##### Table of Contents









UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549




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Form 10-K



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|           |  |                                                                                           
|---------- |  | ------------------------------------------------------------------------------------------
|(Mark One) |  |                                                                                           
|þ          |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR
	15(d)
	OF THE SECURITIES EXCHANGE ACT OF 1934    
|          
|           |  | For the year ended December 31,
	2001                                                     
|          
|o          |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR
	15(d)
	OF THE SECURITIES EXCHANGE ACT OF 1934
|          
|           |  | For the transition period
	from          to          .                                    

Commission file number 0-27116



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Pyramid Breweries Inc.

(Exact name of registrant as specified in its
charter)


|                                                                |  |                                   
|--------------------------------------------------------------- |  | ----------------------------------
|Washington                                                      |  | 91-1258355                        
|(State or other jurisdiction of
	incorporation or organization) |  | (IRS Employer
	Identification No.)

91 So. Royal Brougham Way,

Seattle, WA 98134


(Address of principal executive offices) (Zip
Code)


Registrants telephone number, including
area code: (206) 682-8322

Securities registered pursuant to
Section 12(b) of the Act: None.

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

Common Stock $.01 Par Value




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Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 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  þ          No o

Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not 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-K or any amendment to this
Form 10-K. o

The aggregate market value of the voting stock
held by non-affiliates of the registrant at February 19,
2002, was $19,188,592.

The number of shares outstanding of the
registrants common stock as of February 19, 2002, was
8,306,750.

DOCUMENTS INCORPORATED BY REFERENCE


Portions of the Companys Proxy Statement
for the Annual Meeting of Stockholders to be held on May 2,
2002 are incorporated by reference into Part III of this
Form 10-K.



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TABLE OF CONTENTS



|              |                                                                                                 |  |  |  |  |  |  | 
|------------- | ----------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I       
|              | Item 1 -- Business                                                                             
|              | Item 2 -- Properties                                                                           
|              | Item 3 -- Legal Proceedings                                                                    
|              | Item 4 -- Submission of Matters to a Vote of the Security Holders                              
|              | Item 4A -- Executive Officers of the Company                                                   
|PART II      
|              | Item 5 -- Market for Registrants Common Equity and Related Stockholder Matters                
|              | Item 6 -- Selected Financial Data                                                              
|              | Item 7 -- Managements Discussion and Analysis of Financial Condition and Results of Operations
|              | Item 8 -- Financial Statements                                                                 
|              | Item 9 -- Change in and Disagreements with Accountants on Accounting and Financial Disclosure  
|PART III     
|              | Item 10 -- Directors and Executive Officers of the Company                                     
|              | Item 11 -- Executive Compensation                                                              
|              | Item 12 -- Security Ownership of Certain Beneficial Owners and Management                      
|              | Item 13 -- Certain Relationships and Related Transactions                                      
|PART IV      
|              | Item 14 -- Exhibits, Financial Statement Schedules, and Reports on Form 8-K                    
|SIGNATURES   
|EXHIBIT 10.13
|EXHIBIT 10.14
|EXHIBIT 10.15
|EXHIBIT 23.1 



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##### Table of Contents



PYRAMID BREWERIES INC.

ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED
DECEMBER 31, 2001

|         |  |                                                                                        |  |      |    | 
|-------- |  | -------------------------------------------------------------------------------------- |  | ---- | -- | 
|         |  |                                                                                        |  | Page
|         |  |                                                                                        |  |     
|PART I  
|Item 1.  |  | Business                                                                               |  |      | 2  | 
|Item 2.  |  | Properties                                                                             |  |      | 5  | 
|Item 3.  |  | Legal Proceedings                                                                      |  |      | 6  | 
|Item 4.  |  | Submission of Matters to a Vote of Security
	Holders                                   |  |      | 6  | 
|Item 4A. |  | Executive Officers of the Company                                                      |  |      | 6  | 
|PART II 
|Item 5.  |  | Market for Registrants Common Equity and
	Related Stockholder Matters                 |  |      | 7  | 
|Item 6.  |  | Selected Financial Data                                                                |  |      | 9  | 
|Item 7.  |  | Managements Discussion and Analysis of
	Financial Condition and Results of Operations |  |      | 10 | 
|Item 8.  |  | Financial Statements                                                                   |  |      | 16 | 
|Item 9.  |  | Change in and Disagreements with Accountants on
	Accounting and Financial Disclosure   |  |      | 16 | 
|PART III
|Item 10. |  | Directors and Executive Officers of the Company                                        |  |      | 16 | 
|Item 11. |  | Executive Compensation                                                                 |  |      | 16 | 
|Item 12. |  | Security Ownership of Certain Beneficial Owners
	and Management                        |  |      | 16 | 
|Item 13. |  | Certain Relationships and Related Transactions                                         |  |      | 16 | 
|PART IV 
|Item 14. |  | Exhibits, Financial Statement Schedules, and
	Reports on Form 8-K                      |  |      | 17 | 

1



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##### Table of Contents






PART I




Item 1 
Business

Pyramid Breweries Inc. (the Company) is one of
the leading brewers of fresh, full-flavored specialty beers,
generally known as craft beers. The Company produces and markets
over 20 styles of beer under the Pyramid and Thomas Kemper
brand names. In 1997, Pyramid added a line of hand crafted
sodas, including root beer and other premium flavors, to its
business when it acquired the Thomas Kemper Soda Company. The
Company also operates restaurants adjacent to its breweries,
under the Pyramid Alehouse brand name.

The Companys breweries produce high
quality, full-flavored beers in small batches using traditional
brewing methods. The Company also produces old-fashioned,
full-flavored, hand crafted sodas. The Companys two
breweries, one in Seattle, Washington (Seattle Brewery) and one
in Berkeley, California (Berkeley Brewery), had an estimated
total annual beer production capacity of 200,000 barrels as of
the end of 2001. The Seattle Brewery opened in March 1995 with
an initial estimated annual beer capacity of 92,000 barrels.
During 2000, ten fermenting vessels were moved from Seattle to
the Berkeley Brewery which reduced the Seattle Brewery annual
beer production capacity to 50,000 barrels. The Berkeley Brewery
was completed in February 1997 with an initial estimated annual
beer production capacity of 80,000 barrels and was expanded
during 2000 to a total beer capacity of 150,000 barrels. The
primary beer production capacity limitation is fermentation
capacity. This limitation does not apply to soda production. The
Company believes that the breweries and adjacent alehouses
provide increased consumer awareness and loyalty for the
Companys brands by increasing opportunities for sampling
and local product promotion.

The Companys Pyramid and Thomas Kemper beer
brands compete primarily in the craft beer category, and
secondarily in the larger specialty category (which
includes craft beers, imports and super premium beers). Craft
beers are a small segment of the estimated $50 billion
dollar brewing industry. Craft beers are distinguishable from
mass-produced beers by their wide range of fuller flavors and
adherence to traditional European styles and ingredients.
Industry experts estimate that total beer shipments, including
imports, increased 1% in 2000, while craft beer shipments, which
comprise approximately 3% of the total, were estimated to have
increased by 3-5%.

The Company has been successful in marketing a
full line of flavorful ales and lagers. Under the Pyramid brand,
Pyramid Hefeweizen, Pyramid Apricot Ale and Pyramid Snowcap are
the Companys best selling beer styles. Thomas Kemper
Weizenberry is currently the Companys best selling beer
within the Thomas Kemper brand.

Craft beers generally sell for retail prices
ranging from $5.99 to $7.99 per six pack. Retail prices are set
independently by distributors and retailers. The Companys
retail prices are usually at the high end of this range.
Increased consumer demand for high quality, full-flavored beers
allows for a price premium relative to mass-produced domestic
beers. This price premium results in higher profit margins,
which can motivate distributors and retailers to offer and
promote craft beers. The Companys craft beers are sold
primarily in Washington, Oregon and California, which accounted
for approximately 84% of the Companys 2001 beer sales.

The Company participates in the craft soda
category with a line of old-fashioned, hand crafted sodas sold
under the Thomas Kemper Soda Company label. Thomas Kemper Soda
Companys premium soft drinks include root beer, cream
soda, orange cream soda and black cherry soda. During March
2001, the Company introduced two new flavors, grape and ginger
ale, to the Thomas Kemper Soda Company portfolio. The Company
distributes its soda products in supermarkets, independent food
stores, convenience stores and restaurants. Craft sodas
typically sell for $3.99 to $5.49 per six pack, with prices
being set independently by distributors and retailers. The
prices for craft sodas are substantially higher than the
mass-produced brands, due to their flavor profile, unique and
upscale packaging and flavors, and strong consumer demand.

The Company currently operates restaurants
adjacent to its Seattle and Berkeley breweries. The restaurants
are operated under the Pyramid Alehouse brand name. In 2001, the
restaurants contributed sales of $8,456,000 including
approximately $2,600,000 in the Companys beers and sodas
and $150,000 in branded

2



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clothing and other merchandise. The restaurants
have a total of over 700 seats, plus outdoor eating areas, and
are both situated in highly visible, high traffic locations. The
Alehouses had approximately 560,000 guest visits during 2001. A
third restaurant is scheduled to open in Walnut Creek,
California during second quarter of 2002. The Walnut Creek
restaurant will have over 275 seats, plus outdoor seating and is
located in the heart of the Walnut Creek business district.


The Companys beverage operations
contributed 72% of net sales in 2001, with beer comprising 53%
and soda 19%. Alehouse operations contributed 28% of net sales
in 2001.

Business Strategy

The Company has developed a balanced internal and
external growth strategy which includes growing the
Companys beverage portfolio in its core western markets;
expanding the Alehouse division through the development of new
properties and new acquisitions; and continuing to improve the
Companys cost structure. Key elements of the
Companys strategy are: (i) building a strong
portfolio of craft beer brands, (ii) increasing the focus
on the craft soda business, (iii) building brand awareness
and sales through company-owned restaurants, and
(iv) maintaining a direct store delivery
(DSD) distribution system.



| |                                                  
| | -------------------------------------------------
| | Building a Strong Portfolio of Craft Beer
	Brands

The Company is committed to producing a portfolio
of high quality craft beers to appeal to a variety of discerning
consumer tastes. The Company currently markets over
20 styles of beer under the Pyramid and Thomas Kemper
brands. The Pyramid brand accounted for 95% of the
Companys beer sales and 72% of the Companys beverage
sales in 2001. The Company continues to seek opportunities to
develop or acquire other distinctive regional brands, which may
help broaden the Companys product portfolio and strengthen
the Companys presence geographically. The wide range of
styles enables the Company to obtain better market penetration
through greater shelf space for its packaged products in retail
stores and additional tap handles in draft beer outlets.

The Company brews its beers and specialty
beverages in company-operated breweries providing direct control
of the entire production process from purchase of ingredients to
packaging and shipment. The proximity of the Companys
breweries to its key West Coast markets helps optimize product
freshness, reduces freight costs and minimizes the inventory of
kegs required to service draft accounts.

The Company focuses on local sales and marketing
strategies to build its brands. It uses targeted advertising and
promotions, event marketing, sponsorships, local fairs and
festivals and targeted charitable donations of its products to
assist in developing its market presence. The Company also has
an award-winning website and an active public relations program.
The Company does not compete directly with the national brands
in terms of mass-media advertising.



| |                                                 
| | ------------------------------------------------
| | Increasing the Focus on the Craft Soda
	Business

The Company acquired the Thomas Kemper Soda
Company in 1997. Since that time, the brand has added
significant revenues to the Company. The soda business
represented 24% of beverage sales in 2001, and 19% of total net
sales. During March 2001, the Company introduced two new
flavors, grape and ginger ale, to the Thomas Kemper Soda
portfolio. The craft soda category possesses many
characteristics that are similar to the craft beer category, and
the Company believes it can leverage its experience and existing
infrastructure to further develop the Thomas Kemper Soda brands.
The Company will also seek opportunities to expand the craft
soda portfolio within its core western markets.



| |                                                                      
| | ---------------------------------------------------------------------
| | Building Brand Awareness and Sales through
	Company-Owned Restaurants

The Companys breweries and restaurants are
focal points for marketing, creating brand awareness, and
generating sampling opportunities for the Companys
products. Initially, the breweries provided the attraction to
introduce consumers to the Companys craft products.
However, the restaurants have now become popular and a
significant source of revenues.

3



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In addition to providing sampling and educational
opportunities to Alehouse customers, the Companys
breweries and restaurants are extensively used to entertain the
beverage trade and build relationships with distributors. The
breweries and restaurants highly knowledgeable
employees are an important source of education and training for
the Companys distributors and retailers.

The Company intends to further develop the
Alehouse concept via new developments or acquisitions of
existing brewpubs. These sites would not be full-scale
production breweries, but rather would produce beer for local
consumption and sales. Experience has shown that the local
status of a brand is an important determinant of success,
and also provides clear differentiation versus other specialty
beers.



| |                                                                                   
| | ----------------------------------------------------------------------------------
| | Maintaining a Direct Store Delivery
	(DSD) System through Independent Distributors

The Company distributes its products through a
network of selected independent distributors who deliver
directly to local grocery stores, convenience stores,
restaurants and taverns. The Company feels that this type of
distribution system is best suited for developing local
distribution of Company products, particularly in draft beer
accounts, where there are important sampling and brand building
opportunities. The Company has not aligned itself with the
distribution system of a single larger brewer. This approach
allows the Company to select distributors in each market that it
believes will focus the greatest attention on its products and
best promote its high quality craft beers and sodas.
Additionally, the ability to change distribution arrangements
for performance related issues is an important advantage. During
2001, the Company distributed its products through 155
wholesalers in 32 states and Canada.

Products

The Company produces over 20 authentic,
full-flavored, European beer styles using traditional
ingredients and brewing methods. Eight of these styles are
available on a seasonal basis, and others are available only in
certain geographic areas in accordance with the Companys
regional marketing strategy. Each unique beer style is brewed
with malted barley and wheat grains, hops and, where
appropriate, natural fruit extracts and spices. The Company
avoids the use of less expensive ingredients due to its belief
that quality is supremely important to success in the craft beer
segment.

A similar philosophy is adopted with regard to
the Companys soda products. Each batch of soda is made
from high quality ingredients, rather than from diluting
mass-produced syrups. The sodas are characterized by much more
pronounced flavors. The Companys beverages are not
pasteurized and are currently distributed only in bottles and
kegs.

The Company will continue to innovate, develop
and test new products in order to meet the varying and changing
tastes of its consumers.

Competition

Competition within the craft beer and soda
markets is based on product quality, taste, consistency,
freshness, distribution, price, ability to differentiate
products, promotional methods and other product support.
Statistics from the latest study of the Institute of Brewing
Studies indicate there were approximately 1,500 craft brewers in
the United States at the end of 2001. Approximately two thirds
of these brewers are brewpubs that sell all of their production
at retail on the brewery premises. The remaining brewers market
their products through similar channels to those utilized by the
Company and, although many have limited geographic distribution,
the result is significantly increased competition in all markets.

The Companys past sales growth was achieved
predominantly through increasing penetration in Washington,
Oregon and California, which the Company believes comprise one
of the largest and most competitive craft and specialty beer
markets in the United States. As this market has matured, the
Company has experienced intensified competition, increased
seasonal product offerings and aggressive price promotions.
Although certain competitors distribute their products
nationally and may have greater sales and financial resources
than the Company, the Company believes that being a local
supplier of high quality, traditionally

4



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brewed ales, lagers and sodas will differentiate
the Companys products and allow it to obtain good market
share in those markets adjacent to its breweries and Alehouses.


The Company also competes against producers of
imported specialty beers. Although imported beers currently
account for a much greater share of the U.S. beer market than
craft beers, the Company believes that craft brewers have a
number of competitive advantages over specialty beer imports,
including lower transportation costs, no importation duties,
proximity to and familiarity with local consumers, a higher
degree of product freshness and eligibility for lower federal
excise taxes.

In response to the growth of the craft beer
segment in prior years, all of the national domestic brewers
have introduced full-flavored beers. National brewers, with
their greater financial resources, access to raw materials and
their influence over their established national distribution
networks, have increased competition for market share and
increased price competition within the craft beer segment. The
Company is aware that certain national brewing companies are
using their considerable influence over their independent
distributors to induce them to exclude competing products from
their portfolios. There is also awareness that distributors are
consolidating to improve profit margins. These factors could
have the effect of reducing the distribution options for the
Companys products. While such actions have not at this
time denied access to any market for the Companys
products, there can be no guarantee that this will not happen in
the future.




Item 2 
Properties

The Company currently owns and operates two
breweries, each with an adjacent restaurant; one in Seattle,
Washington and one in Berkeley, California. During October 2001,
the Company signed an agreement to lease a third restaurant
property in Walnut Creek, California which is scheduled to open
during the second quarter of 2002. The estimated total annual
beer capacity of the two breweries was 200,000 barrels at
the end of 2001. During August 2000, ten fermenting vessels were
moved from the Seattle Brewery to the Berkeley Brewery and soda
equipment was then added to the Seattle Brewery. This
redistribution of production equipment and change in production
mix of beer and soda resulted in increased company-wide brewing
capacity.



| |                                  
| | ---------------------------------
| | The Seattle Brewery and
	Alehouse

In March 1995, the Company completed the Seattle
Brewery, Alehouse and corporate offices near downtown Seattle.
This brewery and 340 seat restaurant, operated as the
Pyramid Alehouse, consists of approximately 33,000 square feet
of leased building area. The estimated annual beer production
capacity was 50,000 barrels at the end of 2001. The Seattle
building lease expires in 2004, with options to extend the lease
term for three five-year periods. The Company has also leased
approximately 11,250 square feet of warehouse and additional
outside storage space adjacent to the Seattle Brewery and
Alehouse for a period of seven years, also expiring in 2004, and
has options to extend the lease term for three additional
five-year periods.



| |                                   
| | ----------------------------------
| | The Berkeley Brewery and
	Alehouse

Completed and opened in February 1997, the
Berkeley Brewery and its adjacent Pyramid Alehouse are housed in
a leased building of approximately 93,000 square feet.
During January 2000, the Company exercised an option to lease an
additional 29,000 square feet of adjacent space and is currently
subleasing that space. The brewery had an estimated beer
production capacity of 150,000 barrels at the end of 2001.
During 2000, fermentation capacity was added which increased the
estimated annual beer capacity to 150,000 barrels from
80,000 barrels. The Berkeley Brewery has a designed maximum
potential capacity in excess of 200,000 barrels, which can
be achieved by adding more fermentation capacity. The Berkeley
Alehouse has seating for 380 plus an outdoor seating area. The
building was leased commencing November 1995 for a 15-year term,
with options to extend the lease term for two five-year periods.
The Company also has the option to purchase the entire building
during the lease term at its then fair market value.

