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, 2003
                                       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.[X]

     Revenues for the year ended December 31, 2003:   $10,688,341.

   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 8, 2003 was 9,855,822 shares.

Transitional Small Business Disclosure Format (check one):  Yes  X    No
                                                               -----    -----
<PAGE>
                            PORTLAND BREWING COMPANY
                                2003 FORM 10-KSB
                                TABLE OF CONTENTS


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

Item 7. Description of Property                                             10

Item 8. Directors, Executive Officers and Significant Employees             10

Item 9. Remuneration of Directors and Officers                              12

Item 10.Security Ownership of Management and Certain Security Holders       13

Item 11.Interest of Management and Others in Certain Transactions           16

                         PART II

Item 1. Market Price of and Dividends on the Registrant's Common Equity and 17
           Other Shareholder Matters

Item 2. Legal Proceedings                                                   17

Item 3. Changes in and Disagreements with Accountants                       17

Item 4. Submission of Matters to a Vote of Security Holders                 17

Item 5. Compliance with Section 16(a) of the Exchange Act                   17

Item 6. Reports on Form 8-K                                                 18

        Controls and Procedures                                             18

        Audit Commitee Financial Expert                                     18

        Code of Ethics                                                      18

                        PART F/S

        Index to Consolidated Financial Statements                          19

                        PART III

Item 1. Index to Exhibits                                                   20

Item 2. Description of Exhibits                                             20












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                                     PART I

ITEM 6.  DESCRIPTION OF BUSINESS
-------  -----------------------

GENERAL

On January 26, 2004, Portland Brewing Company (the "Company") Pyramid Breweries
Inc., and PBC Acquisition, LLC (collectively, "Pyramid") entered into an Asset
Purchase Agreement pursuant to which the Company will sell its brewery and
brewery-restaurant operations to Pyramid. The Company also announced that it
intends to proceed with a 600,000-for-1 reverse stock split as part of a "going
private" transaction. Each of these transactions requires the approval of the
Company's shareholders. The Company plans to complete these transactions in the
second quarter. The following discussion does not assume consummation of these
events. [See Note 2 of Notes to Consolidated Financial Statements].


The Company was incorporated in Oregon on November 14, 1983 and conducts
business under the names "MacTarnahan's Brewing Company" and "Portland Brewing
Company". The Company was formed to brew and sell specialty beer (i.e., beer
which is made in relatively small batches and which generally sells at retail in
the super or above premium category at about $7.00 per six-pack). Products
produced by the Company fall primarily within three brand families:
MacTarnahan's, Saxer and Nor'Wester. The MacTarnahan's brand family represents
the largest volume and includes MacTarnahan's Scottish Style Amber Ale,
MacTarnahan's Blackwatch Cream Porter, MacTarnahan's Highlander Pale Ale, and
MacTarnahan's IPA. The Company's seasonal line, which carry the MacTarnahan's
Brewing Company logo, includes Mac Frost Winter Ale, Uncle Otto's WeissBeer, and
Uncle Otto's Oktoberfest Maerzen along with associated brands including Oregon
Honey Beer. The Saxer brand family is represented by Lemon Lager and various
seasonal brands. The Nor'Wester product family includes Nor'Wester HefeWeizen.
Specialty products are made periodically to be served at the Company's
restaurant, The TapRoom, such as ZigZag River Lager and Benchmark Old Ale as
well as certain Saxer and Nor'Wester products. Cask-conditioned variations of
these products are occasionally offered in The TapRoom. The Company uses
distributors to sell principally to the packaged/bottle market through
authorized retail outlets and to the on-premises draft market through
establishments licensed to serve alcoholic beverages. The Company sells beer
primarily in its home market of Oregon as well as in Washington, California and
other western states. In 1996, the Company began selling beer in states east of
the Rocky Mountains. In 2000, the Company began exporting Saxer Lemon Lager to
Japan, and continued to do so throughout 2003. The Company also sells directly
to the public from its restaurant and dock sales facilities.

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

In October 1999, the Company acquired a hand truck manufacturing company, Harco
Products, Inc. (operated as an Oregon subsidiary), with its principal offices in
Beaverton, Oregon. [See Note 7 of Notes to Consolidated Financial Statements].

On January 31, 2000, the Company purchased brands and certain equipment from
Saxer Brewing Company for 900,000 shares of the Company's common stock, $150,000
cash and a three year agreement to pay certain amounts based on barrel sales of
the Saxer and Nor'wester brands, such amount secured by the Saxer and Nor'wester
brands. In 2003, the amount paid based on barrel sales was $15,000. [See Note 11
of Notes to Consolidated Financial Statements].

INDUSTRY OVERVIEW

NATIONAL BEER INDUSTRY. The nation's three largest breweries; Anheuser-Busch,
Miller Brewing Company and Coors Brewing Co., comprise nearly 79% of the
country's shipments. (Beer Marketer's Insights, January 12, 2004.) In 2003,
national sales continued to be affected by gains in the premium "light" beer
category, the success of flavored alcoholic beverages or "malternatives", and
continued growth of imports. Of equal significance to the domestic market was
the continuing consolidation of international brewers and the international

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brewers' emphasis on targeting the U.S. market. These trends are expected to
continue in 2004. Consolidation has continued both nationally and
internationally.

SPECIALTY BEER INDUSTRY--PACIFIC NORTHWEST. According to Beer Marketer's
Insights (February 9, 2004) references to an increase of 1% in 2003 in the total
specialty beer category should be interpreted as indicating that specialty
brewers producing less than the top ten leaders in the market are trending down
about 3%, with the segment remaining at approximately 3% share of the US market
for the eighth straight year. Statistics on sales of specialty beers in Oregon
for 2003 indicate the market is flat overall (Oregon Liquor Control Statistics,
October 2003). Paralleling the national industry, malternatives continue to
affect the Oregon brewing industry, especially craft/specialty brewers. Oregon
and Washington are considered to be mature markets in the U.S. specialty beer
segment, consequently, the Company believes that future growth will be more
difficult in these two states.


PRODUCTS

The Company offers a wide variety of specialty beers. The complete product line
includes core brands, which are available year-round, a selection of seasonal
brands, and specialty products. Draft product (kegs) accounted for approximately
27% and 25% of the Company's beer shipments in 2003 and 2002, respectively.

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

Portland Brewing Company's brands include:

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

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

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

         OREGON HONEY BEER. 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 on draft and in 12 oz. bottles.

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

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

         HONU BEER. Honu Beer is a lighter style, all-malt refresher that is
available in 12 oz. bottles.

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

         UNCLE OTTO'S OKTOBERFEST MAERZEN. This beer, lagered for a full two
months, is created using a blend of pale and select specialty malts, spiced with
Northwest grown Mt. Hood hops, and is offered in September and October.

         UNCLE OTTO'S WEISSBEER. This authentic sparkling Bavarian style wheat
beer is made with a special yeast that produces clove/banana flavors and is
offered in spring and summer.

         MAC FROST WINTER ALE. This winter ale is made using two special yeasts
which yield a very rich flavored beer. This product is offered from November
through January.
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Saxer brands include:

         LEMON LAGER. This is a lager beer with special flavorings added to make
a unique refreshing taste.

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

         JACK FROST.  A  fine traditional German style winter doppelbock.

Nor'Wester brands include:

         NOR'WESTER HEFEWEIZEN. This is an American style hefe-weizen brewed
with wheat malt and left unfiltered to preserve all the flavor and aroma.


RESTAURANT

The Company operates a restaurant, The TapRoom, which is located at the
Company's brewery, providing a tasting room for the products it manufactures.
The TapRoom restaurant is upscale in comparison to other brewpubs in the region
and features a European atmosphere, a wood-burning fireplace, outdoor patio, a
terrace with an arbor and seating for over 150 guests.

MARKETING AND SALES

The Company uses both licensed beer and wine distributors/wholesalers to sell to
and service on- and off-premises accounts for specific geographic territories.
These distributors maintain broad distribution in the Company's core markets:
Oregon, Washington, and California. Columbia Distributing Company services
almost all of the major markets in Oregon and Washington. In California, Wine
Warehouse represents the Company on a statewide basis handling most of the sales
to that state. Approximately 46 distributors represent the Company in its
western markets and the Company employs seven salespeople to service its primary
markets: one chain sales representative, five salespeople in Oregon, one in
Washington, and one in California. The Company also uses the services of two
broker/agents: one in northern California and one in the east. Shipments for
markets east of the Rocky Mountains increased 6% in 2003 from a decline of 5% in
2002.

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

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


TRADEMARKS

The Company has developed brand recognition with several trademarks and trade
names. The Company has protected those trademarks and trade names through
obtaining and maintaining federal and state trademark registrations and assumed
business name registrations. Federally registered trademarks for key brand names
for malt beverages include the names Portland Brewing, Portland, and Portland
Brewing label design. In connection


                                       5
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with the MacTarnahan's brand, the Company has federally registered
MacTarnahan's, "Mac's", the running Mac design icon, and MacTarnahan's
Highlander. Other federally registered trademarks include BobbyDazzler Ale and
the Oregon Honey Beer label design. In addition, the Company has obtained
federal registration for The MacTarnahan(R) in connection with its Whisky trade
name. 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, and to use "The
MacTarnahan(R)" on a nationwide basis in connection with Whisky.

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

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


COMPETITION

The domestic specialty brewing industry remains at approximately 3% of the total
national market (Beer Marketer's Insights, February 9, 2004) and is projected to
remain at 12% of the Oregon market in 2004 (Oregon Liquor Control Commission
Statement of Beer Sales in Oregon, 2003). Growth rates have slowed for the
majority of craft brewers. The national brewers continue to develop brands to
compete directly with specialty brands and these national competitors have
advantages such as lower production costs, larger marketing budgets, greater
financial and other resources, and a more developed and extensive distribution
network than the Company. In addition, new players and the "spirits" industry
have entered the marketplace. Growing demand for imported beer continues to have
a negative impact on sales of domestic specialty beer. The Company believes that
continued saturation in the specialty brewing category, the growth of imports,
and the success of malternatives are constraining growth for specialty brewers,
including the Company.

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


GOVERNMENTAL REGULATION

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

LICENSE DESCRIPTION. The Company operates under a Brewery Public House license
which allows sales off-premises as well as through up to two retail outlets. The
Company operates one restaurant at its brewery.

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

DRAM SHOP LIABILITY. The Oregon Supreme Court has held that the serving of
alcoholic beverages to a person known to be intoxicated may, under certain
circumstances, result in the server being held liable to third parties for
injuries


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caused by the intoxicated customer. The Company serves beer and wine to its
customers at its restaurant. If an intoxicated customer is served wine or beer
and subsequently commits a tort such as causing an automobile accident, the
Company may be held liable for damages to the injured person or persons. The
Company has obtained liquor law legal liability insurance coverage and will
continue such coverage if available at a reasonable cost. However, future
increases in insurance premiums may make it prohibitive for the Company to
maintain adequate insurance coverage. A large damage award against the Company,
not adequately covered by insurance, would adversely affect the Company's
financial position.

RESEARCH AND DEVELOPMENT

The Company had minimal research and development expenditures in 2003 and 2002.
The Company has from time to time, developed new products and may continue to do
so in the future. Such products are sold to retail customers, and accordingly,
associated development costs are expensed as cost of goods sold.

EMPLOYEES

As of December 31, 2003, the Company had 79 employees (59 full time), including
25 in brewing, bottling and shipping operations, 36 in retail operations, 15 in
sales, marketing, and administration, and 3 in the Company's hand truck
business. None of the Company's employees are covered by collective bargaining
agreements. The Company provides its full-time employees with health, dental and
life insurance, short and long term disability, and a 401(k) plan. The Company
made no contributions to the 401(k) plan in 2003 or 2002. The Company believes
its employee relations are good, and believes its employee practices comply with
all Federal and State laws and regulations. The Company does carry employment
practices liability insurance. There can be no assurance that such insurance
will continue to be available at a price or on other terms satisfactory to the
Company.

