##### Table of Contents









UNITED STATES SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





Amendment No. 3


Form 10-K/A





|           |  |                                                                                             
|---------- |  | --------------------------------------------------------------------------------------------
|(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, 2004                                                        
|          
|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





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 South Royal Brougham Way,


Seattle, WA 98134


(Address of principal executive offices)


(206) 682-8322


(Registrants telephone number, including area code)


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


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


Common Stock, par value $.01 per share





þ o


o


o þ














---










PYRAMID BREWERIES INC.


ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED
DECEMBER 31, 2004


|             |  |                                                                                                                      |  |      |    | 
|------------ |  | -------------------------------------------------------------------------------------------------------------------- |  | ---- | -- | 
|             |  |                                                                                                                      |  | Page |   
|             |  |                                                                                                                      |  |      |   
|             |  | Explanatory Note                                                                                                     |  |      | ii | 
|PART I      
|Item 1.      |  | Business                                                                                                             |  |      | 1  | 
|             |  | General                                                                                                              |  |      | 1  | 
|             |  | Industry Background                                                                                                  |  |      | 1  | 
|             |  | Business Strategy                                                                                                    |  |      | 2  | 
|             |  | Products                                                                                                             |  |      | 3  | 
|             |  | Competition                                                                                                          |  |      | 4  | 
|             |  | Internal Controls                                                                                                    |  |      | 5  | 
|             |  | Government Regulations                                                                                               |  |      | 6  | 
|             |  | Trademarks                                                                                                           |  |      | 7  | 
|             |  | Environmental Regulations and Operating
    Considerations                                                           |  |      | 7  | 
|             |  | Employees                                                                                                            |  |      | 8  | 
|             |  | Available Information                                                                                                |  |      | 8  | 
|Item 2.      |  | Properties                                                                                                           |  |      | 8  | 
|Item 3.      |  | Legal Proceedings                                                                                                    |  |      | 9  | 
|Item 4.      |  | Submission of Matters to a Vote of Security
    Holders                                                              |  |      | 9  | 
|PART II     
|Item 5.      |  | Market for Registrants Common Equity,
    Related Stockholder Matters and Issuer Purchases of Equity
    Securities |  |      | 9  | 
|Item 6.      |  | Selected Financial Data                                                                                              |  |      | 11 | 
|Item 7.      |  | Managements Discussion and Analysis
    of Financial Condition and Results of Operations                            |  |      | 12 | 
|Item 7A.     |  | Quantitative and Qualitative Disclosures
    about Market Risk                                                       |  |      | 21 | 
|Item 8.      |  | Financial Statements and Supplementary
    Data                                                                      |  |      | 22 | 
|Item 9.      |  | Change in and Disagreements with
    Accountants on Accounting and Financial Disclosure                              |  |      | 49 | 
|Item 9A.     |  | Controls and Procedures                                                                                              |  |      | 49 | 
|Item 9B.     |  | Other Information                                                                                                    |  |      | 49 | 
|PART III    
|Item 10.     |  | Directors and Executive Officers of the
    Company                                                                  |  |      | 50 | 
|Item 11.     |  | Executive Compensation                                                                                               |  |      | 53 | 
|Item 12.     |  | Security Ownership of Certain Beneficial
    Owners and Management                                                   |  |      | 58 | 
|Item 13.     |  | Certain Relationships and Related
    Transactions                                                                   |  |      | 60 | 
|Item 14.     |  | Principal Accountant Fees and Services                                                                               |  |      | 60 | 
|PART IV     
|Item 15.     |  | Exhibits, Financial Statement Schedules,
    and Reports on Form 8-K                                                 |  |      | 61 | 
|             |  | Signatures                                                                                                           |  |      | 62 | 
|EXHIBIT 31.1
|EXHIBIT 31.2
|EXHIBIT 31.3
|EXHIBIT 32.1
|EXHIBIT 32.2
|EXHIBIT 32.3



i



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EXPLANATORY NOTE






ii



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##### Table of Contents



PYRAMID BREWERIES INC.





PART I





Item 1  Business





General






www.PyramidBrew.com





Industry Background








1



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Business Strategy






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



2



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www.PyramidBrew.com




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





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







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






Products




3



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Competition




| |            
| | -----------
| | Craft Beers











4



---



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| |      
| | -----
| | Sodas







| |          
| | ---------
| | Alehouses






Internal Controls




5



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Government Regulations




| |                      
| | ---------------------
| | Restaurant Regulation





| |                                           
| | ------------------------------------------
| | Alcoholic Beverage Regulation and Taxation





| |                     
| | --------------------
| | Licenses and Permits









6



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| |         
| | --------
| | Taxation





| |                 
| | ----------------
| | Dram Shop Laws






Trademarks







Environmental Regulations and Operating Considerations




7



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Employees







Available Information







Item 2  Properties






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





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



8



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| |                                               
| | ----------------------------------------------
| | The Portland Brewery and MacTarnahans Taproom





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





| |                        
| | -----------------------
| | The Sacramento Alehouse






Item 3  Legal Proceedings









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






PART II







|         |                                                                                                                     
|-------- | --------------------------------------------------------------------------------------------------------------------
|Item 5  | Market for Registrants Common Equity, Related
    Stockholder Matters and Issuer Purchases of Equity
    Securities



9



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|                         |                |      |   |      |     |          |   |      |  |  |   |       | 
|------------------------ | -------------- | ---- | - | ---- | --- | -------- | - | ---- |  |  | - | ----- | 
|                         |                |      |   |      |     | Dividend |  
|                         |                | High |   |      | Low |          |   | Paid | 
|                         |                |      |   |      |     |          |   |      | 
|Calendar Quarters  2004 |                |      |   |      |     |          |   |      |  |  |   |      
|                         | First Quarter  |      | $ | 3.72 |     |          | $ | 2.96 |  |  | $ | 0.044 | 
|                         | Second Quarter |      |   | 3.40 |     |          |   | 2.05 |  |  |   | 0.022 | 
|                         | Third Quarter  |      |   | 2.46 |     |          |   | 2.02 |  |  |   | 0.022 | 
|                         | Fourth Quarter |      |   | 2.30 |     |          |   | 1.97 |  |  |   | 0.022 | 
|Calendar Quarters  2003 |                |      |   |      |     |          |   |      |  |  |   |      
|                         | First Quarter  |      | $ | 2.93 |     |          | $ | 2.61 |  |  |   | 0.044 | 
|                         | Second Quarter |      |   | 3.58 |     |          |   | 2.82 |  |  |   | 0.044 | 
|                         | Third Quarter  |      |   | 3.47 |     |          |   | 2.81 |  |  |   | 0.044 | 
|                         | Fourth Quarter |      |   | 3.44 |     |          |   | 2.96 |  |  |   | 0.044 | 





DIVIDEND POLICY




10



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SELECTED FINANCIAL AND OPERATING DATA







|         |                        
|-------- | -----------------------
|Item 6  | Selected Financial Data



SELECTED FINANCIAL DATA


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


|                                             |  |                          |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|-------------------------------------------- |  | ------------------------ | ------- | - | ---- | - | ------- | ---- |  | - | ------- | - |  | ---- | ------- | - |  | - | ------- | -
|                                             |  | Years Ended December 31, |        
|                                             |  |                          |        
|                                             |  | 2004(1)                  |         |   | 2003 |   |         | 2002 |  |   | 2001    |   |  | 2000 |        
|                                             |  |                          |         |   |      |   |         |      |  |   |         |   |  |      |        
|Income Statement Data:                       |  |                          |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Gross sales                                  |  | $                        | 42,176  |   |      | $ | 36,378  |      |  | $ | 35,523  |   |  | $    | 31,995  |   |  | $ | 30,275  |  
|Less excise taxes                            |  |                          | 2,092   |   |      |   | 1,753   |      |  |   | 1,711   |   |  |      | 1,572   |   |  |   | 1,704   |  
|                                             |  |                          |         |   |      |   |         |      |  |   |         |   |  |      |        
|Net sales                                    |  |                          | 40,084  |   |      |   | 34,625  |      |  |   | 33,812  |   |  |      | 30,423  |   |  |   | 28,571  |  
|Cost of sales                                |  |                          | 32,293  |   |      |   | 27,640  |      |  |   | 25,360  |   |  |      | 22,877  |   |  |   | 20,802  |  
|                                             |  |                          |         |   |      |   |         |      |  |   |         |   |  |      |        
|Gross margin                                 |  |                          | 7,791   |   |      |   | 6,985   |      |  |   | 8,452   |   |  |      | 7,546   |   |  |   | 7,769   |  
|Selling, general and administrative expenses |  |                          | 10,550  |   |      |   | 8,492   |      |  |   | 8,678   |   |  |      | 9,129   |   |  |   | 8,370   |  
|Impairment charge                            |  |                          |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|                                             |  |                          |         |   |      |   |         |      |  |   |         |   |  |      |        
|Operating loss                               |  |                          | (2,759  | ) |      |   | (1,507  | )    |  |   | (226    | ) |  |      | (1,583  | ) |  |   | (601    | )
|Other income (expense), net                  |  |                          | 34      |   |      |   | 312     |      |  |   | 380     |   |  |      | 542     |   |  |   | 586     |  
|                                             |  |                          |         |   |      |   |         |      |  |   |         |   |  |      |        
|(Loss) income before income taxes            |  |                          | (2,725  | ) |      |   | (1,195  | )    |  |   | 154     |   |  |      | (1,041  | ) |  |   | (15     | )
|(Provision) benefit for income taxes         |  |                          | (4      | ) |      |   | (3      | )    |  |   | 98      |   |  |      | (574    | ) |  |   |        |  
|                                             |  |                          |         |   |      |   |         |      |  |   |         |   |  |      |        
|Net (loss) income                            |  | $                        | (2,729  | ) |      | $ | (1,198  | )    |  | $ | 252     |   |  | $    | (1,615  | ) |  | $ | (15     | )
|                                             |  |                          |         |   |      |   |         |      |  |   |         |   |  |      |        
|Basic net (loss) income per share            |  | $                        | (0.32   | ) |      | $ | (0.14   | )    |  | $ | 0.03    |   |  | $    | (0.20   | ) |  | $ | (0.00   | )
|                                             |  |                          |         |   |      |   |         |      |  |   |         |   |  |      |        
|Weighted average basic shares outstanding    |  |                          | 8,578   |   |      |   | 8,452   |      |  |   | 8,203   |   |  |      | 7,987   |   |  |   | 7,940   |  
|                                             |  |                          |         |   |      |   |         |      |  |   |         |   |  |      |        
|Diluted net (loss) income per share          |  | $                        | (0.32   | ) |      | $ | (0.14   | )    |  | $ | 0.03    |   |  | $    | (0.20   | ) |  | $ | (0.00   | )
|                                             |  |                          |         |   |      |   |         |      |  |   |         |   |  |      |        
|Weighted average diluted shares outstanding  |  |                          | 8,578   |   |      |   | 8,452   |      |  |   | 8,243   |   |  |      | 7,987   |   |  |   | 7,940   |  
|                                             |  |                          |         |   |      |   |         |      |  |   |         |   |  |      |        
|Cash dividends declared per share            |  | $                        | 0.088   |   |      | $ | 0.176   |      |  | $ | 0.176   |   |  | $    | 0.176   |   |  | $ | 0.160   |  
|                                             |  |                          |         |   |      |   |         |      |  |   |         |   |  |      |        
|Balance Sheet Data:                          |  |                          |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Working capital                              |  | $                        | (2,167  | ) |      | $ | 1,745   |      |  | $ | 3,783   |   |  | $    | 4,728   |   |  | $ | 7,026   |  
|Fixed assets, net                            |  |                          | 28,859  |   |      |   | 21,406  |      |  |   | 20,682  |   |  |      | 20,523  |   |  |   | 21,126  |  
|Total assets                                 |  |                          | 34,316  |   |      |   | 27,784  |      |  |   | 29,295  |   |  |      | 29,605  |   |  |   | 32,270  |  
|Stockholders equity                         |  |                          | 19,773  |   |      |   | 22,203  |      |  |   | 24,536  |   |  |      | 25,224  |   |  |   | 27,938  |  
|Operating Data (in barrels):                 |  |                          |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Beer barrels shipped                         |  |                          | 142,000 |   |      |   | 115,000 |      |  |   | 117,000 |   |  |      | 111,000 |   |  |   | 110,000 |  
|Soda barrels shipped                         |  |                          | 41,000  |   |      |   | 44,000  |      |  |   | 47,000  |   |  |      | 46,000  |   |  |   | 38,000  |  
|                                             |  |                          |         |   |      |   |         |      |  |   |         |   |  |      |        
|Total barrels shipped                        |  |                          | 183,000 |   |      |   | 159,000 |      |  |   | 164,000 |   |  |      | 157,000 |   |  |   | 148,000 |  
|                                             |  |                          |         |   |      |   |         |      |  |   |         |   |  |      |        
|Beer production capacity at year-end         |  |                          | 334,000 |   |      |   | 204,000 |      |  |   | 203,000 |   |  |      | 200,000 |   |  |   | 200,000 |  
|                                             |  |                          |         |   |      |   |         |      |  |   |         |   |  |      |        






|    |                                                                                                                                                                                                                                                                                                                                                                                                                             
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | On July 31, 2004, the Company completed its acquisition of
    the brewery and alehouse business of the Portland Brewing
    Company. The Companys results of operations from
    August 1, 2004 through December 31, 2004 include the
    results of operations for the acquired business. This
    acquisition materially affects the comparability of operating
    results for 2004 to earlier periods presented above.

11



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

Overview














12



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Critical Accounting Policies








| |   |                                                                                                                                                                                            
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | it requires us to make assumptions because information was not
    available at the time or it included matters that were highly
    uncertain at the time we were making the estimate, and
|
| |  | changes in the estimate or different estimates that we
    reasonably could have selected would have had a material impact
    on our financial condition or results of operations.        



Long-Lived Assets Impairment.


Realization of Deferred Tax Assets.


