##### 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, 2005                                                        
| 
|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 þ


þ o


S-K 10-K 10-K. o


12b-2




|                           |                      |                          | 
|-------------------------- | -------------------- | ------------------------ | 
|Large Accelerated filer  o | Accelerated filer  o | Non-accelerated filer  þ | 

12b-2 o þ









DOCUMENTS INCORPORATED BY REFERENCE












---



##### 












PYRAMID BREWERIES INC.


ANNUAL REPORT ON
FORM 10-K FOR THE
YEAR ENDED DECEMBER 31, 2005


|              |  |                                                                                                                      |  |      |    | 
|------------- |  | -------------------------------------------------------------------------------------------------------------------- |  | ---- | -- | 
|              |  |                                                                                                                      |  | Page |   
|              |  |                                                                                                                      |  |      |   
|PART I       
|Item 1.       |  | Business                                                                                                             |  |      | 1  | 
|Item 1A.      |  | Risk Factors                                                                                                         |  |      | 8  | 
|Item 1B.      |  | Unresolved Staff Comments                                                                                            |  |      | 11 | 
|Item 2.       |  | Properties                                                                                                           |  |      | 11 | 
|Item 3.       |  | Legal Proceedings                                                                                                    |  |      | 12 | 
|Item 4.       |  | Submission of Matters to a Vote of Security
    Holders                                                              |  |      | 12 | 
|PART II      
|Item 5.       |  | Market for Registrants Common Equity,
    Related Stockholder Matters and Issuer Purchases of Equity
    Securities |  |      | 13 | 
|Item 6.       |  | Selected Financial Data                                                                                              |  |      | 14 | 
|Item 7.       |  | Managements Discussion and Analysis
    of Financial Condition and Results of Operations                            |  |      | 15 | 
|Item 7A.      |  | Quantitative and Qualitative Disclosures
    about Market Risk                                                       |  |      | 23 | 
|Item 8.       |  | Financial Statements and Supplementary
    Data                                                                      |  |      | 24 | 
|Item 9.       |  | Changes in and Disagreements With
    Accountants on Accounting and Financial Disclosure                             |  |      | 50 | 
|Item 9A.      |  | Controls and Procedures                                                                                              |  |      | 50 | 
|Item 9B.      |  | Other Information                                                                                                    |  |      | 50 | 
|PART III     
|Item 10.      |  | Directors and Executive Officers of the
    Company                                                                  |  |      | 50 | 
|Item 11.      |  | Executive Compensation                                                                                               |  |      | 51 | 
|Item 12.      |  | Security Ownership of Certain Beneficial
    Owners and Management and Related Stockholder Matters                   |  |      | 51 | 
|Item 13.      |  | Certain Relationships and Related
    Transactions                                                                   |  |      | 51 | 
|Item 14.      |  | Principal Accountant Fees and Services                                                                               |  |      | 51 | 
|PART IV      
|Item 15.      |  | Exhibits, Financial Statement Schedules                                                                              |  |      | 51 | 
|              |  | Signatures                                                                                                           |  |      | 52 | 
|              |  | Exhibit Index                                                                                                        |  |      | 53 | 
|EXHIBIT 10.26
|EXHIBIT 10.27
|EXHIBIT 10.28
|EXHIBIT 10.29
|EXHIBIT 10.30
|EXHIBIT 10.31
|EXHIBIT 10.32
|EXHIBIT 10.33
|EXHIBIT 10.34
|EXHIBIT 10.35
|EXHIBIT 10.36
|EXHIBIT 21.1 
|EXHIBIT 23.1 
|EXHIBIT 23.2 
|EXHIBIT 31.1 
|EXHIBIT 31.2 
|EXHIBIT 32.1 
|EXHIBIT 32.2 



i



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##### Table of Contents






PART I







|        |         
|------- | --------
|Item 1. | Business

General




on-site


www.PyramidBrew.com.


Segment Financial Information


Segment Information and
Other Data, 10-K.






Industry Background




1



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Business Strategy






| |                                  
| | ---------------------------------
| | Building Strong Craft Beer Brands





2



---



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







| |                                                                              
| | -----------------------------------------------------------------------------
| | Utilizing a Direct Store Delivery System through
    Independent Distributors



Contract Brewing Arrangement




Products








3



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Competition




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













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



4



---



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







Sources and Availability of Raw Materials




Seasonality and Quarterly Results




5



---



##### Table of Contents



Dependence on a Single Distributor


Segment Information and Other Data, 10-K.


Government Regulations




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





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





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







6



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out-of








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







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



Trademarks


® ® ® ® ® ® ®


7



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Environmental Regulations and Operating Considerations






Employees




Available Information


10-K, 10-Q, 8-K





Item 1A.Risk
Factors


Liquidity.


Beverage Competition. out-of


8



---



##### Table of Contents





Alehouse Competition.


Access to Markets.


Government Regulations, Policies and Audits.


TTB Audit.


9



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Retention of Management Personnel.


Stock Price Volatility.




| |   |                                                                                                                                           
| | - | ------------------------------------------------------------------------------------------------------------------------------------------
| |  | actual or anticipated variations in quarterly operating results;                                                                          
|
| |  | changes in financial estimates or recommendations by securities
    analysts;                                                             
|
| |  | conditions or trends in the craft beer, specialty beer or
    specialty restaurant markets;                                               
|
| |  | announcements by us or our competitors of significant gains or
    losses of distributors, or new products, or other developments;        
|
| |  | announcements by us or our competitors of significant
    acquisitions, strategic partnerships, joint ventures or capital
    commitments;
|
| |  | additions or departures of key personnel;                                                                                                 
|
| |  | sales of a large number of shares of our common stock;                                                                                    
|
| |  | adverse litigation;                                                                                                                       
|
| |  | unfavorable legislative or regulatory decisions; and                                                                                      
|
| |  | general market conditions.                                                                                                                



Selling Prices.


Variability of Margins and Operating Results.


10



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Seasonality.


Public Safety and Health. multi-unit


Inclement Weather.







|         |                          
|-------- | -------------------------
|Item 1B. | Unresolved Staff Comments








|        |           
|------- | ----------
|Item 2. | Properties

on-site




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

on-site


11



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





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





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

on-site 11-year




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

on-site 10-year 8-month







|        |                  
|------- | -----------------
|Item 3. | Legal Proceedings








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



12



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##### Table of Contents






PART II







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



|     |                |      |   |      |     |          |   |      |  |  |   |       | 
|---- | -------------- | ---- | - | ---- | --- | -------- | - | ---- |  |  | - | ----- | 
|     |                |      |   |      |     | Dividend |  
|     |                | High |   |      | Low |          |   | Paid | 
|     |                |      |   |      |     |          |   |      | 
|2005 |                |      |   |      |     |          |   |      |  |  |   |      
|     | First Quarter  |      | $ | 2.19 |     |          | $ | 1.75 |  |  | $ |      | 
|     | Second Quarter |      |   | 1.91 |     |          |   | 1.39 |  |  |   |      | 
|     | Third Quarter  |      |   | 2.47 |     |          |   | 1.76 |  |  |   |      | 
|     | Fourth Quarter |      |   | 3.37 |     |          |   | 2.07 |  |  |   |      | 
|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 | 





Dividend Policy




Sale of Unregistered Securities




13



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|        |                        
|------- | -----------------------
|Item 6. | Selected Financial Data



SELECTED CONSOLIDATED FINANCIAL DATA


(In thousands, except per share and operating data)