CONCENTRATIONS OF RISK

DISTRIBUTOR CONCENTRATION. In 2003, wholesale distributors accounted for 72% of
the Company's shipments, of which 33% 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 30% of
the Company's net sales in 2003. The next largest distributor, Wine Warehouse,
accounted for approximately 15% of the Company's net sales for the same period.
Distribution agreements generally grant exclusive territories to distributors.
The Company's distributors also market and distribute competing brands. While
the Company believes it has good relationships with most of its distributors,
the Company can give no assurance that each of its distributors will continue to
effectively market and distribute the Company's beer. State laws and/or standard
contractual provisions limit the Company's ability to terminate a distribution
agreement, therefore the Company can give no assurance that a distributor for
any given geographic area could be replaced without cost or replaced
immediately, either temporarily or permanently, in the event the distributor was
performing poorly in its efforts to distribute the Company's products or was
otherwise unable to perform (e.g. as a result of an employee strike or damage
caused by fire or natural disaster). The Company's inability to replace a
non-performing or poorly performing distributor in a timely fashion and/or with
minimal cost, could have a significant adverse effect on the Company's results
of operations, particularly if the distributor were Columbia Distributing
Company or Wine Warehouse, the Company's largest distributors.

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

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

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ENVIRONMENTAL MATTERS

The Company's compliance with federal, state and local laws and regulations
regulating the discharge of materials into the environment, had no material
effect upon capital expenditures, earnings, or competitive position of the
Company during the year ended December 31, 2003.

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.

Due to market conditions and lower sales volumes, the Company continues its cost
cutting measures to lower its operating costs. The Company's working capital
requirements over the next year are expected to be met partially from cash flow
through operations, funds available under the Company's revolving line of credit
and, if appropriate and available, borrowings from other lenders as well as
loans guaranteed by the MacTarnahans.

Effective September 1, 2003, the Company entered into a $1,200,000 revolving
line of credit ("Revolving Line") with Washington Mutual Bank which is scheduled
to mature on April 15, 2004. The Company and Washington Mutual Bank have engaged
in preliminary discussions regarding an extension of the maturity date in the
event that the Revolving Line is not paid off by April 15, 2004. At December 31,
2003 and 2002, $643,324 and $962,359 were outstanding, respectively. The
Revolving Line is secured by a first lien on the Company's accounts receivable
and inventory and is guaranteed by certain shareholders. Interest is payable
monthly at a floating per annum rate of 1% above the prime rate published in the
Wall Street Journal (Western Edition) (5.00% at December 31, 2003). The
Revolving Line contains certain covenants including restrictions on additional
indebtedness and payment of dividends without the permission of the lender.
Effective December 26, 2003, the Company and Washington Mutual Bank entered into
a First Amendment to Business Loan Agreement (Asset Based), under which a
definition was modified and the inventory advance rate was changed. Effective
March 8, 2004, the Company and Washington Mutual Bank entered into a Second
Amendment to Business Loan Agreement (Asset Based), under which the inventory
advance rate was changed further. At December 31, 2003, the Company was in
violation of a financial covenant of the Revolving Line because it failed to
maintain the required ratio of Total Liabilities to Tangible Net Worth. By
letter dated March 17, 2004, Washington Mutual Bank has waived its right to
exercise its remedies with respect to this noncompliance through April 15, 2004,
the current maturity date of the Revolving Line. The MacTarnahans, the
controlling shareholders, have agreed to provide additional security by
executing a pledge of funds held in a savings account in the amount of $400,000
to Washington Mutual Bank, in order to ensure that the Company can continue to
meet its current cash flow needs with advances pursuant to the Revolving Line.
[See Note 4 of Notes to Consolidated Financial Statements].

On November 1, 2001, the Company and MacTarnahan Limited Partnership
("MacTarnahan") entered into a term loan of $1,700,000 ("MacTarnahan Term
Loan"). The MacTarnahan Term Loan is a three year facility, secured with the
Company's personal property (priority is subject to existing liens). Interest is
payable monthly at a floating per annum rate of 1.25% above the prime rate
published in the Wall Street Journal (Western Edition) (5.00% at December 31,
2003). Principal payments of not less than $15,000 are payable monthly and two
additional principal payments of not less than $35,000 are payable
semi-annually. Effective June 1, 2002, the Company and MacTarnahan entered into
a First Amendment To Loan Arrangement ("First Amendment"). Under the terms of
the First Amendment, the Company's obligation to make monthly payments was
deferred until December 2002 and the Company's obligation to make semi-annual
payments was deferred until April 2003. Effective October 1, 2002, the Company
and MacTarnahan entered into a Second Amendment To Loan Arrangement ("Second
Amendment"). Under the terms of the Second Amendment, the principal amount due
was increased to $1,770,000. Effective January 1, 2003, the Company and
MacTarnahan entered into a Third Amendment To Loan Arrangement ("Third
Amendment"). Under the terms of the Third Amendment and the Amended and Restated
Promissory Note executed in connection with the Third Amendment, the Company's
obligation to make monthly payments was deferred until January 2004 and the
Company's obligation to make semi-annual payments was deferred until April 2004.
Effective June 30, 2003 the Company and MacTarnahan entered into a Fourth
Amendment to Loan Arrangement ("Fourth Amendment"). Under the terms of the
Fourth Amendment the principal amount due was increased to $2,000,000 and
existing terms remained intact. Effective January 1, 2004, the Company and
MacTarnahan entered into a Fifth Amendment To Loan Arrangement ("Fifth
Amendment"). Under the terms of the Fifth Amendment and the Amended and Restated
Promissory Note executed in connection with the Fifth Amendment, the Company's
obligation to make monthly payments was deferred until January 2005 and the
Company's obligation to make semi-annual payments was deferred until April 2005.
The loan balance at December 31, 2003 was $1,700,000 and reflects
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a paydown resulting from the real estate refinance of November 1, 2003.
MacTarnahan is owned by affiliates of Robert M. MacTarnahan and R. Scott
MacTarnahan, directors of the Company, and other MacTarnahan family members. The
principal may be prepaid at any time. The MacTarnahan Term Loan contains certain
covenants including restrictions on additional encumbrances.

In 1998, the Company offered several of its trade creditors the option of
receiving a discounted amount of cash immediately or the entire amount owed to
them to be paid over a five-year period. As a result, the Company issued notes
in the aggregate principal amount of $148,065 to trade creditors, of which no
amounts were outstanding at December 31, 2003. The notes matured on September 1,
2003.

Effective November 1, 2003 the Company entered into a real estate term loan in
the amount of $1,473,311 with Sterling Savings Bank ("Real Estate Term Loan").
The Real Estate Term Loan is secured by a first deed of trust on the brewery
property located at 2730 NW 31st Ave (the "Brewery Property") and a security
interest in the Company's furniture, fixtures and equipment. The Real Estate
Term Loan is guaranteed by certain shareholders. The Real Estate Term Loan
replaces term debt held Washington Mutual Bank and Capital Crossings Bank, with
balances of $56,712 and $881,988, respectively as of October 31, 2003. These
amounts were repaid upon funding of the Real Estate Term Loan. $300,000 of the
proceeds of the Real Estate Term Loan was used to repay part of the MacTarnahan
Term Loan. Repayment of the Real Estate Loan is based on a ten-year term loan
with a 25-year amortization at a five-year fixed rate index plus 300 basis
points. At December 31, 2003, the five-year fixed rate index was 3.69%,
resulting in a composite rate of 6.69%. The outstanding balance at December 31,
2003 was $1,473,311. At December 31, 2003, the Company did not meet the Minimum
Income and cash flow covenant of the Real Estate Term Loan. By letter dated
March 9, 2004, Sterling Saving Bank waived this financial covenant through the
end of fiscal year 2004, and agreed not to accelerate the loan because of the
noncompliance during this period. [See Note 5 of Notes to Consolidated Financial
Statements].

As part of the asset purchase agreement, the Company intends to enter into a
real estate transaction with the MacTarnahan Limited Partnership pursuant to
which the Company will sell the Brewery Property to MacTarnahan Limited
Partnership, and in consideration for that transfer MacTarnahan Limited
Partnership will forgive a portion of the MacTarnahan Term Loan. The amount of
this forgiveness will equal the appraised fair market value of the Brewery
Property minus the outstanding balance of the Real Estate Loan, which will be
assumed by MacTarnahan. If the Asset Purchase Agreement is not closed, this
transaction will not occur.

In connection with the contemplated asset sale and reverse split transactions,
MacTarnahan Limited Partnership and other MacTarnahan family entities executed a
commitment letter dated January 24, 2004 to lend the Company amounts up to
$650,000 to cover fees and expenses incurred in connection with the Asset
Purchase Agreement and the reverse split transaction, working capital
requirements, and post-transaction losses. By letter dated March 25, 2004, the
date by which definitive loan documents are to be executed was extended to July
31, 2004. The Company expects to repay the loans with earn out payments and
holdback amounts that it may receive after the closing of the asset sale. The
loans will be secured by the Company's assets that are not transferred to
Pyramid in the asset sale, any Pyramid stock received as consideration on the
asset sale transaction and earn out and holdback rights.

Pursuant to a Deferred Redemption Agreement dated February 25, 2004, the holders
of Series A Preferred stock have agreed to defer the mandatory redemption date
of the Series A Preferred shares and to accept a portion of the consideration
paid to the Company by Pyramid in the asset sale in redemption for the Series A
Preferred stock.


LIQUIDITY RISKS

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

OPERATING LOSSES. The Company experienced significant operating losses during
the years ended December 31, 2003 and 2002, and has continued to incur losses in
the first quarter of 2004. Operating results have fluctuated and may continue to
fluctuate as a result of many factors including lower sales volumes and selling
prices, continued increases in
                                       9
<PAGE>
transportation, utility and insurance costs as well as increased depreciation
and other fixed operating costs as a percent of sales during periods when the
Company's brewery is operating at less than full capacity. Changes in product
mix and increased selling and marketing costs incurred as the Company protects
its business in existing markets also contribute to the fluctuation. There can
be no assurance that the Company will not continue to experience operating
losses.


ITEM 7.  DESCRIPTION OF PROPERTY
-------  -----------------------

The Company's brewery, located at 2730 and 2750 NW 31st Avenue in Portland,
showcases the copper brewing vessels and equipment acquired in 1991 from the
Sixenbrau brewery in Nordlingen, Germany. The brewery opened in 1993 and has a
present annual production capacity of approximately 135,000 barrels of ale. The
brewery has 27,000 square feet of manufacturing, shipping and warehouse space
with a 1,000 square foot, three-story brewhouse (to house and display the copper
brewing vessels), and 3,000 square feet of offices. Also included is a 3,000
square foot restaurant, The TapRoom, complete with an outdoor seating area. The
Company purchased a portion of the Brewery Property including the real property
located at 2730 NW 31st Ave from PBB LLC on October 12, 2001, thereby
terminating the existing lease with them. A portion of this office space is
leased to Greenstead = Accounting Resource. [See Item 11 - Interest of
Management and Others in Certain Transactions - Recapitalization/PBB, LLC Lease,
and Note 7 of Notes to Consolidated Financial Statements].

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

In October 1999, in connection with the purchase of Harco Products, Inc.
("Harco"), the Company entered into a lease with a related party for
approximately 5,600 square feet of space in which Harco operates. Rent under the
lease is $2,500 per month and the term of the lease is five years, and can be
terminated upon 60 days notice by the Company. [See Item 11- Interest of
Management and Others in Certain Transactions - Lease Agreement with Harco
Products, Inc., and Notes 7 of Notes to Consolidated Financial Statements].