5



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| |                          
| | -------------------------
| | The Walnut Creek Alehouse

Scheduled to open in April 2002, the Walnut Creek
Pyramid Alehouse will be located in a leased building of
approximately 7,800 square feet. The restaurant has a
small, on-site brewery with an estimated beer production
capacity of 10,000 barrels. The Walnut Creek Alehouse has
seating for 275 plus an outdoor seating area. The building was
leased commencing October 2001 for an initial 11-year term, with
options to extend the lease term for three five-year periods and
one final option for a four-year period.




Item 3  Legal
Proceedings

The Company is involved from time to time in
claims, proceedings and litigation arising in the ordinary
course of business. The Company does not believe that any such
claim, proceeding or litigation, either alone or in the
aggregate, will have a material adverse effect on the
Companys financial position or results of operations.




Item 4  Submission of
Matters to a Vote of the Security Holders

The Companys annual meeting is scheduled
for 9 a.m. on May 2, 2002 at the Berkeley Pyramid
Alehouse, 901 Gilman Street, Berkeley,
California 94710. Matters to be voted on will be included
in the Companys proxy statement to be filed with the
Securities and Exchange Commission and distributed to
stockholders prior to the meeting.




Item 4A  Executive Officers
of the Company



| |                                                           
| | ----------------------------------------------------------
| | Martin Kelly (47)  President and
	Chief Executive Officer

Mr. Kelly was appointed Chief Executive
Officer in December 1999. Mr. Kelly joined Pyramid
Breweries Inc. in August 1999 as President and Chief Operating
Officer. Mr. Kelly has over 20 years of food and
beverage industry experience, earned at Miller Brewing Company
(Miller), Borden, Inc. (Borden), and Coca-Cola Enterprises
(Coca-Cola). At Miller, he served as Regional Vice President for
twenty-three western states and was responsible for the
operations of the Jacob Leinenkugel Brewing Company, a regional
specialty brewer, and a wholly owned subsidiary of Miller. Prior
to joining Miller, Mr. Kelly was a Vice President of
Marketing and Sales Development at Borden. At Coca-Cola,
Mr. Kelly held a variety of sales, marketing and general
management positions, and most recently was Division Vice
President and General Manager of the Mid Atlantic Division.
Mr. Kelly earned a Masters Degree in Business
Administration and a Bachelor of Science Degree in Commerce from
the University of Virginia.



| |                                                                                     
| | ------------------------------------------------------------------------------------
| | Wayne Drury (50)  Vice
	President  Finance, Chief Financial Officer and
	Secretary

Mr. Drury was appointed as Vice
President  Finance, Chief Financial Officer and
Secretary in July 2000. Mr. Drury is responsible for all
finance and administration, including strategic planning,
investments and acquisitions, risk management and investor
relations. Mr. Drury has an extensive management and
financial background. He most recently served as Chief Financial
Officer at Azteca Restaurant Enterprises (Azteca), a Seattle
based company with 31 locations. Prior to joining Azteca,
Mr. Drury was Chief Financial Officer at Country Harvest
Restaurants, Corporate Controller at Perkins Family Restaurants
and Kindercare, as well as Director of Planning and Analysis at
KFC International. He began his career as an accountant for
Coopers & Lybrand. Mr. Drury earned both a Bachelor of
Science Degree in Accounting and a Masters Degree in Business
Administration from the University of Kentucky. He is a
certified public accountant.



| |                                            
| | -------------------------------------------
| | Gary McGrath (42)  Vice
	President  Sales

Mr. McGrath was appointed as Vice
President  Sales in November 1999. Mr. McGrath
has over 15 years of experience in the alcohol and
non-alcohol beverage industry. Most recently, he held the
position of General Manager for Millers northwest region,
responsible for growing sales, market share and profit in a
seven-state area. Also at Miller, Mr. McGrath worked as
Director of National Accounts, accountable for setting strategy
and developing sales in the convenience and mass merchandise
channels. Prior to Miller, he

6



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##### Table of Contents



held numerous sales and operating positions with
Pepsi Cola USA, 7UP and Oscar Mayer. Mr. McGrath received
his Bachelors Degree from Fredonia State University in New York
and his Graduate Degree from Harvard University.




| |                                                                                  
| | ---------------------------------------------------------------------------------
| | Nick Walpert (41)  Vice
	President/ Chief Operating Officer  Alehouse
	Division

Mr. Walpert was appointed as Vice President/
Chief Operating Officer  Alehouse Division, in March
2000. Mr. Walpert is responsible for directing the
performance of the two existing alehouse restaurants as well as
expanding the concept through both acquisition and internal
development. Mr. Walpert has an extensive management and
restaurant background. Most recently, Mr. Walpert was Chief
Operating Officer of CAL-Group Holdings, a multi-concept
restaurant and hotel operator with nearly 300 Wendys
Restaurants, Bobs Big Boys, and Fairfield Hotel locations.
Prior to CAL-Group Holdings, Mr. Walpert spent over five
years as Regional Manager for Godfathers Pizza which
included 62 units throughout the Pacific Rim. Mr. Walpert
has an undergraduate degree from San Diego State University and
a Masters Degree in Business Administration from the University
of Southern California.



| |                                                       
| | ------------------------------------------------------
| | Mark House (43)  Vice
	President  Brewery Operations

Mr. House was appointed as Vice
President  Brewery Operations, in July 2001.
Mr. House is responsible for directing the performance of
the two existing breweries as well as purchasing,
transportation, quality assurance, product development,
forecasting, and facility issues. Mr. House had been
Director of Corporate Operations since 1999, responsible for
quality assurance, product development, forecasting and
distribution. He joined Pyramid in 1996 as Manager of
Distribution/ Production. Prior to joining Pyramid, House had
14 years of brewing industry experience with the G.
Heileman Brewing Co (Heileman). As Distribution Manager for
Heileman, House was responsible for warehousing/distribution,
production planning, and customer service for both the Rainier
Brewery in Seattle, Washington and Henry Weinhards Brewery in
Portland, Oregon. Mr. House has an undergraduate degree
from Washington State University.




PART II




Item 5  Market for
Registrants Common Equity and Related Stockholder
Matters

Trading in Pyramid Breweries Inc.s common
stock began on December 14, 1995, and is quoted on the
NASDAQ Stock Markets National Market under the ticker
symbol PMID.

The following table sets forth the high and low
sales prices and the cash dividends paid per share of Pyramid
Breweries Inc.s common stock for the years ended
December 31, 2000 and 2001.

|                         |                |      |  |      |  |          |  |      |  |  |  |       | 
|------------------------ | -------------- | ---- |  | ---- |  | -------- |  | ---- |  |  |  | ----- | 
|                         |                |      |  |      |  | Dividend
|                         |                | High |  | Low  |  | Paid    
|                         |                |      |  |      |  |         
|Calendar Quarters  2000 |                |      |  |      |  |          |  |      |  |  |  |      
|                         | First Quarter  |      |  | 2.06 |  |          |  | 1.88 |  |  |  | 0.04  | 
|                         | Second Quarter |      |  | 2.00 |  |          |  | 1.50 |  |  |  | 0.04  | 
|                         | Third Quarter  |      |  | 2.63 |  |          |  | 1.63 |  |  |  | 0.04  | 
|                         | Fourth Quarter |      |  | 2.47 |  |          |  | 1.78 |  |  |  | 0.04  | 
|Calendar Quarters  2001 |                |      |  |      |  |          |  |      |  |  |  |      
|                         | First Quarter  |      |  | 2.47 |  |          |  | 1.88 |  |  |  | 0.044 | 
|                         | Second Quarter |      |  | 3.00 |  |          |  | 2.19 |  |  |  | 0.044 | 
|                         | Third Quarter  |      |  | 2.75 |  |          |  | 2.15 |  |  |  | 0.044 | 
|                         | Fourth Quarter |      |  | 2.50 |  |          |  | 2.20 |  |  |  | 0.044 | 

On February 19, 2002, the Company had 316
stockholders of record. The last reported sale price per share
on February 19, 2002, was $2.31. The Company had no sales
of unregistered securities during 2001.

7



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##### Table of Contents



DIVIDEND POLICY

On December 15, 1999, the Company announced
a new dividend policy and declared its first quarterly cash
dividend. The Company paid $1,391,000, or $0.172 per common
share, of cash dividends during the fiscal year ended
December 31, 2001. On February 12, 2002, the Board of
Directors declared a quarterly cash dividend of $.044 per common
share to shareholders of record on March 29, 2002. Any
future declaration of dividends will depend, among other things,
on the Companys results of operations, capital
requirements and financial condition, and on such other factors
as the Companys Board of Directors may in its discretion
consider relevant.

8



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##### Table of Contents



SELECTED FINANCIAL AND OPERATING
DATA




Item 6  Selected Financial
Data

The following selected financial data should be
read in conjunction with the Companys Financial Statements
and the Notes thereto and Managements Discussion and
Analysis of Financial Condition and Results of Operations
included elsewhere in this Form 10-K.

Selected Financial Data

(Dollars in thousands, except per share and
operating data)


|                                                       |                                      |                          |        |             |  |             |        |             |  |             |        |         |  |   |        |         |  |   |        |         | 
|------------------------------------------------------ | ------------------------------------ | ------------------------ | ------ | ----------- |  | ----------- | ------ | ----------- |  | ----------- | ------ | ------- |  | - | ------ | ------- |  | - | ------ | ------- | 
|                                                       |                                      |                         
|                                                       |                                      | Years Ended December 31,
|                                                       |                                      |                         
|                                                       |                                      |                          |        | 2000        |  | 1999        |        | 1998        |  | 1997       
|                                                       |                                      | 2001                     |        | Restated(1) |  | Restated(1) |        | Restated(1) |  | Restated(1)
|                                                       |                                      |                          |        |             |  |             |        |             |  |            
|Income Statement Data:                                 |                                      |                          |        |             |  |             |        |             |  |             |        |         |  |   |        |         |  |   |        |        
|Gross sales                                            |                                      | $                        | 31,995 |             |  | $           | 30,275 |             |  | $           | 28,811 |         |  | $ | 27,326 |         |  | $ | 29,447 |        
|Less excise taxes                                      |                                      |                          | 1,572  |             |  |             | 1,704  |             |  |             | 1,735  |         |  |   | 1,672  |         |  |   | 1,971  |        
|                                                       |                                      |                          |        |             |  |             |        |             |  |             |        |         |  |   |        |         |  |   |        |        
|Net sales                                              |                                      |                          | 30,423 |             |  |             | 28,571 |             |  |             | 27,076 |         |  |   | 25,654 |         |  |   | 27,476 |        
|Cost of sales                                          |                                      |                          | 22,877 |             |  |             | 20,802 |             |  |             | 20,053 |         |  |   | 19,578 |         |  |   | 20,420 |        
|                                                       |                                      |                          |        |             |  |             |        |             |  |             |        |         |  |   |        |         |  |   |        |        
|Gross margin                                           |                                      |                          | 7,546  |             |  |             | 7,769  |             |  |             | 7,023  |         |  |   | 6,076  |         |  |   | 7,056  |        
|Selling, general and administrative expenses           |                                      |                          | 9,128  |             |  |             | 8,370  |             |  |             | 8,375  |         |  |   | 8,415  |         |  |   | 8,713  |        
|Impairment and restructuring charge                    |                                      |                          |       |             |  |             |       |             |  |             | 3,288  |         |  |   |       |         |  |   | 1,600  |        
|                                                       |                                      |                          |        |             |  |             |        |             |  |             |        |         |  |   |        |         |  |   |        |        
|Operating loss                                         |                                      |                          | (1,582 | )           |  |             | (601   | )           |  |             | (4,640 | )       |  |   | (2,339 | )       |  |   | (3,257 | )      
|Other income (expense), net                            |                                      |                          | 542    |             |  |             | 586    |             |  |             | 494    |         |  |   | 580    |         |  |   | (70    | )      
|                                                       |                                      |                          |        |             |  |             |        |             |  |             |        |         |  |   |        |         |  |   |        |        
|Loss before income taxes                               |                                      |                          | (1,040 | )           |  |             | (15    | )           |  |             | (4,146 | )       |  |   | (1,759 | )       |  |   | (3,327 | )      
|Benefit (provision) for income taxes                   |                                      |                          | (575   | )           |  |             |       |             |  |             |       |         |  |   | 582    |         |  |   | 1,215  |        
|                                                       |                                      |                          |        |             |  |             |        |             |  |             |        |         |  |   |        |         |  |   |        |        
|Net loss                                               |                                      | $                        | (1,615 | )           |  | $           | (15    | )           |  | $           | (4,146 | )       |  | $ | (1,177 | )       |  | $ | (2,112 | )      
|                                                       |                                      |                          |        |             |  |             |        |             |  |             |        |         |  |   |        |         |  |   |        |        
|Basic and diluted net loss per share                   |                                      | $                        | (0.20  | )           |  | $           | (0.00  | )           |  | $           | (0.50  | )       |  | $ | (0.14  | )       |  | $ | (0.26  | )      
|                                                       |                                      |                          |        |             |  |             |        |             |  |             |        |         |  |   |        |         |  |   |        |        
|Weighted average basic and diluted shares
	outstanding |                                      |                          | 7,987  |             |  |             | 7,940  |             |  |             | 8,231  |         |  |   | 8,213  |         |  |   | 8,206  |        
|                                                       |                                      |                          |        |             |  |             |        |             |  |             |        |         |  |   |        |         |  |   |        |        
|Dividend declared per share                            |                                      | $                        | 0.18   |             |  | $           | 0.16   |             |  | $           | 0.04   |         |  | $ |       |         |  | $ |       |        
|                                                       |                                      |                          |        |             |  |             |        |             |  |             |        |         |  |   |        |         |  |   |        |        
|Balance Sheet Data:                                    |                                      |                          |        |             |  |             |        |             |  |             |        |         |  |   |        |         |  |   |        |        
|                                                       | Working capital                      |                          | $      | 5,235       |  |             | $      | 7,392       |  |             | $      | 6,981   |  |   | $      | 6,258   |  |   | $      | 6,345   | 
|                                                       | Fixed assets, net                    |                          |        | 20,223      |  |             |        | 21,126      |  |             |        | 22,739  |  |   |        | 27,559  |  |   |        | 28,600  | 
|                                                       | Total assets                         |                          |        | 29,431      |  |             |        | 32,071      |  |             |        | 33,719  |  |   |        | 37,237  |  |   |        | 38,593  | 
|                                                       | Stockholders equity                 |                          |        | 25,224      |  |             |        | 27,938      |  |             |        | 29,861  |  |   |        | 34,391  |  |   |        | 35,546  | 
|Operating Data (in barrels):                           |                                      |                          |        |             |  |             |        |             |  |             |        |         |  |   |        |         |  |   |        |        
|                                                       | Beer barrels shipped                 |                          |        | 110,800     |  |             |        | 109,900     |  |             |        | 108,400 |  |   |        | 105,900 |  |   |        | 121,200 | 
|                                                       | Soda barrels shipped                 |                          |        | 46,000      |  |             |        | 38,400      |  |             |        | 29,600  |  |   |        | 26,700  |  |   |        | 22,200  | 
|                                                       |                                      |                          |        |             |  |             |        |             |  |             |        |         |  |   |        |         |  |   |        |        
|                                                       | Total barrels shipped                |                          |        | 156,800     |  |             |        | 148,300     |  |             |        | 138,000 |  |   |        | 132,600 |  |   |        | 143,400 | 
|                                                       |                                      |                          |        |             |  |             |        |             |  |             |        |         |  |   |        |         |  |   |        |        
|                                                       | Beer production capacity at year-end |                          |        | 200,000     |  |             |        | 200,000     |  |             |        | 172,000 |  |   |        | 172,000 |  |   |        | 172,000 | 
|                                                       |                                      |                          |        |             |  |             |        |             |  |             |        |         |  |   |        |         |  |   |        |        



---



|    |                                                                                                                                                                                                                                                                                                            
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The company changed the accounting method for
	package design costs to reflect the expensing of these costs as
	incurred rather than capitalizing and amortizing over twelve
	months. This change has been accounted for as prior period
	adjustment in accordance with Accounting Principals Board Opinion

9



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##### Table of Contents



| |                                                                                                                                                                                                                                                        
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | No. 20. The financial statements for all
	periods presented have been restated to reflect this change. The
	impact on the 1997 retained earnings beginning balance as a
	result of the restatement was an approximate $185,000 decrease
	to $2,561,000.