13



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Stock-Based Compensation.


Accounting for Stock-Based
Compensation Accounting for Stock Issued to
Employees


Promotional Activities Accrual.


Allowance for Keg Deposits.


Results of Operations




| |                                                                          
| | -------------------------------------------------------------------------
| | Year Ended December 31, 2004 Compared to Year Ended
    December 31, 2003

Gross Sales.


14



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Excise Taxes.


Gross Margin.


|                 |  |                                  |           |         |           |  |      |      |         |   |           |      |  |            |      |   |          |   |         |  |  |  |      |  
|---------------- |  | -------------------------------- | --------- | ------- | --------- |  | ---- | ---- | ------- | - | --------- | ---- |  | ---------- | ---- | - | -------- | - | ------- |  |  |  | ---- | -
|                 |  | Twelve Months Ended December 31, |          
|                 |  |                                  |          
|                 |  |                                  |           | % of    |           |  |      |      | % of    |   |           |     
|                 |  |                                  |           | Segment |           |  |      |      | Segment |   |           | 2004 |  |            |     
|                 |  | 2004                             |           |         | Net Sales |  |      | 2003 |         |   | Net Sales |      |  | $ Increase |      |   | % Change |  
|                 |  |                                  |           |         |           |  |      |      |         |   |           |      |  |            |      |   |          |  
|Beverage Segment |  | $                                | 6,852,000 |         |           |  | 24.3 | %    |         | $ | 6,047,000 |      |  |            | 27.2 | % |          | $ | 805,000 |  |  |  | 13.3 | %
|Alehouse Segment |  |                                  | 939,000   |         |           |  | 6.7  | %    |         |   | 938,000   |      |  |            | 7.6  | % |          |   | 1,000   |  |  |  | 0.1  | %
|                 |  |                                  |           |         |           |  |      |      |         |   |           |      |  |            |      |   |          |  
|Total            |  | $                                | 7,791,000 |         |           |  | 19.4 | %    |         | $ | 6,985,000 |      |  |            | 20.2 | % |          | $ | 806,000 |  |  |  | 11.5 | %
|                 |  |                                  |           |         |           |  |      |      |         |   |           |      |  |            |      |   |          |  



Selling, General and Administrative Expenses.


Other Income (Expense), net.


15



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Income Taxes.


Net (Loss) Income.




| |                                                                          
| | -------------------------------------------------------------------------
| | Year Ended December 31, 2003 Compared to Year Ended
    December 31, 2002

Gross Sales.


Excise Taxes.


Gross Margin.


|                 |  |                                  |           |         |           |  |       |      |         |   |           |  |  |          |       |  |          |   |            |   |  |  |       |   
|---------------- |  | -------------------------------- | --------- | ------- | --------- |  | ----- | ---- | ------- | - | --------- |  |  | -------- | ----- |  | -------- | - | ---------- | - |  |  | ----- | --
|                 |  | Twelve Months Ended December 31, |          
|                 |  |                                  |          
|                 |  |                                  |           | % of    |           |  |       |      | % of    |   |           | 
|                 |  |                                  |           | Segment |           |  |       |      | Segment |   |           | 
|                 |  | 2003                             |           |         | Net Sales |  |       | 2002 |         |   | Net Sales |  |  | $ Change |       |  | % Change |  
|                 |  |                                  |           |         |           |  |       |      |         |   |           |  |  |          |       |  |          |  
|Beverage Segment |  | $                                | 6,047,000 |         |           |  | 27.2% |      |         | $ | 7,311,000 |  |  |          | 31.1% |  |          | $ | (1,264,000 | ) |  |  | (17.3 | )%
|Alehouse Segment |  |                                  | 938,000   |         |           |  | 7.6%  |      |         |   | 1,141,000 |  |  |          | 11.0% |  |          |   | (203,000   | ) |  |  | (17.8 | )%
|                 |  |                                  |           |         |           |  |       |      |         |   |           |  |  |          |       |  |          |  
|Total            |  | $                                | 6,985,000 |         |           |  | 20.2% |      |         | $ | 8,452,000 |  |  |          | 25.0% |  |          | $ | (1,467,000 | ) |  |  | (17.4 | )%
|                 |  |                                  |           |         |           |  |       |      |         |   |           |  |  |          |       |  |          |  

Selling, General and Administrative Expenses.


16



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Other Income, net.


Income Taxes.


Net (Loss) Income.


Liquidity and Capital Resources








17



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|                 |  |            |  |            |  |            |  |            |  |           |           | 
|---------------- |  | ---------- |  | ---------- |  | ---------- |  | ---------- |  | --------- | --------- | 
|                 |  |            |  |            |  |            |  |            |  | More Than |          
|                 |  | Total      |  | Year 1     |  | Year 2 - 3 |  | Year 4 - 5 |  | 5 Years   |          
|                 |  |            |  |            |  |            |  |            |  |           |          
|Operating leases |  | $8,336,000 |  | $1,300,000 |  | $2,613,000 |  | $2,177,000 |  | $         | 2,246,000 | 
|Note payable(1)  |  | 20,000     |  | 20,000     |  |           |  |           |  |           |          | 
|Note payable(2)  |  | 7,850,000  |  | 80,000     |  | 204,000    |  | 228,000    |  |           | 7,338,000 | 






|    |                                                                                                                                                          
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The amounts are payments as stated in the non-interest bearing
    note. The note payable is recorded using a 10% discount rate on
    the balance sheet.
|   
|(2) | The amounts are principal only payments as stated in securitized
    financing arrangement for the Berkeley Facility purchase.                           









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1 2










| |                                 
| | --------------------------------
| | Recent Accounting Pronouncements





Accounting for Stock Issued to Employees


19



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Risk Factors and Forwarding Looking Statements




Increasing Competition.


Access to Markets.


Government Regulations.


Selling Prices.


Variability of Margins and Operating Results.


20



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Acquisitions.




Impact of Inflation







Item 7A  Quantitative and Qualitative
Disclosures about Market Risk






21



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|         |                                            
|-------- | -------------------------------------------
|Item 8  | Financial Statements and Supplementary Data

|                                                                                                         |  |      |    | 
|-------------------------------------------------------------------------------------------------------- |  | ---- | -- | 
|                                                                                                         |  | Page |   
|                                                                                                         |  |      |   
|Report of Independent Registered Accounting Firm                                                         |  |      | 23 | 
|Report of Registered Independent Public Accounting Firm                                                  |  |      | 24 | 
|Consolidated Balance Sheets as of December 31, 2004 and 2003                                             |  |      | 25 | 
|Consolidated Statements of Operations for the Years Ended
    December 31, 2004, 2003 and 2002           |  |      | 26 | 
|Consolidated Statements of Stockholders Equity for the
    Years Ended December 31, 2004, 2003 and 2002 |  |      | 27 | 
|Consolidated Statements of Cash Flows for the Years Ended
    December 31, 2004, 2003 and 2002           |  |      | 28 | 
|Notes to Consolidated Financial Statements                                                               |  |      | 29 | 

22



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Report of Independent Registered Accounting Firm














| |                   
| | ------------------
| | /s/ Moss Adams LLP





23



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Report of Independent Registered Public Accounting Firm














| |             
| | ------------
| | /s/ KPMG LLP





24



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PYRAMID BREWERIES INC.


CONSOLIDATED BALANCE SHEETS


|                                     |                                                                                                                           |                                            |   |         |        |  |   |         |        | 
|------------------------------------ | ------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | - | ------- | ------ |  | - | ------- | ------ | 
|                                     |                                                                                                                           | December 31,                               |  
|                                     |                                                                                                                           |                                            |  
|                                     |                                                                                                                           | 2004                                       |   |         | 2003   | 
|                                     |                                                                                                                           |                                            |   |         |        | 
|                                     |                                                                                                                           | (In thousands)                             |  
|ASSETS                              
|CURRENT ASSETS:                      |                                                                                                                           |                                            |   |         |        |  |   |        
|                                     | Cash and cash equivalents                                                                                                 |                                            | $ |        |        |  | $ | 1,558   |       
|                                     | Short-term investments                                                                                                    |                                            |   |        |        |  |   | 492     |       
|                                     | Accounts receivable, net of $32 and $20 allowance                                                                         |                                            |   | 2,191   |        |  |   | 1,281   |       
|                                     | Inventories                                                                                                               |                                            |   | 2,129   |        |  |   | 1,654   |       
|                                     | Prepaid expenses and other                                                                                                |                                            |   | 324     |        |  |   | 756     |       
|                                     |                                                                                                                           |                                            |   |         |        | 
|                                     |                                                                                                                           | Total current assets                       |   |         | 4,644  |  |   |         | 5,741  | 
|                                     | Note receivable  related party                                                                                           |                                            |   |        |        |  |   | 81      |       
|                                     | Fixed assets, net                                                                                                         |                                            |   | 28,859  |        |  |   | 21,406  |       
|                                     | Goodwill                                                                                                                  |                                            |   | 415     |        |  |   | 415     |       
|                                     | Intangibles                                                                                                               |                                            |   | 209     |        |  |   |        |       
|                                     | Other                                                                                                                     |                                            |   | 189     |        |  |   | 141     |       
|                                     |                                                                                                                           |                                            |   |         |        | 
|                                     |                                                                                                                           | Total assets                               |   | $       | 34,316 |  |   | $       | 27,784 | 
|                                     |                                                                                                                           |                                            |   |         |        | 
|                                    
|LIABILITIES AND STOCKHOLDERS EQUITY
|CURRENT LIABILITIES:                 |                                                                                                                           |                                            |   |         |        |  |   |        
|                                     | Accounts payable                                                                                                          |                                            | $ | 2,776   |        |  | $ | 1,349   |       
|                                     | Accrued expenses                                                                                                          |                                            |   | 2,682   |        |  |   | 1,562   |       
|                                     | Refundable deposits                                                                                                       |                                            |   | 582     |        |  |   | 487     |       
|                                     | Line of credit                                                                                                            |                                            |   | 400     |        |  |   |        |       
|                                     | Current portion of long-term financing                                                                                    |                                            |   | 83      |        |  |   |        |       
|                                     | Note payable  current                                                                                                    |                                            |   | 20      |        |  |   | 20      |       
|                                     | Deferred rent  current                                                                                                   |                                            |   | 75      |        |  |   | 199     |       
|                                     | Dividends payable                                                                                                         |                                            |   | 193     |        |  |   | 379     |       
|                                     |                                                                                                                           |                                            |   |         |        | 
|                                     |                                                                                                                           | Total current liabilities                  |   |         | 6,811  |  |   |         | 3,996  | 
|                                     | Note payable, net of current                                                                                              |                                            |   |        |        |  |   | 16      |       
|                                     | Long-term financing, net of current                                                                                       |                                            |   | 7,117   |        |  |   |        |       
|                                     | Deferred rent, net of current                                                                                             |                                            |   | 615     |        |  |   | 1,569   |       
|                                     |                                                                                                                           |                                            |   |         |        | 
|                                     |                                                                                                                           | Total liabilities                          |   | $       | 14,543 |  |   | $       | 5,581  | 
|                                     |                                                                                                                           |                                            |   |         |        | 
|COMMITMENTS AND CONTINGENCIES        |                                                                                                                           |                                            |   |         |        |  |   |        
|STOCKHOLDERS EQUITY:                |                                                                                                                           |                                            |   |         |        |  |   |        
|                                     | Preferred stock, 10,000,000 shares authorized, none issued                                                                |                                            |   |        |        |  |   |        |       
|                                     | Common stock, $.01 par value; 40,000,000 shares
    authorized, 8,776,000 and 8,620,000 shares issued and
    outstanding |                                            |   | 88      |        |  |   | 86      |       
|                                     | Additional paid-in capital                                                                                                |                                            |   | 37,214  |        |  |   | 36,374  |       
|                                     | Note receivable  related party                                                                                           |                                            |   |        |        |  |   | (764    | )     
|                                     | Deferred stock-based compensation                                                                                         |                                            |   | (384    | )      |  |   | (27     | )     
|                                     | Accumulated deficit                                                                                                       |                                            |   | (17,145 | )      |  |   | (13,466 | )     
|                                     |                                                                                                                           |                                            |   |         |        | 
|                                     |                                                                                                                           | Total stockholders equity                 |   |         | 19,773 |  |   |         | 22,203 | 
|                                     |                                                                                                                           |                                            |   |         |        | 
|                                     |                                                                                                                           | Total liabilities and stockholders equity |   | $       | 34,316 |  |   | $       | 27,784 | 
|                                     |                                                                                                                           |                                            |   |         |        | 



25



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##### Table of Contents



PYRAMID BREWERIES INC.