ITEM 8.  DIRECTORS, EXECUTIVE OFFICERS AND SIGNIFICANT EMPLOYEES
-------  -------------------------------------------------------

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

                     NAME OF DIRECTOR                             AGE
                     ----------------                             ---
                     Peter F. Adams                               59
                     Frederick L. Bowman                          59
                     James W. Linford                             57
                     Robert M. MacTarnahan                        88
                     R. Scott MacTarnahan                         57
                     Keith D. Martin                              73
                                       10
<PAGE>
                     Thomas C. Moir                               61
                     Scott M. Nelson                              36
                     William J. Prenger                           57


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

Frederick L. Bowman. Mr. Bowman is a founder of the Company and has been
President since May 2002. Mr. Bowman served as Vice President from February 1992
until May 2002. 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. He was a
member of the founding board of the Oregon Brewers Guild. Mr. Bowman was elected
to the Board of Directors of the Brewer's Association of America ("BAA") in 1993
and has continued to serve on the board and several national committees since
then. In 2000, Mr. Bowman was recognized with a national award by the BAA. Mr.
Bowman is also a member of the Board of Directors and Secretary of the
Metropolitan Business Association of Portland.

James W. Linford. Mr. Linford was appointed to the Board of Directors in May
2002. Mr. Linford is also Senior Vice President and Chief Operating Officer of
Gardenburger, Inc. Prior to joining Gardenburger, Mr. Linford was Director of
Manufacturing for OceanSpray Cranberries, Inc. Mr. Linford started his food
career with H.J. Heinz, spending the next 17 years working in engineering,
research and operations. He was a member of the Sr. Management team at Ore-Ida
and Weight Watchers Food companies. Mr. Linford is a Director on the American
Frozen Food Institute Board, has served on the College of Engineering Advisory
Board for the University of Idaho, served on various committees for the
Northwest Food Processors Association and other food industry associations. Mr.
Linford has a degree in Mechanical Engineering from the University of Idaho with
graduate studies at Colorado State University.

Robert M. MacTarnahan. Mr. MacTarnahan has been a Director since July 1985. Mr.
MacTarnahan has been a principal in Harmer Company and Black Lake Investments
for more than six 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 products are 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 12 years. Mr. MacTarnahan received a B.S. in
Business Administration from Portland State University in 1968. Mr. Robert M.
MacTarnahan is his father.

Keith D. Martin. Mr. Martin has been a director since October 2002. Mr. Martin
has extensive experience in operations, marketing, sales and strategic planning.
He has held positions in companies ranging in size from start-ups to a Fortune
500 conglomorate. Mr. Martin is currently co-Chief Executive Officer and
co-Chief Operating Officer of Precision Wire Components, based in Wilsonville,
Oregon. Mr. Martin received a Bachelor's in Management Engineering from
Renesslear Polytechnic Institute in 1952, and a J.D. from the Northwestern
School of Law of Lewis & Clark College in 1982.

Thomas C. Moir. Mr. Moir was appointed to the Board of Directors in October
2002. He is currently Director of Business and Technology Development of the LMC
business unit of Coherent, Inc. He assumed this position following the purchase
by Coherent, Inc. of Molectron Detector, Inc. in December 2002. Mr. Moir had
served as President and Chief Operating Officer of Molectron Detector, Inc. for
a period of three years preceding the
                                       11
<PAGE>
acquisition of Molectron Detector, Inc. Prior to that, Mr. Moir served as
President and CEO of the PRIO Corporation, In-Control Solutions, Inc., and Aptec
Computer Systems. Mr. Moir received a Bachelor's in Electrical Engineering from
Purdue University in 1965, and a Masters in Business Administration from Harvard
University in 1967.

Scott M. Nelson. Mr. Nelson was appointed to the Board of Directors in October
2002. He has been a Corporate Executive Officer of Roseburg Forest Products Co.
since 1997. Mr. Nelson is also a Director (previously Chairman of the Board) of
the Riverside Center, a health treatment facility located in Douglas County,
Oregon. Prior to joining Roseburg Forest Products, he worked at Arthur Andersen,
LLP for seven years in the Audit and Business Consulting divisions. Mr. Nelson
received a degree in Business Administration and graduate studies in History and
Political Science, both from the University of Portland. Mr. Nelson is a
Certified Public Accountant licensed in the State of Oregon.

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

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
     ----                     ---         ------------------------
     Frederick L. Bowman       59         President, Secretary, and Treasurer
     Jerome M. Chicvara        52         Chief Executive Officer
     Mark L. Carver            50         Vice President, Sales

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

Jerome M. Chicvara. Mr. Chicvara was appointed as Chief Executive Officer of the
Company in May 2002. Prior to that, he served as Executive Vice President of the
Company, and was a director from June 2001 to February 2001. He is a twenty-year
veteran of the beer and wine industry, and has delivered many keynote speeches
to the industry in his role as industry pioneer and visionary. He spent the
first seven years of his beverage career learning the wholesale trade as a Sales
Executive. In 1987, Mr. Chicvara co-founded the Full Sail Brewing Company and
served as Director of Sales & Marketing. His guidance assisted the company as it
pioneered Oregon's first microbeer in a bottle. Mr. Chicvara was founding
President of the Oregon Brewer's Guild, an association committed to quality
brewing techniques in Oregon's vast microbrew industry. In 1999, Mr. Chicvara
sold his equity in Full Sail and joined Saxer Brewing/Nor'Wester Beer as VP
Marketing & Sales. Mr. Chicvara joined Portland Brewing Co. in April 2000. He
holds a Bachelor of Communications from Evergreen State College.

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

ITEM 9.  REMUNERATION OF DIRECTORS AND OFFICERS
-------  --------------------------------------

a. Director and Officer Remuneration

Directors receive no cash compensation for serving on the Board of Directors.
Robert M. MacTarnahan and R. Scott MacTarnahan have been granted options under
the Company's Non-Qualified Stock Option Plan ("NQSOP"). As of December 31,
2001, 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 2003 or 2002.
                                       12
<PAGE>
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, 2003;
<TABLE>
<CAPTION>
                                     CAPACITIES IN WHICH                        AGGREGATE
     NAME                            REMUNERATION WAS RECEIVED                  REMUNERATION
     ----                            -------------------------                  ------------
<S>                                  <C>                                        <C>
     Frederick L. Bowman             President, Principal Accounting Officer    $     60,000
     Mark L. Carver                  Vice President, Sales                      $     80,000
     Jerome M. Chicvara              Chief Executive Officer                    $     60,000
     All officers as a group (3                                                 $    200,000
     persons)
</TABLE>

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,
2003, options covering 211,050 shares of the Company's Common Stock were
outstanding under the ISOP.

INCENTIVE STOCK OPTION REPRICING. The Company maintains its ISOP to provide
incentives to the Company's key employees to exert their best efforts on behalf
of the Company. In 1999, the Company noted that there was a significant
difference between the exercise prices of stock options held by its employees
and the market value of the underlying stock, which results in options providing
little incentive. The Board of Directors determined that establishing new,
shorter term options, based on pricing which more closely reflects the
underlying stock price, was crucial to obtaining and retaining its personnel.
Accordingly, in May 1999, options to purchase 118,800 shares of Common Stock at
prices ranging from $3.33 to $7.00 per share were repriced and regranted on
different terms, of which options to purchase 72,000 shares were held by
executive officers of the Company. Repriced options to purchase 82,800 shares
were issued at an exercise price of $0.54 per share and repriced options granted
to Mr. Adams to purchase 36,000 shares were issued at an exercise price of
$0.594 per share. All of the repriced options became exercisable on May 20,
2000. In 2001, options to purchase 73,000 shares at $0.59 per share were issued
to certain officers of the Company. In 2003, no options were issued.

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 2002 or 2003 under the Plan.

NON-QUALIFIED STOCK OPTION PLAN. In August 1994, the Board of Directors adopted
the 1994 Non-Qualified Stock Option Plan ("NQSOP"). The NQSOP is administered by
the Board of Directors and provides for grants to officers, employees, directors
and consultants of options to acquire up to 45,000 shares of the Company's
Common Stock at an exercise price of at least 85% of the fair market value of
the subject shares of Common Stock at the time the option is granted. The
granting of options is at the discretion of the Board of Directors. As of
December 31, 2003, 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 8, 2004 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.
                                       13
<PAGE>
<TABLE>
<CAPTION>
                                                                                        Series A
                                                   Common Stock                     Preferred Stock
                                             --------------------------      -------------------------------
                                          Shares     Percent of       Shares        Percent of
    Name of Beneficial Owner or        Beneficially    Shares      Beneficially       Shares
    Number of Persons in Group           Owned (1)   Outstanding     Owned (1)      Outstanding
    --------------------------           ---------   -----------     ---------      -----------
<S>                                      <C>           <C>           <C>               <C>
 Shareholder Group - Voting Trust (5)    7,316,062     74.1  %       5,770             100  %

 Shareholder Group - Adams Parties
   And Voting Trust (5)(6)               7,316,062     74.1          5,770             100

 Robert M. MacTarnahan (5)(6)            7,316,062     74.1          5,770             100

 R. Scott MacTarnahan (5)(6)             7,316,062     74.1          5,770             100

 Peter F. Adams (5)(6)                   7,316,062     74.1          5,770             100

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

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

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

 All Officers and Directors as a group,
 (11 persons)  (4)(5)(6)                 7,500,657     75.0  %      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.

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

(4)  Includes 141,000 shares which may be purchased for prices ranging from
     $0.54 to $5.33 per share, upon exercise of stock options and warrants held
     by all Directors and officers, as a group.

(5)  The members of the MacTarnahan Portland Brewing Company Voting Trust (the
     "Voting Trust") are members of a "group" as that term is used in Section
     13(d)(3) of the Securities Exchange Act of 1934 ("34 Act"). The members of
     the Voting Trust are: the Voting Trust, R. Scott MacTarnahan, Jean
     MacTarnahan, Andrea J. MacTarnahan, Sara M. Whitworth, Black Lake
     Investments, LLC, the MacTarnahan Limited Partnership, Harmer Mill &
     Logging Supply Co., The MacTarnahan Family Trust, the R.M. MacTarnahan
     Trust, and the Ruth A. MacTarnahan Trust. The Trustee of the Voting Trust
     is Robert M. MacTarnahan. The business address for each of the foregoing
     parties is: 11270 SW Lynnridge Avenue Portland, Oregon 97225. Pursuant to
     Rule 13d-5 promulgated under the 34 Act, the group is deemed to
     beneficially own all shares of Portland Brewing which are beneficially
     owned by any member of the group and therefore the group beneficially owns
     4,702,030 shares of common stock, which includes options to purchase 12,000
     shares of common stock, and 2,885 shares of Series A Preferred stock, which
     is the total number of shares and options deposited into the Voting Trust
     by its members. In addition, the Voting Trust is a member of a separate
     "group" (see footnote 6) and is deemed to beneficially own an additional
     2,614,032 shares of common stock and 2,885 shares of Series A Preferred
     stock. Therefore, each member of the Voting Trust is deemed to own
     7,316,062 shares of common stock and 5,770 shares of Series A Preferred
     stock.
                                       14
<PAGE>
(6)  The Voting Trust, Charles A. Adams, Electra Partners, Inc. (17675 SW
     Farmington Road, PMB #470 Aloha, Oregon 97007), the Charles A. Adams Family
     Trust (4047 SW Shattuck Road, Portland, Oregon 97221), Katherine McBride
     Adams (fka Katherine Maxwell Adams) (2636 NE 11th Avenue, Portland, Oregon
     97212), Charles F. Adams III (4923 SW Lowell, Portland, Oregon 97221), and
     Karban Development Corporation (17675 SW Farmington Road, PMB #470 Aloha,
     Oregon 97007) are parties to a Voting Agreement dated July 27, 2001 and
     therefore are members of a "group" as that term is used in Section 13(d)(3)
     of the 34 Act. Peter F. Adams (17675 SW Farmington Road, PMB #470 Aloha,
     Oregon 97007) is also a member of the group. Pursuant to Rule 13d-5
     promulgated under the 34 Act, the group is deemed to beneficially own all
     shares of Portland Brewing which are beneficially owned by any member of
     the group and therefore the group beneficially owns 7,316,062 shares of
     common stock, which includes options to purchase 12,000 shares of common
     stock, and 5,770 shares of Series A Preferred stock.

