Portland Brewing Company
                               2730 NW 31st Avenue
                             Portland, Oregon 97210
                               Phone 503-226-7623
                                Fax 503-226-2702





March 28, 2000


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, 1999
         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 31,1999.

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.




                                            Very Truly Yours,

                                            Glenmore James
                                            Executive Vice President and
                                            Chief Financial Officer



<PAGE>



                     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, 1999
                                       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, 1999: $10,463,331.

     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 17, 2000 was 4,994,714 shares.

     Transitional Small Business Disclosure Format (check one):  Yes X   No
                                                                    ---    ---


<PAGE>


                            PORTLAND BREWING COMPANY
                                1999 FORM 10-KSB
                                TABLE OF CONTENTS


                                     Part I
                                                                            Page

     Item 6.        Description of Business                                    2

     Item 7.        Description of Property                                   10

     Item 8.        Directors, Executive Officers and Significant Employees   11

     Item 9.        Remuneration of Directors and Officers                    13

     Item 10.       Security Ownership of Management and Certain
                    Security Holders                                          14

     Item 11.       Interest of Management and Others in Certain
                    Transactions                                              17

                                     Part II

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

     Item 2.        Legal Proceedings                                         21

     Item 3.        Changes in and Disagreements with Accountants             21

     Item 4.        Submission of Matters to a Vote of Security Holders       21

     Item 5.        Compliance with Section 16(a) of the Exchange Act         21

     Item 6.        Reports on Form 8-K                                       22

                                    Part F/S

                    Index to Consolidated Financial Statements                22

                                    Part III

     Item 1.        Index to Exhibits                                         23

     Item 2.        Description of Exhibits                                   23

                                       1

<PAGE>


                                     Part I

Item 6.  Description of Business
-------  -----------------------
General

The Company was  incorporated  in Oregon on November 14,  1983.  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  prices of over  $5.00 per
six-pack).  The  Company's  product  line  includes the  following  core brands:
MacTarnahan's  Scottish  Style Amber Ale,  Original  Honey Beer,  Haystack Black
Porter,  ZigZag River Lager and Woodstock IPA. In addition,  there is a seasonal
line of beers including  BobbyDazzler Old London Style Holiday Ale,  Thunderhead
Cream Stout,  Portland Pale Ale (also known as Kornhauser's  Oast Ale) and Uncle
Otto's  Oktoberfest  Maerzen.  Specialty  products are made  periodically  to be
served at the Company's restaurant, The Tap Room, such as Bavarian Style Weizen,
Benchmark MM Old Ale and certain Saxer and Nor'wester products. The Company uses
distributors  to  sell  principally  to  the   packaged/bottle   market  through
authorized retail outlets and the on-premise 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 addition,  in 1996, the Company began selling beer in states east of
the Rocky Mountains.

The Company opened its first brewery in January 1986 at 1339 NW Flanders  Street
in Portland,  Oregon.  In March 1986 a pub was added which allowed  customers to
view  various  stages  of the  brewing  process,  and in July  1996 the  Company
completed an expansion which significantly  increased the restaurant area of the
pub. In November 1998,  the Company sold this  facility.  The Company opened its
second  brewery in June 1993 located at 2730 NW 31st Avenue in  Portland,  which
initially  more than  doubled its annual  production  capacity to  approximately
26,000  barrels.  Subsequent  equipment  additions and expansion  have increased
capacity to approximately  135,000 barrels per year. In July 1994, a restaurant,
The Tap Room, was constructed at the main brewery and opened to the public.

Acquisition

In October 1999,  the Company  acquired all of the  outstanding  common stock of
Harco  Products,  Inc.,  ("Harco"),  from a related  party.  Harco produces hand
trucks for various industrial uses. The purchase price of $569,585,  was paid by
the issuance of 759,447 shares of the Company's common stock valued at $0.75 per
share. In connection with the  acquisition,  the Company  received and cancelled
30,000  shares  of its  Common  Stock  that were  owned by Harco.  See Item 11 -
Interest of Management and Others in Certain Transactions - Acquisition of Harco
Products, Inc. and Note 3 of Notes to Consolidated Financial Statements.

Saxer Brewing Company Asset Purchase

On January 31, 2000, the Company purchased certain assets (equipment and brands)
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.  See Item 11 -  Interest  of  Management  and  Others  in  Certain
Transactions  - Saxer  Brewing  Company  Asset  Purchase and Note 14 of Notes to
Consolidated Financial Statements.

Industry Overview

National Beer  Industry.  Total beer  consumption in the United States has grown
just 4.9% since 1986. (The Maxwell  Report,  February 2000) In the early 1980's,
when  sales  of  imported  beers  were  growing,  a  few  entrepreneurs  founded
micro-breweries  to compete  with  imported  beer.  What came to be known as the

                                       2

<PAGE>


domestic  specialty (craft) beer market,  went on to experience fifteen years of
extremely  rapid  growth.  In addition to new small  breweries,  large  domestic
brewers  produced  craft-style  beers and contract  brewers used excess regional
brewery capacity to add brands.  Stores and pubs found it difficult to find room
for all the  brands  that  were  available,  and the  consumer  was  faced  with
bewildering  variety.  The market  saturation  which began in 1996,  resulted in
excess capacity throughout the industry.

The large national breweries (Anheuser-Busch,  Miller Brewing Company and Adolph
Coors  Brewing   Company)   continued  to  dominate  the  market  in  1999  with
approximately  an aggregate  82% share,  according to Maxwell  Report,  February
2000. In 1999,  Pabst  Brewing  Company  purchased  The Stroh  Brewing  Company,
closing  most of its  breweries  and  selling  off some of its  brands to Miller
Brewing  Company,  which eliminated some of the excess capacity in the industry.
Additionally,  Pabst closed all but one of its own  breweries  and now contracts
most of its production to Miller Brewing Company.  Consolidation in the industry
is expected to continue on every level for at least another year.

In 1999,  sales of imported beer continued to increase,  with most of the growth
in Corona, Heineken, Molson, Labatts, and Guinness, while the growth of domestic
beer consumption  slowed.  The domestic  specialty and the imported beer markets
currently  account for  approximately 3% and 9%,  respectively of the total U.S.
beer market,  according  to Beer  Marketers  Insight,  January 2000 and February
2000.

Specialty Beer Industry--Pacific  Northwest.  Sales of specialty beers in Oregon
increased by approximately  7% in 1999,  compared to 2% in 1998 and 1% 1997; and
accounted  for  approximately  an 11% and 10%  market  share in 1999  and  1998,
respectively,  according to Oregon Liquor Control  Commission's  beer sales data
for the  respective  periods.  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 rotating selection of
seasonal  brands,  and specialty  products.  Draft product (kegs)  accounted for
approximately  35% and 39% of the  Company's  beer  shipments  in 1999 and 1998,
respectively.

Portland Brewing Company's core 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. and
22 oz. bottles and a 12 ounce (355 ml.) can.

     Original Honey Beer.  Original  (Oregon) Honey Beer is a pale  light-bodied
ale made  with  two-row  barley  malt,  Oregon  clover  honey,  and  Nugget  and
Willamette hops, and is available in draft, 12 oz. and 22 oz. packages.

     Haystack Black Porter. Haystack Black Porter contains a balance of domestic
pale,  caramel and black malts,  enhanced with imported English  chocolate malt,
and is available in draft and 12 oz. packages.

     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 in draft and 12 oz. packages.

     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 in draft and
12 oz. packages.

                                       3

<PAGE>


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

     Thunderhead Cream Stout. The Company's  heartiest brew blends the flavor of
pale, crystal, dark malts and roasted barley,  balanced with the subtle aroma of
Styrian Golding hops, and is offered from February through April.

     Portland Pale Ale (also known as Kornhauser's  Oast Ale). A modified recipe
of the founders'  original is a clean light-bodied malt ale with ample hop aroma
and a crisp refreshing  finish. The ale is brewed with two-row barley malt and a
blend of  Northwest  hops,  including  an aromatic  hop oil extract  added after
filtration, and is offered from April through August.

     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
Northern Brewer and Bohemian Saaz hops, and is offered in September and October.

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

Saxer Brewing Company brands include:

     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.

     Saxer Dunkel Bock.  This beer is also brewed in the true Bavarian style but
with darker malts delivering a very rich, roasted malt sweetness.

     Saxer Pilsner.  This beer is a golden lager  replicating the tradition that
started in Pilsen, Czech Republic (then Bohemia, Germany). It is very dry to the
palate yet it is very aromatic because of its unique hopping.

     Saxer Lemon Lager.  This is a lager beer with sucrose and flavorings  added
to make a unique refreshing citrus taste.

Nor'wester brands include:

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

     Raspberry  Hefe-weizen.  This is a wheat ale flavored  with  raspberry  and
other natural  flavors left  unfiltered to preserve all the natural  flavors and
aromas.

     Nor'wester  Oregon Pale Ale.  This is a blonde ale with a crisp hop profile
and full-bodied malt character.

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

     Mr. Angel  Oktoberfest.  This is a classic  Munich-style  lager  originally
brewed to celebrate the wedding of the Prince of Bavaria.

                                       4

<PAGE>


Restaurant

The  Company  operates  a  restaurant,  The Tap Room,  which is  located  at the
Company's brewery. The Tap Room is a tasting room and restaurant that is upscale
in  comparison  to other  brewpubs  in the  region.  The Tap Room has a European
atmosphere, a wood-burning fireplace, outdoor patio and a terrace with an arbor.

Marketing and Sales

The Company uses both licensed beer and wine distributors/wholesalers to sell to
and service on- and off-premise  accounts for specific  geographic  territories.
These  distributors  maintain broad  distribution  in the Company's core markets
i.e., 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 state wide basis  handling  most of the
Company's sales to that state.  The Company  expects that Columbia  Distributing
and Wine Warehouse will continue to be large volume distributors of its products
in 2000.  Approximately  73  distributors  represent  the Company in its Western
Markets and the Company employs 11 salespeople to service its core markets:  six
in Oregon, three in Washington, and two in California.  Additionally,  one brand
manager,  two  salespeople and two drivers are employed to support the Saxer and
Nor'wester  brands.  Because of the excess  capacity  in the  industry,  and the
mature markets of the Pacific  Northwest,  the Company has been expanding  sales
into other markets for the last three years and is now represented in 44 states.
Shipments for all markets east of the Rocky Mountains accounted for 9% and 8% of
total  shipments  in  1999  and  1998,   respectively.   With  consolidation  of
independent  distributors  accelerating,  the Company may be required to further
adjust its distribution arrangements in the future.