|                                                  |  |                         |         |   |         |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|------------------------------------------------- |  | ----------------------- | ------- | - | ------- | - | ------- | ---- |  | - | ------- | - |  | ---- | ------- | - |  | - | ------- | -
|                                                  |  | Year Ended December 31, |        
|                                                  |  |                         |        
|                                                  |  | 2005                    |         |   | 2004(1) |   |         | 2003 |  |   | 2002    |   |  | 2001 |        
|                                                  |  |                         |         |   |         |   |         |      |  |   |         |   |  |      |        
|Consolidated Statements of Operation Data:        |  |                         |         |   |         |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Gross sales                                       |  | $                       | 50,886  |   |         | $ | 42,176  |      |  | $ | 36,378  |   |  | $    | 35,523  |   |  | $ | 31,995  |  
|Less excise taxes                                 |  |                         | 2,528   |   |         |   | 2,092   |      |  |   | 1,753   |   |  |      | 1,711   |   |  |   | 1,572   |  
|                                                  |  |                         |         |   |         |   |         |      |  |   |         |   |  |      |        
|Net sales                                         |  |                         | 48,358  |   |         |   | 40,084  |      |  |   | 34,625  |   |  |      | 33,812  |   |  |   | 30,423  |  
|Cost of sales                                     |  |                         | 38,001  |   |         |   | 32,803  |      |  |   | 27,875  |   |  |      | 25,455  |   |  |   | 23,161  |  
|                                                  |  |                         |         |   |         |   |         |      |  |   |         |   |  |      |        
|Gross margin                                      |  |                         | 10,357  |   |         |   | 7,281   |      |  |   | 6,750   |   |  |      | 8,357   |   |  |   | 7,262   |  
|Selling, general and administrative expenses      |  |                         | 11,364  |   |         |   | 10,050  |      |  |   | 8,260   |   |  |      | 8,583   |   |  |   | 8,845   |  
|Operating loss                                    |  |                         | (1,007  | ) |         |   | (2,769  | )    |  |   | (1,510  | ) |  |      | (226    | ) |  |   | (1,583  | )
|Other income, net                                 |  |                         | (45     | ) |         |   | 44      |      |  |   | 315     |   |  |      | 380     |   |  |   | 542     |  
|                                                  |  |                         |         |   |         |   |         |      |  |   |         |   |  |      |        
|(Loss) income before income taxes                 |  |                         | (1,052  | ) |         |   | (2,725  | )    |  |   | (1,195  | ) |  |      | 154     |   |  |   | (1,041  | )
|(Provision) benefit for income taxes              |  |                         | (3      | ) |         |   | (4      | )    |  |   | (3      | ) |  |      | 98      |   |  |   | (574    | )
|                                                  |  |                         |         |   |         |   |         |      |  |   |         |   |  |      |        
|Net (loss) income                                 |  | $                       | (1,055  | ) |         | $ | (2,729  | )    |  | $ | (1,198  | ) |  | $    | 252     |   |  | $ | (1,615  | )
|                                                  |  |                         |         |   |         |   |         |      |  |   |         |   |  |      |        
|Basic net (loss) income per share                 |  | $                       | (0.12   | ) |         | $ | (0.32   | )    |  | $ | (0.14   | ) |  | $    | 0.03    |   |  | $ | (0.20   | )
|                                                  |  |                         |         |   |         |   |         |      |  |   |         |   |  |      |        
|Weighted average basic shares outstanding         |  |                         | 8,794   |   |         |   | 8,578   |      |  |   | 8,452   |   |  |      | 8,203   |   |  |   | 7,987   |  
|                                                  |  |                         |         |   |         |   |         |      |  |   |         |   |  |      |        
|Diluted net (loss) income per share               |  | $                       | (0.12   | ) |         | $ | (0.32   | )    |  | $ | (0.14   | ) |  | $    | 0.03    |   |  | $ | (0.20   | )
|                                                  |  |                         |         |   |         |   |         |      |  |   |         |   |  |      |        
|Weighted average diluted shares outstanding       |  |                         | 8,794   |   |         |   | 8,578   |      |  |   | 8,452   |   |  |      | 8,243   |   |  |   | 7,987   |  
|                                                  |  |                         |         |   |         |   |         |      |  |   |         |   |  |      |        
|Cash dividends declared per share                 |  | $                       |        |   |         | $ | 0.088   |      |  | $ | 0.176   |   |  | $    | 0.176   |   |  | $ | 0.176   |  
|                                                  |  |                         |         |   |         |   |         |      |  |   |         |   |  |      |        
|Balance Sheet Data:                               |  |                         |         |   |         |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Cash and cash equivalents and accounts receivable |  | $                       | 3,254   |   |         | $ | 2,116   |      |  | $ | 2,839   |   |  | $    | 2,540   |   |  | $ | 1,851   |  
|Working capital                                   |  |                         | (972    | ) |         |   | (2,167  | )    |  |   | 1,745   |   |  |      | 3,783   |   |  |   | 4,728   |  
|Fixed assets, net                                 |  |                         | 26,666  |   |         |   | 28,859  |      |  |   | 21,406  |   |  |      | 20,682  |   |  |   | 20,523  |  
|Total assets                                      |  |                         | 33,903  |   |         |   | 34,316  |      |  |   | 27,784  |   |  |      | 29,295  |   |  |   | 29,605  |  
|Stockholders equity                              |  |                         | 18,911  |   |         |   | 19,773  |      |  |   | 22,203  |   |  |      | 24,536  |   |  |   | 25,224  |  
|Operating Data (in barrels):                      |  |                         |         |   |         |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Beer shipped                                      |  |                         | 185,000 |   |         |   | 142,000 |      |  |   | 115,000 |   |  |      | 117,000 |   |  |   | 111,000 |  
|Soda shipped                                      |  |                         | 45,000  |   |         |   | 41,000  |      |  |   | 44,000  |   |  |      | 47,000  |   |  |   | 46,000  |  
|                                                  |  |                         |         |   |         |   |         |      |  |   |         |   |  |      |        
|Total shipped                                     |  |                         | 230,000 |   |         |   | 183,000 |      |  |   | 159,000 |   |  |      | 164,000 |   |  |   | 157,000 |  
|                                                  |  |                         |         |   |         |   |         |      |  |   |         |   |  |      |        
|Beer production capacity at year-end              |  |                         | 265,000 |   |         |   | 334,000 |      |  |   | 204,000 |   |  |      | 203,000 |   |  |   | 200,000 |  
|                                                  |  |                         |         |   |         |   |         |      |  |   |         |   |  |      |        






|    |                                                                                                                                                                                                                                                                                                                               
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | On July 31, 2004, the Company completed its purchase of
    certain Portland Brewing Company (Portland Brewing) assets which
    included assets of the brewery and alehouse. The Company reports
    revenues under the commercial arrangements with Portland Brewing
    on a gross basis in accordance with
    EITF 99-19,

14



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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Reporting Revenue Gross as a Principal versus Net as an Agentas it is a principal (See Notes 1 and 2 to the
    Consolidated Financial Statements), and as such, the results of
    operations of Portland Brewing are included in Pyramids
    consolidated statements of operations for the full year in 2005
    and for the five month period ended December 31, 2004
    (since the July 31, 2004 inception). This acquisition
    materially affects the comparability of operating results for
    2004 to earlier periods presented above.






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

Forward-Looking Statements


This report contains forward-looking statements within the
meaning of the federal securities laws. All statements that do
not concern historical facts are forward-looking statements
concerning future performance, developments or events,
concerning potential sales, restaurant expansion, production
capacity, pending agreements with third parties and any other
guidance on future periods, constitute forward-looking
statements. These statements may be identified by the use of
forward-looking terminology such as anticipate,
believe, continue, could,
estimate, expect, intend,
may, might, plan,
potential, predict, should,
or will, or the negative thereof, or comparable
terminology. While we believe these expectations, assumptions,
estimates and projections are reasonable, such forward-looking
statements are only predictions and involve known and unknown
risks and uncertainties, many of which are beyond our control
and which could cause actual results or outcomes to differ
materially from our stated expectations. See Item 1A of
Part I, Risk Factors. Any forward-looking
statements are made only as of the date hereof. We do not
undertake any obligation to update any such statements or to
publicly announce the results of any revisions to any such
statements to reflect future events or developments, except as
may be required by law. The Companys actual future results
could differ materially from those projected in the
forward-looking statements. Some factors, which could cause
future actual results to differ materially from the
Companys recent results or those projected in the
forward-looking statements, are described in Item 1a. Risk
Factors and Forward Looking Statements below. The Company
assumes no obligation to update the forward-looking statements
for such factors.


Overview










15



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5-year on-site Reporting Revenue Gross as a
Principal versus Net as an Agent


on-site


Results of Operations




| |                                       
| | --------------------------------------
| | Years Ended December 31, 2005 and 2004

Gross Sales.


Excise Taxes.


Gross Margin.


16



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|                 |  |      |        |         |           |  |      |      |         |   |           |  |  |          |      |   |          |   |       |  |  |  |      |  
|---------------- |  | ---- | ------ | ------- | --------- |  | ---- | ---- | ------- | - | --------- |  |  | -------- | ---- | - | -------- | - | ----- |  |  |  | ---- | -
|                 |  |      |        | % of    |           |  |      |      | % of    |   |           |  |  |         
|                 |  |      |        | Segment |           |  |      |      | Segment |   |           |  |  |         
|Gross Margin     |  | 2005 |        |         | Net Sales |  |      | 2004 |         |   | Net Sales |  |  | $ Change |      |   | % Change |  
|                 |  |      |        |         |           |  |      |      |         |   |           |  |  |          |      |   |          |  
|Beverage Segment |  | $    | 9,911  |         |           |  | 30.0 | %    |         | $ | 6,843     |  |  |          | 26.2 | % |          | $ | 3,068 |  |  |  | 44.8 | %
|Alehouse Segment |  |      | 446    |         |           |  | 2.9  | %    |         |   | 438       |  |  |          | 3.1  | % |          |   | 8     |  |  |  | 1.8  | %
|                 |  |      |        |         |           |  |      |      |         |   |           |  |  |          |      |   |          |  
|Total            |  | $    | 10,357 |         |           |  | 21.4 | %    |         | $ | 7,281     |  |  |          | 18.2 | % |          | $ | 3,076 |  |  |  | 42.2 | %
|                 |  |      |        |         |           |  |      |      |         |   |           |  |  |          |      |   |          |  

Selling, General and Administrative Expenses.


Other Income (Expense), net.


Income Taxes.


Net Loss.




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

Gross Sales.


17



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Excise Taxes.