CONSOLIDATED STATEMENTS OF OPERATIONS


|                                              |  |                                          |           |   |      |   |           |      |  |   |           |  
|--------------------------------------------- |  | ---------------------------------------- | --------- | - | ---- | - | --------- | ---- |  | - | --------- | -
|                                              |  | Years Ended December 31,                 |          
|                                              |  |                                          |          
|                                              |  | 2004                                     |           |   | 2003 |   |           | 2002 | 
|                                              |  |                                          |           |   |      |   |           |      | 
|                                              |  | (In thousands, except per share amounts) |          
|Gross sales                                   |  | $                                        | 42,176    |   |      | $ | 36,378    |      |  | $ | 35,523    |  
|Less excise taxes                             |  |                                          | 2,092     |   |      |   | 1,753     |      |  |   | 1,711     |  
|                                              |  |                                          |           |   |      |   |           |      | 
|Net sales                                     |  |                                          | 40,084    |   |      |   | 34,625    |      |  |   | 33,812    |  
|Cost of sales                                 |  |                                          | 32,293    |   |      |   | 27,640    |      |  |   | 25,360    |  
|                                              |  |                                          |           |   |      |   |           |      | 
|Gross margin                                  |  |                                          | 7,791     |   |      |   | 6,985     |      |  |   | 8,452     |  
|Selling, general and administrative expenses  |  |                                          | 10,550    |   |      |   | 8,492     |      |  |   | 8,678     |  
|                                              |  |                                          |           |   |      |   |           |      | 
|Operating loss                                |  |                                          | (2,759    | ) |      |   | (1,507    | )    |  |   | (226      | )
|Other income, net                             |  |                                          | 34        |   |      |   | 312       |      |  |   | 380       |  
|                                              |  |                                          |           |   |      |   |           |      | 
|(Loss) income before income taxes             |  |                                          | (2,725    | ) |      |   | (1,195    | )    |  |   | 154       |  
|(Provision) benefit for income taxes          |  |                                          | (4        | ) |      |   | (3        | )    |  |   | 98        |  
|                                              |  |                                          |           |   |      |   |           |      | 
|Net (loss) income                             |  | $                                        | (2,729    | ) |      | $ | (1,198    | )    |  | $ | 252       |  
|                                              |  |                                          |           |   |      |   |           |      | 
|Basic and diluted net (loss) income per share |  | $                                        | (0.32     | ) |      | $ | (0.14     | )    |  | $ | 0.03      |  
|                                              |  |                                          |           |   |      |   |           |      | 
|Weighted average basic shares outstanding     |  |                                          | 8,578,000 |   |      |   | 8,452,000 |      |  |   | 8,203,000 |  
|                                              |  |                                          |           |   |      |   |           |      | 
|Weighted average diluted shares outstanding   |  |                                          | 8,578,000 |   |      |   | 8,452,000 |      |  |   | 8,243,000 |  
|                                              |  |                                          |           |   |      |   |           |      | 
|Cash dividends declared per share             |  | $                                        | 0.088     |   |      | $ | 0.176     |      |  | $ | 0.176     |  



26



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##### Table of Contents



PYRAMID BREWERIES INC.


CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY


|                           |                                |                |       |      |            |      |    |             |   |   |             |        |   |              |      |       |               |   |      |        |   |   |         |        |   |   |        |        |  
|-------------------------- | ------------------------------ | -------------- | ----- | ---- | ---------- | ---- | -- | ----------- | - | - | ----------- | ------ | - | ------------ | ---- | ----- | ------------- | - | ---- | ------ | - | - | ------- | ------ | - | - | ------ | ------ | -
|                           |                                |                |       |      |            | Note |    |             |   |   |             |        |  
|                           |                                | Common Stock   |       |      | Additional |      |    | Receivable- |   |   | Deferred    |        |   |              |      | Total |              
|                           |                                |                |       |      | Paid-In    |      |    | Related-    |   |   | Stock-Based |        |   | Accumulated  |      |       | Stockholders |  
|                           |                                | Shares         |       |      | Amount     |      |    | Capital     |   |   | Party       |        |   | Compensation |      |       | Deficit       |   |      | Equity |  
|                           |                                |                |       |      |            |      |    |             |   |   |             |        |   |              |      |       |               |   |      |        |  
|                           |                                | (In thousands) |      
|Balance, December 31, 2001 |                                |                | 8,300 |      |            | $    | 83 |             |   | $ | 35,649      |        |   | $            | (787 | )     |               | $ | (186 | )      |   | $ | (9,536  | )      |   | $ | 25,223 |       
|                           | Net income                     |                |       |     |            |      |    |            |   |   |             |       |   |              |      |      |               |   |      |       |   |   |         | 252    |   |   |        | 252    |  
|                           | Dividends declared             |                |       |     |            |      |    |            |   |   |             |       |   |              |      |      |               |   |      |       |   |   |         | (1,477 | ) |   |        | (1,477 | )
|                           | Shares issued                  |                |       | 35   |            |      |    |            |   |   |             | 71     |   |              |      |      |               |   |      |       |   |   |         |       |   |   |        | 71     |  
|                           | Exercised stock options        |                |       | 169  |            |      |    | 2           |   |   |             | 315    |   |              |      |      |               |   |      |       |   |   |         |       |   |   |        | 317    |  
|                           | Stock-based compensation       |                |       |     |            |      |    |            |   |   |             | 6      |   |              |      |      |               |   |      | 139    |   |   |         |       |   |   |        | 145    |  
|                           | Note repayment                 |                |       |     |            |      |    |            |   |   |             |       |   |              |      | 5     |               |   |      |       |   |   |         |       |   |   |        | 5      |  
|                           |                                |                |       |      |            |      |    |             |   |   |             |        |   |              |      |       |               |   |      |        |  
|Balance, December 31, 2002 |                                |                | 8,504 |      |            | $    | 85 |             |   | $ | 36,041      |        |   | $            | (782 | )     |               | $ | (47  | )      |   | $ | (10,761 | )      |   | $ | 24,536 |       
|                           | Net loss                       |                |       |     |            |      |    |            |   |   |             |       |   |              |      |      |               |   |      |       |   |   |         | (1,198 | ) |   |        | (1,198 | )
|                           | Dividends declared             |                |       |     |            |      |    |            |   |   |             |       |   |              |      |      |               |   |      |       |   |   |         | (1,507 | ) |   |        | (1,507 | )
|                           | Shares issued                  |                |       | 25   |            |      |    |            |   |   |             | 58     |   |              |      |      |               |   |      |       |   |   |         |       |   |   |        | 58     |  
|                           | Exercised stock options        |                |       | 91   |            |      |    | 1           |   |   |             | 203    |   |              |      |      |               |   |      |       |   |   |         |       |   |   |        | 204    |  
|                           | Stock-based compensation       |                |       |     |            |      |    |            |   |   |             | 72     |   |              |      |      |               |   |      | 20     |   |   |         |       |   |   |        | 92     |  
|                           | Note repayment                 |                |       |     |            |      |    |            |   |   |             |       |   |              |      | 18    |               |   |      |       |   |   |         |       |   |   |        | 18     |  
|                           |                                |                |       |      |            |      |    |             |   |   |             |        |   |              |      |       |               |   |      |        |  
|Balance, December 31, 2003 |                                |                | 8,620 |      |            | $    | 86 |             |   | $ | 36,374      |        |   | $            | (764 | )     |               | $ | (27  | )      |   | $ | (13,466 | )      |   | $ | 22,203 |       
|                           | Net loss                       |                |       |     |            |      |    |            |   |   |             |       |   |              |      |      |               |   |      |       |   |   |         | (2,729 | ) |   |        | (2,729 | )
|                           | Dividends declared             |                |       |     |            |      |    |            |   |   |             |       |   |              |      |      |               |   |      |       |   |   |         | (950   | ) |   |        | (950   | )
|                           | Shares issued                  |                |       | 472  |            |      |    | 5           |   |   |             | 1,530  |   |              |      |      |               |   |      |       |   |   |         |       |   |   |        | 1,535  |  
|                           | Exercised stock options        |                |       | 71   |            |      |    | 1           |   |   |             | 163    |   |              |      |      |               |   |      |       |   |   |         |       |   |   |        | 164    |  
|                           | Stock-based compensation       |                |       |     |            |      |    |            |   |   |             | 376    |   |              |      |      |               |   |      | (357   | ) |   |         |       |   |   |        | 19     |  
|                           | Note repayment                 |                |       |     |            |      |    |            |   |   |             |       |   |              |      | 764   |               |   |      |       |   |   |         |       |   |   |        | 764    |  
|                           | Shares repurchased and retired |                |       | (387 | )          |      |    | (4          | ) |   |             | (1,229 | ) |              |      |      |               |   |      |       |   |   |         |       |   |   |        | (1,233 | )
|                           |                                |                |       |      |            |      |    |             |   |   |             |        |   |              |      |       |               |   |      |        |  
|Balance, December 31, 2004 |                                |                | 8,776 |      |            | $    | 88 |             |   | $ | 37,214      |        |   | $            |     |       |               | $ | (384 | )      |   | $ | (17,145 | )      |   | $ | 19,773 |       
|                           |                                |                |       |      |            |      |    |             |   |   |             |        |   |              |      |       |               |   |      |        |  



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PYRAMID BREWERIES INC.


CONSOLIDATED STATEMENTS OF CASH FLOWS


|                      |                                                                                              |                                                                 |   |        |        |   |   |        |        |   |   |     |        |  
|--------------------- | -------------------------------------------------------------------------------------------- | --------------------------------------------------------------- | - | ------ | ------ | - | - | ------ | ------ | - | - | --- | ------ | -
|                      |                                                                                              | Years Ended December 31,                                        |  
|                      |                                                                                              |                                                                 |  
|                      |                                                                                              | 2004                                                            |   |        | 2003   |   |   | 2002   |       
|                      |                                                                                              |                                                                 |   |        |        |   |   |        |       
|                      |                                                                                              | (In thousands)                                                  |  
|OPERATING ACTIVITIES: |                                                                                              |                                                                 |   |        |        |   |   |        |        |   |   |    
|                      | Net (loss) income                                                                            |                                                                 | $ | (2,729 | )      |   | $ | (1,198 | )      |   | $ | 252 |       
|                      | Adjustments to reconcile net (loss) income to net cash provided
    by operating activities: |                                                                 |   |        |        |   |   |        |        |   |   |     |       
|                      |                                                                                              | Depreciation and amortization                                   |   |        | 2,668  |   |   |        | 2,443  |   |   |     | 2,202  |  
|                      |                                                                                              | Stock-based compensation expense                                |   |        | 19     |   |   |        | 92     |   |   |     | 145    |  
|                      |                                                                                              | Interest expense                                                |   |        | 4      |   |   |        | 5      |   |   |     | 7      |  
|                      |                                                                                              | Loss (gain) on sale of fixed assets                             |   |        | 10     |   |   |        | 2      |   |   |     | (4     | )
|                      |                                                                                              | Deferred rent                                                   |   |        | (133   | ) |   |        | 639    |   |   |     | (124   | )
|                      | Changes in operating assets and liabilities:                                                 |                                                                 |   |        |        |   |   |        |        |   |   |     |       
|                      |                                                                                              | Accounts receivable                                             |   |        | 69     |   |   |        | 663    |   |   |     | (519   | )
|                      |                                                                                              | Inventories                                                     |   |        | 83     |   |   |        | (64    | ) |   |     | (412   | )
|                      |                                                                                              | Prepaid expenses and other                                      |   |        | 94     |   |   |        | (192   | ) |   |     | (432   | )
|                      |                                                                                              | Accounts payable and accrued expenses                           |   |        | 1,243  |   |   |        | 212    |   |   |     | 549    |  
|                      |                                                                                              | Refundable deposits                                             |   |        | (10    | ) |   |        | (19    | ) |   |     | (44    | )
|                      |                                                                                              |                                                                 |   |        |        |   |   |        |       
|                      |                                                                                              | Net cash provided by operating activities                       |   |        | 1,318  |   |   |        | 2,583  |   |   |     | 1,620  |  
|                      |                                                                                              |                                                                 |   |        |        |   |   |        |       
|INVESTING ACTIVITIES: |                                                                                              |                                                                 |   |        |        |   |   |        |        |   |   |    
|                      |                                                                                              | Purchases of short-term investments                             |   |        |       |   |   |        | (2,455 | ) |   |     | (5,044 | )
|                      |                                                                                              | Proceeds from the sale and maturities of short-term investments |   |        | 492    |   |   |        | 5,205  |   |   |     | 6,944  |  
|                      |                                                                                              | Acquisitions of fixed assets                                    |   |        | (1,002 | ) |   |        | (3,142 | ) |   |     | (2,282 | )
|                      |                                                                                              | Proceeds from sale of fixed assets                              |   |        | 11     |   |   |        |       |   |   |     | 16     |  
|                      |                                                                                              | Acquisition of Portland Brewing Company Assets                  |   |        | (1,416 | ) |   |        |       |   |   |     |       |  
|                      |                                                                                              | Acquisition of Berkeley                                         |   |        | (195   | ) |   |        |       |   |   |     |       |  
|                      |                                                                                              |                                                                 |   |        |        |   |   |        |       
|                      |                                                                                              | Net cash used in investing activities                           |   |        | (2,110 | ) |   |        | (392   | ) |   |     | (366   | )
|                      |                                                                                              |                                                                 |   |        |        |   |   |        |       
|FINANCING ACTIVITIES: |                                                                                              |                                                                 |   |        |        |   |   |        |        |   |   |    
|                      |                                                                                              | Proceeds from sale of common stock and option exercises         |   |        | 224    |   |   |        | 262    |   |   |     | 388    |  
|                      |                                                                                              | Net borrowings (payments) on line of credit                     |   |        | 400    |   |   |        |       |   |   |     |       |  
|                      |                                                                                              | Deferred financing fees                                         |   |        | (68    | ) |   |        |       |   |   |     |       |  
|                      |                                                                                              | Notes receivable                                                |   |        |       |   |   |        | 31     |   |   |     | 18     |  
|                      |                                                                                              | Repayment on note payable                                       |   |        | (20    | ) |   |        | (20    | ) |   |     | (20    | )
|                      |                                                                                              | Borrowings on short-term note payable to related party          |   |        | 200    |   |   |        |       |   |   |     |       |  
|                      |                                                                                              | Cash dividends paid                                             |   |        | (1,137 | ) |   |        | (1,502 | ) |   |     | (1,469 | )
|                      |                                                                                              | Shares repurchased and retired                                  |   |        | (365   | ) |   |        |       |   |   |     |       |  
|                      |                                                                                              |                                                                 |   |        |        |   |   |        |       
|                      |                                                                                              | Net cash used in financing activities                           |   |        | (766   | ) |   |        | (1,229 | ) |   |     | (1,083 | )
|                      |                                                                                              |                                                                 |   |        |        |   |   |        |       
|                      |                                                                                              | Increase (decrease) in cash and cash equivalents                |   |        | (1,558 | ) |   |        | 962    |   |   |     | 171    |  
|                      |                                                                                              | Cash and cash equivalents at beginning of year                  |   |        | 1,558  |   |   |        | 596    |   |   |     | 425    |  
|                      |                                                                                              |                                                                 |   |        |        |   |   |        |       
|                      |                                                                                              | Cash and cash equivalents at end of year                        |   | $      |       |   |   | $      | 1,558  |   |   | $   | 596    |  
|                      |                                                                                              |                                                                 |   |        |        |   |   |        |       
|                      |                                                                                              | SUPPLEMENTAL DATA:                                              |   |        |        |   |   |        |        |   |   |     |        |  
|                      |                                                                                              | Interest paid                                                   |   | $      | 220    |   |   | $      |       |   |   | $   |       |  
|                      |                                                                                              | Acquisition of Berkeley facility for debt                       |   |        | 7,000  |   |   |        |       |   |   |     |       |  
|                      |                                                                                              | Stock issued for purchase of Portland Brewing Company assets    |   |        | 1,474  |   |   |        |       |   |   |     |       |  
|                      |                                                                                              | Notes receivable repaid through stock repurchase                |   |        | 843    |   |   |        |       |   |   |     |       |  