The Company's 1999 marketing plan focused on key western U.S. markets  including
Oregon,  Washington and California.  Secondary  markets include virtually all of
the western  United States  including  Hawaii and Alaska and many states east of
the Rocky Mountains.

The  Company  has  shifted its focus to  individual  brands and  especially  its
flagship,  MacTarnahan's  Scottish  Style  Amber Ale,  from the family of brands
approach it had been following.  Going forward, the Company plans to continue to
direct  a  significant   portion  of  its  marketing   budget  toward  promoting
MacTarnahan's  Scottish Style Amber Ale while secondary brands will receive less
support.  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  Trailblazers  and the  Highland  Games in  Oregon  and
California.  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.  In Oregon,  the Company  focuses
equally on draft and package sales.

Trademarks

The Company has a program to obtain United States  trademark  registrations  for
its key bottled brands. The Company owns federal trademark registrations for the
names Portland Brewing,  MacTarnahan's,  Haystack Black, ZigZag River Lager, and
Woodstock  IPA;  the  Oregon  Honey Beer label  design and  MacTarnahan's  label
design; and the mark Portland Brewing.  The Company has pending applications for
federal  registration of the brand names Thunderhead  Cream Stout,  BobbyDazzler
Ale,  "Mac's"  and the  running Mac design  icon.  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 long  maintained  a practice of  registering  its brand names as
trademarks  in the State of Oregon.  It owns Oregon  registrations  for numerous
marks,  including  the brand names  Haystack  Black,  Uncle Otto's  Oktoberfest,
Portland Porter,  Portland Brewing,  Portland Ale and Malarkey's Wild Irish Ale.
In addition, the Company owns state registrations in California,  Washington and
Colorado for key brand names. 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.

                                       5
<PAGE>


In January  2000,  the Company  acquired from Saxer  Brewing  Company  federally
registered trademarks for the names Nor'wester,  Saxer, Three Finger Jack, Peach
Creme, Blacksmith, 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.

Competition

The specialty  brewing industry has experienced  significant  change in the past
several years. Growth rates have slowed,  distribution opportunities have become
limited,  and more brewers have entered the industry.  The Company believes that
category  saturation  continues  to make  growth  more  difficult  for  existing
regional  specialty  brewers,  and that  competition  affecting  its growth will
continue to come from imported beers,  national  breweries,  national  specialty
breweries,  larger regional  specialty  breweries with aggressive mass marketing
capabilities,  and small micro  breweries  and brew pubs which have strong local
appeal.  The  proliferation  of  specialty  brewers,  new beers,  and brew pubs,
efforts by regional  craft  brewers to expand their  production  capacities  and
distribution,  and  underutilized  domestic brewing capacity are all competitive
factors for  specialty  brewers.  Additionally,  larger  national  brewers  have
developed or are developing  brands to compete  directly with  specialty  beers.
These national  competitors  have  advantages  such as lower  production  costs,
larger  marketing  budgets,  greater  financial  and  other  resources  and more
developed and extensive distribution networks than the Company.

Sales of domestic  specialty  beer to chain stores  increased  only an estimated
1.3% in 1999,  compared to 0.6% in 1998 and 8% percent in 1997. (Beer Marketer's
Insights - February 2000) In the northwestern U.S. markets,  the top 10 domestic
specialty brewers experienced mixed performance in 1999 as four of them reported
sales  decreases  in  California  and  Oregon,  and six of them  reported  sales
decreases in Washington.  (Oregon Liquor Control Commission and Washington State
Liquor Control Board, November 1999 data)

As distributors and retailers become more selective in accepting new brands, the
rate of domestic specialty brewery openings continues to decline. In 1999 in the
U.S., 39 domestic  specialty  breweries opened and 47 closed.  However,  in that
same time period,  125  BrewPubs  opened and 66 closed,  indicating  significant
growth in these  venues.  (Institute of Brewing  Studies,  February  2000).  The
Company believes that price discounting,  solidifying distribution,  maintaining
shelf space and increasing  sales and marketing  efforts will continue to be key
to near and long term survival.

Growing demand for imported beer has also negatively  impacted sales of domestic
specialty  beer.  Import sales  increased  21% in Oregon and 9% in Washington in
1999,  compared to 1998.  Nationally,  import beers outsell  domestic  specialty
beers  approximately  three to one. However,  in the northwestern U.S., domestic
specialty  beers outsell  imports  approximately  four to three.  (Oregon Liquor
Control Commission and Washington State Liquor Control Board November 1999 data)

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.

License  Description.  The Company operates under a Brewery Public House license
which allow sales  off-premise as well as through up to two retail outlets.  The
Company operates one restaurant at its brewery.  The Company is currently in the
process  of  changing  its  license  to a  Brewery  license,  which  will  allow
production,  sales and  distribution.  Breweries under 200,000 barrels of annual
production are also allowed to have one retail outlet on brewery premises,  i.e.
The Tap Room.

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 and a Washington excise tax of $4.78 per barrel on beer sold in those
states.  In other

                                       6
<PAGE>


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 host liquor 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 1999 and 1998,
and had no customer  sponsored  research and development  activities during such
periods.  However,  the Company has from time to time,  developed  new products.
Such  products  are  sold  to  retail  customers  and,  accordingly,  associated
development costs are expensed as cost of goods sold.

Employees

As of December 31, 1999, the Company had 99 employees (84 full time),  including
33 in brewing, bottling and shipping operations, 36 in retail operations, six in
administration,  19 in sales and marketing and five 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.  No
contributions  were made by the Company to the 401(k) plan in 1999 or 1998.  The
Company believes its employee relations are good.

Concentrations of Risk

Distributor Concentration.  In 1999, wholesale distributors accounted for 84% of
the Company's shipments, of which 54% 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 40% of
the  Company's  net sales in 1999.  The next largest  distributor  accounted for
approximately  16% of the Company's net sales for the same period.  Distribution
agreements generally grant exclusive  territories to distributors.  Distribution
agreements  and  applicable  state  laws  limit the  ability  of the  Company to
terminate such agreements. 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  market and distribute the Company's
beer. Because state liquor laws and/or standard contractual provisions limit the
Company's ability to terminate a distribution agreement, 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, the Company's largest distributor.

Increased  Competition  and  Saturation in the  Specialty  Beer  Industry.  (See
"Overview" and "Competition" above.) Increased competition and the proliferation
of brands in the  specialty  beer  industry  has 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  specialty  beer  industry will
experience  growth,  that it will not experience a


                                       7
<PAGE>


downturn or that any downturn will not be severe.  The Company's  future success
will depend upon its ability to continue to build brand  awareness  and increase
sales and profits.

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 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 business interruption  insurance to cover against insured losses
to equipment from direct physical damage.

Environmental Matters

The Company has  addressed  the waste water  treatment  issues raised in a March
1998 letter from the City of Portland,  Oregon. In 1999, the Company implemented
a solution to ensure continued compliance with appropriate  standards which cost
approximately  $65,000.  The  Company  is not aware of any  other  environmental
matters.

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.

In 1998, the Company recorded an extraordinary  gain of $1,200,279  related to a
debt restructuring.  In connection with the debt restructuring,  the MacTarnahan
Limited  Partnership (a related party) purchased certain secured Company debt of
the  Company,  which in turn  resulted in a net loan payable from the Company to
the MacTarnahan Limited Partnership of $2.1 million.  (See Item 11 - Interest of
Management and Others in Certain  Transactions - Purchase and  Restructuring  of
Secured  Debt.)  The  $2.1  million  term  loan  ("Term  Loan")  is  secured  by
receivables,  inventory,  equipment and general intangibles of the Company.  The
Term Loan bears  interest at a per annum rate equal to the prime lending rate of
the Bank of the Northwest plus 1% (9.5% at December 31, 1999). The Term Loan was
originally due on January 31, 2000. On January 31, 2000, the available borrowing
capacity of the Term Loan was increased to $2,500,000  and the maturity date was
extended to April 1, 2001.  In March 2000,  the Company  borrowed an  additional
$400,000 under the Term Loan and paid $400,000 of the amounts  outstanding under
its revolving line of credit (see below).  The Company expects to place the debt
permanently  with a financial  institution  by April 1, 2001 or pay off the debt
through the raising of additional  capital.  There can be no assurance  that the
Company will be able to obtain permanent financing from a financial  institution
or that the Company  will be able to raise  additional  capital on  commercially
reasonable  terms or at all. (See Item 11 - Interest of Management and Others in
Certain Transactions - Purchase and Restructuring of Secured Debt.)

In 1998,  the Company was  relieved  of $272,915 of trade  accounts  payable and
issued notes in the aggregate  principal  amount of $148,065 to trade creditors,
to be paid over a five-year  period.  The notes  mature on September 1, 2003 and
bear  interest  at 6%  per  annum.  At  December  31,  1999,  $112,805  remained
outstanding under these notes.

The  Company has a $750,000  revolving  line of credit  ("Revolving  Line") with
Washington  Mutual  Bank  (d.b.a.   Western  Bank),  under  which  $435,465  was
outstanding  at December 31, 1999.  Payment of the Revolving  Line is secured by
certain of the  Company's  assets and is  guaranteed by certain of the Company's
shareholders.  Interest  is  payable  monthly at a per annum rate equal to prime
rate plus 1% (9.5% at December 31, 1999).  In February  2000, the Revolving Line
was increased to  $1,000,000,  and the  expiration  date was extended to June 1,
2001. In March 2000, the Company paid $400,000 of the amounts  outstanding under
the Revolving Line.

                                       8

<PAGE>

On March 1, 1999,  Harmer Mill & Logging Supply Co. (dba Harmer Company) and the
Charles A. Adams  Family  Trust each  purchased  2,885  shares of the  Company's
Series A Preferred Stock ("Series A") for $52 per share,  resulting in aggregate
proceeds to the Company of $300,040.  (See Item 11 - Interest of Management  and
Others in Certain Transactions -Series A Preferred Stock.)

In  December  1997,  the Company  borrowed a total of  $400,000  from two of its
shareholders under 10% Amortizing  Subordinated  Notes (the "Notes").  On August
25,  1998,  the two  shareholders  agreed to cancel  the Notes in  exchange  for
645,162  shares of the Company's  Common  Stock,  resulting in the issuance of a
total of 1,290,324  shares.  (See Item 11 - Interest of Management and Others in
Certain Transactions - 10% Amortizing Subordinated Notes.)