Gross Margin.




|                 |  |      |       |         |           |  |      |      |         |   |           |  |  |          |      |   |          |   |      |   |  |  |       |   
|---------------- |  | ---- | ----- | ------- | --------- |  | ---- | ---- | ------- | - | --------- |  |  | -------- | ---- | - | -------- | - | ---- | - |  |  | ----- | --
|                 |  |      |       | % of    |           |  |      |      | % of    |   |           |  |  |         
|                 |  |      |       | Segment |           |  |      |      | Segment |   |           |  |  |         
|Gross Margin     |  | 2004 |       |         | Net Sales |  |      | 2003 |         |   | Net Sales |  |  | $ Change |      |   | % Change |  
|                 |  |      |       |         |           |  |      |      |         |   |           |  |  |          |      |   |          |  
|Beverage Segment |  | $    | 6,843 |         |           |  | 26.2 | %    |         | $ | 6,031     |  |  |          | 27.2 | % |          | $ | 812  |   |  |  | 13.5  | % 
|Alehouse Segment |  |      | 438   |         |           |  | 3.1  | %    |         |   | 719       |  |  |          | 5.8  | % |          |   | (281 | ) |  |  | (39.1 | )%
|                 |  |      |       |         |           |  |      |      |         |   |           |  |  |          |      |   |          |  
|Total            |  | $    | 7,281 |         |           |  | 18.2 | %    |         | $ | 6,750     |  |  |          | 19.5 | % |          | $ | 531  |   |  |  | 7.9   | % 
|                 |  |      |       |         |           |  |      |      |         |   |           |  |  |          |      |   |          |  

Selling, General and Administrative Expenses.


Other Income (Expense), net.


Income Taxes.


Net Loss.


Liquidity and Capital Resources




18



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Contractual Obligations




|                 |  |       |       |           |        |  |     |             |  |  |             |  |  |         |       |  |  |  |       | 
|---------------- |  | ----- | ----- | --------- | ------ |  | --- | ----------- |  |  | ----------- |  |  | ------- | ----- |  |  |  | ----- | 
|                 |  |       |       | Less than |        |  |     |             |  |  | After       | 
|                 |  | Total |       |           | 1 Year |  |     | 1 - 3 Years |  |  | 3 - 5 Years |  |  | 5 Years |      
|                 |  |       |       |           |        |  |     |             |  |  |             |  |  |         |      
|Operating leases |  | $     | 5,518 |           |        |  | 990 |             |  |  | 1,816       |  |  |         | 1,396 |  |  |  | 1,316 | 
|Note payable(1)  |  | $     | 7,770 |           |        |  | 99  |             |  |  | 215         |  |  |         | 243   |  |  |  | 7,213 | 






|    |                                                                                                                               
|--- | ------------------------------------------------------------------------------------------------------------------------------
|(1) | The amounts are principal only payments as stated in securitized
    financing arrangement for the Berkeley Facility purchase.

5-year




Contingencies








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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.        



Inventory. first-in,


21



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Long-Lived Assets Impairment.


Goodwill Impairment.


Revenue Recognition.




Realization of Deferred Tax Assets.


Promotional Activities.


Allowance for Keg Deposits.


Recently Issued Accounting Pronouncements




22



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05-6


13-1, 13-1 13-1









|         |                                                               
|-------- | --------------------------------------------------------------
|Item 7A. | Quantitative and Qualitative Disclosures about Market
    Risk



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

|                                                        |  |      |    | 
|------------------------------------------------------- |  | ---- | -- | 
|                                                        |  | Page |   
|                                                        |  |      |   
|Report of Independent Registered Public Accounting Firm |  |      | 25 | 
|Report of Independent Registered Public Accounting Firm |  |      | 26 | 
|Consolidated Balance Sheets                             |  |      | 27 | 
|Consolidated Statements of Operations                   |  |      | 28 | 
|Consolidated Statements of Stockholders Equity         |  |      | 29 | 
|Consolidated Statements of Cash Flows                   |  |      | 30 | 
|Notes to Consolidated Financial Statements              |  |      | 31 | 

24



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Report of Independent Registered Public Accounting Firm














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





25



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Report of Independent Registered Public Accounting Firm














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





26



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PYRAMID BREWERIES INC.


CONSOLIDATED BALANCE SHEETS


|                                     |                                                            |                                            |                                                                                                         |         |        |    |   |         |        |    | 
|------------------------------------ | ---------------------------------------------------------- | ------------------------------------------ | ------------------------------------------------------------------------------------------------------- | ------- | ------ | -- | - | ------- | ------ | -- | 
|                                     |                                                            | December 31,                               |                                                                                                        
|                                     |                                                            |                                            |                                                                                                        
|                                     |                                                            | 2005                                       |                                                                                                         |         | 2004   |   
|                                     |                                                            |                                            |                                                                                                         |         |        |   
|                                     |                                                            | (In thousands, except                      |                                                                                                        
|                                     |                                                            | per share amounts)                         |                                                                                                        
|ASSETS                              
|CURRENT ASSETS:                      |                                                            |                                            |                                                                                                         |         |        |    |   |        
|                                     | Cash and cash equivalents                                  |                                            | $                                                                                                       | 416     |        |    | $ |        |       
|                                     | Accounts receivable, net of $20 and $32 allowance          |                                            |                                                                                                         | 2,838   |        |    |   | 2,094   |       
|                                     | Inventories                                                |                                            |                                                                                                         | 1,841   |        |    |   | 2,129   |       
|                                     | Prepaid expenses and other                                 |                                            |                                                                                                         | 716     |        |    |   | 421     |       
|                                     |                                                            |                                            |                                                                                                         |         |        |   
|                                     |                                                            | Total current assets                       |                                                                                                         |         | 5,811  |    |   |         | 4,644  |   
|                                     | Fixed assets, net                                          |                                            |                                                                                                         | 26,666  |        |    |   | 28,859  |       
|                                     | Goodwill                                                   |                                            |                                                                                                         | 415     |        |    |   | 415     |       
|                                     | Intangibles                                                |                                            |                                                                                                         | 163     |        |    |   | 209     |       
|                                     | Escrow reserve                                             |                                            |                                                                                                         | 623     |        |    |   |        |       
|                                     | Other assets                                               |                                            |                                                                                                         | 225     |        |    |   | 189     |       
|                                     |                                                            |                                            |                                                                                                         |         |        |   
|                                     |                                                            | Total assets                               |                                                                                                         | $       | 33,903 |    |   | $       | 34,316 |   
|                                     |                                                            |                                            |                                                                                                         |         |        |   
|                                    
|LIABILITIES AND STOCKHOLDERS EQUITY
|CURRENT LIABILITIES:                 |                                                            |                                            |                                                                                                         |         |        |    |   |        
|                                     | Accounts payable                                           |                                            | $                                                                                                       | 3,243   |        |    | $ | 2,776   |       
|                                     | Accrued expenses                                           |                                            |                                                                                                         | 2,770   |        |    |   | 2,682   |       
|                                     | Refundable deposits                                        |                                            |                                                                                                         | 596     |        |    |   | 582     |       
|                                     | Line of credit                                             |                                            |                                                                                                         |        |        |    |   | 400     |       
|                                     | Current portion of long-term financing                     |                                            |                                                                                                         | 99      |        |    |   | 83      |       
|                                     | Note payable  current                                     |                                            |                                                                                                         |        |        |    |   | 20      |       
|                                     | Deferred rent  current                                    |                                            |                                                                                                         | 75      |        |    |   | 75      |       
|                                     | Dividends payable                                          |                                            |                                                                                                         |        |        |    |   | 193     |       
|                                     |                                                            |                                            |                                                                                                         |         |        |   
|                                     |                                                            | Total current liabilities                  |                                                                                                         |         | 6,783  |    |   |         | 6,811  |   
|                                     | Long-term financing, net of current                        |                                            |                                                                                                         | 7,671   |        |    |   | 7,117   |       
|                                     | Deferred rent, net of current                              |                                            |                                                                                                         | 538     |        |    |   | 615     |       
|COMMITMENTS AND CONTINGENCIES        |                                                            |                                            |                                                                                                         |         |        |    |   |        
|STOCKHOLDERS EQUITY:                |                                                            |                                            |                                                                                                         |         |        |    |   |        
|                                     | Preferred stock, 10,000,000 shares authorized, none issued |                                            |                                                                                                         |        |        |    |   |        |       
|                                     | Common stock, $.01 par value:                              |                                            |                                                                                                         |         |        |    |   |         |       
|                                     | Authorized shares  40,000,000                             |                                            |                                                                                                         |         |        |    |   |         |       
|                                     |                                                            |                                            | Issued and outstanding shares  8,806,000 and
    8,776,000 at December 31, 2005 and 2004, respectively |         |        | 88 |   |         |        | 88 | 
|                                     | Additional paid-in capital                                 |                                            |                                                                                                         | 37,343  |        |    |   | 37,214  |       
|                                     | Deferred stock-based compensation                          |                                            |                                                                                                         | (320    | )      |    |   | (384    | )     
|                                     | Accumulated deficit                                        |                                            |                                                                                                         | (18,200 | )      |    |   | (17,145 | )     
|                                     |                                                            |                                            |                                                                                                         |         |        |   
|                                     |                                                            | Total stockholders equity                 |                                                                                                         |         | 18,911 |    |   |         | 19,773 |   
|                                     |                                                            |                                            |                                                                                                         |         |        |   
|                                     |                                                            | Total liabilities and stockholders equity |                                                                                                         | $       | 33,903 |    |   | $       | 34,316 |   
|                                     |                                                            |                                            |                                                                                                         |         |        |   



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PYRAMID BREWERIES INC.


