 per share upon
         exercise of incentive stock options granted to Mr. Chicvara on February
         22, 2001, and vested on February 22, 2002.

    (8)  Includes  1,100  shares  owned  individually  by Mr.  Carver and 28,000
         shares  which may be  purchased  for $0.54 per share upon  exercise  of
         incentive stock options held by Mr. Carver.

                                       17
<PAGE>
OPTIONS, WARRANTS AND RIGHTS

The following table sets forth certain information regarding outstanding options
and  warrants to purchase  shares of Common Stock of the Company as of March 18,
2002 as to (i) each person who is known by the Company to own  beneficially  10%
or more of the outstanding  shares of the Company's  Common Stock,  (ii) each of
the three most highly compensated  officers and (iii) all Directors and officers
as a group.
<TABLE>
<CAPTION>


                                     Number of Shares of Common Stock
                                          Called for by Options
Name of  Holder                                And Warrants              Exercise Price        Date of Exercise
--------------------------------        ----------------------------    -----------------     -------------------

<S>                                              <C>                    <C>                        <C>
Shareholder Group - Voting Trust (1)              88,735.5               $3.333-$5.333              (2)
Shareholder Group - Adams Parties
  And Voting Trust (1)                            88,735.5               $3.333-$5.333              (2)
Robert M. MacTarnahan (1)                         88,735.5               $3.333-$5.333              (2)
R. Scott MacTarnahan (1)                          88,735.5               $3.333-$5.333              (2)
Charles A. (Tony) Adams                           88,735.5               $3.333-$5.333              (2)
Peter F. Adams                                    88,735.5               $3.333-$5.333              (2)
Frederick L. Bowman                                 51,000                   $0.54                  (3)
Jerome M. Chicvara                                  50,000                   $0.59                  (4)
Mark L. Carver                                      28,000                   $0.54                  (5)

All Directors and officers as a group,
(9 persons)                                      217,735.5                $0.54-$5.33               (6)

</TABLE>

    (1)  As noted in Item 10 - Security  Ownership  of  Management  and  Certain
         Security Holders,  Footnotes 5 and 6, each of these holders are members
         of a "group"  as that term is used in Section  13(d)(3)  of the 34 Act.
         Pursuant  to Rule  13d-5  promulgated  under  the 34 Act,  the group is
         deemed  to  beneficially  own  all  shares  of the  Company  which  are
         beneficially  owned by any member of the group and  therefore the group
         beneficially owns 88,735.5 shares of Common Stock which may be acquired
         under outstanding options and warrants, as noted in the table above.

    (2)  Options and warrants are currently exercisable.

    (3)  Options to purchase  8,000 shares of Common Stock issued to Mr.  Bowman
         in January  1996 at $7.00 per share were  repriced in May 1999 to $0.54
         per share. [See "Remuneration of Directors and Officers-Incentive Stock
         Option Repricing"].  Additionally,  in May 1999, Mr. Bowman was granted
         options to  purchase  20,000  shares  Common  Stock at $0.54 per share.
         28,000 of Mr. Bowman's  outstanding  options became  exercisable on May
         20, 2000.  In  addition,  options to purchase  23,000  shares of Common
         Stock were issued to Mr.  Bowman in  February  2001 at $0.59 per share.
         These options became exercisable on February 22, 2002.

    (4)  Options  to  purchase  50,000  shares  of  Common  Stock  issued to Mr.
         Chicvara in February,  2001 at $0.59 per share.  All of Mr.  Chicvara's
         outstanding options became exercisable on February 22, 2002.

                                       18
<PAGE>
    (5)  Options to purchase  28,000 shares of Common Stock issued to Mr. Carver
         in July 1993 at $3.33 per share were  repriced in May 1999 to $0.54 per
         share.  [See  "Remuneration of Directors and  Officers-Incentive  Stock
         Option  Repricing"].  All of Mr.  Carver's  outstanding  options became
         exercisable on May 20, 2000.

    (6)  As of March 18,  2002,  options to  purchase  113,000  shares of Common
         Stock were  exercisable.  As of March 18,  2002,  warrants  to purchase
         76,735.5 shares of Common Stock were exercisable.



Item 11.  Interest of Management and Others in Certain Transactions
-------------------------------------------------------------------

Saxer Brewing Company Asset Purchase

On January 31, 2000,  the Company  purchased  brands and certain  equipment from
Saxer Brewing Company for 900,000 shares of the Company's common stock, $150,000
cash and a three year agreement to pay certain  amounts based on barrel sales of
the Saxer and Nor'Wester brands, such amount secured by the Saxer and Nor'Wester
brands. In connection with the purchase,  Mr. Goebel, a majority  shareholder of
Saxer  Brewing  Company,  was  appointed  to the board of the  Company.  Also in
connection  with  the  purchase,  the  Company  and Mr.  Goebel  entered  into a
consulting  agreement under which Mr. Goebel provided consulting services to the
Company  relating to brand  management and marketing,  for $4,500 per month. The
consulting  agreement  terminated  on May 31,  2000,  and was not  extended.  In
connection  with the  purchase,  Charles A. Adams,  the Charles A. Adams  Family
Trust,  Electra,  and Mr. Adams' children and Mr. and Mrs. Robert M. MacTarnahan
and their children and certain entities controlled by them entered into a voting
agreement.  The Voting Agreement was terminated in March 2001. In February 2001,
Mr. Goebel resigned from the Board of Directors.  In 2001, the amount paid based
on barrel  sales was  $67,500.  [See Note 4 of Notes to  Consolidated  Financial
Statements].

Harco Products, Inc. Lease Agreement

In connection with the purchase of Harco,  the Company entered into a lease with
MacTarnahan,   an  entity  controlled  by  two  directors  of  the  Company  for
approximately 5,600 square feet of space in which Harco operates. Rent under the
lease is $2,500  per month and the term of the lease is five  years,  and can be
terminated  upon  60  days  notice  by the  Company.  [See  Note 8 of  Notes  to
Consolidated Financial Statements].

Also in  connection  with the  purchase  of Harco,  the Company and Mr. R. Scott
MacTarnahan entered into a consulting agreement under which Mr. MacTarnahan will
provide consulting  services to the Company for $2,500 per month. The consulting
agreement will terminate upon 30 days notice by the Company or Mr. MacTarnahan.


Lease Agreement with L & L Land Company

In May 1999,  the Company  entered into a lease of  approximately  30,100 square
feet of space  (the  "lease")  located  in the  warehouse  and  office  building
commonly  known as 2750  N.W.  31st  Avenue,  Portland,  Oregon  (the  "Adjacent
Building").  The  Adjacent  Building  is owned by L & L Land  Company (a general
partnership  consisting  of Howard M. Wall, a director of the  Company,  and his
wife,  Patricia  Wall).  The term of the  lease is 5 years,  with one  option to
extend the term until June 14, 2008.  Rent under the lease is $12,000 per month.
In addition,  the Company  agreed to pay, as additional  rent, the real property
taxes for and to insure the Adjacent  Building and to be responsible for certain
types of  maintenance  and repairs.  The lease  contains a first  opportunity to
purchase the Adjacent Building.


                                       19
<PAGE>
The lease is guaranteed by Robert M.  MacTarnahan  and Charles A. Adams. As part
of the lease transaction, L & L Land Company reimbursed the Company for $218,000
for its costs in  constructing  the shipping dock. In connection with the lease,
the Company entered into a sublease with Power  Transmission  Products,  Inc. of
approximately  13,000 square feet of office and warehouse space and a portion of
the parking lot. The term of sublease is one year,  with a one-year  renewal and
rent is $4,974  per month,  plus $365 per month for real  property  taxes,  plus
payment of utilities,  insurance and interior  maintenance.  In March 2000,  the
Company  reduced  the amount of  subleased  space  from  13,000  square  feet to
approximately  8,000 square feet.  This reduction in subleased space has reduced
the month-to-month  rental income from $4,974 per month to $3,168 per month. The
terms of the lease and sublease  were  determined  to be fair to the Company and
approved by all members of the Board of Directors, except Mr. Wall.

License Agreement with Robert M. MacTarnahan

In July 1994, the Company entered into a License Agreement ("License Agreement")
with Robert M.  MacTarnahan,  a director of the Company,  and Harmer,  a company
controlled  by Mr.  and Mrs.  Robert M.  MacTarnahan.  Pursuant  to the  License
Agreement,  (i) Mr.  MacTarnahan  conveyed  to the  Company the right to use his
surname and its variation  "MacTarnahan"  as a Company  trademark,  and (ii) the
Company has been granted an exclusive worldwide license to use Mr. MacTarnahan's
likeness,  image  and  other  personal  attributes  to  promote  the sale of the
Company's products,  merchandise,  and related materials. The license expires on
December 31, 2093. In consideration of the license grant, the Company must pay a
royalty of $1.00 per barrel of  MacTarnahan's  Scottish  Style Amber Ale sold by
the Company for the term of the license.  The Company has the right to terminate
the  License  Agreement  on  30-days'  written  notice and the  license may also
terminate under other conditions as specified in the License  Agreement.  In the
event the license is  terminated  or  terminates,  the  Company  must assign its
rights  to  the  trademark   "MacTarnahan"  and  the  above  variations  to  Mr.
MacTarnahan.  Royalties paid to Harmer under the License  Agreement for 2001 and
2000 were  $22,030  and  $27,837  respectively,  based on the sale of 22,030 and
27,837 barrels,  respectively,  of MacTarnahan's Scottish Style Amber Ale during
the same periods.  Effective  January 1, 2002,  Harmer assigned its rights under
the License Agreement,  including the right to receive royalties,  to Black Lake
Investments,  LLC, a company  controlled by Robert M.  MacTarnahan  and R. Scott
MacTarnahan.  On January 15, 2002 the License  Agreement was extended to include
monthly royalty  payments at $1 per barrel for  MacTarnahan's  Blackwatch  Cream
Porter and MacTarnahan's Highlander Pale Ale sales effective January 1, 2002.