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##### Table of Contents



PYRAMID BREWERIES INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




|   |                                                         
|-- | --------------------------------------------------------
|1. | Nature of Operations and Significant Accounting Policies



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



















29



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##### Table of Contents



PYRAMID BREWERIES INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




| |              
| | -------------
| | Consolidation





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





| |                       
| | ----------------------
| | Short-Term Investments





| |                                    
| | -----------------------------------
| | Fair Value of Financial Instruments





| |                    
| | -------------------
| | Accounts Receivable





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



30



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##### Table of Contents



PYRAMID BREWERIES INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




| |                  
| | -----------------
| | Valuation Account



|                                |  |              |        |            |           |  |              |             |  |  |            |  |              |      |   |  |  |   |        | 
|------------------------------- |  | ------------ | ------ | ---------- | --------- |  | ------------ | ----------- |  |  | ---------- |  | ------------ | ---- | - |  |  | - | ------ | 
|                                |  |              |        | Charged to |           |  | Purchased as |             |  |  |            | 
|                                |  | December 31, |        |            | Costs and |  |              | Part of     |  |  |            |  | December 31, |     
|Description                     |  | 2003         |        |            | Expenses  |  |              | Acquisition |  |  | Deductions |  |              | 2004 |  
|                                |  |              |        |            |           |  |              |             |  |  |            |  |              |      |  
|Allowance for doubtful accounts |  | $            | 20,000 |            |           |  | 0            |             |  |  | 12,000     |  |              |      | 0 |  |  | $ | 32,000 | 



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





|                             |  |                                               
|---------------------------- |  | ----------------------------------------------
|Buildings                    |  | 15 to 40 years                                
|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 25 years





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





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



31



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##### Table of Contents



PYRAMID BREWERIES INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






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







| |           
| | ----------
| | Trademarks





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







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





| |             
| | ------------
| | Excise Taxes



32



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##### Table of Contents



PYRAMID BREWERIES INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)








| |                   
| | ------------------
| | Cost of Goods Sold





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







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



|                              |  |                         |      |   |      |   |     |      |  |   |     |  
|----------------------------- |  | ----------------------- | ---- | - | ---- | - | --- | ---- |  | - | --- | -
|                              |  | Year Ended December 31, |     
|                              |  |                         |     
|                              |  | 2004                    |      |   | 2003 |   |     | 2002 | 
|                              |  |                         |      |   |      |   |     |      | 
|                              |  | (In thousands)          |     
|Interest income               |  | $                       | 22   |   |      | $ | 56  |      |  | $ | 102 |  
|Sublease Income               |  |                         | 90   |   |      |   |    |      |  |   |    |  
|Interest expense              |  |                         | (224 | ) |      |   | (5  | )    |  |   | (7  | )
|Parking income                |  |                         | 188  |   |      |   | 216 |      |  |   | 234 |  
|(Loss) gain on sale of assets |  |                         | (10  | ) |      |   | (3  | )    |  |   | 4   |  
|Amortization  Loan fee       |  |                         | (46  | ) |      |   |    |      |  |   |    |  
|Other income                  |  |                         | 14   |   |      |   | 48  |      |  |   | 47  |  
|                              |  |                         |      |   |      |   |     |      | 
|Other income, net             |  | $                       | 34   |   |      | $ | 312 |      |  | $ | 380 |  
|                              |  |                         |      |   |      |   |     |      | 

33



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##### Table of Contents



PYRAMID BREWERIES INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




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







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







|                  |                                             |                            |            |           |       |   |            |           |       |   |         |           |      | 
|----------------- | ------------------------------------------- | -------------------------- | ---------- | --------- | ----- | - | ---------- | --------- | ----- | - | ------- | --------- | ---- | 
|                  |                                             | Years Ended December 31,   |           
|                  |                                             |                            |           
|                  |                                             | 2004                       |            |           | 2003  |   |            | 2002      |      
|                  |                                             |                            |            |           |       |   |            |           |      
|Net (loss) income |                                             | $                          | (2,729,000 | )         |       | $ | (1,198,000 | )         |       | $ | 252,000 |          
|Shares:           |                                             |                            |            |           |       |   |            |           |       |   |         |          
|                  | Weighted average shares outstanding         |                            |            | 8,578,000 |       |   |            | 8,502,000 |       |   |         | 8,363,000 |     
|                  | Shares subject to repurchase                |                            |            |          |       |   |            | (50,000   | )     |   |         | (160,000  | )   
|                  |                                             |                            |            |           |       |   |            |           |      
|                  | Weighted average basic shares outstanding   |                            |            | 8,578,000 |       |   |            | 8,452,000 |       |   |         | 8,203,000 |     
|                  |                                             |                            |            |           |       |   |            |           |      
|                  |                                             | Basic earnings per share   |            | $         | (0.32 | ) |            | $         | (0.14 | ) |         | $         | 0.03 | 
|                  |                                             |                            |            |           |       |   |            |           |      
|                  | Stock option dilution                       |                            |            |          |       |   |            |          |       |   |         | 40,000    |     
|                  |                                             |                            |            |           |       |   |            |           |      
|                  | Weighted average diluted shares outstanding |                            |            | 8,578,000 |       |   |            | 8,452,000 |       |   |         | 8,243,000 |     
|                  |                                             |                            |            |           |       |   |            |           |      
|                  |                                             | Diluted earnings per share |            | $         | (0.32 | ) |            | $         | (0.14 | ) |         | $         | 0.03 | 
|                  |                                             |                            |            |           |       |   |            |           |      

34



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##### Table of Contents



PYRAMID BREWERIES INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




| |                         
| | ------------------------
| | Stock Based Compensation



|                                                                                              |  |                          |            |   |      |   |            |      |  |   |          |  
|--------------------------------------------------------------------------------------------- |  | ------------------------ | ---------- | - | ---- | - | ---------- | ---- |  | - | -------- | -
|                                                                                              |  | Years Ended December 31, |           
|                                                                                              |  |                          |           
|                                                                                              |  | 2004                     |            |   | 2003 |   |            | 2002 | 
|                                                                                              |  |                          |            |   |      |   |            |      | 
|Net (loss) income as reported                                                                 |  | $                        | (2,729,000 | ) |      | $ | (1,198,000 | )    |  | $ | 252,000  |  
|Add: Employee stock-based compensation cost as reported                                       |  |                          | 56,000     |   |      |   | 92,000     |      |  |   | 145,000  |  
|Less: Employee stock-based compensation cost determined under
    the fair value based method |  |                          | (158,000   | ) |      |   | (206,000   | )    |  |   | (304,000 | )
|                                                                                              |  |                          |            |   |      |   |            |      | 
|Net (loss) income pro forma                                                                   |  | $                        | (2,831,000 | ) |      | $ | (1,312,000 | )    |  | $ | 93,000   |  
|Basic and diluted net (loss) income per share as reported                                     |  | $                        | (0.32      | ) |      | $ | (0.14      | )    |  | $ | 0.03     |  
|Basic and diluted net (loss) income per share pro forma                                       |  | $                        | (0.33      | ) |      | $ | (0.15      | )    |  | $ | 0.01     |  





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





35



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##### Table of Contents



PYRAMID BREWERIES INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




| |                 
| | ----------------
| | Use of Estimates





| |                                 
| | --------------------------------
| | Recent Accounting Pronouncements





pensation, Accounting for Stock Issued to
Employees,




|   |          
|-- | ---------
|2. | Liquidity





36



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##### Table of Contents



PYRAMID BREWERIES INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






|   |                                           
|-- | ------------------------------------------
|3. | Portland Brewing Company Asset Acquisition









|                                                      |  |      |        |   |      |   |        |  
|----------------------------------------------------- |  | ---- | ------ | - | ---- | - | ------ | -
|                                                      |  | 2004 |        |   | 2003 |  
|                                                      |  |      |        |   |      |  
|Net sales                                             |  |      | 45,834 |   |      |   | 42,213 |  
|                                                      |  |      |        |   |      |  
|Net loss                                              |  | $    | (3,752 | ) |      | $ | (1,890 | )
|                                                      |  |      |        |   |      |  
|Basic and diluted net loss per share                  |  | $    | (0.44  | ) |      | $ | (0.22  | )
|Weighted average basic and diluted shares outstanding |  |      | 8,578  |   |      |   | 8,452  |  

37



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##### Table of Contents



PYRAMID BREWERIES INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                               |                               |                |       |       | 
|------------------------------ | ----------------------------- | -------------- | ----- | ----- | 
|                               |                               | (In thousands) |      
|Net tangible assets acquired:  |                               |                |       |      
|                               | Cash                          |                | $     | 3     | 
|                               | Accounts receivable           |                |       | 978   | 
|                               | Inventories                   |                |       | 559   | 
|                               | Property, plant and equipment |                |       | 2,730 | 
|                               | Other long-term assets        |                |       | 24    | 
|                               |                               |                |      
|Total tangible assets          |                               |                | 4,294 |      
|Net intangible assets acquired |                               |                | 228   |      
|                               |                               |                |      
|Total purchase price           |                               | $              | 4,522 |      
|                               |                               |                |      







|   |            
|-- | -----------
|4. | Inventories



|                |  |                |       |  |      |   |       | 
|--------------- |  | -------------- | ----- |  | ---- | - | ----- | 
|                |  | December 31,   |      
|                |  |                |      
|                |  | 2004           |       |  | 2003 |  
|                |  |                |       |  |      |  
|                |  | (In thousands) |      
|Raw materials   |  | $              | 905   |  |      | $ | 664   | 
|Work in process |  |                | 191   |  |      |   | 155   | 
|Finished goods  |  |                | 1,033 |  |      |   | 835   | 
|                |  |                |       |  |      |  
|                |  | $              | 2,129 |  |      | $ | 1,654 | 
|                |  |                |       |  |      |  





|   |             
|-- | ------------
|5. | Fixed Assets



|                                               |  |                |         |   |      |   |         |  
|---------------------------------------------- |  | -------------- | ------- | - | ---- | - | ------- | -
|                                               |  | December 31,   |        
|                                               |  |                |        
|                                               |  | 2004           |         |   | 2003 |  
|                                               |  |                |         |   |      |  
|                                               |  | (In thousands) |        
|Land                                           |  | $              | 6,181   |   |      | $ |        |  
|Buildings                                      |  |                | 11,895  |   |      |   |        |  
|Brewery and retail equipment                   |  |                | 19,328  |   |      |   | 16,402  |  
|Furniture and fixtures                         |  |                | 1,106   |   |      |   | 952     |  
|Leasehold improvements                         |  |                | 5,899   |   |      |   | 17,587  |  
|Construction in progress                       |  |                | 208     |   |      |   | 101     |  
|                                               |  |                |         |   |      |  
|                                               |  |                | 44,617  |   |      |   | 35,042  |  
|Less accumulated depreciation and amortization |  |                | (15,758 | ) |      |   | (13,636 | )
|                                               |  |                |         |   |      |  
|                                               |  | $              | 28,859  |   |      | $ | 21,406  |  
|                                               |  |                |         |   |      |  

38



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##### Table of Contents



PYRAMID BREWERIES INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






|   |                                
|-- | -------------------------------
|6. | Note Receivable  Related Party







|   |             
|-- | ------------
|7. | Walnut Creek





|   |               
|-- | --------------
|8. | Line of Credit

1 2




|   |     
|-- | ----
|9. | Debt



39



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##### Table of Contents



PYRAMID BREWERIES INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|           |  |   |           | 
|---------- |  | - | --------- | 
|2005       |  | $ | 83,000    | 
|2006       |  |   | 99,000    | 
|2007       |  |   | 105,000   | 
|2008       |  |   | 110,000   | 
|2009       |  |   | 118,000   | 
|Thereafter |  |   | 7,335,000 | 
|           |  |   |          
|           |  | $ | 7,850,000 | 
|           |  |   |          



|    |                 
|--- | ----------------
|10. | Accrued Expenses



|                                     |  |                |       |  |      |   |       | 
|------------------------------------ |  | -------------- | ----- |  | ---- | - | ----- | 
|                                     |  | December 31,   |      
|                                     |  |                |      
|                                     |  | 2004           |       |  | 2003 |  
|                                     |  |                |       |  |      |  
|                                     |  | (In thousands) |      
|Salaries, wages and related accruals |  | $              | 978   |  |      | $ | 529   | 
|Barrel taxes                         |  |                | 157   |  |      |   | 100   | 
|Other accruals                       |  |                | 1,547 |  |      |   | 933   | 
|                                     |  |                |       |  |      |  
|                                     |  | $              | 2,682 |  |      | $ | 1,562 | 
|                                     |  |                |       |  |      |  



|    |             
|--- | ------------
|11. | Income Taxes



|         |  |                |    |   |      |   |    |      |  |   |    | 
|-------- |  | -------------- | -- | - | ---- | - | -- | ---- |  | - | -- | 
|         |  | December 31,   |   
|         |  |                |   
|         |  | 2004           |    |   | 2003 |   |    | 2002 | 
|         |  |                |    |   |      |   |    |      | 
|         |  | (In thousands) |   
|Current  |  | $              | (4 | ) |      | $ | (3 | )    |  | $ | 98 | 
|Deferred |  |                |   |   |      |   |   |      |  |   |   | 
|         |  |                |    |   |      |   |    |      | 
|         |  | $              | (4 | ) |      | $ | (3 | )    |  | $ | 98 | 
|         |  |                |    |   |      |   |    |      | 