Liquidity Risks

Competition.  The  Company  operates in the  specialty  beer  industry.  Intense
competition and the proliferation of new brands has 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 "Overview" and "Competition" above.)

Operating Losses. The Company  experienced  significant  operating losses during
the years ended  December 31, 1999,  1998 and 1997,  and has  continued to incur
losses in the first quarter of 2000.  Operating results have and may continue to
fluctuate as a result of many factors  including lower sales volumes and selling
prices,  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,  increased  selling and marketing  costs incurred as the
Company protects its business in existing  markets and increased  transportation
costs as it develops business in new geographic markets.

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 Company  believes  that the  additional  volume will
strengthen  its financial  performance  over time.  However,  the production and
distribution  of the Saxer and Nor'wester  brands  requires  additional  working
capital.  The Company has also  agreed to pay  certain  amounts  based on barrel
sales of the Saxer and Nor'wester  brands.  Subsequent to December 31, 1999, the
Company  increased  its Term Loan  from $2.1  million  to $2.5  million  and its
Revolving  Line from  $750,000 to  $1,000,000  to  accommodate  its  anticipated
additional  working  capital needs.  There are no assurances 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.

Ability to Refinance  or Retire  Outstanding  Debt.  The Company has a Term Loan
payable  to the  MacTarnahan  Limited  Partnership  (a  related  party)  of $2.1
million.  The Term Loan was  originally  due on January 31, 2000. On January 31,
2000,  the  available  borrowing  capacity  of the Term  Loan was  increased  to
$2,500,000  and the maturity  date was extended to April 1, 2001. In March 2000,
the  Company  borrowed  an  additional  $400,000  under  the Term  Loan and paid
$400,000  of the  amounts  outstanding  under its  Revolving  Line.  The Company
expects to place the debt permanently  with a financial  institution by April 1,
2001 or pay off the debt through the raising of additional capital. There can be
no assurance that the Company will be able to obtain permanent  financing from a
financial  institution  or that the  Company  will be able to  raise  additional
capital on commercially  reasonable  terms or at all. (See Item 11 - Interest of
Management and Others in Certain  Transactions - Purchase and  Restructuring  of
Secured Debt.)

The Company's working capital requirements over the next year are expected to be
met 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.  There can be no assurance the Company will be able to raise
additional funds through equity offerings or additional borrowings.

                                       9
<PAGE>


Year 2000 Issue

Costs directly related to Year 2000 remediation  efforts were immaterial in 1999
and the Company does not expect to incur  additional  expense in addressing Year
2000 issues. As of the date of this filing,  the Company has not experienced any
Year 2000 issues with  respect to its  computer  equipment  and  software or any
disruptions with its significant vendors or customers, or problems in processing
orders and billings.  Additionally, the Company has not experienced difficulties
relating  to Year 2000  issues  resulting  in  disruption  of  service  from its
infrastructure  suppliers or its  telecommunications  and transportation  supply
channels.

Item 7.  Description of Property
-------  -----------------------

The Company's brewery, located at 2730 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 display the copper brewing vessels), and
3,000 square feet of offices.  Also included is a 3,000 square foot  restaurant,
The Tap Room,  complete with an outdoor seating area. The brewery lease is for a
15 year term which  commenced  June 15,  1993.  The monthly rent is $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
increased rental adjustment was determined subsequent to July 1, 1998, resulting
in a $19,922 charge which was paid by the Company in twelve monthly installments
beginning  February  1,  1999.  (See  Notes  7 and 9 of  Notes  to  Consolidated
Financial  Statements  and Item 11- Interest of Management and Others in Certain
Transactions - Lease Agreement with Portland Brewing Building, L.L.C.)

In May  1999,  the  Company  entered  into a  lease  with a  related  party  for
approximately  23,000  square feet of space in a building  adjoining its brewery
located at 2750 NW 31st Avenue in Portland,  Oregon ("Adjacent  Building").  The
initial term of the lease is five years, with an option to extend the term until
June 14,  2008,  with base rent of $12,000 per month,  plus a share of taxes and
operating expenses.  The Company subleases  approximately  13,000 square feet of
the Adjacent  Building to Power  Transmission  Products,  Inc. for approximately
$5,000 per month.  The sublease  expires in April 2000, with a one-year  renewal
option.  In March 2000,  the Company  reduced the amount of  subleased  space by
taking back for its own use  approximately  4,700 square feet, which will reduce
the sublease amount to approximately $3,200 per month. In 1999, L & L reimbursed
the Company  $218,000 for its costs in  constructing  the shipping  dock at this
property in 1996. (See Note 9 of Notes to Consolidated  Financial Statements and
Item 11-  Interest  of  Management  and Others in Certain  Transactions  - Lease
Agreement with L & L Land Company.)

In October 1999, in connection  with the purchase of 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 Note 9 of Notes to Consolidated  Financial Statements and Item 11-
Interest of Management and Others in Certain Transactions - Acquisition of Harco
Products, Inc. and Note 3 of Notes to Consolidated Financial Statements)

                                       10

<PAGE>


Item 8.  Directors, Executive Officers and Significant Employees
-------  -------------------------------------------------------

Directors.  The following lists the persons currently serving as directors along
with  certain  information.  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                      53
                     Frederick L. Bowman                          55
                     Steven C. Goebel                             45
                     Robert M. MacTarnahan                        85
                     R. Scott MacTarnahan                         53
                     Howard M. Wall, Jr.                          54


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.

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 both a technician and a 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.

Steven C. Goebel.  In connection  with the Company's  purchase of certain assets
from Saxer Brewing Company in February 2000, Mr. Goebel was appointed a Director
of the Company.  Mr.  Goebel has been a director and  president of Saxer Brewing
Company  since  1995.  Prior  to  that,  Mr.  Goebel  was  employed  by The Mead
Corporation  for twelve  years in  various  marketing,  sales and  manufacturing
positions. Mr. Goebel is a graduate of the University of Cincinnati and has also
completed The Program for Management Development at Harvard School of Business.

Robert M. MacTarnahan.  Mr. MacTarnahan has been a Director since July 1985. Mr.
MacTarnahan has been a partner in Harmer Company and Black Lake  Investments for
more than five years.  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's Ale is named after him. See "Certain
Relationships And Related 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 10 years.  Mr.  MacTarnahan  received  a B.S.  in
Business  Administration  from Portland State  University in 1968. Mr. Robert M.
MacTarnahan is his father.

                                       11

<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.


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    53    Chairman of the Board, President and Chief
                                      Executive Officer
     Glenmore James             45    Executive Vice President, Chief Financial
                                      Officer and Chief Operating Officer
     Frederick L. Bowman        55    Vice President, Treasurer and Secretary
     Mark Carver                46    Vice President, Sales
     Michael Skelley            38    Vice President, Sales

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

Glenmore James.  Mr. James has been Executive Vice President and Chief Financial
Officer since June 1994,  served as Executive  Vice President and Treasurer from
June 1994 until July 1997,  and served as Secretary  from  September  1996 until
July 1997. In July 1997 Mr. James was elected Chief Operating Officer. He joined
the  Company  full-time  in April  1994.  Prior to that,  Mr.  James  acted as a
consultant  to the  Company.  Mr. James is  responsible  for the  financial  and
operations  departments  of the  Company.  Mr.  James has worked for over twenty
years in the Portland area business community, initially in financial accounting
management  positions in various  manufacturing  and distribution  companies and
more recently as an independent business consultant. Mr. James received his ICSA
certification in 1976 from Anglia University, England.

Mark 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.

Michael  Skelley.  Mr. Skelley has been Vice  President,  Sales since  September
1999, has served as Director of Sales & Marketing - Central and Eastern  markets
from January 1998 until  September 1999, and has served as General Sales Manager
- Midwest and East from June 1996 until January 1998.  Mr. Skelley has worked in
the beverage  industry for 12 years and has 17 years of consumer  product  sales
and marketing  experience.  Mr. Skelley  received his Bachelor of Arts Degree in
Business Administration/Marketing in 1984 from Coe College, Cedar Rapids, Iowa.

                                       12


<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.
Each Director,  with the exception of Mr. Adams,  has been granted options under
the  Company's  Non-Qualified  Stock Option Plan  ("NQSOP").  As of December 31,
1999, 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 1999.

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, 1999.

                       Capacities in Which                          Aggregate
     Name              Remuneration Was Received                    Remuneration
     ----              -------------------------                    ------------
Mark Carver            Vice President, Sales                        $   77,696

Glenmore James         Executive Vice President, Chief Financial
                       Officer and Chief Operating Officer             106,749

Michael Skelley        Vice President, Sales                           104,012

All officers as
a group (5 persons)                                                $   413,575

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,
1999,  options  covering  361,550  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  become  exercisable  on May 20,
2000.

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 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 1999 or 1998 under the Plan.

                                       13

<PAGE>


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, 1999,  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 1, 2000 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 (13)
                                                  ---------------------------   --------------------------
                                                     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 (12)                        2,376,697.5      46.4  %       5,770         100  %

      Robert M. MacTarnahan (2) (3) (12)            2,376,697.5      46.4          5,770         100

      R. Scott MacTarnahan (2) (4) (12)             2,376,697.5      46.4          5,770         100

      Charles A. (Tony) Adams (2) (5) (12)          2,376,697.5      46.4          5,770         100

      Saxer Brewing Company (7)                       900,000        18.1
      5875 SW Lake View Blvd.
      Lake Oswego, OR 97035

      Frederick L. Bowman (2) (6)                      72,445         1.4             -           -

      Steven C. Goebel (2) (7)                               --        --             -           -

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

      Michael Skelley (2) (9)                          25,000           *             -           -

      Glenmore James (2) (10)                          79,500         1.6             -           -

      All Officers and Directors as a group,
      (nine persons)  (11) (12)                     2,593,392.5      49.1  %       5,770         100  %

</TABLE>

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

     (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.