Lease Agreement with Clan Associates as Tenants-in-common

The Company leased approximately 15,000 square feet for parking at $0.10/sq. ft.
from  Clan  Associates  under an oral  agreement  beginning  in  April  2000 for
$1,500.00 per month. Clan Associates was a tenancy in common between Electra and
Harmer.  The terms of the lease were  determined  to be fair to the  Company and
approved by all disinterested  members of the Board of Directors.  This property
was  contributed to PBB LLC and was sold to the Company in August 2001, and this
lease agreement was terminated. [See "Recapitalization/PBB, LLC Lease" below].

Lease Agreement with Greenstead = Accounting Resource

The  Company  leases  approximately  1,520  square  feet of office  space at the
Company's  facility  located at 2750 NW 31st Avenue to  Greenstead  = Accounting
Resource  ("Greenstead")  under the terms of a Services Agreement dated December
1, 2001 between Greenstead and the Company. Greenstead is owned by affiliates of
Charles A. Adams and Peter Adams,  directors of the Company. The rent is $950.00
per week.

Recapitalization/PBB LLC Lease

                                       20
<PAGE>

See Item 6 -  Sources  of  Liquidity  and Note 6 and 8 of Notes to  Consolidated
Financial  Statements  for a  description  of  the  related  party  transactions
involved in the recapitalization/reorganization plan.

As a result of the recapitalization/reorganization plan, the Company and PBB LLC
terminated the triple net, 15 year lease (with three five-year  renewal options)
for the real property  portion of the Brewery  Property  located at 2730 NW 31st
Avenue,  Portland,  Oregon.  The monthly rent was $24,906 plus  property  taxes,
insurance and  maintenance,  with an adjustment for inflation or changes in fair
market rental value  scheduled for July 1, 1998, and July 1, 2003. In connection
with the  negotiation  of this lease,  MacTarnahan  and Electra each were issued
warrants  for the  purchase of  43,848.75  shares of Common  Stock at $3.333 per
share,  exercisable  at any time through  December 31, 2002.  Under the terms of
these warrants, the warrants did not terminate upon termination of the lease.

On November 5, 2001 PBB LLC dissolved,  and on November 6, 2001  distributed its
assets to its members in proportion to their positive capital account  balances.
The members of PBB LLC at the time of dissolution were MacTarnahan,  Harmer, and
Electra.  As a result  of the  distribution  of PBB  LLC's  assets,  MacTarnahan
received  1,960,878  shares  of Common  Stock of the  Company,  Harmer  received
1,107,748 shares of Common Stock of the Company,  and Electra received 1,207,910
shares of Common Stock of the Company.


                                     Part II

Item 1. Market Price and Dividends on the Registrant's Common Equity and
-------------------------------------------------------------------------
        Other Shareholder Matters
        -------------------------

There is no public  trading market for the Company's  Common Stock.  The Company
had 5,680  shareholders  of record as of March 18,  2002.  The Company has never
declared any cash dividends on its Common Stock,  nor does the Company intend to
do so in the near  future.  Pursuant  to certain  loan  agreements,  the Company
cannot  declare  or  pay  dividends  on any of  its  outstanding  stock,  except
dividends payable in Common Stock of the Company,  without prior written consent
of the lenders.  Holders of the Company's  Series A Preferred Stock are entitled
to  receive  cumulative  dividends  at the  rate of 8% per  annum,  when  and if
declared  by the Board of  Directors,  prior to payment of  dividends  on Common
Stock. No cash or stock dividends have been declared to date. The Revolving Line
contains a  restriction  on the  payment of  dividends  on the  Company's  stock
without prior consent of the lender.

Item 2. Legal Proceedings
-------------------------

As of the  date  of this  Report  on  Form  10-KSB,  there  are no  other  legal
proceedings  pending  to which  the  Company  is a party or to which  any of its
property is  subject,  and the  Company  does not know of any such action  being
contemplated.

Item 3. Changes in and Disagreements with Accountants
-----------------------------------------------------

None.

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

No matters were  submitted to a vote of the  Company's  shareholders  during the
quarter ended December 31, 2001.

                                       21
<PAGE>

Item 5. Compliance with Section 16(a) of the Exchange Act
---------------------------------------------------------

Section 16(a) Beneficial Ownership Reporting Compliance

Section  16(a) of the  Securities  Exchange  Act of 1934  (the  "Exchange  Act")
requires the Company's  executive  officers and  Directors,  and persons who own
more than ten percent of a registered class of the Company's  equity  securities
to file reports of ownership and changes in ownership  with the  Securities  and
Exchange Commission ("SEC"). Executive officers,  Directors and greater than ten
percent  stockholders are required by SEC regulation to furnish the Company with
copies of all Section  16(a) forms they file.  Based solely on its review of the
copies of such forms  received by it, or written  representations  from  certain
reporting  persons,  the Company  believes  that,  during  2001,  all  executive
officers,  Directors  and  greater  than  10%  shareholders  complied  with  all
applicable  filing  requirements,  except  that each of Charles A. Adams  Family
Trust,  Charles F. Adams III and Katherine Adams McBride failed to timely file a
Form 3.


Item 6. Reports on Form 8-K
---------------------------

During the quarter  ended  December 31, 2001,  the Company  filed two reports on
Form 8-K: one on November 2, 2001 to report a change in the Company's Certifying
Accountant, and one on October 26, 2001 to report the acquisition of assets.

                                       22
<PAGE>
                                    Part F/S


Index to Consolidated Financial Statements
-----------------------------------------
                                                                    Page
                                                                    ----

INDEPENDENT AUDITOR'S REPORT                                       F -1-2


FINANCIAL STATEMENTS

      Consolidated balance sheets                                   F - 3
      Consolidated statements of operations                         F - 4
      Consolidated statements of stockholders' equity               F - 5
      Consolidated statements of cash flows                         F - 6
      Notes to consolidated statements                        F - 7  -  F - 20


                                       23
<PAGE>
                                    Part III

Item 1. and Item 2.        Index to Exhibits and Description of Exhibits
-------------------        ---------------------------------------------
Exhibit   Exhibit
Number    Number
(1-A)    (S-B 601)            Description
-----    ---------            -----------
2.1         3.1          Articles of Incorporation, as amended  (8)
2.2         3.2          Bylaws, as amended (8)
3.1         4.1          Specimen of Common Stock Certificate (1)
3.2         4.2          Warrant issued to Electra Partners, Inc. dated
                         March 25, 1996 (2)
3.3         4.3          Warrant issued to MacTarnahan Limited Partnership dated
                         March 25, 1996 (2)
6.1         10.1         Indenture of Lease between the Company and Portland
                         Brewing Building Partners dated November 4, 1992, as
                         amended (1)
6.2         10.2         Sublease between the Company, Power Transmission
                         Products, Inc., and Pacific Realty Associates, L.P.,
                         dated January 26, 1995 (1)
6.3         10.3         License Agreement between the Company, R. M.
                         MacTarnahan and Harmer Company dated July 1, 1994 (1)
6.4         10.4         The Company's Incentive Stock Option Plan, as amended
                         and Specimen Form Plan Documents (1)(10)
6.5         10.5         Amendment to the Company's Incentive Stock Option Plan
                         (7) (10)
6.6         10.6         The Company's 1994 Nonqualified Stock Option Plan and
                         Specimen Form Plan Documents (1) (10)
6.7         10.7         Distribution Agreement between the Company and Columbia
                         Distributing, dated April 8, 1996 (5)
6.8         10.8         Voting Agreement, dated November 18, 1998 (8)
6.9         10.9         Amendment No. 1 to November 18, 1998 Voting Agreement,
                         dated December 6, 1999 (12)
6.10        10.10        Restated Cash Incentive Plan, as amended (1) (10)
6.11        10.11        The Company's Stock Offering Purchase Plan for
                         Employees and Specimen Form Plan (1) (10)
6.12        10.12        Option to Purchase and Agreement and Option to Lease
                         between the Company and L&L Land Co., dated December
                         1995 (2)
6.13        10.13        Indenture of Lease between the Company and Western
                         Stations Co. dated May 1, 1995 (3)
6.14        10.14        Manufacturing Services Agreement between the Company
                         and The Stroh Brewery Company dated January 31, 1996(4)
6.15        10.15        Loan Agreement, dated February 2, 2000 (6)
6.16        10.16        Lease Agreement between the Company and L&L Land
                         Company, dated May 18, 1999 (certain schedules to the
                         Lease Agreement have been omitted) (9)
6.17        10.17        Sublease Agreement between the Company and Power
                         Transmission Products, Inc., dated May 1, 1999 (9)
6.18        10.18        Business Loan Agreement, dated February 1, 2001 (10)
6.19        10.19        Consulting Agreement between the Company and R. Scott
                         McTarnahan, dated November 1, 1999 (11) (12)
6.20        10.20        Lease Agreement between the Company and MacTarnahan
                         Limited Partnership, dated November 1, 1999 (12)
6.21        10.21        June 12, 2000 Amendment to License Agreement between
                         the Company and Harmer Mill & Logging Supply, Inc.,
                         dated July 1, 1994 (13)
6.22        10.22        July 1, 2000 Amendment to License Agreement between the
                         Company, RM MacTarnahan and Harmer Mill & Logging
                         Supply, Inc., dated July 1, 1994 (14)

                                       24
<PAGE>

6.23        10.23        Letter Agreement, dated March 19, 2001 (15)
6.24        10.24        Purchase and Sale Agreement and Receipt for Earnest
                         Money dated August 12, 2001 (16)
6.25        10.25        Business Loan Agreement dated September 14, 2001 (17)
6.26        10.26        Purchase and Sale Agreement dated October 12, 2001 (18)
6.27        10.27        Modification to Deed of Trust and Loan Documents dated
                         September 19, 2001 (19)
6.28        10.28        Promissory Note and Security Agreement dated
                         November 1, 2001 (20)
6.29        10.29        Business Loan Agreement dated October 21, 2001*
6.30        10.30        Voting Agreement, dated July, 27, 2001 (21)
--          21.0         Subsidiaries of the Registrant (22)
10.0        23.0         Consent of Moss Adams LLP*
10.1        23.1         Consent of Arthur Andersen LLP*

