##### 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,
    2003                                                        
|          
|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




---

Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the
past
90 days.     Yes  þ          No o

Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be
contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any
amendment to this
Form 10-K.     o

Indicate by check mark whether the registrant is
an accelerated filer (as defined in Exchange Act
Rule 12b-2).     Yes o          No þ

The aggregate market value of the voting stock
held by non-affiliates of the registrant as of the last business
day of the registrants most recently completed second
quarter, June 30, 2003, was $29,930,975.

The number of shares outstanding of the
registrants common stock as of March 8, 2004, was
8,665,085.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Companys definitive Proxy
Statement for the Annual Meeting of Stockholders (to be filed)
to be held on May 12, 2004 are incorporated by reference
into Part III of this Form 10-K.



---






---










PYRAMID BREWERIES INC.

ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED
DECEMBER 31, 2003

|              |  |                                                                                           |  |      |    | 
|------------- |  | ----------------------------------------------------------------------------------------- |  | ---- | -- | 
|              |  |                                                                                           |  | Page
|              |  |                                                                                           |  |     
|PART I       
|Item 1.       |  | Business                                                                                  |  |      | 1  | 
|              |  | General                                                                                   |  |      | 1  | 
|              |  | Industry Background                                                                       |  |      | 1  | 
|              |  | Business Strategy                                                                         |  |      | 2  | 
|              |  | Products                                                                                  |  |      | 3  | 
|              |  | Competition                                                                               |  |      | 3  | 
|              |  | Internal Controls                                                                         |  |      | 5  | 
|              |  | Government Regulations                                                                    |  |      | 5  | 
|              |  | Trademarks                                                                                |  |      | 6  | 
|              |  | Environmental Regulations
    and Operating Considerations                                |  |      | 7  | 
|              |  | Employees                                                                                 |  |      | 7  | 
|              |  | Available Information                                                                     |  |      | 7  | 
|Item 2.       |  | Properties                                                                                |  |      | 7  | 
|Item 3.       |  | Legal Proceedings                                                                         |  |      | 8  | 
|Item 4.       |  | Submission of Matters to a
    Vote of Security Holders                                   |  |      | 8  | 
|PART II      
|Item 5.       |  | Market for Registrants
    Common Equity and Related Stockholder Matters                 |  |      | 8  | 
|Item 6.       |  | Selected Financial Data                                                                   |  |      | 10 | 
|Item 7.       |  | Managements Discussion
    and Analysis of Financial Condition and Results of Operations |  |      | 11 | 
|Item 7A.      |  | Quantitative and Qualitative
    Disclosures about Market Risk                            |  |      | 17 | 
|Item 8.       |  | Financial Statements                                                                      |  |      | 18 | 
|Item 9.       |  | Change in and Disagreements
    with Accountants on Accounting and Financial Disclosure   |  |      | 18 | 
|Item 9A.      |  | Controls and Procedures                                                                   |  |      | 18 | 
|PART III     
|Item 10.      |  | Directors and Executive
    Officers of the Company                                       |  |      | 18 | 
|Item 11.      |  | Executive Compensation                                                                    |  |      | 20 | 
|Item 12.      |  | Security Ownership of
    Certain Beneficial Owners and Management                        |  |      | 20 | 
|Item 13.      |  | Certain Relationships and
    Related Transactions                                        |  |      | 20 | 
|Item 14.      |  | Principal Accountant Fees
    and Services                                                |  |      | 20 | 
|PART IV      
|Item 15.      |  | Exhibits, Financial
    Statement Schedules, and Reports on Form 8-K                      |  |      | 20 | 
|              |  | Signatures                                                                                |  |      | 21 | 
|EXHIBIT 10.19
|EXHIBIT 23.1 
|EXHIBIT 31.1 
|EXHIBIT 31.2 
|EXHIBIT 31.3 
|EXHIBIT 32.1 
|EXHIBIT 32.2 
|EXHIBIT 32.3 



i



---



##### Table of Contents



PYRAMID BREWERIES INC.



PART I




Item 1 
Business



General

Pyramid Breweries Inc. (the Company) is one of
the leading brewers of fresh, full-flavored specialty beers,
generally known as craft beers. The Company produces and markets
over 20 styles of beer under the Pyramid and Thomas Kemper
brand names and a line of six premium sodas produced under the
Thomas Kemper Soda Company brand name. The Company also operates
restaurants adjacent to its breweries under the Pyramid Alehouse
brand name.

The Companys breweries produce high
quality, full-flavored beers in small batches using traditional
brewing methods. The Company also produces high quality,
full-flavored, batch brewed sodas. The Company has two main
breweries, one in Seattle, Washington (Seattle Brewery) which
opened in March 1995, and one in Berkeley, California (Berkeley
Brewery), which opened in February 1997. The Companys
third and fourth breweries which are located in Walnut Creek and
Sacramento, California produce products primarily for on-site
consumption. The Company believes that the breweries and
adjacent alehouses provide increased consumer awareness and
loyalty for the Companys brands by increasing
opportunities for sampling and local product promotion. In 2003,
the Company sold approximately 159,000 barrels of its beer
and soda products.

The Company was incorporated as Hart Brewing in
Washington in March 1984 and changed its name to Pyramid
Breweries Inc. in May 1996 and is headquartered in Seattle,
Washington. The Companys headquarters mailing address is
91 South Royal Brougham Way, Seattle, Washington, 98134, and the
telephone number at that location is (206) 682-8322. The
Companys website address is www.PyramidBrew.com.




Industry Background

The Companys Pyramid and Thomas Kemper beer
brands compete primarily in the craft beer category, and
secondarily in the larger specialty category (which
includes craft beers, imports and super premium beers).
Nationally, craft beers represented approximately 3% of total
beer shipments in 2002 including imports. Craft beers are
distinguishable from mass-produced beers by their wide range of
fuller flavors and adherence to traditional European styles and
higher quality ingredients. Industry experts estimate that total
beer shipments, including imports, increased approximately 1% in
2002, craft beer shipments were estimated to have increased
3.4%, and imports represented a 6% increase.

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

Craft beers generally sell for retail prices
ranging from $5.99 to $7.99 per six-pack. Retail prices are set
independently by distributors and retailers. The Companys
retail prices are usually at the higher end of this range.
Increased consumer demand for high quality, full-flavored beers
allows for a price premium relative to mass-produced domestic
beers. This price premium results in higher profit margins,
which can motivate distributors and retailers to offer and
promote craft beers. The Companys craft beers are sold
primarily in Washington, Oregon and California, which accounted
for approximately 82% of the Companys 2003 beer sales.

The Company participates in the craft soda
category with a line of full flavored, batch brewed sodas sold
under the Thomas Kemper Soda Company label. Thomas Kemper Soda
Companys premium soft drinks include root beer, cream
soda, orange cream, black cherry, grape and ginger ale. The
Company distributes its soda products in supermarkets,
independent food stores, convenience stores and restaurants,
taking advantage of distribution channels established for beer
products. Craft sodas typically sell for $3.99 to $5.49 per
six-pack,

1



---



##### Table of Contents



with prices being set independently by
distributors and retailers. The prices for craft sodas are
substantially higher than the mass-produced brands due to their
flavor profile, unique and upscale packaging and flavors, and
strong consumer demand.


The Company currently operates restaurants
adjacent to its Seattle and Berkeley breweries and the
Sacramento and Walnut Creek Alehouses with the brewery situated
within the restaurant. The restaurants are operated under the
Pyramid Alehouse brand name. In 2003, the restaurants
contributed sales of $12,420,000 including approximately
$4,050,000 in the Companys beers and sodas and $221,000 in
branded clothing and other merchandise. The restaurants have a
total of over 1,300 seats, including outdoor eating areas, and
are situated in highly visible, high traffic locations. The
Alehouses had approximately 744,000 guest visits during 2003.

The Companys beverage operations (sales to
third party distributors) contributed 64% of net sales in 2003,
with beer comprising 48% and soda 16%. Alehouse operations
contributed 36% of net sales in 2003.




Business Strategy

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



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

The Company is committed to producing a portfolio
of high quality craft beers to appeal to a variety of discerning
consumer tastes. The Company currently markets over 20 styles of
beer under the Pyramid and Thomas Kemper brands. The Pyramid
brand accounted for 97% of the Companys beer sales and 73%
of the Companys beverage sales in 2003. The Company
continues to seek opportunities to develop or acquire other
distinctive regional brands, which may help broaden the
Companys product portfolio and strengthen the
Companys presence geographically. The wide range of styles
enables the Company to obtain better market penetration through
greater shelf space for its packaged products in retail stores
and additional tap handles in draft beer outlets.

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

The Company focuses on local sales and marketing
strategies to build its brands. It uses targeted advertising and
promotions, event marketing, sponsorships, local fairs and
festivals and targeted charitable donations of its products to
assist in developing its market presence. The Company also has a
website located at www.PyramidBrew.com. The Company does
not compete directly with the national brands in terms of
mass-media advertising.



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

The Company acquired the Thomas Kemper Soda
Company in 1997. Since that time, the brand has added
significant revenues to the Company. The soda business
represented 25% of beverage sales in 2003, and 16% of total net
sales. The craft soda category possesses many characteristics
that are similar to the craft beer category, and the Company
believes it can leverage its experience and existing
infrastructure to further develop the Thomas Kemper Soda brands.
The Company will also seek opportunities to expand the craft
soda portfolio within its core western markets.

2



---



##### Table of Contents





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

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

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

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



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

The Company distributes its products through a
network of selected independent distributors who deliver
directly to local grocery stores, convenience stores,
restaurants and taverns. The Company feels this type of
distribution system is best suited for developing local
distribution of Company products, particularly in draft beer
accounts where there are important sampling and brand building
opportunities. The Company has not aligned itself with the
distribution system of a single larger brewer. This approach
allows the Company to select distributors in each market that it
believes will focus the greatest attention on its products and
best promote its high quality craft beers and sodas.
Additionally, the ability to change distribution arrangements
for performance related issues is an important advantage. During
2003, the Company distributed its products through 163
wholesalers in 32 states and Canada. Consolidation in the
distribution industry has resulted in a decrease in the number
of distributors to which the Company ships. The Company expects
this trend to continue as additional industry consolidation is
expected.




Products

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

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

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




Competition



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

Competition within the craft beer and soda
markets is based on product quality, taste, consistency,
freshness, distribution, price, ability to differentiate
products, promotional methods and other product support.
Statistics from the latest study of the Institute of Brewing
Studies indicate there were approximately 1,300 craft brewers in
the United States at the end of 2003. Approximately two thirds
of these brewers are brewpubs that sell all of their production
at retail on the brewery premises. The remaining brewers market
their products

3



---



##### Table of Contents



through similar channels to those utilized by the
Company and, although many have limited geographic distribution,
the result is significantly increased competition in all markets.


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

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

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



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

The Companys soda products compete in the
non-alcoholic beverages segment of the commercial beverage
industry. That segment is highly competitive, consisting of
numerous firms including firms that compete in multiple
geographic areas as well as those that are primarily local in
operation, many of which are marketed by companies with
substantially greater financial resources than the Company.
Competitive products include other carbonated drinks, packaged
water, fruit juices, fruit drinks and other beverages sold to
customers in a ready to drink form.

Competitive factors with respect to the
Companys nonalcoholic beverages include pricing, promotion
programs, production efficiency, access to shelf space in retail
outlets and consumer acceptance. The Company competes by
providing a higher quality, full flavored soda product which
requires fresh and natural ingredients, whereas many of the
Companys competitors, utilizing low cost concentrates,
compete more on providing a low cost product.



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

The restaurant industry is highly competitive.
There are a substantial number of restaurant operations that
compete directly and indirectly with the Company, many of which
have significantly greater financial resources, higher revenues
and greater economies of scale. The restaurant business is often
affected by changes in consumer tastes and discretionary
spending patterns; national and regional economic and public
safety conditions; demographic trends; the cost and availability
of raw materials, labor and energy; purchasing power;
governmental regulations and local competitive factors. Any
change in these or other related factors could adversely affect
the Companys restaurant operations. Accordingly, the
Company must constantly evolve and refine the critical elements
of the restaurant concepts over time to protect its longer-term
competitiveness. Multi-unit foodservice operations such as the
Companys can also be substantially affected by adverse
publicity resulting from food quality, illness, injury, health
concerns or operating issues stemming from a single restaurant.
The Company attempts to manage these factors, but the occurrence
of any one of these factors

4



---



##### Table of Contents



could cause the entire Company, beverage and
alehouse operations, to be adversely affected. Management
believes that the restaurant operations compete favorably with
consumers on the critical attributes of quality, variety, taste,
service, consistency and overall value.





Internal Controls

The Company maintains internal controls for each
of its restaurants and breweries through the use of accounting
and management information systems. Each restaurant has the
ability to compile its sales and labor information on a daily
basis through the utilization of point-of-sale terminals. Cash
is controlled through daily deposits of sales proceeds into the
Companys principal depository account, maintained in
Seattle, Washington. The Company stresses the interaction with
restaurant management to ensure accurate, efficient and timely
reporting. Brewery facilities also have time collection computer
payroll systems that have allowed management to manage and
control labor costs efficiently as well as transmit payroll
information directly to the Company.




Government Regulations



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

The Companys Alehouse facilities are
subject to regulation by federal agencies and to licensing and
regulation by state and local health, sanitation, safety, fire
and other departments relating to the development and operation
of restaurants. These regulations include matters relating to
environmental, building and zoning requirements, the preparation
and sale of food and alcoholic beverages, designation of
non-smoking and smoking areas and accessibility of restaurants
to disabled customers. Various federal and state labor laws
govern the Companys relationship with its employees,
including minimum wage requirements, overtime, working
conditions and immigration requirements. Significant additional
government-imposed increases in minimum wages, paid leaves of
absence and mandated health benefits, or increased tax reporting
and tax payment requirements for employees who receive
gratuities, could have an adverse effect on the Companys
results of operations. Delays or failures in obtaining the
required construction and operating licenses, permits or
approvals could delay or prevent the opening of new restaurants.
Management believes the Company is operating in substantial
compliance with applicable laws and regulations governing its
operations.



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

The manufacture and sale of alcoholic beverages
is a highly regulated and taxed business. The Companys
operations are subject to more restrictive regulations and
increased taxation by federal, state, and local governmental
entities than are those of non-alcohol related beverage
businesses. Federal, state, and local laws and regulations
govern the production and distribution of beer, including
permitting, licensing, trade practices, labeling, advertising,
marketing, alcohol content, distributor relationships, and
related matters. Federal, state, and local governmental entities
also levy various taxes, license fees, and other similar charges
and may require bonds to ensure compliance with applicable laws
and regulations. Failure by the Company to comply with
applicable federal, state, or local laws and regulations could
result in penalties, fees, suspension, or revocation of permits,
licenses, or approvals. There can be no assurance that other or
more restrictive laws, regulations or higher taxes will not be
enacted in the future.



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

The Company produces and sells its alcoholic
beverages to distributors pursuant to a federal
wholesalers basic permit and a federal brewers
notice. Brewery and wholesale operations require various
federal, state, and local licenses, permits, and approvals. In
addition, some states prohibit wholesalers and/or retailers from
holding an interest in any supplier, such as the Company or the
Company owning any interest in a distributor or retailer.
Violation of such regulations can result in the loss or
revocation of existing licenses by the wholesaler, retailer,
and/or the supplier. The loss or revocation of any existing
licenses, permits or approvals, and/or the failure to obtain any
additional or new licenses, could have a material adverse effect
on the ability of the Company to conduct its business.

5



---



##### Table of Contents



On January 24, 2003 (60 days after the
Homeland Security Act became law), the Bureau of Alcohol Tobacco
and Firearms (BATF) was divided into two new bureaus, the BATF
and the Alcohol and Tobacco Tax Trade Bureau (TTB). The BATF,
part of the Department of Justice, will oversee the firearms,
explosives and arson programs and the TTB, Department of
Treasury, will handle the regulatory aspects of the alcohol and
tobacco industries.

On the federal level, brewers are required to
file an amended notice with the TTB in the event of a material
change in the production process, production equipment, the
brewerys location, the brewerys management, or the
brewerys ownership. The Companys operations are
subject to audit and inspection by the TTB at any time.

On the state and local level, some jurisdictions
merely require notice of any material change in the operations,
management or ownership of the permit or licensee. State and
local laws and regulations governing the sale of beer within a
particular state by an out-of-state brewer or wholesaler vary
from locale to locale.

The TTB permits and registrations can be
suspended, revoked or otherwise adversely affected for failure
to pay tax, keep proper accounts, pay fees, bond premises, abide
by federal alcoholic beverage production and distribution
regulations, and to notify the TTB of any change (as described
above). Permits, licenses, and approvals from state regulatory
agencies can be revoked for many of the same reasons.

Because of the many and various state and federal
licensing and permitting requirements, there is a risk that one
or more regulatory agencies could determine that the Company has
not complied with applicable licensing or permitting regulations
or has not maintained the approvals necessary for it to conduct
business within its jurisdiction. There can be no assurance that
any such regulatory action would not have a material adverse
effect upon the Company or its operating results. Management
believes the Company is operating in substantial compliance with
applicable laws and regulations governing its operations.