CONSOLIDATED STATEMENTS OF OPERATIONS


|                                                      |  |                                          |           |   |      |   |           |      |  |   |           |  
|----------------------------------------------------- |  | ---------------------------------------- | --------- | - | ---- | - | --------- | ---- |  | - | --------- | -
|                                                      |  | Years Ended December 31,                 |          
|                                                      |  |                                          |          
|                                                      |  | 2005                                     |           |   | 2004 |   |           | 2003 | 
|                                                      |  |                                          |           |   |      |   |           |      | 
|                                                      |  | (In thousands, except per share amounts) |          
|Gross sales                                           |  | $                                        | 50,886    |   |      | $ | 42,176    |      |  | $ | 36,378    |  
|Less excise taxes                                     |  |                                          | 2,528     |   |      |   | 2,092     |      |  |   | 1,753     |  
|                                                      |  |                                          |           |   |      |   |           |      | 
|Net sales                                             |  |                                          | 48,358    |   |      |   | 40,084    |      |  |   | 34,625    |  
|Cost of sales                                         |  |                                          | 38,001    |   |      |   | 32,803    |      |  |   | 27,875    |  
|                                                      |  |                                          |           |   |      |   |           |      | 
|Gross margin                                          |  |                                          | 10,357    |   |      |   | 7,281     |      |  |   | 6,750     |  
|Selling, general and administrative expenses          |  |                                          | 11,364    |   |      |   | 10,050    |      |  |   | 8,260     |  
|                                                      |  |                                          |           |   |      |   |           |      | 
|Operating loss                                        |  |                                          | (1,007    | ) |      |   | (2,769    | )    |  |   | (1,510    | )
|Other (expense), income, net                          |  |                                          | (45       | ) |      |   | 44        |      |  |   | 315       |  
|                                                      |  |                                          |           |   |      |   |           |      | 
|Loss before income taxes                              |  |                                          | (1,052    | ) |      |   | (2,725    | )    |  |   | (1,195    | )
|Provision for income taxes                            |  |                                          | (3        | ) |      |   | (4        | )    |  |   | (3        | )
|                                                      |  |                                          |           |   |      |   |           |      | 
|Net loss                                              |  | $                                        | (1,055    | ) |      | $ | (2,729    | )    |  | $ | (1,198    | )
|                                                      |  |                                          |           |   |      |   |           |      | 
|Basic and diluted net loss per share                  |  | $                                        | (0.12     | ) |      | $ | (0.32     | )    |  | $ | (0.14     | )
|                                                      |  |                                          |           |   |      |   |           |      | 
|Weighted average basic and diluted shares outstanding |  |                                          | 8,794,000 |   |      |   | 8,578,000 |      |  |   | 8,452,000 |  
|                                                      |  |                                          |           |   |      |   |           |      | 
|Cash dividends declared per share                     |  | $                                        |          |   |      | $ | 0.088     |      |  | $ | 0.176     |  



28



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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 |  
|                           |                                               |                |       |      |            |      |    |             |   |   |             |        |   |              |      |       |               |   |      |        |  
|                           |                                               | (In thousands) |      
|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 | )
|                           | Stock issued via employee stock purchase plan |                |       | 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   | )
|                           | Stock issued via employee stock purchase plan |                |       | 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 |       
|                           | Net loss                                      |                |       |     |            |      |    |            |   |   |             |       |   |              |      |      |               |   |      |       |   |   |         | (1,055 | ) |   |        | (1,055 | )
|                           | Stock issued via employee stock purchase plan |                |       | 29   |            |      |    |            |   |   |             | 47     |   |              |      |      |               |   |      |       |   |   |         |       |   |   |        | 47     |  
|                           | Exercised stock options                       |                |       | 1    |            |      |    |            |   |   |             |       |   |              |      |      |               |   |      |       |   |   |         |       |   |   |        |       |  
|                           | Stock-based compensation                      |                |       |     |            |      |    |            |   |   |             | 82     |   |              |      |      |               |   |      | 64     |   |   |         |       |   |   |        | 146    |  
|                           |                                               |                |       |      |            |      |    |             |   |   |             |        |   |              |      |       |               |   |      |        |  
|Balance, December 31, 2005 |                                               |                | 8,806 |      |            | $    | 88 |             |   | $ | 37,343      |        |   | $            |     |       |               | $ | (320 | )      |   | $ | (18,200 | )      |   | $ | 18,911 |       
|                           |                                               |                |       |      |            |      |    |             |   |   |             |        |   |              |      |       |               |   |      |        |  



29



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PYRAMID BREWERIES INC.


CONSOLIDATED STATEMENTS OF CASH FLOWS


|                      |                                                                                     |                                                                                                         |   |        |       |   |   |        |        |   |   |        |        |  
|--------------------- | ----------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------- | - | ------ | ----- | - | - | ------ | ------ | - | - | ------ | ------ | -
|                      |                                                                                     | Years Ended December 31,                                                                                |  
|                      |                                                                                     |                                                                                                         |  
|                      |                                                                                     | 2005                                                                                                    |   |        | 2004  |   |   | 2003   |       
|                      |                                                                                     |                                                                                                         |   |        |       |   |   |        |       
|                      |                                                                                     | (In thousands)                                                                                          |  
|OPERATING ACTIVITIES: |                                                                                     |                                                                                                         |   |        |       |   |   |        |        |   |   |       
|                      | Net loss                                                                            |                                                                                                         | $ | (1,055 | )     |   | $ | (2,729 | )      |   | $ | (1,198 | )     
|                      | Adjustments to reconcile net loss to net cash provided by
    operating activities: |                                                                                                         |   |        |       |   |   |        |        |   |   |        |       
|                      |                                                                                     | Depreciation and amortization                                                                           |   |        | 2,765 |   |   |        | 2,668  |   |   |        | 2,443  |  
|                      |                                                                                     | Stock-based compensation expense                                                                        |   |        | 146   |   |   |        | 19     |   |   |        | 92     |  
|                      |                                                                                     | Interest expense                                                                                        |   |        |      |   |   |        | 4      |   |   |        | 5      |  
|                      |                                                                                     | (Gain) loss on sale of fixed assets                                                                     |   |        | (415  | ) |   |        | 10     |   |   |        | 2      |  
|                      |                                                                                     | Deferred rent                                                                                           |   |        | (78   | ) |   |        | (133   | ) |   |        | 639    |  
|                      | Changes in operating assets and liabilities:                                        |                                                                                                         |   |        |       |   |   |        |        |   |   |        |       
|                      |                                                                                     | Accounts receivable                                                                                     |   |        | (744  | ) |   |        | 69     |   |   |        | 663    |  
|                      |                                                                                     | Inventories                                                                                             |   |        | 289   |   |   |        | 83     |   |   |        | (64    | )
|                      |                                                                                     | Prepaid expenses and other                                                                              |   |        | (347  | ) |   |        | 94     |   |   |        | (192   | )
|                      |                                                                                     | Accounts payable and accrued expenses                                                                   |   |        | 556   |   |   |        | 1,243  |   |   |        | 212    |  
|                      |                                                                                     | Refundable deposits                                                                                     |   |        | 143   |   |   |        | (10    | ) |   |        | (19    | )
|                      |                                                                                     |                                                                                                         |   |        |       |   |   |        |       
|                      |                                                                                     | Net cash provided by operating activities                                                               |   |        | 1,260 |   |   |        | 1,318  |   |   |        | 2,583  |  
|                      |                                                                                     |                                                                                                         |   |        |       |   |   |        |       
|INVESTING ACTIVITIES: |                                                                                     |                                                                                                         |   |        |       |   |   |        |        |   |   |       
|                      |                                                                                     | Purchases of short-term investments                                                                     |   |        |      |   |   |        |       |   |   |        | (2,455 | )
|                      |                                                                                     | Proceeds from the sale and maturities of available-for-sale
    securities                              |   |        |      |   |   |        | 492    |   |   |        | 5,205  |  
|                      |                                                                                     | Acquisitions of fixed assets                                                                            |   |        | (981  | ) |   |        | (1,002 | ) |   |        | (3,142 | )
|                      |                                                                                     | Proceeds from sale of fixed assets                                                                      |   |        | 783   |   |   |        | 11     |   |   |        |       |  
|                      |                                                                                     | Acquisition of Portland Brewing Company Assets                                                          |   |        |      |   |   |        | (1,416 | ) |   |        |       |  
|                      |                                                                                     | Acquisition of Berkeley facility land and building                                                      |   |        |      |   |   |        | (195   | ) |   |        |       |  
|                      |                                                                                     |                                                                                                         |   |        |       |   |   |        |       
|                      |                                                                                     | Net cash used in investing activities                                                                   |   |        | (198  | ) |   |        | (2,110 | ) |   |        | (392   | )
|                      |                                                                                     |                                                                                                         |   |        |       |   |   |        |       
|FINANCING ACTIVITIES: |                                                                                     |                                                                                                         |   |        |       |   |   |        |        |   |   |       
|                      |                                                                                     | Proceeds from exercise of stock options and stock issuance
    through the employee stock purchase plan |   |        | 47    |   |   |        | 224    |   |   |        | 262    |  
|                      |                                                                                     | Net borrowings (cash paid) on line of credit                                                            |   |        | (400  | ) |   |        | 400    |   |   |        |       |  
|                      |                                                                                     | Deferred financing fees                                                                                 |   |        |      |   |   |        | (68    | ) |   |        |       |  
|                      |                                                                                     | Notes receivable                                                                                        |   |        |      |   |   |        |       |   |   |        | 31     |  
|                      |                                                                                     | Note payable                                                                                            |   |        | (100  | ) |   |        | (20    | ) |   |        | (20    | )
|                      |                                                                                     | Borrowings on short-term note payable to related party                                                  |   |        |      |   |   |        | 200    |   |   |        |       |  
|                      |                                                                                     | Cash dividends paid                                                                                     |   |        | (193  | ) |   |        | (1,137 | ) |   |        | (1,502 | )
|                      |                                                                                     | Purchase and retirement of common stock                                                                 |   |        |      |   |   |        | (365   | ) |   |        |       |  
|                      |                                                                                     |                                                                                                         |   |        |       |   |   |        |       
|                      |                                                                                     | Net cash used in financing activities                                                                   |   |        | (646  | ) |   |        | (766   | ) |   |        | (1,229 | )
|                      |                                                                                     |                                                                                                         |   |        |       |   |   |        |       
|                      |                                                                                     | Increase (decrease) in cash and cash equivalents                                                        |   |        | 416   |   |   |        | (1,558 | ) |   |        | 962    |  
|                      |                                                                                     | Cash and cash equivalents at beginning of year                                                          |   |        |      |   |   |        | 1,558  |   |   |        | 596    |  
|                      |                                                                                     |                                                                                                         |   |        |       |   |   |        |       
|                      |                                                                                     | Cash and cash equivalents at end of year                                                                |   | $      | 416   |   |   | $      |       |   |   | $      | 1,558  |  
|                      |                                                                                     |                                                                                                         |   |        |       |   |   |        |       
|                      |                                                                                     | SUPPLEMENTAL DATA:                                                                                      |   |        |       |   |   |        |        |   |   |        |        |  
|                      |                                                                                     | Interest paid                                                                                           |   | $      | 520   |   |   | $      | 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    |   |   |        |       |  