40



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##### Table of Contents



PYRAMID BREWERIES INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                                               |  |              |       |   |      |  |       |      |  |  |       |   
|---------------------------------------------- |  | ------------ | ----- | - | ---- |  | ----- | ---- |  |  | ----- | --
|                                               |  | December 31, |      
|                                               |  |              |      
|                                               |  | 2004         |       |   | 2003 |  |       | 2002 | 
|                                               |  |              |       |   |      |  |       |      | 
|Federal statutory rate                         |  |              | 34.0  | % |      |  | 34.0  | %    |  |  | (34.0 | )%
|State taxes, net of federal income tax benefit |  |              | 3.6   |   |      |  | 2.1   |      |  |  | (2.1  | ) 
|Meals and entertainment                        |  |              | (3.1  | ) |      |  | (5.2  | )    |  |  | (41.1 | ) 
|Valuation allowance                            |  |              | (34.4 | ) |      |  | (30.6 | )    |  |  | 141.2 |   
|                                               |  |              |       |   |      |  |       |      | 
|                                               |  |              | 0.1   | % |      |  | 0.3   | %    |  |  | 64.0  | % 
|                                               |  |              |       |   |      |  |       |      | 



|                                 |  |                |        |   |      |   |        |  
|-------------------------------- |  | -------------- | ------ | - | ---- | - | ------ | -
|                                 |  | December 31,   |       
|                                 |  |                |       
|                                 |  | 2004           |        |   | 2003 |  
|                                 |  |                |        |   |      |  
|                                 |  | (In thousands) |       
|Accelerated depreciation         |  | $              | (1,457 | ) |      | $ | (1,569 | )
|Package design costs             |  |                | 127    |   |      |   | 165    |  
|Accrued vacation                 |  |                | 118    |   |      |   | 73     |  
|Deferred rent                    |  |                | 259    |   |      |   | 350    |  
|Net operating loss carryforwards |  |                | 3,827  |   |      |   | 2,792  |  
|Other, net                       |  |                | 183    |   |      |   | 174    |  
|Valuation allowance              |  |                | (3,057 | ) |      |   | (1,985 | )
|                                 |  |                |        |   |      |  
|                                 |  | $              |       |   |      | $ |       |  
|                                 |  |                |        |   |      |  





|    |                 
|--- | ----------------
|12. | Operating Leases



|                         |  |      |      |  |         |                                                                          
|------------------------ |  | ---- | ---- |  | ------- | -------------------------------------------------------------------------
|Location                 |  | Year |      |  | Options
|                         |  |      |      |  |        
|Sacramento, California   |  |      | 2014 |  |         | Two additional five year periods                                         
|Seattle, Washington      |  |      | 2009 |  |         | Two additional five year periods                                         
|Walnut Creek, California |  |      | 2012 |  |         | Three additional five year periods and one addional four year
    period 
|Portland, Oregon (2730)  |  |      | 2014 |  |         | Two additional five year periods                                         
|Portland, Oregon (2750)  |  |      | 2008 |  |         | One additional three year period and two additional five year
    periods

41



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##### Table of Contents



PYRAMID BREWERIES INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






|           |  |   |           | 
|---------- |  | - | --------- | 
|2005       |  | $ | 1,300,000 | 
|2006       |  |   | 1,302,000 | 
|2007       |  |   | 1,311,000 | 
|2008       |  |   | 1,247,000 | 
|2009       |  |   | 930,000   | 
|Thereafter |  |   | 2,246,000 | 
|           |  |   |          
|           |  | $ | 8,336,000 | 
|           |  |   |          





|    |                              
|--- | -----------------------------
|13. | Commitments and Contingencies





|    |              
|--- | -------------
|14. | Cash Dividend





42



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##### Table of Contents



PYRAMID BREWERIES INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|    |                   
|--- | ------------------
|15. | Stock Buyback Plan





|    |                                          
|--- | -----------------------------------------
|16. | Major Customers and Financial Instruments









|    |                    
|--- | -------------------
|17. | Segment Information





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





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





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



43



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##### Table of Contents



PYRAMID BREWERIES INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                             |                                        |                |   |        |          |  |   |        |  |  |       |        |   |  |   |        |  
|---------------------------- | -------------------------------------- | -------------- | - | ------ | -------- |  | - | ------ |  |  | ----- | ------ | - |  | - | ------ | -
|                             |                                        | Beverage       |   |        |          |  |   |        | 
|                             |                                        | Operations     |   |        | Alehouse |  |   | Other  |  |  | Total |       
|                             |                                        |                |   |        |          |  |   |        |  |  |       |       
|                             |                                        | (In thousands) |  
|Year ended December 31, 2004 |                                        |                |   |        |          |  |   |        |  |  |       |        |   |  |   |       
|                             | Gross revenues from external customers |                | $ | 28,172 |          |  | $ | 14,004 |  |  | $     |       |   |  | $ | 42,176 |  
|                             | Net revenues from external customers   |                |   | 26,080 |          |  |   | 14,004 |  |  |       |       |   |  |   | 40,084 |  
|                             | Intersegment revenues                  |                |   | 546    |          |  |   |       |  |  |       | (546   | ) |  |   |       |  
|                             | Interest income                        |                |   |       |          |  |   |       |  |  |       | 22     |   |  |   | 22     |  
|                             | Depreciation and amortization          |                |   | 1,607  |          |  |   | 841    |  |  |       | 240    |   |  |   | 2,688  |  
|                             | Operating income (loss)                |                |   | 2,082  |          |  |   | 438    |  |  |       | (5,279 | ) |  |   | (2,759 | )
|                             | Capital expenditures                   |                |   | 555    |          |  |   | 250    |  |  |       | 197    |   |  |   | 1,002  |  
|                             | Total assets                           |                |   | 19,469 |          |  |   | 6,584  |  |  |       | 8,263  |   |  |   | 34,316 |  
|Year ended December 31, 2003 |                                        |                |   |        |          |  |   |        |  |  |       |        |   |  |   |       
|                             | Gross revenues from external customers |                | $ | 23,958 |          |  | $ | 12,420 |  |  | $     |       |   |  | $ | 36,378 |  
|                             | Net revenues from external customers   |                |   | 22,205 |          |  |   | 12,420 |  |  |       |       |   |  |   | 34,625 |  
|                             | Intersegment revenues                  |                |   | 442    |          |  |   |       |  |  |       | (442   | ) |  |   |       |  
|                             | Interest income                        |                |   |       |          |  |   |       |  |  |       | 56     |   |  |   | 56     |  
|                             | Depreciation and amortization          |                |   | 1,564  |          |  |   | 668    |  |  |       | 211    |   |  |   | 2,443  |  
|                             | Operating income (loss)                |                |   | 1,915  |          |  |   | 719    |  |  |       | (4,141 | ) |  |   | (1,507 | )
|                             | Capital expenditures                   |                |   | 515    |          |  |   | 2,496  |  |  |       | 131    |   |  |   | 3,142  |  
|                             | Total assets                           |                |   | 17,509 |          |  |   | 6,736  |  |  |       | 3,539  |   |  |   | 27,784 |  
|Year ended December 31, 2002 |                                        |                |   |        |          |  |   |        |  |  |       |        |   |  |   |       
|                             | Gross revenues from external customers |                | $ | 25,196 |          |  | $ | 10,327 |  |  | $     |       |   |  | $ | 35,523 |  
|                             | Net revenues from external customers   |                |   | 23,485 |          |  |   | 10,327 |  |  |       |       |   |  |   | 33,812 |  
|                             | Intersegment revenues                  |                |   | 359    |          |  |   |       |  |  |       | (359   | ) |  |   |       |  
|                             | Interest income                        |                |   |       |          |  |   |       |  |  |       | 102    |   |  |   | 102    |  
|                             | Depreciation and amortization          |                |   | 1,601  |          |  |   | 439    |  |  |       | 162    |   |  |   | 2,202  |  
|                             | Operating income (loss)                |                |   | 1,671  |          |  |   | 975    |  |  |       | (2,872 | ) |  |   | (226   | )
|                             | Capital expenditures                   |                |   | 421    |          |  |   | 1,605  |  |  |       | 256    |   |  |   | 2,282  |  
|                             | Total assets                           |                |   | 18,952 |          |  |   | 4,871  |  |  |       | 5,472  |   |  |   | 29,295 |  



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





|    |                       
|--- | ----------------------
|18. | Employee Benefit Plans



| |                             
| | ----------------------------
| | Employee Stock Purchase Plan



44



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##### Table of Contents



PYRAMID BREWERIES INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






| |                            
| | ---------------------------
| | Employee Stock Option Plans





45



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##### Table of Contents



PYRAMID BREWERIES INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                                         |             |               |           |          |              |   |            |                |  |   |      |      | 
|---------------------------------------- | ----------- | ------------- | --------- | -------- | ------------ | - | ---------- | -------------- |  | - | ---- | ---- | 
|                                         |             | Share Subject |           |          | Option Price |   |            | Average        | 
|                                         |             | to Option     |           |          | Range        |   |            | Exercise Price | 
|                                         |             |               |           |          |              |   |            |                | 
|Options outstanding at December 31, 2001 |             |               | 810,000   |          |              | $ | 1.56-12.25 |                |  | $ | 2.55 |     
|                                         | Granted     |               |           | 380,000  |              |   | $          | 2.19-2.48      |  |   | $    | 2.30 | 
|                                         | Forfeitures |               |           | (189,000 | )            |   | $          | 1.70-12.25     |  |   | $    | 2.29 | 
|                                         | Exercised   |               |           | (169,000 | )            |   | $          | 1.70-2.00      |  |   | $    | 1.87 | 
|                                         |             |               |           |          |              |   |            |                | 
|Options outstanding at December 31, 2002 |             |               | 832,000   |          |              | $ | 1.56-10.75 |                |  | $ | 2.63 |     
|                                         | Granted     |               |           | 165,000  |              |   | $          | 2.96-3.10      |  |   | $    | 2.99 | 
|                                         | Forfeitures |               |           | (148,000 | )            |   | $          | 2.33-10.75     |  |   | $    | 2.95 | 
|                                         | Exercised   |               |           | (91,000  | )            |   | $          | 1.70-2.56      |  |   | $    | 2.24 | 
|                                         |             |               |           |          |              |   |            |                | 
|Options outstanding at December 31, 2003 |             |               | 758,000   |          |              | $ | 1.56-10.75 |                |  | $ | 2.69 |     
|                                         | Granted     |               |           | 387,000  |              |   | $          | 0.00-2.26      |  |   | $    | 0.22 | 
|                                         | Forfeitures |               |           | (89,000  | )            |   | $          | 2.13-10.75     |  |   | $    | 2.85 | 
|                                         | Exercised   |               |           | (21,000  | )            |   | $          | 1.82-2.56      |  |   | $    | 2.04 | 
|Options outstanding at December 31, 2004 |             |               | 1,035,000 |          |              | $ | 1.56-10.75 |                |  | $ | 1.67 |     
|                                         |             |               |           |          |              |   |            |                | 



|            |           |           |                  |  |            |             |           |  |                |  |  |   |       | 
|----------- | --------- | --------- | ---------------- |  | ---------- | ----------- | --------- |  | -------------- |  |  | - | ----- | 
|            |           | Weighted- |                  |  |            |             |          
|            |           | Average   |                  |  |            |             | Weighted- | 
|Options     |           |           | Remaining        |  |            | Options     |           |  | Average        | 
|Outstanding |           |           | Contractual Life |  |            | Exercisable |           |  | Exercise Price | 
|            |           |           |                  |  |            |             |           |  |                | 
|            | 18,000    |           |                  |  | 17 Months  |             |           |  | 18,000         |  |  | $ | 10.75 | 
|            | 5,000     |           |                  |  | 24 Months  |             |           |  | 5,000          |  |  | $ | 4.75  | 
|            | 41,000    |           |                  |  | 42 Months  |             |           |  | 41,000         |  |  | $ | 2.56  | 
|            | 2,000     |           |                  |  | 45 Months  |             |           |  | 2,000          |  |  | $ | 1.56  | 
|            | 50,000    |           |                  |  | 58 Months  |             |           |  | 50,000         |  |  | $ | 2.00  | 
|            | 10,000    |           |                  |  | 60 Months  |             |           |  | 10,000         |  |  | $ | 1.82  | 
|            | 10,000    |           |                  |  | 64 Months  |             |           |  | 10,000         |  |  | $ | 1.75  | 
|            | 6,000     |           |                  |  | 65 Months  |             |           |  | 6,000          |  |  | $ | 1.82  | 
|            | 6,000     |           |                  |  | 67 Months  |             |           |  | 6,000          |  |  | $ | 1.82  | 
|            | 100,000   |           |                  |  | 71 Months  |             |           |  | 100,000        |  |  | $ | 2.00  | 
|            | 15,000    |           |                  |  | 76 Months  |             |           |  | 15,000         |  |  | $ | 2.67  | 
|            | 75,000    |           |                  |  | 78 Months  |             |           |  | 75,000         |  |  | $ | 2.57  | 
|            | 4,000     |           |                  |  | 84 Months  |             |           |  | 4,000          |  |  | $ | 2.45  | 
|            | 10,000    |           |                  |  | 86 Months  |             |           |  | 9,000          |  |  | $ | 2.30  | 
|            | 11,000    |           |                  |  | 86 Months  |             |           |  | 10,000         |  |  | $ | 2.29  | 
|            | 25,000    |           |                  |  | 88 Months  |             |           |  | 25,000         |  |  | $ | 2.48  | 
|            | 100,000   |           |                  |  | 93 Months  |             |           |  | 79,000         |  |  | $ | 2.19  | 
|            | 25,000    |           |                  |  | 100 Months |             |           |  | 25,000         |  |  | $ | 3.10  | 
|            | 120,000   |           |                  |  | 102 Months |             |           |  | 50,000         |  |  | $ | 2.96  | 
|            | 15,000    |           |                  |  | 108 Months |             |           |  | 5,000          |  |  | $ | 3.02  | 
|            | 20,000    |           |                  |  | 113 Months |             |           |  | 20,000         |  |  | $ | 2.20  | 
|            | 350,000   |           |                  |  | 115 Months |             |           |  |               |  |  | $ |      | 
|            | 17,000    |           |                  |  | 116 Months |             |           |  |               |  |  | $ | 2.26  | 
|            |           |           |                  |  |            |             |           |  |                | 
|            | 1,035,000 |           |                  |  |            |             |           |  | 565,000        |  |  | $ | 3.21  | 
|            |           |           |                  |  |            |             |           |  |                | 