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

The federal government and all of the states levy
excise taxes on alcoholic beverages, including beer. For brewers
producing no more than 2.0 million barrels of beer per
calendar year, the federal excise tax is $7.00 per barrel on the
first 60,000 barrels of beer removed for consumption or sale
during a calendar year, and $18.00 per barrel for each barrel in
excess of 60,000. For brewers producing more than
2.0 million barrels of beer for domestic consumption in a
calendar year, the federal excise tax is $18.00 per barrel. The
Company has been able to take advantage of this reduced tax on
the first 60,000 barrels of its beers produced. Individual
states also impose excise taxes on alcoholic beverages in
varying amounts, which have also been subject to change. The
determination of the party responsible, between the Company or
the distributor, to bear the liability of these taxes varies by
state. Federal and state legislators routinely consider various
proposals to impose additional excise taxes on the production
and distribution of alcoholic beverages. Further increases in
excise taxes on beer could result in a general reduction in
sales for the affected products and/or in the profit realized
from the sales of the affected products.



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

The Company is subject to dram-shop
laws in most states where it currently operates and will
potentially be subject to such statutes in certain other states
for future sites. These laws generally provide a person injured
by an intoxicated person the right to recover damages from an
establishment which wrongfully served alcoholic beverages to
such person. The Company carries liquor liability coverage as
part of its existing comprehensive general liability insurance
which it believes is consistent with coverage carried by other
entities in the restaurant industry. However, a judgment against
the Company under a dram-shop statute in excess of the
Companys liability coverage could have a material adverse
effect on the Company.




Trademarks

The Company has obtained United States Trademark
Registrations for several trademarks, including but not limited
to Pyramid®, Pyramid Ales®, Pyramid Alehouse®,
Pyramid Breweries® and Thomas Kemper® as

6



---



##### Table of Contents



well trademarks and pending trademark
applications on individual products and design logos. The
Company regards its Pyramid family of trademarks and
other trademarks as having substantial value and as being an
important factor in the marketing of its products. The Company
is not aware of any trademark infringements that could
materially affect its current business or any prior claim to the
trademarks that would prevent the Company from using such
trademarks in its business. The Companys policy is to
pursue registration of its trademarks whenever possible and to
vigorously oppose any infringement of its trademarks.





Environmental Regulations and Operating
Considerations

The Companys operations are subject to a
variety of extensive and changing federal, state, and local
environmental laws, regulations, and ordinances that govern
activities or operations that may have adverse effects on human
health or the environment. Such laws, regulations, or ordinances
may impose liability for the cost of remediation of, and for
certain damages resulting from sites of past releases of
hazardous materials. The Company believes that it currently
conducts, and in the past has conducted, its activities and
operations in substantial compliance with applicable
environmental laws, and believes that any cost arising from
existing environmental laws will not have a material adverse
effect on the Companys financial condition or results of
operations. However, there can be no assurance that
environmental laws will not become more stringent in the future
or that the Company will not incur costs in the future in order
to comply with such laws.

The Companys operations are subject to
certain hazards and liability risks faced by all producers of
alcoholic beverages, such as potential contamination of
ingredients or products by bacteria or other external agents
that may be wrongfully or accidentally introduced into products
or packaging. While the Company has never experienced a
contamination problem in its products, the occurrence of such a
problem could result in a costly product recall and cause
serious damage to the Companys reputation for product
quality, as well as give rise to product liability claims. The
Company maintains insurance which the Company believes is
sufficient to cover any product liability claims which might
result from a contamination problem in its products.




Employees

At December 31, 2003, the Company employed
395 people, including 43 in the Brewery Operations, 298 in the
Alehouse Segment, 32 in sales and marketing and 22 in
administration capacities (including home office, administrative
and executive personnel). No employee is covered by a collective
bargaining agreement, and the Company has never experienced an
organized work stoppage, strike or labor dispute. The Company
believes it maintains a good working relationship with its
employees and has no reason to believe that a good working
relationship will not continue.




Available Information

We maintain an Internet site at
http://www.PyramidBrew.com. We make available free of charge on
or through our Internet site, our annual report on
Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K and amendments to those reports filed
or furnished pursuant to Section 13(a) or 15(d) of the
Exchange Act as soon as reasonably practicable after we
electronically file such material with, or furnish it to, the
SEC. We will voluntarily provide electronic copies of our
filings free of charge upon request.




Item 2 
Properties

The Company currently owns and operates four
breweries, each with an adjacent restaurant: one in Seattle,
Washington, one in Berkeley, California, one in Sacramento,
California and one in Walnut Creek, California. The estimated
total annual beer capacity of the four breweries was
approximately 204,000 barrels at the end of 2003.



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

In March 1995, the Company completed the Seattle
Brewery, Alehouse and corporate offices near downtown Seattle.
This brewery and 340 seat restaurant plus an outdoor seating
area, operated as the Pyramid Alehouse, consists of
approximately 33,000 square feet of leased building area. The
estimated annual beer

7



---



##### Table of Contents



production capacity was 50,000 barrels at the end
of 2003. The Seattle building lease expires in 2004, with
options to extend the lease term for three five-year periods.
The Company has also leased approximately 11,250 square feet of
warehouse and additional outside storage space adjacent to the
Seattle Brewery and Alehouse for a period of seven years, also
expiring in 2004, and has options to extend the lease term for
three additional five-year periods. The Company exercised the
options to renew the Seattle facility leases in 2004.




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

Completed and opened in February 1997, the
Berkeley Brewery and its adjacent Pyramid Alehouse are housed in
a leased building of approximately 93,000 square feet. During
January 2000, the Company exercised an option to lease an
additional 29,000 square feet of adjacent space and is currently
subleasing that space. The brewery had an estimated beer
production capacity of 150,000 barrels at the end of 2003.
During 2000, fermentation capacity was added which increased the
estimated annual beer capacity to 150,000 barrels from 80,000
barrels. The Berkeley Brewery has a designed maximum potential
capacity in excess of 200,000 barrels, which can be achieved by
adding more fermentation capacity. The Berkeley Alehouse has
seating for 350 plus an outdoor seating area. The building was
leased commencing in November 1995 for a 15-year term, with
options to extend the lease term for two five-year periods. The
Company also has the option to purchase the entire building
during the lease term at its fair market value.



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

Completed and opened in May 2002, the Walnut
Creek Alehouse is located in a leased building of approximately
7,800 square feet. The restaurant has a small, on-site brewery
with an estimated beer production capacity of 2,600 barrels. The
Walnut Creek Alehouse has seating for 275 plus an outdoor
seating area. The building was leased commencing in October 2001
for an initial 11-year term, with options to extend the lease
term for three five-year periods and one final option for a
four-year period.



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

Completed and opened in July 2003, the Sacramento
Alehouse is located in a leased building of approximately 9,500
square feet. The restaurant has a small, on-site brewery with an
estimated beer production capacity of 1,600 barrels. The
Sacramento Alehouse is designed with seating for 295, plus an
outdoor seating area. The building lease was entered into April
2002, commencing in July 2003 for an initial 10-year and 8-month
term, with options to extend the lease term for two five-year
periods.




Item 3  Legal
Proceedings

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




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

There were no matters submitted to a vote of
security holders during the fourth quarter of 2003.




PART II



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

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

8



---



##### Table of Contents



The following table sets forth the high and low
sales prices and the cash dividends paid per share of Pyramid
Breweries Inc.s common stock for the years ended
December 31, 2003 and 2002.

|                         |                |      |   |      |  |          |   |      |  |  |   |       | 
|------------------------ | -------------- | ---- | - | ---- |  | -------- | - | ---- |  |  | - | ----- | 
|                         |                |      |   |      |  | Dividend
|                         |                | High |   | Low  |  | Paid    
|                         |                |      |   |      |  |         
|Calendar Quarters  2003 |                |      |   |      |  |          |   |      |  |  |   |      
|                         | First Quarter  |      | $ | 2.93 |  |          | $ | 2.61 |  |  | $ | 0.044 | 
|                         | Second Quarter |      |   | 3.58 |  |          |   | 2.82 |  |  |   | 0.044 | 
|                         | Third Quarter  |      |   | 3.47 |  |          |   | 2.81 |  |  |   | 0.044 | 
|                         | Fourth Quarter |      |   | 3.44 |  |          |   | 2.96 |  |  |   | 0.044 | 
|Calendar Quarters  2002 |                |      |   |      |  |          |   |      |  |  |   |      
|                         | First Quarter  |      |   | 2.49 |  |          |   | 2.25 |  |  |   | 0.044 | 
|                         | Second Quarter |      |   | 2.48 |  |          |   | 2.26 |  |  |   | 0.044 | 
|                         | Third Quarter  |      |   | 2.40 |  |          |   | 2.19 |  |  |   | 0.044 | 
|                         | Fourth Quarter |      |   | 2.99 |  |          |   | 2.11 |  |  |   | 0.044 | 

On March 8, 2004, the Company had
approximately 4,377 stockholders. The last reported sale
price per share on March 8, 2004, was $3.10. The Company
had no sales of unregistered securities during 2003.

DIVIDEND POLICY

On December 15, 1999, the Company announced
a new dividend policy and declared its first quarterly cash
dividend. The Company paid approximately $1,502,000, or $0.176
per common share, of cash dividends during the fiscal year ended
December 31, 2003. On March 5, 2004, the Board of
Directors declared a quarterly cash dividend of $0.044 per
common share to shareholders of record on March 31, 2004.
Any future declaration of dividends will depend, among other
things, on the Companys results of operations, capital
requirements and financial condition, and on such other factors
as the Companys Board of Directors may in its discretion
consider relevant.

9



---



##### Table of Contents



SELECTED FINANCIAL AND OPERATING
DATA



Item 6  Selected Financial
Data

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

SELECTED FINANCIAL DATA

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


|                                             |  |                          |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|-------------------------------------------- |  | ------------------------ | ------- | ---- |  | ---- | ------- | ---- |  | ---- | ------- | - |  | - | ------- | - |  | - | ------- | -
|                                             |  |                         
|                                             |  | Years Ended December 31,
|                                             |  |                         
|                                             |  | 2003                     |         | 2002 |  | 2001 |         | 2000 |  | 1999
|                                             |  |                          |         |      |  |      |         |      |  |     
|Income Statement Data:                       |  |                          |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|Gross sales                                  |  | $                        | 36,378  |      |  | $    | 35,523  |      |  | $    | 31,995  |   |  | $ | 30,275  |   |  | $ | 28,811  |  
|Less excise taxes                            |  |                          | 1,753   |      |  |      | 1,711   |      |  |      | 1,572   |   |  |   | 1,704   |   |  |   | 1,735   |  
|                                             |  |                          |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|Net sales                                    |  |                          | 34,625  |      |  |      | 33,812  |      |  |      | 30,423  |   |  |   | 28,571  |   |  |   | 27,076  |  
|Cost of sales                                |  |                          | 27,640  |      |  |      | 25,360  |      |  |      | 22,877  |   |  |   | 20,802  |   |  |   | 20,053  |  
|                                             |  |                          |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|Gross margin                                 |  |                          | 6,985   |      |  |      | 8,452   |      |  |      | 7,546   |   |  |   | 7,769   |   |  |   | 7,023   |  
|Selling, general and administrative expenses |  |                          | 8,492   |      |  |      | 8,678   |      |  |      | 9,129   |   |  |   | 8,370   |   |  |   | 8,375   |  
|Impairment charge                            |  |                          |        |      |  |      |        |      |  |      |        |   |  |   |        |   |  |   | 3,288   |  
|                                             |  |                          |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|Operating loss                               |  |                          | (1,507  | )    |  |      | (226    | )    |  |      | (1,583  | ) |  |   | (601    | ) |  |   | (4,640  | )
|Other income, net                            |  |                          | 312     |      |  |      | 380     |      |  |      | 542     |   |  |   | 586     |   |  |   | 494     |  
|                                             |  |                          |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|(Loss) income before income taxes            |  |                          | (1,195  | )    |  |      | 154     |      |  |      | (1,041  | ) |  |   | (15     | ) |  |   | (4,146  | )
|(Provision) benefit for income taxes         |  |                          | (3      | )    |  |      | 98      |      |  |      | (574    | ) |  |   |        |   |  |   |        |  
|                                             |  |                          |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|Net (loss) income                            |  | $                        | (1,198  | )    |  | $    | 252     |      |  | $    | (1,615  | ) |  | $ | (15     | ) |  | $ | (4,146  | )
|                                             |  |                          |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|Basic net (loss) income per share            |  | $                        | (0.14   | )    |  | $    | 0.03    |      |  | $    | (0.20   | ) |  | $ | (0.00   | ) |  | $ | (0.50   | )
|                                             |  |                          |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|Weighted average basic shares outstanding    |  |                          | 8,452   |      |  |      | 8,203   |      |  |      | 7,987   |   |  |   | 7,940   |   |  |   | 8,231   |  
|                                             |  |                          |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|Diluted net (loss) income per share          |  | $                        | (0.14   | )    |  | $    | 0.03    |      |  | $    | (0.20   | ) |  | $ | (0.00   | ) |  | $ | (0.50   | )
|                                             |  |                          |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|Weighted average diluted shares outstanding  |  |                          | 8,452   |      |  |      | 8,243   |      |  |      | 7,987   |   |  |   | 7,940   |   |  |   | 8,231   |  
|                                             |  |                          |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|Cash dividends declared per share            |  | $                        | 0.176   |      |  | $    | 0.176   |      |  | $    | 0.176   |   |  | $ | 0.160   |   |  | $ | 0.04    |  
|                                             |  |                          |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|Balance Sheet Data:                          |  |                          |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|Working capital                              |  | $                        | 1,745   |      |  | $    | 3,783   |      |  | $    | 4,728   |   |  | $ | 7,026   |   |  | $ | 6,981   |  
|Fixed assets, net                            |  |                          | 21,406  |      |  |      | 20,682  |      |  |      | 20,523  |   |  |   | 21,126  |   |  |   | 22,739  |  
|Total assets                                 |  |                          | 27,784  |      |  |      | 29,295  |      |  |      | 29,605  |   |  |   | 32,270  |   |  |   | 33,719  |  
|Stockholders equity                         |  |                          | 22,203  |      |  |      | 24,536  |      |  |      | 25,224  |   |  |   | 27,938  |   |  |   | 29,861  |  
|Operating Data (in barrels):                 |  |                          |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|Beer barrels shipped                         |  |                          | 115,000 |      |  |      | 117,000 |      |  |      | 111,000 |   |  |   | 110,000 |   |  |   | 108,000 |  
|Soda barrels shipped                         |  |                          | 44,000  |      |  |      | 47,000  |      |  |      | 46,000  |   |  |   | 38,000  |   |  |   | 30,000  |  
|                                             |  |                          |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|Total barrels shipped                        |  |                          | 159,000 |      |  |      | 164,000 |      |  |      | 157,000 |   |  |   | 148,000 |   |  |   | 138,000 |  
|                                             |  |                          |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|Beer production capacity at year-end         |  |                          | 204,000 |      |  |      | 203,000 |      |  |      | 200,000 |   |  |   | 200,000 |   |  |   | 172,000 |  
|                                             |  |                          |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  

10



---



##### Table of Contents








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

Overview

Pyramid Breweries Inc. was incorporated in
1984 and is engaged in the brewing and sale of specialty beers
and sodas and in restaurant operations. The Company currently
sells its beverage products primarily in Washington, Oregon and
California under the Pyramid and Thomas Kemper brand names and
operates four restaurants, under the Pyramid Alehouse name. The
restaurants in Seattle, Washington and Berkeley, California are
located adjacent to the main production facilities. The other
two restaurants, located in Walnut Creek and Sacramento,
California are primarily restaurants with a brewery capable of
providing products for on-site consumption. For the year ended
December 31, 2003, the Company had gross revenues of
$36,378,000, an increase of 2% from 2002. The Companys
revenues consist of sales of beer and soda to third-party
distributors and retail sales of beer, soda, food, apparel and
other items in its restaurants. For the years ended
December 31, 2003 and 2002, approximately 64% and 69% of
the Companys net sales were sales of beer and soda to
third party distributors. Total retail alehouse sales accounted
for 36% and 31% of total net sales in 2003 and 2002,
respectively.

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

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

The Company sells its craft beers in bottles and
kegs. Although bottled products normally sell for a higher per
barrel selling price, gross margin on the Companys draft
products are typically higher as a percentage. Changes in the
proportion of sales of bottled and draft products therefore will
affect the Companys gross margin. For 2003 and 2002,
approximately 55% of the Companys sales of craft beers
were bottled products.

On January 26, 2004 the Company and Portland
Brewing Company, an Oregon corporation, announced that they had
entered into an asset purchase agreement. Per the asset purchase
agreement, Pyramid Breweries Inc. will acquire Portland
Brewing Companys brewery and alehouse assets for total
consideration of approximately $4.2 million, consisting of
a combination of assumed liabilities, cash and, at the
Companys sole option, shares of the Companys
unregistered common stock. The terms of the transaction also
include a 5-year earn out which may result in additional
payments to Portland Brewing based on sales of Portland Brewing
brands during the earn-out period. The transaction is subject to
approval by the shareholders of Portland Brewing, and other
customary closing conditions. However, shareholders representing
at least 74% of Portland Brewings outstanding voting power
are committed to vote in favor of the transaction pursuant to a
voting agreement. The transaction is expected to close in the
second quarter of 2004.