                                       14

<PAGE>

     (3)  Includes   22,860   shares  owned   individually   by  Mr.  Robert  M.
          MacTarnahan,  433,971  shares owned by the  MacTarnahan  Family Trust,
          73,335 shares held by Black Lake  Investments  and 765,162 shares held
          by Harmer  Mill & Logging  Supply Co. (dba  Harmer  Company),  each of
          which is controlled by Mr. and Mrs.  Robert M.  MacTarnahan and Mr. R.
          Scott MacTarnahan, 43,848.75 shares which may be purchased for $3.3333
          per share  upon  exercise  of a warrant  held by  MacTarnahan  Limited
          Partnership, whose general partner is Harmer Mill & Logging Supply Co.
          and whose limited partners are Mr. Robert M. MacTarnahan and Mrs. Ruth
          MacTarnahan  and 6,000 shares  which may be purchased  for $5.3333 per
          share upon exercise of a non-qualified stock option held by Mr. Robert
          M. MacTarnahan. See note 12.

     (4)  Includes   108,492   shares  owned   individually   by  Mr.  R.  Scott
          MacTarnahan,  73,335  shares held by Black Lake  Investments,  765,162
          shares  held by Harmer  Mill &  Logging  Supply  Co,  each of which is
          controlled by Mr. Robert M. MacTarnahan and Mr. R. Scott  MacTarnahan,
          600 shares held by Mr. R. Scott MacTarnahan's spouse, 43,848.75 shares
          which may be purchased for $3.333 per share upon exercise of a warrant
          held by  MacTarnahan  Limited  Partnership,  whose general  partner is
          Harmer Mill & Logging  Supply Co. and whose  limited  partners are Mr.
          Robert M. MacTarnahan and Mrs. Ruth MacTarnahan and 6,000 shares which
          may be purchased for $5.333 per share upon exercise of a non-qualified
          stock option held by Mr. R. Scott MacTarnahan. See note 12.

     (5)  Includes  180,300  shares held by Electra  Partners,  Inc.,  an entity
          controlled by Mr. Adams,  666,192  shares held by Mr. Adams as Trustee
          of the Charles A. Adams Family  Trust,  525 shares held by Mr.  Adams'
          daughter and 525 shares held by Mr. Adams' son, 32,886.75 shares which
          may be  purchased  for  $3.3333  upon  exercise  of a warrant  held by
          Electra  Partners,  Inc. and 36,000  shares which may be purchased for
          $0.594 per share upon exercise of incentive  stock options held by Mr.
          Adams. See note 12.

     (6)  Includes 44,445 shares owned  individually  by Mr. Bowman,  and 28,000
          shares  which may be  purchased  for $0.54 per share upon  exercise of
          incentive stock options held by Mr. Bowman.

     (7)  The information as to beneficial  ownership is based on a Schedule 13D
          filed with the  Securities  and Exchange  Commission  by Saxer Brewing
          Company on February 8, 2000,  reflecting its  beneficial  ownership of
          Common  Stock as of January 31,  2000.  The  Schedule  13D states that
          Saxer  Brewing  Company has sole voting  power with respect to 900,000
          shares  of  Common  Stock.  Mr.  Goebel,  who is a  director  and  the
          president of Saxer Brewing Company,  disclaims beneficial ownership of
          these shares.

     (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

     (9)  Includes 25,000 shares which may be purchased for $0.54 per share upon
          exercise of incentive stock options held by Mr. Skelley.

     (10) Includes  1,500  shares  owned  individually  by Mr.  James and 78,000
          shares  which may be  purchased  for $0.54 per share upon  exercise of
          incentive stock options held by Mr. James.

     (11) Includes 208,500 shares which may be purchased for prices ranging from
          $0.54 to $5.33 per share,  upon  exercise of stock options held by all
          Directors and officers,  as a group.  Includes  43,848.75 shares which
          may be purchased for $3.3333 per share upon exercise of a warrant held
          by MacTarnahan  Limited  Partnership and 32,886.75 shares which may be
          purchased  for  $3.3333  upon  exercise  of a warrant  held by Electra
          Partners, Inc.

                                       15

<PAGE>


     (12) Robert M. MacTarnahan,  Robert S.  MacTarnahan,  Harmer Mill & Logging
          Supply Co. (dba Harmer Company) (11416 SW Lynnridge,  Portland, Oregon
          97225), MacTarnahan Family Trust (11416 SW Lynnridge, Portland, Oregon
          97225), Black Lake Investments (11416 SW Lynnridge,  Portland,  Oregon
          97225), MacTarnahan Limited Partnership (11416 SW Lynnridge, Portland,
          Oregon  97225),  Charles  A.  Adams,  Electra  Partners,   Inc.  (1765
          Farmington Road, Aloha,  Oregon 97007) and the Charles A. Adams Family
          Trust (4047  Shattuck Road,  Portland,  Oregon 97221) are members of a
          "group" as that term is used in  Section  13(d)(3)  of the  Securities
          Exchange  Act of 1934 ("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 2,376,697.5 shares of Common
          Stock.  Because each member of the group shares  investment and voting
          control  of the group  shares,  each  member of the group is deemed to
          beneficially  own all  shares of the group.  Therefore,  (a) Robert M.
          MacTarnahan  is  deemed to  beneficially  own  1,031,520.75  shares of
          Common  Stock in  addition to the shares  described  in note 3, (b) R.
          Scott MacTarnahan is deemed to beneficially own 1,379,259.75 shares of
          Common  Stock in addition to the shares  described  in note 4, and (c)
          Charles A. Adams is deemed to beneficially own 1,460,268.75  shares of
          Common  Stock in addition to the shares  described in note 5. See note
          13 regarding Series A Preferred Stock.

     (13) On March 1,  1999,  Harmer  Mill &  Logging  Supply  Co.  (dba  Harmer
          Company) and the Charles A. Adams Family  Trust each  purchased  2,885
          shares of the Company's  Series A Preferred Stock ("Series A") for $52
          per share, resulting in aggregate proceeds to the Company of $300,040.
          As noted  above in note 12,  Harmer  Company  and the Charles A. Adams
          Family  Trust 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 5,770 shares of Series A stock.
          Because each member of the group shares  investment and voting control
          of  the  group  shares,   each  member  of  the  group  is  deemed  to
          beneficially own all shares of the group.


                          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 1,
2000 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>

MacTarnahan Limited Partnership
(1)                                              43,848.75                   $3.333                 (2)
Electra Partners, Inc. (1)                       32,886.75                   $3.333                 (2)
Robert M. MacTarnahan (1)                         6,000                      $5.333                 (2)
R. Scott MacTarnahan (1)                          6,000                      $5.333                 (2)
Charles A. (Tony) Adams (1)                      36,000                      $0.594                 (3)
Frederick L. Bowman                              28,000                      $0.54                  (4)
Mark Carver                                      28,000                      $0.54                  (5)
Michael Skelley                                  25,000                      $0.54                  (6)
Glenmore James                                   78,000                      $0.54                  (7)
All Directors and officers as
 a group, (nine persons)                        285,235.5                   $0.54-$5.33             (8)

</TABLE>

                                       16

<PAGE>

     (1)  As noted in Item 10 - Security  Ownership  of  Management  and Certain
          Security Holders,  Footnote 12, 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  124,735.5  shares  of  Common  Stock  which may be
          acquired under outstanding options and warrants, as noted in the table
          above.  Because each member of the group shares  investment and voting
          control  of the group  shares,  each  member of the group is deemed to
          beneficially own all shares of the group.

     (2)  Options and warrants are currently exercisable.

     (3)  Options to purchase  36,000 shares of Common Stock issued to Mr. Adams
          in  November  1994 at $5.86 per  share  were  repriced  in May 1999 to
          $0.594 per share.  These options  become  exercisable on May 20, 2000.
          See  "Remuneration  of Directors and  Officers-Incentive  Stock Option
          Repricing."

     (4)  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. All
          of Mr.  Bowman's  outstanding  options  become  exercisable on May 20,
          2000.

     (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 at $0.54 per
          share.  See  "Remuneration of Directors and  Officers-Incentive  Stock
          Option  Repricing."  All of Mr.  Carver's  outstanding  options become
          exercisable on May 20, 2000.

     (6)  Options  to  purchase  25,000  shares  of Common  Stock  issued to Mr.
          Skelley in August,  1996 at $7.00 per share were  repriced in May 1999
          at   $0.54   per   share.   See   "Remuneration   of   Directors   and
          Officers-Incentive  Stock  Option  Repricing."  All of  Mr.  Skelley's
          outstanding options become exercisable on May 20, 2000.

     (7)  Options to purchase  28,000 shares of Common Stock issued to Mr. James
          at various dates from  November  1994 to April 1997 at prices  ranging
          from $5.33 to $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. James was granted
          options to purchase 50,000 shares Common Stock at $0.54 per share. All
          of Mr. James' outstanding options become exercisable on May 20, 2000.

     (8)  As of December 31, 1999,  options to purchase  13,500 shares of Common
          Stock were  exercisable.  Options to purchase  the  remaining  195,000
          shares of Common  Stock  become  exercisable  on May 20,  2000.  As of
          December  31,  1999,  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 certain assets (equipment and brands)
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

                                      17

<PAGE>


Company and Mr.  Goebel  entered  into a  consulting  agreement  under which Mr.
Goebel  will  provide  consulting  services  to the  Company  relating  to brand
management  and  marketing,  for  $4,500  per month.  The  consulting  agreement
terminates  on May 31, 2000,  and can be extended to June 30, 2000 at the option
of the Company.

In connection with the purchase,  Charles A. Adams,  the Charles A. Adams Family
Trust,  Electra  Partners,  Inc. and Mr. Adams' children  ("Adams  Parties") and
Robert M. MacTarnahan,  R. Scott MacTarnahan and certain entities  controlled by
them ("MacTarnahan  Parties") entered into a voting agreement.  Under the voting
agreement,  the Adams Parties and MacTarnahan  Parties agreed to vote all shares
of the Company's Common Stock owned or acquired by them, for Steven C. Goebel as
a director of the Company, at each annual meeting of the Company's shareholders,
or at any special  meeting of the Company's  shareholders at which directors are
elected, through January 31, 2003, subject to certain conditions as specified in
the voting agreement.

Acquisition of Harco Products, Inc.

In October 1999,  the Company  acquired all of the  outstanding  common stock of
Harco Products,  Inc., ("Harco"), an entity controlled by Mr. and Mrs. Robert M.
MacTarnahan and Mr. R. Scott MacTarnahan. Harco produces hand trucks for various
industrial  uses.  The purchase  price of $569,585,  was paid by the issuance of
759,447  shares  the  Company's  common  stock  valued  at $0.75 per  share.  In
connection  with the  acquisition,  the Company  received and  cancelled  30,000
shares of its  Common  Stock  that were  owned by Harco.  See Note 3 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.