    (1)  Incorporated by reference to the Company's Form SB-1  (Commission  File
         No. 33-90914-LA) as filed with the Commission on April 4, 1995.
    (2)  Incorporated  by  reference to the  Company's  Form 10-KSB for the year
         ended December 31, 1995 as filed with the Commission on March 28, 1996.
    (3)  Incorporated  by reference to the Company's Form 10-QSB for the quarter
         ended March 31, 1996 as filed with the Commission on May 2, 1996.
    (4)  Incorporated  by reference to the Company's Form 10-QSB/A No. 1 for the
         quarter  ended March 31, 1996 as filed with the  Commission on July 31,
         1996.
    (5)  Incorporated  by reference to the Company's Form 10-QSB for the quarter
         ended  September 30, 1996 as filed with the  Commission on November 12,
         1996.
    (6)  Incorporated  by reference to the Company's Form 10-QSB for the quarter
         ended March 31, 2000 as filed with the Commission on May 11, 2000.
    (7)  Incorporated by reference to the Company's  Definitive  Proxy Statement
         for the  1998  Annual  Meeting  of  Shareholders,  as  filed  with  the
         Commission on November 17, 1998.
    (8)  Incorporated  by  reference to the  Company's  Form 10-KSB for the year
         ended December 31, 1998 as filed with the Commission on March 31, 1999.
    (9)  Incorporated  by  reference  to the  Company's  Form  10-QSB/A  for the
         quarter ended June 30, 1999 as filed with the  Commission on August 10,
         1999.
    (10) Incorporated  by  reference to the  Company's  Form 10-KSB for the year
         ended December 31, 2000 as filed with the Commission on April 2, 2001.
    (11) Denotes a management contract or compensatory plan or arrangement.
    (12) Incorporated  by  reference to the  Company's  Form 10-KSB for the year
         ended December 31, 1999 as filed with the Commission on March 28, 2000.
    (13) Incorporated  by reference to the Company's Form 10-QSB for the quarter
         ended June 30, 2000 as filed with the Commission on August 10, 2000.
    (14) Incorporated  by reference to the Company's Form 10-QSB for the quarter
         ended  September 30, 2000 as filed with the  Commission on November 14,
         2000.
    (15) Incorporated  by  reference to the  Company's  Form 10-KSB for the year
         ended December 31, 2000 as filed with the Commission on April 2, 2001.
    (16) Incorporated  by reference to the Company's Form 10-QSB for the quarter
         ended  September 30, 2001 as filed with the  Commission on November 14,
         2001.
    (17) Incorporated  by reference to the Company's Form 10-QSB for the quarter
         ended  September 30, 2001 as filed with the  Commission on November 14,
         2001.
    (18) Incorporated  by reference to the Company's Form 10-QSB for the quarter
         ended  September 30, 2001 as filed with the  Commission on November 14,
         2001.

                                       25
<PAGE>

    (19) Incorporated  by reference to the Company's Form 10-QSB for the quarter
         ended  September 30, 2001 as filed with the  Commission on November 14,
         2001.
    (20) Incorporated  by reference to the Company's Form 10-QSB for the quarter
         ended  September 30, 2001 as filed with the  Commission on November 14,
         2001.
    (21) Incorporated  by reference to Schedule 13D Amendment No. 2 filed by the
         MacTarnahan Portland Brewing Company Voting Trust and the Adams Parties
         as filed with the Commission on July 30, 2001.
    (22) Incorporated  by  reference to the  Company's  Form 10-KSB for the year
         ended December 31, 2001 as filed with the Commission on April 2, 2001.


       *    Filed herewith.


                                       26
<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, on the 29th day of March, 2002.


                                 PORTLAND BREWING COMPANY


                                 By:      /S/  CHARLES A. ADAMS
                                          Charles A. Adams
                                          Chairman of the Board, President and
                                          Chief Executive Officer

In  accordance  with the Exchange  Act, this report has been signed below by the
following persons on behalf of the registrant in the capacities indicated and on
the 29th day of March, 2002.

     Signature                              Title
     ---------                              -----

     /S/  CHARLES A. ADAMS              Chairman of the Board, President and
     ---------------------                  Chief Executive Officer
     Charles A. Adams                   (Principal Executive Officer,
                                         Principal Accounting Officer)

     /S/ FREDERICK L. BOWMAN            Director
     -----------------------
     Frederick L. Bowman

     /S/ ROBERT M. MACTARNAHAN          Director
     Robert M. MacTarnahan

     /S/ R. SCOTT MACTARNAHAN           Director
     R. Scott MacTarnahan

     /S/ HOWARD M. WALL, JR.            Director
     -----------------------
     Howard M. Wall, Jr.

     /S/ WILLIAM J. PRENGER             Director
     ----------------------
     William J. Prenger

     /S/ PETER F. ADAMS                 Director
     --------------------
     Peter F. Adams




                                       27
<PAGE>
INDEPENDENT AUDITOR'S REPORT


To the Board of Directors and Stockholders of
Portland Brewing Company:



We have audited the accompanying  consolidated balance sheet of Portland Brewing
Company (an Oregon  Corporation) and subsidiary as of December 31, 2001, and the
related  consolidated  statements of operations,  stockholders'  equity and cash
flows for the year 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 audit.

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


In our opinion, the consolidated  financial statements referred to above present
fairly,  in all material  respects,  the financial  position of Portland Brewing
Company  and  subsidiary  as of  December  31,  2001,  and the  results of their
operations  and their cash flows for the year then  ended,  in  conformity  with
accounting principles generally accepted in the United States of America.





Portland, Oregon
March 8, 2002

                                      F-1
<PAGE>
<TABLE>
<CAPTION>


                                                                             PORTLAND BREWING COMPANY AND SUBSIDIARY
                                                                                         CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------------------------------------------

                                                                                         December 31,
                                                                           -----------------------------------------
                                                                                   2001                 2000
                                                                           ---------------------- ------------------
                                     ASSETS
                                     ------
<S>                                                                              <C>                 <C>
CURRENT ASSETS
       Cash and cash equivalents                                                 $     24,741        $    35,693
       Accounts receivable, net of allowance for doubtful  accounts
                                                                                      669,571            885,632
       Inventories
                                                                                      966,279          1,050,964
       Other current assets                                                                              139,853
                                                                                      276,959
                                                                           ------------------- ------------------
                                Total current assets                                                   2,112,142
                                                                                    1,937,550
                                                                           ------------------- ------------------

PROPERTY AND EQUIPMENT, net                                                         7,161,850          6,401,146

OTHER ASSETS, net                                                                     628,834            808,177
                                                                            ------------------- ------------------
                                Total assets                                     $  9,728,234        $ 9,321,465
                                                                            =================== ==================

                      LIABILITIES AND STOCKHOLDERS' EQUITY
                      ------------------------------------
CURRENT LIABILITIES
       Line of credit                                                            $    617,300        $   750,752
       Current portion of long-term debt                                              380,770             26,779
       Accounts payable                                                               927,786          1,506,490
       Customer (keg) deposits held                                                   116,690            138,559
       Accrued payroll and related expenses                                            83,046            160,892
       Other accrued liabilities                                                      402,048            137,021
                                                                           ------------------- ------------------
                                 Total current liabilities                          2,527,640          2,720,493
                                                                           ------------------- ------------------

LONG-TERM DEBT, less current portion                                                1,048,246             43,217
STOCKHOLDER TERM LOAN (Note 6), less current portion                                1,420,000          2,500,000
OTHER LONG-TERM LIABILITIES                                                            85,636             42,500
Series A Redeemable Convertible Preferred Stock, $52 par value,
       10,000 shares authorized, 5,770 shares issued and oustanding,
       liquidation preference of $300,040                                             300,040            300,040

STOCKHOLDERS' EQUITY
       Common stock, no par value; 25,000,000 authorized shares issued
         and outstanding:  9,855,822 (2001) and 4,995,014 (2000)                    9,506,090          8,164,320
       Accumulated deficit                                                         (5,159,418)        (4,449,105)
                                                                           ---------------------- ------------------
                                Total stockholders' equity                          4,346,672          3,715,215
                                                                           ---------------------- ------------------

                                Total liabilities and stockholders' equity       $  9,728,234       $  9,321,465
                                                                           ====================== ==================
</TABLE>

See accompanying notes

                                      F-3
<PAGE>
                                         PORTLAND BREWING COMPANY AND SUBSIDIARY
                                           CONSOLIDATED STATEMENTS OF OPERATIONS
--------------------------------------------------------------------------------

                                                   Year ended December 31,
                                            ----------------------------------
                                                   2001                 2000
                                            -----------------  ---------------

SALES                                           $12,202,588      $12,977,848
Less excise tax                                     442,072          626,164
                                              ---------------- ---------------
              Net sales                          11,760,516       12,351,684
COST OF SALES                                     8,513,949        8,989,853
                                              ---------------- ---------------
GROSS PROFIT                                      3,246,567        3,361,831

GENERAL AND ADMINISTRATIVE EXPENSES               1,514,674        1,634,091
SALES AND MARKETING EXPENSES                      2,182,016        2,777,255
                                              ----------------  --------------
LOSS FROM OPERATIONS                               (450,123)      (1,049,515)

OTHER INCOME (EXPENSE)
     Interest expense, net                         (255,397)        (284,519)
     Other income                                   118,891          112,818
     Other expense                                 (123,684)         (55,722)
                                              ----------------  --------------
                                                   (260,190)        (227,423)
                                              ----------------  --------------

NET LOSS                                         $ (710,313)     $(1,276,938)
                                              ================  ==============

Basic and diluted net loss per common share         $ (0.11)         $ (0.26)
                                              ================  ==============
Shares used in per share calculation              6,691,084        4,920,014
                                              ================  ==============


See accompanying notes.