Impact of Restatement on Prior
Periods  Increase (Decrease) in Amounts

(Dollars in thousands, except per share
data)


|                                             |  |                          |      |      |  |      |       |      |  |   |      |   |  |   |       |  
|-------------------------------------------- |  | ------------------------ | ---- | ---- |  | ---- | ----- | ---- |  | - | ---- | - |  | - | ----- | -
|                                             |  |                         
|                                             |  | Years Ended December 31,
|                                             |  |                         
|                                             |  | 2000                     |      | 1999 |  | 1998 |       | 1997
|                                             |  |                          |      |      |  |      |       |     
|Income Statement Data:                       |  |                          |      |      |  |      |       |      |  |   |      |   |  |   |       |  
|Cost of sales                                |  | $                        | (210 | )    |  | $    | (432  | )    |  | $ | (448 | ) |  | $ | (441  | )
|Selling, general and administrative expenses |  |                          | 258  |      |  |      | 227   |      |  |   | 512  |   |  |   | 393   |  
|Net loss                                     |  |                          | 48   |      |  |      | (205  | )    |  |   | 41   |   |  |   | (31   | )
|Basic and diluted net loss per share         |  | $                        | 0.00 |      |  | $    | (0.03 | )    |  | $ | 0.00 |   |  | $ | (0.00 | )
|Balance Sheet Data:                          |  |                          |      |      |  |      |       |      |  |   |      |   |  |   |       |  
|Working capital                              |  | $                        | (39  | )    |  | $    | 9     |      |  | $ | (195 | ) |  | $ | (154  | )
|Total assets                                 |  |                          | (39  | )    |  |      | 9     |      |  |   | (195 | ) |  |   | (154  | )
|Stockholders equity                         |  |                          | (39  | )    |  |      | 9     |      |  |   | (195 | ) |  |   | (154  | )




Item 7  Managements
Discussion and Analysis of Financial Condition and Results of
Operations

Overview

Pyramid Breweries Inc. was incorporated in 1984
and is engaged in the brewing and sale of specialty beers and
sodas and in restaurant operations. The Company currently sells
its beverage products primarily in Washington, Oregon and
California under the Pyramid and Thomas Kemper brand names and
operates two restaurants, under the Pyramid Alehouse name, each
adjacent to its Seattle, Washington and Berkeley, California
breweries. The Companys revenues consist of sales of beer
and soda to third-party distributors and retail sales of beer,
soda, food, apparel and other items in its restaurants. For the
years ended December 31, 2001 and 2000, approximately 72%
and 73% of the Companys net sales were sales of beer and
soda to third party distributors. Total retail alehouse sales
accounted for 28% and 27% of total net sales in 2001 and 2000,
respectively.

The Companys sales volumes and selling
prices are affected by several factors such as level of consumer
demand in existing markets, sales in new distribution areas,
availability of beer distributors in new and existing markets,
and competitive factors, including the increase or decrease in
the number of competing craft beers, new product introductions
and promotional pricing. Sales in the craft beer industry
generally reflect a significant degree of seasonality with the
second and third calendar quarters reflecting stronger sales
than in the first and fourth calendar quarters.

The Companys operating results are subject
to quarterly fluctuations due to a variety of factors and the
Company anticipates that its operating margin will fluctuate as
a result of many factors, including (i) lower sales volumes
due to changes in demand and lower selling prices due to
increased product availability, (ii) increased depreciation
and other fixed and semi-fixed operating costs as a percent of
sales during periods when the Companys breweries are
producing below capacity, (iii) sales seasonality and
competition, (iv) increased raw material or packaging
costs, and (v) changes in the sales mix. Increased selling
and promotional costs incurred as the Company protects its
business in existing markets and develops its business in new
geographic areas may also cause operating margins and operating
income to decrease.

The Company sells its craft beers in bottles and
kegs. Although bottled products normally sell for a higher per
barrel selling price, gross margin on the Companys draft
products are typically higher as a percentage. Changes in the
proportion of sales of bottled and draft products therefore will
affect the Companys gross margin. For 2001 and 2000,
approximately 58% and 60%, respectively, of the Companys
sales of craft beers were bottled products.

10



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##### Table of Contents



The company changed the accounting method for
package design costs to reflect the expensing of these costs as
incurred rather than capitalizing and amortizing over twelve
months. This change has been accounted for as a prior period
adjustment in accordance with Accounting Principals Board
Opinion No. 20 Accounting Changes. The
financial statements for all periods presented have been
restated to reflect this change. The impact of the restatement
on cost of sales for 2000 and 1999 was a decrease of
approximately $210,000 and $432,000, respectively. The
restatement impact on selling, general and administrative
expenses for 2000 and 1999 was an increase of approximately
$258,000 and $227,000, respectively. The restatement impact on
the net loss for 2000 was a $48,000 increase in net loss and for
1999 a $205,000 decrease in net loss. The restatement impact on
net loss per share was no change for 2000 and a $0.03 decrease
for 1999. The impact on the 1999 retained deficit beginning
balance as a result of the restatement was an approximately
$195,000 increase in the retained deficit to a $728,000
beginning balance.

This report contains forward-looking statements
within the meaning of Section 21E of the Securities
Exchange Act of 1934, which are subject to the safe
harbor created by that section. These forward-looking
statements include, but are not limited to, statements
concerning future revenues, operating margins, expenses and cash
needs. The Companys actual future results could differ
materially from those projected in the forward-looking
statements. Some factors, which could cause future actual
results to differ materially from the Companys recent
results or those projected in the forward-looking statements,
are described below. The Company assumes no obligation to update
the forward-looking statements for such factors.

Critical Accounting Policies

The Company believes that its critical accounting
policies include the following:



| |   |                                   
| | - | ----------------------------------
| |  | Long-lived assets impairment      
|
| |  | Valuation of returnable containers
|
| |  | Realization of deferred tax assets

Long-Lived Assets Impairment.The Company reviews its long-lived
assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of the assets
may not be recoverable. The Companys evaluation is based
on an estimate of the future undiscounted net cash flows of the
related asset or asset grouping over the remaining life in
measuring whether the assets are recoverable. Long-lived assets
to be disposed of are evaluated in relation to the estimated
fair value of such assets less the estimated costs to sell.
Long-lived assets are written down to their estimated net fair
value calculated using a discounted future cash flows analysis
in the event of an impairment. Effective in the fiscal year
2002, the Company will account for long-lived assets in
accordance with Statement of Financial Accounting Standards
No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets. If circumstances related to the
Companys long-lived assets change, the Companys
valuation of the long-lived assets could materially change.

Returnable Containers.The accounting for returnable
containers (primarily kegs) requires management to make
judgments and estimates of physical quantities and valuation as
of each balance sheet date. Containers held by the Company are
counted as part of the Companys annual physical inventory
count procedures. The number of kegs held by distributors is
primarily based on annual confirmation with distributors. Kegs
are capitalized at their purchased cost as part of fixed assets
and are depreciated over their estimated useful economic life
based on historical experience, which currently ranges from five
to ten years. In the period it is identified the Company
recognizes a loss for the average remaining undepreciated cost
for lost and obsolete containers. The Company also collects a
deposit from customers for containers shipped to them and
recognizes a liability for the deposits collected. The recorded
liability is adjusted as necessary to be consistent with the
estimate of the number of containers held by distributors. If
circumstances related to the Companys returnable container
physical quantities or estimated valuation change, the
Companys recorded assets containers and related deposit
liabilities for returnable containers could materially change.

Realization of Deferred Tax Assets.The Company evaluates the
realizability of its deferred tax assets quarterly by assessing
the need for and amount of the valuation allowance. The
evaluation of the realizability

11



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##### Table of Contents



of the deferred tax assets is based on an
assessment of the Companys ability to generate future U.S.
taxable income. Results of operations in recent years are
considered in the assessment. The Company records a valuation
allowance for the portion of its deferred tax assets that do not
meet the recognition criteria of Statement of Financial
Accounting Standards No. 109 Accounting for Income
Taxes. If circumstances related to the Companys
ability to generate future U.S. taxable income change, the
Companys evaluation of the realizability of its deferred
tax assets could materially change.


Results of Operations



| |                                                                              
| | -----------------------------------------------------------------------------
| | Year Ended December 31, 2001 Compared
        to Year Ended December 31, 2000

Gross Sales.Gross
sales increased 5.7% to $31,995,000 in the year ended
December 31, 2001 from $30,275,000 for 2000. The sales
increase was primarily the result of a 19.5% increase in soda
sales in 2001 to $5,735,000 from $4,800,000 in 2000 and a 9.3%
increase in alehouse sales in 2001 to $8,456,000 from $7,737,000
in 2000. Total beer sales in 2001 increased slightly to
$17,804,000 from $17,738,000 in 2000. Soda shipments increased
19.8% to 46,000 barrels in 2001 from 38,400 in 2000 primarily
due to increased sales of root beer, orange cream soda, the soda
sampler pack, which includes all four of the soda products, and
the introduction of two new flavors. Alehouse sales increased
mainly as a result of increased sales prices and patronage at
both alehouse restaurants. Beer shipments increased 0.8% to
110,800 barrels in 2001 from 109,900 in 2000. Of wholesale beer
shipments, Pyramid beer increased 2.9% to 104,900 barrels while
Thomas Kemper beer shipments decreased 26.3% to 5,900 barrels
for 2001 compared to 2000. Wholesale beverage sales (beer and
soda combined) in Washington, Oregon and California increased by
4.1% in 2001 compared to 2000 sales. Sales in Washington, Oregon
and California accounted for 84.2% and 85.0% of the
Companys beverage sales in 2001 and 2000, respectively.

Excise Taxes.Excise
taxes were 4.9% and 5.6% of gross sales in 2001 and 2000,
respectively. Excise taxes were slightly lower as a percentage
of gross sales in 2001 due to a greater proportion of alehouse
and soda sales in 2001 compared to 2000, which do not bear
excise taxes.

Gross Margin.Gross
margin decreased 2.9% to $7,546,000 in 2001 from $7,769,000 in
2000. Gross margin as a percentage of net sales also decreased
to 24.8% in 2001 from 27.2% in 2000. The decrease in gross
margin was due primarily to increased utility and material costs
and a shift in product mix with increasing sales of 12-pack
products in the beverage division.

Selling, General and Administrative
Expenses.Selling, general and
administrative expenses increased 9.1% to $9,128,000 in 2001
from $8,370,000 in 2000. Selling, general and administrative
expenses as a percent of net sales also increased to 30.0% from
29.3% in the prior year. This increase was due primarily to
increased advertising expense, selling expense and a non-cash
stock compensation charge of $241,000 related to the new equity
arrangement with the Companys CEO announced in the second
quarter of 2001.

Other Income, net.Other income, net decreased to $542,000 in 2001 from $586,000 in
2000. The 7.5% decrease was due mainly from the interest earned
on cash equivalents. Both lower investment balances and lower
rates of interest income caused the decline in interest income.
This was partially offset by increased parking income and
decreased losses on sales of assets. Interest income was
$271,000 and $418,000 for the years ended December 31, 2001
and 2000, respectively. Parking income was $257,000 and $219,000
for the years ended December 31, 2001 and 2000,
respectively.

Income Taxes.As of
December 31, 2001, the Company had deferred tax assets
arising from deductible temporary differences, tax loss carry
forwards and tax credits offset against certain deferred tax
liabilities. During 2001, the Company determined that its
deferred tax assets no longer meet the recognition criteria of
Statement of Financial Accounting Standards No. 109,
Accounting for Income Taxes, and therefore increased
the valuation allowance by $575,000 to meet this requirement.
Realization of the deferred tax asset representing tax loss and
credit carryforwards is dependent on the Companys ability
to generate future U.S. taxable income. The Company will
continue to evaluate the realizability of the deferred tax
assets quarterly by assessing the need for and amount of the
valuation allowance.

12



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##### Table of Contents



Net Loss.The
Company incurred a net loss of $1,615,000 for 2001 compared with
net loss of $15,000 in 2000. The $1,600,000 increase in net loss
was due to higher brewery operating costs, higher selling,
general and administrative expenses and the increase in the tax
valuation allowance mentioned above.



| |                                                                       
| | ----------------------------------------------------------------------
| | Year Ended December 31, 2000 Compared
	to Year Ended December 31, 1999

Gross Sales.Gross
sales increased 5.1% to $30,275,000 in the year ended
December 31, 2000 from $28,811,000 for 1999. The sales
increase was primarily the result of a 26.3% increase in soda
sales in 2000 to $4,800,000 from $3,800,000 in 1999 and a 6.7%
increase in alehouse sales in 2000 to $7,737,000 from $7,251,000
in 1999. Soda shipments increased 29.7% to 38,400 barrels in
2000 from 29,600 in 1999 primarily due to increased sales of
root beer, orange cream soda and the soda sampler pack, which
includes all four of the soda products. Alehouse sales increased
mainly as a result of increased sales prices and patronage at
both alehouse restaurants. Beer shipments increased 1.4% to
109,900 barrels in 2000 from 108,400 in 1999. Of wholesale beer
shipments, Pyramid beer increased 6.6% to 101,900 barrels while
Thomas Kemper beer shipments decreased 32.9% to 8,000 barrels
for 2000 compared to 1999. Wholesale beverage sales (beer and
soda combined) in Washington, Oregon and California increased by
5.3% in 2000 compared to 1999 sales. Sales in Washington, Oregon
and California accounted for 85.0% and 84.4% of the
Companys beverage sales in 2000 and 1999, respectively.

Excise Taxes.Excise
taxes were 5.6% and 6.0% of gross sales in 2000 and 1999,
respectively. Excise taxes were slightly lower as a percentage
of gross sales in 2000 due to a greater proportion of alehouse
and soda sales in 2000 compared to 1999, which do not bear
excise taxes.

Gross Margin.Gross
margin increased 10.6% to $7,769,000 in 2000 from $7,023,000 in
1999. Gross margin as a percentage of net sales also increased
to 27.2% in 2000 from 25.9% in 1999. The increase in gross
margin was due primarily to increased sales and improved
operating efficiencies in both the alehouse and beverage
divisions.

Selling, General and Administrative
Expenses.Selling, general and
administrative expenses remained flat at $8,370,000 for the
years ended 2000 from $8,375,000 in 1999. Excluding the $480,000
severance accrual recorded in the fourth quarter of 1999,
selling, general and administrative expenses increased by
approximately $485,000. This increase was due primarily to
increased marketing expense for the development of a brand
awareness campaign. As a percentage of net sales, selling,
general and administrative expenses increased slightly to 29.3%
of net sales in 2000 from 29.2% of net sales in 1999 (excluding
the effect of the 1999 severance charge).

Impairment Charge.During fiscal year 1999, the Company wrote down approximately
$3,288,000 of impaired long-lived assets. The write-down
included $2,545,000 of brewing machinery and equipment and
$743,000 of leasehold and other equipment. The Company reviews
assets for impairment whenever events or changes in
circumstances indicate that the book value of the asset may not
be recoverable. Based on the Companys expectation of
future undiscounted net cash flows, these assets were written
down to their estimated net fair value.

Other Income, net.Other income, net increased to $586,000 in 2000 from $494,000 in
1999. The 18.6% increase was due mainly to higher interest rates
earned on cash equivalents. Interest income was $418,000 and
$322,000 for the years ended December 31, 2000 and 1999,
respectively.

Income Taxes.As of
December 31, 2000, the Company had deferred tax assets
arising from deductible temporary differences tax loss carry
forwards and tax credits offset against certain deferred tax
liabilities. During 2000 and 1999, a valuation allowance was
recorded against the deferred tax asset for the benefits of tax
losses which may not be realized which resulted in no income tax
benefit being recorded for the years ended December 31,
2000 and 1999. Realization of the deferred tax asset
representing tax loss and credit carryforwards is dependent on
the Companys ability to generate future U.S. taxable
income. The Company will continue to evaluate the realizability
of the deferred tax assets quarterly by assessing the need for
and amount of the valuation allowance.

13



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##### Table of Contents



Net Loss.The
Company recorded net loss of $15,000 for 2000 compared with net
loss of $4,146,000 in 1999. Excluding the effect of the asset
impairment charge and severance accruals recorded in 1999 of
$3,288,000 and $480,000, respectively, the adjusted net loss
would have been $378,000 or 1.4% of 1999 net sales. The decrease
in net loss for the year was primarily the result of the
increased sales and improved margins for the year ended
December 31, 2000.

Liquidity and Capital Resources

Net cash provided by operating activities for the
year ended December 31, 2001 decreased to $1,589,000 from
$2,528,000 for the prior year. The decrease was primarily due to
the decrease from the results of operations partially offset by
an increase from net operating assets. At December 31,
2001, the Companys working capital decreased to $5,235,000
compared to $7,392,000 at December 31, 2000.

Net cash used in investing activities for the
year ended December 31, 2001 was $1,556,000 compared to
$465,000 for the prior year. The cash used in investing
activities in 2001 included long-term investments in
certificates of deposit, equipment and facility upgrades in the
Berkeley and Seattle Breweries, expansion of the Seattle
Alehouse and the purchase of and improvements to the new Walnut
Creek Alehouse. Those investments and the Companys
quarterly dividend payments to shareholders impacted working
capital. Cash used in investing activities during 2000 included
the upgrade of production equipment at the Berkeley Brewery,
remodel of the Seattle Alehouse and various upgrades of computer
equipment, net of proceeds from the sale of equipment and
proceeds from a long-term receivable.

On December 15, 1999, the Company announced
a stock buyback plan to repurchase up to $2,000,000 of the
Companys common stock from time to time on the open
market. Stock purchases are at the discretion of management and
depend, among other things, on the Companys results of
operations, capital requirements and financial condition, and on
such other factors as the Companys management may consider
relevant. As of December 31, 2001, the Company has
purchased a total of 457,724 shares at an average price of $1.94
per share for a total of $892,000 since the inception of the
program. During the year ended December 31, 2001 the
Company expended a total of $25,000 to purchase shares.

The Company had a $5,000,000 line of credit (the
Line of Credit) for short-term operating needs which expired on
July 31, 2001. The Company had never borrowed on the Line
of Credit.

Future capital requirements may vary depending on
such factors as the cost of acquisition of businesses, brands
and real estate costs in the markets selected for future
expansion, whether such real estate is leased or purchased and
the extent of improvements necessary. Capital expenditures
during 2001 were approximately $1,079,000, which includes
equipment and facility upgrades in the Berkeley and Seattle
Breweries, expansion of the Seattle Alehouse and improvements to
the new Walnut Creek Alehouse. Capital expenditures for 2002 are
estimated to be $1,500,000. The Companys future cash
requirements and cash flow expectations are closely related to
its expansion plans. While there can be no assurance that
current expectations will be realized and plans are subject to
change upon further review, the Company believes that its cash
reserves, together with cash from operations, will be sufficient
for the Companys working capital needs.