In connection with the purchase of Harco,  the Company entered into a lease with
the McTarnahan Limited Partnership, 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.

Lease Agreement with Portland Brewing Building, L.L.C.

In November 1992,  the Company  executed a triple net, 15 year lease (with three
five-year  renewal options) with Portland Brewing  Building  Partners  ("Brewing
Partners"),  which developed the Company's new brewery at 2730 NW 31st Avenue in
Portland.  The Company  believes that the terms and conditions of its lease,  as
amended,  are fair and  reasonable and are no less favorable to the Company than
could be obtained from unaffiliated parties. Brewing Partners was an equal 50/50
partnership of Electra Partners,  Inc. ("Electra"),  a company controlled by Mr.
Adams, and Harmer Mill & Logging Supply Co. ("Harmer"),  a company controlled by
Mr. and Mrs. Robert M. MacTarnahan. In 1995, after a series of transactions, the
property and the lease were contributed to Portland Brewing Building, LLC, which
is owned 50% by MacTarnahan Limited Partnership (whose general partner is Harmer
and whose  limited  partners are Robert M.  MacTarnahan  and Ruth  MacTarnahan);
25.1604% by Electra;  and 24.8396% by L & L Land Company (a general  partnership
consisting  of Howard M. Wall, a director of the Company and his wife,  Patricia
Wall).  In connection with the  negotiation of this lease,  MacTarnahan  Limited
Partnership  and  Electra  Partners,  Inc.  each were  issued  warrants  for the
purchase of 43,848.75  shares of Common Stock,  exercisable  at any time through
December 31, 2002, at an exercise price of $3.333 per share.

The monthly rent is $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 increased rental adjustment was determined subsequent
to July 1,  1998,  resulting  in a  $19,922  charge  which is being  paid by the
Company in twelve  monthly  installments  which began on  February  1, 1999.  In
December  1997,  in connection  with the issuance of $400,000 of 10%  Amortizing
Subordinated  Notes,  the lease  payments were reduced by $5,000 for

                                       18

<PAGE>


each of the months of January  through July 1998,  and by $3,060 for each of the
months of August and September 1998.

Lease Agreement with L & L Land Company

In May 1999,  the Company  entered into a lease of  approximately  23,000 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. 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 by
taking back for its own use  approximately  4,700 square feet, which will reduce
the sublease amount to  approximately  $3,200 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 Mill & Logging
Supply  Co.  ("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  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 1999 and 1998 were $27,245 and $24,426, respectively, based on the
sale of 27,245 and 24,426 barrels, respectively, of MacTarnahan's Ale during the
same periods.

10% Amortizing Subordinated Notes

In  December   1997,  the  Company   borrowed   $400,000  under  10%  Amortizing
Subordinated  Notes (the "Notes").  Of the $400,000,  $200,000 was borrowed from
each of (i) Harmer Mill & Logging  Supply Co. (dba  Harmer  Company),  an entity
controlled by Robert M. MacTarnahan, a Director of the Company; and (ii) Charles
A. Adams Family Trust, an entity  controlled by Charles A. Adams,  the Company's
President.  On August 25, 1998, the two shareholders  agreed to cancel the Notes
in exchange for 645,162 shares of the Company's  Common Stock,  resulting in the
issuance of a total of 1,290,324 shares.

Series A Preferred Stock

On March 1, 1999,  Harmer and the Charles A. Adams Family  Trust each  purchased
2,885 shares of the Company's  Series A 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-

                                       19

<PAGE>


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. 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.  No dividends have been declared to date. In the event of any liquidation
or dissolution of the Company, either voluntary or 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 per share for each share of Series A and, in  addition,  an
amount equal to all declared but unpaid dividends on Series A.

Purchase and Restructuring of Secured Debt

On August 17, 1998, the MacTarnahan Limited Partnership purchased  approximately
$3.5 million of secured Company debt held by Bank of America, NT&SA ("Debt") and
evidenced by a Business Loan Agreement dated as of December 15, 1995, as amended
("Bank of America Loan Agreement"), a Security Agreement (receivables, inventory
and  equipment)  dated  December 15, 1995 and related UCC  financing  statements
("Security Agreement"). In addition, on August 17, 1998 the Company entered into
a Credit and Forbearance Agreement ("Credit and Forbearance Agreement") with the
MacTarnahan  Limited  Partnership  pursuant  to which  the  MacTarnahan  Limited
Partnership  agreed to forbear from  exercising its remedies with respect to the
Debt and agreed to make up to an additional $600,000 in working capital advances
to the Company  pursuant to a Promissory  Note dated August 17, 1998  ("$600,000
Note") which was secured by the Security Agreement.

In September 1998, the Company entered into a revolving loan with a bank,  which
replaced  the  $600,000  Note,  and in August  1999,  the Company  replaced  the
$600,000  revolving loan with new $750,000 Revolving Line. The Revolving Line is
guaranteed by Robert M. MacTarnahan,  Charles A. Adams,  Charles A. Adams Family
Trust, Harmer Mill & Logging Supply Co. and MacTarnahan Limited Partnership.  In
February  2000,  the  Revolving  Line  was  increased  to  $1,000,000,  and  the
expiration  date was extended to June 1, 2001.  In March 2000,  the Company paid
$400,000 of the amounts outstanding under the Revolving Line.

On  November  18,  1998,  the Company and the  MacTarnahan  Limited  Partnership
entered into a Loan Restructuring  Agreement  ("Restructuring  Agreement") which
replaced  the Bank of America  Loan  Agreement  and the  Credit and  Forbearance
Agreement and reduced the  outstanding  amount of the loan  previously due under
the Bank of America  Loan  Agreement  (which was  subsequently  assigned  to the
MacTarnahan  Limited  Partnership)  to  approximately  $2,100,000.  This in turn
resulted  in a net loan  payable  from the  Company to the  MacTarnahan  Limited
Partnership  of $2.1  million,  which  is  secured  by  receivables,  inventory,
equipment  and general  intangibles  of the Company,  and bears  interest at the
prime lending rate of Bank of the Northwest plus 1% per annum. This loan was due
on January 31, 2000. On January 31, 2000,  the available  borrowing  capacity of
the Term Loan was increased to $2,500,000  and the maturity date was extended to
April 1, 2001. In March 2000, the Company borrowed an additional  $400,000 under
the Term Loan and paid $400,000 of the amounts  outstanding  under its Revolving
Line.

In connection with the  Restructuring  Agreement,  Charles A. Adams,  the Trust,
Electra Partners,  Inc. and Mr. Adams' children ("Adams Parties") entered into a
Voting Agreement with Robert M.  MacTarnahan,  R. Scott  MacTarnahan and certain
entities  controlled  by them  ("MacTarnahan  Parties").  The  Voting  Agreement
replaces  the  letter  voting  agreement  entered  into on August  26,  1998 and
provides that the Adams  Parties will vote all of their voting  capital stock in
the Company at the direction of the MacTarnahan  Parties.  The Voting  Agreement
expires upon termination of the payment of amounts owing under the Restructuring
Agreement.

                                       20

<PAGE>


                                     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 5,700  shareholders  of record as of March 17,  2000.  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
-------  -----------------
On December  16, 1998,  Lydia Mather filed a lawsuit  against the Company in the
Multnomah County Circuit Court of Oregon.  The complaint alleges that Ms. Mather
attended a holiday party on the Company's  premises and fell and was injured due
to the  Company's  negligence.  Ms. Mather is seeking  economic and  noneconomic
damages in excess of $145,000. The Company is defending the lawsuit and does not
believe  the  outcome  will have a  material  adverse  effect on the  results of
operations, financial condition or liquidity of the Company.

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, 1999.

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  1999,  all  executive
officers,  Directors  and  greater  than  10%  shareholders  complied  with  all
applicable filing  requirements,  except the MacTarnahan  Family Trust failed to
file its reports in  connection  with shares of stock  received from the sale to
the Company of Harco Products, Inc.; such forms were subsequently filed.

                                       21

<PAGE>


Item 6.  Reports on Form 8-K
-------  -------------------
There were no reports on Form 8-K filed  during the quarter  ended  December 31,
1999.

                                    Part F/S

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

     Report of Independent Public Accountants                                F-1

     Consolidated Balance Sheets as of December 31, 1999 and 1998            F-2

     Consolidated Statements of Operations for the years ended December
     31, 1999 and 1998                                                       F-3

     Consolidated Statements of Stockholders' Equity for the years ended
     December 31, 1999 and 1998                                              F-4

     Consolidated Statements of Cash Flows for years ended December 31,
     1999 and 1998                                                           F-5

     Notes to Consolidated Financial Statements                              F-6




                                       22


<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) (12)
6.5         10.5     Amendment to the Company's Incentive Stock Option
                     Plan (7) (12)
6.6         10.6     The Company's 1994 Nonqualified Stock Option Plan and
                     Specimen Form Plan Documents (1) (12)
6.7         10.7     Distribution Agreement between the Company and Columbia
                     Distributing, dated April 8, 1996 (5)
6.8         10.8     Loan Restructuring Agreement, dated November 18, 1998 (8)
6.9         10.9     First Amendment to November 18, 1998  Loan Restructuring
                     Agreement (10)
6.10        10.10    Voting Agreement, dated November 18, 1998 (8)
6.11        10.11    Amendment No. 1 to November 18, 1998 Voting Agreement,
                     dated December 6, 1999 *
6.12        10.12    Restated Cash Incentive Plan, as amended (1) (12)
6.13        10.13    The Company's Stock Offering Purchase Plan for Employees
                     and Specimen Form Plan (1) (12)
6.14        10.14    Option to Purchase and Agreement and Option to Lease
                     between the Company and L&L Land Co., dated December
                     1995 (2)
6.15        10.15    Indenture of Lease between the Company and Western Stations
                     Co. dated May 1, 1995 (3)
6.16        10.16    Manufacturing Services Agreement between the Company and
                     The Stroh Brewery Company dated January 31, 1996 (4)
6.17        10.17    Loan Agreement dated September 2, 1998 (6)
6.18        10.18    Lease Agreement between the Company and L&L Land Company,
                     dated May 18, 1999 (certain schedules to the Lease
                     Agreement have been omitted) (9)
6.19        10.19    Sublease Agreement between the Company and Power
                     Transmission Products, Inc., dated May 1, 1999 (9)
6.20        10.20    Business Loan Agreement, dated August 16, 1999 (10)
6.21        10.21    Second Amendment to November 18, 1998 Loan Restructuring
                     Agreement, dated January 31, 2000 *
6.22        10.22    Amended November 18, 1998 Promissory Note, dated
                     January 31, 2000 *
6.23        10.23    Consulting Agreement between the Company and R. Scott
                     McTarnahan, dated November 1, 1999 (12) *
6.24        10.24    Lease Agreement between the Company and MacTarnahan Limited
                     Partnership, dated November 1, 1999*
6.25        10.25    Consulting Agreement between the Company and Steven C.
                     Goebel, dated January 31, 2000 (12) *
6.26        10.26    Voting Agreement, dated January 31, 2000 (11)
--          21.0     Subsidiaries of the Registrant*
10.0        23.0     Consent of Arthur Andersen LLP *
12.0        27       Financial Data Schedule *

     (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.