                                      F-4
<PAGE>



                                         PORTLAND BREWING COMPANY AND SUBSIDIARY
                                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                                   FOR THE YEAR ENDED DECEMBER 31, 2001 AND 2000
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>

                                                       Common Stock
                                               -----------------------------
                                                                               Accumulated
                                                  Shares         Amount          Deficit           Total
                                               -------------  --------------  ---------------  --------------

<S>                                              <C>           <C>             <C>               <C>
Balance,  December  31,   1999                    4,094,714     $ 7,662,508     $(3,172,167)      $4,490,341

Common stock issued in connection with
acquisition of
     Saxer Brands                                   900,000         486,000                -         486,000

Reconciliation of stock outstanding
                                                        300               -                -               -

Compensation expense on variable stock
option plan                                                          15,812                -          15,812

Net loss                                                  -               -      (1,276,938)     (1,276,938)
                                               -------------  --------------  ---------------  --------------

Balance, December 31,  2000                       4,995,014       8,164,320      (4,449,105)       3,715,215

Common stock issued from stock
     option plan                                      5,500           2,970                -           2,970

Common stock issued in connection with
the sale of stock related to
     property  acquisitions                       4,855,308       1,338,800                -       1,338,800

Net loss                                                  -               -        (710,313)       (710,313)
                                               -------------  --------------  ---------------  --------------
                                               -------------  --------------  ---------------  --------------

Balance,  December 31,  2001                      9,855,822     $ 9,506,090     $(5,159,418)      $4,346,672
                                               =============  ==============  ===============  ==============
                                               =============  ==============  ===============  ==============
</TABLE>

See accompanying notes.

                                      F-5
<PAGE>
                                         PORTLAND BREWING COMPANY AND SUBSIDIARY
                                           CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                                   Year ended December 31,
                                                                            -------------------------------------
                                                                                  2001                 2000
                                                                            ---------------       ---------------
<S>                                                                             <C>                <C>
CASH FLOWS FROM OPERATING ACTIVITIES
     Net loss                                                                  $ (710,313)         $ (1,276,938)
     Adjustments to reconcile net loss to net cash from
        operating
     activities:
         Depreciation                                                              843,629               888,315
         Amortization                                                              320,490               257,930
         Allowance for doubtful accounts                                            31,156                16,570
         Loss on disposition of assets                                              19,979                 4,884
         Compensation expense on variable stock option plan                              -                15,812
         Changes in assets and liabilities, net of effect of acquisitions:
             Accounts receivable                                                   184,905             (247,138)
             Inventories                                                            84,685             (321,111)
             Other current assets                                                (114,973)                78,697
             Other assets                                                            5,657              (83,810)
             Accounts payable                                                    (578,704)               697,121
             Customer deposits held                                               (21,869)                 6,738
             Accrued payroll and other accrued liabilities                         187,181             (156,273)
             Other liabilities                                                      43,136              (37,500)
                                                                            ---------------    ------------------

                             Net cash from operating activities                    294,959             (156,703)
                                                                            ---------------    ------------------

CASH FLOWS FROM INVESTING  ACTIVITIES
     Purchase of property and equipment                                          (136,477)             (481,392)
     Proceeds from sale of property and equipment                                   21,850                76,024
     Purchase of acquired business assets                                                -             (150,000)

                                                                            -------------------------------------
                         Net cash from investing activities                      (114,627)             (555,368)
                                                                            ---------------    ------------------

CASH FLOWS FROM FINANCING  ACTIVITIES
     Net borrowings (paydown) under line of credit                               (133,452)               315,287
     Repayments of long-term debt                                                (148,734)              (70,529)
     Proceeds from stockholders' loans                                                   -               400,000
     Repayment of stockholders' loans                                            (830,000)                     -
     Proceeds from sale of common stock                                              2,970                     -
     Proceeds from issuance of common stock                                      1,082,779                     -
     Costs related to issuance of common stock                                   (164,847)                     -
                                                                            ---------------    ------------------
                         Net cash from financing activities                      (191,284)               644,758
                                                                            ---------------    ------------------

Net decrease in cash and cash equivalents                                         (10,952)              (67,313)

CASH AND CASH EQUIVALENTS, beginning of year                                        35,693               103,006
                                                                            ---------------    ------------------

CASH AND CASH EQUIVALENTS, end of year                                          $   24,741           $    35,693
                                                                            ===============    ==================

NONCASH TRANSACTIONS:
     Common stock issued in connection with acquisitions                       $ 1,338,800           $   486,000
     Capital lease addition                                                    $         -           $    27,720
     Assumptions of debt in connection with acquisitions                       $ 1,256,701           $         -

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
     Cash paid for interest                                                    $   255,397           $   325,544

</TABLE>

See accompanying notes.

                                      F-6
<PAGE>
                                         PORTLAND BREWING COMPANY AND SUBSIDIARY
                                                NOTES TO CONSOLIDATED STATEMENTS
--------------------------------------------------------------------------------


NOTE 1   -    DESCRIPTION OF BUSINESS

    Portland  Brewing  Company  ("the  Company") was  incorporated  in Oregon in
    November  1983. The Company opened its first brewery in January 1986 at 1339
    NW Flanders  Street in Portland,  Oregon which operated until November 1998,
    when the Company sold the Flanders Street facility. The Company continues to
    operate a brewery at 2730 NW 31st Avenue in  Portland,  Oregon,  which has a
    capacity of  approximately  135,000  barrels of ale per year, and includes a
    restaurant,  The TapRoom,  open to the public.  The Company also  operates a
    hand truck  manufacturing  company,  "Harco  Products,  Inc." in  Beaverton,
    Oregon which was purchased in October 1999.


NOTE 2   -    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

    Principles of Consolidation - The consolidated  financial statements include
    the accounts of the Company and its wholly owned subsidiary (Harco Products,
    Inc.). All significant intercompany balances have been eliminated.

    Revenue Recognition - Revenue from the sale of products is recognized at the
    time of shipment to the customer when title has passed.

    Customer Deposits - Customer deposits held represent the Company's liability
    for deposits  charged to customers for  returnable  containers.  The Company
    collects a deposit as they sell product in returnable containers and credits
    the customer's account as the containers are returned to the Company.

    Inventories  - Inventories  are stated at the lower of average  cost,  which
    approximates the first-in, first-out (FIFO) method, or market. Raw materials
    include amounts  related to the Company's hand truck  business.  Inventories
    consist of the following:

                                                     December 31,
                                        --------------------------------------
                                        --------------------------------------
                                                2001               2000
                                        -------------------- -----------------
               Raw materials                      $ 463,402         $ 480,045
               Work-in-process                      162,684           159,898
               Finished goods                       288,905           341,362
               Merchandise                           51,288            69,659
                                        -------------------- -----------------
                                                  $ 966,279        $1,050,964
                                        ==================== =================

    Property and Equipment - Property and equipment are stated at cost. Interest
    costs  related  to  the   construction  of  certain   long-term  assets  are
    capitalized  and amortized  over the  estimated  useful lives of the related
    assets.

    Property and equipment consists of the following:

                                                          December 31,
                                             --------------------------------
                                                    2001              2000
                                             ---------------    --------------
               Land and buildings               $ 1,568,000       $         -
               Plant and equipment                8,230,739         8,248,801
               Leasehold improvements             1,621,315         1,605,275
               Office and laboratory equipment
                and vehicles                        784,741           744,301
               Kegs                                 627,990           627,990
               Construction in progress              92,795           156,172
                                             ---------------    --------------
                                                 12,925,580        11,382,539
               Less accumulated depreciation     (5,763,730)       (4,981,393)
                                             ---------------    --------------

                                                $ 7,161,850       $ 6,401,146
                                             ===============    ==============

                                      F-7
<PAGE>

                                         PORTLAND BREWING COMPANY AND SUBSIDIARY
                                                NOTES TO CONSOLIDATED STATEMENTS
--------------------------------------------------------------------------------

NOTE 2   -    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

    Property and equipment is depreciated  using the  straight-line  method over
    estimated useful lives as follows:
                                                            Years
                                                            -----
               Building                                       39
               Plant and equipment                          10-20
               Office and laboratory equipment
                  and vehicles                               5-10
               Leasehold improvements                        5-15
               Kegs                                            5


    Intangible  Assets -  Intangible  assets  consist of package  design  costs,
    plates  and  dies,  trademarks,  goodwill  and  brand  names  acquired  from
    acquisitions.  Trademarks are amortized on a straight-line  basis over three
    years.  Package  design  costs  and  plates  and  dies  are  amortized  on a
    straight-line  basis  over  twelve  months.  Goodwill  and  brand  names are
    amortized on a  straight-line  basis over five years.  The Company  believes
    these useful lives are appropriate  based upon such factors as product life,
    profitability and the general industry  outlook.  Packaging costs and plates
    and dies are included in current assets. Trademarks, goodwill and brand name
    assets are  included in other  assets on the  accompanying  balance  sheets.
    Amortization  expense related to intangible assets was $320,490 and $231,938
    for the years ended December 31, 2001 and 2000, respectively.

    The Company  adopted a change in  accounting  estimate  that  relates to the
    amortization  period of packaging  design costs, and plates and dies used in
    packaging. In prior periods, these costs were capitalized and amortized over
    a three-year  period.  The new  estimate  will  amortize  these costs over a
    twelve-month period. The Company believes that customer loyalty in the craft
    beer  market  has  drastically  diminished  because of the number of options
    available and the tendency of larger breweries to utilize  marketing dollars
    to  gain  market  share.   Consequently,   management  believes  a  one-year
    amortization  period for these types of costs better reflects the life cycle
    of the packaging design and the industry standard.  The change in accounting
    estimate did not have a material impact on the financial statements.

    In June 2001 the Financial  Accounting  Standards  Board  ("FASB")  approved
    Statement  of Financial  Accounting  Standards  ("SFAS") No. 141,  "Business
    Combinations,"  and SFAS No. 142,  "Goodwill and Other  Intangible  Assets."
    SFAS No. 141  prospectively  prohibits  the  pooling of  interest  method of
    accounting for business combinations initiated after June 30, 2001. SFAS No.
    142 requires companies to cease amortizing goodwill that existed at June 30,
    2001. The annual  amortization of existing goodwill of approximately  $7,800
    ceased on December 31, 2001.  SFAS No. 142 also  establishes a new method of
    testing goodwill for impairment on an annual basis or on an interim basis if
    an event  occurs or  circumstances  change  that would more  likely than not
    reduce the fair value of a  reporting  unit below its  carrying  value.  The
    adoption of SFAS No. 142 will  result in the  Company's  discontinuation  of
    amortization of its goodwill;  however, the Company will be required to test
    its goodwill for  impairment  under the new standard  beginning in the first
    quarter of 2002. At this time,  the Company does not expect to recognize any
    material impairment charge.