30



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##### Table of Contents



PYRAMID BREWERIES INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




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



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





| |                       
| | ----------------------
| | Basis of Consolidation





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





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





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





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



31



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##### Table of Contents



PYRAMID BREWERIES INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




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

first-in,




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







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





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





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



32



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##### Table of Contents



PYRAMID BREWERIES INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




Reporting Revenue Gross
as a Principal versus Net as an Agent




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





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







| |              
| | -------------
| | Cost of Sales





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





33



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##### Table of Contents



PYRAMID BREWERIES INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




| |                            
| | ---------------------------
| | Other Income (Expense), Net



|                            |  |                          |      |   |      |   |      |      |  |   |     |  
|--------------------------- |  | ------------------------ | ---- | - | ---- | - | ---- | ---- |  | - | --- | -
|                            |  | Years Ended December 31, |     
|                            |  |                          |     
|                            |  | 2005                     |      |   | 2004 |   |      | 2003 | 
|                            |  |                          |      |   |      |   |      |      | 
|Interest expense            |  | $                        | (520 | ) |      | $ | (224 | )    |  | $ | (5  | )
|Sublease income             |  |                          | 217  |   |      |   | 90   |      |  |   |    |  
|Parking income              |  |                          | 212  |   |      |   | 188  |      |  |   | 216 |  
|Amortization-loan fee       |  |                          | (43  | ) |      |   | (46  | )    |  |   |    |  
|Interest income             |  |                          | 9    |   |      |   | 22   |      |  |   | 56  |  
|Other income                |  |                          | 80   |   |      |   | 14   |      |  |   | 48  |  
|                            |  |                          |      |   |      |   |      |      | 
|Other income (expense), net |  | $                        | (45  | ) |      | $ | 44   |      |  | $ | 315 |  
|                            |  |                          |      |   |      |   |      |      | 



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







| |                   
| | ------------------
| | Net Loss Per Share





34



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##### Table of Contents



PYRAMID BREWERIES INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                   |                                                       |                          |        |       |      |   |        |       |   |   |        |       |  
|------------------ | ----------------------------------------------------- | ------------------------ | ------ | ----- | ---- | - | ------ | ----- | - | - | ------ | ----- | -
|                   |                                                       | Years Ended December 31, |       
|                   |                                                       |                          |       
|                   |                                                       | 2005                     |        |       | 2004 |   |        | 2003  |  
|                   |                                                       |                          |        |       |      |   |        |       |  
|Net loss           |                                                       | $                        | (1,055 | )     |      | $ | (2,729 | )     |   | $ | (1,198 | )    
|Basic and diluted: |                                                       |                          |        |       |      |   |        |       |   |   |        |      
|                   | Weighted average shares outstanding                   |                          |        | 8,794 |      |   |        | 8,578 |   |   |        | 8,502 |  
|                   | Shares subject to repurchase                          |                          |        |      |      |   |        |      |   |   |        | (50   | )
|                   |                                                       |                          |        |       |      |   |        |       |  
|                   | Weighted average basic and diluted shares outstanding |                          |        | 8,794 |      |   |        | 8,578 |   |   |        | 8,452 |  
|                   |                                                       |                          |        |       |      |   |        |       |  
|                   | Basic and diluted net loss per share                  |                          | $      | (0.12 | )    |   | $      | (0.32 | ) |   | $      | (0.14 | )
|                   |                                                       |                          |        |       |      |   |        |       |  



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



|                                                                                     |  |                          |        |   |      |   |        |      |  |   |        |  
|------------------------------------------------------------------------------------ |  | ------------------------ | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                                                                     |  | Years Ended December 31, |       
|                                                                                     |  |                          |       
|                                                                                     |  | 2005                     |        |   | 2004 |   |        | 2003 | 
|                                                                                     |  |                          |        |   |      |   |        |      | 
|Net loss as reported                                                                 |  | $                        | (1,055 | ) |      | $ | (2,729 | )    |  | $ | (1,198 | )
|Add: Stock-based compensation cost as reported                                       |  |                          | 64     |   |      |   | 56     |      |  |   | 92     |  
|Less: Stock-based compensation cost determined under the fair
    value based method |  |                          | (94    | ) |      |   | (158   | )    |  |   | (206   | )
|                                                                                     |  |                          |        |   |      |   |        |      | 
|Net loss as adjusted                                                                 |  | $                        | (1,085 | ) |      | $ | (2,831 | )    |  | $ | (1,312 | )
|Basic and diluted net loss per share as reported                                     |  | $                        | (0.12  | ) |      | $ | (0.32  | )    |  | $ | (0.14  | )
|Basic and diluted net loss per share as adjusted                                     |  | $                        | (0.12  | ) |      | $ | (0.33  | )    |  | $ | (0.15  | )



|                                 |  |                          |            |   |      |   |            |      |  |   |            |  
|-------------------------------- |  | ------------------------ | ---------- | - | ---- | - | ---------- | ---- |  | - | ---------- | -
|                                 |  | Years Ended December 31, |           
|                                 |  |                          |           
|                                 |  | 2005                     |            |   | 2004 |   |            | 2003 | 
|                                 |  |                          |            |   |      |   |            |      | 
|Average risk-free interest rates |  |                          | 4.40- 4.41 | % |      |   | 1.71- 3.67 | %    |  |   | 2.95- 3.98 | %
|Average expected life (in years) |  |                          | 4          |   |      |   | 7          |      |  |   | 7          |  
|Volatility                       |  |                          | 27.8       | % |      |   | 51.0       | %    |  |   | 51.0       | %
|Expected future dividends        |  | $                        | 0.00       |   |      | $ | 0.176      |      |  | $ | 0.176      |  

35



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##### Table of Contents



PYRAMID BREWERIES INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






| |          
| | ---------
| | Liquidity









| |                 
| | ----------------
| | Reclassification





| |                                          
| | -----------------------------------------
| | Recently Issued Accounting Pronouncements



36



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##### Table of Contents



PYRAMID BREWERIES INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






05-6


13-1, 13-1 13-1






|   |                                           
|-- | ------------------------------------------
|2. | Portland Brewing Company Asset Acquisition

5-year






| |   |                                                                                                                                                                  
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the Company subleases to Portland Brewing the premises on which
    the Portland Brewery is located and leases to Portland Brewing
    certain brewery equipment;
|
| |  | the Company engages Portland Brewing to produce certain
    Company-branded beers on those premises; and                                                         

37



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##### Table of Contents



PYRAMID BREWERIES INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




| |   |                                                                                                         
| | - | --------------------------------------------------------------------------------------------------------
| |  | the Company provides employees to Portland Brewing for Portland
    Brewings use in brewery operations.