                                       23

<PAGE>


     (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  September 30, 1998 as filed with the Commission on November 16,
          1998.

     (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-QSB for the quarter
          ended  September 30, 1999 as filed with the Commission on November 12,
          1999.

     (11) Incorporated  by reference  to a Schedule  13D filed by Saxer  Brewing
          Company Brewing Company on February 9, 2000.

     (12) Denotes a management contract or compensatory plan or arrangement.

        * Filed herewith.

                                       24

<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 24th day of March, 2000.


                            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 24th day of March, 2000.

     Signature                              Title


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

     /S/  GLENMORE JAMES         Executive Vice President and Chief Financial
     -------------------------   Officer (Principal Financial and Accounting
     Glenmore James              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.


     -------------------------   Director
     Steven C. Goebel


                                       25


<PAGE>


                    Report of Independent Public Accountants


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

We have audited the accompanying consolidated balance sheets of Portland Brewing
Company (an Oregon Corporation) and subsidiary as of December 31, 1999 and 1998,
and the related consolidated statements of operations,  stockholders' equity and
cash  flows for each of the two years in the period  ended  December  31,  1999.
These financial  statements are the responsibility of the Company's  management.
Our responsibility is to express an opinion on these financial  statements based
on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable  assurance about whether the financial  statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting  the amounts and  disclosures in the financial  statements.  An audit
also includes assessing the accounting principles used and significant estimates
made by  management,  as well as  evaluating  the  overall  financial  statement
presentation.  We believe  that our audits  provide 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, 1999 and 1998, and the results of its
operations  and its cash  flows  for each of the two years in the  period  ended
December 31, 1999, in conformity with accounting  principles  generally accepted
in the United States.



                                              Arthur Andersen LLP


Portland, Oregon
March 10, 2000





                                      F-1

<PAGE>


                     PORTLAND BREWING COMPANY AND SUBSIDIARY
                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>

                                       ASSETS                                                            December 31,
                                       ------                                                            ------------
CURRENT ASSETS:                                                                                   1999                  1998
                                                                                                  ----                  ----
  <S>                                                                                       <C>                 <C>
  Cash                                                                                      $    103,006        $      52,532
  Accounts receivable, net of allowance of $8,000 (1999), $0 (1998)                              655,064              765,997
  Inventories                                                                                    729,853              554,864
  Prepaid assets                                                                                 218,550              266,452
                                                                                       ------------------   ------------------
          Total current assets                                                                 1,706,473            1,639,845

Property and equipment, net                                                                    6,711,257            7,249,791
Other assets, net                                                                                198,544              113,933
                                                                                       ------------------   ------------------
          Total assets                                                                        $8,616,274           $9,003,569
                                                                                             ===========          ===========

                      LIABILITIES AND STOCKHOLDERS' EQUITY
                      ------------------------------------
CURRENT LIABILITIES:
 Line of credit                                                                              $   435,465          $   323,626
 Current portion of long-term debt                                                                26,706               26,178
 Accounts payable                                                                                809,369              879,265
 Customer deposits held                                                                          131,821              133,464
 Accrued payroll                                                                                 170,580              134,247
 Other accrued liabilities                                                                        65,853               70,052
                                                                                       -----------------    -----------------
          Total current liabilities                                                            1,639,794            1,566,832

Long-term debt, less current portion                                                              86,099              113,334
 Stockholder term loan                                                                         2,100,000            2,100,000

Series A Redeemable Convertible Preferred Stock, $52 par value, 10,000 shares
   authorized, shares issued and outstanding: 5,770, liquidation preference of
   of $300,040                                                                                   300,040                   --

COMMITMENTS AND CONTINGENCIES (Note 13)

STOCKHOLDERS' EQUITY:
  Common stock, no par value, 25,000,000 shares authorized
    shares issued and outstanding: 4,094,714 (1999), 3,365,267 (1998)                          7,662,883            7,115,798
  Stock notes receivable                                                                            (375)                (375)
  Accumulated deficit                                                                         (3,172,167)          (1,892,020)
                                                                                       ------------------   ------------------
          Total stockholders' equity                                                           4,490,341            5,223,403
                                                                                       ------------------   ------------------
          Total liabilities and stockholders' equity                                          $8,616,274           $9,003,569
                                                                                             ===========          ===========
</TABLE>

        The accompanying notes are an integral part of these statements.

                                       F-2

<PAGE>


                     PORTLAND BREWING COMPANY AND SUBSIDIARY
                      CONSOLIDATED STATEMENTS OF OPERATIONS


<TABLE>
<CAPTION>




                                                                       Year Ended December 31,
                                                                  --------------------------------
                                                                      1999                  1998
                                                                  -----------             --------
<S>                                                               <C>                  <C>
Sales                                                             $ 10,463,331         $10,187,554
Less- excise tax                                                       508,521             467,875
                                                              ----------------    ----------------
          Net sales                                                  9,954,810           9,719,679

Cost of sales                                                        7,221,743           7,327,639
                                                              ----------------    ----------------
Gross profit                                                         2,733,067           2,392,040

General and administrative expenses                                  1,278,665           1,331,730
Sales and marketing expenses                                         2,436,648           2,099,163
Loss on disposition of assets                                               --             406,807
                                                              ----------------    ----------------
Loss from operations                                                  (982,246)         (1,445,660)

  Interest expense                                                    (249,850)           (289,182)
  Other expense, net                                                   (48,051)           (186,204)
                                                              ----------------    ----------------
          Total other expense, net                                    (297,901)           (475,386)
                                                              ----------------    ----------------
Net loss before extraordinary item                                  (1,280,147)         (1,921,046)

Extraordinary item - gain on debt restructuring                             --           1,200,279
                                                              ----------------    ----------------
          Net loss                                                $ (1,280,147)      $    (720,767)
                                                                    ==========          ==========

Basic and diluted net loss per share                            $      (0.37)       $      (0.29)
                                                                    ==========          ==========

Shares used in per share calculations                                3,486,842           2,505,051
                                                                    ==========          ==========


</TABLE>


        The accompanying notes are an integral part of these statements.

                                       F-3

<PAGE>


                    PORTLAND BREWING COMPANY AND SUBSIDIARY
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>

                                                  Common Stock                                  Retained
                                               -------------------           Stock Notes        Earnings
                                            Shares           Amount          Receivable         (Deficit)         Total
                                           ---------       ----------        -----------        ---------       -------
<S>                                         <C>             <C>                <C>           <C>               <C>


December 31, 1997                           2,074,943       $6,715,798         $  (375)      $(1,171,253)      $5,544,170

Conversion of stockholder
  loans to common stock                     1,290,324                             --             --               400,000
                                                               400,000

Net loss                                       --                --               --            (720,767)        (720,767)
                                       --------------    --------------     -----------      -----------      ------------
December 31, 1998                           3,365,267        7,115,798            (375)       (1,892,020)       5,223,403

Common stock issued in
  connection with acquisition
  of Harco Products, Inc.                     759,447          569,585            --             --               569,585

Receipt and cancellation of stock
  in connection with acquisition
  of Harco Products, Inc.                     (30,000)         (22,500)           --             --               (22,500)

Net loss                                                                                      (1,280,147)      (1,280,147)
                                       --------------    --------------     -----------      ------------     ------------
December 31, 1999                           4,094,714       $7,662,883          $ (375)      $(3,172,167)      $4,490,341
                                            =========       ==========         ========       ===========      ===========


</TABLE>


        The accompanying notes are an integral part of these statements.

                                      F-4
<PAGE>


                     PORTLAND BREWING COMPANY AND SUBSIDIARY
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>

                                                                                   Year Ended December 31,
                                                                                   -----------------------
                                                                                  1999                 1998
                                                                               ----------            --------
<S>                                                                          <C>                   <C>
Cash flows relating to operating activities:
  Net loss                                                                   $(1,280,147)          $ (720,767)
  Adjustments to reconcile net loss to net cash
     used in operating activities-
      Depreciation                                                               909,427            1,009,037
      Amortization                                                               111,574              158,655
      (Gain) loss on disposition of assets                                       (17,075)             406,807
      Extraordinary item                                                              --           (1,200,279)
     Changes in assets and liabilities, net of effect of acquisition:
      (Increase) decrease in:
        Accounts receivable, net                                                 148,873             (113,467)
        Inventories                                                              (22,915)              83,041
        Prepaid assets                                                            47,902              (64,911)
        Other assets                                                            (112,627)             (34,625)
        Accounts payable                                                         (75,466)             (93,914)
        Customer deposits held                                                    (1,643)             (31,739)
        Accrued payroll and other accrued liabilities                             29,988               42,453
                                                                        ----------------     ----------------
          Net cash used in operating activities                                 (262,109)            (559,709)
                                                                        ----------------      ---------------
Cash flows relating to investing activities:
  Purchase of property and equipment                                            (535,805)            (154,180)
  Proceeds from sale of property and equipment                                   245,587              232,031
  Acquisition, net of cash acquired                                              217,629                   --
                                                                        ----------------     ----------------
        Net cash (used in) provided by investing activities                      (72,589)              77,851
                                                                        ----------------     ----------------
Cash flows relating to financing activities:
  Net borrowings under line of credit                                            111,839              420,781
  Issuance of notes payable to distributors                                           --              170,353
  Repayments of long-term debt                                                   (26,707)          (2,209,463)
  Proceeds from stockholders' loans                                                   --            2,100,000
  Issuance of preferred stock, net                                               300,040                   --
                                                                        ----------------     ----------------
        Net cash provided by financing activities                                385,172              481,671
                                                                        ----------------     ----------------
Net increase (decrease) in cash                                                   50,474                 (187)

Cash, beginning of period                                                         52,532               52,719
                                                                         ---------------      ---------------
Cash, end of period                                                             $103,006         $     52,532
                                                                              ==========           ==========
Noncash transactions:
   Common stock issued in connection with acquisition                           $569,585      $            --
   Conversion of stockholder loans to common stock                                    --              400,000
   Reclassification of other assets to property and equipment                         --               49,380

Supplemental disclosure of cash flow information:
    Cash paid during the period for interest                                    $229,850             $289,182

</TABLE>



        The accompanying notes are an integral part of these statements.