    Income Taxes - The Company accounts for income taxes in accordance with SFAS
    No. 109, Accounting for Income Taxes. Deferred taxes are determined based on
    the  estimated  future tax  effects of  differences  between  the  financial
    statement and tax basis of assets and  liabilities  given the  provisions of
    enacted tax laws and tax rates.  Deferred income tax expenses or credits are
    based on the changes in the financial  statement  basis versus the tax basis
    in the Company's assets or liabilities from period to period. See Note 7.


                                      F-8
<PAGE>
                                         PORTLAND BREWING COMPANY AND SUBSIDIARY
                                                NOTES TO CONSOLIDATED STATEMENTS
--------------------------------------------------------------------------------


NOTE 2   -    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

    Net Loss Per Share - The  Company has adopted  SFAS No.  128,  Earnings  per
    Share.  Basic loss per common  share is computed by dividing net loss by the
    weighted  average  number  of shares of  common  stock  outstanding  for the
    period.  Diluted net loss per common share for all periods  presented is the
    same as basic net loss per share since all potential dilutive securities are
    excluded because they are anti-dilutive.

    The dilutive effect of stock options outstanding for the purchase of 242,050
    and 329,750 shares at December 31, 2001 and 2000, respectively, warrants for
    the  purchase of 87,697.5  shares at December  31, 2001 and 2000 and 577,000
    shares of common  stock  into  which the  outstanding  Series A  Reedeemable
    Convertible  Preferred  Stock are convertible at December 31, 2001, and 2000
    were not  included in loss per common share  calculations,  because to do so
    would have been anti-dilutive.

    Advertising  Costs -  Advertising  costs are  expensed  as  incurred.  Total
    advertising   expense  was   $253,500   and   $344,527  in  2001  and  2000,
    respectively.

    Fair Value of Financial  Instruments and  Concentration of Credit Risk - All
    current assets and liabilities are carried at cost, which  approximates fair
    value because of the short-term  nature of those  instruments.  The recorded
    amounts of the Company's  long-term  debt also  approximate  fair value,  as
    estimated using discounted cash flow analysis.

    Financial instruments, which potentially expose the Company to concentration
    of credit risk, consist primarily of trade accounts  receivable.  Assets for
    which the Company had credit risk totaled  $721,012 and $905,917 at December
    31, 2001 and 2000, respectively.  Two distributors accounted for 21% and 22%
    of total trade  accounts  receivable as of December 31, 2001 and 32% and 13%
    of total trade  accounts  receivable  as of December 31, 2000.  For the year
    ended December 31, 2001 and 2000, 45% percent and 47%, respectively,  of net
    sales were through two distributors.

    Reclassifications - Certain  reclassifications  have been made to prior year
    amounts to conform to the current year presentation.

    Recent Accounting  Pronouncements - In August 2001, the FASB issued SFAS No.
    143,  "Accounting for Asset Retirement  Obligations."  SFAS No. 143 requires
    entities  to record the fair value of a  liability  for an asset  retirement
    obligation  in the  period in which it is  incurred.  The  associated  asset
    retirement  costs  are  capitalized  as part of the  carrying  amount of the
    long-lived  asset.  The  statement  will be effective  for the 2002 calendar
    year,  and early  adoption  is  permitted.  The  adoption of SFAS 143 is not
    expected  to have a material  impact on the  Company's  financial  position,
    results of operations or cash flows.

    In  October  2001,  the  FASB  issued  SFAS  No.  144,  "Accounting  for the
    Impairment or Disposal of Long-Lived Assets",  which supersedes SFAS No. 121
    and the accounting and reporting  provisions of Accounting  Principles Board
    Opinion No. 30 "Reporting  the Results of Operations - Reporting the Effects
    of  Disposal  of a Segment of a  Business,  and  Extraordinary,  Unusual and
    Infrequently  Occurring  Events  and  Transactions"  for the  disposal  of a
    segment of a business.  SFAS No. 144 requires that  long-lived  assets to be
    disposed of by sale be  measured  at the lower of  carrying  amounts or fair
    value less cost to sell,  whether  reported in  continuing  operations or in
    discontinued  operations.  SFAS  No.  144  also  expands  the  reporting  of
    discontinued  operations to include  portions of an entity that have been or
    will be disposed of rather than limiting such discontinuance to a segment of
    a business.  The statement is effective for the 2002 fiscal year,  and early
    adoption is  permitted.  The  adoption of SFAS 144 is not expected to have a
    material impact on the Company's financial  position,  results of operations
    or cash flows.

                                      F-9
<PAGE>
                                         PORTLAND BREWING COMPANY AND SUBSIDIARY
                                                NOTES TO CONSOLIDATED STATEMENTS
--------------------------------------------------------------------------------

NOTE 2   -    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

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


NOTE 3   -    RECAPITALIZATION/REORGANIZATION PLAN

    The Company experienced  significant operating losses during the years ended
    December 31, 2001 and 2000,  and has  continued to incur losses in the first
    quarter of 2002.  Operating  results  have  fluctuated  and may  continue to
    fluctuate  as a result of many  factors  including  lower sales  volumes and
    selling prices, increases in transportation,  utility and insurance costs as
    well as increased  depreciation and other fixed operating costs as a percent
    of sales  during  periods  when the  Company's  brewery is at less than full
    capacity,  changes in product mix, and increased selling and marketing costs
    incurred as the Company protects its business in existing markets.

    The Company's  working capital  requirements over the next year are expected
    to be met partially from cash flow through operations, funds available under
    the Company's  revolving line of credit and, if  appropriate  and available,
    additional equity offerings and/or borrowings from other lenders.

    Effective as of July 31, 2001,  the Board of Directors  ratified,  confirmed
    and adopted a recapitalization  / reorganization  plan for the Company which
    included the  following  elements:  (a)  re-forecasting  and  re-sizing  the
    current  operations;  (b) refinancing and increasing the revolving loan with
    Western Bank; (c) issuing common stock for the  contribution of certain real
    property; (d) issuing common stock for the contribution of the brewery land,
    building  and  related  equipment,  and  assumption  of debt  related to the
    brewery;  and (e)  refinancing  the Company's term debt. The purposes of the
    recapitalization/reorganization plan were to obtain and stabilize short-term
    and long-term  financing,  lower  operating costs and acquire capital assets
    which could be sold or used as  collateral.  Since the various  transactions
    involved affiliates of the Company,  the plan and certain  transactions were
    approved by the board of  directors  after full  disclosure  of the material
    facts and determinations that the transactions were fair to the Company.

    On August 9, 2001, Portland Brewing Building, L.L.C. ("PBB LLC") and Electra
    Partners Inc. ("Electra") contributed to the Company approximately 1.5 acres
    consisting  of a  parking  lot and a 16,000  square  foot  building  located
    between 29th and 30th on Industrial  Avenue  ("Parking Lot") in exchange for
    3,472,560  shares of its common stock valued at $.25 per share.  The Parking
    Lot was valued by using the ad valorum property tax assessment.  The members
    of PBB LLC are MacTarnahan Limited Partnership ("MacTarnahan"),  Harmer Mill
    & Logging  Supply Co.  ("Harmer")  and Electra.  MacTarnahan  and Harmer are
    owned by  affiliates  of Robert M.  MacTarnahan  and R.  Scott  MacTarnahan.
    Electra  is owned by  affiliates  of Charles  A.  (Tony)  Adams and Peter F.
    Adams.

    On  September  14,  2001,  Western  Bank  and the  Company  entered  into an
    unsecured  loan for $182,741.  This loan  replaced the loan between  Western
    Bank and PBB LLC, and was made in preparation for a transfer of certain real
    property and associated  personal  property (the "Brewery  Property").  This
    loan is guaranteed by several of the Company's shareholders.  On October 12,
    2001, PBB LLC  contributed  the Brewery  Property to the Company in exchange
    for  1,382,748  shares of common  stock,  valued at $.25 per share,  and the
    Company's  assumption of  indebtedness  in the amount of  $1,256,701  (which
    consists  of  the  unsecured   Western  Bank  loan  described   above,   and
    indebtedness  to Capital  Crossings  Bank) and  secured by certain  real and
    personal  property.  The real  property  was valued  based on the ad valorum
    property  tax  assessments  while the  value of the  personal  property  was
    determined by using PBB LLC's net book value.

                                      F-10
<PAGE>
                                         PORTLAND BREWING COMPANY AND SUBSIDIARY
                                                NOTES TO CONSOLIDATED STATEMENTS
--------------------------------------------------------------------------------


NOTE 3   -    RECAPITALIZATION/REORGANIZATION PLAN (continued)

    On November 1, 2001, the Company replaced its Western Bank term debt (due in
    November  2001)  with a new term  loan of  $1,700,000  from the  MacTarnahan
    Limited Partnership  ("MacTarnahan Term Loan"). The MacTarnahan Term Loan is
    a  three  year  facility,  secured  with  the  Company's  personal  property
    (priority is subject to existing  liens).  Interest is payable  monthly at a
    floating per annum rate of 1.25% above the prime rate  published in the Wall
    Street Journal  (Western  Edition)  (6.00% at December 31, 2001).  Principal
    payments of not less than  $15,000 are  payable  monthly and two  additional
    principal payments of not less than $35,000 are payable  semi-annually.  The
    principal  may be prepaid at any time.  The  MacTarnahan  Term Loan contains
    certain covenants including restrictions on additional encumbrances.

    As a result of the  recapitalization/reorganization  plan,  (i) the  Company
    down-sized  and reduced  costs;  (ii) the Company's  revolving  facility was
    increased  and renewed to August  2002;  (iii) the  Company's  term debt was
    reduced to $1,700,000 and  refinanced to mature in 2004;  (iv) the Company's
    brewery lease  payments for the brewery as well as the rent payments for the
    personal  property  were  eliminated,   and  the  Company  assumed  debt  of
    approximately  $1,257,000;  and (v) a long-term parking easement was secured
    as well as the rental obligation eliminated. Following the recapitalization,
    affiliates of the MacTarnahans and Adams together own approximately 74.5% of
    the  common  stock of the  Company,  based on the  beneficial  ownership  as
    reported on Schedules 13D.