Reporting Revenue Gross
as a Principal versus Net as an Agent




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



|                           |                               |   |       |       | 
|-------------------------- | ----------------------------- | - | ----- | ----- | 
|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 |      
|Intangible assets acquired |                               |   | 228   |      
|                           |                               |   |      
|Total purchase price       |                               | $ | 4,522 |      
|                           |                               |   |      



38



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##### Table of Contents



PYRAMID BREWERIES INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|   |                  
|-- | -----------------
|3. | Sale of Equipment





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



|                |  |      |       |  |      |   |       | 
|--------------- |  | ---- | ----- |  | ---- | - | ----- | 
|                |  | 2005 |       |  | 2004 |  
|                |  |      |       |  |      |  
|Raw materials   |  | $    | 741   |  |      | $ | 905   | 
|Work in process |  |      | 123   |  |      |   | 191   | 
|Finished goods  |  |      | 977   |  |      |   | 1,033 | 
|                |  |      |       |  |      |  
|                |  | $    | 1,841 |  |      | $ | 2,129 | 
|                |  |      |       |  |      |  





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



|                                               |  |      |         |   |      |   |         |  
|---------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|                                               |  | 2005 |         |   | 2004 |  
|                                               |  |      |         |   |      |  
|Land                                           |  | $    | 6,181   |   |      | $ | 6,181   |  
|Buildings                                      |  |      | 11,895  |   |      |   | 11,895  |  
|Brewery and retail equipment                   |  |      | 17,614  |   |      |   | 19,328  |  
|Furniture and fixtures                         |  |      | 1,142   |   |      |   | 1,106   |  
|Leasehold improvements                         |  |      | 6,060   |   |      |   | 5,899   |  
|Construction in progress                       |  |      | 68      |   |      |   | 208     |  
|                                               |  |      |         |   |      |  
|                                               |  |      | 42,960  |   |      |   | 44,617  |  
|Less accumulated depreciation and amortization |  |      | (16,294 | ) |      |   | (15,758 | )
|                                               |  |      |         |   |      |  
|                                               |  | $    | 26,666  |   |      | $ | 28,859  |  
|                                               |  |      |         |   |      |  





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



39



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##### Table of Contents



PYRAMID BREWERIES INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






|   |                 
|-- | ----------------
|7. | Accrued Expenses



|                                     |  |      |       |  |      |   |       | 
|------------------------------------ |  | ---- | ----- |  | ---- | - | ----- | 
|                                     |  | 2005 |       |  | 2004 |  
|                                     |  |      |       |  |      |  
|Salaries, wages and related accruals |  | $    | 1,415 |  |      | $ | 978   | 
|Barrel taxes                         |  |      | 272   |  |      |   | 157   | 
|Other accruals                       |  |      | 1,083 |  |      |   | 1,547 | 
|                                     |  |      |       |  |      |  
|                                     |  | $    | 2,770 |  |      | $ | 2,682 | 
|                                     |  |      |       |  |      |  



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

1 2




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





40



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##### Table of Contents



PYRAMID BREWERIES INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






|           |  |   |       | 
|---------- |  | - | ----- | 
|2006       |  | $ | 99    | 
|2007       |  |   | 105   | 
|2008       |  |   | 110   | 
|2009       |  |   | 118   | 
|2010       |  |   | 125   | 
|Thereafter |  |   | 7,213 | 
|           |  |   |      
|           |  | $ | 7,770 | 
|           |  |   |      



|    |                 
|--- | ----------------
|10. | Operating Leases





|           |  |   |       | 
|---------- |  | - | ----- | 
|2006       |  | $ | 990   | 
|2007       |  |   | 992   | 
|2008       |  |   | 824   | 
|2009       |  |   | 749   | 
|2010       |  |   | 647   | 
|Thereafter |  |   | 1,316 | 
|           |  |   |      
|           |  | $ | 5,518 | 
|           |  |   |      







|    |              
|--- | -------------
|11. | Contingencies



41



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##### Table of Contents



PYRAMID BREWERIES INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)












|    |              
|--- | -------------
|12. | Cash Dividend



42



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##### Table of Contents



PYRAMID BREWERIES INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|    |                   
|--- | ------------------
|13. | Stock Buyback Plan





|    |                       
|--- | ----------------------
|14. | Employee Benefit Plans



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





43



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##### Table of Contents



PYRAMID BREWERIES INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                                                   |                    |        |         |              |       |          |            |                |  |   |      |      | 
|-------------------------------------------------- | ------------------ | ------ | ------- | ------------ | ----- | -------- | ---------- | -------------- |  | - | ---- | ---- | 
|                                                   |                    |        |         |              |       | Weighted |           
|                                                   |                    |        |         | Option Price |       |          | Average    |               
|                                                   |                    | Shares |         |              | Range |          |            | Exercise Price | 
|                                                   |                    |        |         |              |       |          |            |                | 
|Balance at December 31, 2002 (401,000 exercisable) |                    |        | 832,000 |              |       | $        | 1.56-10.75 |                |  | $ | 2.63 |     
|                                                   | Granted            |        |         | 165,000      |       |          |            | 2.96-3.10      |  |   |      | 2.99 | 
|                                                   | Exercised          |        |         | (91,000      | )     |          |            | 1.70-2.56      |  |   |      | 2.24 | 
|                                                   | Canceled/Forfeited |        |         | (148,000     | )     |          |            | 2.33-10.75     |  |   |      | 2.95 | 
|                                                   |                    |        |         |              |       |          |            |                | 
|Balance at December 31, 2003 (554,000 exercisable) |                    |        | 758,000 |              |       | $        | 1.56-10.75 |                |  | $ | 2.69 |     
|                                                   | Granted            |        |         | 464,000      |       |          |            | 1.82-2.26      |  |   |      | 2.11 | 
|                                                   | Exercised          |        |         | (458,000     | )     |          |            | 1.82-2.56      |  |   |      | 2.06 | 
|                                                   | Canceled/Forfeited |        |         | (57,000      | )     |          |            | 1.82-10.75     |  |   |      | 3.21 | 
|                                                   |                    |        |         |              |       |          |            |                | 
|Balance at December 31, 2004 (565,000 exercisable) |                    |        | 707,000 |              |       | $        | 1.56-10.75 |                |  | $ | 2.64 |     
|                                                   | Granted            |        |         | 113,000      |       |          |            | 2.07-2.61      |  |   |      | 2.12 | 
|                                                   | Exercised          |        |         | (1,000       | )     |          |            | 1.82           |  |   |      | 1.82 | 
|                                                   | Canceled/Forfeited |        |         | (188,000     | )     |          |            | 1.75-10.75     |  |   |      | 2.87 | 
|                                                   |                    |        |         |              |       |          |            |                | 
|Balance at December 31, 2005 (520,000 exercisable) |                    |        | 631,000 |              |       | $        | 1.56-10.75 |                |  | $ | 2.48 |     



|                         |  |                     |         |                     |             |  |          |       |  |   |        |          |  |       |         |  |  |   |      | 
|------------------------ |  | ------------------- | ------- | ------------------- | ----------- |  | -------- | ----- |  | - | ------ | -------- |  | ----- | ------- |  |  | - | ---- | 
|                         |  |                     |         | Exercisable Options |            
|                         |  | Options Outstanding |         |                     | Outstanding | 
|                         |  |                     |         |                     |             | 
|                         |  |                     |         | Weighted            |             |  |          |       | 
|                         |  |                     |         | Average             |             |  | Weighted |       |  |   |        | Weighted | 
|                         |  |                     |         | Remaining           |             |  | Average  |       |  |   |        | Average  | 
|                         |  |                     |         | Contractual         |             |  | Exercise |       |  |   |        | Exercise | 
|Range of Exercise Prices |  | Shares              |         |                     | Life (Yrs)  |  |          | Price |  |   | Shares |          |  | Price |        
|                         |  |                     |         |                     |             |  |          |       |  |   |        |          |  |       |        
|$1.56-$ 2.00             |  |                     | 179,500 |                     |             |  | 4.2      |       |  | $ | 1.97   |          |  |       | 179,500 |  |  | $ | 1.97 | 
|$2.07-$ 2.20             |  |                     | 220,500 |                     |             |  | 8.9      |       |  | $ | 2.15   |          |  |       | 124,700 |  |  | $ | 2.18 | 
|$2.21-$ 2.48             |  |                     | 47,500  |                     |             |  | 6.8      |       |  | $ | 2.36   |          |  |       | 41,600  |  |  | $ | 2.38 | 
|$2.56-$ 2.67             |  |                     | 128,500 |                     |             |  | 4.1      |       |  | $ | 2.58   |          |  |       | 126,100 |  |  | $ | 2.57 | 
|$3.02-$10.75             |  |                     | 55,000  |                     |             |  | 4.7      |       |  | $ | 5.31   |          |  |       | 48,100  |  |  | $ | 5.64 | 
|                         |  |                     |         |                     |             |  |          |       |  |   |        |          |  |       |         |  |  |   |      | 
|                         |  |                     | 631,000 |                     |             |  | 7.1      |       |  | $ | 2.48   |          |  |       | 520,000 |  |  | $ | 2.54 | 
|                         |  |                     |         |                     |             |  |          |       |  |   |        |          |  |       |        





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



44



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##### Table of Contents



PYRAMID BREWERIES INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






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





|    |                        
|--- | -----------------------
|15. | Shareholder Rights Plan

1 1000




|    |             
|--- | ------------
|16. | Income Taxes



|         |  |      |    |   |      |   |    |      |  |   |    |  
|-------- |  | ---- | -- | - | ---- | - | -- | ---- |  | - | -- | -
|         |  | 2005 |    |   | 2004 |   |    | 2003 | 
|         |  |      |    |   |      |   |    |      | 
|Current  |  | $    | (3 | ) |      | $ | (4 | )    |  | $ | (3 | )
|Deferred |  |      |   |   |      |   |   |      |  |   |   |  
|         |  |      |    |   |      |   |    |      | 
|         |  | $    | (3 | ) |      | $ | (4 | )    |  | $ | (3 | )
|         |  |      |    |   |      |   |    |      | 