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

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


                          OPTIONS, WARRANTS AND RIGHTS

The following table sets forth certain information regarding outstanding options
and warrants to purchase shares of common stock of Portland Brewing as of March
8, 2004 as to (i) each person who is known by Portland Brewing to own
beneficially 10% or more of the outstanding shares of Portland Brewing's common
stock, (ii) each of the three most highly compensated officers and (iii) all
Directors and officers as a group.
<TABLE>
<CAPTION>
                                     Number of Shares of Common Stock
                                          Called for by Options
Name of  Holder                                And Warrants              Exercise Price        Date of Exercise
--------------------------------        ----------------------------    -----------------     -------------------
<S>                                              <C>                      <C>                    <C>
Shareholder Group - Voting Trust (1)                12,000                   $5.333                 (2)
Shareholder Group - Adams Parties
  And Voting Trust (1)                              12,000                   $5.333                 (2)
Robert M. MacTarnahan (1)                           12,000                   $5.333                 (2)
R. Scott MacTarnahan (1)                            12,000                   $5.333                 (2)
Peter F. Adams                                      12,000                   $5.333                 (2)
Frederick L. Bowman                                 51,000                   $0.54                  (3)
Jerome M. Chicvara                                  50,000                   $0.59                  (4)
Mark L. Carver                                      28,000                   $0.54                  (5)

All Directors and officers as a group,
(11 persons)                                       141,000                $0.54-$5.33               (6)
</TABLE>
(1)  As noted in Security Ownership of Certain Beneficial Owners and Management,
     Footnotes 5 and 6, each of these holders are members of a "group" as that
     term is used in Section 13(d)(3) of the 34 Act. Pursuant to Rule 13d-5
     promulgated under the 34 Act, the group is deemed to beneficially own all
     shares of Portland Brewing which are beneficially owned by any member of
     the group and therefore the group beneficially owns 12,000 shares of common
     stock which may be acquired under outstanding options, as noted in the
     table above.

(2)  Options are currently exercisable.

(3)  Options to purchase 8,000 shares of common stock issued to Mr. Bowman in
     January 1996 at $7.00 per share were repriced in May 1999 to $0.54 per
     share. Additionally, in May 1999, Mr. Bowman was granted options to
     purchase 20,000 shares common stock at $0.54 per share. 28,000 of Mr.
     Bowman's outstanding options became exercisable on May 20, 2000. In
     addition, options to purchase 23,000 shares of common stock were issued to
     Mr. Bowman in February 2001 at $0.59 per share. These options became
     exercisable on February 22, 2002.

                                       15
<PAGE>
(4)  Options to purchase 50,000 shares of common stock issued to Mr. Chicvara in
     February 2001 at $0.59 per share. All of Mr. Chicvara's outstanding options
     became exercisable on February 22, 2002.

(5)  Options to purchase 28,000 shares of common stock issued to Mr. Carver in
     July 1993 at $3.33 per share were repriced in May 1999 to $0.54 per share.
     All of Mr. Carver's outstanding options became exercisable on May 20, 2000.

(6)  As of March 8, 2004, options to purchase 141,000 shares of common stock
     were exercisable.


ITEM 11.  INTEREST OF MANAGEMENT AND OTHERS IN CERTAIN TRANSACTIONS
--------  ---------------------------------------------------------

HARCO PRODUCTS, INC. LEASE AGREEMENT

In connection with the purchase of Harco, the Company entered into a lease with
MacTarnahan, an entity controlled by two directors of the Company for
approximately 5,600 square feet of space in which Harco operates. Rent under the
lease is $2,500 per month and the term of the lease is five years, and can be
terminated upon 60 days notice by the Company. [See Note 7 of Notes to
Consolidated Financial Statements].

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


LEASE AGREEMENT WITH L & L LAND COMPANY

In May 1999, the Company entered into a lease of approximately 30,100 square
feet of space (the "lease") located in the warehouse and office building
commonly known as 2750 N.W. 31st Avenue, Portland, Oregon (the "Adjacent
Building"). The Adjacent Building is owned by L & L Land Company (a general
partnership consisting of Howard M. Wall, a former 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
from 13,000 square feet to approximately 8,000 square feet. This reduction in
subleased space has reduced the month-to-month rental income from $4,974 per
month to $3,168 per month. The terms of the lease and sublease were determined
to be fair to the Company and approved by all members of the Board of Directors,
except Mr. Wall, who abstained.


LICENSE AGREEMENT WITH ROBERT M. MACTARNAHAN

In July 1994, the Company entered into a License Agreement ("License Agreement")
with Robert M. MacTarnahan, a director of the Company, and Harmer, a company
controlled by Mr. and Mrs. Robert M. MacTarnahan. Pursuant to the License
Agreement, (i) Mr. MacTarnahan conveyed to the Company the right to use his
surname and its variation "MacTarnahan" as a Company trademark, and (ii) the
Company has been granted an exclusive worldwide license to use Mr. MacTarnahan's
likeness, image and other personal attributes to promote the sale of the
Company's products, merchandise, and related materials. The license expires on
December 31, 2093. In consideration of the license grant, the Company must pay a
royalty of $1.00 per barrel of MacTarnahan's Scottish Style Amber Ale sold by
the Company for the term of the license. The Company has the right to terminate
the License Agreement on 30-days' written notice and the license may also
terminate under other conditions as specified in the License Agreement. In the
event the license is terminated or terminates, the Company must assign its
rights to the trademark "MacTarnahan" and the above variations to Mr.
MacTarnahan. On January 15, 2002 the License Agreement was extended to include
monthly royalty payments at $1 per barrel for MacTarnahan's Blackwatch Cream
Porter and MacTarnahan's Highlander Pale Ale sales
                                       16
<PAGE>
effective January 1, 2002. MacTarnahan's IPA was added effective July 1, 2002.
Royalties paid per the License Agreement for 2003 and 2002 were $22,903 and
$23,578 respectively, based on the sale of 22,903 and 23,578 barrels,
respectively. Effective January 1, 2002, Harmer assigned its rights under the
License Agreement, including the right to receive royalties, to Black Lake
Investments, LLC, a company controlled by Robert M. MacTarnahan and R. Scott
MacTarnahan. On January 15, 2002 the License Agreement was extended to include
monthly royalty payments at $1 per barrel for MacTarnahan's Blackwatch Cream
Porter and MacTarnahan's Highlander Pale Ale sales effective January 1, 2002.
Effective July 1, 2002, the License Agreement was extended to include monthly
royalty payments at $1 per barrel for MacTarnahan's IPA and Mac Frost. On
January 26, 2004, the Company executed a Fourth Amendment to Trademark License
Agreement with Robert M. MacTarnahan and Black Lake Investments, LLC under which
the products covered, royalty structure, and term of the agreement were amended.

LEASE AGREEMENT WITH GREENSTEAD = ACCOUNTING RESOURCE

The Company leases approximately 1,520 square feet of office space at the
Company's facility located at 2750 NW 31st Avenue to Greenstead = Accounting
Resource ("Greenstead") under the terms of a Services Agreement dated December
1, 2001 between Greenstead and the Company. Greenstead is owned by affiliates of
Charles A. Adams, a former director and officer of the Company, and Peter F.
Adams, a current director of the Company. The rent is $950 per week.


                                     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 5,699 shareholders of record as of March 8, 2004. The Company has never
declared any cash dividends on its Common Stock, nor does the Company intend to
do so in the near future. Pursuant to certain loan agreements, the Company
cannot declare or pay dividends on any of its outstanding stock, except
dividends payable in Common Stock of the Company, without prior written consent
of the lenders. Holders of the Company's Series A Preferred Stock are entitled
to receive cumulative dividends at the rate of 8% per annum, when and if
declared by the Board of Directors, prior to payment of dividends on Common
Stock. No cash or stock dividends have been declared to date. The Revolving Line
contains a restriction on the payment of dividends on the Company's stock
without prior consent of the lender.


ITEM 2.  LEGAL PROCEEDINGS
-------  -----------------

As of the date of this Report on Form 10-KSB, there are no other legal
proceedings pending to which the Company is a party or to which any of its
property is subject that the outcome of which would have a material adverse
effect on the Company's business, and the Company does not know of any such
action being contemplated. [See Note 11 of Notes to Consolidated Financial
Statements].

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, 2003.

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
                                       17
<PAGE>
written representations from certain reporting persons, the Company believes
that, during 2003, all executive officers, Directors and greater than 10%
shareholders complied with all applicable filing requirements.


ITEM 6.  REPORTS ON FORM 8-K
-------  -------------------
No reports on Form 8-K were filed during the quarter ended December 31, 2003.


CONTROLS AND PROCEDURES
-----------------------

(a)  Evaluation of disclosure controls and procedures. The Company's chief
     executive officer and chief financial officer, after evaluating the
     effectiveness of the Company's "disclosure controls and procedures" (as
     defined in the Securities Exchange Act of 1934 Rules 13a-14(c) and
     15d-14(c)) as of a date (the "Evaluation Date") within 90 days before the
     filing date of this annual report, have concluded that as of the Evaluation
     Date, the Company's disclosure controls and procedures were effective and
     designed to ensure that material information relating to the Company and
     the Company's consolidated subsidiaries would be made known to them by
     others within those entities.

(b)  Changes in internal controls. There were no significant changes in the
     Company's internal controls or in other factors that could significantly
     affect those controls subsequent to the Evaluation Date.


AUDIT COMMITTEE FINANCIAL EXPERT
--------------------------------

Under rules adopted by the SEC, the Company is required to disclose whether it
has an "Audit Committee Financial Expert" serving on its Audit Committee.
Although management believes that at least one member of the Audit Committee
would qualify as an Audit Committee Financial Expert, the Company's board of
directors has not designated any particular member of the Audit Committee as the
Audit Committee Financial Expert under the SEC's rules. Management believes that
at least one member of the Audit Committee is capable of: (i) understanding
generally accepted accounting principles and financial statements; (ii)
assessing the general application these principles in connection with the
accounting for estimates, accruals and reserves; (iii) analyzing and evaluating
the Company's consolidated financial statements; (iv) understanding internal
control over financial reporting; and (v) understanding audit committee
functions. Additionally, all members of the Company's Audit Committee are
independent.

CODE OF ETHICS
--------------

The Company has not adopted a Code of Ethics, within the meaning of applicable
SEC rules, relating to the conduct of its officers and directors. Management and
the board of directors have concentrated their efforts on addressing the
Company's liquidity issues and historical losses, and have not yet considered
the adoption of a formal Code of Ethics. The Company's board of directors will
review this requirement and will consider developing a Code of Ethics during
2004.