Risk Factors and Forwarding Looking
Statements

The Company does not provide forecasts of future
financial performance. However this report does contain
forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, which
are subject to the safe harbor created by that
section. There are numerous important factors that could cause
results to differ materially from those anticipated by some of
the statements made by the Company. Investors are cautioned that
all forward-looking statements involve a high degree of risk and
uncertainty.

Increasing
Competition.The domestic market in
which the Companys craft beers compete is highly
competitive for many reasons, including the continuing
proliferation of new beers and brew pubs, efforts by regional
craft brewers to expand their distribution, the introduction of
fuller-flavored products by certain major

14



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##### Table of Contents



national brewers, and underutilized craft brewing
capacity. The Company anticipates that intensifying competition
from craft beer and imported beer producers and excess capacity
in the craft beer segment may adversely impact the
Companys operating margins. In addition, the larger
national brewers have developed brands to compete directly with
craft beers. These national competitors have advantages such as
lower production costs, larger marketing budgets, greater
financial and other resources and more developed and extensive
distribution networks than the Company. There can be no
assurance that the Company will be able to grow its volumes or
be able to maintain its selling prices in existing markets or as
it enters new markets.


Access to Markets.Most of the Companys independent
distributors are also distributors of national brewers, some of
whom have used their greater influence and marketing resources
to persuade those distributors to exclude the products of other
breweries from their portfolios. Such actions by national
brewers have the effect of reducing distribution options for the
Companys products. In addition, there is evidence that
independent distributors are moving towards consolidation to
improve profit margins. Although the Company has not yet been
negatively impacted by such events, it is possible that the
Company could effectively be denied access to a market or
markets by the tactics of the national brewers and further
consolidation of independent distributors. In the states that
comprise the majority of its sales, the Company has the option
to distribute its products directly to retailers and the Company
has previous experience in doing so. However, there is no
assurance that self-distribution can be done in an economic
manner over large territories.

Government
Regulations.The Companys
business is highly regulated at the federal, state and local
levels, and its brewery and restaurant operations require
various licenses, permits and approvals. The loss or revocation
of any existing licenses, permits or approvals or the failure to
obtain any additional licenses, permits or approvals in new
jurisdictions where the Company intends to do business could
have a material adverse effect on the ability of the Company to
conduct its business. Further, federal regulations prohibit,
among other things, the payment of slotting allowances to
retailers for beer products. These regulations have the effect
of preventing competitors with greater financial resources from
excluding smaller brewers from retailers. If these regulations
were repealed or substantially modified, there would likely be a
material adverse effect on the Companys business and
operating results.

Selling Prices.The
future selling prices the Company charges for its craft beer and
other specialty beverages may decrease from historical levels
due to increasing competitive pressures. The Company has and
will continue to participate in price promotions with its
wholesalers and their retail customers. Management believes that
the number and frequency of the Companys promotions will
increase during 2002.

Variability of Margins and Operating
Results.The Company anticipates that
its operating margins will fluctuate and may decline as a result
of many factors, including (i) lower sales volumes and
selling prices, (ii) increased depreciation and other fixed
and semi-fixed operating costs as a percent of sales during
periods when the Companys breweries are producing below
designed capacity, (iii) increased raw material and
packaging costs, (iv) changes in product mix and packaging,
(v) increased transportation costs, (vi) increased
sales from retail operations which may have a lower gross margin
(as a percentage of net sales) than beer sales, and
(vii) increased selling and promotional costs incurred as
the Company protects its business in existing markets. Increases
in federal or state excise taxes and the impact of an increasing
average federal excise tax rate as production increases may also
cause a decline in the Companys gross margins. The Company
pays federal excise taxes on all beer sales and pays state
excise taxes on beer sales occurring in various states at
various tax rates. The federal excise tax is $7.00 per barrel on
the first 60,000 barrels and $18.00 per barrel exceeding 60,000
annually, as long as total annual sales are less than two
million barrels. The Washington state excise tax is $4.78 per
barrel annually and the California state excise tax is $6.20 per
barrel annually.

Results of operations in any period should not be
considered indicative of the results to be expected for future
periods. Fluctuations in operating results may also result in
fluctuations in the price of the Companys common stock. In
future quarters, the Companys operating results may not
meet the expectations of public market analysts or investors. In
such an event, the market price of the common stock could be
materially adversely affected.

15



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##### Table of Contents



Impact of Inflation

Although the Company has not attempted to
calculate the effect of inflation, management does not believe
inflation has had a material adverse effect on the
Companys results of operations. In the future, increases
in costs and expenses, particularly energy, packaging, raw
materials and labor costs may have a significant impact on the
Companys operating results to the extent that such cost
increases cannot be passed along to its customers.




Item 8  Financial
Statements

Financial statements of Pyramid Breweries Inc.
are as follows:

|                                                                                         |  |      |    | 
|---------------------------------------------------------------------------------------- |  | ---- | -- | 
|                                                                                         |  | Page
|                                                                                         |  |     
|Report of Independent Public Accountants                                                 |  |      | 20 | 
|Balance Sheets as of December 31, 2001 and
	2000                                         |  |      | 21 | 
|Statements of Operations for the Years Ended
	December 31, 2001, 2000 and 1999           |  |      | 22 | 
|Statements of Stockholders Equity for the
	Years Ended December 31, 2001, 2000 and 1999 |  |      | 23 | 
|Statements of Cash Flows for the Years Ended
	December 31, 2001, 2000 and 1999           |  |      | 24 | 
|Notes to Financial Statements                                                            |  |      | 25 | 




Item 9  Change in and
Disagreements with Accountants on Accounting and Financial
Disclosure

None.




PART III




Item 10  Directors and
Executive Officers of the Company

For information with respect to the executive
officers of the Registrant, see Item 4A 
Executive Officers of the Company at the end of
Part I of this report. The information required by this
Item concerning the Directors and nominees for Director of the
Company is incorporated herein by reference to Pyramid Breweries
Inc. Proxy Statement for its Annual Meeting of Stockholders, to
be held on May 2, 2002, to be filed with the Commission
pursuant to Regulation 14A.




Item 11  Executive
Compensation

The information required by this Item is
incorporated herein by reference to Pyramid Breweries Inc. Proxy
Statement for its Annual Meeting of Stockholders, to be held on
May 2, 2002, to be filed with the Commission pursuant to
Regulation 14A.




Item 12  Security Ownership
of Certain Beneficial Owners and Management

The information required by this Item is
incorporated herein by reference to Pyramid Breweries Inc. Proxy
Statement for its Annual Meeting of Stockholders, to be held on
May 2, 2002, to be filed with the Commission pursuant to
Regulation 14A.




Item 13  Certain
Relationships and Related Transactions

The information required by this Item is
incorporated herein by reference to Pyramid Breweries Inc. Proxy
Statement for its Annual Meeting of Stockholders, to be held on
May 2, 2002, to be filed with the Commission pursuant to
Regulation 14A.

16



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##### Table of Contents






PART IV




Item 14  Exhibits,
Financial Statement Schedules, and Reports on
Form 8-K

(a) Documents filed as part of this report
are as follows:



| |                                                                                                                              
| | -----------------------------------------------------------------------------------------------------------------------------
| | 1.     Financial
	Statements: See listing of Financial Statements included as
	a part of this Form 10-K on Item 8 of Part II.
|
| | 2.     Financial
	Statement Schedules  None.                                                                                

(b) No reports on Form 8-K were filed
during the last quarter of the period covered by this Annual
Report.



| |                                                                                                                                                                               
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 3.     Exhibits:The required exhibits are included at the end of the
	Form 10-K Annual Report and are described in the
	Exhibit Index immediately preceding the first exhibit.

17



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##### Table of Contents






SIGNATURES

Pursuant to the requirements of Section 13
of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.

February 28, 2002



| |                       
| | ----------------------
| | PYRAMID BREWERIES INC.
| | (Registrant)          



| |    |                
| | -- | ---------------
| | By | /s/ WAYNE DRURY

| |                                            
| | -------------------------------------------
| |                                            
| | Wayne Drury                                
| | Vice President and Chief Financial
	Officer

Pursuant to the requirements of the Securities
Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the
capacities and on the dates indicated.

|   |  |                                                                                                       |  |                  
|-- |  | ----------------------------------------------------------------------------------------------------- |  | -----------------
|  
|By |  | /s/ MARTIN KELLY                                                                                      |  | February 28, 2002
|   |  |                                                                                                      
|   |  | Martin Kelly
	President and Chief Executive Officer
	Chairman of the Board                            |  |                  
|  
|By |  | /s/ WAYNE DRURY                                                                                       |  | February 28, 2002
|   |  |                                                                                                      
|   |  | Wayne Drury
	Vice President and Chief Financial Officer
	(Principal Financial and Accounting Officer) |  |                  
|  
|  
|By |  | /s/ KURT DAMMEIER                                                                                     |  | February 28, 2002
|   |  |                                                                                                      
|   |  | Kurt Dammeier
	Director                                                                               |  |                  
|  
|By |  | /s/ SCOTT S. BARNUM                                                                                   |  | February 28, 2002
|   |  |                                                                                                      
|   |  | Scott S. Barnum
	Director                                                                             |  |                  
|  
|By |  | /s/ GEORGE HANCOCK                                                                                    |  | February 28, 2002
|   |  |                                                                                                      
|   |  | George Hancock
	Director and Founder                                                                  |  |                  
|  
|By |  | /s/ NANCY MOOTZ                                                                                       |  | February 28, 2002
|   |  |                                                                                                      
|   |  | Nancy Mootz
	Director                                                                                 |  |                  
|  
|By |  | /s/ SCOTT SVENSON                                                                                     |  | February 28, 2002
|   |  |                                                                                                      
|   |  | Scott Svenson
	Director                                                                               |  |                  

18



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##### Table of Contents



PYRAMID BREWERIES INC.

INDEX TO FINANCIAL STATEMENTS

|                                                                                         |  |      |    | 
|---------------------------------------------------------------------------------------- |  | ---- | -- | 
|                                                                                         |  | Page
|                                                                                         |  |     
|Report of Independent Public Accountants                                                 |  |      | 20 | 
|Balance Sheets as of December 31, 2001 and
	2000                                         |  |      | 21 | 
|Statements of Operations for the Years Ended
	December 31, 2001, 2000 and 1999           |  |      | 22 | 
|Statements of Stockholders Equity for the
	Years Ended December 31, 2001, 2000 and 1999 |  |      | 23 | 
|Statements of Cash Flows for the Years Ended
	December 31, 2001, 2000 and 1999           |  |      | 24 | 
|Notes to Financial Statements                                                            |  |      | 25 | 

19



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##### Table of Contents



REPORT OF INDEPENDENT PUBLIC
ACCOUNTANTS

To the Board of Directors of Pyramid Breweries
Inc.:

We have audited the accompanying balance sheets
of Pyramid Breweries Inc. as of December 31, 2001 and 2000
and the related statements of operations, stockholders
equity and cash flows for each of the three years ended
December 31, 2001. These financial statements are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements based on our audits.

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

In our opinion, the financial statements referred
to above present fairly, in all material respects, the financial
position of Pyramid Breweries Inc. as of December 31, 2001
and 2000, and the results of its operations and its cash flows
for each of the three years ended December 31, 2001 in
conformity with accounting principles generally accepted in the
United States.

As explained in Note 1 to the financial
statements, the Company has restated the 2000 and 1999 financial
statements for the change in accounting for package design costs.



| |                        
| | -----------------------
| | /s/ ARTHUR ANDERSEN LLP

Seattle, Washington,

January 25, 2002


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##### Table of Contents



PYRAMID BREWERIES INC.

BALANCE SHEETS

|                                      |                                                                                                                    |                                            |   |            |            |  |   |            |            | 
|------------------------------------- | ------------------------------------------------------------------------------------------------------------------ | ------------------------------------------ | - | ---------- | ---------- |  | - | ---------- | ---------- | 
|                                      |                                                                                                                    |                                           
|                                      |                                                                                                                    | December 31,                              
|                                      |                                                                                                                    |                                           
|                                      |                                                                                                                    |                                            |   | 2000      
|                                      |                                                                                                                    | 2001                                       |   | Restated  
|                                      |                                                                                                                    |                                            |   |           
|ASSETS                               
|CURRENT ASSETS:                       |                                                                                                                    |                                            |   |            |            |  |   |           
|                                      | Cash and cash equivalents                                                                                          |                                            | $ | 5,075,454  |            |  | $ | 6,444,145  |           
|                                      | Accounts receivable, net of allowance for
	doubtful accounts of $20,000 as of December 31, 2001 and
	2000          |                                            |   | 1,425,592  |            |  |   | 1,664,466  |           
|                                      | Inventories                                                                                                        |                                            |   | 1,178,148  |            |  |   | 1,164,388  |           
|                                      | Prepaid expenses and other                                                                                         |                                            |   | 382,826    |            |  |   | 512,651    |           
|                                      | Deferred income taxes                                                                                              |                                            |   |           |            |  |   | 425,947    |           
|                                      |                                                                                                                    |                                            |   |            |            |  |   |           
|                                      |                                                                                                                    | Total current assets                       |   |            | 8,062,020  |  |   |            | 10,211,597 | 
|                                      | Long term investments                                                                                              |                                            |   | 491,742    |            |  |   |           |           
|                                      | Note receivable related party                                                                                      |                                            |   | 106,965    |            |  |   |           |           
|                                      | Fixed assets, net                                                                                                  |                                            |   | 20,222,560 |            |  |   | 21,125,892 |           
|                                      | Deferred income taxes                                                                                              |                                            |   |           |            |  |   | 148,674    |           
|                                      | Other                                                                                                              |                                            |   | 547,466    |            |  |   | 584,866    |           
|                                      |                                                                                                                    |                                            |   |            |            |  |   |           
|                                      |                                                                                                                    | Total assets                               |   | $          | 29,430,753 |  |   | $          | 32,071,029 | 
|                                      |                                                                                                                    |                                            |   |            |            |  |   |           
|                                     
|LIABILITIES AND STOCKHOLDERS
	EQUITY
|CURRENT LIABILITIES:                  |                                                                                                                    |                                            |   |            |            |  |   |           
|                                      | Accounts payable                                                                                                   |                                            | $ | 662,527    |            |  | $ | 739,284    |           
|                                      | Accrued expenses                                                                                                   |                                            |   | 1,312,641  |            |  |   | 1,297,370  |           
|                                      | Refundable deposits                                                                                                |                                            |   | 550,259    |            |  |   | 534,295    |           
|                                      | Note payable  current                                                                                             |                                            |   | 20,000     |            |  |   |           |           
|                                      | Dividends payable                                                                                                  |                                            |   | 365,178    |            |  |   | 314,530    |           
|                                      |                                                                                                                    |                                            |   |            |            |  |   |           
|                                      |                                                                                                                    | Total current liabilities                  |   |            | 2,910,605  |  |   |            | 2,885,479  | 
|                                      | Note payable                                                                                                       |                                            |   | 43,397     |            |  |   |           |           
|                                      | Deferred rent                                                                                                      |                                            |   | 1,252,650  |            |  |   | 1,247,639  |           
|                                      |                                                                                                                    |                                            |   |            |            |  |   |           
|                                      |                                                                                                                    | Total liabilities                          |   |            | 4,206,652  |  |   |            | 4,133,118  | 
|                                      |                                                                                                                    |                                            |   |            |            |  |   |           
|COMMITMENTS AND CONTINGENCIES         |                                                                                                                    |                                            |   |            |            |  |   |           
|STOCKHOLDERS EQUITY:                 |                                                                                                                    |                                            |   |            |            |  |   |           
|                                      | Preferred stock, 10,000,000 shares authorized,
	none issued                                                        |                                            |   |           |            |  |   |           |           
|                                      | Common stock, $.01 par value; 40,000,000 shares
	authorized, 8,299,493 and 7,863,251 shares issued and outstanding |                                            |   | 82,995     |            |  |   | 78,632     |           
|                                      | Additional paid-in capital                                                                                         |                                            |   | 35,649,120 |            |  |   | 34,337,887 |           
|                                      | Note receivable                                                                                                    |                                            |   | (786,818   | )          |  |   |           |           
|                                      | Deferred compensation                                                                                              |                                            |   | (185,486   | )          |  |   |           |           
|                                      | Retained deficit                                                                                                   |                                            |   | (9,535,710 | )          |  |   | (6,478,608 | )         
|                                      |                                                                                                                    |                                            |   |            |            |  |   |           
|                                      |                                                                                                                    | Total stockholders equity                 |   |            | 25,224,101 |  |   |            | 27,937,911 | 
|                                      |                                                                                                                    |                                            |   |            |            |  |   |           
|                                      |                                                                                                                    | Total liabilities and stockholders equity |   | $          | 29,430,753 |  |   | $          | 32,071,029 | 
|                                      |                                                                                                                    |                                            |   |            |            |  |   |           

The accompanying notes are an integral part of
these balance sheets.

21



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##### Table of Contents



PYRAMID BREWERIES INC.