This report contains forward-looking statements
within the meaning of Section 21E of the Securities
Exchange Act of 1934, which are subject to the safe
harbor created by that section. These forward-looking
statements include, but are not limited to, statements
concerning future revenues, operating margins, expenses and cash
needs. The Companys actual future results could differ
materially from those projected in the forward-looking
statements. Some factors, which could cause future actual
results to differ materially from the Companys recent
results or those projected in the forward-looking statements,
are described in the Risk

11



---



##### Table of Contents



Factors and Forward Looking Statements below. The
Company assumes no obligation to update the forward-looking
statements for such factors.


Critical Accounting Policies

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

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

Realization of Deferred Tax Assets.The Company evaluates the
realizability of its deferred tax assets quarterly by assessing
the need for and amount of the valuation allowance. The
evaluation of the realizability of the deferred tax assets is
based on existing deferred tax liabilities and an assessment of
the Companys ability to generate future U.S. taxable
income. Results of operations in recent years are considered in
the assessment. The Company records a valuation allowance for
the portion of its deferred tax assets that do not meet the
recognition criteria of SFAS No. 109, Accounting for
Income Taxes. If circumstances related to the
Companys ability to generate future U.S. taxable
income change, the Companys evaluation of the
realizability of its deferred tax assets could materially change.

Stock-Based Compensation.The Company follows Accounting
Principles Board Opinion No. 25 (APB 25),
Accounting for Stock Issued to Employees, in
accounting for its employee stock options and employee stock
purchase plan using the fair value based method. Under
APB 25, because the exercise price of the Companys
employee stock options equals the market price of the underlying
stock on the date of grant, no compensation expense is
recognized in the Companys Statements of Operations. The
Company is required under SFAS No. 123, Accounting
for Stock-Based Compensation, to disclose pro forma
information regarding option grants made to its employees based
on specific valuation techniques that produce estimated
compensation charges. The Black-Scholes option pricing model is
used by the Company in estimating the fair value of options. If
the Company changes the accounting for stock-based compensation,
the Companys results of operations could materially change.

Results of Operations



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

Gross Sales.Gross
sales increased 2.4% to $36,378,000 in the year ended
December 31, 2003 from $35,523,000 for 2002. The sales
increase was driven primarily by a 20.3% or $2,093,000 increase
in Alehouse Segment sales to $12,420,000 offset by a 4.9% or
$1,238,000 decrease in Beverage Segment sales. The alehouse
sales increase was primarily the result of the new Sacramento
Alehouse location which contributed $1,760,000 in sales since
the opening date in July 2003. The additional increase in
alehouse sales is attributed to a full year of operation in 2003
from the Walnut Creek Alehouse location which was only open for
eight months of 2002, the first year of its operation. Total
beverage shipments in 2003 decreased 2.6% to 159,000 barrels.
Beer shipments decreased 1.4% across various products, while
soda decreased 5.7% driven by a 27.4% decrease in the soda
sampler pack. Wholesale beverage sales (beer and soda combined)
in Washington, Oregon and California decreased by 4.1% in 2003
compared to 2002 sales. Sales in Washington, Oregon and
California accounted for 82.2% and 83.2% of the Companys
beverage sales in 2003 and 2002, respectively. Sales in the
Southern California region, which is the Companys second
largest in terms of barrel shipments behind Washington State,
increased 4.9% to 34,000 barrels over 2002.

12



---



##### Table of Contents



Excise Taxes.Excise
taxes were 4.8% of gross sales in 2003 and 2002. The weighted
average excise tax per barrel of beer sold was $15.20 and $14.62
for the years ended December 31, 2003 and 2002,
respectively. The per barrel increase is the result of a greater
mix of beer shipments to California which bear a higher state
excise tax than the Companys other primary states of
business.

Gross Margin.Gross
margin decreased 17.4% to $6,985,000 in 2003 from $8,452,000 in
2002. This decrease was due in part to (1) lower sales
volumes, (2) lower net selling prices, including increased
promotional activities on the beverage side of the business,
(3) increased insurance and benefit costs of approximately
$402,000, (4) $100,000 of pre-opening costs for the
Sacramento Alehouse and (5) Alehouse Segment labor cost
increases. The following table represents the gross margin
comparisons and changes by segment:

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

Selling, General and Administrative
Expenses.Selling, general and
administrative expenses decreased 2.1% to $8,492,000 in 2003
from $8,678,000 in 2002. Selling, general and administrative
expenses as a percent of net sales also decreased to 24.5% in
2003 from 25.7% in the prior year. This decrease was due
primarily to a decrease in incentive compensation expense during
the year as a result of the Companys 2003 performance.

Other Income, net.Other income, net decreased to $312,000 in 2003 from $380,000 in
2002 or a 17.9% decrease. Both lower investment balances and
lower rates of interest earned on cash equivalents and
short-term investments caused the decline in interest income.
Interest income was $56,000 and $102,000 for the years ended
December 31, 2003 and 2002, respectively. Parking income
was $216,000 and $234,000 for the years ended December 31,
2003 and 2002, respectively.

Income Taxes.As of
December 31, 2003, the Company had deferred tax assets
arising from deductible temporary differences and tax loss
carryforwards offset against certain deferred tax liabilities.
Realization of the deferred tax assets is dependent on the
Companys ability to generate future U.S. taxable
income. The Company does not believe that its net deferred
assets meet the more likely than not realization
criteria of SFAS No. 109, Accounting for Income
Taxes. Accordingly, a full valuation allowance has been
established. The Company will continue to evaluate the
realizability of the deferred tax assets quarterly by assessing
the need for and amount of the valuation allowance.

Net (Loss) Income.The Company generated a net loss of $1,198,000 for 2003 compared
with a net income of $252,000 in 2002. The $1,450,000 reduction
was due to lower beverage operation sales volumes and lower
operating margins.



| |                                                                          
| | -------------------------------------------------------------------------
| | Year Ended December 31, 2002 Compared
    to Year Ended December 31, 2001

Gross Sales.Gross
sales increased 11.0% to $35,523,000 in the year ended
December 31, 2002 from $31,995,000 for 2001. The sales
increase was primarily the result of a 7.0% increase in beverage
sales to $25,196,000 in 2002 from $23,539,000 in 2001 and the
new Walnut Creek Alehouse location which contributed $2,091,000
in sales since the opening date in May 2002. Alehouse same store
sales were down $220,000 or 2.6% for the year, primarily
resulting from reduced July and October sales in the Seattle
Alehouse which benefited from the All-Star Game and additional
Seattle Mariners (Major League Baseball) playoff games in 2001,
held directly across the street from the alehouse. Total
beverage shipments in 2002 increased 4.4% to
163,700 barrels from 156,800 barrels in 2001. Beer
shipments increased 5.7% to 117,100 barrels, driven by the
Companys top selling product, Pyramid Hefeweizen, which
was up 6% and the newer Coastline Pilsner which contributed 4.7%
of the increase over 2001 shipments. Soda shipments increased
1.3% to 46,600 barrels in 2002 from 46,000 in 2001 primarily due
to increased sales of the soda sampler pack, which includes

13



---



##### Table of Contents



all six of the Companys soda products.
Thomas Kemper beer shipments decreased 25.4% to
4,400 barrels in 2002 from 5,900 in 2001. Wholesale
beverage sales (beer and soda combined) in Washington, Oregon
and California increased by 5.5% in 2002 compared to 2001 sales.
Sales in Washington, Oregon and California accounted for 83.2%
and 84.2% of the Companys beverage sales in 2002 and 2001,
respectively. Sales in the Southern California region, which is
the Companys second largest in terms of barrel shipments
behind Washington State, increased 22.8% to 32,300 barrels over
2001.


Excise Taxes.Excise
taxes were 4.8% and 4.9% of gross sales in 2002 and 2001,
respectively. Excise taxes were slightly lower as a percentage
of gross sales in 2002 due to a greater proportion of alehouse
sales in 2002 compared to 2001, which do not bear excise taxes.

Gross Margin.Gross
margin increased 12.0% to $8,452,000 in 2002 from $7,546,000 in
2001. Gross margin as a percentage of net sales also increased
to 25.0% in 2002 from 24.8% in 2001. The increase in gross
margin was due primarily to volume growth in core products such
as Pyramid Hefeweizen and Coastline Pilsner, strategic price
increases on selected beverages and increased production
efficiencies primarily in the Seattle brewing facility, being
only partially offset by the start up costs of the new Walnut
Creek Alehouse.

Selling, General and Administrative
Expenses.Selling, general and
administrative expenses decreased 4.9% to $8,678,000 in 2002
from $9,128,000 in 2001. Selling, general and administrative
expenses as a percent of net sales also decreased to 25.7% in
2002 from 30.0% in the prior year. This decrease was due
primarily to a decrease in selected advertising expenses and a
decrease of $103,000 for a non-cash stock-based compensation
expense related to the equity arrangement with the
Companys CEO announced in the second quarter of 2001.

Other Income, net.Other income, net decreased to $380,000 in 2002 from $542,000 in
2001. The 29.9% decrease was due mainly from the lower interest
earned on cash equivalents and short-term investments. Both
lower investment balances and lower rates of interest caused the
decline in interest income. Parking income also decreased as
there were fewer Seattle Mariners games across the street from
the Seattle Alehouse location in 2002 versus 2001. Interest
income was $102,000 and $271,000 for the years ended
December 31, 2002 and 2001, respectively. Parking income
was $234,000 and $257,000 for the years ended December 31,
2002 and 2001, respectively.

Income Taxes.During
2002, the Company was able to recognize a $98,286 tax refund
resulting from the Job Creation and Worker Assistance Act of
2002. This Act provided for an increase to the limit on net
operating loss deductions for alternative minimum tax (AMT)
purposes from 90% of AMT income to 100% for net operating losses
generated in tax years ending in 2001. As of December 31,
2002, the Company had deferred tax assets arising from
deductible temporary differences and tax loss carryforwards
offset against certain deferred tax liabilities. Realization of
the deferred tax assets is dependent on the Companys
ability to generate future U.S. taxable income. The Company
does not believe that its net deferred assets meet the
more likely than not realization criteria of SFAS
No. 109. Accordingly, a full valuation allowance has been
established. The Company will continue to evaluate the
realizability of the deferred tax assets quarterly by assessing
the need for and amount of the valuation allowance.

Net Income (Loss).The Company earned net income of $252,000 for 2002 compared with
a net loss of $1,615,000 in 2001. The $1,867,000 improvement was
due to improved operating margins, lower selling, general and
administrative expenses and the AMT tax refund in 2002 versus
the increase in the tax valuation allowance recorded in 2001.

Liquidity and Capital Resources

The Company had $2,050,000 of cash, cash
equivalents and short-term investments at December 31,
2003. At December 31, 2003, the Companys working
capital was $1,745,000 compared to $3,783,000 at
December 31, 2002. Net cash provided by operating
activities for the year ended December 31, 2003 increased
to $2,583,000 from $1,620,000 for the prior year. The increase
was primarily due to the collection timing of accounts
receivable and the $800,000 tenant improvement credit received
from the landlord of the Sacramento Alehouse facility.

14



---



##### Table of Contents



Net cash used in investing activities for the
year ended December 31, 2003 was $392,000 compared to
$366,000 for the prior year. The cash used in investing
activities in 2003 included approximately $3,142,000 in capital
spending, including $2,293,000 for the development of the
Sacramento Alehouse, $515,000 for equipment improvements in the
breweries with the balance going to the existing alehouse and
various marketing projects. The cash used for capital spending
was funded primarily with proceeds related to the sales and
maturities, net of purchases, of short-term investments which
was $2,750,000. The Companys long term investments
purchased in the fourth quarter of 2001 have maturity dates in
2004 and therefore are classified as short-term investments, at
December 31, 2003. The Company currently has no other
long-term investments.

At December 31, 2003, the Companys
commitment to make future payments under contractual obligations
was as follows:

|                 |  |       |           |           |  |             |           |             |  |           |           |  |  |   |           |  |  |   |           | 
|---------------- |  | ----- | --------- | --------- |  | ----------- | --------- | ----------- |  | --------- | --------- |  |  | - | --------- |  |  | - | --------- | 
|                 |  |       |           | Less Than |  |             |           |             |  | More Than
|                 |  | Total |           | 1 Year    |  | 1 - 3 years |           | 3 - 5 years |  | 5 years  
|                 |  |       |           |           |  |             |           |             |  |          
|Operating leases |  | $     | 8,878,000 |           |  | $           | 1,238,000 |             |  | $         | 2,140,000 |  |  | $ | 2,220,000 |  |  | $ | 3,280,000 | 
|Note payable(1)  |  |       | 40,000    |           |  |             | 20,000    |             |  |           | 20,000    |  |  |   |          |  |  |   |          | 



---



|    |                                                                                                                                                          
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The amounts are payments as stated in the
    non-interest bearing note. The note payable is recorded using a
    10% discount rate on the balance sheet.

On December 15, 1999, the Company announced
its first regular quarterly cash dividend and has declared and
paid a quarterly cash dividend each consecutive quarter since
the initial declaration. During the year ended December 31,
2003 the Company declared per share dividends of $0.176 and paid
out $1,502,000 in cash dividends. Any future declaration of
dividends will depend, among other things, on the Companys
results of operations, capital requirements and financial
condition, and on other such factors as the Companys Board
of Directors may in its discretion consider relevant.

On December 15, 1999, the Company also
announced a stock buyback plan to repurchase up to $2,000,000 of
the Companys common stock from time to time on the open
market. Stock purchases are at the discretion of management and
depend, among other things, on the Companys results of
operations, capital requirements and financial condition, and on
such other factors as the Companys management may consider
relevant. As of December 31, 2003, the Company has
purchased a total of 457,724 shares at an average price of
$1.94 per share for a total of $892,000 since the inception
of the program. During the year ended December 31, 2003,
the Company did not purchase any shares.

On January 26, 2004 the Company and Portland
Brewing Company, an Oregon corporation, announced that they had
entered into an asset purchase agreement. Per the asset purchase
agreement, Pyramid Breweries Inc. will acquire Portland Brewing
Companys brewery and alehouse assets for total
consideration of approximately $4.2 million, consisting of
a combination of assumed liabilities, cash and, at the
Companys sole option, shares of the Companys
unregistered common stock. The terms of the transaction also
include a 5-year earn out which may result in additional
payments to Portland Brewing based on sales of Portland Brewing
brands during the earn-out period.

On February 26, 2004, the Company announced
that Martin Kelly is stepping down as Chairman and Chief
Executive Officer. In connection with Mr. Kellys
termination, there are amounts due to him related to salary
continuation payments under his employment agreement.
Additionally, Mr. Kelly has the right to sell his shares of
Company stock back to the Company, which would result in
acceleration of repayment of the notes due to the Company
related to his original purchase of those shares. The net cash
impact of Mr. Kelly selling his shares to the Company would
be a function of the then current market price of the
Companys stock, reduced by the balance of the notes
outstanding at that time. The Company estimates that the net
cash requirements on the Company related to Mr. Kelly selling
his shares would be in the range of $300,000 to $400,000.

The Company believes that during the first half
of 2004, there is the potential that the acquisition of Portland
Brewing Company, the uncertainty of payments related to the
termination of the former CEO, and the ongoing operational needs
of the Company may exceed its current level of available working
capital. If

15



---



##### Table of Contents



required, the Company intends to seek a line of
credit from a financial institution to meet these additional
working capital needs. While the Company is confident in its
ability to obtain the necessary financing, there can be no
assurance that such financing will be available, or that it will
be available at commercially acceptable terms to the Company.


Future capital requirements may vary depending on
such factors as the cost of acquisition of businesses, brands
and real estate costs in the markets selected for future
expansion, whether such real estate is leased or purchased and
the extent of improvements necessary. While there can be no
assurance that current expectations will be realized and plans
are subject to change upon further review, the Company believes
that its cash balances, together with cash from operations and,
to the extent required and available, bank borrowings, will be
sufficient for the Companys working capital needs.



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

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

In November 2002, the FASB issued FASB
Interpretation No. (FIN) 45, Guarantors Accounting
and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others. FIN 45 requires
recording of a liability for the fair value of the guarantee at
the inception of certain guarantees issued or modified after
December 31, 2002. FIN 45 also requires disclosures about a
guarantors obligations under certain guarantees. Adoption
of the interpretation did not have a material impact on the
Companys financial position or results of operations.

Risk Factors and Forwarding Looking
Statements

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

Increasing
Competition.The domestic market in
which the Companys craft beers compete is highly
competitive for many reasons, including the continuing
proliferation of new beers and brew pubs, efforts by regional
craft brewers to expand their distribution, the introduction of
fuller-flavored products by certain major national brewers, and
underutilized craft brewing capacity. The Company anticipates
that intensifying competition from craft beer and imported beer
producers and excess capacity in the craft beer segment may
adversely impact the Companys operating margins. In
addition, the larger national brewers have developed brands to
compete directly with craft beers. These national competitors
have advantages such as lower production costs, larger marketing
budgets, greater financial and other resources and more
developed and extensive distribution networks than the Company.
There can be no assurance that the Company will be able to grow
its volumes or be able to maintain its selling prices in
existing markets or as it enters new markets.

Access to Markets.Most of the Companys independent
distributors are also distributors of national brewers, some of
whom have used their greater influence and marketing resources
to persuade those distributors to exclude the products of other
breweries from their portfolios. Such actions by national
brewers have the effect of reducing distribution options for the
Companys products. In addition, many independent
distributors are moving towards consolidation to improve profit
margins. Although the Company has not yet been negatively
impacted by such events, it is possible that the Company could
effectively be denied access to a market or markets by the
tactics of the national brewers and further consolidation of
independent distributors. In the states that comprise the
majority of its sales, the Company has the option to distribute
its

16



---



##### Table of Contents



products directly to retailers and the Company
has previous experience in doing so. However, there is no
assurance that self-distribution can be done in an economic
manner over large territories.


