##### Table of Contents









UNITED STATES SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





Form 10-K





|           |  |                                                                                             
|---------- |  | --------------------------------------------------------------------------------------------
|(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





o þ


o


o þ






DOCUMENTS INCORPORATED BY REFERENCE












---










PYRAMID BREWERIES INC.


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


|              |  |                                                                                                                      |  |      |    | 
|------------- |  | -------------------------------------------------------------------------------------------------------------------- |  | ---- | -- | 
|              |  |                                                                                                                      |  | Page |   
|              |  |                                                                                                                      |  |      |   
|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  | 
|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                                                                                                 |  |      | 22 | 
|Item 9.       |  | Change in and Disagreements with
    Accountants on Accounting and Financial Disclosure                              |  |      | 22 | 
|Item 9A.      |  | Controls and Procedures                                                                                              |  |      | 22 | 
|Item 9B.      |  | Other Information                                                                                                    |  |      | 22 | 
|PART III     
|Item 10.      |  | Directors and Executive Officers of the
    Company                                                                  |  |      | 23 | 
|Item 11.      |  | Executive Compensation                                                                                               |  |      | 24 | 
|Item 12.      |  | Security Ownership of Certain Beneficial
    Owners and Management                                                   |  |      | 24 | 
|Item 13.      |  | Certain Relationships and Related
    Transactions                                                                   |  |      | 25 | 
|Item 14.      |  | Principal Accountant Fees and Services                                                                               |  |      | 25 | 
|PART IV      
|Item 15.      |  | Exhibits, Financial Statement Schedules,
    and Reports on Form 8-K                                                 |  |      | 25 | 
|              |  | Signatures                                                                                                           |  |      | 26 | 
|EXHIBIT 10.15
|EXHIBIT 10.17
|EXHIBIT 10.18
|EXHIBIT 10.19
|EXHIBIT 10.20
|EXHIBIT 10.24
|EXHIBIT 10.25
|EXHIBIT 23.1 
|EXHIBIT 23.2 
|EXHIBIT 31.1 
|EXHIBIT 31.2 
|EXHIBIT 31.3 
|EXHIBIT 32.1 
|EXHIBIT 32.2 
|EXHIBIT 32.3 



i



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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



---



##### Table of Contents







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



---



##### Table of Contents







| |      
| | -----
| | 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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##### Table of Contents





|                         |                |      |   |      |     |          |   |      |  |  |   |       | 
|------------------------ | -------------- | ---- | - | ---- | --- | -------- | - | ---- |  |  | - | ----- | 
|                         |                |      |   |      |     | 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.                           









18



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1 2










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





Accounting for Stock Issued to Employees


19



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##### Table of Contents





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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##### Table of Contents





Acquisitions.




Impact of Inflation







Item 7A  Quantitative and Qualitative
Disclosures about Market Risk






21



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|         |                     
|-------- | --------------------
|Item 8  | Financial Statements



|                                                                                                         |  |      |    | 
|-------------------------------------------------------------------------------------------------------- |  | ---- | -- | 
|                                                                                                         |  | Page |   
|                                                                                                         |  |      |   
|Report of Independent Public Accountants                                                                 |  |      | 27 | 
|Report of Independent Registered Public Accounting Firm                                                  |  |      | 28 | 
|Consolidated Balance Sheets as of December 31, 2004 and 2003                                             |  |      | 29 | 
|Consolidated Statements of Operations for the Years Ended
    December 31, 2004, 2003 and 2002           |  |      | 30 | 
|Consolidated Statements of Stockholders Equity for the
    Years Ended December 31, 2004, 2003 and 2002 |  |      | 31 | 
|Consolidated Statements of Cash Flows for the Years Ended
    December 31, 2004, 2003 and 2002           |  |      | 32 | 
|Notes to Consolidated Financial Statements                                                               |  |      | 33 | 






|         |                                                                                        
|-------- | ---------------------------------------------------------------------------------------
|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



22



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PART III







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



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





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



23



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| |                                               
| | ----------------------------------------------
| | Gary McGrath (45)  Vice President 
    Sales





| |                                                             
| | ------------------------------------------------------------
| | Patrick Coll (42)  Vice President 
    Alehouse Operations





| |                                                          
| | ---------------------------------------------------------
| | Mark House (46)  Vice President 
    Brewery Operations










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








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



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








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






PART IV







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





| |                                                                                                                                                                                        
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1.Financial Statements: See
    listing of Financial Statements included as a part of this
    Form 10-K on Item 8 of Part II.                                                         
|
| | 2.Financial Statement
    Schedules  None.                                                                                                                                            
|
| | 3.Exhibits: The required
    exhibits are included at the end of the Annual Report on
    Form 10-K and are described in the Exhibit Index
    immediately preceding the first exhibit.