NOTE 4   -    ACQUISITIONS

    Saxer  Brewing  Company  Brand  Purchase - On January 31, 2000,  the Company
    purchased  brands  and  certain  equipment  from  Saxer  Brewing  Company in
    exchange for stock,  cash and other  consideration.  The purchase  price was
    determined as follows:

           Shares issued at FMV (900,000 @ $.54/share)          $   486,000

           Cash consideration paid                                  150,000

           Minimum payment due under earn-out agreement             200,000

           Assumption of liabilities                                 29,688

           Legal costs incurred                                      63,095
                                                                 ----------

           Total acquisition cost                               $   928,783
                                                                 ==========

    The purchase price of approximately $929,000 was allocated:  $779,000 to the
    estimated  fair  value  of the  brands  acquired  and  $150,000  to  certain
    equipment and vehicles acquired. The brand intangible is amortized using the
    straight-line method over five years.

    The minimum  earn-out  agreement  requires annual payments over a three-year
    period totaling $200,000 for the rights to the Saxer and Nor'wester  brands.
    The  earn-out  payment  is  secured  by the  Saxer  and  Nor'wester  brands.
    Additional  royalties  will be paid if  certain  pre-established  levels  of
    barrel sales are exceeded. The Company must pay $12 per barrel on all barrel
    sales exceeding 10,000 barrels for the twelve month period ended January 31,
    2001,  $7.50 per barrel on all barrel sales  exceeding 6,667 barrels for the
    twelve  month  period  ended  January  31,  2002 and $5.00 per barrel on all
    barrel  sales  exceeding  6,000  barrels for the twelve  month  period ended
    January  31,  2003.  The  Company  has  recorded  all  expected  liabilities
    associated with this earn-out agreement.

                                      F-11
<PAGE>
                                         PORTLAND BREWING COMPANY AND SUBSIDIARY
                                                NOTES TO CONSOLIDATED STATEMENTS
--------------------------------------------------------------------------------

NOTE 5   -    LINE OF CREDIT

    Effective  August 1, 2001, the Company  entered into a $1,200,000  revolving
    line of credit  ("Revolving Line") with Western Bank which expires on August
    1, 2002 and  replaced the existing  $1,000,000  revolving  line with Western
    Bank. At December 31, 2001 and December 31, 2000, $617,300 and $750,752 were
    outstanding,  respectively. The Revolving Line is secured by a first lien on
    the Company's accounts receivable and inventory and is guaranteed by certain
    shareholders. Interest is payable monthly at a floating per annum rate of 1%
    above the prime rate published in the Wall Street Journal (Western  Edition)
    (5.75% at December 31, 2001). The Revolving Line contains certain  covenants
    including  restrictions on additional  indebtedness and payment of dividends
    without the permission of the lender. The Company was in compliance with all
    covenants at December 31, 2001.


NOTE 6   -    LONG-TERM DEBT
<TABLE>
<CAPTION>

                                                                          December 31,
                                                               -------------------------------
                                                                    2001            2000
                                                               --------------- ---------------
        <S>                                                       <C>             <C>
        Note payable to MacTarnahan Limited Partnership, a
          shareholder; due in monthly principal payments of $15,000
          plus interest with two additional principal payments of
          $35,000 due in April 2002
         and July 2002;  interest payable at prime plus 1.25%
          (6.00% at  December 31, 2001); collateralized
          by receivables, inventory, equipment and
          general intangibles; due November 2004.                  $1,670,000      $2,500,000

        Note payable to Capital Crossings Bank; due in monthly
          principal and interest payments of $10,804 with a balloon
          payment of $880,287; interest payable at 9.01%;
          collateralized by certain real and personal property related
          to the Brewery building and land;
          due November 2003.                                          966,974               -

        Note payable to Western Bank; due in monthly principal and
          interest payments of $5,689; interest payable at prime plus
          1.50% (6.25% at December 31,
          2001); due September 2004.                                  168,824               -

        Accounts payable to certain vendors resulting from the
          conversion of current amounts due to five-year payment
          plans; due in monthly principal and interest payments
          totaling $1,668; interest payable at 6.00%;
          due September 2003.                                          31,668          49,206

        Lease payable to vendor; due in monthly principal and
          interest payments of $770; interest payable at 6.31%;
          collateralized by specific equipment; due March 2003.        11,550          20,790
                                                                 ------------- ---------------

                                                                    2,849,016       2,569,996
        Less current portion                                        (380,770)        (26,779)
                                                                 ------------- ---------------

                                                                   $2,468,246      $2,543,217
                                                                 ============= ===============
</TABLE>


                                      F-12
<PAGE>
                                         PORTLAND BREWING COMPANY AND SUBSIDIARY
                                                NOTES TO CONSOLIDATED STATEMENTS
--------------------------------------------------------------------------------


NOTE 6   -    LONG-TERM DEBT (continued)

    In 1998, the Company  obtained a $2,100,000  term loan from  MacTarnahan,  a
    shareholder.   This   $2,100,000  term  loan  was  secured  by  receivables,
    inventory,  equipment and general intangibles of the Company,  with interest
    at a per  annum  rate  equal to the  prime  lending  rate of the Bank of the
    Northwest  plus 1%. The term loan  required  interest only payments with the
    total balance due upon maturity.  On January 31, 2000, the principal  amount
    of the term loan was  increased  to  $2,500,000  and the  maturity  date was
    extended  from  January 31, 2000 to April 1, 2001.  In  February  2001,  the
    Company refinanced the $2,500,000 term loan with Western Bank. This new term
    loan was  secured by the  Company's  personal  property  and  guaranteed  by
    certain of the Company's shareholders,  including MacTarnahan.  The original
    maturity  date of the  replacement  term loan was  August 2,  2001,  and was
    extended  to  November  2, 2001.  The  interest  rate was equal to the prime
    lending  rate of Western  Bank plus 0.5%.  On November 1, 2001,  the Company
    paid down the Western Bank term loan by $800,000 and then  replaced the term
    loan  with  a  new  term  loan  of  $1,700,000  from   MacTarnahan   Limited
    Partnership.  The MacTarnahan  Term Loan is a three-year  facility,  secured
    with the  Company's  personal  property  (priority  is subject  to  existing
    liens).  The  MacTarnahan  Term Loan contains  certain  covenants  including
    restrictions on additional encumbrances.

    Principal  payment   requirements  on  long-term  debt,  and  capital  lease
    obligations are as follows for the years ending December 31:

                   2002                             $ 380,770
                   2003                             1,181,860
                   2004                             1,286,386
                   2005                                     -
                   2006                                     -
                Thereafter                                  -
                                                --------------

                                                  $ 2,849,016
                                                ==============


NOTE 7   -    INCOME TAXES

    The Company is in a net deferred tax asset  position and has  generated  net
    operating  losses to date.  Accordingly,  no  provision  for or benefit from
    income taxes has been recorded in the accompanying  statements of operations
    for 2001. The Company will continue to provide a valuation allowance for its
    deferred tax assets  until it becomes more likely than not, in  management's
    assessment, that the Company's net deferred tax assets will be realized. The
    Company has a pretax net operating loss  carryforward  of  approximately  $6
    million which is available to offset future taxable income, if any, expiring
    through the year 2020.

    The components of the net deferred tax assets and liabilities as of December
    31, 2001 and 2000 are as follows:

                                                           December 31,
                                                      ---------------------
                                                        2001          2000
                                                      ---------    --------

           Deferred tax assets, current
               Basis difference in inventory          $ 47,887     $ 33,202
               Other                                    49,086       42,799
                                                      ---------    ---------
                                                      ---------    ---------

                   Total current deferred tax assets    96,973       76,001
                                                      ---------    ---------


                                      F-13
<PAGE>
                                         PORTLAND BREWING COMPANY AND SUBSIDIARY
                                                NOTES TO CONSOLIDATED STATEMENTS
--------------------------------------------------------------------------------

NOTE 7   -    INCOME TAXES (continued)

                                                          December 31,
                                                   ---------------------------
                                                       2001            2000
                                                   ----------        ---------

       Deferred tax assets, long-term
           Intangible assets                            77,966          37,306
           Net operating loss carryforwards          2,506,997       2,324,574
           Tax credits                                 102,701         102,701
                                                   ------------    ------------

               Total long-term deferred tax assets   2,687,664       2,464,581

       Deferred tax liabilities, long-term
           Basis difference in property, plant and
             equipment                               (798,644)       (708,200)
                                                   ------------    ------------

               Net long-term deferred tax assets     1,889,020       1,756,381
                                                   ------------    ------------

       Net deferred tax assets                       1,985,993       1,832,382
       Less valuation allowance                    (1,985,993)     (1,832,382)
                                                   ------------    ------------

                                                     $      -        $      -
                                                   ============    ============

    The difference between the actual income tax provision (benefit) and the tax
    provision  (benefit)  computed by applying the statutory federal tax rate to
    income (loss) before taxes is attributable to the following:

                                                  Year ended December 31,
                                              ----------------------------------
                                                 2001               2000
                                              --------------------------------

       Federal statutory income tax benefit $(241,506) (34%)   $(485,236)  (34%)
       State statutory income tax benefit     (28,413)  (4%)     (51,078)   (4%)

       Reversals at rates different than
         originally booked                     116,308   16%          -      0%
       Change in valuation allowance for
         deferred tax assets                   153,611   22%      536,314   38%
                                            ----------------  ------------------
                                            ----------------  ------------------

                                            $         -   0%   $      -      0%
                                            ================  ==================


NOTE 8   -        RELATED PARTY TRANSACTIONS

    Lease Agreement with Portland Brewing Building,  L.L.C. - The Company leased
    the  property at 2730 NW 31st Avenue in Portland,  Oregon from PBB,  L.L.C.,
    which was an entity  controlled  by an officer  and  director  and two other
    directors of the Company.  The monthly rent was $24,906 plus property taxes,
    insurance and  maintenance,  with an adjustment  for inflation or changes in
    fair market rental value on July 1, 1998 and July 1, 2003.  The lease was to
    expire in August 2008. In October  2001,  the brewery land and building were
    purchased by the Company,  thereby terminating the Company's lease agreement
    with PBB, L.L.C. In connection with the original negotiation of the lease in
    1992, the Company granted the lessors a warrant to purchase  87,697.5 shares
    of Common Stock.  The warrants are exercisable at any time through  December
    31, 2002, at an exercise price of $3.333 per share.