                                       18
<PAGE>
                                    PART F/S


INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
                                                                       PAGE
                                                                       ----

INDEPENDENT AUDITOR'S REPORT                                          F -1-2


FINANCIAL STATEMENTS

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









































                                       19
<PAGE>
                                    PART III

ITEM 1. AND ITEM 2.        INDEX TO EXHIBITS AND DESCRIPTION OF EXHIBITS
<TABLE>
<CAPTION>
Exhibit  Exhibit
Number   Number
(1-A)   (S-B 601)    Description
-----   ---------    -----------
<C>     <C>          <C>
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)
5.1     9.1          Voting Trust Agreement dated May 31, 2002 (28)
6.1     10.1         Indenture of Lease between the Company and Portland Brewing Building Partners dated
                     November 4, 1992, as amended (1)
6.2     10.2         Sublease between the Company, Power Transmission Products, Inc., and Pacific Realty
                     Associates, L.P., dated January 26, 1995 (1)
6.3     10.3         License Agreement between the Company, R. M. MacTarnahan and Harmer Company dated
                     July 1, 1994 (1)
6.4     10.4         The Company's Incentive Stock Option Plan, as amended and Specimen Form Plan Documents (1)
                     (10)
6.5     10.5         Amendment to the Company's Incentive Stock Option Plan (7) (10)
6.6     10.6         The Company's 1994 Nonqualified Stock Option Plan and Specimen Form Plan Documents (1) (10)
6.7     10.7         Distribution Agreement between the Company and Columbia Distributing, dated April 8, 1996
                     (5)
6.8     10.8         Voting Agreement, dated November 18, 1998 (8)
6.9     10.9         Amendment No. 1 to November 18, 1998 Voting Agreement, dated December 6, 1999 (12)
6.10    10.10        Restated Cash Incentive Plan, as amended (1) (10)
6.11    10.11        The Company's Stock Offering Purchase Plan for Employees and Specimen Form Plan (1) (10)
6.12    10.12        Option to Purchase and Agreement and Option to Lease between the Company and L&L Land Co.,
                     dated December 1995 (2)
6.13    10.13        Indenture of Lease between the Company and Western Stations Co. dated May 1, 1995 (3)
6.14    10.14        Manufacturing Services Agreement between the Company and The Stroh Brewery Company dated
                     January 31, 1996 (4)
6.15    10.15        Loan Agreement, dated February 2, 2000 (6)
6.16    10.16        Lease Agreement between the Company and L&L Land Company, dated May 18, 1999 (certain
                     schedules to the Lease Agreement have been omitted) (9)
6.17    10.17        Sublease Agreement between the Company and Power Transmission Products, Inc., dated May 1,
                     1999 (9)
6.18    10.18        Business Loan Agreement, dated February 1, 2001 (10)
6.19    10.19        Consulting Agreement between the Company and R. Scott MacTarnahan, dated November 1, 1999
                     (11) (12)
6.20    10.20        Lease Agreement between the Company and MacTarnahan Limited Partnership, dated November 1,
                     1999 (12)
6.21    10.21        June 12, 2000 Amendment to License Agreement between the Company and Harmer Mill & Logging
                     Supply, Inc., dated July 1, 1994 (13)
6.22    10.22        July 1, 2000 Amendment to License Agreement between the Company, RM MacTarnahan and Harmer
                     Mill & Logging Supply, Inc., dated July 1, 1994 (14)


                                       20
<PAGE>
6.24    10.24        Purchase and Sale Agreement and Receipt for Earnest Money dated August 12, 2001 (15)
6.25    10.25        Business Loan Agreement dated September 14, 2001 (16)
6.26    10.26        Purchase and Sale Agreement dated October 12, 2001 (17)
6.27    10.27        Modification to Deed of Trust and Loan Documents dated September 19, 2001 (18)
6.28    10.28        Promissory Note and Security Agreement dated November 1, 2001 (19)
6.29    10.29        Business Loan Agreement dated October 21, 2001(20)
6.30    10.30        Voting Agreement, dated July, 27, 2001 (21)
6.31    10.31        First Amendment to Loan Arrangement dated June 1, 2002 (23)
6.32    10.32        July 1, 2002 Amendment to License Agreement between the Company and Harmer Mill & Logging
                     Supply, Inc., dated July 1, 1994 (24)
6.33    10.33        Second Amendment to Loan Arrangement dated October 1, 2002 (25)
6.34    10.34        Third Amendment to Loan Arrangement dated January 1, 2003 (25)
6.35    10.35        Letter Agreement dated March 21, 2003 (25)
6.36    10.36        Fourth Amendment to Loan Arrangement dated June 30, 2003 (26)
6.37    10.37        Business Loan Agreement dated October 28, 2003 (27)
6.38    10.38        Business Loan Agreement (Asset Based) dated September 1, 2003*
6.39    10.39        First Amendment to Business Loan Agreement (Asset Based) dated December 26, 2003*
6.40    10.40        Second Amendment to Business Loan Agreement (Asset Based) dated March 8, 2004*
6.41    10.41        Fourth Amendment to License Agreement dated January 26, 2004*
6.42    10.42        Asset Purchase Agreement between the Company and Pyramid breweries Inc. dated January 26,
                     2004 (29)
6.43    10.43        Letter Agreement between the Company and MacTarnahan Limited Partnership and other parties
                     dated January 24, 2004*
6.44    10.44        Letter Agreement between the Company and MacTarnahan Limited Partnership and other parties
                     dated March 25, 2004*
6.45    10.45        Fifth Amendment to Loan Arrangement dated January 1, 2004*
6.46    10.46        Deferred Redemption Agreement between the Company, Karban Development Corporation and
                     MacTarnahan Portland Brewing Company Voting Trust dated February 25, 2004*
6.47    10.47        Letter Agreement between the Company and MacTarnahan Limited Partnership dated March 25,
                     2004*

--      21.0         Subsidiaries of the Registrant (22)
10.0    23.0         Consent of Moss Adams LLP*
        31.1         Rule 13a-14(a)/15d-14(a) Certification of Frederick L. Bowman *
        31.2         Rule 13a-14(a)/15d-14(a) Certification of Jerome Chicvara*
        32.1         Section 1350 Certification of Frederick L. Bowman*
        32.2         Section 1350 Certification of Jerome Chicvara*
</TABLE>
(1)  Incorporated by reference to the Company's Form SB-1 (Commission File No.
     33-90914-LA) as filed with the Commission on April 4, 1995.
(2)  Incorporated by reference to the Company's Form 10-KSB for the year ended
     December 31, 1995 as filed with the Commission on March 28, 1996.
(3)  Incorporated by reference to the Company's Form 10-QSB for the quarter
     ended March 31, 1996 as filed with the Commission on May 2, 1996.
(4)  Incorporated by reference to the Company's Form 10-QSB/A No. 1 for the
     quarter ended March 31, 1996 as filed with the Commission on July 31, 1996.
(5)  Incorporated by reference to the Company's Form 10-QSB for the quarter
     ended September 30, 1996 as filed with the Commission on November 12, 1996.
(6)  Incorporated by reference to the Company's Form 10-QSB for the quarter
     ended March 31, 2000 as filed with the Commission on May 11, 2000.
(7)  Incorporated by reference to the Company's Definitive Proxy Statement for
     the 1998 Annual Meeting of Shareholders, as filed with the Commission on
     November 17, 1998.
(8)  Incorporated by reference to the Company's Form 10-KSB for the year ended
     December 31, 1998 as filed with the Commission on March 31, 1999.
(9)  Incorporated by reference to the Company's Form 10-QSB/A for the quarter
     ended June 30, 1999 as filed with the Commission on August 10, 1999.
(10) Incorporated by reference to the Company's Form 10-KSB for the year ended
     December 31, 2000 as filed with the Commission on April 2, 2001.
(11) Denotes a management contract or compensatory plan or arrangement.

                                       21
<PAGE>
(12) Incorporated by reference to the Company's Form 10-KSB for the year ended
     December 31, 1999 as filed with the Commission on March 28, 2000.
(13) Incorporated by reference to the Company's Form 10-QSB for the quarter
     ended June 30, 2000 as filed with the Commission on August 10, 2000.
(14) Incorporated by reference to the Company's Form 10-QSB for the quarter
     ended September 30, 2000 as filed with the Commission on November 14, 2000.
(15) Incorporated by reference to the Company's Form 10-QSB for the quarter
     ended September 30, 2001 as filed with the Commission on November 14, 2001.
(16) Incorporated by reference to the Company's Form 10-QSB for the quarter
     ended September 30, 2001 as filed with the Commission on November 14, 2001.
(17) Incorporated by reference to the Company's Form 10-QSB for the quarter
     ended September 30, 2001 as filed with the Commission on November 14, 2001.
(18) Incorporated by reference to the Company's Form 10-QSB for the quarter
     ended September 30, 2001 as filed with the Commission on November 14, 2001.
(19) Incorporated by reference to the Company's Form 10-QSB for the quarter
     ended September 30, 2001 as filed with the Commission on November 14, 2001.
(20) Incorporated by reference to the Company's Form 10-KSB for the year ended
     December 31, 2001 as filed with the Commission on March 29, 2002.
(21) Incorporated by reference to Schedule 13D Amendment No. 2 filed by the
     MacTarnahan Portland Brewing Company Voting Trust and the Adams Parties as
     filed with the Commission on July 30, 2001.
(22) Incorporated by reference to the Company's Form 10-KSB for the year ended
     December 31, 2000 as filed with the Commission on April 2, 2001.
(23) Incorporated by reference to the Company's Form 10-QSB for the quarter
     ended June 30, 2002 as filed with the Commission on August 15, 2002.
(24) Incorporated by reference to the Company's Form 10-QSB for the quarter
     ended September 30, 2002 as filed with the Commission on November 15, 2002.
(25) Incorporated by reference to the Company's Form 10-KSB for the year ended
     December 31, 2002 as filed with the Commission on March 29, 2003.
(26) Incorporated by reference to the Company's Form 10-QSB for the quarter
     ended June 30, 2003 as filed with the Commission on August 14, 2003.
(27) Incorporated by reference to the Company's Form 10-QSB for the quarter
     ended September 30, 2003 as filed with the Commission on November 20, 2003.
(28) Incorporated by reference to Schedule 13D filed by the MacTarnahan Portland
     Brewing Company Voting Trust as filed with the Commission on June 8, 2001.
(29) Incorporated by reference to Pyramid Breweries Inc.'s Form 8-K as filed
     with the Commission on January 28, 2004.




       *    Filed herewith.





                                       22
<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 30th day of March, 2004.


                           PORTLAND BREWING COMPANY


                           By: /s/ FREDERICK L. BOWMAN
                              -------------------------
                              Frederick L. Bowman
                              President and Principal
                              Accounting 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 30th day of March, 2004.

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

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

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

     /s/ JAMES W. LINFORD                       Director
     --------------------
     James W. Linford

     /s/ ROBERT M. MACTARNAHAN                  Director
     -----------------------
     Robert M. MacTarnahan

     /s/ R. SCOTT MACTARNAHAN                   Director
     -----------------------
     R. Scott MacTarnahan

     /s/ KEITH D. MARTIN                        Director
     -------------------
     Keith D. Martin

     /s/ THOMAS C. MOIR                         Director
     ------------------
     Thomas C. Moir

     /s/ SCOTT M. NELSON                        Director
     -------------------
     Scott M. Nelson

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






                                       23
<PAGE>











                            PORTLAND BREWING COMPANY
                                 AND SUBSIDIARY
                                   ----------

                          INDEPENDENT AUDITOR'S REPORT
                                       AND
                              FINANCIAL STATEMENTS
                                   ----------

                           DECEMBER 31, 2003 AND 2002






































--------------------------------------------------------------------------------
<PAGE>



CONTENTS
--------------------------------------------------------------------------------


                                                                        PAGE
                                                                        ----



INDEPENDENT AUDITOR'S REPORT                                             F-3

FINANCIAL STATEMENTS

      Consolidated balance sheets                                        F-4
      Consolidated statements of operations                              F-5
      Consolidated statements of stockholders' equity                    F-6
      Consolidated statements of cash flows                              F-7
      Notes to consolidated financial statements                      F-8 - F19








































<PAGE>
INDEPENDENT AUDITOR'S REPORT


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



We have audited the accompanying consolidated balance sheets of Portland Brewing
Company and Subsidiary (an Oregon Corporation) as of December 31, 2003 and 2002,
and the related consolidated statements of operations, stockholders' equity and
cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above presents
fairly, in all material respects, the financial position of Portland Brewing
Company and Subsidiary as of December 31, 2003 and 2002, and the results of its
operations and cash flows for the years then ended, in conformity with
accounting principles generally accepted in the United States of America.