46



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##### Table of Contents



PYRAMID BREWERIES INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






| |                     
| | --------------------
| | Employee 401(k) Plan





|    |                        
|--- | -----------------------
|19. | Shareholder Rights Plan





|    |                  
|--- | -----------------
|20. | Subsequent Events

th




1 2


47



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##### Table of Contents



PYRAMID BREWERIES INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






|    |                                   
|--- | ----------------------------------
|21. | Interim Financial Data (Unaudited)



|                                              |  |                                         |        |   |                                         |   |        |         |  |   |          |   |  |             |        |   |              |   |        |         |  |   |          |   |  |   |       |   |  |   |       |  
|--------------------------------------------- |  | --------------------------------------- | ------ | - | --------------------------------------- | - | ------ | ------- |  | - | -------- | - |  | ----------- | ------ | - | ------------ | - | ------ | ------- |  | - | -------- | - |  | - | ----- | - |  | - | ----- | -
|                                              |  | 2004 Quarters Ended                     |        |   | 2003 Quarters Ended                     |  
|                                              |  |                                         |        |   |                                         |  
|                                              |  | December 31                             |        |   | September 30                            |   |        | June 30 |  |   | March 31 |   |  | December 31 |        |   | September 30 |   |        | June 30 |  |   | March 31 |  
|                                              |  |                                         |        |   |                                         |   |        |         |  |   |          |   |  |             |        |   |              |   |        |         |  |   |          |  
|                                              |  | (In thousands except per share amounts) |        |   | (In thousands except per share amounts) |  
|Gross sales                                   |  | $                                       | 11,205 |   |                                         | $ | 11,745 |         |  | $ | 10,936   |   |  | $           | 8,290  |   |              | $ | 8,755  |         |  | $ | 10,765   |   |  | $ | 9,882 |   |  | $ | 6,976 |  
|Less excise taxes                             |  |                                         | 617    |   |                                         |   | 532    |         |  |   | 534      |   |  |             | 409    |   |              |   | 426    |         |  |   | 493      |   |  |   | 481   |   |  |   | 353   |  
|                                              |  |                                         |        |   |                                         |   |        |         |  |   |          |   |  |             |        |   |              |   |        |         |  |   |          |  
|Net sales                                     |  |                                         | 10,588 |   |                                         |   | 11,213 |         |  |   | 10,402   |   |  |             | 7,881  |   |              |   | 8,329  |         |  |   | 10,272   |   |  |   | 9,401 |   |  |   | 6,623 |  
|Cost of sales                                 |  |                                         | 9,072  |   |                                         |   | 8,898  |         |  |   | 7,829    |   |  |             | 6,494  |   |              |   | 7,189  |         |  |   | 8,082    |   |  |   | 6,901 |   |  |   | 5,468 |  
|                                              |  |                                         |        |   |                                         |   |        |         |  |   |          |   |  |             |        |   |              |   |        |         |  |   |          |  
|Gross margin                                  |  |                                         | 1,516  |   |                                         |   | 2,315  |         |  |   | 2,573    |   |  |             | 1,387  |   |              |   | 1,140  |         |  |   | 2,190    |   |  |   | 2,500 |   |  |   | 1,155 |  
|Selling, general and administrative expenses  |  |                                         | 2,909  |   |                                         |   | 2,738  |         |  |   | 2,507    |   |  |             | 2,396  |   |              |   | 2,145  |         |  |   | 2,264    |   |  |   | 2,160 |   |  |   | 1,923 |  
|                                              |  |                                         |        |   |                                         |   |        |         |  |   |          |   |  |             |        |   |              |   |        |         |  |   |          |  
|Operating (loss) income                       |  |                                         | (1,393 | ) |                                         |   | (423   | )       |  |   | 66       |   |  |             | (1,009 | ) |              |   | (1,005 | )       |  |   | (74      | ) |  |   | 340   |   |  |   | (768  | )
|Other income, net                             |  |                                         | (64    | ) |                                         |   | 3      |         |  |   | 81       |   |  |             | 14     |   |              |   | 44     |         |  |   | 118      |   |  |   | 106   |   |  |   | 44    |  
|                                              |  |                                         |        |   |                                         |   |        |         |  |   |          |   |  |             |        |   |              |   |        |         |  |   |          |  
|(Loss) income before income taxes             |  |                                         | (1,457 | ) |                                         |   | (420   | )       |  |   | 147      |   |  |             | (995   | ) |              |   | (961   | )       |  |   | 44       |   |  |   | 446   |   |  |   | (724  | )
|(Provision) benefit for income taxes          |  |                                         | (1     | ) |                                         |   |       |         |  |   | (2       | ) |  |             | (1     | ) |              |   |       |         |  |   |         |   |  |   | (2    | ) |  |   | (1    | )
|                                              |  |                                         |        |   |                                         |   |        |         |  |   |          |   |  |             |        |   |              |   |        |         |  |   |          |  
|Net (loss) income                             |  | $                                       | (1,458 | ) |                                         | $ | (420   | )       |  | $ | 145      |   |  | $           | (996   | ) |              | $ | (961   | )       |  | $ | 44       |   |  | $ | 444   |   |  | $ | (725  | )
|Basic and diluted net (loss) income per share |  | $                                       | (0.17  | ) |                                         | $ | (0.05  | )       |  | $ | 0.02     |   |  | $           | (0.12  | ) |              | $ | (0.11  | )       |  | $ | 0.01     |   |  | $ | 0.05  |   |  | $ | (0.09 | )
|                                              |  |                                         |        |   |                                         |   |        |         |  |   |          |   |  |             |        |   |              |   |        |         |  |   |          |  
|Weighted average basic shares outstanding     |  |                                         | 8,776  |   |                                         |   | 8,615  |         |  |   | 8,391    |   |  |             | 8,599  |   |              |   | 8,492  |         |  |   | 8,456    |   |  |   | 8,443 |   |  |   | 8,417 |  
|                                              |  |                                         |        |   |                                         |   |        |         |  |   |          |   |  |             |        |   |              |   |        |         |  |   |          |  
|Weighted average diluted shares outstanding   |  |                                         | 8,776  |   |                                         |   | 8,615  |         |  |   | 8,492    |   |  |             | 8,599  |   |              |   | 8,492  |         |  |   | 8,655    |   |  |   | 8,665 |   |  |   | 8,417 |  
|                                              |  |                                         |        |   |                                         |   |        |         |  |   |          |   |  |             |        |   |              |   |        |         |  |   |          |  

48



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






Item 9A  Controls and Procedures




| |           
| | ----------
| | Procedures



| |                                                
| | -----------------------------------------------
| | Evaluation of disclosure controls and procedure





| |                             
| | ----------------------------
| | Changes in internal controls






Item 9B  Other Information




| |                                          
| | -----------------------------------------
| | Entry into Material Definitive Agreements







49



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##### Table of Contents










PART III







|          |                                                
|--------- | -----------------------------------------------
|Item 10  | Directors and Executive Officers of the Company

George Hancock (60)  Chairman of the Board




Scott S. Barnum (49)  Director




Kurt Dammeier (46)  Director




50



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##### Table of Contents





Scott Svenson (39)  Director




John Lennon (50)  President and Chief Executive
Officer, Director




Jim Hilger (43)  Vice President 
Finance, Chief Financial Officer and Secretary




Gary McGrath (45)  Vice President 
Sales




Patrick Coll (42)  Vice President 
Alehouse Operations




51



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##### Table of Contents





Mark House (46)  Vice President 
Brewery Operations




Independence of the Board of Directors




Board Attendance






Committees of the Board of Directors




| |                
| | ---------------
| | Audit Committee



52



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##### Table of Contents





| |                       
| | ----------------------
| | Compensation Committee



Code of Ethics and Code of Conduct




Section 16(a) Beneficial Ownership Reporting
Compliance









|          |                       
|--------- | ----------------------
|Item 11  | Executive Compensation

Director Compensation








53



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##### Table of Contents



Summary of Cash and Certain Other Executive Compensation


Compensation Summary.


SUMMARY COMPENSATION TABLE


|                            |                                     |      |      |                     |            |                        |            |           |       |            |                  |            |  |              |           |     |             |   |         |              |  |  |   |         |  |  |         |       | 
|--------------------------- | ----------------------------------- | ---- | ---- | ------------------- | ---------- | ---------------------- | ---------- | --------- | ----- | ---------- | ---------------- | ---------- |  | ------------ | --------- | --- | ----------- | - | ------- | ------------ |  |  | - | ------- |  |  | ------- | ----- | 
|                            |                                     |      |      |                     |            | Long-Term Compensation |            |           |      
|                            |                                     |      |      | Annual Compensation |            |                        |            |           |       |           
|                            |                                     |      |      |                     |            |                        | Restricted |           |       | Securities |                  |            | 
|                            |                                     |      |      |                     |            | Other Annual           |            |           | Stock |            |                  | Underlying |  |              | All Other |    
|Name and Principal Position |                                     | Year |      |                     | Salary ($) |                        |            | Bonus ($) |       |            | Compensation ($) |            |  | Award(s) ($) |           |     | Options (#) |   |         | Compensation | 
|                            |                                     |      |      |                     |            |                        |            |           |       |            |                  |            |  |              |           |     |             |   |         |              | 
|John Lennon(1)              |                                     |      | 2004 |                     |            |                        | 93,000     |           |       |            | 0                |            |  |              | 32,000    | (2) |             | $ | 420,000 | (3)          |  |  | 0 |         |  |  | 2,000   | (4)  
|                            | President & Chief Executive Officer |      |      |                     |            |                        |            |           |       |            |                  |            |  |              |           |     |             |   |         |              |  |  |   |         |  |  |         |       | 
|Jim Hilger(5)               |                                     |      | 2004 |                     |            |                        | 145,000    |           |       |            | 0                |            |  |              | 0         |     |             |   | 0       |              |  |  | 0 |         |  |  | 6,000   | (6)  
|                            | Vice President, Chief               |      |      | 2003                |            |                        |            | 38,000    |       |            |                  | 0          |  |              |           | 0   |             |   |         | 0            |  |  |   | 120,000 |  |  |         | 0     | 
|                            | Financial Officer and               |      |      |                     |            |                        |            |           |       |            |                  |            |  |              |           |     |             |   |         |              |  |  |   |         |  |  |         |       | 
|                            | Secretary                           |      |      |                     |            |                        |            |           |       |            |                  |            |  |              |           |     |             |   |         |              |  |  |   |         |  |  |         |       | 
|Patrick Coll(7)             |                                     |      | 2004 |                     |            |                        | 125,000    |           |       |            | 0                |            |  |              | 0         |     |             |   | 0       |              |  |  | 0 |         |  |  | 5,000   | (8)  
|                            | Vice President, Alehouse            |      |      | 2003                |            |                        |            | 127,000   |       |            |                  | 0          |  |              |           | 0   |             |   |         | 0            |  |  |   | 0       |  |  |         | 0     | 
|                            | Operations                          |      |      | 2002                |            |                        |            | 31,000    |       |            |                  | 7,000      |  |              |           | 0   |             |   |         | 0            |  |  |   | 100,000 |  |  |         | 0     | 
|Mark House                  |                                     |      | 2004 |                     |            |                        | 120,000    |           |       |            | 0                |            |  |              | 0         |     |             |   | 0       |              |  |  | 0 |         |  |  | 5,000   | (9)  
|                            | Vice President, Brewery             |      |      | 2003                |            |                        |            | 116,000   |       |            |                  | 0          |  |              |           | 0   |             |   |         | 0            |  |  |   | 0       |  |  |         | 0     | 
|                            | Operations                          |      |      | 2002                |            |                        |            | 119,000   |       |            |                  | 31,000     |  |              |           | 0   |             |   |         | 0            |  |  |   | 0       |  |  |         | 1,000 | 
|Gary McGrath                |                                     |      | 2004 |                     |            |                        | 149,000    |           |       |            | 0                |            |  |              | 0         |     |             |   | 0       |              |  |  | 0 |         |  |  | 10,000  | (10) 
|                            | Vice President, Sales               |      |      | 2003                |            |                        |            | 150,000   |       |            |                  | 0          |  |              |           | 0   |             |   |         | 0            |  |  |   | 0       |  |  |         | 4,000 | 
|                            |                                     |      |      | 2002                |            |                        |            | 156,000   |       |            |                  | 35,000     |  |              |           | 0   |             |   |         | 0            |  |  |   | 5,000   |  |  |         | 3,000 | 
|Martin Kelly(11)            |                                     |      | 2004 |                     |            |                        | 53,000     |           |       |            | 0                |            |  |              | 0         |     |             |   | 0       |              |  |  | 0 |         |  |  | 196,000 | (12) 
|                            | Former President &                  |      |      | 2003                |            |                        |            | 227,000   |       |            |                  | 0          |  |              |           | 0   |             |   |         | 0            |  |  |   | 0       |  |  |         | 4,000 | 
|                            | Chief Executive Officer             |      |      | 2002                |            |                        |            | 234,000   |       |            |                  | 113,000    |  |              |           | 0   |             |   |         | 0            |  |  |   | 0       |  |  |         | 4,000 | 
|George Hancock(13)          |                                     |      | 2004 |                     |            |                        | 76,000     | (14)      |       |            | 0                |            |  |              | 0         |     |             |   | 0       |              |  |  | 0 |         |  |  | 0       |      
|                            | Interim Chief Executive Officer     |      |      |                     |            |                        |            |           |       |            |                  |            |  |              |           |     |             |   |         |              |  |  |   |         |  |  |         |       | 