STATEMENTS OF OPERATIONS

|                                                       |  |                          |            |          |  |          |            |   |  |   |            |  
|------------------------------------------------------ |  | ------------------------ | ---------- | -------- |  | -------- | ---------- | - |  | - | ---------- | -
|                                                       |  |                         
|                                                       |  | Years Ended December 31,
|                                                       |  |                         
|                                                       |  |                          |            | 2000     |  | 1999    
|                                                       |  | 2001                     |            | Restated |  | Restated
|                                                       |  |                          |            |          |  |         
|Gross sales                                            |  | $                        | 31,995,135 |          |  | $        | 30,274,695 |   |  | $ | 28,810,887 |  
|Less excise taxes                                      |  |                          | 1,571,764  |          |  |          | 1,704,283  |   |  |   | 1,734,780  |  
|                                                       |  |                          |            |          |  |          |            |   |  |   |            |  
|Net sales                                              |  |                          | 30,423,371 |          |  |          | 28,570,412 |   |  |   | 27,076,107 |  
|Cost of sales                                          |  |                          | 22,877,076 |          |  |          | 20,801,424 |   |  |   | 20,052,804 |  
|                                                       |  |                          |            |          |  |          |            |   |  |   |            |  
|Gross margin                                           |  |                          | 7,546,295  |          |  |          | 7,768,988  |   |  |   | 7,023,303  |  
|Selling, general and administrative expenses           |  |                          | 9,128,866  |          |  |          | 8,369,580  |   |  |   | 8,376,180  |  
|Asset impairment charge                                |  |                          |           |          |  |          |           |   |  |   | 3,287,822  |  
|                                                       |  |                          |            |          |  |          |            |   |  |   |            |  
|Operating loss                                         |  |                          | (1,582,571 | )        |  |          | (600,592   | ) |  |   | (4,640,699 | )
|Other income, net                                      |  |                          | 542,119    |          |  |          | 585,682    |   |  |   | 494,234    |  
|                                                       |  |                          |            |          |  |          |            |   |  |   |            |  
|Loss before income taxes                               |  |                          | (1,040,452 | )        |  |          | (14,910    | ) |  |   | (4,146,465 | )
|Provision for income taxes                             |  |                          | (574,621   | )        |  |          |           |   |  |   |           |  
|                                                       |  |                          |            |          |  |          |            |   |  |   |            |  
|Net loss                                               |  | $                        | (1,615,073 | )        |  | $        | (14,910    | ) |  | $ | (4,146,465 | )
|                                                       |  |                          |            |          |  |          |            |   |  |   |            |  
|Basic and diluted net loss per share                   |  | $                        | (0.20      | )        |  | $        | (0.00      | ) |  | $ | (0.50      | )
|                                                       |  |                          |            |          |  |          |            |   |  |   |            |  
|Weighted average basic and diluted shares
	outstanding |  |                          | 7,986,595  |          |  |          | 7,939,980  |   |  |   | 8,230,522  |  
|                                                       |  |                          |            |          |  |          |            |   |  |   |            |  

The accompanying notes are an integral part of
these statements.

22



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##### Table of Contents



PYRAMID BREWERIES INC.

STATEMENTS OF STOCKHOLDERS
EQUITY

|                                    |                                                                  |              |           |            |   |         |        |            |   |              |            |               |   |        |          |          |   |   |          |          |   |   |            |            |   |   |            |            |  
|----------------------------------- | ---------------------------------------------------------------- | ------------ | --------- | ---------- | - | ------- | ------ | ---------- | - | ------------ | ---------- | ------------- | - | ------ | -------- | -------- | - | - | -------- | -------- | - | - | ---------- | ---------- | - | - | ---------- | ---------- | -
|                                    |                                                                  |              |           |            |   |         |        |            |   |              |            |              
|                                    |                                                                  | Common Stock |           | Additional |   |         |        |            |   |              |            | Total        
|                                    |                                                                  |              |           | Paid-in    |   | Note    |        | Deferred   |   | Retained     |            | Stockholders
|                                    |                                                                  | Shares       |           | Amount     |   | Capital |        | Receivable |   | Compensation |            | Deficit       |   | Equity
|                                    |                                                                  |              |           |            |   |         |        |            |   |              |            |               |   |       
|As reported balance,                |                                                                  |              |           |            |   |         |        |            |   |              |            |               |   |        |          |          |   |   |          |          |   |   |            |            |   |   |            |           
|                                    | December 31, 1998                                                |              |           | 8,219,532  |   |         | $      | 82,195     |   |              | $          | 35,036,869    |   |        | $        |         |   |   | $        |         |   |   | $          | (533,200   | ) |   | $          | 34,585,864 |  
|                                    | Prior period adjustments                                         |              |           |           |   |         |        |           |   |              |            |              |   |        |          |         |   |   |          |         |   |   |            | (194,935   | ) |   |            | (194,935   | )
|                                    |                                                                  |              |           |            |   |         |        |            |   |              |            |               |   |        |          |          |   |   |          |          |   |   |            |            |   |   |            |           
|Restated balance, December 31, 1998 |                                                                  |              | 8,219,532 |            |   |         | 82,195 |            |   |              | 35,036,869 |               |   |        |         |          |   |   |         |          |   |   | (728,135   | )          |   |   | 34,390,929 |           
|                                    | Net loss restated                                                |              |           |           |   |         |        |           |   |              |            |              |   |        |          |         |   |   |          |         |   |   |            | (4,146,465 | ) |   |            | (4,146,465 | )
|                                    | Dividends declared                                               |              |           |           |   |         |        |           |   |              |            |              |   |        |          |         |   |   |          |         |   |   |            | (329,735   | ) |   |            | (329,735   | )
|                                    | Shares issued                                                    |              |           | 23,848     |   |         |        | 239        |   |              |            | 38,642        |   |        |          |         |   |   |          |         |   |   |            |           |   |   |            | 38,881     |  
|                                    | Shares repurchased and retired                                   |              |           | (49,800    | ) |         |        | (498       | ) |              |            | (92,565       | ) |        |          |         |   |   |          |         |   |   |            |           |   |   |            | (93,063    | )
|                                    |                                                                  |              |           |            |   |         |        |            |   |              |            |               |   |        |          |          |   |   |          |          |   |   |            |            |   |   |            |           
|Restated balance, December 31, 1999 |                                                                  |              | 8,193,580 |            |   |         | 81,936 |            |   |              | 34,982,946 |               |   |        |         |          |   |   |         |          |   |   | (5,204,335 | )          |   |   | 29,860,547 |           
|                                    | Net loss restated                                                |              |           |           |   |         |        |           |   |              |            |              |   |        |          |         |   |   |          |         |   |   |            | (14,910    | ) |   |            | (14,910    | )
|                                    | Dividends declared                                               |              |           |           |   |         |        |           |   |              |            |              |   |        |          |         |   |   |          |         |   |   |            | (1,259,363 | ) |   |            | (1,259,363 | )
|                                    | Shares issued                                                    |              |           | 38,269     |   |         |        | 383        |   |              |            | 59,004        |   |        |          |         |   |   |          |         |   |   |            |           |   |   |            | 59,387     |  
|                                    | Exercised stock options                                          |              |           | 27,600     |   |         |        | 275        |   |              |            | 65,535        |   |        |          |         |   |   |          |         |   |   |            |           |   |   |            | 65,810     |  
|                                    | Shares repurchased and retired                                   |              |           | (396,198   | ) |         |        | (3,962     | ) |              |            | (769,598      | ) |        |          |         |   |   |          |         |   |   |            |           |   |   |            | (773,560   | )
|                                    |                                                                  |              |           |            |   |         |        |            |   |              |            |               |   |        |          |          |   |   |          |          |   |   |            |            |   |   |            |           
|Restated balance, December 31, 2000 |                                                                  |              | 7,863,251 |            |   |         | 78,632 |            |   |              | 34,337,887 |               |   |        |         |          |   |   |         |          |   |   | (6,478,608 | )          |   |   | 27,937,911 |           
|                                    | Net loss                                                         |              |           |           |   |         |        |           |   |              |            |              |   |        |          |         |   |   |          |         |   |   |            | (1,615,073 | ) |   |            | (1,615,073 | )
|                                    | Dividends declared                                               |              |           |           |   |         |        |           |   |              |            |              |   |        |          |         |   |   |          |         |   |   |            | (1,442,029 | ) |   |            | (1,442,029 | )
|                                    | Shares issued                                                    |              |           | 32,268     |   |         |        | 322        |   |              |            | 62,769        |   |        |          |         |   |   |          |         |   |   |            |           |   |   |            | 63,091     |  
|                                    | Exercised stock options                                          |              |           | 415,700    |   |         |        | 4,158      |   |              |            | 841,158       |   |        |          | (786,818 | ) |   |          |         |   |   |            |           |   |   |            | 58,498     |  
|                                    | Stock compensation including amortization of
	stock compensation |              |           |           |   |         |        |           |   |              |            | 186,371       |   |        |          |         |   |   |          | 60,738   |   |   |            |           |   |   |            | 247,109    |  
|                                    | Deferred compensation                                            |              |           |           |   |         |        |           |   |              |            | 246,224       |   |        |          |         |   |   |          | (246,224 | ) |   |            |           |   |   |            |           |  
|                                    | Shares repurchased and retired                                   |              |           | (11,726    | ) |         |        | (117       | ) |              |            | (25,289       | ) |        |          |         |   |   |          |         |   |   |            |           |   |   |            | (25,406    | )
|                                    |                                                                  |              |           |            |   |         |        |            |   |              |            |               |   |        |          |          |   |   |          |          |   |   |            |            |   |   |            |           
|Balance, December 31, 2001          |                                                                  |              | 8,299,493 |            |   | $       | 82,995 |            |   | $            | 35,649,120 |               |   | $      | (786,818 | )        |   | $ | (185,486 | )        |   | $ | (9,535,710 | )          |   | $ | 25,224,101 |           
|                                    |                                                                  |              |           |            |   |         |        |            |   |              |            |               |   |        |          |          |   |   |          |          |   |   |            |            |   |   |            |           

The accompanying notes are an integral part of
these statements.

23



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##### Table of Contents



PYRAMID BREWERIES INC.

STATEMENTS OF CASH FLOWS

|                      |                                                                                  |                                                   |   |            |            |          |   |         |            |   |   |            |           |  
|--------------------- | -------------------------------------------------------------------------------- | ------------------------------------------------- | - | ---------- | ---------- | -------- | - | ------- | ---------- | - | - | ---------- | --------- | -
|                      |                                                                                  |                                                  
|                      |                                                                                  | Years Ended December 31,                         
|                      |                                                                                  |                                                  
|                      |                                                                                  |                                                   |   | 2000       |            | 1999    
|                      |                                                                                  | 2001                                              |   | Restated   |            | Restated
|                      |                                                                                  |                                                   |   |            |            |         
|OPERATING ACTIVITIES: |                                                                                  |                                                   |   |            |            |          |   |         |            |   |   |           
|                      | Net loss                                                                         |                                                   | $ | (1,615,073 | )          |          | $ | (14,910 | )          |   | $ | (4,146,465 | )        
|                      | Adjustments to reconcile net loss to net cash
	provided by operating activities: |                                                   |   |            |            |          |   |         |            |   |   |            |          
|                      |                                                                                  | Depreciation and amortization                     |   |            | 2,141,096  |          |   |         | 2,259,430  |   |   |            | 2,351,597 |  
|                      |                                                                                  | Stock compensation                                |   |            | 247,109    |          |   |         |           |   |   |            |          |  
|                      |                                                                                  | Loss on sales of fixed assets                     |   |            | 9,876      |          |   |         | 85,150     |   |   |            | 22,497    |  
|                      |                                                                                  | Asset impairment charge                           |   |            |           |          |   |         |           |   |   |            | 3,218,584 |  
|                      |                                                                                  | Deferred income taxes                             |   |            | 574,621    |          |   |         | 453,483    |   |   |            |          |  
|                      |                                                                                  | Deferred rent                                     |   |            | 5,011      |          |   |         | 224,962    |   |   |            | 240,432   |  
|                      | Changes in operating assets and liabilities:                                     |                                                   |   |            |            |          |   |         |            |   |   |            |          
|                      |                                                                                  | Accounts receivable                               |   |            | 238,874    |          |   |         | (562,311   | ) |   |            | (98,366   | )
|                      |                                                                                  | Inventories                                       |   |            | (13,760    | )        |   |         | 281,569    |   |   |            | (243,164  | )
|                      |                                                                                  | Prepaid expenses and other                        |   |            | 47,085     |          |   |         | (264,040   | ) |   |            | 15,808    |  
|                      |                                                                                  | Accounts payable and accrued expenses             |   |            | (61,486    | )        |   |         | (3,950     | ) |   |            | 509,047   |  
|                      |                                                                                  | Refundable deposits                               |   |            | 15,964     |          |   |         | 69,111     |   |   |            | 2,437     |  
|                      |                                                                                  |                                                   |   |            |            |          |   |         |            |   |   |           
|                      |                                                                                  | Net cash provided by operating activities         |   |            | 1,589,317  |          |   |         | 2,528,494  |   |   |            | 1,872,407 |  
|                      |                                                                                  |                                                   |   |            |            |          |   |         |            |   |   |           
|INVESTING ACTIVITIES: |                                                                                  |                                                   |   |            |            |          |   |         |            |   |   |           
|                      |                                                                                  | Acquisition of fixed assets                       |   |            | (1,079,250 | )        |   |         | (808,485   | ) |   |            | (899,612  | )
|                      |                                                                                  | Proceeds from sale of fixed assets                |   |            | 15,147     |          |   |         | 157,707    |   |   |            | 139,793   |  
|                      |                                                                                  | Long-term investments                             |   |            | (491,742   | )        |   |         |           |   |   |            |          |  
|                      |                                                                                  | Proceeds from long-term receivable                |   |            |           |          |   |         | 185,820    |   |   |            |          |  
|                      |                                                                                  |                                                   |   |            |            |          |   |         |            |   |   |           
|                      |                                                                                  | Net cash used in investing activities             |   |            | (1,555,845 | )        |   |         | (464,958   | ) |   |            | (759,819  | )
|                      |                                                                                  |                                                   |   |            |            |          |   |         |            |   |   |           
|FINANCING ACTIVITIES: |                                                                                  |                                                   |   |            |            |          |   |         |            |   |   |           
|                      |                                                                                  | Proceeds from sale of stock                       |   |            | 121,589    |          |   |         | 125,197    |   |   |            | 38,881    |  
|                      |                                                                                  | Note receivable                                   |   |            | (106,965   | )        |   |         |           |   |   |            |          |  
|                      |                                                                                  | Cash dividends paid                               |   |            | (1,391,381 | )        |   |         | (1,274,568 | ) |   |            |          |  
|                      |                                                                                  | Shares repurchased and retired                    |   |            | (25,406    | )        |   |         | (773,560   | ) |   |            | (93,063   | )
|                      |                                                                                  |                                                   |   |            |            |          |   |         |            |   |   |           
|                      |                                                                                  | Net cash used in financing activities             |   |            | (1,402,163 | )        |   |         | (1,922,931 | ) |   |            | (54,182   | )
|                      |                                                                                  |                                                   |   |            |            |          |   |         |            |   |   |           
|                      |                                                                                  | Increase (decrease) in cash and cash
	equivalents |   |            | (1,368,691 | )        |   |         | 140,605    |   |   |            | 1,058,406 |  
|                      |                                                                                  | Cash and cash equivalents at beginning of year    |   |            | 6,444,145  |          |   |         | 6,303,540  |   |   |            | 5,245,134 |  
|                      |                                                                                  |                                                   |   |            |            |          |   |         |            |   |   |           
|                      |                                                                                  | Cash and cash equivalents at end of year          |   | $          | 5,075,454  |          |   | $       | 6,444,145  |   |   | $          | 6,303,540 |  
|                      |                                                                                  |                                                   |   |            |            |          |   |         |            |   |   |           
|                      |                                                                                  | Non-cash transactions:                            |   |            |            |          |   |         |            |   |   |            |           |  
|                      |                                                                                  | Note payable for acquisition of assets            |   | $          | 63,397     |          |   | $       |           |   |   | $          |          |  
|                      |                                                                                  | Note receivable for exercise of stock options     |   |            | 786,818    |          |   |         |           |   |   |            |          |  

The accompanying notes are an integral part of
these statements.

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##### Table of Contents



PYRAMID BREWERIES INC.

NOTES TO FINANCIAL STATEMENTS

1.     Nature of
Operations and Significant Accounting Policies



| |            
| | -----------
| | The Company

Pyramid Breweries Inc. (the Company), a
Washington corporation, was incorporated in 1984 and is engaged
in the brewing, marketing and selling of craft beers and sodas.
The Company operates breweries and restaurants in Seattle,
Washington and Berkeley, California. The Company sells its
products through a network of selected independent distributors
primarily in Washington, Oregon and California under the Pyramid
and Thomas Kemper brands. Pyramid also manufactures a line of
gourmet sodas under the Thomas Kemper Soda Company label.

In March 1995, the Company opened the Seattle,
Washington Brewery near downtown Seattle. This brewery and
340-seat alehouse has an estimated annual production capacity of
50,000 barrels as of December 31, 2001.

In December 1995, the Company sold
2,000,000 shares of common stock in an initial public
offering (the Offering). Net proceeds from the Offering amounted
to approximately $34,156,000 and have been used to fund the
Companys growth and expansion plans.

In February 1997, the Company opened the Berkeley
Brewery in Berkeley, California. This brewery and 380-seat
alehouse has an estimated annual beer production capacity of
150,000 barrels as of December 31, 2001.

In March 1997, the Company acquired substantially
all of the operating assets and assumed certain liabilities of
the Thomas Kemper Soda Company. This acquisition expanded the
Companys product line to include a range of premium soft
drinks, including root beer and cream soda.

In October 2001, the Company announced that it
had finalized plans to open a Pyramid Alehouse in Walnut Creek,
California. The Walnut Creek Alehouse has seating for
275 plus an outdoor seating area.



| |                          
| | -------------------------
| | Cash and Cash Equivalents

The Company considers all highly liquid
investments with a maturity of three months or less at the date
of purchase to be cash equivalents.



| |            
| | -----------
| | Inventories

Inventories are stated at the lower of cost or
market. Cost is determined by the first-in- first-out method,
and market represents the lower of replacement cost or estimated
net realizable value.



| |                      
| | ---------------------
| | Long Term Investments

The Company invests in some long term
certificates of deposit that are stated at cost plus accrued
interest, which approximates fair value. These investments have
maturities through 2004 with an average rate of 4%.



| |             
| | ------------
| | Fixed Assets

Fixed assets are stated at cost. Significant
additions and improvements are capitalized. Repairs and
maintenance are expensed as incurred. Upon disposition of fixed
assets, gains and losses are reflected in the statements of
operations. Depreciation is provided using the straight-line
method over lives ranging from three to 25 years. Leasehold
improvements are amortized under the straight-line method over
the shorter of the estimated useful lives of the improvements or
the term of the lease.

25



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##### Table of Contents



PYRAMID BREWERIES INC.