                                      F-14
<PAGE>
                                         PORTLAND BREWING COMPANY AND SUBSIDIARY
                                                NOTES TO CONSOLIDATED STATEMENTS
--------------------------------------------------------------------------------


NOTE 8   -    RELATED PARTY TRANSACTIONS (continued)

    Lease  Agreement with L & L Land Company - In 1999, the Company entered into
    a lease for approximately 30,100 square feet of space in a building adjacent
    to the main brewery with a related  party, L & L Land Company ("L & L"). The
    term of the lease is 5 years,  with one option to extend the term until June
    14,  2008.  Rent under the lease is  $12,000  per month.  In  addition,  the
    Company  agreed  to pay the real  property  taxes on the  building,  provide
    insurance and to make various maintenance and repairs.  The lease contains a
    first opportunity to purchase the adjacent building. The lease is guaranteed
    by two  shareholders  of the  Company.  In  connection  with the lease,  the
    Company entered into a sublease with another party for approximately  13,000
    square feet of office and warehouse  space and a portion of the parking lot.
    The term of the  sublease  is month to month and rent is $4,974  per  month,
    plus $365 per month for real  property  taxes,  plus  payment of  utilities,
    insurance and interior maintenance.  In 2000, the Company reduced the amount
    of subleased  space from 13,000  square feet to  approximately  8,000 square
    feet.  This  reduction  in  subleased  space has reduced the  month-to-month
    rental income from $4,974 to $3,168 per month.

    Lease Agreement with MacTarnahan  Limited  Partnership - In October 1999, in
    connection  with the purchase of Harco  Products,  Inc., the Company entered
    into a lease with a related party. Rent under the lease is $2,500 per month.
    The term of the  lease is five  years,  and can be  terminated  upon 60 days
    notice by the Company.

    The Company  believes  that the terms and  conditions of its leases are fair
    and  reasonable  and are no less  favorable  to the  Company  than  could be
    obtained from unaffiliated parties.

    The following is a schedule of minimum  future  operating  lease payments on
    the above-mentioned leases for the years ending December 31:

                2002                             $ 180,925
                2003                               180,925
                2004                                77,040
                                             --------------

                                                 $ 438,890
                                             ==============

    Rent expense  incurred on operating leases was $388,657 and $437,625 in 2001
    and 2000, respectively.

    License  Agreement  - The Company  has a license  agreement  with one of its
    board  members to utilize his name and  likeness.  The amount of the royalty
    owed is $1 per barrel of  MacTarnahan's  Ale sold.  Royalties paid under the
    license agreement for 2001 and 2000 were $22,030 and $27,837,  respectively,
    based  on  the  sale  of  22,030  and  27,837  barrels,   respectively,   of
    MacTarnahan's  Ale  during the same  periods.  Subsequent  to year end,  the
    Company was notified that the board member was  requesting,  consistent with
    the licensing agreement,  an additional $1 per barrel on MacTarnahan's Black
    Watch Cream  Porter and  MacTarnahan's  Highland  Pale Ale sold.  This is in
    addition to the royalty already paid on the MacTarnahan's Ale. The royalties
    on the Black Watch Cream Porter and MacTarnahan's  Highland Pale Ale are for
    all barrel sales beginning January 1, 2002.

    Acquisition  of Building  and Parking Lot - The Company  acquired a building
    and  adjacent  parking lot from a related  party  during the fiscal year end
    2001.  In exchange for the  building  and parking  lot,  the Company  issued
    3,472,560  shares of its common  stock valued at $.25 per share or $868,140.
    Within a month of acquiring  the parking lot and  building  from the related
    party,  the  building  and the parking lot were sold to an  unrelated  third
    party for $1,150,000 and a 15-year easement to use 25 parking spaces.  Given
    the related  party  nature of the original  acquisition  of the building and
    parking  lot,  the  amount  of the  subsequent  sale was  used to value  the
    transaction.  The Company  recorded the  acquisition  of the parking lot and
    building as follows:


                                      F-15
<PAGE>
                                         PORTLAND BREWING COMPANY AND SUBSIDIARY
                                                NOTES TO CONSOLIDATED STATEMENTS
--------------------------------------------------------------------------------


NOTE 8   -    RELATED PARTY TRANSACTIONS (continued)

           Subsequent sales price of building and parking lot     $1,150,000

           Value assigned to easement received                        75,181

           Closing costs                                            (67,098)

           Offering costs                                          (163,793)
                                                               --------------
           Net value of common stock recorded at
               September 30, 2001                                  $ 994,290
                                                               ==============

    The  Company  recorded  no gain or loss on the sale of the  parking  lot and
    building. The value assigned to the easement will be amortized over the life
    of the agreement  and is included in other assets on the  Company's  balance
    sheet.

    Acquisition of Brewery Property - On October 12, 2001, PBB LLC contributed a
    portion of the  Brewery  Property  (2730 NW 31st  Avenue) to the  Company in
    exchange for $345,687 in common stock (1,382,748  shares at $.25 per share),
    the Company's  assumption of  indebtedness  in the amount of $1,073,960  and
    financed  new debt in the  amount of  $182,741.  In  addition,  the  Company
    incurred closing costs of $1,053. The real property was valued  ($1,568,000)
    based on the ad  valorum  property  tax  assessments  while the value of the
    personal property ($35,441) was determined by using PBB LLC's net book value
    which management believes approximates the fair market value of the property
    received.  The assumed  indebtedness  consists of a note to Capital Crossing
    Bank in the amount of  $1,073,960.  The  Capital  Crossing  note  matures in
    November 2003, and requires monthly payments of $10,804  including  interest
    of 9.01% beginning  November 9, 2001 with all unpaid  principal and interest
    due on the maturity date. The new debt is with Western Bank, as of September
    14, 2001,  in  anticipation  of the transfer of the property to the Company.
    The  Western  Bank note  matures  September  15, 2004 and  requires  monthly
    payments of $5,689 including  interest at prime plus 1.5% beginning  October
    15, 2001.

    Outsourcing of Accounting - During the current year, the Company  outsourced
    the accounting function to Greenstead = Accounting Resource  ("Greenstead").
    Greenstead is owned by Charles A. Adams and Peter F. Adams,  shareholders of
    the Company.  The Company incurred $65,175 for accounting services performed
    by Greenstead during the year ended December 31, 2001. At December 31, 2001,
    the Company owed Greenstead $930.


NOTE 9   -     PREFERRED STOCK

    On March 1, 1999, two  shareholders  of the Company  purchased  2,885 shares
    each of the  Company's  Series  A  Convertible  Redeemable  Preferred  Stock
    ("Series  A") for $52 per share,  resulting  in  aggregate  proceeds  to the
    Company of $300,040.

    Each share of Series A is convertible on February 25, 2004,  into fully paid
    and non-assessable  shares of Common Stock at a rate of 100 shares of Common
    Stock for each share of Series A. The conversion  ratio,  which is currently
    100 to 1, is subject  to  adjustment  in the event of stock  splits or stock
    dividends.  Unless converted, the Company must redeem the Series A shares on
    February 25, 2004, at $52 per share plus any declared but unpaid  dividends,
    in cash or in 24 equal monthly  payments  bearing interest at 12% per annum.
    As of the date of this filing, the Company's Board of Directors have neither
    declared nor intend to declare dividend payments. Each shareholder of Series
    A is entitled to the number of votes equal to the number of shares of Common
    Stock  into  which the  Series A shares  can be  converted  and the Series A
    shares are entitled to vote as a separate class.  Each shareholder of Series
    A is entitled to receive  cumulative  dividends at the rate of 8% per annum,
    when  and if  declared  by the  Board of  Directors,  prior  to  payment  of
    dividends on Common Stock. In the event of any liquidation or dissolution of
    the Company, either voluntary or

                                      F-16
<PAGE>
                                         PORTLAND BREWING COMPANY AND SUBSIDIARY
                                                NOTES TO CONSOLIDATED STATEMENTS
--------------------------------------------------------------------------------


NOTE 9   -     PREFERRED STOCK (continued)

    involuntary,  each  shareholder  of Series A shall be  entitled  to receive,
    prior and in preference to any  distribution  of any assets or surplus funds
    to the holders of Common Stock, an amount equal to $52.00 per share for each
    share of Series A and, in  addition,  an amount  equal to all  declared  but
    unpaid dividends on Series A.


NOTE 10  -    STOCK-BASED COMPENSATION PLANS

    Incentive  Stock  Option Plan - The  Company's  Incentive  Stock Option Plan
    ("ISOP") is  administered  by the Board of Directors and provides for grants
    of options to acquire shares of the Company's  common stock,  subject to the
    limitations set forth in the ISOP. The number of stock options available for
    grant  under  the  ISOP is  400,000.  Pursuant  to the  ISOP,  the  Board of
    Directors has the  authority to set the terms and  conditions of the options
    granted,  but cannot set the option  exercise price at less than 100 percent
    of the fair market  value of the subject  shares of common stock at the time
    the option is granted.

    In May 1999,  options to purchase  118,800  shares of Common Stock at prices
    ranging  from  $3.33 to $7.00 per  share  were  repriced  and  regranted  on
    different  terms,  of which  options to purchase  72,000 shares were held by
    executive officers of the Company.  Repriced options were issued at exercise
    prices of $0.54 per share to $0.594 per share.  All of the repriced  options
    became exercisable on May 20, 2000. Pursuant to Accounting  Principles Board
    Opinion No. 25 ("APB 25"),  options  that are  repriced  after June 1998 are
    subject to  variable  plan  accounting.  The Company  recorded  compensation
    expense of $15,812  for the year ended  December  31,  2000,  related to the
    change  in the  exercise  price of the  options  and the  fair  value of the
    Company's common stock.