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Mr. Lennon has been our President and Chief Executive
    Officer since August 2004.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   
|(2) | Consists of relocation expenses.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   
|(3) | This amount represents 175,000 shares of common stock that
    will be issued upon the completion of continuous service
    requirements pursuant to the terms of Mr. Lennons
    employment agreement with the Company entered into on
    July 16, 2004, valued based on a value of $2.40 per
    share, the closing price for a share of the Companys
    common stock on that date. Under his employment agreement,
    Mr. Lennon will be issued 35,000 shares of restricted
    stock on each of January 1, 2006, 2007, 2008, 2009 and 2010
    based on Mr. Lennons continuous services to the
    Company through each such date. The restricted stock issued on
    each such date will be subject to a lapsing repurchase right in
    favor of the company that will lapse with respect to
    1/3
    of the shares issued on each such date on each of the first
    three anniversaries of the date the shares were issued. If
    Mr. Lennons employment is terminated in certain
    circumstances during 2005, Mr. Lennon will be issued the
    shares that he would have been entitled to receive pursuant to
    his employment agreement on January 1, 2006. If
    Mr. Lennons employment is terminated in certain
    circumstances during any other year, he will receive a prorated
    portion of the relevant annual award as of the date his
    employment is terminated. Under Mr. Lennons
    employment agreement, he will also receive up to 175,000
    additional shares of restricted stock upon the achievement of
    certain performance goals as described under the Long Term
    Incentive Plan disclosure below. As of December 31, 2004,
    Mr. Lennon did not hold any shares of restricted stock.
|   
|(4) | Consists of $2,000 in a car allowance.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

54



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|    |                                                                                                                       
|--- | ----------------------------------------------------------------------------------------------------------------------
|(5) | Mr. Hilger has been our Vice President  Finance,
    Chief Financial Officer and Secretary since September 2003.     
|   
|(6) | Consists of $1,000 in contributions made on the officers
    behalf to his 401(k) plan and a car allowance of $5,000.
|   
|(7) | Mr. Coll has been Vice President  Alehouse
    Operations since September 2002.                                      
|   
|(8) | Consists of $5,000 in a car allowance.                                                                                
|   
|(9) | Consists of $5,000 in a car allowance.                                                                                



|     |                                                                                                                       
|---- | ----------------------------------------------------------------------------------------------------------------------
|(10) | Consists of $4,000 in contributions made on the officers
    behalf to his 401(k) plan and a car allowance of $6,000.
|    
|(11) | Mr. Kelly resigned from his position as President and Chief
    Executive Officer in March 2004.                      
|    
|(12) | Consists of $1,000 in a car allowance and $195,000 in severance.                                                      
|    
|(13) | Mr. Hancock was our interim Chief Executive Officer from March
    2004 until August 2004.                            
|    
|(14) | Includes $5,000 in director fees earned while Mr. Hancock
    was not serving as our interim Chief Executive Officer. 

Option Exercises and Year End Holdings




AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR


AND FISCAL YEAR-END OPTION VALUES


|                  |  |             |   |  |          |                        |                     |             |                         |             |               |  |  |             |        |  |               |   |        |  |  |   |   | 
|----------------- |  | ----------- | - |  | -------- | ---------------------- | ------------------- | ----------- | ----------------------- | ----------- | ------------- |  |  | ----------- | ------ |  | ------------- | - | ------ |  |  | - | - | 
|                  |  |             |   |  |          | Number of Securities   |                     |             | Value of Unexercised   
|                  |  |             |   |  |          | Underlying Unexercised |                     |             | In-the-Money Options at
|                  |  | Shares      |   |  |          |                        | Options at Year End |             |                         | Year End(6)
|                  |  | Acquired    |   |  | Value    |                        |                     |             |                         |             |              
|Name              |  | on Exercise |   |  | Realized |                        |                     | Exercisable |                         |             | Unexercisable |  |  | Exercisable |        |  | Unexercisable
|                  |  |             |   |  |          |                        |                     |             |                         |             |               |  |  |             |        |  |              
|John Lennon       |  |             | 0 |  |          |                        | 0                   |             |                         |             |              |  |  |             |       |  |               | $ |       |  |  | $ |  | 
|Jim Hilger(1)     |  |             | 0 |  |          |                        | 0                   |             |                         |             | 47,000        |  |  |             | 73,000 |  |               |   |       |  |  |   |  | 
|Mark House(2)     |  |             | 0 |  |          |                        | 0                   |             |                         |             | 110,000       |  |  |             |       |  |               |   | 6,000  |  |  |   |  | 
|Gary McGrath(3)   |  |             | 0 |  |          |                        | 0                   |             |                         |             | 164,000       |  |  |             | 7,000  |  |               |   | 16,000 |  |  |   |  | 
|Patrick Coll(4)   |  |             | 0 |  |          |                        | 0                   |             |                         |             | 79,000        |  |  |             | 21,000 |  |               |   |       |  |  |   |  | 
|Martin Kelly      |  |             | 0 |  |          |                        | 0                   |             |                         |             |              |  |  |             |       |  |               |   |       |  |  |   |  | 
|George Hancock(5) |  |             | 0 |  |          |                        | 0                   |             |                         |             | 20,000        |  |  |             |       |  |               |   | 2,000  |  |  |   |  | 






|    |                                                                                             
|--- | --------------------------------------------------------------------------------------------
|(1) | The weighted-average exercise price of these options is
    $2.96 per share of common stock.
|   
|(2) | The weighted-average exercise price of these options is
    $2.53 per share of common stock.
|   
|(3) | The weighted-average exercise price of these options is
    $2.00 per share of common stock.
|   
|(4) | The weighted-average exercise price of these options is
    $2.19 per share of common stock.
|   
|(5) | The weighted-average exercise price of these options is $2.50
    per share of common stock.
|   
|(6) | Based on the fair market value on December 31, 2004 $2.10
    and the exercise price.       

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LONG-TERM INCENTIVE PLANS-AWARDS IN LAST FISCAL YEAR




|               |  |           |         |                      |               |  |                          |                    |  |  |         | 
|-------------- |  | --------- | ------- | -------------------- | ------------- |  | ------------------------ | ------------------ |  |  | ------- | 
|               |  |           |         | Performance or Other |               |  | Estimated Future Payouts |                   
|               |  |           |         | Period Until         |               |  | Under Non-Stock Price-   |                   
|               |  | Number    |         |                      | Maturation or |  |                          | Based Plans Target | 
|Name           |  | of Shares |         |                      | Payout        |  |                          | (100%)             | 
|               |  |           |         |                      |               |  |                          |                    | 
|John Lennon(1) |  |           | 175,000 |                      |               |  | 2006-2010                |                    |  |  | 175,000 | 






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Pursuant to the terms of Mr. Lennons employment
    agreement with the Company entered into on July 16, 2004,
    Mr. Lennon will be issued 35,000 shares of restricted
    stock on each of January 1, 2006, 2007, 2008, 2009 and 2010
    if the Company has achieved certain performance goals for the
    year ending immediately prior to each such date. The restricted
    stock issued on each such date upon the achievement of the
    specified performance goals will be subject to a lapsing
    repurchase right in favor of the company that will lapse with
    respect to
    1/3
    of the shares issued on each such date on each of the first
    three anniversaries of the date the shares were issued. If
    Mr. Lennons employment is terminated under certain
    circumstances pursuant to his employment agreement during 2005,
    he will be issued the shares that he would have been entitled to
    receive on January 1, 2006 as if the applicable performance
    goal had been met. If Mr. Lennons employment is
    terminated under certain circumstances pursuant to his
    employment agreement during any other year, he will be issued
    shares representing a prorated portion of the relevant annual
    performance award as if the relevant annual performance goal had
    been reached, prorated to the date his employment is terminated
    and granted as of the date his employment is terminated. Under
    Mr. Lennons employment agreement, he will also
    receive up to 175,000 additional shares of restricted stock upon
    the completion of continuous service with the Company as
    described in the Summary Compensation Table disclosure above.

Employment Contracts, Termination of Employment and Change of
Control Agreements






56



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##### Table of Contents

















| |   |                                                                                                                                                                                                                                                                         
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | all outstanding awards become fully and immediately exercisable,
    and any restrictions or forfeiture provisions lapse, immediately
    prior to the company transaction, unless such awards are
    converted, assumed, or replaced by the successor
    company; and
|
| |  | performance awards earned and outstanding become payable in full
    at target levels and deferrals or other restrictions not waived
    by the compensation committee shall remain in effect.                                                                          





| |   |                                                                                                                                  
| | - | ---------------------------------------------------------------------------------------------------------------------------------
| |  | any options and stock appreciation rights shall become fully
    exercisable and vested to the full extent of the original grant;
|
| |  | any restrictions and deferral limitations applicable to any
    restricted stock or stock units shall lapse;                     

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##### Table of Contents





| |   |                                                                                                                                                                                                                                                                                                         
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | all performance shares and performance units shall be considered
    to be earned and payable in full at target levels, and any
    deferral or other restriction shall lapse and such performance
    stock and performance units shall be immediately settled or
    distributed;                     
|
| |  | any restrictions and deferral limitations and other conditions
    applicable to any other awards shall lapse, and such other
    awards shall become free of all restrictions, limitations or
    conditions and become fully vested and transferable to the full
    extent of the original grant; and
|
| |  | the compensation committee can provide a cash-out right for
    awards in connection with a change in control.                                                                                                                                                                                          








|          |                                                                   
|--------- | ------------------------------------------------------------------
|Item 12  | Security Ownership of Certain Beneficial Owners and
    Management

Security Ownership of Certain Beneficial Owners and
Management




|                                                               |  |                    |           |  |         |  |      |  
|-------------------------------------------------------------- |  | ------------------ | --------- |  | ------- |  | ---- | -
|                                                               |  | Shares of Common   |          
|                                                               |  | Stock Beneficially |          
|                                                               |  | Owned              |          
|                                                               |  |                    |          
|Name                                                           |  | Number(1)          |           |  | Percent | 
|                                                               |  |                    |           |  |         | 
|Kurt Dammeier(2)                                               |  |                    | 1,527,675 |  |         |  | 17.4 | %
|George Hancock(3)                                              |  |                    | 1,112,178 |  |         |  | 12.7 |  
|Gary McGrath(4)                                                |  |                    | 159,354   |  |         |  | 1.8  |  
|Mark House(5)                                                  |  |                    | 114,739   |  |         |  | 1.3  |  
|John Lennon                                                    |  |                    | 0         |  |         |  | *    |  
|Scott Svenson(6)                                               |  |                    | 73,542    |  |         |  | *    |  
|Patrick Coll(7)                                                |  |                    | 79,000    |  |         |  | *    |  
|Scott Barnum(8)                                                |  |                    | 45,322    |  |         |  | *    |  
|James Hilger(9)                                                |  |                    | 52,000    |  |         |  | *    |  
|Martin Kelly(10)                                               |  |                    |          |  |         |  | *    |  
|All executive officers and directors as a group(9 persons)(11) |  |                    | 3,163,310 |  |         |  | 36.0 | %






| |   |             
| | - | ------------
| | * | Less than 1%



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Includes shares of common stock subject to stock options or
    other convertible securities that are currently exercisable for
    or convertible into shares of our common stock, or that will be
    exercisable for or convertible into shares of our common stock
    within 60 days after March 18, 2005. These securities
    are deemed to be outstanding and beneficially owned by the
    person holding such stock options or other convertible
    securities for the purpose of computing the percentage ownership
    of such person, but are not treated as outstanding for the
    purpose of computing the percentage ownership of any other
    person.

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##### Table of Contents





|    |                                                                                                                                                                    
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | Includes 15,000 shares issuable upon exercise of stock
    options that are currently exercisable or will become
    exercisable within 60 days of March 18, 2005. 
|   
|(3) | Includes 20,000 shares issuable upon exercise of stock
    options that are currently exercisable or will become
    exercisable within 60 days of March 18, 2005. 
|   
|(4) | Includes 158,000 shares issuable upon exercise of stock
    options that are currently exercisable or will become
    exercisable within 60 days of March 18, 2005.
|   
|(5) | Includes 115,000 shares issuable upon exercise of stock
    options that are currently exercisable or will become
    exercisable within 60 days of March 18, 2005.
|   
|(6) | Includes 15,000 shares issuable upon exercise of stock
    options that are currently exercisable or will become
    exercisable within 60 days of March 18, 2005. 
|   
|(7) | Includes 79,000 shares issuable upon exercise of stock
    options that are currently exercisable or will become
    exercisable within 60 days of March 18, 2005. 
|   
|(8) | Includes 20,000 shares issuable upon exercise of stock
    options that are currently exercisable or will become
    exercisable within 60 days of March 18, 2005. 
|   
|(9) | Includes 50,000 shares issuable upon exercise of stock
    options that are currently exercisable or will become
    exercisable within 60 days of March 18, 2005. 



|     |                                                                                                                                                                    
|---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(10) | Mr. Kelly resigned from his position as President and Chief
    Executive Officer in March 2004.                                                                   
|    
|(11) | Includes 463,000 shares issuable upon exercise of stock
    options that are currently exercisable or will become
    exercisable within 60 days of March 18, 2005.