NOTES TO FINANCIAL
STATEMENTS  (Continued)

Returnable containers (primarily kegs) are
capitalized at cost, depreciated over their estimated useful
life of five to ten years, and are included in fixed assets.
Refundable deposits represent the Companys liability for
deposits charged to customers for returnable containers.

|                             |  |                                               
|---------------------------- |  | ----------------------------------------------
|Estimated Useful Lives       |  |                                               
|Brewery and retail equipment |  | 5 to 25 years                                 
|Furniture and fixtures       |  | 3 to 5 years                                  
|Leasehold improvements       |  | Shorter of lease term or life of 3 to 15 years



| |                 
| | ----------------
| | Preopening Costs

The Company accounts for preopening costs related
to new restaurants in accordance with Statement of
Position 98-5 Recording the Cost of Start-Up
Activities and accordingly, there were no unamortized
preopening costs at December 31, 2001 and 2000. All
preopening costs are expensed as incurred.



| |                     
| | --------------------
| | Website Design Costs

Website design costs related to the development
and programming and customizing applications of the
Companys website, www.Pyramidbrew.com, are capitalized in
other assets and amortized over a two-year period. Net
unamortized website design costs totaled approximately $83,000
and $66,000 at December 31, 2001 and 2000, respectively.
Amortization of website design costs totaled approximately
$40,000, $0 and $0, respectively, for the years ended
December 31, 2001, 2000 and 1999. Website design costs
relating to development, programming and customizing
applications are capitalized and amortized in accordance with
Emerging Issues Task Force (EITF) 00-2, Accounting
for Website Development Costs. Costs of operating and
maintaining the website are expensed as incurred.



| |         
| | --------
| | Goodwill

The excess of cost over fair value of the net
assets of businesses acquired is capitalized and amortized on a
straight-line basis over 10 years. Net unamortized goodwill
of approximately $415,000 and $495,000 at December 31, 2001
and 2000, respectively, is included in other assets.
Amortization of goodwill totaled approximately $80,000 for each
of the years ended December 31, 2001, 2000, and 1999.
Accumulated amortization at December 31, 2002 and 2001 was
approximately $388,000 and $308,000 respectively.

In June 2001 the Financial Accounting Standards
Board (FASB) approved Statement of Financial Accounting
Standards (SFAS) No. 141, Business
Combinations, and SFAS No. 142, Goodwill and
Other Intangible Assets. SFAS No. 141 prospectively
prohibits the pooling of interest method of accounting for
business combinations initiated after June 30, 2001. SFAS
No. 142 requires companies to cease amortizing goodwill
that existed at June 30, 2001. The annual amortization of
existing goodwill of approximately $80,000 ceased on
December 31, 2001. SFAS No. 142 also establishes a new
method of testing goodwill for impairment on an annual basis or
on an interim basis if an event occurs or circumstances change
that would more likely than not reduce the fair value of a
reporting unit below its carrying value. The adoption of SFAS
No. 142 will result in the Companys discontinuation
of amortization of its goodwill; however, the Company will be
required to test its goodwill for impairment under the new
standard beginning in the first quarter of 2002. At this time,
the Company does not expect to recognize any material impairment
charge.



| |                    
| | -------------------
| | Revenue Recognition

Revenue from the sale of wholesale beer and soda
product is recognized at the time of shipment to the customer.

26



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##### Table of Contents



PYRAMID BREWERIES INC.


NOTES TO FINANCIAL
STATEMENTS  (Continued)



| |                            
| | ---------------------------
| | Shipping and Handling Costs

Shipping and handling amounts paid to the Company
by customers are included in gross sales. The actual costs of
shipping and handling paid by the Company are included in cost
of sales.



| |                  
| | -----------------
| | Advertising Costs

Advertising costs are expensed as incurred. Total
advertising expense was approximately $560,000, $604,000 and
$304,000 in 2001, 2000 and 1999, respectively.

The Company engages in cooperative advertising
program and buy down programs with resellers. The expenditures
associated with buy down programs are included as an offset in
gross sales. The costs of cooperative advertising programs are
included in the selling, general and administrative expenses
category. The costs of cooperative advertising amounts for the
years ended December 31, 2001, 2000 and 1999 totaled
approximately $91,000, $88,000 and $66,000, respectively.

In April 2001, the EIFT issued EITF
No. 00-25 Vendor Income Statement Characterization of
Consideration Paid to a Reseller of the Vendors
Products. EITF 00-25 addresses the timing,
recognition and classification in the income statement of
certain promotional costs paid to a retailer or wholesaler by a
vendor in connection with the sale of the vendors products
or promotion of sales of the vendors products by the
retailer or wholesaler. The Company is required to adopt
EITF 00-25 in the first quarter of the fiscal year 2002.
The advertising costs meet the requirements of EITF 00-25
to be included in expenses rather than as an offset to revenues
and therefore, the adoption of EITF 00-25 will not have a
material effect on the results of operations of the Company.



| |                  
| | -----------------
| | Other Income, net

Other Income, net consists of interest income and
parking fee income, and other insignificant non-operating income
and expenses.

|                       |  |                          |         |      |  |      |         |   |  |   |         |  
|---------------------- |  | ------------------------ | ------- | ---- |  | ---- | ------- | - |  | - | ------- | -
|                       |  |                         
|                       |  | Years Ended December 31,
|                       |  |                         
|                       |  | 2001                     |         | 2000 |  | 1999
|                       |  |                          |         |      |  |     
|Interest income        |  | $                        | 270,691 |      |  | $    | 417,858 |   |  | $ | 322,044 |  
|Parking income         |  |                          | 257,161 |      |  |      | 219,226 |   |  |   | 189,763 |  
|Loss on sale of assets |  |                          | (9,876  | )    |  |      | (85,150 | ) |  |   | (22,497 | )
|Other income           |  |                          | 24,143  |      |  |      | 33,748  |   |  |   | 4,924   |  
|                       |  |                          |         |      |  |      |         |   |  |   |         |  
|Other income, net      |  | $                        | 542,119 |      |  | $    | 585,682 |   |  | $ | 494,234 |  
|                       |  |                          |         |      |  |      |         |   |  |   |         |  



| |             
| | ------------
| | Income Taxes

The Company is subject to federal and state
income taxes and has recognized deferred taxes in accordance
with SFAS No. 109 Accounting for Income Taxes.
SFAS No. 109 requires companies subject to income taxes to
adjust their deferred tax assets and liabilities based on
temporary differences between financial statement and tax basis
of assets of liabilities, using enacted tax rates in effect in
the years in which the differences are expected to reverse.

Realization of the total deferred tax assets
representing tax loss and credit carryforwards is dependent on
the Companys ability to generate future U.S. taxable
income. Management has established a valuation allowance for the
portion of the deferred tax assets that do not meet the
recognition criteria of SFAS No. 109. During 2001, the
Company determined that its deferred tax assets no longer meet
the recognition criteria of SFAS 109 and increased the
valuation allowance by approximately $575,000. The Company will
continue to

27



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##### Table of Contents



PYRAMID BREWERIES INC.


NOTES TO FINANCIAL
STATEMENTS  (Continued)

evaluate the realizability of the deferred tax
assets quarterly by assessing the need for and amount of a
valuation allowance.



| |                   
| | ------------------
| | Earnings Per Share

Basic earnings per share is computed by dividing
net income (loss) by the weighted average number of shares
outstanding during the year. Diluted earnings per share is
calculated by adjusting outstanding shares, assuming conversion
of all potentially dilutive stock options. Options to purchase
approximately 810,000, 1,211,000 and 801,000 shares of
common stock were outstanding as of December 31, 2001, 2000
and 1999, respectively, but were not included in the computation
of EPS because their effects are anti-dilutive.



| |                                                            
| | -----------------------------------------------------------
| | Quantitative and Qualitative Disclosures
	about Market Risk

The Company has not and does not currently have
any intention to hold any derivative instruments or engage in
hedging activities. Also, the Company does not have any
outstanding variable rate debt and does not enter into
significant transactions denominated in foreign currency.
Therefore, the Companys direct exposure to risks arising
from changes in interest rates, foreign currency exchange rates,
commodity prices, equity prices, and other market changes that
affect market risk sensitive instruments is not material.



| |                 
| | ----------------
| | 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, the disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual
results could differ from those estimates.



| |                                     
| | ------------------------------------
| | Restatement of Package Design
	Costs

The company changed the accounting method for
package design costs to reflect the expensing of these costs as
incurred rather than capitalizing and amortizing over twelve
months. This change has been accounted for as a prior period
adjustment in accordance with Accounting Principals Board
Opinion No. 20 Accounting Changes. The
financial statements for all periods presented have been
restated to reflect this change. The impact of the restatement
on cost of sales for 2000 and 1999 was a decrease of
approximately $210,000 and $432,000, respectively. The
restatement impact on selling, general and administrative
expenses for 2000 and 1999 was an increase of approximately
$258,000 and $227,000, respectively. The restatement impact on
the net loss for 2000 was a $48,000 increase in net loss and for
1999 a $205,000 decrease in net loss. The restatement impact on
net loss per share was no change for 2000 and a $0.03 decrease
for 1999. The impact on the 1999 retained deficit beginning
balance as a result of the restatement was an approximately
$195,000 increase in the retained deficit to a $728,000
beginning balance.

Recent
Accounting Pronouncements

In August 2001, the FASB issued SFAS
No. 143, Accounting for Asset Retirement
Obligations. SFAS No. 143 requires entities to record
the fair value of a liability for an asset retirement obligation
in the period in which it is incurred. The associated asset
retirement costs are capitalized as part of the carrying amount
of the long-lived asset. The statement will be effective for the
2003 fiscal year, and early adoption is permitted. The adoption
of SFAS 143 is not expected to have a material impact on
the Companys financial position, results of operations or
cash flows.

28



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##### Table of Contents



PYRAMID BREWERIES INC.


NOTES TO FINANCIAL
STATEMENTS  (Continued)

In October 2001, the FASB issued SFAS
No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, which supersedes SFAS No. 121 and
the accounting and reporting provisions of Accounting Principles
Board Opinion No. 30 Reporting the Results of
Operations  Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions for the
disposal of a segment of a business. SFAS No. 144 requires
that long-lived assets to be disposed of by sale be measured at
the lower of carrying amounts or fair value less cost to sell,
whether reported in continuing operations or in discontinued
operations. SFAS No. 144 also expands the reporting of
discontinued operations to include portions of an entity that
have been or will be disposed of rather than limiting such
discontinuance to a segment of a business. The statement is
effective for the 2002 fiscal year, and early adoption is
permitted. The Company is currently evaluating the impact of
SFAS 144 to determine the effect, if any, it may have on
the Companys financial position, results of operations or
cash flows.

2.     Accounting for
Impairment of Long-Lived Assets

The Company accounts for impairment of long-lived
assets in accordance with SFAS No. 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of which was issued in March 1995.
SFAS No. 121 requires that long-lived assets be reviewed
for impairment whenever events or changes in circumstances
indicate that the book value of the asset may not be
recoverable. In accordance with SFAS No. 121, the Company
uses an estimate of the future undiscounted net cash flows of
the related asset or asset grouping over the remaining life in
measuring whether the assets are recoverable. During fiscal year
1999, the Company wrote down approximately $3,288,000 of
impaired long-lived assets. The write-down included $2,545,000
of brewing machinery and equipment, $720,000 of leasehold
equipment and $23,000 of other equipment. Based on the
Companys expectation of future discounted net cash flow,
these assets have been written-down to their estimated fair
value.

3.     Inventories

Inventories consist of the following:

|                |  |              |           |      |  |   |           | 
|--------------- |  | ------------ | --------- | ---- |  | - | --------- | 
|                |  |             
|                |  | December 31,
|                |  |             
|                |  | 2001         |           | 2000
|                |  |              |           |     
|Raw materials   |  | $            | 522,226   |      |  | $ | 481,601   | 
|Work in process |  |              | 138,231   |      |  |   | 109,510   | 
|Finished goods  |  |              | 517,691   |      |  |   | 573,277   | 
|                |  |              |           |      |  |   |           | 
|                |  | $            | 1,178,148 |      |  | $ | 1,164,388 | 
|                |  |              |           |      |  |   |           | 

Raw materials primarily include ingredients,
flavorings and packaging. Work in process includes beer held in
fermentation prior to the filtration and packaging process.
Finished goods primarily include product ready for shipment, as
well as promotional merchandise held for sale.

29



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##### Table of Contents



PYRAMID BREWERIES INC.


NOTES TO FINANCIAL
STATEMENTS  (Continued)

4.     Fixed
Assets

Fixed assets consist of the following:

|                              |  |              |            |      |  |   |            |  
|----------------------------- |  | ------------ | ---------- | ---- |  | - | ---------- | -
|                              |  |             
|                              |  | December 31,
|                              |  |             
|                              |  | 2001         |            | 2000
|                              |  |              |            |     
|Brewery and retail equipment  |  | $            | 14,465,637 |      |  | $ | 14,246,061 |  
|Furniture and fixtures        |  |              | 918,879    |      |  |   | 772,562    |  
|Leasehold improvements        |  |              | 13,808,247 |      |  |   | 13,563,615 |  
|Construction in progress      |  |              | 584,855    |      |  |   | 165,555    |  
|Assets held for sale          |  |              |           |      |  |   | 3,832      |  
|                              |  |              |            |      |  |   |            |  
|                              |  |              | 29,777,618 |      |  |   | 28,751,625 |  
|Less accumulated depreciation |  |              | (9,555,058 | )    |  |   | (7,625,733 | )
|                              |  |              |            |      |  |   |            |  
|                              |  | $            | 20,222,560 |      |  | $ | 21,125,892 |  
|                              |  |              |            |      |  |   |            |  

Total depreciation expense was approximately
$2,021,000, $2,179,000 and $2,271,000 for the years ended
December 31, 2001, 2000 and 1999, respectively.

5.     Walnut
Creek

In October 2001, the Company purchased assets of
an alehouse in Walnut Creek, California for $268,000. In
addition, the Company assumed the sublease of the location. The
purchase was made by a $205,000 cash payment and the balance
financed through a $80,000 non-interest bearing note due in four
annual equal payments beginning in October 2002. The note
payable was recorded using a 10% discount rate.

6.     Note
Receivable Related Party

In June 2001, the Company issued a $787,000 full
recourse note to the CEO in exchange for the exercise of options
for 387,400 shares of the Companys common stock. In
addition, the Company issued a $115,000 full recourse note to
the CEO to fund his payment of taxes on the exercise of the
options. The notes are due on the earlier of June 30, 2011
or upon the sale of the stock and bear an annual interest rate
of 5.6%. A total of 135,100 of those shares are unrestricted,
except for being pledged as collateral for the loans, and the
remaining 252,300 shares become unrestricted over the next
three and one-half years. During the year ended
December 31, 2001, the Company recorded $241,000 in
compensation expense in connection with this equity arrangement.

7.     Accrued
Expenses

Accrued expenses consist of the following:

|                                     |  |              |           |      |  |   |           | 
|------------------------------------ |  | ------------ | --------- | ---- |  | - | --------- | 
|                                     |  |             
|                                     |  | December 31,
|                                     |  |             
|                                     |  | 2001         |           | 2000
|                                     |  |              |           |     
|Salaries, wages and related accruals |  | $            | 409,507   |      |  | $ | 364,219   | 
|Severance accrual                    |  |              |          |      |  |   | 149,962   | 
|Barrel taxes                         |  |              | 94,447    |      |  |   | 110,264   | 
|Other accruals                       |  |              | 808,687   |      |  |   | 672,925   | 
|                                     |  |              |           |      |  |   |           | 
|                                     |  | $            | 1,312,641 |      |  | $ | 1,297,370 | 
|                                     |  |              |           |      |  |   |           | 

30



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##### Table of Contents



PYRAMID BREWERIES INC.


NOTES TO FINANCIAL
STATEMENTS  (Continued)

8.     Line of
Credit

The Company had a $5,000,000 line of credit (the
Line of Credit) for short-term operating needs which expired on
July 31, 2001. The Company never borrowed on the Line of
Credit and had no interest expense during fiscal 2001, 2000 and
1999.

9.     Income
Taxes

The provision for income taxes included in the
statements of operations consists of the following:

|         |  |              |          |          |  |          |   |  |  |   |   | 
|-------- |  | ------------ | -------- | -------- |  | -------- | - |  |  | - | - | 
|         |  |             
|         |  | December 31,
|         |  |             
|         |  |              |          | 2000     |  | 1999    
|         |  | 2001         |          | Restated |  | Restated
|         |  |              |          |          |  |         
|Current  |  | $            |         |          |  | $        |  |  |  | $ |  | 
|Deferred |  |              | (574,621 | )        |  |          |  |  |  |   |  | 
|         |  |              |          |          |  |          |   |  |  |   |   | 
|         |  | $            | (574,621 | )        |  | $        |  |  |  | $ |  | 
|         |  |              |          |          |  |          |   |  |  |   |   | 

The provision/benefit for income taxes differed
from the amount obtained by applying the federal statutory
income tax rate to loss before income taxes, as follows:

|                                               |  |              |       |          |  |          |        |   |  |  |       |  
|---------------------------------------------- |  | ------------ | ----- | -------- |  | -------- | ------ | - |  |  | ----- | -
|                                               |  |             
|                                               |  | December 31,
|                                               |  |             
|                                               |  |              |       | 2000     |  | 1999    
|                                               |  | 2001         |       | Restated |  | Restated
|                                               |  |              |       |          |  |         
|Federal statutory rate                         |  |              | 34.0  | %        |  |          | 34.0%  |   |  |  | 34.0% |  
|State taxes, net of federal income tax benefit |  |              | 2.1   |          |  |          | 2.1    |   |  |  | 2.1   |  
|Meals and entertainment                        |  |              | (6.0  | )        |  |          | (350.7 | ) |  |  | (1.3  | )
|Other, net                                     |  |              |      |          |  |          |       |   |  |  | (0.1  | )
|Valuation allowance                            |  |              | (85.3 | )        |  |          | 314.6  |   |  |  | (34.7 | )
|                                               |  |              |       |          |  |          |        |   |  |  |       |  
|                                               |  |              | (55.2 | )%       |  |          | 0.0%   |   |  |  | 0.0%  |  
|                                               |  |              |       |          |  |          |        |   |  |  |       |  

Deferred income tax assets and liabilities are
included in the balance sheet at December 31, 2001 and
2000, as follows:

|                                 |  |              |            |          |  |   |            |  
|-------------------------------- |  | ------------ | ---------- | -------- |  | - | ---------- | -
|                                 |  |             
|                                 |  | December 31,
|                                 |  |             
|                                 |  |              |            | 2000    
|                                 |  | 2001         |            | Restated
|                                 |  |              |            |         
|Accelerated depreciation         |  | $            | (1,666,581 | )        |  | $ | (1,578,973 | )
|Package design costs             |  |              | 178,029    |          |  |   | 203,978    |  
|Accrued vacation                 |  |              | 73,227     |          |  |   | 54,918     |  
|Severance accrual                |  |              |           |          |  |   | 43,211     |  
|Deferred rent                    |  |              | 452,582    |          |  |   | 450,772    |  
|Net operating loss carryforwards |  |              | 2,481,946  |          |  |   | 2,103,441  |  
|Tax credit carryforwards         |  |              | 98,286     |          |  |   | 98,286     |  
|Other, net                       |  |              | 217,743    |          |  |   | 143,423    |  
|Valuation allowance              |  |              | (1,835,232 | )        |  |   | (944,435   | )
|                                 |  |              |            |          |  |   |            |  
|                                 |  | $            |           |          |  | $ | 574,621    |  
|                                 |  |              |            |          |  |   |            |  

At December 31, 2001, the Company had
operating loss carryforwards for federal income tax purposes of
approximately $6,869,000, which are available to offset future
federal taxable income through 2021 and will

31



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##### Table of Contents



PYRAMID BREWERIES INC.