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

Selling Prices.The
future selling prices the Company charges for its craft beer and
other specialty beverages may decrease from historical levels
due to increasing competitive pressures. The Company has and
will continue to participate in price promotions with its
wholesalers and their retail customers. Management believes that
the number and frequency of the Companys promotions may
increase during 2004.

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

Acquisitions.The
acquisition of existing brewery and or restaurant facilities may
have unanticipated consequences that could harm our business and
financial condition. The Company may seek to selectively acquire
existing facilities which requires identification of suitable
acquisition candidates, negotiating acceptable acquisition terms
and obtaining appropriate financing. Any acquisition pursued may
involve risks including material adverse effects on operating
results, costs of integrating the acquired business into the
Company operations, risks associated with entering into new
markets, conducting operations where the Company has limited
experience or the diversion of managements attention from
other business concerns. Future acquisitions, which may be
accomplished through a cash purchase transaction or the issuance
of equity securities, or a combination or both, could result in
potentially dilative issuances of securities, the incurrence of
debt and contingent liabilities and impairment charges related
to goodwill and other intangible assets, any of which could harm
the business and financial condition.

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

Impact of Inflation

Although the Company has not attempted to
calculate the effect of inflation, management does not believe
inflation has had a material adverse effect on the
Companys results of operations. In the future, increases
in costs and expenses, particularly energy, packaging, raw
materials and labor costs may have a

17



---



##### Table of Contents



significant impact on the Companys
operating results to the extent that such cost increases cannot
be passed along to its customers.





Item 7A  Quantitative and
Qualitative Disclosures about Market Risk

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

The Company does maintain an investment portfolio
of various holdings, types and maturities. These securities are
generally classified as available for sale and, consequently,
are recorded on the balance sheets at fair value. At any time, a
rise or decrease in interest rates could have a material impact
on interest earnings of the investment portfolio. The Company
currently does not hedge interest rate exposures.




Item 8  Financial
Statements

Financial statements of Pyramid Breweries Inc.
are as follows:

|                                                                                            |  |      |    | 
|------------------------------------------------------------------------------------------- |  | ---- | -- | 
|                                                                                            |  | Page
|                                                                                            |  |     
|Report of Independent Public Accountants                                                    |  |      | 22 | 
|Report of Former Independent Public Accountants                                             |  |      | 23 | 
|Balance Sheets as of December 31, 2003 and
    2002                                         |  |      | 24 | 
|Statements of Operations for the Years Ended
    December 31, 2003, 2002 and 2001           |  |      | 25 | 
|Statements of Stockholders Equity for the
    Years Ended December 31, 2003, 2002 and 2001 |  |      | 26 | 
|Statements of Cash Flows for the Years Ended
    December 31, 2003, 2002 and 2001           |  |      | 27 | 
|Notes to Financial Statements                                                               |  |      | 28 | 




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

None.




Item 9A  Controls and
Procedures



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



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

The Company maintains a set of disclosure
controls and procedures and internal controls designed to ensure
that information required to be disclosed in its filings under
the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in the
Securities and Exchange Commissions rules and forms. Based
on their evaluation as of the end of the period covered by this
Annual Report on Form 10-K, the Companys Chief
Executive Officer and Chief Financial Officer have concluded
that the Companys disclosure controls and procedures (as
defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934 (the Exchange Act) are effective
to ensure that information required to be disclosed by the
Company in reports that it files or submits under the Exchange
Act is recorded, processed, summarized and reported within the
time periods specified in Securities and Exchange Commission
rules and forms.

18



---



##### Table of Contents





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

There were no changes in the Companys
internal control over financial reporting in connection with
this evaluation that has materially affected, or are reasonably
likely to materially affect, our internal control over financial
reporting.




PART III




Item 10  Directors and
Executive Officers of the Company



| |                                                          
| | ---------------------------------------------------------
| | George Hancock (59)  Interim
    Chief Executive Officer

George Hancock has been a director of the Company
since 1989. Mr. Hancock served as Chief Executive Officer
from May 1992 until his retirement in December 1999
and as Chairman of the Board of the Company from January 1997 to
December 1999. Mr. Hancock previously served as
Chairman of the Board of the Company from July 1989 until
July 1995. He was President of Penknife Computing, Inc., a
computer software company, from 1988 to May 1992.
Mr. Hancock was previously employed by the international
accounting firm of Coopers & Lybrand, where he was
primarily responsible for management consulting projects.
Mr. Hancock was also the founder of two startup software
companies in England and the United States. He was awarded a
Masters in Business Administration by Cranfield Institute of
Technology, England in 1981. He qualified as an accountant in
England in 1967.



| |                                                              
| | -------------------------------------------------------------
| | Martin Kelly (49)  President and
    Chief Executive Officer

Mr. Kelly was appointed Chief Executive
Officer (CEO) in December 1999. Mr. Kelly joined Pyramid
Breweries Inc. in August 1999 as President and Chief Operating
Officer. Mr. Kelly has over 20 years of food and
beverage industry experience, earned at Miller Brewing Company
(Miller), Borden, Inc. (Borden), and Coca-Cola Enterprises
(Coca-Cola). At Miller, he served as Regional Vice President,
from 1994 to 1999, for twenty-three western states and was
responsible for the operations of the Jacob Leinenkugel Brewing
Company, a regional specialty brewer, and a wholly owned
subsidiary of Miller. Prior to joining Miller, Mr. Kelly
was a Vice President of Marketing and Sales Development at
Borden. At Coca-Cola, Mr. Kelly held a variety of sales,
marketing and general management positions, and most recently
was Division Vice President and General Manager of the Mid
Atlantic Division. Mr. Kelly earned a Masters Degree in
Business Administration and a Bachelor of Science Degree in
Commerce from the University of Virginia.

On February 26, 2004 the Company announced
that Martin Kelly is stepping down as Chairman and Chief
Executive Officer. The Company has appointed Pyramid founder and
director George Hancock as non-executive Chairman and has
immediately commenced the process of recruiting a new CEO.
Mr. Hancock was formerly Chairman of the Board and served
as CEO from 1992 through 1999. Until a successor CEO has been
named, Mr. Hancock will oversee the Companys day to
day operations.



| |                                                                                          
| | -----------------------------------------------------------------------------------------
| | Jim Hilger (42)  Vice
    President  Finance, Chief Financial Officer and
    Secretary

Mr. Hilger was appointed as Vice
President  Finance, Chief Financial Officer and
Secretary in September 2003. Mr. Hilger came to the Company
from WorldCatch, Inc., a Seattle, Washington based seafood
importing company which developed e-commerce solutions for the
seafood industry. As Chief Executive Officer, Mr. Hilger
had primary responsibility for all financial and operational
aspects of the company, which serviced large retailers, food
service distributors and seafood processing companies.
Mr. Hilger also held Chief Financial Officer positions with
WorldCatch, American Gem Seafoods, The Albert Fisher Group, and
Profish International. Mr. Hilger earned a Business
Administration degree from Gonzaga University, and a MBA from
Pacific Lutheran University. He is a registered CPA in the state
of Washington.



| |                                               
| | ----------------------------------------------
| | Gary McGrath (44)  Vice
    President  Sales

Mr. McGrath was appointed as Vice
President  Sales in November 1999. Mr. McGrath
has over 15 years of experience in the alcohol and
non-alcohol beverage industry. Most recently, he held the
position of

19



---



##### Table of Contents



General Manager for Millers northwest
region, responsible for growing sales, market share and profit
in a seven-state area from 1994 to 1999. Also at Miller,
Mr. McGrath worked as Director of National Accounts,
accountable for setting strategy and developing sales in the
convenience and mass merchandise channels. Prior to Miller, he
held numerous sales and operating positions with Pepsi Cola USA,
7UP and Oscar Mayer. Mr. McGrath received his Bachelors
Degree from Fredonia State University in New York and his
Graduate Degree from Harvard University.




| |                                                             
| | ------------------------------------------------------------
| | Patrick Coll (41)  Vice
    President  Alehouse Operations

Mr. Coll was appointed as Vice
President  Alehouse Operations in September 2002.
Mr. Coll is responsible for directing the operational
performance of the three existing alehouses as well as
successfully opening and directing additional sites as they are
developed. Mr. Coll has over 15 years of experience in
the restaurant industry ranging from Chef to Opening Project
Manager. Most recently, he held the position of Managing Partner
with Essential Food Group, a restaurant consulting company, from
2001 to 2002, and Director of Food Service Operations for the
Old Navy Division of Gap Inc, from 1998 to 2001. Prior to Gap
Inc., Mr. Coll was with the Real Restaurant Group in
Sausalito, California, responsible for the successful
development and opening of restaurant concepts.



| |                                                          
| | ---------------------------------------------------------
| | Mark House (45)  Vice
    President  Brewery Operations

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

Other information required by this Item is
incorporated herein by reference to Pyramid Breweries Inc.
definitive Proxy Statement for its Annual Meeting of
Shareholders, to be held on May 12, 2004, to be filed with
the Commission pursuant to Regulation 14A.




Item 11  Executive
Compensation

The information required by this Item is
incorporated herein by reference to Pyramid Breweries Inc. Proxy
Statement for its Annual Meeting of Stockholders, to be held on
May 12, 2004, to be filed with the Commission pursuant to
Regulation 14A.




Item 12  Security Ownership
of Certain Beneficial Owners and Management

The information required by this Item is
incorporated herein by reference to Pyramid Breweries Inc.
definitive Proxy Statement for its Annual Meeting of
Stockholders, to be held on May 12, 2004, to be filed with
the Commission pursuant to Regulation 14A.




Item 13  Certain
Relationships and Related Transactions

The information required by this Item is
incorporated herein by reference to Pyramid Breweries Inc.
definitive Proxy Statement for its Annual Meeting of
Stockholders, to be held on May 12, 2004, to be filed with
the Commission pursuant to Regulation 14A.

20



---



##### Table of Contents






Item 14  Principal
Accountant Fees and Services

The information required by this Item is
incorporated herein by reference to Pyramid Breweries Inc.
definitive Proxy Statement for its Annual Meeting of
Stockholders, to be held on May 12, 2004, to be filed with
the Commission pursuant to Regulation 14A.




PART IV



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

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



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

(b) A report on Form 8-K (Items 7
and 12) was filed on October 30, 2003.

21



---



##### Table of Contents






SIGNATURES

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

March 10, 2004



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



| |    |                    
| | -- | -------------------
| | By | /s/ JAMES K. HILGER

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

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

|   |  |                                                                                                       |  |               
|-- |  | ----------------------------------------------------------------------------------------------------- |  | --------------
|  
|By |  | /s/ GEORGE HANCOCK                                                                                    |  | March 10, 2004
|   |  |                                                                                                      
|   |  | George Hancock
    Interim Chief Executive Officer
    Chairman of the Board
    Director and Founder |  |               
|  
|By |  | /s/ JAMES K. HILGER                                                                                   |  | March 10, 2004
|   |  |                                                                                                      
|   |  | James K. Hilger
    Vice President and Chief Financial Officer                                        |  |               
|  
|By |  | /s/ JASON W. REES                                                                                     |  | March 10, 2004
|   |  |                                                                                                      
|   |  | Jason W. Rees
    Controller and Chief Accounting Officer                                             |  |               
|  
|By |  | /s/ SCOTT S. BARNUM                                                                                   |  | March 10, 2004
|   |  |                                                                                                      
|   |  | Scott S. Barnum
    Director                                                                          |  |               
|  
|By |  | /s/ KURT DAMMEIER                                                                                     |  | March 10, 2004
|   |  |                                                                                                      
|   |  | Kurt Dammeier
    Director                                                                            |  |               
|  
|By |  | /s/ NANCY MOOTZ                                                                                       |  | March 10, 2004
|   |  |                                                                                                      
|   |  | Nancy Mootz
    Director                                                                              |  |               
|  
|By |  | /s/ SCOTT SVENSON                                                                                     |  | March 10, 2004
|   |  |                                                                                                      
|   |  | Scott Svenson
    Director                                                                            |  |               

22



---



##### Table of Contents



REPORT OF INDEPENDENT PUBLIC
ACCOUNTANTS

The Board of Directors Pyramid Breweries Inc.:

We have audited the accompanying balance sheets
of Pyramid Breweries Inc. as of December 31, 2003 and 2002,
and the related statements of operations, stockholders
equity and cash flows for each of the years in the two-year
period ended December 31, 2003. These financial statements
are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements based on our audits. The financial statements of
Pyramid Breweries Inc. as of December 31, 2001 and for the
year then ended were audited by other auditors who have ceased
operations. Those auditors expressed an unqualified
opinion on those financial statements, before the revision
described in Note 1 to the financial statements, in their
report dated January 25, 2002.

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

In our opinion, the 2003 and 2002 financial
statements referred to above present fairly, in all material
respects, the financial position of Pyramid Breweries Inc. as of
December 31, 2003 and 2002, and the results of its
operations and its cash flows for each of the years in the
two-year period ended December 31, 2003 in conformity with
accounting principles generally accepted in the United States of
America.

As discussed above, the financial statements of
Pyramid Breweries Inc. as of December 31, 2001 and for the
year then ended were audited by other auditors who have ceased
operations. As described in Note 1, these financial
statements have been revised to include the transitional
disclosures required by Statement of Financial Accounting
Standards No. 142, Goodwill and Other Intangible
Assets, which was adopted by the Company as of
January 1, 2002. In our opinion, the disclosures for 2001
in Note 1 are appropriate. However, we were not engaged to
audit, review or apply any procedures to the 2001 financial
statements of Pyramid Breweries Inc. other than with respect to
such disclosures and accordingly, we do not express an opinion
or any other form of assurance on the 2001 financial statements
taken as a whole.



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

Seattle, Washington,

January 23, 2004


23



---



##### Table of Contents



REPORT OF INDEPENDENT PUBLIC
ACCOUNTANTS

To the Board of Directors of Pyramid Breweries
Inc.:

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

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

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

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



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

Seattle, Washington,

January 25, 2002


This is a copy of the audit report previously
issued by Arthur Andersen LLP in connection with the
Companys filing on Form 10-K for the fiscal years
ended December 31, 2001 and 2000. This audit report has not
been reissued by Arthur Andersen LLP in connection with
this filing on Form 10-K nor has Arthur Andersen LLP
provided a consent to the inclusion of its report in this
Form 10-K. For further discussion, see Exhibit 23.2(b)
to the Form 10-K of which this report forms a part. The
financial statements of Pyramid Breweries Inc. to which this
report relates have been revised to include the transitional
disclosures required by Statement of Financial Accounting
Standards No. 142, as described in Note 1 to the
financial statements. These revisions are not covered by the
copy of the report of Arthur Andersen LLP. See the report
of KPMG regarding these revisions.

24



---



##### Table of Contents



PYRAMID BREWERIES INC.