/s/ MOSS ADAMS LLP
------------------

Portland, Oregon
March 5, 2004






















See accompanying notes.                                                      F-3
--------------------------------------------------------------------------------
<PAGE>
                                         PORTLAND BREWING COMPANY AND SUBSIDIARY
                                                     CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                 December 31,
                                                        -----------------------------
                                                            2003             2002
                                                        ------------     ------------
CURRENT ASSETS
<S>                                                     <C>              <C>
  Cash and cash equivalents                             $    55,401      $    34,622
  Accounts receivable, net of allowance for doubtful
    accounts                                                694,192          922,166
  Inventories                                             1,019,763        1,024,663
  Assets held for sale                                            -           51,682
  Other current assets                                      198,128          232,803
                                                        ------------     ------------
        Total current assets                              1,967,484        2,265,936
                                                        ------------     ------------
PROPERTY AND EQUIPMENT, NET                               4,375,407        6,421,810
OTHER ASSETS, NET                                           280,891          450,766
                                                        ------------     ------------

                                                        $ 6,623,782      $ 9,138,512
                                                        ============     ============
CURRENT LIABILITIES
                                                                       $
  Line of credit                                            643,324          962,359
  Current portion of long-term debt                          20,414           77,816
  Current portion of long-term debt expected to be
  refinanced                                                      -          922,092
  Accounts payable                                          989,130        1,153,373
  Customer (keg) deposits held                              124,522          117,549
  Accrued payroll and related expenses                       95,318           99,297
  Other accrued liabilities                                 115,434          144,404
                                                        ------------     ------------

        Total current liabilities                         1,988,142        3,476,890
                                                        ------------     ------------

LONG-TERM DEBT, LESS CURRENT PORTION                      1,452,896           45,911
                                                        ------------     ------------

STOCKHOLDER TERM LOAN , LESS CURRENT PORTION              1,700,000        1,700,000
                                                        ------------     ------------
OTHER LONG-TERM LIABILITIES
                                                                  -           36,949
                                                        ------------     ------------
  Series A Redeemable Convertible Preferred Stock, $52
   value, 10,000 shares authorized, 5,770 shares issued
   and outstanding, liquidation preference of $300,040      300,040          300,040
                                                        ------------     ------------

STOCKHOLDERS' EQUITY
  Common stock, no par value; 25,000,000 authorized
   shares issued and outstanding:  9,855,822 (2003 and
   2002)                                                  9,501,620        9,501,620

  Accumulated deficit                                    (8,318,916)      (5,922,898)
                                                        ------------     ------------

        Total stockholders' equity                        1,182,704        3,578,722
                                                        ------------     ------------

        Total liabilities and stockholders' equity      $ 6,623,782      $ 9,138,512
                                                        ============     ============
</TABLE>
See accompanying notes.                                                      F-4
--------------------------------------------------------------------------------
<PAGE>
                                         PORTLAND BREWING COMPANY AND SUBSIDIARY
                                           CONSOLIDATED STATEMENTS OF OPERATIONS
--------------------------------------------------------------------------------



                                             For the year ended December 31,
                                        ------------------------------------
                                               2003                  2002
                                        -------------          -------------

Sales                                    $10,668,341            $11,713,863
Less excise tax                              401,485                368,506
                                        -------------          -------------


              Net sales                   10,266,856             11,345,357


Cost of sales                              7,539,003              8,238,014
                                        -------------          -------------


Gross profit                               2,727,853              3,107,343


General and administrative expenses        1,323,197              1,402,378

Sales and marketing expenses               2,168,172              2,168,341

Impairment charge                          1,370,000                 40,000
                                        -------------          -------------


Loss from operations                      (2,133,516)              (503,376)


Interest expense, net                       (234,984)              (247,064)

Other income                                  46,553                 21,571

Other expense                                (74,071)               (34,611)
                                        -------------          -------------

                                            (262,502)              (260,104)
                                        -------------          -------------

Net loss                                $ (2,396,018)          $   (763,480)
                                        =============          =============

Basic and diluted net loss per share          ($0.24)                ($0.08)
                                        =============          =============

Shares used in per share calculation       9,855,822              9,855,822
                                        =============          =============



See accompanying notes.                                                      F-5
--------------------------------------------------------------------------------
<PAGE>
                                        PORTLAND BREWING COMPANY AND SUBSIDIARY
                                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                  COMMON STOCK
                            --------------------------
                                                           ACCUMULATED
                              SHARES         AMOUNT           DEFICIT              TOTAL
                            -----------  -------------    --------------      ------------
<S>                          <C>         <C>              <C>                 <C>
BALANCE, DECEMBER 31, 2001   9,855,822   $  9,506,090     $  (5,159,418)      $ 4,346,672

OFFERING COSTS RELATED
   TO STOCK SALE                     -         (4,470)                -            (4,470)


NET LOSS                             -              -          (763,480)         (763,480)
                            -----------  -------------    --------------      ------------

BALANCE, DECEMBER 31, 2002   9,855,822   $  9,501,620     $  (5,922,898)       $3,578,722


NET LOSS                             -              -        (2,396,018)       (2,396,018)
                            -----------  -------------    --------------      ------------

BALANCE, DECEMBER 30, 2003   9,855,822   $ (8,318,916)    $  (8,318,916)      $ 1,182,704
                            ===========  =============    ==============      ============
</TABLE>




























See accompanying notes.                                                      F-6
--------------------------------------------------------------------------------
<PAGE>
                                         PORTLAND BREWING COMPANY AND SUBSIDIARY
                                           CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------
                                                 For the year ended December 31,
                                                   ---------------------------
                                                        2003           2002
                                                   ------------   ------------
Cash flows relating to operating activities:
     Net loss                                      $(2,396,018)   $  (763,480)
     Adjustments to reconcile net loss to net cash
       from operating activities:
         Depreciation                                  724,522        840,362
         Amortization                                  262,037        291,444
         Allowance for doubtful accounts               (28,000)       (30,162)
         Gain on sale of assets                        (30,153)        (5,471)
         Impairment charge                           1,370,000         40,000
         Interest capitalized into long-term debt           -          50,053
     (Increase) decrease in cash due to changes in
       assets and liabilities
         Accounts receivable                           255,974       (222,433)
         Inventories                                     4,900        (58,384)
         Other current assets                          (53,074)       (66,351)
         Other assets                                   (4,413)        (2,869)
         Accounts payable                             (164,243)       210,534
         Customer deposits held                        (32,949)           859
         Accrued payroll and other
             accrued liabilities                         6,973       (241,393)
         Other long term liabilities                   (36,949)       (48,687)
                                                    -----------    -----------

         Net cash from operating activities           (121,393)        (5,978)
                                                    -----------    -----------
Cash flows relating to investing activities:
     Purchase of property and equipment                (48,495)      (193,921)
     Proceeds from sale of property and equipment       82,211          7,388
                                                    -----------    -----------
         Net cash from investing activities             33,716       (186,533)
                                                    -----------    -----------
Cash flows relating to financing activities:
     Net borrowings (payments) on the line of credit  (319,035)       345,059
     Borrowings of long-term debt                    1,473,310             -
     Principal payments on long-term debt           (1,045,819)      (133,197)
     Repayment of stockholders' loans                       -         (75,000)
     Proceeds from long-term stockholders' loans            -          70,000
     Costs related to issuance of common stock              -          (4,470)
                                                    -----------    -----------
         Net cash from financing activities            108,456        202,392
                                                    -----------    -----------

Net increase in cash                                    20,779          9,881
                                                    -----------    -----------
Cash, beginning of period                               34,622         24,741
                                                    -----------    -----------
Cash, end of period                                 $   55,401     $   34,622
                                                    ===========    ===========
Non-cash disclosure
     Interest capitalized into long-term debt       $       -      $   50,053
                                                    ===========    ===========
Supplemental disclosure of cash flow information:
     Cash paid during the period for interest       $  234,984     $  247,064
                                                    ===========    ===========

See accompanying notes.                                                      F-7
--------------------------------------------------------------------------------
<PAGE>
                                         PORTLAND BREWING COMPANY AND SUBSIDIARY
                                                NOTES TO CONSOLIDATED STATEMENTS
--------------------------------------------------------------------------------

NOTE 1   -    DESCRIPTION OF BUSINESS

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


NOTE 2   -    SUBSEQUENT EVENT

         On January 26, 2004 and subject to shareholder approval, the Company
         entered into an asset purchase agreement (the "Asset Purchase
         Agreement") with Pyramid Breweries Inc. and PBC Acquisition, LLC
         (collectively, "Pyramid") to sell substantially all of the brewery and
         restaurant assets of the Company for approximately $4.2 million. As
         part of this transaction, the Company will sell the real property to
         the MacTarnahan Limited Partnership ("MacTarnahan") (principal
         shareholders through ownership) for $1.76 million, which includes the
         assumption of the Sterling Savings Bank long-term debt (approximately
         $1.5 million) which is secured by the real property. Any remaining
         amount due the Company on the real property sale will be offset against
         the amounts currently owed to MacTarnahan.

         Payment of the sales price in the Asset Purchase Agreement will consist
         of a combination of cash, assumption of the Company's liabilities and
         at Pyramid's option, Pyramid common stock. At the conclusion of these
         transactions, the remaining assets of the Company will be the assets
         associated with the Harco subsidiary, all scotch inventory on hand, any
         Pyramid common stock received in the asset sale, and the right to
         receive certain earn-out payments pursuant to the Asset Purchase
         Agreement. As of December 31, 2003, the book value of the Harco assets
         and the scotch inventory totaled $296,000 and the related liabilities
         totaled $101,000.

         In anticipation of these transactions, the Company has recognized an
         impairment charge in accordance with Statement of Financial Accounting
         Standard No. 144 of $1.37 million for the year ended December 31, 2003.

         Immediately following the sale, and subject to shareholder approval,
         the Company will proceed with a reverse stock split of 600,000 to 1.
         The terms of the reverse split will require the Company to repurchase
         all fractional shares resulting from the reverse split for $.10 per
         share. Management estimates this payment will be approximately
         $256,000. The reverse split and resulting stock repurchase will reduce
         the number of shareholders below 300 at which time the Company
         anticipates filing the appropriate paperwork with the SEC to become a
         private company.

         In connection with the contemplated asset sale and reverse split
         transactions, MacTarnahan Limited Partnership and other MacTarnahan
         family entities executed a commitment letter dated January 24, 2004 to
         lend the Company amounts up to $650,000 to cover fees and expenses
         incurred in connection with the Asset Purchase Agreement and the
         reverse split transaction, working capital requirements, and
         post-transaction losses. By letter dated March 25, 2004, the date by
         which definitive loan documents are to be executed was extended to July
         31, 2004. The Company expects to repay the loans with earn out payments
         and holdback amounts that it may receive after the closing of the asset
         sale. The loans will be secured by the Company's assets that are not
         transferred to Pyramid in the asset sale, any Pyramid stock received as
         consideration on the asset sale transaction and earn out and holdback
         rights.

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

NOTE 3   -    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

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

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







































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


NOTE 3   -    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

         INVENTORIES - Inventories are stated at the lower of average cost,
         which approximates the first-in, first-out method, or market. Raw
         materials include amounts related to the Company's hand truck business.
         Inventories were recorded at cost as of December 31, 2003 and 2002 and
         consist of the following:

                                                           December 31,
                                                  ----------------------------
                                                      2003            2002
                                                  ------------    ------------

                    Raw materials                 $    450,633    $    510,193
                    Work-in-process                    185,724         210,455
                    Finished goods                     344,635         252,867
                    Merchandise                         38,771          51,148
                                                  ------------    ------------
                                                  $  1,019,763    $  1,024,663
                                                  ============    ============


         PROPERTY AND EQUIPMENT - Pursuant to the provisions of Financial
         Accounting Standard (SFAS) 144, Accounting for the Impairment of
         Disposal of Long-Lived Assets, management has conducted an analysis
         property and equipment to determine whether the carrying amount of the
         assets was impaired at December 31, 2003. In light of the proposed sale
         of these assets described in Note 3, management has determined that an
         impairment had occurred as of December 31, 2003. Based upon the fair
         value of the transaction, a non-cash impairment loss of $1,370,000 has
         been recognized in the statement of operations for the year ended
         December 31, 2003 and property and equipment are stated at estimated
         net realizable value at December 31, 2003. Net realizable value was
         estimated using the expected asset sale price described in Note 3.
         Property and equipment at December 31, 2002 are stated at cost.
         Interest costs related to the construction of certain long-term assets
         are capitalized and amortized over the estimated useful lives of the
         related assets.