NOTES TO FINANCIAL
STATEMENTS  (Continued)

begin to expire in 2017. In addition, the Company
had alternative minimum tax credit carryforwards of
approximately $98,000, which are available to reduce future
federal income taxes over an indefinite period. During 2001, the
valuation allowance against deferred tax assets increased by
approximately $891,000, which included an increase of
approximately $575,000 for previously recognized deferred tax
assets that no longer met the recognition criteria of SFAS
No. 109.

10.     401(k)
Plan

The Company has a 401(k) plan for all eligible
employees and had 264 employees as of December 31,
2001. Employees who are at least age 21 become eligible to
participate following the first plan quarter in which they
perform at least 250 hours of service. Employees can elect
to contribute up to 15% of their eligible compensation to the
401(k) plan. The Company generally matches employee
contributions (that do not exceed 6% of the employees
compensation) at the rate of 50%. The Company may also make
additional discretionary contributions. The Companys
matching contributions for the years ended December 31,
2001, 2000 and 1999, totaled approximately $93,000, $70,000 and
$28,000, respectively.

11.     Operating
Leases

The Company leases its office, warehouse and
plant facilities under operating leases in Seattle, Berkeley and
Walnut Creek. The Seattle brewery and warehouse lease agreements
expire in 2004 and contains options to extend the lease term for
three additional five-year periods under the same terms and
conditions except that the monthly rent will be increased by the
increase in the Consumer Price Index, but in no event shall the
increase be less than 15% nor greater than 25% for each term.
The Berkeley brewery lease agreement expires in 2010 and
contains options to extend the lease term for two additional
five-year periods. The Walnut Creek alehouse lease agreement
expires in 2012 and contains options to extend the lease term
for three additional five-year periods and one final option for
a four year period. These lease agreements contain provisions
for free rent periods and scheduled rent increases. Accordingly,
the Company has recorded deferred rent of approximately
$1,253,000 and $1,248,000 at December 31, 2001 and 2000,
respectively, representing the pro rata rent which would have
been due if equal payments had been required under the lease
terms. The Company also leases office, storage and distribution
facilities under month-to-month lease agreements.

At December 31, 2001, future minimum rental
payments are as follows:

|           |  |   |           | 
|---------- |  | - | --------- | 
|2002       |  | $ | 1,206,000 | 
|2003       |  |   | 1,206,000 | 
|2004       |  |   | 1,048,000 | 
|2005       |  |   | 811,000   | 
|2006       |  |   | 884,000   | 
|Thereafter |  |   | 4,009,000 | 
|           |  |   |           | 
|           |  | $ | 9,164,000 | 
|           |  |   |           | 

Total rent expense was approximately $732,000,
$731,000 and $777,000 in 2001, 2000 and 1999, respectively.

12.     Commitments
and Contingencies

The Company is involved from time to time in
claims, proceedings and litigation arising in the ordinary
course of business. The Company does not believe that any such
claim, proceeding or litigation, either alone or in the
aggregate, will have a material adverse effect on the
Companys financial position or results of operations.

32



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##### Table of Contents



PYRAMID BREWERIES INC.


NOTES TO FINANCIAL
STATEMENTS  (Continued)

13.     Cash
Dividend

The Board of Directors announced on
November 20, 2001, the declaration of a $0.044 per common
share dividend payable on January 11, 2002 to shareholders
of record on December 31, 2001. The Board of Directors also
announced on February 14, 2002, the declaration of a $0.044
per common share dividend payable on April 12, 2002 to
shareholders of record on March 29, 2002. The cash
dividends declared in November 2001 totaled approximately
$365,000 for all common stock outstanding as of the dates of
record. During the years ended December 31, 2001 and 2000,
the Company paid approximately $1,391,000 and $1,275,000, or
$0.172 and $0.16 per common share, of cash dividends,
respectively.

Cash dividends declared per common share:

|     |  |   |       | 
|---- |  | - | ----- | 
|2001 |  | $ | 0.176 | 
|2000 |  | $ | 0.160 | 
|1999 |  | $ | 0.040 | 

14.     Stock Buyback
Plan

On December 15, 1999, the Board of Directors
authorized a stock buyback plan to repurchase up to $2,000,000
of the Companys outstanding common stock on the open
market. For the years ended December 31, 2001, 2000 and
1999, the Company repurchased 11,726, 396,198 and 49,800 shares
of common stock at costs of approximately $25,000, $774,000 and
$93,000, respectively.

15.     Major
Customers and Financial Instruments

Financial instruments that potentially subject
the Company to credit risk consist principally of trade
receivables and interest-bearing deposits. The Companys
interest-bearing deposits are placed with major financial
institutions. Wholesale distributors account for substantially
all accounts receivable; therefore, this concentration risk is
limited due to the number of distributors, their geographic
dispersion and state laws regulating the financial affairs of
distributors of alcoholic beverages.

During the years ended December 31, 2001,
2000 and 1999, one customer comprised approximately 24%, 29% and
24% of the Companys revenue, respectively. Accounts
receivable at December 31, 2001 and 2000 include
approximately $323,000 and $447,000, respectively, due from this
customer.

16.     Segment
Information

The Company adopted SFAS No. 131
Disclosures about Segments of an Enterprise and Related
Information, during 1998. Following the provisions of SFAS
No. 131, the Company is reporting segment information in
the same format as reviewed by the Companys management
(the Management Approach), which is organized around
products and services. During 1999, the internal transfer
pricing of beverage products to the alehouse operations changed
from wholesale price to cost.



| |                      
| | ---------------------
| | Products and Services

The Companys reportable segments include
beverage operations and alehouses. Beverage operations include
the production and sale of Pyramid Ales, Thomas Kemper beers and
Thomas Kemper soda products. The alehouse segment consists of
two full-service alehouses, which market and sell the full line
of the Companys beer and soda products as well as food and
certain merchandise.

33



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##### Table of Contents



PYRAMID BREWERIES INC.


NOTES TO FINANCIAL
STATEMENTS  (Continued)



| |                                              
| | ---------------------------------------------
| | Factors used to identify reportable
	segments

The Companys reportable segments are
strategic business units that offer distinct and different
products and services. These segments are managed separately
because each business requires different production, management
and marketing strategies.



| |                                                  
| | -------------------------------------------------
| | Measurement of segment profit and segment
	assets

The accounting policies of the segments are the
same as those described in the summary of significant accounting
policies. The Company evaluates performance based on profit or
loss from operations before income taxes not including
nonrecurring gains and losses. The Company records intersegment
sales at cost.

Segment profit and segment assets are as follows:

|                             |                                                             |                        |   |          |   |       |   |       |   |  |   |        |   |  |   |        |  
|---------------------------- | ----------------------------------------------------------- | ---------------------- | - | -------- | - | ----- | - | ----- | - |  | - | ------ | - |  | - | ------ | -
|                             |                                                             | Beverage               |   |          |   |       |   |      
|                             |                                                             | Operations             |   | Alehouse |   | Other |   | Total
|                             |                                                             |                        |   |          |   |       |   |      
|                             |                                                             |                       
|                             |                                                             | (Dollars in thousands)
|Year ended December 31, 2001 |                                                             |                        |   |          |   |       |   |       |   |  |   |        |   |  |   |       
|                             | Revenues from external customers                            |                        | $ | 23,539   |   |       | $ | 8,456 |   |  | $ |       |   |  | $ | 31,995 |  
|                             | Intersegment revenues                                       |                        |   | 292      |   |       |   | (292  | ) |  |   |       |   |  |   |       |  
|                             | Interest income                                             |                        |   |         |   |       |   |      |   |  |   | 271    |   |  |   | 271    |  
|                             | Depreciation and amortization including stock
	compensation |                        |   | 1,587    |   |       |   | 414   |   |  |   | 387    |   |  |   | 2,388  |  
|                             | Operating (loss) income                                     |                        |   | 257      |   |       |   | 944   |   |  |   | (2,784 | ) |  |   | (1,583 | )
|                             | Capital expenditures                                        |                        |   | 354      |   |       |   | 533   |   |  |   | 192    |   |  |   | 1,079  |  
|                             | Total assets                                                |                        |   | 16,106   |   |       |   | 3,543 |   |  |   | 9,782  |   |  |   | 29,431 |  
|Year ended December 31, 2000 |                                                             |                        |   |          |   |       |   |       |   |  |   |        |   |  |   |       
|                             | Revenues from external customers                            |                        | $ | 22,538   |   |       | $ | 7,737 |   |  | $ |       |   |  | $ | 30,275 |  
|                             | Intersegment revenues                                       |                        |   | 259      |   |       |   | (259  | ) |  |   |       |   |  |   |       |  
|                             | Interest income                                             |                        |   |         |   |       |   |      |   |  |   | 418    |   |  |   | 418    |  
|                             | Restated depreciation and amortization                      |                        |   | 1,662    |   |       |   | 408   |   |  |   | 189    |   |  |   | 2,259  |  
|                             | Restated operating (loss) income                            |                        |   | 1,195    |   |       |   | 671   |   |  |   | (2,467 | ) |  |   | (601   | )
|                             | Capital expenditures                                        |                        |   | 373      |   |       |   | 273   |   |  |   | 162    |   |  |   | 808    |  
|                             | Restated total assets                                       |                        |   | 17,239   |   |       |   | 3,333 |   |  |   | 11,499 |   |  |   | 32,071 |  
|Year ended December 31, 1999 |                                                             |                        |   |          |   |       |   |       |   |  |   |        |   |  |   |       
|                             | Revenues from external customers                            |                        | $ | 21,560   |   |       | $ | 7,251 |   |  | $ |       |   |  | $ | 28,811 |  
|                             | Intersegment revenues                                       |                        |   | 279      |   |       |   | (279  | ) |  |   |       |   |  |   |       |  
|                             | Interest income                                             |                        |   |         |   |       |   |      |   |  |   | 322    |   |  |   | 322    |  
|                             | Restated depreciation and amortization                      |                        |   | 1,775    |   |       |   | 431   |   |  |   | 146    |   |  |   | 2,352  |  
|                             | Impairment and restructuring charge                         |                        |   | 3,288    |   |       |   |      |   |  |   |       |   |  |   | 3,288  |  
|                             | Restated operating (loss) income                            |                        |   | (2,289   | ) |       |   | 626   |   |  |   | (2,978 | ) |  |   | (4,641 | )
|                             | Capital expenditures                                        |                        |   | 350      |   |       |   | 337   |   |  |   | 213    |   |  |   | 900    |  
|                             | Restated total assets                                       |                        |   | 18,558   |   |       |   | 3,454 |   |  |   | 11,707 |   |  |   | 33,719 |  



| |      
| | -----
| | Other

Other consists of interest income, general and
administrative expenses, corporate office assets and other
reconciling items that are not allocated to segments for
internal management reporting purposes. Total assets include all
assets except for fixed assets which are presented by segment.

34



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##### Table of Contents



PYRAMID BREWERIES INC.


NOTES TO FINANCIAL
STATEMENTS  (Continued)

17.     Stock Option
Plans

The Companys Amended and Restated 1995
Employee Stock Option Plan (the Employee Plan) permits the
granting of options to employees. A total of 1,315,000 shares
have been reserved under the Employee Plan. The options are
granted at the fair market value of the Companys common
stock at the date of grant. Each outstanding option has a term
of 10 years from the date of grant and vests over a period
of three years.

The Companys Non-Employee Director Stock
Option Plan (the Director Plan) provides for the granting of
stock options covering 5,000 shares of common stock to be made
automatically on the date of each annual meeting of stockholders
to each non-employee director of the Company, so long as shares
of common stock remain available under the Director Plan. A
total of 250,000 shares have been reserved under the Director
Plan. As of December 31, 2001 and 2000, 127,500 and 92,500
options have been granted, respectively. Each outstanding option
granted under this plan has a term of 10 years from the
date of grant and vests immediately.

The Company has adopted the disclosure-only
provision of the SFAS No. 123 Accounting for
Stock-Based Compensation. Accordingly no compensation cost
has been recognized for options issued under the Employee and
Director Plans (the Plans). Had compensation cost been
recognized based on the fair value at the date of grant for
options awarded under the Plans, the pro forma amounts of the
Companys net loss and net loss per share for the years
ended December 31, 2001, 2000 and 1999, would have been as
follows:

|                                           |  |              |            |      |  |      |          |   |  |   |            |  
|------------------------------------------ |  | ------------ | ---------- | ---- |  | ---- | -------- | - |  | - | ---------- | -
|                                           |  |             
|                                           |  | December 31,
|                                           |  |             
|                                           |  | 2001         |            | 2000 |  | 1999
|                                           |  |              |            |      |  |     
|Net loss  as reported/restated            |  | $            | (1,615,073 | )    |  | $    | (14,910  | ) |  | $ | (4,146,465 | )
|                                           |  |              |            |      |  |      |          |   |  |   |            |  
|Net loss  pro forma                       |  | $            | (1,938,460 | )    |  | $    | (466,096 | ) |  | $ | (4,964,652 | )
|                                           |  |              |            |      |  |      |          |   |  |   |            |  
|Net loss per share  as
	reported/restated |  | $            | (0.20      | )    |  | $    | (0.00    | ) |  | $ | (0.50      | )
|                                           |  |              |            |      |  |      |          |   |  |   |            |  
|Net loss per share  pro forma             |  | $            | (0.24      | )    |  | $    | (0.06    | ) |  | $ | (0.60      | )
|                                           |  |              |            |      |  |      |          |   |  |   |            |  

The fair value of options granted was estimated
using the Black-Scholes option-pricing model with the following
weighted average assumptions: risk-free interest rates ranging
from 2.13% to 6.87%; expected option lives of six to eight
years; expected volatility of 40% to 112%; and expected future
dividends. The weighted-average fair value of options granted
during the years 2001, 2000 and 1999 was $1.46, $1.27 and $1.46,
respectively. The effect of applying SFAS No. 123 for
providing pro-forma disclosures is not indicative of future
results.

35



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##### Table of Contents



PYRAMID BREWERIES INC.


NOTES TO FINANCIAL
STATEMENTS  (Continued)

Information with respect to the Plans follows:

|                                         |             |               |           |             |   |                |              |              |  |   |      |      | 
|---------------------------------------- | ----------- | ------------- | --------- | ----------- | - | -------------- | ------------ | ------------ |  | - | ---- | ---- | 
|                                         |             | Share Subject |           | Option      |   | Average       
|                                         |             | to Option     |           | Price Range |   | Exercise Price
|                                         |             |               |           |             |   |               
|Options outstanding at December 31, 1998 |             |               | 652,500   |             |   | $              | 1.56 - 19.00 |              |  | $ | 4.33 |     
|                                         | Granted     |               |           | 305,000     |   |                | $            | 2.00 -  2.50 |  |   | $    | 2.05 | 
|                                         | Forfeitures |               |           | (156,834    | ) |                | $            | 2.56 - 19.00 |  |   | $    | 6.00 | 
|                                         |             |               |           |             |   |                |              |              |  |   |      |     
|Options outstanding at December 31, 1999 |             |               | 800,666   |             |   | $              | 1.56 - 12.25 |              |  | $ | 3.14 |     
|                                         | Granted     |               |           | 610,000     |   |                | $            | 1.70 -  2.00 |  |   | $    | 1.87 | 
|                                         | Forfeitures |               |           | (171,632    | ) |                | $            | 1.82 - 12.25 |  |   | $    | 2.81 | 
|                                         | Exercised   |               |           | (27,600     | ) |                | $            | 1.75 -  2.13 |  |   | $    | 1.85 | 
|                                         |             |               |           |             |   |                |              |              |  |   |      |     
|Options outstanding at December 31, 2000 |             |               | 1,211,434 |             |   | $              | 1.56 - 12.25 |              |  | $ | 2.56 |     
|                                         | Granted     |               |           | 260,000     |   |                | $            | 2.13 -  2.67 |  |   | $    | 2.33 | 
|                                         | Forfeitures |               |           | (246,034    | ) |                | $            | 1.82 - 10.75 |  |   | $    | 3.25 | 
|                                         | Exercised   |               |           | (415,700    | ) |                | $            | 1.56 -  2.67 |  |   | $    | 2.03 | 
|                                         |             |               |           |             |   |                |              |              |  |   |      |     
|Options outstanding at December 31, 2001 |             |               | 809,700   |             |   | $              | 1.56 - 12.25 |              |  | $ | 2.55 |     
|                                         |             |               |           |             |   |                |              |              |  |   |      |     

Shares available for future grants at
December 31, 2001 and 2000 totaled 312,000 and 326,000,
respectively.