BALANCE SHEETS

|                                         |                                                                                                                       |                                            |   |             |            |  |   |             |            | 
|---------------------------------------- | --------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | - | ----------- | ---------- |  | - | ----------- | ---------- | 
|                                         |                                                                                                                       |                                           
|                                         |                                                                                                                       | December 31,                              
|                                         |                                                                                                                       |                                           
|                                         |                                                                                                                       | 2003                                       |   | 2002       
|                                         |                                                                                                                       |                                            |   |            
|ASSETS                                  
|CURRENT ASSETS:                          |                                                                                                                       |                                            |   |             |            |  |   |            
|                                         | Cash and cash equivalents                                                                                             |                                            | $ | 1,558,000   |            |  | $ | 596,000     |           
|                                         | Short-term investments                                                                                                |                                            |   | 492,000     |            |  |   | 2,750,000   |           
|                                         | Accounts receivable, net of allowance for
    doubtful accounts of $20,000 as of December 31, 2003 and
    2002       |                                            |   | 1,281,000   |            |  |   | 1,944,000   |           
|                                         | Inventories                                                                                                           |                                            |   | 1,654,000   |            |  |   | 1,590,000   |           
|                                         | Prepaid expenses and other                                                                                            |                                            |   | 756,000     |            |  |   | 626,000     |           
|                                         |                                                                                                                       |                                            |   |             |            |  |   |            
|                                         |                                                                                                                       | Total current assets                       |   |             | 5,741,000  |  |   |             | 7,506,000  | 
|                                         | Long term investments                                                                                                 |                                            |   |            |            |  |   | 492,000     |           
|                                         | Note receivable  related party                                                                                       |                                            |   | 81,000      |            |  |   | 94,000      |           
|                                         | Fixed assets, net                                                                                                     |                                            |   | 21,406,000  |            |  |   | 20,682,000  |           
|                                         | Goodwill                                                                                                              |                                            |   | 415,000     |            |  |   | 415,000     |           
|                                         | Other                                                                                                                 |                                            |   | 141,000     |            |  |   | 106,000     |           
|                                         |                                                                                                                       |                                            |   |             |            |  |   |            
|                                         |                                                                                                                       | Total assets                               |   | $           | 27,784,000 |  |   | $           | 29,295,000 | 
|                                         |                                                                                                                       |                                            |   |             |            |  |   |            
|LIABILITIES AND STOCKHOLDERS
    EQUITY
|CURRENT LIABILITIES:                     |                                                                                                                       |                                            |   |             |            |  |   |            
|                                         | Accounts payable                                                                                                      |                                            | $ | 1,349,000   |            |  | $ | 952,000     |           
|                                         | Accrued expenses                                                                                                      |                                            |   | 1,562,000   |            |  |   | 1,747,000   |           
|                                         | Refundable deposits                                                                                                   |                                            |   | 487,000     |            |  |   | 506,000     |           
|                                         | Note payable  current                                                                                                |                                            |   | 20,000      |            |  |   | 20,000      |           
|                                         | Deferred rent  current                                                                                               |                                            |   | 199,000     |            |  |   | 124,000     |           
|                                         | Dividends payable                                                                                                     |                                            |   | 379,000     |            |  |   | 374,000     |           
|                                         |                                                                                                                       |                                            |   |             |            |  |   |            
|                                         |                                                                                                                       | Total current liabilities                  |   |             | 3,996,000  |  |   |             | 3,723,000  | 
|                                         | Note payable, net of current                                                                                          |                                            |   | 16,000      |            |  |   | 31,000      |           
|                                         | Deferred rent, net of current                                                                                         |                                            |   | 1,569,000   |            |  |   | 1,005,000   |           
|                                         |                                                                                                                       |                                            |   |             |            |  |   |            
|                                         |                                                                                                                       | Total liabilities                          |   |             | 5,581,000  |  |   |             | 4,759,000  | 
|                                         |                                                                                                                       |                                            |   |             |            |  |   |            
|COMMITMENTS AND CONTINGENCIES            |                                                                                                                       |                                            |   |             |            |  |   |            
|STOCKHOLDERS EQUITY:                    |                                                                                                                       |                                            |   |             |            |  |   |            
|                                         | Preferred stock, 10,000,000 shares authorized,
    none issued                                                        |                                            |   |            |            |  |   |            |           
|                                         | Common stock, $.01 par value; 40,000,000 shares
    authorized, 8,620,000 and 8,504,000 shares issued and outstanding |                                            |   | 86,000      |            |  |   | 85,000      |           
|                                         | Additional paid-in capital                                                                                            |                                            |   | 36,374,000  |            |  |   | 36,041,000  |           
|                                         | Note receivable  related party                                                                                       |                                            |   | (764,000    | )          |  |   | (782,000    | )         
|                                         | Deferred stock-based compensation                                                                                     |                                            |   | (27,000     | )          |  |   | (47,000     | )         
|                                         | Accumulated deficit                                                                                                   |                                            |   | (13,466,000 | )          |  |   | (10,761,000 | )         
|                                         |                                                                                                                       |                                            |   |             |            |  |   |            
|                                         |                                                                                                                       | Total stockholders equity                 |   |             | 22,203,000 |  |   |             | 24,536,000 | 
|                                         |                                                                                                                       |                                            |   |             |            |  |   |            
|                                         |                                                                                                                       | Total liabilities and stockholders equity |   | $           | 27,784,000 |  |   | $           | 29,295,000 | 
|                                         |                                                                                                                       |                                            |   |             |            |  |   |            

See accompanying notes to financial statements.

25



---



##### Table of Contents



PYRAMID BREWERIES INC.

STATEMENTS OF OPERATIONS

|                                              |  |                          |            |      |  |      |            |   |  |   |            |  
|--------------------------------------------- |  | ------------------------ | ---------- | ---- |  | ---- | ---------- | - |  | - | ---------- | -
|                                              |  |                         
|                                              |  | Years Ended December 31,
|                                              |  |                         
|                                              |  | 2003                     |            | 2002 |  | 2001
|                                              |  |                          |            |      |  |     
|Gross sales                                   |  | $                        | 36,378,000 |      |  | $    | 35,523,000 |   |  | $ | 31,995,000 |  
|Less excise taxes                             |  |                          | 1,753,000  |      |  |      | 1,711,000  |   |  |   | 1,572,000  |  
|                                              |  |                          |            |      |  |      |            |   |  |   |            |  
|Net sales                                     |  |                          | 34,625,000 |      |  |      | 33,812,000 |   |  |   | 30,423,000 |  
|Cost of sales                                 |  |                          | 27,640,000 |      |  |      | 25,360,000 |   |  |   | 22,877,000 |  
|                                              |  |                          |            |      |  |      |            |   |  |   |            |  
|Gross margin                                  |  |                          | 6,985,000  |      |  |      | 8,452,000  |   |  |   | 7,546,000  |  
|Selling, general and administrative expenses  |  |                          | 8,492,000  |      |  |      | 8,678,000  |   |  |   | 9,129,000  |  
|                                              |  |                          |            |      |  |      |            |   |  |   |            |  
|Operating loss                                |  |                          | (1,507,000 | )    |  |      | (226,000   | ) |  |   | (1,583,000 | )
|Other income, net                             |  |                          | 312,000    |      |  |      | 380,000    |   |  |   | 542,000    |  
|                                              |  |                          |            |      |  |      |            |   |  |   |            |  
|(Loss) income before income taxes             |  |                          | (1,195,000 | )    |  |      | 154,000    |   |  |   | (1,041,000 | )
|(Provision) benefit for income taxes          |  |                          | (3,000     | )    |  |      | 98,000     |   |  |   | (574,000   | )
|                                              |  |                          |            |      |  |      |            |   |  |   |            |  
|Net (loss) income                             |  | $                        | (1,198,000 | )    |  | $    | 252,000    |   |  | $ | (1,615,000 | )
|                                              |  |                          |            |      |  |      |            |   |  |   |            |  
|Basic and diluted net (loss) income per share |  | $                        | (0.14      | )    |  | $    | 0.03       |   |  | $ | (0.20      | )
|                                              |  |                          |            |      |  |      |            |   |  |   |            |  
|Weighted average basic shares outstanding     |  |                          | 8,452,000  |      |  |      | 8,203,000  |   |  |   | 7,987,000  |  
|                                              |  |                          |            |      |  |      |            |   |  |   |            |  
|Weighted average diluted shares outstanding   |  |                          | 8,452,000  |      |  |      | 8,243,000  |   |  |   | 7,987,000  |  
|                                              |  |                          |            |      |  |      |            |   |  |   |            |  
|Cash dividends declared per share             |  | $                        | 0.176      |      |  | $    | 0.176      |   |  | $ | 0.176      |  

See accompanying notes to financial statements.

26



---



##### Table of Contents



PYRAMID BREWERIES INC.

STATEMENTS OF STOCKHOLDERS
EQUITY

|                           |                                |              |           |            |   |             |        |             |  |              |            |               |   |        |          |          |   |   |          |          |   |   |             |            |   |   |            |            |  
|-------------------------- | ------------------------------ | ------------ | --------- | ---------- | - | ----------- | ------ | ----------- |  | ------------ | ---------- | ------------- | - | ------ | -------- | -------- | - | - | -------- | -------- | - | - | ----------- | ---------- | - | - | ---------- | ---------- | -
|                           |                                |              |           |            |   | Note        |        |             |  |              |            |              
|                           |                                | Common Stock |           | Additional |   | Receivable- |        | Deferred    |  |              |            | Total        
|                           |                                |              |           | Paid-in    |   | Related-    |        | Stock-Based |  | Accumulated  |            | Stockholders
|                           |                                | Shares       |           | Amount     |   | Capital     |        | Party       |  | Compensation |            | Deficit       |   | Equity
|                           |                                |              |           |            |   |             |        |             |  |              |            |               |   |       
|Balance, December 31, 2000 |                                |              | 7,863,000 |            |   | $           | 79,000 |             |  | $            | 34,338,000 |               |   | $      |         |          |   | $ |         |          |   | $ | (6,479,000  | )          |   | $ | 27,938,000 |           
|                           | Net loss                       |              |           |           |   |             |        |            |  |              |            |              |   |        |          |         |   |   |          |         |   |   |             | (1,615,000 | ) |   |            | (1,615,000 | )
|                           | Dividends declared             |              |           |           |   |             |        |            |  |              |            |              |   |        |          |         |   |   |          |         |   |   |             | (1,442,000 | ) |   |            | (1,442,000 | )
|                           | Shares issued                  |              |           | 32,000     |   |             |        |            |  |              |            | 63,000        |   |        |          |         |   |   |          |         |   |   |             |           |   |   |            | 63,000     |  
|                           | Exercised stock options        |              |           | 416,000    |   |             |        | 4,000       |  |              |            | 841,000       |   |        |          | (787,000 | ) |   |          |         |   |   |             |           |   |   |            | 58,000     |  
|                           | Stock-based compensation       |              |           |           |   |             |        |            |  |              |            | 186,000       |   |        |          |         |   |   |          | 60,000   |   |   |             |           |   |   |            | 246,000    |  
|                           | Deferred compensation          |              |           |           |   |             |        |            |  |              |            | 246,000       |   |        |          |         |   |   |          | (246,000 | ) |   |             |           |   |   |            |           |  
|                           | Shares repurchased and retired |              |           | (11,000    | ) |             |        |            |  |              |            | (25,000       | ) |        |          |         |   |   |          |         |   |   |             |           |   |   |            | (25,000    | )
|                           |                                |              |           |            |   |             |        |             |  |              |            |               |   |        |          |          |   |   |          |          |   |   |             |            |   |   |            |           
|Balance, December 31, 2001 |                                |              | 8,300,000 |            |   | $           | 83,000 |             |  | $            | 35,649,000 |               |   | $      | (787,000 | )        |   | $ | (186,000 | )        |   | $ | (9,536,000  | )          |   | $ | 25,223,000 |           
|                           | Net income                     |              |           |           |   |             |        |            |  |              |            |              |   |        |          |         |   |   |          |         |   |   |             | 252,000    |   |   |            | 252,000    |  
|                           | Dividends declared             |              |           |           |   |             |        |            |  |              |            |              |   |        |          |         |   |   |          |         |   |   |             | (1,477,000 | ) |   |            | (1,477,000 | )
|                           | Shares issued                  |              |           | 35,000     |   |             |        |            |  |              |            | 71,000        |   |        |          |         |   |   |          |         |   |   |             |           |   |   |            | 71,000     |  
|                           | Exercised stock options        |              |           | 169,000    |   |             |        | 2,000       |  |              |            | 315,000       |   |        |          |         |   |   |          |         |   |   |             |           |   |   |            | 317,000    |  
|                           | Stock-based compensation       |              |           |           |   |             |        |            |  |              |            | 6,000         |   |        |          |         |   |   |          | 139,000  |   |   |             |           |   |   |            | 145,000    |  
|                           | Note repayment                 |              |           |           |   |             |        |            |  |              |            |              |   |        |          | 5,000    |   |   |          |         |   |   |             |           |   |   |            | 5,000      |  
|                           |                                |              |           |            |   |             |        |             |  |              |            |               |   |        |          |          |   |   |          |          |   |   |             |            |   |   |            |           
|Balance, December 31, 2002 |                                |              | 8,504,000 |            |   | $           | 85,000 |             |  | $            | 36,041,000 |               |   | $      | (782,000 | )        |   | $ | (47,000  | )        |   | $ | (10,761,000 | )          |   | $ | 24,536,000 |           
|                           | Net loss                       |              |           |           |   |             |        |            |  |              |            |              |   |        |          |         |   |   |          |         |   |   |             | (1,198,000 | ) |   |            | (1,198,000 | )
|                           | Dividends declared             |              |           |           |   |             |        |            |  |              |            |              |   |        |          |         |   |   |          |         |   |   |             | (1,507,000 | ) |   |            | (1,507,000 | )
|                           | Shares issued                  |              |           | 25,000     |   |             |        |            |  |              |            | 58,000        |   |        |          |         |   |   |          |         |   |   |             |           |   |   |            | 58,000     |  
|                           | Exercised stock options        |              |           | 91,000     |   |             |        | 1,000       |  |              |            | 203,000       |   |        |          |         |   |   |          |         |   |   |             |           |   |   |            | 204,000    |  
|                           | Stock-based compensation       |              |           |           |   |             |        |            |  |              |            | 72,000        |   |        |          |         |   |   |          | 20,000   |   |   |             |           |   |   |            | 92,000     |  
|                           | Note repayment                 |              |           |           |   |             |        |            |  |              |            |              |   |        |          | 18,000   |   |   |          |         |   |   |             |           |   |   |            | 18,000     |  
|                           |                                |              |           |            |   |             |        |             |  |              |            |               |   |        |          |          |   |   |          |          |   |   |             |            |   |   |            |           
|Balance, December 31, 2003 |                                |              | 8,620,000 |            |   | $           | 86,000 |             |  | $            | 36,374,000 |               |   | $      | (764,000 | )        |   | $ | (27,000  | )        |   | $ | (13,466,000 | )          |   | $ | 22,203,000 |           
|                           |                                |              |           |            |   |             |        |             |  |              |            |               |   |        |          |          |   |   |          |          |   |   |             |            |   |   |            |           

See accompanying notes to financial statements.

27



---



##### Table of Contents



PYRAMID BREWERIES INC.

STATEMENTS OF CASH FLOWS

|                      |                                                                                              |                                                                     |   |            |            |      |   |         |            |   |   |            |            |  
|--------------------- | -------------------------------------------------------------------------------------------- | ------------------------------------------------------------------- | - | ---------- | ---------- | ---- | - | ------- | ---------- | - | - | ---------- | ---------- | -
|                      |                                                                                              |                                                                    
|                      |                                                                                              | Years Ended December 31,                                           
|                      |                                                                                              |                                                                    
|                      |                                                                                              | 2003                                                                |   | 2002       |            | 2001
|                      |                                                                                              |                                                                     |   |            |            |     
|OPERATING ACTIVITIES: |                                                                                              |                                                                     |   |            |            |      |   |         |            |   |   |           
|                      | Net (loss) income                                                                            |                                                                     | $ | (1,198,000 | )          |      | $ | 252,000 |            |   | $ | (1,615,000 | )         
|                      | Adjustments to reconcile net (loss) income to net
    cash provided by operating activities: |                                                                     |   |            |            |      |   |         |            |   |   |            |           
|                      |                                                                                              | Depreciation and amortization                                       |   |            | 2,443,000  |      |   |         | 2,202,000  |   |   |            | 2,141,000  |  
|                      |                                                                                              | Stock-based compensation expense                                    |   |            | 92,000     |      |   |         | 145,000    |   |   |            | 246,000    |  
|                      |                                                                                              | Interest expense                                                    |   |            | 5,000      |      |   |         | 7,000      |   |   |            |           |  
|                      |                                                                                              | Loss (gain) on sale of fixed assets                                 |   |            | 2,000      |      |   |         | (4,000     | ) |   |            | 10,000     |  
|                      |                                                                                              | Deferred income taxes                                               |   |            |           |      |   |         |           |   |   |            | 574,000    |  
|                      |                                                                                              | Deferred rent                                                       |   |            | 639,000    |      |   |         | (124,000   | ) |   |            | 5,000      |  
|                      | Changes in operating assets and liabilities:                                                 |                                                                     |   |            |            |      |   |         |            |   |   |            |           
|                      |                                                                                              | Accounts receivable                                                 |   |            | 663,000    |      |   |         | (519,000   | ) |   |            | 239,000    |  
|                      |                                                                                              | Inventories                                                         |   |            | (64,000    | )    |   |         | (412,000   | ) |   |            | (14,000    | )
|                      |                                                                                              | Prepaid expenses and other                                          |   |            | (192,000   | )    |   |         | (432,000   | ) |   |            | 47,000     |  
|                      |                                                                                              | Accounts payable and accrued expenses                               |   |            | 212,000    |      |   |         | 549,000    |   |   |            | (62,000    | )
|                      |                                                                                              | Refundable deposits                                                 |   |            | (19,000    | )    |   |         | (44,000    | ) |   |            | 16,000     |  
|                      |                                                                                              |                                                                     |   |            |            |      |   |         |            |   |   |           
|                      |                                                                                              | Net cash provided by operating activities                           |   |            | 2,583,000  |      |   |         | 1,620,000  |   |   |            | 1,587,000  |  
|                      |                                                                                              |                                                                     |   |            |            |      |   |         |            |   |   |           
|INVESTING ACTIVITIES: |                                                                                              |                                                                     |   |            |            |      |   |         |            |   |   |           
|                      |                                                                                              | Purchases of short-term investments                                 |   |            | (2,455,000 | )    |   |         | (5,044,000 | ) |   |            | (5,569,000 | )
|                      |                                                                                              | Proceeds from the sale and maturities of
    short-term investments |   |            | 5,205,000  |      |   |         | 6,944,000  |   |   |            | 5,569,000  |  
|                      |                                                                                              | Acquisitions of fixed assets                                        |   |            | (3,142,000 | )    |   |         | (2,282,000 | ) |   |            | (1,079,000 | )
|                      |                                                                                              | Proceeds from sale of fixed assets                                  |   |            |           |      |   |         | 16,000     |   |   |            | 15,000     |  
|                      |                                                                                              | Long-term investments                                               |   |            |           |      |   |         |           |   |   |            | (492,000   | )
|                      |                                                                                              |                                                                     |   |            |            |      |   |         |            |   |   |           
|                      |                                                                                              | Net cash used in investing activities                               |   |            | (392,000   | )    |   |         | (366,000   | ) |   |            | (1,556,000 | )
|                      |                                                                                              |                                                                     |   |            |            |      |   |         |            |   |   |           
|FINANCING ACTIVITIES: |                                                                                              |                                                                     |   |            |            |      |   |         |            |   |   |           
|                      |                                                                                              | Proceeds from sale of common stock and option
    exercises         |   |            | 262,000    |      |   |         | 388,000    |   |   |            | 121,000    |  
|                      |                                                                                              | Notes receivable                                                    |   |            | 31,000     |      |   |         | 18,000     |   |   |            | (107,000   | )
|                      |                                                                                              | Repayment on note payable                                           |   |            | (20,000    | )    |   |         | (20,000    | ) |   |            |           |  
|                      |                                                                                              | Cash dividends paid                                                 |   |            | (1,502,000 | )    |   |         | (1,469,000 | ) |   |            | (1,391,000 | )
|                      |                                                                                              | Shares repurchased and retired                                      |   |            |           |      |   |         |           |   |   |            | (25,000    | )
|                      |                                                                                              |                                                                     |   |            |            |      |   |         |            |   |   |           
|                      |                                                                                              | Net cash used in financing activities                               |   |            | (1,229,000 | )    |   |         | (1,083,000 | ) |   |            | (1,402,000 | )
|                      |                                                                                              |                                                                     |   |            |            |      |   |         |            |   |   |           
|                      |                                                                                              | Increase (decrease) in cash and cash equivalents                    |   |            | 962,000    |      |   |         | 171,000    |   |   |            | (1,371,000 | )
|                      |                                                                                              | Cash and cash equivalents at beginning of year                      |   |            | 596,000    |      |   |         | 425,000    |   |   |            | 1,794,000  |  
|                      |                                                                                              |                                                                     |   |            |            |      |   |         |            |   |   |           
|                      |                                                                                              | Cash and cash equivalents at end of year                            |   | $          | 1,558,000  |      |   | $       | 596,000    |   |   | $          | 423,000    |  
|                      |                                                                                              |                                                                     |   |            |            |      |   |         |            |   |   |           
|                      |                                                                                              | Non-cash transactions:                                              |   |            |            |      |   |         |            |   |   |            |            |  
|                      |                                                                                              | Note payable for acquisition of assets                              |   | $          |           |      |   | $       |           |   |   | $          | 63,000     |  
|                      |                                                                                              | Note receivable for exercise of stock options                       |   |            |           |      |   |         |           |   |   |            | 787,000    |  

See accompanying notes to financial statements.