         Property and equipment, after impairment, consists of the following:

                                                              December 31,
                                                      -------------------------
                                                          2003          2002
                                                      -----------   -----------

         Land and buildings                           $ 1,568,000   $ 1,568,000
         Plant and equipment                            6,981,025     8,321,576
         Leasehold improvements                         1,626,220     1,621,315
         Office and laboratory equipment and vehicles     794,875       793,632
         Kegs                                             559,023       610,651
         Construction in progress                           8,170        92,596
                                                      -----------   -----------

                                                       11,537,313    13,007,770
         Less accumulated depreciation                 (7,161,906)   (6,585,960)
                                                      -----------   -----------

                                                      $ 4,375,407   $ 6,421,810
                                                      ===========   ===========

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

NOTE 3   -    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

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

         INTANGIBLE ASSETS - Intangible assets consist of package design costs,
         plates and dies, goodwill and brand names acquired from acquisitions.
         Package design costs and plates and dies are amortized on a
         straight-line basis over twelve months. Brand names are amortized on a
         straight-line basis over five years. The Company believes these useful
         lives are appropriate based upon such factors as product life,
         profitability and the general industry outlook. Packaging costs and
         plates and dies are included in current assets. Goodwill and brand name
         assets are included in other assets on the accompanying balance sheets.
         Amortization expense related to intangible assets was $262,037 and
         $291,444 for the years ended December 31, 2003 and 2002, respectively.

         In accordance with SFAS No. 142, Goodwill and Other Intangible Assets,
         goodwill is not amortized. As required under SFAS No. 142, the Company
         evaluates the goodwill for any impairment on an ongoing basis. The
         Company did not recognize any goodwill impairment during the year ended
         December 31, 2003 or 2002.

         INCOME TAXES - The Company accounts for income taxes in accordance with
         SFAS No. 109, Accounting for Income Taxes. Deferred taxes are
         determined based on the estimated future tax effects of differences
         between the financial statement and tax basis of assets and liabilities
         given the provisions of enacted tax laws and tax rates. Deferred income
         tax expenses or credits are based on the changes in the financial
         statement basis versus the tax basis in the Company's assets or
         liabilities from period to period. See Note 6.

         STOCK-BASED COMPENSATION - The Company accounts for stock-based
         employee compensation arrangements in accordance with the provisions of
         Accounting Principles Board Opinion ("APB") No. 25, Accounting for
         Stock Issued to Employees, and complies with the disclosure provisions
         of SFAS No. 123, Accounting for Stock-Based Compensation. Under APB No.
         25, compensation expense is the excess, if any, of the fair value of
         the Company's stock at a measurement date over the amount that must be
         paid to acquire the stock. SFAS No. 123 requires a fair value method to
         be used when determining compensation expense for stock options and
         similar equity instruments. SFAS No. 123 permits a company to continue
         to use APB No. 25 to account for stock-based compensation to employees,
         but pro forma disclosures of net income and earnings per share must be
         made as if SFAS No. 123 had been adopted in its entirety. Stock options
         issued to non-employees are valued under the provisions of SFAS No.
         123.

         LOSS PER COMMON SHARE - Loss per common share is computed using the
         weighted average number of common shares outstanding. Since a loss from
         operations exists for the years ended December 31, 2003 and 2002, a
         diluted earnings per share number is not presented because the
         inclusion of common stock equivalents in the computation would be
         antidilutive. Common stock equivalents associated with stock options,
         warrants and Series A Reedeemable Convertible Preferred Stock, which
         are exercisable into 801,550 and 890,497 shares of common stock at
         December 31, 2003 and 2002, respectively, could potentially dilute
         earnings per share in future years.

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


NOTE 3   -    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

         Had compensation cost for the Company's options been determined based
         on the methodology prescribed under SFAS No. 123, the Company's net
         loss and loss per share would have been as follows:

                                              AS REPORTED       PROFORMA
                                             ------------    -------------
                  2003
                  Net loss                   $(2,396,018)     $(2,396,018)
                  Net loss per share         $     (0.24)          $(0.24)

                  2002
                  Net loss                   $  (763,480)       $(763,480)
                  Net loss per share         $     (0.08)          4(0.08)

         The fair value of each option is estimated on the date of grant using
         the Black-Scholes option-pricing model with the following
         weighted-average assumptions:

                                                       2003           2002
                                                    ---------      ---------

                    Dividends                          N/A           N/A
                    Expected volatility                N/A           N/A
                    Risk free interest rate            N/A           N/A
                    Expected life                      N/A           N/A

         ADVERTISING COSTS - Advertising costs are expensed as incurred. Total
         advertising expense was $228,664 and $297,069 in 2003 and 2002,
         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 these
         instruments. The recorded amounts of the Company's long-term debt also
         approximate fair value, as estimated using discounted cash flow
         analysis.

         Financial instruments, which potentially expose the Company to
         concentration of credit risk, consist primarily of trade accounts
         receivable. Assets for which the Company had credit risk totaled
         $743,471 and $943,443 at December 31, 2003 and 2002, respectively.
         Management routinely assesses collectibility of receivables. This
         assessment provides the basis for the allowance for doubtful accounts
         of $49,279 and $21,279 at December 31, 2003 and 2002, respectively.

         Two distributors accounted for 35% and 18% of total trade accounts
         receivable as of December 31, 2003 and 24% and 18% of total trade
         accounts receivable as of December 31, 2002. For the year ended
         December 31, 2003 and 2002, 45% and 44%, respectively, of net sales
         were through two distributors.

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

NOTE 3   -    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

         RECENT ACCOUNTING PRONOUNCEMENTS - In December 2003, the SEC published
         Staff Accounting Bulletin No. 104, Revenue Recognition ("SAB 104"). SAB
         104 was effective upon issuance and supercedes SAB No. 101, Revenue
         Recognition in Financial Statements ("SAB 101") and rescinds the
         accounting guidance contained in SAB 101 related to multiple-element
         revenue arrangements that was superseded by Emerging Issues Task Force
         ("EITF") Issue No. 00-21 ("EITF 00-21"), Accounting for Revenue
         Arrangements with Multiple Deliverables. Additionally, SAB 104 rescinds
         portions of the interpretive guidance included in Topic 13 of the
         codification of staff accounting bulletins. While the wording of SAB
         104 has changed to reflect the issuance of EITF 00-21, the revenue
         recognition principles of SAB 101 have remained largely unchanged. The
         adoption of SAB 104 did not have an effect on the Company's financial
         statements.

          In May 2003, the Emerging Issues Task Force issued EITF 00-21,
         Accounting for Revenue Arrangements with Multiple Deliverables. EITF
         00-21 addresses certain aspects of the accounting by a vendor for
         arrangements under which it will perform multiple revenue generating
         activities; specifically, how to determine whether an arrangement
         involving multiple deliverables contains more than one unit of
         accounting and how arrangement consideration should be measured and
         allocated to the separate units of accounting in the arrangement. EITF
         00-21 does not change otherwise applicable revenue recognition
         criteria. EITF 00-21 is effective for revenue arrangements entered into
         in fiscal periods beginning after June 15, 2003. The adoption of EITF
         00-21 did not have a material effect on the Company's financial
         statements.

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


NOTE 4   -    LINE OF CREDIT

         Effective September 1, 2003, the Company entered into a $1,200,000
         revolving line of credit ("Revolving Line") with Washington Mutual Bank
         which is scheduled to mature on April 15, 2004. At December 31, 2003
         and 2002, $643,324 and $962,359 were outstanding, respectively. The
         Revolving Line is secured by a first lien on the Company's accounts
         receivable and inventory and is guaranteed by certain shareholders.
         Interest is payable monthly at a floating per annum rate of 1% above
         the prime rate published in the Wall Street Journal (Western Edition)
         (5.00% at December 31, 2003). The Revolving Line contains certain
         covenants including restrictions on additional indebtedness and payment
         of dividends without the permission of the lender. At December 31,
         2003, the Company was in violation of a financial covenant of the
         Revolving Line because it failed to maintain the required ratio of
         Total Liabilities to Tangible Net Worth. By letter dated March 17,
         2004, Washington Mutual Bank has waived its right to exercise its
         remedies with respect to this noncompliance through April 15, 2004, the
         current maturity date of the Revolving Line.

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


NOTE 5  -     LONG-TERM DEBT
                                                            December 31,
                                                    ---------------------------
                                                        2003           2002
                                                    ------------   ------------
      Note payable to MacTarnahan, due in monthly
        principal payments of $15,000 beginning
        January 2005, additional annual payments
        of $35,000 are due in April and June 2005
        and each year thereafter; interest payable
        monthly at prime (4.00% at December 31,
        2003) plus 1.25%; collateralized by
        receivables, inventory, equipment and
        general intangibles; all unpaid interest
        and principal due November 2007.            $ 1,700,000    $ 1,700,000

      Real estate term loan payable to Sterling
        Savings Bank; due in monthly principal and
        interest payments of $10,248; interest is
        based on a ten-year term loan with a
        25-year amortization at a five-year fixed
        rate index plus 300 basis points.
        Composite rate at December 31, 2003 was
        6.69%.                                        1,473,310              -

      Note payable to Capital Crossings Bank; due
        in monthly installments $10,804 including
        interest; and a balloon payment of
        $925,319 in November 2003, at which time
        the Company refinanced.                               -        922,092

      Note payable to Washington Mutual Bank; due
        in 36 monthly installment payments of of
        $5,735, including interest. Note was paid
        in full on October 30, 2003 as part of
        real property refinance.                              -        109,485

      Accounts payable to certain vendors as a
        result of converting amounts due to a
        five-year payment plan paid monthly
        beginning September 1998, including
        interest at 6.00% Amounts paid in full in
        2003.                                                 -         11,928

      Lease payable to a certain vendor; due in
        monthly installments of $770.00 each,
        Including interest at 6.31%;
        collateralized by specific equipment; due
        through March 2003.                                   -          2,314
                                                    ------------   ------------

                                                      3,173,310      2,745,819
      Less current portion                              (20,414)      (999,908)
                                                    ------------   ------------

                                                    $ 3,152,896    $ 1,745,911
                                                    ============   ============

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


NOTE 5   -    LONG-TERM DEBT (CONTINUED)

         Effective November 1, 2003 the Company entered into a real estate term
         loan in the amount of $1,473,311 with Sterling Savings Bank ("Real
         Estate Term Loan"). The Real Estate Term Loan is secured by a first
         deed of trust on the brewery property located at 2730 NW 31st Ave and a
         security interest in the Company's furniture, fixtures and equipment.
         The Real Estate Term Loan is guaranteed by certain Shareholders. The
         Real Estate Term Loan replaces term debt held by Washington Mutual Bank
         and Capital Crossings Bank, which had balances of $56,712 and $881,988,
         respectively as of October 30, 2003. These amounts were repaid upon
         funding of the Real Estate Term Loan.

         At December 31, 2003, the Company did not meet the Minimum Income and
         cash flow covenant of the Real Estate Term Loan. By letter dated March
         9, 2004, Sterling Saving Bank waived this financial covenant through
         the end of fiscal year 2004, and agreed not to accelerate the loan
         because of the noncompliance during this period. As such, the debt has
         been classified as long-term based on the original terms of the debt.