36



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##### Table of Contents



PYRAMID BREWERIES INC.


NOTES TO FINANCIAL
STATEMENTS  (Continued)

Information about options outstanding at
December 31, 2001 follows:

|            |         |                  |  |             |            |                |  |  |         |  |  |   |       | 
|----------- | ------- | ---------------- |  | ----------- | ---------- | -------------- |  |  | ------- |  |  | - | ----- | 
|            |         | Weighted-        |  |             |            |               
|            |         | Average          |  |             |            | Weighted-     
|Options     |         | Remaining        |  | Options     |            | Average       
|Outstanding |         | Contractual Life |  | Exercisable |            | Exercise Price
|            |         |                  |  |             |            |               
|            | 32,500  |                  |  |             | 53 months  |                |  |  | 32,500  |  |  | $ | 10.75 | 
|            | 5,000   |                  |  |             | 53 months  |                |  |  | 5,000   |  |  | $ | 12.25 | 
|            | 5,000   |                  |  |             | 60 months  |                |  |  | 5,000   |  |  | $ | 4.75  | 
|            | 6,000   |                  |  |             | 62 months  |                |  |  | 6,000   |  |  | $ | 4.13  | 
|            | 5,000   |                  |  |             | 65 months  |                |  |  | 5,000   |  |  | $ | 3.25  | 
|            | 7,500   |                  |  |             | 70 months  |                |  |  | 7,500   |  |  | $ | 3.09  | 
|            | 5,000   |                  |  |             | 77 months  |                |  |  | 5,000   |  |  | $ | 2.63  | 
|            | 97,000  |                  |  |             | 78 months  |                |  |  | 97,000  |  |  | $ | 2.56  | 
|            | 1,700   |                  |  |             | 81 months  |                |  |  | 1,700   |  |  | $ | 1.56  | 
|            | 15,000  |                  |  |             | 89 months  |                |  |  | 15,000  |  |  | $ | 2.13  | 
|            | 50,000  |                  |  |             | 94 months  |                |  |  | 36,400  |  |  | $ | 2.00  | 
|            | 20,000  |                  |  |             | 96 months  |                |  |  | 13,000  |  |  | $ | 1.82  | 
|            | 100,000 |                  |  |             | 99 months  |                |  |  | 53,300  |  |  | $ | 2.00  | 
|            | 25,000  |                  |  |             | 100 months |                |  |  | 25,000  |  |  | $ | 1.75  | 
|            | 25,000  |                  |  |             | 101 months |                |  |  | 12,500  |  |  | $ | 1.82  | 
|            | 120,000 |                  |  |             | 103 months |                |  |  | 56,600  |  |  | $ | 1.70  | 
|            | 50,000  |                  |  |             | 103 months |                |  |  | 23,800  |  |  | $ | 2.00  | 
|            | 35,000  |                  |  |             | 103 months |                |  |  | 16,100  |  |  | $ | 1.82  | 
|            | 100,000 |                  |  |             | 107 months |                |  |  | 36,000  |  |  | $ | 2.00  | 
|            | 30,000  |                  |  |             | 112 months |                |  |  | 30,000  |  |  | $ | 2.67  | 
|            | 75,000  |                  |  |             | 114 months |                |  |  | 10,500  |  |  | $ | 2.57  | 
|            |         |                  |  |             |            |                |  |  |         |  |  |   |       | 
|            | 809,700 |                  |  |             |            |                |  |  | 492,900 |  |  |   |       | 
|            |         |                  |  |             |            |                |  |  |         |  |  |   |       | 

The Company had options exercisable of 604,900
with weighted-average exercise prices ranging from $1.56 to
$12.25 and options exercisable of 384,120 with weighted-average
exercise prices ranging from $1.56 to $12.25 as of
December 31, 2000 and 1999, respectively.

18.     Employee
Stock Purchase Plan

The Companys Employee Stock Purchase Plan
(the Purchase Plan) allows eligible employees to acquire shares
of common stock of the Company at a discount. Eligible employees
may contribute up to 10% of their base earnings toward the
quarterly purchase of the Companys common stock. The
employees purchase price is 85% of the lesser of the fair
market value of the stock on the first business day or the last
business day of the quarterly offering period. Discounts related
to employee stock purchases during 2001, 2000 and 1999 were
insignificant. The total number of shares issuable under the
plan is 500,000. There were 25,344, 26,686 and 15,376 shares
issued under the Purchase Plan during 2001, 2000 and 1999 at a
weighted-average price of approximately $1.78, $1.44 and $1.36
per share, respectively.

37



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##### Table of Contents



PYRAMID BREWERIES INC.


NOTES TO FINANCIAL
STATEMENTS  (Continued)

19.     Interim
Financial Data (Unaudited)

The following table presents the results of
operations for each of the four quarters in 2001 and 2000. This
quarterly information is unaudited, has been prepared on the
same basis as the annual financial information and, in the
opinion of management, reflects all adjustments (consisting only
of normal recurring adjustments) necessary for a fair
presentation of the information for the periods presented. A
variety of factors may lead to significant fluctuations in the
Companys quarterly results of operations, including timing
of new product introduction, seasonality of demand, any decrease
in the demand for craft beers and general economic conditions.
As a result, the Companys results of operations for any
quarter are not necessarily indicative of results for any future
period.

|                                              |  |                                         |        |                     |  |             |       |             |  |             |       |              |  |             |       |             |  |   |       |   |  |   |       |  |  |   |       |  |  |   |       |  
|--------------------------------------------- |  | --------------------------------------- | ------ | ------------------- |  | ----------- | ----- | ----------- |  | ----------- | ----- | ------------ |  | ----------- | ----- | ----------- |  | - | ----- | - |  | - | ----- |  |  | - | ----- |  |  | - | ----- | -
|                                              |  |                                         |        |                    
|                                              |  | 2001 Quarters Ended                     |        | 2000 Quarters Ended
|                                              |  |                                         |        |                    
|                                              |  |                                         |        | September 30        |  | June 30     |       | March 31    |  | December 31 |       | September 30 |  | June 30     |       | March 31   
|                                              |  | December 31                             |        | Restated(1)         |  | Restated(1) |       | Restated(1) |  | Restated(1) |       | Restated(1)  |  | Restated(1) |       | Restated(1)
|                                              |  |                                         |        |                     |  |             |       |             |  |             |       |              |  |             |       |            
|                                              |  |                                        
|                                              |  | (In thousands except per share amounts)
|Gross sales                                   |  | $                                       | 7,622  |                     |  | $           | 8,429 |             |  | $           | 9,366 |              |  | $           | 6,578 |             |  | $ | 7,179 |   |  | $ | 8,148 |  |  | $ | 8,425 |  |  | $ | 6,523 |  
|Less excise taxes                             |  |                                         | 443    |                     |  |             | 404   |             |  |             | 447   |              |  |             | 278   |             |  |   | 397   |   |  |   | 446   |  |  |   | 506   |  |  |   | 355   |  
|                                              |  |                                         |        |                     |  |             |       |             |  |             |       |              |  |             |       |             |  |   |       |   |  |   |       |  |  |   |       |  |  |   |       |  
|Net sales                                     |  |                                         | 7,179  |                     |  |             | 8,025 |             |  |             | 8,919 |              |  |             | 6,300 |             |  |   | 6,782 |   |  |   | 7,702 |  |  |   | 7,919 |  |  |   | 6,168 |  
|Cost of sales                                 |  |                                         | 5,548  |                     |  |             | 6,217 |             |  |             | 6,220 |              |  |             | 4,892 |             |  |   | 5,066 |   |  |   | 5,409 |  |  |   | 5,667 |  |  |   | 4,660 |  
|                                              |  |                                         |        |                     |  |             |       |             |  |             |       |              |  |             |       |             |  |   |       |   |  |   |       |  |  |   |       |  |  |   |       |  
|Gross margin                                  |  |                                         | 1,631  |                     |  |             | 1,808 |             |  |             | 2,699 |              |  |             | 1,408 |             |  |   | 1,716 |   |  |   | 2,293 |  |  |   | 2,252 |  |  |   | 1,508 |  
|Selling, general and administrative expenses  |  |                                         | 2,338  |                     |  |             | 1,999 |             |  |             | 2,516 |              |  |             | 2,275 |             |  |   | 2,421 |   |  |   | 2,105 |  |  |   | 2,039 |  |  |   | 1,805 |  
|                                              |  |                                         |        |                     |  |             |       |             |  |             |       |              |  |             |       |             |  |   |       |   |  |   |       |  |  |   |       |  |  |   |       |  
|Operating (loss) income                       |  |                                         | (707   | )                   |  |             | (191  | )           |  |             | 183   |              |  |             | (867  | )           |  |   | (705  | ) |  |   | 188   |  |  |   | 213   |  |  |   | (297  | )
|Other income, net                             |  |                                         | 79     |                     |  |             | 200   |             |  |             | 162   |              |  |             | 101   |             |  |   | 115   |   |  |   | 160   |  |  |   | 219   |  |  |   | 92    |  
|                                              |  |                                         |        |                     |  |             |       |             |  |             |       |              |  |             |       |             |  |   |       |   |  |   |       |  |  |   |       |  |  |   |       |  
|Income (loss) before income taxes             |  |                                         | (628   | )                   |  |             | 9     |             |  |             | 345   |              |  |             | (766  | )           |  |   | (590  | ) |  |   | 348   |  |  |   | 432   |  |  |   | (205  | )
|Provision for income taxes                    |  |                                         | (575   | )                   |  |             |      |             |  |             |      |              |  |             |      |             |  |   |      |   |  |   |      |  |  |   |      |  |  |   |      |  
|                                              |  |                                         |        |                     |  |             |       |             |  |             |       |              |  |             |       |             |  |   |       |   |  |   |       |  |  |   |       |  |  |   |       |  
|Net (loss) income                             |  | $                                       | (1,203 | )                   |  | $           | 9     |             |  | $           | 345   |              |  | $           | (766  | )           |  | $ | (590  | ) |  | $ | 348   |  |  | $ | 432   |  |  | $ | (205  | )
|Basic and diluted net (loss) income per share |  | $                                       | (0.15  | )                   |  | $           | 0.00  |             |  | $           | 0.04  |              |  | $           | (0.10 | )           |  | $ | (0.08 | ) |  | $ | 0.04  |  |  | $ | 0.05  |  |  | $ | (0.03 | )
|                                              |  |                                         |        |                     |  |             |       |             |  |             |       |              |  |             |       |             |  |   |       |   |  |   |       |  |  |   |       |  |  |   |       |  
|Weighted average basic shares outstanding     |  |                                         | 8,089  |                     |  |             | 8,069 |             |  |             | 7,920 |              |  |             | 7,868 |             |  |   | 7,857 |   |  |   | 7,830 |  |  |   | 7,925 |  |  |   | 8,149 |  
|                                              |  |                                         |        |                     |  |             |       |             |  |             |       |              |  |             |       |             |  |   |       |   |  |   |       |  |  |   |       |  |  |   |       |  
|Weighted average diluted shares outstanding   |  |                                         | 8,089  |                     |  |             | 8,195 |             |  |             | 8,077 |              |  |             | 7,868 |             |  |   | 7,857 |   |  |   | 7,885 |  |  |   | 7,926 |  |  |   | 8,149 |  
|                                              |  |                                         |        |                     |  |             |       |             |  |             |       |              |  |             |       |             |  |   |       |   |  |   |       |  |  |   |       |  |  |   |       |  



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                            
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The company changed the accounting method for
	package design costs to reflect the expensing of these costs as
	incurred rather than capitalizing and amortizing over twelve
	months. This change has been accounted for as a prior period
	adjustment in accordance with Accounting Principals Board
	Opinion No. 20 Accounting Changes. The
	financial statements for all periods presented have been
	restated to reflect this change.

Impact of Restatement on Prior
Periods  Increase (Decrease) in Amounts

|                                             |  |                                               |       |                     |  |          |      |             |  |              |      |         |  |          |      |   |  |   |       |   |  |   |       |   |  |   |      |  
|-------------------------------------------- |  | --------------------------------------------- | ----- | ------------------- |  | -------- | ---- | ----------- |  | ------------ | ---- | ------- |  | -------- | ---- | - |  | - | ----- | - |  | - | ----- | - |  | - | ---- | -
|                                             |  |                                               |       |                    
|                                             |  | 2001 Quarters Ended                           |       | 2000 Quarters Ended
|                                             |  |                                               |       |                    
|                                             |  | September 30                                  |       | June 30             |  | March 31 |      | December 31 |  | September 30 |      | June 30 |  | March 31
|                                             |  |                                               |       |                     |  |          |      |             |  |              |      |         |  |         
|                                             |  |                                              
|                                             |  | (Dollars in thousands, except per share data)
|Income Statement Data:                       |  |                                               |       |                     |  |          |      |             |  |              |      |         |  |          |      |   |  |   |       |   |  |   |       |   |  |   |      |  
|Cost of sales                                |  | $                                             | (58   | )                   |  | $        | (69  | )           |  | $            | (65  | )       |  | $        | (62  | ) |  | $ | (51   | ) |  | $ | (47   | ) |  | $ | (50  | )
|Selling, general and administrative expenses |  |                                               | 46    |                     |  |          | 41   |             |  |              | 105  |         |  |          | 87   |   |  |   | 68    |   |  |   | 58    |   |  |   | 45   |  
|Net loss/income                              |  |                                               | (12   | )                   |  |          | 28   |             |  |              | 40   |         |  |          | 25   |   |  |   | (17   | ) |  |   | (11   | ) |  |   | 5    |  
|Basic and diluted net loss per share         |  | $                                             | (0.00 | )                   |  | $        | 0.00 |             |  | $            | 0.01 |         |  | $        | 0.01 |   |  | $ | (0.01 | ) |  | $ | (0.01 | ) |  | $ | 0.00 |  

38



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##### Table of Contents



EXHIBIT INDEX

The following exhibits are filed as part of this
Annual Report on Form 10-K or are incorporated herein by
reference. Where an exhibit is incorporated by reference, the
number, which follows the description of the exhibit, indicates
the document to which cross reference is made. See the end of
this exhibit index for a listing of cross-referenced documents.

|        |         |             |  |                                                                                                                                                                                                                             
|------- | ------- | ----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |         |            
|No.     |         | Description
|        |         |            
|        | 3.1(1)  |             |  | Amended and Restated Articles of Incorporation of
	Registrant                                                                                                                                                               
|        | 3.2(1)  |             |  | Form of Amended and Restated Bylaws of Registrant                                                                                                                                                                           
|        | 3.3     |             |  | Rights Agreement between ChaseMellon Shareholder
	Services LLC and the Registrant dated June 14, 1999.
	(Incorporated by reference to the Current Report on
	Form 8-K dated June 17, 1999.)                                 
|        | 4.1(1)  |             |  | Form of Common Stock Certificate                                                                                                                                                                                            
|        | 10.1(1) |             |  | Lease between Harold W. Hill and the Registrant
	dated April 13, 1994                                                                                                                                                       
|        | 10.2(1) |             |  | Addendum of Lease between Harold W. Hill and
	the Registrant dated November 28, 1994                                                                                                                                        
|        | 10.3(1) |             |  | Second Addendum of Lease between 1201 Building
	L.L.C. and the Registrant dated June 26, 1995                                                                                                                               
|        | 10.4(1) |             |  | Distribution Agreement between the Registrant and
	Western Washington Beverage dated August 24, 1995                                                                                                                        
|        | 10.5(1) |             |  | Registrants 1995 Employee Stock Option Plan                                                                                                                                                                                
|        | 10.6(1) |             |  | Registrants Non-Employee Director Stock
	Option Plan                                                                                                                                                                       
|        | 10.7(1) |             |  | Form of Non-Qualified Stock Option Agreement                                                                                                                                                                                
|        | 10.8(1) |             |  | Commercial Lease between Esther Podlesak, Trustee
	of the John A. and Esther Podlesak 1990 Family Trust and
	Pyramid Breweries California, Inc. dated November 1, 1995                                                      
|        | 10.9(1) |             |  | Assignment, Assumption and Consent Agreement
	between Esther Podlesak, Trustee of the John A. and Esther
	Podlesak 1990 Family Trust, Pyramid Breweries California, Inc.
	and Pyramid Breweries Inc. dated November 17, 1995
|        | 10.10   |             |  | Employment Agreement and First Amendment between
	the Registrant and Martin Kelly (Incorporated by reference to
	the Registrants Annual Report on Form 10-K for the
	year ended December 31, 1999.)                        
|        | 10.11   |             |  | Employment Agreement between the Registrant and
	Gary McGrath (Incorporated by reference to the Registrants
	Annual Report on Form 10-K for the year ended
	December 31, 1999.)                                            
|        | 10.12   |             |  | Employment Agreement between the Registrant and
	Wayne Drury (Incorporated by reference to the Registrants
	Annual Report on 10.12 Form 10-K for the year ended
	December 31, 2000.)                                       
|        | 10.13   |             |  | Assignment, Assumption and Consent Agreement
	between KLP Properties, Inc., Faultline Brewing Company, Inc.,
	and the Registrant dated October 26, 2001                                                                     
|        | 10.14   |             |  | Sublease between KLP Properties, Inc. and
	Faultline Brewing Company, Inc. dated April 3, 1996                                                                                                                              
|        | 10.15   |             |  | Lease between Peter Vasconi and the James and
	Maura Belka Trust dated December 28, 1995                                                                                                                                    
|        | 10.16   |             |  | Stock Purchase Agreement and Promissory Notes
	between the Company and Martin Kelly (Incorporated by reference
	to the Registrants Form 10-Q for the quarter ended
	June 30, 2001.)                                        
|        | 23.1    |             |  | Consent of Independent Public Accountants                                                                                                                                                                                   



---



|    |                                                                                                                                                   
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Incorporated by reference to the exhibits filed
	as part of the Registration Statement on Form S-1 of
	Pyramid Breweries Inc. (File No. 33-97834).

39