45



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##### Table of Contents



PYRAMID BREWERIES INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                                               |  |              |       |    |      |  |       |      |  |  |       |  
|---------------------------------------------- |  | ------------ | ----- | -- | ---- |  | ----- | ---- |  |  | ----- | -
|                                               |  | December 31, |      
|                                               |  |              |      
|                                               |  | 2005         |       |    | 2004 |  |       | 2003 | 
|                                               |  |              |       |    |      |  |       |      | 
|Federal statutory rate                         |  |              | 34.0  | %  |      |  | 34.0  | %    |  |  | 34.0  | %
|State taxes, net of federal income tax benefit |  |              | 2.8   |    |      |  | 3.6   |      |  |  | 2.1   |  
|Meals and entertainment                        |  |              | (13.0 | )  |      |  | (3.1  | )    |  |  | (5.2  | )
|Valuation allowance                            |  |              | (24.1 | )  |      |  | (34.4 | )    |  |  | (30.6 | )
|                                               |  |              |       |    |      |  |       |      | 
|                                               |  |              | (0.3  | %) |      |  | 0.1   | %    |  |  | 0.3   | %
|                                               |  |              |       |    |      |  |       |      | 



|                                               |  |      |        |   |      |   |        |  
|---------------------------------------------- |  | ---- | ------ | - | ---- | - | ------ | -
|                                               |  | 2005 |        |   | 2004 |  
|                                               |  |      |        |   |      |  
|Deferred tax liabilities:                      |  |      |        |   |      |   |        |  
|Depreciation                                   |  | $    | (1,074 | ) |      | $ | (1,454 | )
|Goodwill                                       |  |      | (31    | ) |      |   | (12    | )
|                                               |  |      |        |   |      |  
|Deferred tax liabilities                       |  | $    | (1,105 | ) |      | $ | (1,466 | )
|Deferred tax assets:                           |  |      |        |   |      |   |        |  
|Employee benefits                              |  |      | 207    |   |      |   | 134    |  
|Deferred rent                                  |  |      | 228    |   |      |   | 259    |  
|Deferred compensation                          |  |      | 31     |   |      |   | 11     |  
|Package design costs                           |  |      | 189    |   |      |   | 127    |  
|Trademarks                                     |  |      | 21     |   |      |   | 11     |  
|Unicap                                         |  |      | 43     |   |      |   | 48     |  
|Charitable contribution carryforward           |  |      | 84     |   |      |   | 77     |  
|Inventory                                      |  |      | 8      |   |      |   | 20     |  
|Other                                          |  |      | 35     |   |      |   | 10     |  
|Net operating loss and tax credit carryforward |  |      | 3,409  |   |      |   | 3,826  |  
|                                               |  |      |        |   |      |  
|                                               |  |      | 4,255  |   |      |   | 4,523  |  
|Less valuation allowance                       |  |      | (3,150 | ) |      |   | (3,057 | )
|                                               |  |      |        |   |      |  
|Deferred tax assets, net                       |  | $    | 1,105  |   |      | $ | 1,466  |  
|                                               |  |      |        |   |      |  
|Net deferred tax asset and liability           |  |      |       |   |      |   |       |  
|                                               |  |      |        |   |      |  



46



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PYRAMID BREWERIES INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|    |                                   
|--- | ----------------------------------
|17. | Segment Information and Other Data









|                             |                                        |            |   |        |          |  |   |        |  |  |       |        |   |  |   |        |  
|---------------------------- | -------------------------------------- | ---------- | - | ------ | -------- |  | - | ------ |  |  | ----- | ------ | - |  | - | ------ | -
|                             |                                        | Beverage   |   |        |          |  |   |        | 
|                             |                                        | Operations |   |        | Alehouse |  |   | Other  |  |  | Total |       
|                             |                                        |            |   |        |          |  |   |        |  |  |       |       
|Year ended December 31, 2005 |                                        |            |   |        |          |  |   |        |  |  |       |        |   |  |   |       
|                             | Gross revenues from external customers |            | $ | 35,525 |          |  | $ | 15,361 |  |  | $     |       |   |  | $ | 50,886 |  
|                             | Net revenues from external customers   |            |   | 32,997 |          |  |   | 15,361 |  |  |       |       |   |  |   | 48,358 |  
|                             | Intersegment revenues                  |            |   | 609    |          |  |   |       |  |  |       | (609   | ) |  |   |       |  
|                             | Interest income                        |            |   |       |          |  |   |       |  |  |       | 9      |   |  |   | 9      |  
|                             | Depreciation and amortization          |            |   | 1,563  |          |  |   | 960    |  |  |       | 153    |   |  |   | 2,676  |  
|                             | Operating income (loss)                |            |   | 4,770  |          |  |   | 446    |  |  |       | (6,223 | ) |  |   | (1,007 | )
|                             | Capital expenditures                   |            |   | 726    |          |  |   | 180    |  |  |       | 75     |   |  |   | 981    |  
|                             | Total assets                           |            |   | 19,714 |          |  |   | 5,562  |  |  |       | 8,627  |   |  |   | 33,903 |  
|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          |            |   | 1,588  |          |  |   | 807    |  |  |       | 149    |   |  |   | 2,544  |  
|                             | Operating income (loss)                |            |   | 2,383  |          |  |   | 438    |  |  |       | (5,590 | ) |  |   | (2,769 | )
|                             | Capital expenditures                   |            |   | 555    |          |  |   | 250    |  |  |       | 197    |   |  |   | 1,002  |  
|                             | Total assets                           |            |   | 20,692 |          |  |   | 6,266  |  |  |       | 7,358  |   |  |   | 34,316 |  

47



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PYRAMID BREWERIES INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


|                             |                                        |            |   |        |          |  |   |        |  |  |       |        |   |  |   |        |  
|---------------------------- | -------------------------------------- | ---------- | - | ------ | -------- |  | - | ------ |  |  | ----- | ------ | - |  | - | ------ | -
|                             |                                        | Beverage   |   |        |          |  |   |        | 
|                             |                                        | Operations |   |        | Alehouse |  |   | Other  |  |  | Total |       
|                             |                                        |            |   |        |          |  |   |        |  |  |       |       
|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  |          |  |   | 616    |  |  |       | 184    |   |  |   | 2,364  |  
|                             | Operating income (loss)                |            |   | 1,912  |          |  |   | 719    |  |  |       | (4,141 | ) |  |   | (1,510 | )
|                             | Capital expenditures                   |            |   | 515    |          |  |   | 2,496  |  |  |       | 131    |   |  |   | 3,142  |  
|                             | Total assets                           |            |   | 17,509 |          |  |   | 6,736  |  |  |       | 3,539  |   |  |   | 27,784 |  



|    |                  
|--- | -----------------
|18. | Subsequent Events









|    |                                     
|--- | ------------------------------------
|19. | Quarterly Financial Data (Unaudited)



48



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PYRAMID BREWERIES INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                                              |  |                     |        |   |                     |   |        |         |  |   |          |  |  |             |        |   |              |   |        |         |  |   |          |   |  |   |        |  |  |   |        |  
|--------------------------------------------- |  | ------------------- | ------ | - | ------------------- | - | ------ | ------- |  | - | -------- |  |  | ----------- | ------ | - | ------------ | - | ------ | ------- |  | - | -------- | - |  | - | ------ |  |  | - | ------ | -
|                                              |  | 2005 Quarters Ended |        |   | 2004 Quarters Ended |  
|                                              |  |                     |        |   |                     |  
|                                              |  | December 31         |        |   | September 30        |   |        | June 30 |  |   | March 31 |  |  | December 31 |        |   | September 30 |   |        | June 30 |  |   | March 31 |  
|                                              |  |                     |        |   |                     |   |        |         |  |   |          |  |  |             |        |   |              |   |        |         |  |   |          |  
|Gross sales                                   |  | $                   | 12,432 |   |                     | $ | 14,284 |         |  | $ | 13,713   |  |  | $           | 10,457 |   |              | $ | 11,205 |         |  | $ | 11,745   |   |  | $ | 10,936 |  |  | $ | 8,290  |  
|Net sales                                     |  |                     | 11,912 |   |                     |   | 13,526 |         |  |   | 13,020   |  |  |             | 9,900  |   |              |   | 10,588 |         |  |   | 11,213   |   |  |   | 10,402 |  |  |   | 7,881  |  
|Gross margin                                  |  |                     | 2,504  |   |                     |   | 3,354  |         |  |   | 2,995    |  |  |             | 1,504  |   |              |   | 1,372  |         |  |   | 2,169    |   |  |   | 2,463  |  |  |   | 1,277  |  
|Operating (loss) income                       |  |                     | (561   | ) |                     |   | 444    |         |  |   | 175      |  |  |             | (1,065 | ) |              |   | (1,393 | )       |  |   | (423     | ) |  |   | 66     |  |  |   | (1,019 | )
|Net (loss) income                             |  |                     | (531   | ) |                     |   | 439    |         |  |   | 168      |  |  |             | (1,131 | ) |              |   | (1,458 | )       |  |   | (420     | ) |  |   | 145    |  |  |   | (996   | )
|Basic and diluted net (loss) income per share |  | $                   | 0.06   |   |                     | $ | 0.05   |         |  | $ | 0.02     |  |  | $           | (0.13  | ) |              | $ | (0.17  | )       |  | $ | (0.05    | ) |  | $ | 0.02   |  |  | $ | (0.12  | )