Equity Compensation Plan Information




|                                                           |  |                      |           |  |                     |                      |                     |                     |  |  |           |       
|---------------------------------------------------------- |  | -------------------- | --------- |  | ------------------- | -------------------- | ------------------- | ------------------- |  |  | --------- | ------
|                                                           |  |                      |           |  |                     | Number of Securities |                    
|                                                           |  | Number of Securities |           |  |                     |                      | Remaining Available |                    
|                                                           |  | to be Issued Upon    |           |  | Weighted Average    |                      |                     | for Future Issuance | 
|                                                           |  | Exercise of          |           |  | Exercise Price of   |                      |                     | Under Equity        | 
|Plan Category                                              |  | Outstanding Options  |           |  | Outstanding Options |                      |                     | Compensation Plans  | 
|                                                           |  |                      |           |  |                     |                      |                     |                     | 
|Equity compensation plans approved by security holders     |  |                      | 1,035,000 |  |                     | $                    | 3.21                |                     |  |  | 1,822,248 | (1)(2)
|Equity compensation plans not approved by security holders |  |                      | 0         |  |                     |                      | N/A                 |                     |  |  | 0         |       
|                                                           |  |                      |           |  |                     |                      |                     |                     | 
|Total                                                      |  |                      | 1,035,000 |  |                     | $                    | 3.21                |                     |  |  | 1,822,248 |       






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Of these shares, 497,530 are available for purchase under the
    2003 Employee Stock Purchase Plan, 110,018 are available under
    the Amended and Restated Non-Employee Director Stock Option
    Plan, 135,000 are available under the Directors Compensation
    Plan and 1,079,700 are available under the 2004 Equity Incentive
    Plan as of December 31, 2004. Shares available under the
    Directors Compensation Plan are payable in shares of the
    Companys stock. Shares available for issuance under the
    2004 Equity Incentive Plan may be issued as stock options, stock
    awards, restricted stock units, rights to purchase stock,
    warrants, stock appreciation rights or performance shares.
|   
|(2) | Pursuant to the Amended and Restated Non-Employee Director Stock
    Option Plan, each non-employee director receives an automatic
    grant of a stock option to purchase 5,000 shares of
    Common Stock automatically on the date of each annual
    shareholders meeting.                                                                                                                                                                                                                                                                                                                                                                                                                                                

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|          |                                               
|--------- | ----------------------------------------------
|Item 13  | Certain Relationships and Related Transactions








|          |                                       
|--------- | --------------------------------------
|Item 14  | Principal Accountant Fees and Services



|                   |            |                |        |        |             |   |   |      |  |   |        |        |  |   |        |         | 
|------------------ | ---------- | -------------- | ------ | ------ | ----------- | - | - | ---- |  | - | ------ | ------ |  | - | ------ | ------- | 
|                   |            | Moss Adams LLP |        |        | KPMG LLP(1) |  
|                   |            |                |        |        |             |  
|                   |            | 2004           |        |        | 2003        |   |   | 2004 |  |   | 2003   |       
|                   |            |                |        |        |             |   |   |      |  |   |        |       
|Audit Fees(2)      |            | $              | 0      |        |             | $ | 0 |      |  | $ | 53,000 |        |  | $ | 83,000 |        
|Audit-Related Fees |            |                | 0      |        |             |   | 0 |      |  |   | 0      |        |  |   | 0      |        
|Tax Fees(3)        |            |                | 0      |        |             |   | 0 |      |  |   | 21,000 |        |  |   | 87,000 |        
|All Other Fees(4)  |            |                | 19,000 |        |             |   | 0 |      |  |   | 14,000 |        |  |   | 7,000  |        
|                   |            |                |        |        |             |   |   |      |  |   |        |       
|                   | Total Fees |                | $      | 19,000 |             |   | $ | 0    |  |   | $      | 88,000 |  |   | $      | 177,000 | 






|    |                                                                                                                                                                                                                     
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Effective December 14, 2004, we dismissed KPMG LLP as our
    independent accountant and engaged Moss Adams LLP to serve as
    our independent accountants for the fiscal year ended
    December 31, 2004.        
|   
|(2) | Audit services billed in 2004 and 2003 consisted of the audit of
    our annual financial statements, review of quarterly financial
    statements, consents and other services related to filings with
    the SEC.
|   
|(3) | Tax services billed in 2004 and 2003 consisted of the following:                                                                                                                                                    



| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a) | Fees for tax compliance services totaled $21,000 in 2004 and
    $25,000 in 2003. Tax compliance services are services rendered,
    based upon facts already in existence or transactions already
    occurred, to document and compute amounts to be included in tax
    filings. Such services consisted of federal and state income tax
    return assistance.                                                                                                                                                                          
|
| | (b) | Fees for tax planning and advice services totaled $0 in 2004 and
    $5,000 in 2003. Tax planning and advice are services rendered
    with respect to proposed transactions, earnings and profit
    calculations for dividend classification or that structure a
    transaction to obtain a particular tax result.                                                                                                                                                                                                                       
|
| | (c) | Fees for a review of Washington State sales and use tax payments
    made by the Company dating back five years (1998 
    2002) for the purpose of identifying possible overpayments and
    opportunities for refund, and included a review of the
    Washington state law regarding the machinery and equipment
    exemption and the resale exemption as it applies to Pyramid
    Breweries Inc. Findings-based fees for the application and
    receipt of a refund related to the state tax exemptions totaled
    $57,000 in 2003.



|    |                                                                                                                                                                                                                                                                                                                                        
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(4) | All other fees billed by KPMG in 2004 and 2003 consisted of fees
    associate with due diligence related to the acquisition of the
    Portland Brewing Company assets. All other fees paid to Moss
    Adams in 2004 consisted of liabilities the Company assumed from
    Portland Brewing Company as part of the asset acquisition.

Audit Committee Pre-Approval Policy




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##### Table of Contents










PART IV







|          |                                                                     
|--------- | --------------------------------------------------------------------
|Item 15  | Exhibits, Financial Statement Schedules, and Reports on
    Form 8-K





| |                                                                                     
| | ------------------------------------------------------------------------------------
| | 1. Financial Statements: See Financial Statements included
    in Item 8 of Part II.
|
| | 2. Financial Statement Schedules: None.                                             

Exhibits:


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##### Table of Contents






SIGNATURES






| |                       
| | ----------------------
| | Pyramid Breweries Inc.
| | (Registrant)          



| |    |                    
| | -- | -------------------
| | By | /s/ James K. Hilger

| |                        
| | -----------------------
| |                        
| | James K. Hilger        
| | Vice President and     
| | Chief Financial Officer



62



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##### Table of Contents



EXHIBIT INDEX




|        |    |             |  |                                                                                                                                                                                                                                         
|------- | -- | ----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|No.     |    | Description
|        |    |            
|        | 3  | .1          |  | Amended and Restated Articles of Incorporation of Registrant(9)                                                                                                                                                                         
|        | 3  | .2          |  | Form of Amended and Restated Bylaws of Registrant(9)                                                                                                                                                                                    
|       
|        | 3  | .3          |  | Rights Agreement between ChaseMellon Shareholder Services LLC
    and the Registrant dated June 14, 1999(2)                                                                                                                             
|       
|        | 4  | .1(1)       |  | Form of Common Stock Certificate(1)                                                                                                                                                                                                     
|       
|        | 4  | .4*         |  | Directors Compensation Plan(5)                                                                                                                                                                                                          
|       
|        | 10 | .1          |  | Lease between Harold W. Hill and the Registrant dated
    April 13, 1994(1)                                                                                                                                                             
|       
|        | 10 | .2          |  | Addendum of Lease between Harold W. Hill and the Registrant
    dated November 28, 1994(1)                                                                                                                                              
|       
|        | 10 | .3          |  | Second Addendum of Lease between 1201 Building L.L.C. and the
    Registrant dated June 26, 1995(1)                                                                                                                                     
|       
|        | 10 | .4          |  | Distribution Agreement between the Registrant and Western
    Washington Beverage dated August 24, 1995(1)                                                                                                                              
|       
|        | 10 | .5*         |  | Registrants Non-Employee Director Stock Option Plan(1)                                                                                                                                                                                 
|       
|        | 10 | .6*         |  | Form of Non-Qualified Stock Option Agreement(1)                                                                                                                                                                                         
|       
|        | 10 | .7*         |  | Employment Agreement between the Registrant and Gary McGrath(3)                                                                                                                                                                         
|       
|        | 10 | .8          |  | Assignment, Assumption and Consent Agreement between KLP
    Properties, Inc., Faultline Brewing Company, Inc., and the
    Registrant dated October 26, 2001(4)                                                                        
|       
|        | 10 | .9          |  | Sublease between KLP Properties, Inc. and Faultline Brewing
    Company, Inc. dated April 3, 1996(4)                                                                                                                                    
|       
|        | 10 | .10         |  | Lease between Peter Vasconi and the James and Maura Belka Trust
    dated December 28, 1995(4)                                                                                                                                          
|       
|        | 10 | .11         |  | Commercial Lease between County Supervisors Association of
    California and Pyramid Breweries, Inc. dated April 15,
    2002(6)                                                                                                       
|       
|        | 10 | .12*        |  | Registrants 2003 Employee Stock Purchase Plan(6)                                                                                                                                                                                       
|       
|        | 10 | .13*        |  | Registrants Non-Employee Director Stock Compensation
    Plan.(6)                                                                                                                                                                      
|       
|        | 10 | .14         |  | Asset Purchase Agreement between Pyramid Breweries Inc.,
    Portland Brewing Company and PBC Acquisition, LLC dated
    January 26, 2004(7)                                                                                            
|       
|        | 10 | .15*        |  | Employment Agreement between Registrant and John Lennon+                                                                                                                                                                                
|       
|        | 10 | .16         |  | Registrants 2004 Equity Incentive Plan(8)                                                                                                                                                                                              
|        | 10 | .17         |  | Promissory Note from Pyramid Gilman Street Property, LLC to
    Morgan Stanley Capital Inc.+                                                                                                                                            
|       
|        | 10 | .18         |  | Deed of Trust, Assignment of Leases and Rents, Security
    Agreement and Fixture Filing between Pyramid Gilman Street
    Property, LLC and Morgan Stanley Mortgage Capital Inc+                                                       
|       
|        | 10 | .19         |  | Reserve and Security Agreement between Pyramid Gilman Street
    Property, LLC and Morgan Stanley Mortgage Capital Inc.+                                                                                                                
|       
|        | 10 | .20         |  | Guaranty of Recourse Obligations of Borrower from Pyramid
    Breweries, Inc. to Morgan Stanley Mortgage Capital Inc.+                                                                                                                  
|       
|        | 10 | .21*        |  | Amended and Restated Employment Agreement between Registrant and
    Martin Kelly dated June 19, 2001(10)                                                                                                                               
|       
|        | 10 | .22         |  | 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(1)                                                         
|       
|        | 10 | .23         |  | 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(1)

63



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##### Table of Contents



|        |    |             |  |                                                                                                                                                                                                
|------- | -- | ----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|No.     |    | Description
|        |    |            
|       
|        | 10 | .24*        |  | 2005 Officer Incentive Compensation Plan Policy+                                                                                                                                               
|       
|        | 10 | .25*        |  | Amendment No. 1 to Employment Agreement between Registrant
    and John Lennon+                                                                                                                
|       
|        | 23 | .1          |  | Consent of Moss Adams LLP+                                                                                                                                                                     
|       
|        | 23 | .2          |  | Consent of KPMG LLP+                                                                                                                                                                           
|       
|        | 31 | .1          |  | Certification Pursuant to 18 U.S.C Section 1350, as Adopted
    Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002:
    John J. Lennon, President and Chief Executive Officer           
|       
|        | 31 | .2          |  | Certification Pursuant to 18 U.S.C Section 1350, as Adopted
    Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002:
    James K. Hilger, Vice-President and Chief Financial Officer     
|       
|        | 31 | .3          |  | Certification Pursuant to 18 U.S.C Section 1350, as Adopted
    Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002:
    Jason W. Rees, Controller and Chief Accounting Officer          
|       
|        | 32 | .1          |  | Certification Pursuant to 18 U.S.C. Section 1350, as
    Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
    of 2002: John Lennon, President and Chief Executive Officer             
|       
|        | 32 | .2          |  | Certification Pursuant to 18 U.S.C. Section 1350, as
    Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
    of 2002: James K. Hilger, Vice-President and Chief Financial
    Officer
|        | 32 | .3          |  | Certification Pursuant to 18 U.S.C. Section 1350, as
    Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
    of 2002: Jason W. Rees, Controller and Chief Accounting Officer         






| |   |                                                                  
| | - | -----------------------------------------------------------------
| | * | Indicates management contract or compensatory plan or arrangement



| |   |                                                                                                                                                           
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------
| | + | Previously filed with the Registrants Annual Report on
    Form 10-K for the year ended December 31, 2004, as
    amended April 11, 2005 and May 4, 2005.



| |     |                                                                                                                                                         
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------
| | (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).
|
| | (2) | Incorporated by reference to the Current Report on Form 8-K
    dated June 17, 1999.                                                                    
|
| | (3) | Incorporated by reference to the Registrants Annual Report
    on Form 10-K for the year ended December 31, 1999.                                      
|
| | (4) | Incorporated by reference to the Registrants Annual Report
    on Form 10-K for the year ended December 31, 2001.                                      
|
| | (5) | Incorporated by reference to the Registrants Form S-8
    dated June 26, 2002                                                                          
|
| | (6) | Incorporated by reference to the Registrants Annual Report
    on Form 10-K for the year ended December 31, 2002.                                      
|
| | (7) | Incorporated by reference to the Current Report on Form 8-K
    January 28, 2004.                                                                       
|
| | (8) | Incorporated by reference to the Registrants Form S-8
    dated July 22, 2004.                                                                         
|
| | (9) | Incorporated by reference to the Registrants Annual Report
    on Form 10-K/ A for the year ended December 31, 2003,
    as amended December 10, 2004. 



|     |                                                                                                                         
|---- | ------------------------------------------------------------------------------------------------------------------------
|(10) | Incorporated by reference to the Registrants Quarterly
    Report on Form 10-Q for the quarter ended June 30,
    2001.

64