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

                                    2004              $  20,414

                                    2005                275,203

                                    2006                276,966

                                    2007              1,228,853

                                    2008                 30,605

                              Thereafter              1,341,269
                                                    -----------

                                                    $ 3,173,310
                                                    ===========



NOTE 6   -    INCOME TAXES

         The Company has generated net operating losses to date and is therefore
         in a net deferred tax asset position. Accordingly, no provision for or
         benefit from income taxes has been recorded in the accompanying
         statements of operations for 2003 or 2002. 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 $7.5 million
         expiring through the year 2020, which is available to offset future
         taxable income.

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


NOTE 6   -    INCOME TAXES (CONTINUED)
<TABLE>
<CAPTION>
         The components of the net deferred tax assets and liabilities as of
         December 31, 2003 and 2002 are as follows:
                                                                       December 31,
                                                             -------------------------------
                                                                 2003               2002
                                                             ------------       ------------
<S>                                                          <C>                <C>
            Deferred tax assets, current
                   Basis difference in inventory             $    24,549        $    33,985
                   Other                                          53,255             50,309
                                                             ------------       ------------
                   Total current deferred tax assets              77,804             84,294
                                                             ------------       ------------
            Deferred tax assets, long-term
                   Intangible assets                             163,505            121,921
                   Net operating loss carryforwards            2,963,640          2,692,810
                   Tax credits                                   102,701            102,701
                                                             ------------       ------------

                   Total long-term deferred tax assets         3,229,846          2,917,432

            Deferred tax liabilities, long-term
                   Basis difference in property, plant and
                     Equipment                                   (73,661)           (748,048)
                                                             ------------       ------------

                   Net long-term deferred tax assets           3,156,185          2,169,384
                                                             ------------       ------------

            Net deferred tax assets                            3,233,989          2,253,678

            Less valuation allowance                          (3,233,989)        (2,253,678)
                                                             ------------       ------------
                                                             $         -        $         -
                                                             ============       ============
</TABLE>
         The difference between the actual income tax provision (benefit) and
         the tax provision (benefit) computed by applying the statutory federal
         tax rate to income (loss) before taxes is attributable to the
         following:
                                                     Year ended December 31,
                                              ---------------------------------
                                                    2003             2002
                                              ---------------   ---------------
         Federal statutory income tax benefit $(879,246) -34%   $(259,583) -34%
         State statutory income tax benefit    (103,441)  -4%     (30,539)  -4%

         Reversals at rates different than
           originally booked                      2,376    0%      22,438    3%
         Change in valuation allowance for
           deferred tax assets                 980,311   -38%     267,684   35%
                                              --------           --------
                                              $     -            $     -
                                              ========           ========
                                                                            F-16
--------------------------------------------------------------------------------
<PAGE>
                                         PORTLAND BREWING COMPANY AND SUBSIDIARY
                                                NOTES TO CONSOLIDATED STATEMENTS
--------------------------------------------------------------------------------


NOTE 7   -     RELATED PARTY TRANSACTIONS

         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 MacTarnahan Limited Partnership, 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
         lease is fair and reasonable and are no less favorable to the Company
         than could be obtained from unaffiliated parties.

         LICENSE AGREEMENT - The Company has a license agreement with one of its
         board members to utilize his name and likeness. For 2001, the amount of
         royalty owed was $1 per barrel of MacTarnahan's Ale sold. This
         licensing agreement was amended effective January 1, 2002, to include a
         $1 royalty on MacTarnahan's Black Watch Cream Porter and MacTarnahan's
         Highland Pale Ale and amended again as of July 1, 2002 to include
         MacTarnahan's IPA and Mac Frost. Royalties paid under the license
         agreement for 2003 and 2002 were $22,903 and $23,578, respectively,
         based on the sale of 22,903 and 23,578 barrels, respectively, of
         products bearing the MacTarnahan name during the same periods.
         Effective January 1, 2002, Harmer assigned its rights under the License
         Agreement, including the right to receive royalties, to Black Lake
         Investments, LLC, a company controlled by Robert M. MacTarnahan and R.
         Scott MacTarnahan. On January 26, 2004, the Company executed a Fourth
         Amendment to Trademark License Agreement with Robert M. MacTarnahan and
         Black Lake Investments, LLC under which the products covered, royalty
         structure, and term of the agreement were amended.

         OUTSOURCING OF ACCOUNTING - The Company outsources the accounting
         function to Greenstead = Accounting Resource ("Greenstead"). Greenstead
         is owned by affiliates of Peter F. Adams, a director of the Company.
         The Company incurred $255,010 and $250,588 for accounting services
         performed by Greenstead during the year ended December 31, 2003 and
         2002, respectively.


NOTE 8   -     PREFERRED STOCK

         On March 1, 1999, two shareholders of the Company each purchased 2,885
         shares 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. Under the original terms, the Company was
         required to 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. Pursuant to a
         Deferred Redemption Agreement dated February 25, 2004, the holders of
         Series A Preferred stock have agreed to defer the mandatory redemption
         date of the Series A Preferred shares and to accept a portion of the
         consideration paid to the Company by Pyramid in the asset sale in
         redemption for the Series A Preferred stock. 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. As of the
         date of this filing, the Company's Board of Directors has neither
         declared nor intends to declare dividend payments. 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-17
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<PAGE>
                                         PORTLAND BREWING COMPANY AND SUBSIDIARY
                                                NOTES TO CONSOLIDATED STATEMENTS
--------------------------------------------------------------------------------


NOTE 9   -    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.

         Activity under the ISOP is summarized as follows:

                                                   SHARES          EXERCISE
                                                 SUBJECT TO          PRICE
                                                   OPTIONS         PER SHARE
                                                    -------      -------------

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

                Options cancelled
                                                    -------      -------------
                                                    (16,250)         $0.54
                                                    -------      -------------

                Balances, December 31, 2002
                                                    212,300      $0.54 - $0.59

                Options cancelled                    (1,250)         $0.54
                                                    -------      -------------
                Balances, December 31, 2003
                                                    211,050      $0.54 - $0.59
                                                    =======      =============



         NONQUALIFIED STOCK OPTION PLAN - In August 1994, the Board of Directors
         approved a Nonqualified Stock Option Plan ("NQSOP"). The NQSOP provides
         for the issuance of 45,000 stock options to employees, nonemployee
         members of the Board of Directors, consultants and other independent
         contractors who provide valuable service to the Company, at a minimum
         of 85 percent of fair market value and have a term of 10 years. Options
         to purchase 13,500 shares at $5.33 each were outstanding and
         exercisable at December 31, 2003 and 2002. There were no shares
         cancelled during the year ended December 31, 2003.

         The following table sets forth the exercise price range, number of
         shares, weighted average exercise price, and remaining contractual
         lives by groups of similar price and grant date as of December 31,
         2003:
<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         2003         LIFE (YEARS)     PRICE              2003          PRICE
         --------------    --------------    ------------    --------       --------------   ---------
<S>      <C>               <C>                <C>            <C>               <C>            <C>
         $0.54 - $0.59          211,050            6.0          $ 0.56            211,050        $ 0.56
              5.33               13,500             .7            5.33             13,500          5.33
                         -------------------                               -----------------

             Totals             224,550                                           224,550
                         ===================                               =================
</TABLE>
                                                                            F-18
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<PAGE>
                                         PORTLAND BREWING COMPANY AND SUBSIDIARY
                                                NOTES TO CONSOLIDATED STATEMENTS
--------------------------------------------------------------------------------

NOTE 9   -    STOCK-BASED COMPENSATION PLANS (CONTINUED)

         CASH INCENTIVE PLAN - The Company may award its officers and employees,
         under its Restated Cash Incentive Plan (the "Plan"), bonuses in an
         amount up to 10% of net operating profits before taxes. Awards under
         the Plan will be allocated among the officers and employees in
         accordance with the provisions of the Plan at the discretion of the
         Board of Directors. No amounts were awarded in 2003 or 2002 under the
         Plan.

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

         The maximum contribution by each employee is 100% of his or her pay, up
         to $11,000. The Company may make discretionary contributions. Full
         vesting of any employer contributions occurs after five years of
         service. During 2003 and 2002, the Company made no discretionary
         contributions to the 401(k) Plan.

NOTE 10  -    SEGMENT INFORMATION

         The Company is organized into three product-based segments: brewery
         operations, restaurant operations and hand truck manufacturing. The
         Company's brewery segment brews and sells specialty beer in its
         Portland, Oregon brewery, which is sold to distributors and retail
         customers. The Company's restaurant, which adjoins its brewery, sells
         the Company's specialty beers along with lunch and dinner. Harco
         Products, Inc., a subsidiary, produces hand trucks for various
         industrial and personal uses.
<TABLE>
<CAPTION>
                                                                    YEAR ENDED DECEMBER 31,
                                                                ------------------------------
                                                                    2003              2002
                                                                -----------        -----------
<S>                                                             <C>                <C>
           Net sales:
               Brewery                                            8,074,267          9,155,162
               Restaurant                                         2,269,743          2,236,692
           Less intersegment sales                                 (363,380)          (324,121)
                                                                -----------        -----------
                 Subtotal                                         9,980,630          11,067,733
               Harco Products                                       286,227            277,624
                                                                -----------        -----------
                 Total net sales                                 10,266,856         11,345,357
                                                                -----------        -----------
           Gross Profit:
               Brewery                                            2,179,689          2,518,708
               Restaurant                                           626,794            659,641
           Less intersegment gross profit                          (152,426)          (145,905)
                                                                -----------        -----------
                 Subtotal                                         2,654,057          3,032,444
               Harco Products                                        73,796             74,899
                                                                -----------        -----------
                 Total gross profit                             $ 2,727,853        $ 3,107,343
                                                                ==============================
           Depreciation and amortization expense:
               Brewery                                              704,756            726,103
               Restaurant                                            78,892             77,536
               Harco products                                        13,772             25,336
               Unallocated corporate amounts                        213,564            302,831
                                                                -----------        -----------
                 Total depreciation and amortization expense    $ 1,010,983        $ 1,131,806
                                                                ===========        ===========
</TABLE>
                                                                            F-19
--------------------------------------------------------------------------------
<PAGE>
                                         PORTLAND BREWING COMPANY AND SUBSIDIARY
                                                NOTES TO CONSOLIDATED STATEMENTS
--------------------------------------------------------------------------------


NOTE 10  -    SEGMENT INFORMATION (CONTINUED)

           Capital expenditures:
               Brewery                              $    38,777    $   162,953
               Restaurant                                 9,718         22,059
               Unallocated corporate amounts                  -          8,909
                                                    -----------    -----------

                   Total capital expenditures       $    48,495    $   193,921
                                                    ===========    ===========

           Total assets:
               Brewery                              $ 5,757,507    $ 8,225,945
               Restaurant                               399,158        467,107
               Harco products                           222,371        295,784
               Unallocated corporate amounts            244,746        149,676
                                                    -----------    -----------
                   Total assets                     $ 6,623,782    $ 9,138,512
                                                    ===========    ===========

         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.


NOTE 11  -    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.

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

         The Company has a lease for approximately 30,100 square feet of space
         in a building adjacent to the main brewery with L & L Land Company. The
         term of the lease is 5 years expiring June 14, 2004, with one option to
         extend the term until June 14, 2008. Rent under the lease is $12,000
         per month. In addition, the Company agreed to pay the real property
         taxes on the building, provide insurance and to make various
         maintenance and repairs. The lease contains a first opportunity to
         purchase the adjacent building. This 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 8,000
         square feet of office and warehouse space and a portion of the parking
         lot. The term of the sublease is month to month and rent is $3,168 per
         month plus $365 per month for real property taxes, plus payment of
         utilities, insurance and interior maintenance.

         The following is a schedule of minimum future operating lease payments,
         including the related party leases disclosed in Note 7, for the years
         ending December 31:

                  2004                    $   77,040
                                          ==========

         Total rent expense incurred was $128,724 in 2003 and 2002.
                                                                            F-20
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