49



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|        |                                                                                         
|------- | ----------------------------------------------------------------------------------------
|Item 9. | Changes in and Disagreements With Accountants on
    Accounting and Financial Disclosure








|         |                        
|-------- | -----------------------
|Item 9A. | Controls and Procedures



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

Evaluation of
disclosure controls and procedure


10-K, 10-K, 13a-15(e) 15d-15(e)




Changes in internal
controls









|         |                  
|-------- | -----------------
|Item 9B. | Other Information






PART III







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



50



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|         |                       
|-------- | ----------------------
|Item 11. | Executive Compensation








|         |                                                                                                   
|-------- | --------------------------------------------------------------------------------------------------
|Item 12. | Security Ownership of Certain Beneficial Owners and
    Management and Related Stockholder Matters








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








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






PART IV







|         |                                        
|-------- | ---------------------------------------
|Item 15. | Exhibits, Financial Statement Schedules

Documents filed as part of this report are as
follows:




| |                         
| | ------------------------
| | 1. Financial Statements:



| |                                                
| | -----------------------------------------------
| | Independent Registered Public Accounting Firm  
|
| | Independent Registered Public Accounting Firm  
|
| | Consolidated Balance Sheets                    
|
| | Consolidated Statements of Income              
|
| | Consolidated Statements of Stockholders Equity
|
| | Consolidated Statements of Cash Flows          
|
| | Notes to Consolidated Financial Statements     



| |                                        
| | ---------------------------------------
| | 2. Financial Statement Schedules: None.



| |    |                                                                                                                   
| | -- | ------------------------------------------------------------------------------------------------------------------
| | 3. | Exhibits: The required exhibits are included at the end of this
    report and are described in the Exhibit Index.

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SIGNATURES






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



| |    |                   
| | -- | ------------------
| | By | /s/ John L. Lennon

| |                        
| | -----------------------
| |                        
| | John Lennon            
| | Chief Executive Officer



|                                   |  |                                                                                             |  |                |  | 
|---------------------------------- |  | ------------------------------------------------------------------------------------------- |  | -------------- |  | 
|Signature                          |  | Title                                                                                       |  | Date          
|                                   |  |                                                                                             |  |               
|                                  
|/s/ George HancockGeorge Hancock   |  | Chairman of the Board
    and Director                                                      |  | March 29, 2006
|                                  
|/s/ John LennonJohn Lennon         |  | President and Chief
    Executive Officer, Director(its principal executive officer)        |  | March 29, 2006
|                                  
|/s/ Jason W. ReesJason W. Rees     |  | Vice President of Finance and
    Chief Accounting Officer(its principal financial officer) |  | March 29, 2006
|                                  
|/s/ Lee AndrewsLee Andrews         |  | Director                                                                                    |  | March 29, 2006
|                                  
|/s/ Scott S. BarnumScott S. Barnum |  | Director                                                                                    |  | March 29, 2006
|                                  
|/s/ Kurt DammeierKurt Dammeier     |  | Director                                                                                    |  | March 29, 2006
|                                  
|/s/ Scott SvensonScott Svenson     |  | Director                                                                                    |  | March 29, 2006

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EXHIBIT INDEX


10-K


|        |    |             |  |                                                                                                                                                                                                                                         
|------- | -- | ----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|No.     |    | Description
|        |    |            
|        | 3  | .1          |  | Amended and Restated Articles of Incorporation of Registrant(8)                                                                                                                                                                         
|        | 3  | .2          |  | Form of Amended and Restated Bylaws of Registrant(8)                                                                                                                                                                                    
|        | 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)                                                                                                                                                                                                     
|        | 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(5)                                                                                                        
|        | 10 | .12*        |  | Registrants 2003 Employee Stock Purchase Plan(5)                                                                                                                                                                                       
|        | 10 | .13*        |  | Registrants Non-Employee Director Stock Compensation
    Plan(5)                                                                                                                                                                       
|        | 10 | .14         |  | Asset Purchase Agreement between Pyramid Breweries Inc.,
    Portland Brewing Company and PBC Acquisition, LLC dated
    January 26, 2004(6)                                                                                            
|        | 10 | .15*        |  | Employment Agreement between Registrant and John Lennon(10)                                                                                                                                                                             
|        | 10 | .16         |  | Registrants 2004 Equity Incentive Plan(7)                                                                                                                                                                                              
|        | 10 | .17         |  | Promissory Note from Pyramid Gilman Street Property, LLC to
    Morgan Stanley Capital Inc.(10)                                                                                                                                         
|        | 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)                                                    
|        | 10 | .19         |  | Reserve and Security Agreement between Pyramid Gilman Street
    Property, LLC and Morgan Stanley Mortgage Capital Inc.(10)                                                                                                             
|        | 10 | .20         |  | Guaranty of Recourse Obligations of Borrower from Pyramid
    Breweries Inc. to Morgan Stanley Mortgage Capital Inc.(10)                                                                                                                
|        | 10 | .21*        |  | Amended and Restated Employment Agreement between Registrant and
    Martin Kelly dated June 19, 2001(9)                                                                                                                                
|        | 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)                                                                                                                                                                                     

53



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|        |    |             |  |                                                                                                                                                                                                          
|------- | -- | ----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|No.     |    | Description
|        |    |            
|        | 10 | .25*        |  | Amendment No. 1 to Employment Agreement between Registrant
    and John Lennon(10)                                                                                                                       
|        | 10 | .26         |  | Brewery Sublease Agreement between, Portland Brewing Company and
    PBC Acquisition, LLC dated February 14, 2006                                                                                        
|        | 10 | .27         |  | Equipment Lease Agreement between, Portland Brewing Company and
    PBC Acquisition, LLC dated February 14, 2006                                                                                         
|        | 10 | .28         |  | Production Agreement between Pyramid Breweries Inc., and
    Portland Brewing Company dated February 14, 2006                                                                                            
|        | 10 | .29         |  | Staffing Agreement between Pyramid Breweries Inc., and Portland
    Brewing Company dated February 14, 2006                                                                                              
|        | 10 | .30         |  | Alehouse Sublease Agreement between Portland Brewing and PBC
    Acquisition, LLC dated February 14, 2006                                                                                                
|        | 10 | .31         |  | Restaurant Management Agreement between Pyramid Breweries Inc.,
    and Portland Brewing Company dated February 14, 2006                                                                                 
|        | 10 | .32         |  | Indemnification Agreement between Pyramid Breweries Inc. and
    Portland Brewing Company dated February 14, 2006                                                                                        
|        | 10 | .33         |  | Indenture of Lease (Alehouse) between MacTarnahan Limited
    Partnership dba Harmer Company and PBC Acquisition, LLC
    dated July 31, 2004                                                            
|        | 10 | .34         |  | Indenture of Lease (Brewery) between MacTarnahan Limited
    Partnership dba Harmer Company and PBC Acquisition, LLC
    dated July 31, 2004                                                             
|        | 10 | .35         |  | Line of Credit with First Mutual dated May 14, 2004, as
    amended                                                                                                                                      
|        | 10 | .36*        |  | Directors Compensation Plan                                                                                                                                                                              
|        | 10 | .37*        |  | Employment Agreement between the Registrant and
    Jason Rees(11)                                                                                                                                       
|        | 21 | .1          |  | Subsidiaries of Pyramid Breweries Inc.                                                                                                                                                                   
|        | 23 | .1          |  | Consent of Moss Adams LLP                                                                                                                                                                                
|        | 23 | .2          |  | Consent of KPMG LLP                                                                                                                                                                                      
|        | 31 | .1          |  | Certification Pursuant to 18 U.S.C Section 1350, as Adopted
    Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002:
    John J. Lennon, President and Chief Executive Officer                     
|        | 31 | .2          |  | Certification Pursuant to 18 U.S.C Section 1350, as Adopted
    Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002:
    Jason W. Rees, Vice President of Finance 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: Jason W. Rees, Vice President of Finance 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 Annual Report
    on Form 10-K for
    the year ended December 31, 2002.                                          
|
| | (6) | Incorporated by reference to the Current Report on
    Form 8-K
    January 28, 2004.                                                                           

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| |     |                                                                                                                                                            
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------
| | (7) | Incorporated by reference to the Registrants
    Form S-8 dated
    July 22, 2004.                                                                        
|
| | (8) | 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.
|
| | (9) | Incorporated by reference to the Registrants Quarterly
    Report on
    Form 10-Q for the
    quarter ended June 30, 2001.                               



|     |                                                                                                                                                                                        
|---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(10) | Incorporated by reference to the Registrants Annual Report
    on Form 10-K/ A
    for the year ended December 31, 2004, as amended
    April 11, 2005, May 4, 2005 and June 10, 2005.
|    
|(11) | Incorporated by reference to the Current Report on
    Form 8-K
    September 6, 2005.                                                                                                 

55