    Activity under the ISOP is summarized as follows:

                                                Shares              Exercise
                                              Subject to              Price
                                               Options             Per Share
                                            ---------------    -----------------

            Balances, December 31, 1999            361,550      $0.54 - $0.59
            Options canceled                      (45,300)      $0.54 - $0.59
                                            ---------------    -----------------

            Balances, December 31, 2000            316,250      $0.54 - $0.59

            Options granted                         73,000          $0.59
            Options exercised                      (5,500)      $0.54 - $0.59
            Options canceled                     (155,200)      $0.54 - $0.59
                                            ---------------    -----------------

            Balances, December 31, 2001            228,550       $0.54 - $0.59
                                            ===============    =================



    Nonqualified  Stock  Option Plan - In August  1994,  the Board of  Directors
    approved a Nonqualified Stock Option Plan ("NQSOP").  The NQSOP provides for
    the issuance of 45,000 stock  options to employees,  nonemployee  members of
    the Board of Directors,  consultants and other  independent  contractors who
    provide valuable service to the Company,  at a minimum of 85 percent of fair
    market value and have a term of 10 years.  Options to purchase 13,500 shares
    at $5.33 each were  outstanding  and  exercisable  at December  31, 2001 and
    2000. There were no shares canceled during the year ended December 31, 2001.

                                      F-17
<PAGE>
                                         PORTLAND BREWING COMPANY AND SUBSIDIARY
                                                NOTES TO CONSOLIDATED STATEMENTS
--------------------------------------------------------------------------------


NOTE 10  -    STOCK-BASED COMPENSATION PLANS (continued)

    Statement of Financial  Accounting  Standards  No. 123 (SFAS 123) - SFAS 123
    defines a fair value based method of accounting  for employee  stock options
    and similar  equity  instruments  and  encourages all entities to adopt that
    method of accounting for all employee stock compensation plans.  However, it
    also  allows an entity to continue  to measure  compensation  cost for those
    plans using the method of accounting  prescribed  by  Accounting  Principles
    Board No. 25 ("APB 25").  Entities electing to remain with the accounting in
    APB 25 must make pro forma disclosures of net income and earnings per share,
    as if the fair value based method of accounting defined in SFAS 123 had been
    applied.

    The Company has elected to account for its  stock-based  compensation  plans
    under APB 25; however,  the Company has computed,  for pro forma  disclosure
    purposes,   the  value  of  all  options  granted  using  the  Black-Scholes
    option-pricing  model as prescribed by SFAS 123. 73,000 options were granted
    in 2001 and were valued using the following weighted average assumptions:

              Risk-free interest rate            4.7%
              Expected dividend yield               0%
              Expected lives                     5 years
              Expected volatility                318%

    The total value of options granted during 2001 was computed as approximately
    $43,055 amortized on a pro forma basis over the respective vesting period of
    the options (one year).  The weighted  average fair value of options granted
    during  2001 was $0.59 per  share.  If the  Company  had  accounted  for its
    stock-based  compensation  plans in accordance  with SFAS 123, the Company's
    pro forma  net loss and pro  forma  net loss per  share for the years  ended
    December 31, 2001 and 2000 would have been as follows:

                                       As Reported           Pro Forma
                                    -----------------    -----------------
              2001
              Net loss                $ (710,313)          $  (753,368)
              Net loss per share      $    (0.11)          $     (0.11)

              2000
              Net loss                $(1,276,938)         $(1,283,484)
              Net loss per share      $     (0.26)         $     (0.26)


    The  effect  of  applying  SFAS  123 in this  pro  forma  disclosure  is not
    indicative  of future  results.  SFAS 123 does not apply to awards  prior to
    January 1, 1995. Additional awards are anticipated in future years.

    The following  table sets forth the exercise price range,  number of shares,
    weighted average exercise price, and remaining  contractual  lives by groups
    of similar price and grant date as of December 31, 2001:
<TABLE>
<CAPTION>

                  Options Outstanding                 Options Exercisable
       -----------------------------------------------------------------------------------------

                                       Weighted
                         Number         Average     Weighted      Number         Weighted
                     Outstanding at    Remaining     Average   Exercisable at     Average
           Exercise   December 31,    Contractual   Exercise    December 31,     Exercise
            Price         2001       Life (Years)    Price         2001            Price
       ----------------------------- ------------------------ ---------------  --------------

<S>    <C>             <C>              <C>           <C>       <C>                 <C>
       $0.54 - $0.59    228,550          8.0           $0.56     155,550         $  0.54
           5.33          13,500          2.7            5.33      13,500            5.33
                     ---------------                          ---------------
           Totals       242,050                                  169,050
                     ===============                          ===============
</TABLE>

                                      F-18
<PAGE>
                                         PORTLAND BREWING COMPANY AND SUBSIDIARY
                                                NOTES TO CONSOLIDATED STATEMENTS
--------------------------------------------------------------------------------


NOTE 10  -    STOCK-BASED COMPENSATION PLANS (continued)

    Cash  Incentive  Plan - The Company may award its  officers  and  employees,
    under its Restated Cash Incentive Plan ("the Plan"), bonuses in an amount up
    to 10% of net operating profits before taxes.  Awards under the Plan will be
    allocated among the officers and employees in accordance with the provisions
    of the Plan at the  discretion  of the Board of  Directors.  No amounts were
    awarded in 2001 or 2000 under the Plan.

    401(k)  Plan - The  Company  has a 401(k)  deferred  compensation  plan (the
    "401(k)  Plan").  The 401(k) Plan covers all employees  over 21 years of age
    that have worked for the  Company for over one year.  The 401(k) Plan allows
    for entrance on a quarterly basis.

    The maximum  contribution  by each  employee  is 15% of his or her pay.  The
    Company may make discretionary  contributions.  Full vesting of any employer
    contributions occurs after five years of service.  During 2001 and 2000, the
    Company made no discretionary contributions to the 401(k) Plan.


NOTE 11  -    SEGMENT INFORMATION

    The  Company  is  organized  into  three  product-based  segments:   brewery
    operations,   restaurant  operations  and  hand  truck  manufacturing.   The
    Company's  brewery  segment brews and sells  specialty beer in its Portland,
    Oregon brewery,  which is sold to  distributors  and retail  customers.  The
    Company's  restaurant,  which  adjoins  its  brewery,  sells  the  Company's
    specialty  beers along with lunch and dinner.  In October 1999,  the Company
    purchased  Harco  Products,  Inc., a company which  produces hand trucks for
    various industrial and personal uses.

    All revenues are attributable  to, and all long-lived  assets are located in
    the  United  States,  the  Company's  country  of  domicile.  The  basis  of
    accounting  for  transactions  between  segments is based on the fair market
    value of the respective goods or services.  Interest expense is considered a
    corporate expense and is not allocated to the three segments.

                                                  Year ended December 31,
                                               ------------------------------
                                                     2001           2000
                                               -------------- ---------------
              Net sales:
               Brewery                           $ 9,800,346     $10,497,454
               Restaurant                          1,904,787       1,737,283
       Less intersegment sales                     (309,163)       (299,786)
                                               -------------- ---------------
                                               -------------- ---------------

                                 Subtotal         11,395,970      11,934,951
               Harco Products                        364,546         416,733
                                               -------------- ---------------
                                               -------------- ---------------

                 Total net sales                 $11,760,516     $12,351,684
                                               ============== ===============
                                               ============== ===============

       Gross Profit:
               Brewery                           $ 2,738,587     $ 3,008,400
               Restaurant                            513,193         357,930
       Less intersegment gross profit              (150,953)       (165,146)
                                               -------------- ---------------
                                               -------------- ---------------

                                 Subtotal          3,100,827       3,201,184
               Harco Products                        145,740         160,647
                                               -------------- ---------------
                                               -------------- ---------------

                 Total gross profit              $ 3,246,567     $ 3,361,831
                                               ============== ===============
                                               ============== ===============

       Depreciation and amortization expense:
               Brewery                             $ 784,360       $ 748,460
               Restaurant                             73,654          74,083
               Harco Products                         17,100          22,941
               Unallocated corporate amounts         289,005         300,761
                                               -------------- ---------------

                 Total depreciation
                     and amortization expense    $ 1,164,119     $ 1,146,245
                                               ============== ===============

                                      F-19
<PAGE>
                                         PORTLAND BREWING COMPANY AND SUBSIDIARY
                                                NOTES TO CONSOLIDATED STATEMENTS
--------------------------------------------------------------------------------

NOTE 11  -    SEGMENT INFORMATION (continued)

                                                  Year ended December 31,
                                              -------------------------------
                                                  2001               2000
                                              --------------    -------------
         Capital expenditures:
              Brewery                           $ 1,663,199       $  391,656
              Saxer equipment                             -          150,000
              Restaurant                             21,105           29,678
              Harco Products                              -           12,122
              Unallocated corporate amounts               -           75,656
                                              --------------    -------------

                  Total capital expenditures    $ 1,684,304       $  659,112
                                              ==============    =============
                                              ==============    =============

         Total assets:
              Brewery                           $ 8,622,688      $ 8,145,659
              Restaurant                            516,491          562,649
              Harco Products                        277,328          324,769
              Unallocated corporate amounts         311,727          288,388
                                              --------------    -------------
                                              --------------    -------------

                  Total assets                  $ 9,728,234      $ 9,321,465
                                              ==============    =============


NOTE 12  -    COMMITMENTS AND CONTINGENCIES

    The  Company  is  involved  from  time to time in  claims,  proceedings  and
    litigation arising in the ordinary course of business.  The Company believes
    it is not  presently a party to any  litigation,  the outcome of which would
    have  a  material  adverse  effect  on  the  Company's  business,  financial
    condition, results of operations or cash flows.


                                      F-20
<PAGE>

                            PORTLAND BREWING COMPANY
                               2730 NW 31st Avenue
                             Portland, Oregon 97210
                               Phone 503-226-7623
                                Fax 503-226-2702





March 29, 2002


United States Securities and Exchange Commission
Judiciary Plaza
Document Control
450 5th Street, NW, Room 1004
Washington, D.C. 20549

RE:      Portland Brewing Company
         Form 10-KSB for the year ended December 31, 2001
         File No. 0 - 25836

Ladies and Gentlemen:

Attached for filing on behalf of Portland Brewing Company (the "Company") is the
Company's Annual Report on Form 10-KSB for the year ended December 31, 2001.

Pursuant to General  Instruction C(3) of Form 10-KSB, this letter confirms that,
with  respect  to  the  Consolidated   Financial   Statements  included  in  the
accompanying Form 10-KSB,  there have been no changes from the preceding year in
the  Company's  accounting  principles or practices or in the method of applying
such principles or practices.


                               Sincerely,


                               Charles A. Adams
                               President and Chief Executive Officer