                                       F-5

<PAGE>



                     PORTLAND BREWING COMPANY AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


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
Tap Room, open to the public.

The Company  experienced  significant  operating  losses  during the years ended
December  31,  1999 and 1998,  and has  continued  to incur  losses in the first
quarter of 2000. Operating results have fluctuated and may continue to fluctuate
as a result of many factors  including  lower sales volumes and selling  prices,
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,  increased  selling and marketing  costs incurred as the Company
protects its business in existing markets and increased  transportation costs as
it develops business in new geographic markets.

The Company's working capital requirements over the next year are expected to be
met from cash flow  through  operations,  funds  available  under the  Company's
revolving line and, if appropriate and available,  additional  equity  offerings
and/or borrowings from other lenders. There can be no assurance the Company will
be able to  raise  additional  funds  through  equity  offerings  or  additional
borrowings.  The Company's  term loan is due on April 1, 2001.  See Note 14. The
Company expects to place the debt  permanently  with a financial  institution by
April 1, 2001,  or pay off the debt through the raising of  additional  capital.
There can be no  assurance  that the  Company  will be able to obtain  permanent
financing from a financial institution or that the Company will be able to raise
additional capital on commercially reasonable terms or at all.


2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
    -------------------------------------------

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

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.

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

                                       F-6

<PAGE>


Inventories
-----------
Inventories  are stated at the lower of average  cost,  which  approximates  the
first-in,  first-out (FIFO) method, or market and include  materials,  labor and
manufacturing  overhead. Raw materials includes amounts related to the Company's
hand truck business which was purchased in October 1999. See Note 3. Inventories
consist of the following:

                                                       December 31,
                                         ---------------------------------------
                                                1999                    1998
                                                ----                    ----
Raw materials                               $352,860                $176,288
Work-in-process                              177,985                 164,428
Finished goods                               111,268                 138,357
Merchandise                                   87,740                  49,685
Kegs, inventory value                             --                  26,106
                                         -----------          --------------
                                            $729,853                $554,864
                                            ========                ========

Property and Equipment
----------------------
Property  and  equipment  is  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,
                                               ---------------------------------
                                                    1999                 1998
                                                    ----                 ----
Plant and equipment                             $7,871,802           $7,456,273
Leasehold improvements                           1,563,261            1,753,415
Office and laboratory equipment and vehicles       667,670              639,406
Kegs                                               707,366              813,956
Construction in progress                           109,868               63,170
                                                ----------           -----------
           Total property and equipment         10,919,967           10,726,220
  Less- accumulated depreciation                (4,208,710)          (3,476,429)
                                                ----------           -----------
                                                $6,711,257           $7,249,791
                                               ===========           ===========

Property  and  equipment  is  depreciated  using the  straight-line  method over
estimated useful lives as follows:

                                                                  Years
                                                                  -----
Plant and equipment                                               10-20
Office and laboratory equipment and vehicles                       5-10
Leasehold improvements                                             5-15
Kegs                                                                5


                                       F-7


<PAGE>


Package Design
--------------
Package  design costs,  which include costs related to design,  plates and dyes,
are amortized on a straight-line  basis over three years.  Package design costs,
net of accumulated  amortization  were $108,601 and $99,985 at December 31, 1999
and 1998,  respectively.  Amortization  expense related to package design costs,
which is included in selling and marketing expense,  was $85,634 and $113,237 in
1999 and 1998, respectively.

Income Taxes
------------
The Company  accounts for income taxes in accordance with Statement of Financial
Accounting  Standards  ("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
8.

Net Loss Per Share
------------------
The Company has adopted SFAS No. 128,  Earnings per Share  ("SFAS  128").  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
antidilutive.

The dilutive effect of stock options outstanding for the purchase of 375,050 and
144,525  shares at December  31, 1999 and 1998,  respectively,  warrants for the
purchase of 87,697.5  shares at December 31, 1999 and 1998 and 577,000 shares of
common  stock  into  which  the  outstanding  Series A  Reedeemable  Convertible
Preferred  Stock are  convertible at December 31, 1999 were not included in loss
per share calculations, because to do so would have been anti-dilutive.

Advertising Costs
-----------------
Advertising  costs are  expensed  as  incurred.  Total  advertising  expense was
$347,040 and $398,738 in 1999 and 1998, 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.  For the year ended
December 31, 1999 and 1998, 40% percent and 16%, respectively, of net sales were
through two  distributors.  For the year ended  December 31,  1998,  40%, of net
sales were through a single  distributor.  At December 31, 1999,  17% and 29% of
total accounts receivable,  respectively,  was attributable to two distributors.
At December 31, 1998,  45% and 19% of total accounts  receivable,  respectively,
was attributable to two distributors.

Impairment of Long-lived Assets
-------------------------------
SFAS 121,  Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of, establishes  criteria for and requires  recognition of
impairment  losses on  long-lived  assets  and  prescribes  the  accounting  for
long-lived  assets that are  expected to be disposed of in future  periods.  The
Company's  long-lived  assets are reviewed  for  impairment  when  circumstances
indicate that the carrying

                                       F-8

<PAGE>

amount may not be  recoverable.  If the sum of the expected future cash flows is
less than the carrying amount of the asset, a loss is recognized. As of December
31, 1999, there were no impairments of long-lived assets.

Comprehensive Income (Loss)
---------------------------
On January 1, 1998, the Company  adopted SFAS No. 130,  Reporting  Comprehensive
Income  ("SFAS  130"),   which   establishes   requirements  for  disclosure  of
comprehensive income (loss). The objective of SFAS 130 is to report a measure of
all changes in equity that result from  transactions  and economic  events other
than transactions with owners.  Comprehensive  income (loss) is the total of net
income (loss) and all other non-owner changes in equity.  Comprehensive loss did
not differ from reported net loss in the periods presented.

Recent Accounting Pronouncements
--------------------------------
In June 1998,  SFAS No. 133,  Accounting for Derivative  Instruments and Hedging
Activities  ("SFAS  133")  was  issued.  SFAS  133  establishes  accounting  and
reporting  standards  requiring every  derivative  instrument be recorded in the
balance sheet as either an asset or liability  measured at its fair value.  SFAS
133  also  requires  changes  in  the  derivative  instrument's  fair  value  be
recognized  currently in results of operations  unless specific hedge accounting
criteria  are met.  SFAS 133,  as amended by SFAS 137, is  effective  for fiscal
years  beginning  after June 15, 2000. The Company's  management has studied the
implications  of SFAS  133 and  based on the  initial  evaluation,  expects  the
adoption to have no impact on the  Company's  financial  condition or results of
operations.

3. ACQUISITION:
   -----------
In October 1999,  the Company  acquired all of the  outstanding  common stock of
Harco Products, Inc. ("Harco"), from a related party. Harco produces hand trucks
for  various  industrial  uses.  The  purchase  price of  $569,585,  paid by the
issuance of shares of the Company's  common stock valued at $0.75 per share. The
common  stock  issued in  connection  with  this  acquisition  contains  certain
incidental  registration  rights.  The  acquisition  was accounted for using the
purchase  method  of  accounting,  which  requires  that the  purchase  price be
allocated  to the net  assets  acquired  based upon the  relative  fair value of
assets  acquired.  The excess of the acquisition cost over the fair value of the
net assets  acquired,  of  approximately  $36,000,  will be amortized  using the
straight-line  method over five years.  The  accompanying  financial  statements
include the results of operations  from the date of  acquisition.  In connection
with the  acquisition,  the Company  received  30,000 shares of its common stock
that Harco owned, and recorded a corresponding reduction to shareholders equity.

4. LOSS ON DISPOSITION OF ASSETS:
   -----------------------------

Results of operations for 1998 included a charge of $402,712  associated  with a
plan designed to reduce costs and improve operational efficiencies. The non-cash
charge  included the write-down of machinery and equipment used in the Company's
Flanders Street  facility to fair market value.  In November 1998,  these assets
were sold at market value.

5. EXTRAORDINARY ITEM:
   -------------------

In 1998, the Company recorded an extraordinary  gain of $1,200,279  related to a
debt  restructuring.  The Company was relieved of $1,079,257 of debt and accrued
interest originated by a bank and $272,915 of trade accounts  payable.  The gain
was  offset by  professional  fees  related  to  the  restructuring of $151,893.
(See Note 6)

                                       F-9


<PAGE>

6. LONG-TERM DEBT AND LINE OF CREDIT:
   ---------------------------------

Of the $1,200,279  extraordinary gain recorded in 1998,  $1,079,257 was debt and
accrued  interest  forgiven by the  MacTarnahan  Limited  Partnership (a related
party) from its  purchase  of the  Company's  debt with a bank.  (See Note 5) In
connection  with  the  troubled  debt  restructuring,  the  MacTarnahan  Limited
Partnership purchased approximately $3.1 million of secured Company debt held by
a bank.  The $3.1  million bank debt plus  accrued  interest  and other  related
charges  was  settled  by the  MacTarnahan  Limited  Partnership  which  in turn
resulted  in a net loan  payable  from the  Company to the  MacTarnahan  Limited
Partnership  of  $2.1  million.   This   $2,100,000  term  loan  is  secured  by
receivables,  inventory,  equipment and general intangibles of the Company,  and
bears  interest at a per annum rate equal to the prime  lending rate of the Bank
of the Northwest  plus 1% (9.5% at December 31, 1999).  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.  See Note 14. The
Company expects to place the debt  permanently  with a financial  institution by
April 1, 2001 or pay off the debt through the raising of additional capital.

In 1998,  the  Company  offered  certain  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
$112,805 was outstanding at December 31, 1999. The notes bear interest at 6% per
annum and mature on September 1, 2003. Payments under the notes are due in equal
monthly payment of principal and interest.