28



---



##### Table of Contents



PYRAMID BREWERIES INC.

NOTES TO FINANCIAL STATEMENTS



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



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

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

In March 1995, the Company opened the Seattle,
Washington Brewery near downtown Seattle. This brewery and
340-seat alehouse has an estimated annual production capacity of
50,000 barrels as of December 31, 2003.

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

In February 1997, the Company opened the Berkeley
Brewery in Berkeley, California. This brewery and 350-seat
alehouse has an estimated annual beer production capacity of
150,000 barrels as of December 31, 2003.

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

In May 2002, the Company opened the Walnut Creek
Alehouse and Brewery in Walnut Creek, California. The alehouse
has seating for 275 plus an outdoor patio seating area and an
estimated annual brewing capacity of 2,600 barrels as of
December 31, 2003.

In July 2003, the Company opened the Sacramento
Alehouse and Brewery in Sacramento, California. The alehouse has
seating for 295 plus an outdoor patio seating area and an
estimated annual brewing capacity of 1,600 barrels as of
December 31, 2003.



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

The Company considers all highly liquid
investments purchased with an original or remaining maturity of
three months or less at the date of purchase to be cash
equivalents. Cash and cash equivalents are maintained with
multiple financial institutions.



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

The Companys investments are primarily
comprised of fixed rate certificates of deposit and taxable
variable rate notes with maturity dates of less than one year.
Investments are custodied with major financial institutions. The
specific identification method is used to determine the cost
basis of investments sold or matured. At December 31, 2003
and December 31, 2002, substantially all of the
Companys short-term investments were classified as
available for sale. These investments are recorded on the
balance sheet at fair value. During the years ended
December 31, 2003 and 2002, the Company realized cash
proceeds, net of purchases, on the sales and maturities of
short-term investments in the amount of $2,750,000 and
$1,900,000, respectively. There were no unrealized or realized
gains or losses during the years ended December 31, 2003,
2002 and 2001.

29



---



##### Table of Contents





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

The Companys accounts receivable balance
includes balances from trade sales and other miscellaneous
receivables. As December 31, 2002, $98,000 related to a tax
refund was included in the accounts receivable balance. The
allowance for doubtful accounts is the Companys best
estimate of the amount of probable credit losses in the
Companys existing accounts receivable. The Company
determines the allowance for doubtful accounts based on
historical write-off experience. Account balances that are
deemed uncollectable, are charged off against the allowance
after all means of collection have been exhausted and the
potential for recovery is considered remote. The Company does
not have any off-balance-sheet credit exposure related to its
customers.



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

Inventories are stated at the lower of cost or
market. Cost is computed using standard cost, which approximates
actual cost, on a first-in, first-out basis and market
represents the lower of replacement cost or estimated net
realizable value. The Company adjusts its inventory carrying
values downward to market values based on the existence of
excess and obsolete inventories determined primarily by seasonal
demand forecasts and branding changes.



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

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

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

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

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



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

The Company accounts for preopening costs related
to new restaurants in accordance with Statement of Position
98-5, Recording the Cost of Start-Up Activities and
accordingly, there were no unamortized preopening costs at
December 31, 2003 and 2002. All preopening costs are
expensed as incurred.

30



---



##### Table of Contents





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

Website design costs related to developing,
programming, and customizing applications of the Companys
website, www.PyramidBrew.com, are capitalized in other assets
and amortized over a two-year period. Net unamortized website
design costs totaled approximately $25,000 and $52,000 at
December 31, 2003 and 2002, respectively. Amortization of
website design costs totaled approximately $27,000, $49,000 and
$40,000 respectively, for the years ended December 31,
2003, 2002 and 2001. Website design costs relating to
developing, programming and customizing applications are
capitalized and amortized in accordance with Emerging Issues
Task Force (EITF) 00-2, Accounting for Website Development
Costs. Costs of operating and maintaining the website are
expensed as incurred.



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

The excess of cost over fair value of the net
assets of businesses acquired was capitalized as goodwill and
amortized on a straight-line basis over 10 years, prior to
the 2002 fiscal year. Amortization of goodwill totaled
approximately $80,000 for the year ended December 31, 2001.
Accumulated amortization at December 31, 2003 and 2002 was
approximately $388,000 and relates entirely to the
Companys previous acquisition of Thomas Kemper Soda. The
goodwill is included in the Beverage Operations segment.

In June 2001, the Financial Accounting Standards
Board (FASB) issued Statement of Financial Accounting Standards
(SFAS) No. 142, Goodwill and Other Intangible
Assets. SFAS No. 142 requires goodwill to be tested
for impairment on an annual basis and between annual tests in
certain circumstances, and written down when impaired, rather
than being amortized as previous accounting standards required.
Effective January 1, 2002, the Company adopted SFAS
No. 142. The Company would recognize an impairment charge
for the amount by which the carrying amount of an identified
reporting units goodwill exceeds its fair value. Based on
the transitional impairment test and the annual impairment tests
performed, there was no impairment of goodwill during the years
ended December 31, 2003 and 2002. There can be no assurance
that future goodwill impairment tests will not result in a
charge to earnings.

The annual amortization of existing goodwill of
approximately $80,000 ceased on December 31, 2001. The
following table presents the impact of SFAS No. 142 on net
loss and net loss per share had the accounting standard been in
effect for the year ended December 31, 2001:

|                                                 |                          |              |            |        | 
|------------------------------------------------ | ------------------------ | ------------ | ---------- | ------ | 
|                                                 |                          | Year Ended  
|                                                 |                          | December 31,
|                                                 |                          | 2001        
|                                                 |                          |             
|Net loss as reported                             |                          | $            | (1,615,000 | )     
|Adjustments:                                     |                          |              |            |       
|                                                 | Amortization of goodwill |              |            | 80,000 | 
|                                                 |                          |              |            |       
|Net loss as adjusted                             |                          | $            | (1,535,000 | )     
|                                                 |                          |              |            |       
|Basic and diluted net loss per share as reported |                          | $            | (0.20      | )     
|Basic and diluted net loss per share as adjusted |                          | $            | (0.19      | )     



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

The Company recognizes revenue from the sale of
wholesale beer and soda products at the time of shipment, when
the title of the Companys products passes to the customer
in accordance with distributor sales agreements and
collectibility is probable. The Companys revenue from its
alehouses are comprised of food, beverage and merchandise, and
are recognized at the time of sale.



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

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

31



---



##### Table of Contents





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

The federal government and all of the states levy
excise taxes on alcoholic beverages, including beer. For brewers
producing no more than 2.0 million barrels of beer per
calendar year, the federal excise tax is $7.00 per barrel on the
first 60,000 barrels of beer removed for consumption or sale
during a calendar year, and $18.00 per barrel for each barrel in
excess of 60,000. Individual states also impose excise taxes on
alcoholic beverages in varying amounts, which have also been
subject to change.

As represented on the statement of operations,
gross sales of the Company represents billed to customer
activities. Excise taxes are taxes paid by the Company to state
and federal government agencies. Net sales represent revenues to
the Company net of applicable state and federal excise taxes.



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

Advertising costs are expensed as incurred. Total
advertising expense was approximately $228,000, $252,000 and
$560,000 in 2003, 2002 and 2001, respectively.

The Company engages in cooperative advertising
programs and buy-down programs with resellers. The expenditures
associated with buy down programs are included as an offset in
gross sales. The costs of cooperative advertising programs are
included in the selling, general and administrative expenses
category. The costs of cooperative advertising amounts for the
years ended December 31, 2003, 2002 and 2001 totaled
approximately $89,000, $76,000 and $91,000, respectively. EITF
No. 01-9, Accounting for Consideration Given by a
Vendor to a Customer (Including a Reseller of the Vendors
Products), addresses the timing, recognition and
classification in the income statement of certain promotional
costs paid to a retailer or wholesaler by a vendor in connection
with the sale of the vendors products or promotion of
sales of the vendors products by the retailer or
wholesaler. The Company adopted EITF 01-9 in the first quarter
of the fiscal year 2002. The advertising costs meet the
requirements of EITF 01-9 to be included in expenses rather than
as an offset to revenues and therefore, the adoption of EITF
01-9 did not have an effect on the results of operations of the
Company.



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

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

|                              |  |                         |         |      |  |      |         |   |  |   |         |  
|----------------------------- |  | ----------------------- | ------- | ---- |  | ---- | ------- | - |  | - | ------- | -
|                              |  |                        
|                              |  | Year Ended December 31,
|                              |  |                        
|                              |  | 2003                    |         | 2002 |  | 2001
|                              |  |                         |         |      |  |     
|Interest income               |  | $                       | 56,000  |      |  | $    | 102,000 |   |  | $ | 271,000 |  
|Interest expense              |  |                         | (5,000  | )    |  |      | (7,000  | ) |  |   |        |  
|Parking income                |  |                         | 216,000 |      |  |      | 234,000 |   |  |   | 257,000 |  
|(Loss) gain on sale of assets |  |                         | (3,000  | )    |  |      | 4,000   |   |  |   | (10,000 | )
|Other income                  |  |                         | 48,000  |      |  |      | 47,000  |   |  |   | 24,000  |  
|                              |  |                         |         |      |  |      |         |   |  |   |         |  
|Other income, net             |  | $                       | 312,000 |      |  | $    | 380,000 |   |  | $ | 542,000 |  
|                              |  |                         |         |      |  |      |         |   |  |   |         |  



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

Income taxes are accounted for under the asset
and liability method. Deferred tax assets and liabilities are
recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases
and operating loss and tax credit carryforwards. Deferred tax
assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled.
The effect on deferred tax assets and liabilities of a change in
tax rates is recognized in income in the period that includes
the enactment date.

32



---



##### Table of Contents



Realization of the deferred tax assets is
dependent on the Companys ability to generate future
U.S. taxable income. Management has established a valuation
allowance for the portion of the deferred tax assets that do not
meet the recognition criteria of SFAS No. 109,
Accounting for Income Taxes. The Company will
continue to evaluate the realizability of deferred tax assets
quarterly by assessing the need for and amount of a valuation
allowance.



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

Basic earnings (loss) per share is computed by
dividing net (loss) income available to common shareholders by
the weighted average number of shares outstanding, excluding
shares subject to repurchase, during the year. Options
outstanding as of December 31, 2003 totaling approximately
758,000 are not included in the diluted earnings per share
calculation because their effects are anti-dilutive.
Approximately 261,000 options outstanding as of
December 31, 2002 are not included in the diluted earnings
per share calculation because the exercise price of the options
were greater than the average market price of the common shares.
Options outstanding as of December 31, 2001 totaling
approximately 810,000 are not included in the diluted earnings
per share calculation because their effects are anti-dilutive.
Diluted earnings (loss) per share is calculated by adjusting
outstanding shares, assuming conversion of all potentially
dilutive stock options. The following represents a
reconciliation from basic earnings per share to diluted earnings
per share:

|                  |                                             |                            |            |           |       |      |         |           |      |   |            |           |       |  
|----------------- | ------------------------------------------- | -------------------------- | ---------- | --------- | ----- | ---- | ------- | --------- | ---- | - | ---------- | --------- | ----- | -
|                  |                                             |                           
|                  |                                             | Years ended December 31,  
|                  |                                             |                           
|                  |                                             | 2003                       |            | 2002      |       | 2001
|                  |                                             |                            |            |           |       |     
|Net (loss) income |                                             | $                          | (1,198,000 | )         |       | $    | 252,000 |           |      | $ | (1,615,000 | )        
|Shares:           |                                             |                            |            |           |       |      |         |           |      |   |            |          
|                  | Weighted average shares outstanding         |                            |            | 8,502,000 |       |      |         | 8,363,000 |      |   |            | 8,118,000 |      
|                  | Shares subject to repurchase                |                            |            | (50,000   | )     |      |         | (160,000  | )    |   |            | (131,000  | )    
|                  |                                             |                            |            |           |       |      |         |           |      |   |            |          
|                  | Weighted average basic shares outstanding   |                            |            | 8,452,000 |       |      |         | 8,203,000 |      |   |            | 7,987,000 |      
|                  |                                             |                            |            |           |       |      |         |           |      |   |            |          
|                  |                                             | Basic earnings per share   |            | $         | (0.14 | )    |         | $         | 0.03 |   |            | $         | (0.20 | )
|                  |                                             |                            |            |           |       |      |         |           |      |   |            |          
|                  | Stock option dilution                       |                            |            |          |       |      |         | 40,000    |      |   |            |          |      
|                  |                                             |                            |            |           |       |      |         |           |      |   |            |          
|                  | Weighted average diluted shares outstanding |                            |            | 8,452,000 |       |      |         | 8,243,000 |      |   |            | 7,987,000 |      
|                  |                                             |                            |            |           |       |      |         |           |      |   |            |          
|                  |                                             | Diluted earnings per share |            | $         | (0.14 | )    |         | $         | 0.03 |   |            | $         | (0.20 | )
|                  |                                             |                            |            |           |       |      |         |           |      |   |            |          

33



---



##### Table of Contents





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

At December 31, 2003, the Company has
stock-based compensation plans which are described more fully in
Note 15. The Company accounts for those plans under the
recognition and measurement principles of Accounting Principles
Board (APB) Opinion No. 25, Accounting for Stock
Issued to Employees, and related interpretations. The
Company has adopted the disclosure-only provisions of SFAS
No. 123, Accounting for Stock-Based
Compensation, as amended by SFAS 148. Accordingly, no
compensation cost has been recognized for the fair value of
options issued under the employee and director plans (the Plans)
except as described in Note 4. Had compensation cost been
recognized based on the fair value at the date of grant for
options awarded under the Plans, the pro forma amounts of the
Companys net loss and net loss per share for the years
ended December 31, 2003, 2002 and 2001, would have been as
follows:

|                                                                                              |  |                          |            |      |  |      |          |   |  |   |            |  
|--------------------------------------------------------------------------------------------- |  | ------------------------ | ---------- | ---- |  | ---- | -------- | - |  | - | ---------- | -
|                                                                                              |  |                         
|                                                                                              |  | Years Ended December 31,
|                                                                                              |  |                         
|                                                                                              |  | 2003                     |            | 2002 |  | 2001
|                                                                                              |  |                          |            |      |  |     
|Net (loss) income as reported                                                                 |  | $                        | (1,198,000 | )    |  | $    | 252,000  |   |  | $ | (1,615,000 | )
|Add: Employee stock-based compensation cost as
    reported                                   |  |                          | 92,000     |      |  |      | 145,000  |   |  |   | 246,000    |  
|Less: Employee stock-based compensation cost
    determined under the fair value based method |  |                          | (206,000   | )    |  |      | (304,000 | ) |  |   | (569,000   | )
|                                                                                              |  |                          |            |      |  |      |          |   |  |   |            |  
|Net (loss) income pro forma                                                                   |  | $                        | (1,312,000 | )    |  | $    | 93,000   |   |  | $ | (1,938,000 | )
|Basic and diluted net (loss) income per share as
    reported                                 |  | $                        | (0.14      | )    |  | $    | 0.03     |   |  | $ | (0.20      | )
|Basic and diluted net (loss) income per share
    pro forma                                   |  | $                        | (0.15      | )    |  | $    | 0.01     |   |  | $ | (0.24      | )

The fair value of options granted was estimated
using the Black-Scholes option-pricing model with the following
weighted average assumptions: 2003 risk-free interest rates
ranging from 2.95% to 3.98%, 2002 risk-free rate of 4.76% and
2001 risk-free interest rates ranging from 2.13% to 6.87%; all
other assumptions are consistent over the years presented,
expected option lives of seven years; expected volatility of 51%
and expected future dividends of $0.176 per share. The
weighted-average fair value of options granted during the years
2003, 2002 and 2001 was $0.83, $0.63 and $1.46, respectively.
The effect of applying SFAS No. 123 for providing pro-forma
disclosures is not indicative of future results.