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SIGNATURES








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



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

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



|   |  |                                                                   |  |               
|-- |  | ----------------------------------------------------------------- |  | --------------
|  
|By |  | /s/ George Hancock                                                |  | March 31, 2005
|   |  |                                                                  
|   |  | George Hancock
    Director and Founder
    Chairman of the Board |  |               
|  
|By |  | /s/ John Lennon                                                   |  | March 31, 2005
|   |  |                                                                  
|   |  | John Lennon
    President and Chief Executive Officer             |  |               
|  
|By |  | /s/ James K. Hilger                                               |  | March 31, 2005
|   |  |                                                                  
|   |  | James K. Hilger
    Vice President and Chief Financial Officer    |  |               
|  
|By |  | /s/ Jason W. Rees                                                 |  | March 31, 2005
|   |  |                                                                  
|   |  | Jason W. Rees
    Controller and Chief Accounting Officer         |  |               
|  
|By |  | /s/ Scott S. Barnum                                               |  | March 31, 2005
|   |  |                                                                  
|   |  | Scott S. Barnum
    Director                                      |  |               
|  
|By |  | /s/ Kurt Dammeier                                                 |  | March 31, 2005
|   |  |                                                                  
|   |  | Kurt Dammeier
    Director                                        |  |               
|  
|By |  | /s/ Scott Svenson                                                 |  | March 31, 2005
|   |  |                                                                  
|   |  | Scott Svenson
    Director                                        |  |               

26



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REPORT OF INDEPENDENT REGISTERED ACCOUNTING FIRM














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





27



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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM














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





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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 | 
|                                     |                                                                                                                           |                                            |   |         |        | 



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PYRAMID BREWERIES INC.


CONSOLIDATED STATEMENTS OF OPERATIONS




|                                              |  |                          |           |   |      |   |           |      |  |   |           |  
|--------------------------------------------- |  | ------------------------ | --------- | - | ---- | - | --------- | ---- |  | - | --------- | -
|                                              |  | Years Ended December 31, |          
|                                              |  |                          |          
|                                              |  | 2004                     |           |   | 2003 |   |           | 2002 | 
|                                              |  |                          |           |   |      |   |           |      | 
|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     |  



30



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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 |  
|                           |                                |              |       |      |            |      |    |             |   |   |             |        |   |              |      |       |               |   |      |        |  
|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 |       
|                           |                                |              |       |      |            |      |    |             |   |   |             |        |   |              |      |       |               |   |      |        |  



31



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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    |   |   |        |       |   |   |     |       |  



32



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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



















33



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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



34



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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(1) |  |              | 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



35



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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



36



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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 |  
|                              |  |                         |      |   |      |   |     |      | 

37



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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 | 
|                  |                                             |                            |            |           |       |   |            |           |      



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



38



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##### Table of Contents



PYRAMID BREWERIES INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                                                                                              |  |                          |            |   |      |   |            |      |  |   |          |  
|--------------------------------------------------------------------------------------------- |  | ------------------------ | ---------- | - | ---- | - | ---------- | ---- |  | - | -------- | -
|                                                                                              |  | 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







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



39



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##### Table of Contents



PYRAMID BREWERIES INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






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





Accounting for Stock Issued to Employees




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







40



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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  |  

41



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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 | 
|                |  |                |       |  |      |  



42



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##### Table of Contents



PYRAMID BREWERIES INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|   |             
|-- | ------------
|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  |  
|                                               |  |                |         |   |      |  





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







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



43



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##### Table of Contents



PYRAMID BREWERIES INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


8.     Line of Credit


1 2


9.     Debt






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

44



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##### Table of Contents



PYRAMID BREWERIES INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


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 | 
|         |  |                |    |   |      |   |    |      | 



|                                               |  |              |       |   |      |  |       |      |  |  |       |   
|---------------------------------------------- |  | ------------ | ----- | - | ---- |  | ----- | ---- |  |  | ----- | --
|                                               |  | 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 | )
|                                 |  |                |        |   |      |  
|                                 |  | $              |       |   |      | $ |       |  
|                                 |  |                |        |   |      |  

45



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##### Table of Contents



PYRAMID BREWERIES INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




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 additional 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 





|           |  |   |           | 
|---------- |  | - | --------- | 
|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 | 
|           |  |   |          



46



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##### Table of Contents



PYRAMID BREWERIES INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


13.     Commitments and
Contingencies




14.     Cash Dividend








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





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









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



47



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##### Table of Contents



PYRAMID BREWERIES INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




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





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





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



48



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##### Table of Contents



PYRAMID BREWERIES INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




| |                                                  
| | -------------------------------------------------
| | Segment profit and segment assets are as follows:

|                             |                                        |                |   |        |          |  |   |        |  |  |       |        |   |  |   |        |  
|---------------------------- | -------------------------------------- | -------------- | - | ------ | -------- |  | - | ------ |  |  | ----- | ------ | - |  | - | ------ | -
|                             |                                        | 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



49



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##### Table of Contents



PYRAMID BREWERIES INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






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





50



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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 |     
|                                         |             |               |           |          |              |   |              |                | 

51



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PYRAMID BREWERIES INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|            |           |           |                  |  |            |             |           |  |                |  |  |   |       | 
|----------- | --------- | --------- | ---------------- |  | ---------- | ----------- | --------- |  | -------------- |  |  | - | ----- | 
|            |           | 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  | 
|            |           |           |                  |  |            |             |           |  |                | 





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





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



52



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PYRAMID BREWERIES INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






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





1 2


53



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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) |       
|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 |  
|                                              |  |                                         |        |   |                     |   |        |         |  |   |          |   |  |             |        |   |              |   |        |         |  |   |          |  

54



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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)
|        | 10 | .24*  |             | 2005 Officer Incentive Compensation Plan Policy                                                                                                                                                                                         
|        | 10 | .25*  |             | Amended and Restated Employment Agreement between Registrant and
    John Lennon                                                                                                                                                        
|        | 23 | .1    |             | Consent of Moss Adams LLP                                                                                                                                                                                                               



---



##### Table of Contents



|        |    |    |             |                                                                                                                                                                                                
|------- | -- | -- | ----------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |    |            
|No.     |    |    | Description
|        |    |    |            
|        | 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



| |     |                                                                                                                                                         
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------
| | (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.