The  Company has a $750,000  revolving  line of credit  ("Revolving  Line") with
Washington  Mutual  Bank  (d.b.a.   Western  Bank),  under  which  $435,465  was
outstanding  at December 31, 1999.  Payment of the Revolving  Line is secured by
certain of the  Company's  assets and is  guaranteed by certain of the Company's
shareholders.  Interest  is  payable  monthly at a per annum rate equal to prime
rate plus 1% (9.5% at December 31, 1999).  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, 1999. In February  2000,  the Revolving  Line
was  increased to  $1,000,000  and its  expiration  date was extended to June 1,
2001. See Note 14.

Principal  payment  requirements  on long-term debt are as follows for the years
ending December 31:

           2000               $     28,353
           2001                  2,130,102
           2002                     31,958
           2003                     22,392
                             -------------
                                $2,212,805
                                  ========

7.  LEASES:
    -------
The  following  is a schedule of minimum  future  lease  payments  for the years
ending December 31:

           2000                  $   436,737
           2001                      456,637
           2002                      456,637
           2003                      449,797
           2004                      446,912
        Thereafter                 1,021,146
                               -------------
                                  $3,267,866
                                    ========

Rent expense  incurred on operating leases was $386,876 and $362,083 in 1999 and
1998, respectively.


                                      F-10

<PAGE>


8.  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 1999.
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 $4.7 million which is available
to offset future taxable income, if any, expiring through the year 2019.

The components of the net deferred tax assets and liabilities as of December 31,
1999 and 1998 are as follows:
                                                           December 31,
                                               ---------------------------------
                                                       1999               1998
                                                       ----               ----
Deferred tax assets, current-
  Basis difference in inventory                     $28,510            $27,507
  Other                                              36,849             27,495
                                               ------------       ------------
     Total current deferred tax assets               65,359             55,002
                                               ------------       ------------
Deferred tax assets, long-term-
  Net operating loss carryforwards                2,096,602          1,391,836
  Tax credits                                       115,022            115,022
                                               ------------       ------------
     Total long-term deferred tax assets          2,211,624          1,506,858

Deferred tax liabilities, long term-
  Basis difference in property, plant
    and equipment                                  (661,676)          (603,545)
                                               ------------       ------------
     Net long-term deferred tax assets            1,549,948            903,313
                                               ------------       ------------
Net deferred tax assets                           1,615,307            958,315
 Less: valuation allowance                       (1,615,307)          (958,315)
                                               ------------       ------------
Net deferred taxes                                 $     --           $     --
                                                    =======            =======


9.  RELATED PARTY TRANSACTIONS:
    ---------------------------

Lease Agreement with Portland Brewing Building, LLC
---------------------------------------------------
The Company leases the property at 2730 NW 31st Avenue in Portland,  Oregon from
Portland Brewing Building,  L.L.C.,  which is an entity controlled by an officer
and director and two other directors of the Company. The monthly rent is $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
increased rental adjustment was determined subsequent to July 1, 1998, resulting
in a  $19,922  charge  which is being  paid by the  Company  in  twelve  monthly
installments which began on February 1, 1999. The lease expires in August 2008.

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-11

<PAGE>


Lease Agreement with L & L Land Co.
-----------------------------------
In 1999 the Company entered into a lease for approximately 23,000 square feet of
space in a building  adjacent to the main brewery with a related party. 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 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.  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
sublease is one year and rent is $4,974 per month,  plus $365 per month for real
property taxes, plus payment of utilities, insurance and interior maintenance.

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.

Purchase and Restructuring of Secured Debt
------------------------------------------
See Notes 5, 6 and 14.

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  Scottish  Style Amber Ale sold.  Royalties paid under the license
agreement for 1999 and 1998 were $27,245 and $24,426, respectively, based on the
sale of 27,245 and 24,426  barrels,  respectively,  of  MacTarnahan's  Amber Ale
during the same periods.

10. 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. 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.  No dividends have been declared to date. In the event of any liquidation
or dissolution of the Company, either voluntary or 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.


                                      F-12


<PAGE>


11.  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.  Options  outstanding  at December  31,
1999 become exercisable on May 20, 2000.

Activity under the ISOP is summarized as follows:

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

Balances, December 31, 1997                  139,500            $3.33-$7.00
Options granted                               --                     --
Options exercised                             --                     --
Options canceled                             (15,975)              $7.00
                                          ----------             ----------
Balances, December 31, 1998                  123,525            $3.33-$7.00
Options granted                              363,050            $0.54-$0.594
Options exercised                             --                     --
Options canceled                            (125,025)           $0.54-$7.00
                                          ----------             ----------
Balances, December 31, 1999                  361,550            $0.54-$0.594
                                              ======               ========

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  become
exercisable on May 20, 2000.

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 and 21,000  shares at $5.33 each were
outstanding and exercisable at December 31, 1999 and 1998, respectively.

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.

                                      F-13


<PAGE>


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. No options were granted in 1998. Options granted in 1999
were valued using the following weighted average assumptions:

               Risk-free interest rate            6.5%
               Expected dividend yield               0%
               Expected lives                     4 years
               Expected volatility                48%

The total value of options  granted  during 1999 was  computed as  approximately
$88,317 and is being 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 1999 was $0.24 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,
1999 and 1998 would have been as follows:

                                   As Reported                  Pro Forma
                                   -----------                  ---------
1999
Net loss                       $     (1,280,147)           $    (1,346,106)
Net loss per share             $          (0.37)           $         (0.39)

1998
Net loss                       $       (720,767)           $      (834,489)
Net loss per share             $          (0.29)           $         (0.33)


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:

<TABLE>
<CAPTION>

                        Options Outstanding                                        Options Exercisable
--------------------------------------------------------------------         --------------------------------
                                          Weighted
                           Number          Average       Weighted                 Number         Weighted
                       Outstanding at     Remaining      Average              Exercisable at      Average
                        December 31,     Contractual     Exercise              December 31,      Exercise
   Exercise Price           1999        Life (Years)      Price                    1999            Price
                            ----        ------------      -----                    ----            -----
       <S>                <C>                <C>          <C>                     <C>             <C>

       $ 0.54             325,550            9.3          $ 0.54                    --            $ 0.54
         0.59              36,000            4.3            0.59                    --              0.59
         5.33              13,500            4.7            5.33                  13,500            5.33
                         ---------                                              ---------
       Totals             375,050                                                 13,500
                          ========                                                ======

</TABLE>

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

                                      F-14

<PAGE>
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 1999 or
1998 under the Plan.

12. SEGMENT INFORMATION:
    -------------------

In 1998,  the Company  adopted SFAS No. 131,  Disclosures  about  Segments of an
Enterprise and Related Information, ("SFAS 131") which establishes new standards
for defining and reporting  information about a Company's segments.  It requires
that the  information  be reported  about the  segments of the Company for which
separate financial  information is available and for which operating results are
regularly evaluated by executive management to make decisions about resources to
be  allocated to each segment and to assess  performance.  Management  evaluates
segment performance based on segment operating (loss) income.

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  segment
consisted of two  restaurants  until  November  1998,  when one of the Company's
restaurants  was sold.  The Company's  remaining  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 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.  In 1998,  the  extraordinary  item
(gain on debt  restructuring)  is also considered a corporate expense and is not
allocated to the three segments.

                                                   Year Ended December 31,
                                             -----------------------------------
                                                   1999              1998
                                             ----------------- -----------------
Net Sales:
  Brewery                                    $      8,529,412    $    7,743,255
  Restaurant(s)                                     1,625,874         2,344,708
Less: intersegment sales                             (272,126)         (368,284)
                                                 -------------    --------------
    Subtotal                                        9,883,160         9,719,679
  Harco Products                                       71,650                --
                                                 -------------    --------------
  Total net sales                            $      9,954,810    $    9,719,679
                                                 =============    ==============

Gross Profit:
  Brewery                                    $      2,510,071    $    2,192,138
  Restaurant(s)                                       358,332           393,976
  Less: intersegment gross profit                    (145,084)         (194,074)
                                                 -------------    --------------
Subtotal                                            2,723,319         2,392,040
  Harco Products                                        9,748                 --
                                                 -------------    --------------
Total gross profit                           $      2,733,067    $    2,392,040
                                                 =============    ==============

Depreciation and amortization expense:
  Brewery                                    $        771,956    $      802,948
  Restaurant(s)                                        90,578           150,651
  Harco Products                                        2,120                --
  Unallocated corporate amounts                       156,347           214,091
                                                 -------------    --------------
Total depreciation and amortization expense  $      1,021,001    $    1,167,690
                                                 =============    ==============

                                      F-15
<PAGE>


                                                Year Ended December 31,
                                         --------------------------------------
                                                 1999                1998
                                         -----------------    -----------------
Capital Expenditures:
  Brewery                                $        459,157     $        206,839
  Restaurant(s)                                    48,383                3,044
  Harco Products                                       --                   --
  Unallocated corporate amounts                    28,265               13,776
                                             -------------       --------------
Total capital expenditures               $        535,805     $        223,659
                                             =============       ==============

Total Assets:
  Brewery                                $      7,313,542     $      7,954,706
  Restaurant(s)                                   625,990              667,931
  Harco Products                                  352,586                   --
  Unallocated corporate amounts                   324,156              380,932
                                             -------------       --------------
Total assets                             $      8,616,274     $      9,003,569
                                             =============       ==============


13. 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.

14. SUBSEQUENT EVENTS:
    -----------------

Saxer Brewing Company Asset Purchase
------------------------------------
On January 31, 2000, the Company purchased certain assets (equipment and brands)
from Saxer Brewing Company  ("Saxer")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, was appointed to the board of the Company.

Long Term Debt
--------------
At December 31, 1999 the Company had a loan payable to the  MacTarnahan  Limited
Partnership  (a  related  party) of $2.1  million.  On  January  31,  2000,  the
borrowing  capacity  under  the  term  loan was  increased  from  $2,100,000  to
$2,500,000  and the maturity date was extended from January 31, 2000 to April 1,
2001. In March 2000, the Company borrowed an additional  $400,000 under the term
loan and paid $400,000 of the amounts  outstanding under its Revolving Line. See
Note 6.

Revolving Line
--------------
In February  2000,  the  Revolving  Line was  increased  to  $1,000,000  and the
expiration  date was extended to June 1, 2001.  In March 2000,  the Company paid
$400,000 of the amounts outstanding under the Revolving Line. See note 6.

                                      F-16