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

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

The Company does maintain an investment portfolio
of various holdings, types and maturities. These securities are
generally classified as available for sale and, consequently,
are recorded on the balance sheets at fair value. At any time, a
rise or decrease in interest rates could have a material impact
on interest earnings of the investment portfolio. The Company
currently does not hedge interest rate exposures.



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

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

34



---



##### Table of Contents





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

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

In November 2002, the FASB issued FASB
Interpretation No. (FIN) 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others. FIN 45
requires recording of a liability for the fair value of the
guarantee at the inception of certain guarantees issued or
modified after December 31, 2002. FIN 45 also requires
disclosures about a guarantors obligations under certain
guarantees. Adoption of the interpretation did not have a
material impact on the Companys financial position or
results of operations.

2.     Inventories

Inventories consist of the following:

|                |  |              |           |      |  |   |           | 
|--------------- |  | ------------ | --------- | ---- |  | - | --------- | 
|                |  |             
|                |  | December 31,
|                |  |             
|                |  | 2003         |           | 2002
|                |  |              |           |     
|Raw materials   |  | $            | 664,000   |      |  | $ | 821,000   | 
|Work in process |  |              | 155,000   |      |  |   | 162,000   | 
|Finished goods  |  |              | 835,000   |      |  |   | 607,000   | 
|                |  |              |           |      |  |   |           | 
|                |  | $            | 1,654,000 |      |  | $ | 1,590,000 | 
|                |  |              |           |      |  |   |           | 

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

3.     Fixed
Assets

Fixed assets consist of the following:

|                                               |  |              |             |      |  |   |             |  
|---------------------------------------------- |  | ------------ | ----------- | ---- |  | - | ----------- | -
|                                               |  |             
|                                               |  | December 31,
|                                               |  |             
|                                               |  | 2003         |             | 2002
|                                               |  |              |             |     
|Brewery and retail equipment                   |  | $            | 16,402,000  |      |  | $ | 15,121,000  |  
|Furniture and fixtures                         |  |              | 952,000     |      |  |   | 916,000     |  
|Leasehold improvements                         |  |              | 17,587,000  |      |  |   | 15,525,000  |  
|Construction in progress                       |  |              | 101,000     |      |  |   | 609,000     |  
|                                               |  |              |             |      |  |   |             |  
|                                               |  |              | 35,042,000  |      |  |   | 32,171,000  |  
|Less accumulated depreciation and amortization |  |              | (13,636,000 | )    |  |   | (11,489,000 | )
|                                               |  |              |             |      |  |   |             |  
|                                               |  | $            | 21,406,000  |      |  | $ | 20,682,000  |  
|                                               |  |              |             |      |  |   |             |  

Total depreciation and amortization expense was
approximately $2,365,000, $2,111,000 and $2,021,000 for the
years ended December 31, 2003, 2002 and 2001, respectively.

4.     Note
Receivable  Related Party

In June 2001, the Company issued a $787,000 full
recourse note to the Companys Chief Executive Officer
(CEO) in exchange for the exercise of options for
387,400 shares of the Companys common stock. In
addition, the Company issued a $115,000 full recourse note to
the CEO to fund his payment of taxes on the exercise of the
options. The notes are due on the earlier of June 30, 2011
or upon the sale of the stock and bear an annual interest rate
of 5.6%. A total of 135,100 of those shares were unrestricted,
except for being pledged

35



---



##### Table of Contents



as collateral for the loans, and the remaining
252,300 shares would become unrestricted over the next year. As
of December 31, 2003, 50,000 shares remained
restricted. Compensation expense on the shares is accounted for
under the variable accounting method until the shares become
unrestricted. During the years ended December 31, 2003,
2002 and 2001, the Company recorded approximately $88,000,
$139,000 and $241,000, respectively, in compensation expense in
connection with this arrangement, which is included in selling,
general and administrative expenses.


5.     Walnut
Creek

In October 2001, the Company purchased assets of
an alehouse in Walnut Creek, California for $268,000. In
addition, the Company assumed the sublease of the location. The
purchase was made by a $205,000 cash payment and the balance was
financed through an $80,000 non-interest bearing note due in
four annual equal payments beginning October 2002. The note
payable was recorded using a 10% discount rate. As of
December 31, 2003, a net balance of approximately $36,000
remained payable on the note.

6.     Sacramento

In April 2002, the Company signed a lease with
the County Supervisors Association of California to lease
building space in Sacramento, California with payments
commencing on July 2003. The Company spent approximately
$1.9 million, net of an $800,000 incentive provided by the
landlord, to build-out the alehouse and brewery facility.
Completed and opened in July 2003, the Sacramento Alehouse is
located in a leased building of approximately 9,500 square
feet. The restaurant has a small, on-site brewery with an
estimated beer production capacity of 1,600 barrels. The
building was leased commencing in July 2003 for an initial
10-year and 8-month term, with options to extend the lease term
for two five-year periods.

7.     Accrued
Expenses

Accrued expenses consist of the following:

|                                     |  |              |           |      |  |   |           | 
|------------------------------------ |  | ------------ | --------- | ---- |  | - | --------- | 
|                                     |  |             
|                                     |  | December 31,
|                                     |  |             
|                                     |  | 2003         |           | 2002
|                                     |  |              |           |     
|Salaries, wages and related accruals |  | $            | 529,000   |      |  | $ | 963,000   | 
|Barrel taxes                         |  |              | 100,000   |      |  |   | 118,000   | 
|Other accruals                       |  |              | 933,000   |      |  |   | 666,000   | 
|                                     |  |              |           |      |  |   |           | 
|                                     |  | $            | 1,562,000 |      |  | $ | 1,747,000 | 
|                                     |  |              |           |      |  |   |           | 

8.     Income
Taxes

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

|         |  |              |        |      |  |      |        |  |  |   |          |  
|-------- |  | ------------ | ------ | ---- |  | ---- | ------ |  |  | - | -------- | -
|         |  |             
|         |  | December 31,
|         |  |             
|         |  | 2003         |        | 2002 |  | 2001
|         |  |              |        |      |  |     
|Current  |  | $            | (3,000 | )    |  | $    | 98,000 |  |  | $ |         |  
|Deferred |  |              |       |      |  |      |       |  |  |   | (574,000 | )
|         |  |              |        |      |  |      |        |  |  |   |          |  
|         |  | $            | (3,000 | )    |  | $    | 98,000 |  |  | $ | (574,000 | )
|         |  |              |        |      |  |      |        |  |  |   |          |  

36



---



##### Table of Contents



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

|                                               |  |              |       |      |  |      |       |    |  |  |       |   
|---------------------------------------------- |  | ------------ | ----- | ---- |  | ---- | ----- | -- |  |  | ----- | --
|                                               |  |             
|                                               |  | December 31,
|                                               |  |             
|                                               |  | 2003         |       | 2002 |  | 2001
|                                               |  |              |       |      |  |     
|Federal statutory rate                         |  |              | 34.0  | %    |  |      | (34.0 | )% |  |  | 34.0  | % 
|State taxes, net of federal income tax benefit |  |              | 2.1   |      |  |      | (2.1  | )  |  |  | 2.1   |   
|Meals and entertainment                        |  |              | (5.2  | )    |  |      | (41.1 | )  |  |  | (6.0  | ) 
|Valuation allowance                            |  |              | (30.6 | )    |  |      | 141.2 |    |  |  | (85.3 | ) 
|                                               |  |              |       |      |  |      |       |    |  |  |       |   
|                                               |  |              | 0.3   | %    |  |      | 64.0  | %  |  |  | (55.2 | )%
|                                               |  |              |       |      |  |      |       |    |  |  |       |   

Deferred income tax assets and liabilities are
included in the balance sheet at December 31, 2003 and
2002, as follows:

|                                 |  |              |            |      |  |   |            |  
|-------------------------------- |  | ------------ | ---------- | ---- |  | - | ---------- | -
|                                 |  |             
|                                 |  | December 31,
|                                 |  |             
|                                 |  | 2003         |            | 2002
|                                 |  |              |            |     
|Accelerated depreciation         |  | $            | (1,569,000 | )    |  | $ | (1,671,000 | )
|Package design costs             |  |              | 165,000    |      |  |   | 161,000    |  
|Accrued vacation                 |  |              | 73,000     |      |  |   | 61,000     |  
|Deferred rent                    |  |              | 350,000    |      |  |   | 408,000    |  
|Net operating loss carryforwards |  |              | 2,792,000  |      |  |   | 2,452,000  |  
|Other, net                       |  |              | 174,000    |      |  |   | 203,000    |  
|Valuation allowance              |  |              | (1,985,000 | )    |  |   | (1,614,000 | )
|                                 |  |              |            |      |  |   |            |  
|                                 |  | $            |           |      |  | $ |           |  
|                                 |  |              |            |      |  |   |            |  

At December 31, 2003, the Company had
operating loss carryforwards for federal income tax purposes of
approximately $7,728,000, which are available to offset future
federal taxable income through 2023 and begin to expire in 2017.
During 2003, 2002 and 2001 the valuation allowance against
deferred tax assets increased by approximately $371,000,
decreased by approximately $221,000, and increased by
approximately $891,000, respectively. The Company does not
believe that its net deferred tax assets meet the more
likely than not realization criteria of SFAS No. 109.
Accordingly, a valuation allowance has been established, to the
extent deferred tax assets exceed deferred tax liabilities.

9.     Operating
Leases

The Company leases its office, warehouse and
plant facilities under operating leases in Seattle, Washington
and Berkeley, Walnut Creek and Sacramento, California. Leases at
December 31, 2003 were:

|                         |  |            |      |                   |  |                                                                           
|------------------------ |  | ---------- | ---- | ----------------- |  | --------------------------------------------------------------------------
|                         |  | Expiration |      |                  
|Location                 |  | Year       |      | Extension Options
|                         |  |            |      |                  
|Berkeley, California     |  |            | 2010 |                   |  | Two additional five year periods                                          
|Sacramento, California   |  |            | 2014 |                   |  | Two additional five year periods                                          
|Seattle, Washington      |  |            | 2004 |                   |  | Three additional five year periods                                        
|Walnut Creek, California |  |            | 2012 |                   |  | Three additional five year periods and one
    additional four year period

These lease agreements contain provisions for
free rent periods, scheduled rent increases and tenant
improvement reimbursements. Accordingly, the Company has
recorded deferred rent liabilities of approximately $1,768,000
and $1,129,000 at December 31, 2003 and 2002, respectively,
representing the pro rata rent which would have been due if
equal payments had been required under the lease terms. During
2003 the Company received an $800,000 tenant improvement
incentive related to the construction costs incurred in the
build-out of the Sacramento Alehouse facility. The $800,000 cash
receipt was recorded as a deferred rent

37



---



##### Table of Contents



liability and will be amortized over the life of
the lease. The Company also leases storage and distribution
facilities under month-to-month lease agreements.


At December 31, 2003, future minimum rental
payments are as follows:

|           |  |   |           | 
|---------- |  | - | --------- | 
|2004       |  |   | 1,238,000 | 
|2005       |  |   | 1,033,000 | 
|2006       |  |   | 1,107,000 | 
|2007       |  |   | 1,109,000 | 
|2008       |  |   | 1,111,000 | 
|Thereafter |  |   | 3,280,000 | 
|           |  |   |           | 
|           |  | $ | 8,878,000 | 
|           |  |   |           | 

Total rent expense was approximately $1,027,000,
$908,000 and $732,000 in 2003, 2002 and 2001, respectively.

10.     Commitments
and Contingencies

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

11.     Cash
Dividend

The Board of Directors announced on
November 13, 2003, the declaration of a $0.044 per common
share dividend payable on January 16, 2004 to shareholders
of record on December 31, 2003. The cash dividends declared
in November 2003 totaled approximately $379,000 for all common
stock outstanding as of the dates of record. During the years
ended December 31, 2003, 2002 and 2001, the Company paid
approximately $1,502,000, $1,469,000 and $1,391,000, or $0.176
per common share, of cash dividends, respectively.

12.     Stock Buyback
Plan

On December 15, 1999, the Board of Directors
authorized a stock buyback plan to repurchase up to $2,000,000
of the Companys outstanding common stock on the open
market. During the year ended December 31, 2001, the
Company repurchased 11,726 shares of common stock at costs
of approximately $25,000. No shares were repurchased during 2003
and 2002.



|    |                                              
|--- | ---------------------------------------------
|13. | Major Customers and Financial
    Instruments

Financial instruments that potentially subject
the Company to credit risk consist principally of trade
receivables, short-term investments and interest-bearing
deposits. The Companys short-term investments consist
primarily of fixed rate certificates of deposit and taxable
auction variable rate notes with 28 day reset periods. The
Companys interest-bearing deposits are placed with major
financial institutions. Wholesale distributors account for
substantially all accounts receivable; therefore, this
concentration of risk is limited due to the number of
distributors, their geographic dispersion and state laws
regulating the financial affairs of distributors of alcoholic
beverages.

During the years ended December 31, 2003,
2002 and 2001, one customer comprised approximately 18%, 21% and
24% of the Companys revenue, respectively. Accounts
receivable at December 31, 2003 and 2002 include
approximately $228,000 and $498,000, respectively, due from this
customer.

As of December 31, 2003 and 2002, the
carrying amounts for cash and cash equivalents, short term
investments, notes receivable and notes payable approximate
their fair values.

38



---



##### Table of Contents





|    |                    
|--- | -------------------
|14. | Segment Information

The Company follows the provisions of SFAS
No. 131, Disclosures about Segments of an Enterprise
and Related Information, and reports segment information
in the same format as reviewed by the Companys management
(the Management Approach), which is organized around differences
in products and services.



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

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



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

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



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

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

39



---



##### Table of Contents



Segment profit and segment assets are as follows:

|                             |                                        |                        |   |          |  |       |   |        |  |  |   |        |   |  |   |        |  
|---------------------------- | -------------------------------------- | ---------------------- | - | -------- |  | ----- | - | ------ |  |  | - | ------ | - |  | - | ------ | -
|                             |                                        | Beverage               |   |          |  |       |   |       
|                             |                                        | Operations             |   | Alehouse |  | Other |   | Total 
|                             |                                        |                        |   |          |  |       |   |       
|                             |                                        |                       
|                             |                                        | (Dollars in thousands)
|Year ended December 31, 2003 |                                        |                        |   |          |  |       |   |        |  |  |   |        |   |  |   |       
|                             | Gross revenues from external customers |                        | $ | 23,958   |  |       | $ | 12,420 |  |  | $ |       |   |  | $ | 36,378 |  
|                             | Net revenues from external customers   |                        |   | 22,205   |  |       |   | 12,420 |  |  |   |       |   |  |   | 34,625 |  
|                             | Intersegment revenues                  |                        |   | 442      |  |       |   |       |  |  |   | (442   | ) |  |   |       |  
|                             | Interest income                        |                        |   |         |  |       |   |       |  |  |   | 56     |   |  |   | 56     |  
|                             | Depreciation and amortization          |                        |   | 1,564    |  |       |   | 668    |  |  |   | 211    |   |  |   | 2,443  |  
|                             | Operating income (loss)                |                        |   | 1,915    |  |       |   | 719    |  |  |   | (4,141 | ) |  |   | (1,507 | )
|                             | Capital expenditures                   |                        |   | 515      |  |       |   | 2,496  |  |  |   | 131    |   |  |   | 3,142  |  
|                             | Total assets                           |                        |   | 17,509   |  |       |   | 6,736  |  |  |   | 3,539  |   |  |   | 27,784 |  
|Year ended December 31, 2002 |                                        |                        |   |          |  |       |   |        |  |  |   |        |   |  |   |       
|                             | Gross revenues from external customers |                        | $ | 25,196   |  |       | $ | 10,327 |  |  | $ |       |   |  | $ | 35,523 |  
|                             | Net revenues from external customers   |                        |   | 23,485   |  |       |   | 10,327 |  |  |   |       |   |  |   | 33,812 |  
|                             | Intersegment revenues                  |                        |   | 359      |  |       |   |       |  |  |   | (359   | ) |  |   |       |  
|                             | Interest income                        |                        |   |         |  |       |   |       |  |  |   | 102    |   |  |   | 102    |  
|                             | Depreciation and amortization          |                        |   | 1,601    |  |       |   | 439    |  |  |   | 162    |   |  |   | 2,202  |  
|                             | Operating income (loss)                |                        |   | 1,671    |  |       |   | 975    |  |  |   | (2,872 | ) |  |   | (226   | )
|                             | Capital expenditures                   |                        |   | 421      |  |       |   | 1,605  |  |  |   | 256    |   |  |   | 2,282  |  
|                             | Total assets                           |                        |   | 18,952   |  |       |   | 4,871  |  |  |   | 5,472  |   |  |   | 29,295 |  
|Year ended December 31, 2001 |                                        |                        |   |          |  |       |   |        |  |  |   |        |   |  |   |       
|                             | Gross revenues from external customers |                        | $ | 23,539   |  |       | $ | 8,456  |  |  | $ |       |   |  | $ | 31,995 |  
|                             | Net revenues from external customers   |                        |   | 21,967   |  |       |   | 8,456  |  |  |   |       |   |  |   | 30,423 |  
|                             | Intersegment revenues                  |                        |   | 292      |  |       |   |       |  |  |   | (292   | ) |  |   |       |  
|                             | Interest income                        |                        |   |         |  |       |   |       |  |  |   | 271    |   |  |   | 271    |  
|                             | Depreciation and amortization          |                        |   | 1,582    |  |       |   | 414    |  |  |   | 145    |   |  |   | 2,141  |  
|                             | Operating income (loss)                |                        |   | 257      |  |       |   | 944    |  |  |   | (2,784 | ) |  |   | (1,583 | )
|                             | Capital expenditures                   |                        |   | 354      |  |       |   | 533    |  |  |   | 192    |   |  |   | 1,079  |  
|                             | Total assets                           |                        |   | 19,220   |  |       |   | 3,642  |  |  |   | 6,743  |   |  |   | 29,605 |  



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

Other consists of interest income, general and
administrative expenses, corporate office assets and other
reconciling items that are not allocated to segments for
internal management reporting purposes. Total assets include all
assets except for accounts receivable, inventory, goodwill and
fixed assets specific to a segment.



|    |                       
|--- | ----------------------
|15. | Employee Benefit Plans



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

In May 2003, the Company adopted and its
shareholders approved, an Employee Stock Purchase Plan (the 2003
Purchase Plan) which allows eligible employees to acquire shares
of common stock of the Company at a discount. Eligible employees
may contribute up to 10% of their base earnings toward the
quarterly purchase of the Companys common stock. The
employees purchase price is 85% of the lesser of the fair
market value of the stock on the first business day or the last
business day of the quarterly offering period. A total of
500,000 shares of common stock are available under the 2003
Purchase Plan. Generally, all of the Companys officers and
employees who have been employed by the Company for at least six
months and who are regularly scheduled to work more than twenty
hours per week are eligible to participate in the 2003

40



---



##### Table of Contents



Purchase Plan. The 2003 Purchase Plan will
generally operate in successive three month periods, or offering
periods, commencing on each January 1, April 1,
July 1 and October 1 of each year and end on the next
March 31, June 31, September 31 and
December 31, respectively, occurring thereafter. The 2003
Purchase Plan expires February 5, 2013. There were 11,016
shares issued under the 2003 Purchase Plan during 2003 at a
weighted-average price of approximately $2.45 per share. Under
the previous employee stock purchase plan, which expired, there
were 29,356 and 25,344 shares issued during 2002 and 2001 at a
weighted-average price of approximately $1.90 and $1.78 per
share, respectively. Fair value assumptions of the Employee
Stock Purchase Plan are based on the same assumptions used in
the stock option plans.


Employee
Stock Option Plans

The Companys Amended and Restated 1995
Employee Stock Option Plan (the Employee Plan) permits the
granting of options to employees. A total of 1,565,000 shares
have been reserved under the Employee Plan. The options are
granted at the fair market value of the Companys common
stock at the date of grant. Each outstanding option has a term
of 10 years from the date of grant and vests over a period
of three years. Shares available for future grants at
December 31, 2003 totaled 354,000.

The Companys Non-Employee Director Stock
Option Plan (the Director Plan) provides for the granting of
stock options covering 5,000 shares of common stock to be made
automatically on the date of each annual meeting of stockholders
to each non-employee director of the Company, so long as shares
of common stock remain available under the Director Plan. A
total of 250,000 shares have been reserved under the Director
Plan. As of December 31, 2003, 155,000 options were
available for future grants. Each outstanding option granted
under this plan has a term of 10 years from the date of
grant and vests immediately.

Information with respect to the Plans follows:

|                                         |             |               |           |              |   |                |              |              |  |   |      |      | 
|---------------------------------------- | ----------- | ------------- | --------- | ------------ | - | -------------- | ------------ | ------------ |  | - | ---- | ---- | 
|                                         |             | Share Subject |           | Option Price |   | Average       
|                                         |             | to Option     |           | Range        |   | Exercise Price
|                                         |             |               |           |              |   |               
|Options outstanding at December 31, 2000 |             |               | 1,212,000 |              |   | $              | 1.56 - 12.25 |              |  | $ | 2.56 |     
|                                         | Granted     |               |           | 260,000      |   |                | $            | 2.13 -  2.67 |  |   | $    | 2.33 | 
|                                         | Forfeitures |               |           | (246,000     | ) |                | $            | 1.82 - 10.75 |  |   | $    | 3.25 | 
|                                         | Exercised   |               |           | (416,000     | ) |                | $            | 1.56 -  2.67 |  |   | $    | 2.03 | 
|                                         |             |               |           |              |   |                |              |              |  |   |      |     
|Options outstanding at December 31, 2001 |             |               | 810,000   |              |   | $              | 1.56 - 12.25 |              |  | $ | 2.55 |     
|                                         | Granted     |               |           | 380,000      |   |                | $            | 2.19 -  2.48 |  |   | $    | 2.30 | 
|                                         | Forfeitures |               |           | (189,000     | ) |                | $            | 1.70 - 12.25 |  |   | $    | 2.29 | 
|                                         | Exercised   |               |           | (169,000     | ) |                | $            | 1.70 -  2.00 |  |   | $    | 1.87 | 
|                                         |             |               |           |              |   |                |              |              |  |   |      |     
|Options outstanding at December 31, 2002 |             |               | 832,000   |              |   | $              | 1.56 - 10.75 |              |  | $ | 2.63 |     
|                                         | Granted     |               |           | 165,000      |   |                | $            | 2.96 -  3.10 |  |   | $    | 2.99 | 
|                                         | Forfeitures |               |           | (148,000     | ) |                | $            | 2.33 - 10.75 |  |   | $    | 2.95 | 
|                                         | Exercised   |               |           | (91,000      | ) |                | $            | 1.70 -  2.56 |  |   | $    | 2.24 | 
|                                         |             |               |           |              |   |                |              |              |  |   |      |     
|Options outstanding at December 31, 2003 |             |               | 758,000   |              |   | $              | 1.56 - 10.75 |              |  | $ | 2.69 |     
|                                         |             |               |           |              |   |                |              |              |  |   |      |     

41



---



##### Table of Contents



Information about options outstanding at
December 31, 2003 follows:

|            |         |                  |  |             |            |                |  |  |         |  |  |   |       | 
|----------- | ------- | ---------------- |  | ----------- | ---------- | -------------- |  |  | ------- |  |  | - | ----- | 
|            |         | Weighted-        |  |             |            |               
|            |         | Average          |  |             |            | Weighted-     
|Options     |         | Remaining        |  | Options     |            | Average       
|Outstanding |         | Contractual Life |  | Exercisable |            | Exercise Price
|            |         |                  |  |             |            |               
|            | 22,500  |                  |  |             | 29 Months  |                |  |  | 22,500  |  |  | $ | 10.75 | 
|            | 5,000   |                  |  |             | 36 Months  |                |  |  | 5,000   |  |  | $ | 4.75  | 
|            | 6,000   |                  |  |             | 38 Months  |                |  |  | 6,000   |  |  | $ | 4.13  | 
|            | 66,000  |                  |  |             | 54 Months  |                |  |  | 66,000  |  |  | $ | 2.56  | 
|            | 1,700   |                  |  |             | 57 Months  |                |  |  | 1,700   |  |  | $ | 1.56  | 
|            | 50,000  |                  |  |             | 70 Months  |                |  |  | 50,000  |  |  | $ | 2.00  | 
|            | 10,000  |                  |  |             | 72 Months  |                |  |  | 10,000  |  |  | $ | 1.82  | 
|            | 10,000  |                  |  |             | 76 Months  |                |  |  | 10,000  |  |  | $ | 1.75  | 
|            | 11,200  |                  |  |             | 77 Months  |                |  |  | 11,200  |  |  | $ | 1.82  | 
|            | 16,500  |                  |  |             | 79 Months  |                |  |  | 16,500  |  |  | $ | 1.82  | 
|            | 100,000 |                  |  |             | 83 Months  |                |  |  | 100,000 |  |  | $ | 2.00  | 
|            | 15,000  |                  |  |             | 88 Months  |                |  |  | 15,000  |  |  | $ | 2.67  | 
|            | 75,000  |                  |  |             | 90 Months  |                |  |  | 60,900  |  |  | $ | 2.57  | 
|            | 5,000   |                  |  |             | 96 Months  |                |  |  | 3,300   |  |  | $ | 2.45  | 
|            | 10,000  |                  |  |             | 98 Months  |                |  |  | 4,800   |  |  | $ | 2.30  | 
|            | 14,600  |                  |  |             | 98 Months  |                |  |  | 5,600   |  |  | $ | 2.29  | 
|            | 25,000  |                  |  |             | 100 Months |                |  |  | 25,000  |  |  | $ | 2.48  | 
|            | 49,500  |                  |  |             | 100 Months |                |  |  | 49,500  |  |  | $ | 2.33  | 
|            | 100,000 |                  |  |             | 105 Months |                |  |  | 46,000  |  |  | $ | 2.19  | 
|            | 25,000  |                  |  |             | 112 Months |                |  |  | 25,000  |  |  | $ | 3.10  | 
|            | 120,000 |                  |  |             | 117 Months |                |  |  |        |  |  | $ | 2.96  | 
|            | 20,000  |                  |  |             | 120 Months |                |  |  |        |  |  | $ | 3.02  | 
|            |         |                  |  |             |            |                |  |  |         |  |  |   |       | 
|            | 758,000 |                  |  |             |            |                |  |  | 554,000 |  |  | $ | 2.69  | 
|            |         |                  |  |             |            |                |  |  |         |  |  |   |       | 

The Company had options exercisable of 401,000,
with a weighted-average exercise price of $3.00 and options
exercisable of 493,000 with a weighted-average exercise price of
$2.87 as of December 31, 2002 and 2001, respectively.



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

The Company has a 401(k) plan for all eligible
employees. Employees who are at least age 21 become eligible to
participate following the first plan quarter in which they
perform at least 250 hours of service. Employees can elect
to contribute up to 50% of their eligible compensation to the
401(k) plan subject to Internal Revenue Services limitations.
The Company generally matches employee contributions (that do
not exceed 6% of the employees compensation) at the rate
of 50%. The Company may also make additional discretionary
contributions. The Companys matching contributions for the
years ended December 31, 2003, 2002 and 2001, totaled
approximately $80,000, $77,000 and $93,000, respectively.



|    |                        
|--- | -----------------------
|16. | Shareholder Rights Plan

In June 1999, the Board of Directors adopted a
shareholder rights agreement (the Rights Agreement)
and declared a distribution of one preferred share purchase
right (a Right). Under certain conditions, each
Right may be exercised to purchase a unit equal to 1/1000 of a
share of Series RP Preferred Stock at a purchase price of
$12.00 (the Purchase Price), subject to adjustment.
The rights are evidenced by our common stock certificates and
automatically trade with our common stock. The rights are not
exercisable unless a person or group acquires, or commences (or
announces an intention to commence) a tender or

42



---



##### Table of Contents



exchange offer to acquire 20% or more of our
common stock without the approval of our Board of Directors. If
a person or group acquires more than 20% of the then outstanding
shares of common stock, each Right will entitle its holder
(other than such acquiring person or group) to receive, on
exercise, common stock (or, in certain circumstances, other
Pyramid securities) having a value equal to two times the
then-applicable Purchase Price of the Right. In addition, if we
are thereafter acquired in a merger or other business
combination transaction, each Right will entitle its holder to
purchase that number of the acquiring companys common
shares having a market value of twice the Rights exercise
price. We will be entitled to redeem the Rights at $0.001 per
Right at any time prior to the earlier of the expiration of the
Rights in June 2009 or the time that a person has acquired a 20%
position.




|    |                              
|--- | -----------------------------
|17. | Subsequent Events (Unaudited)

The Board of Directors announced on March 5,
2004, the declaration of a $0.044 per common share dividend
payable on April 12, 2004 to shareholders of record on
March 31, 2004.

On January 26, 2004 the Company and Portland
Brewing Company, an Oregon corporation, announced that they had
entered into an asset purchase agreement. Per the asset purchase
agreement, Pyramid Breweries Inc. will acquire Portland Brewing
Companys brewery and alehouse assets for total
consideration of approximately $4.2 million, consisting of
a combination of assumed liabilities, cash and, at the
Companys sole option, shares of the Companys
unregistered common stock. The terms of the transaction also
include a 5-year earn out which may result in additional
payments to Portland Brewing based on sales of Portland Brewing
brands during the earn-out period. The transaction is subject to
approval by the shareholders of Portland Brewing, and other
customary closing conditions. However, shareholders representing
at least 74% of Portland Brewings outstanding voting power
are committed to vote in favor of the transaction pursuant to a
voting agreement. The transaction is expected to close in the
second quarter of 2004.

On February 26, 2004 the Company announced
that Martin Kelly is stepping down as Chairman and Chief
Executive Officer. The Company has appointed Pyramid founder and
director George Hancock as non-executive Chairman and has
immediately commenced the process of recruiting a new CEO.
Mr. Hancock was formerly Chairman of the Board and served
as CEO from 1992 through 1999. Until a successor CEO has been
named, Mr. Hancock will oversee the Companys day to
day operations. The termination of Mr. Kellys
employment will be handled in accordance with a preexisting
employment agreement resulting in an expense and cash charge
during the first quarter of 2004.

43



---



##### Table of Contents





|    |                                   
|--- | ----------------------------------
|18. | Interim Financial Data (Unaudited)

The following table presents the results of
operations for each of the four quarters in 2003 and 2002. This
quarterly information is unaudited, has been prepared on the
same basis as the annual financial information and, in the
opinion of management, reflects all adjustments (consisting only
of normal recurring adjustments) necessary for a fair
presentation of the information for the periods presented. A
variety of factors may lead to significant fluctuations in the
Companys quarterly results of operations, including timing
of new product introduction, seasonality of demand, any decrease
in the demand for craft beers and general economic conditions.
As a result, the Companys results of operations for any
quarter are not necessarily indicative of results for any future
period.

|                                              |  |                                         |        |                     |  |         |        |          |  |             |       |              |  |         |       |          |  |   |       |   |  |   |       |  |  |   |        |  |  |   |       |  
|--------------------------------------------- |  | --------------------------------------- | ------ | ------------------- |  | ------- | ------ | -------- |  | ----------- | ----- | ------------ |  | ------- | ----- | -------- |  | - | ----- | - |  | - | ----- |  |  | - | ------ |  |  | - | ----- | -
|                                              |  |                                         |        |                    
|                                              |  | 2003 Quarters Ended                     |        | 2002 Quarters Ended
|                                              |  |                                         |        |                    
|                                              |  | December 31                             |        | September 30        |  | June 30 |        | March 31 |  | December 31 |       | September 30 |  | June 30 |       | March 31
|                                              |  |                                         |        |                     |  |         |        |          |  |             |       |              |  |         |       |         
|                                              |  |                                        
|                                              |  | (in thousands except per share amounts)
|Gross sales                                   |  | $                                       | 8,755  |                     |  | $       | 10,765 |          |  | $           | 9,882 |              |  | $       | 6,976 |          |  | $ | 8,641 |   |  | $ | 9,871 |  |  | $ | 10,177 |  |  | $ | 6,834 |  
|Less excise taxes                             |  |                                         | 426    |                     |  |         | 493    |          |  |             | 481   |              |  |         | 353   |          |  |   | 434   |   |  |   | 463   |  |  |   | 472    |  |  |   | 342   |  
|                                              |  |                                         |        |                     |  |         |        |          |  |             |       |              |  |         |       |          |  |   |       |   |  |   |       |  |  |   |        |  |  |   |       |  
|Net sales                                     |  |                                         | 8,329  |                     |  |         | 10,272 |          |  |             | 9,401 |              |  |         | 6,623 |          |  |   | 8,207 |   |  |   | 9,408 |  |  |   | 9,705  |  |  |   | 6,492 |  
|Cost of sales                                 |  |                                         | 7,189  |                     |  |         | 8,082  |          |  |             | 6,901 |              |  |         | 5,468 |          |  |   | 6,255 |   |  |   | 6,947 |  |  |   | 7,021  |  |  |   | 5,136 |  
|                                              |  |                                         |        |                     |  |         |        |          |  |             |       |              |  |         |       |          |  |   |       |   |  |   |       |  |  |   |        |  |  |   |       |  
|Gross margin                                  |  |                                         | 1,140  |                     |  |         | 2,190  |          |  |             | 2,500 |              |  |         | 1,155 |          |  |   | 1,952 |   |  |   | 2,461 |  |  |   | 2,684  |  |  |   | 1,356 |  
|Selling, general and administrative expenses  |  |                                         | 2,145  |                     |  |         | 2,264  |          |  |             | 2,160 |              |  |         | 1,923 |          |  |   | 2,149 |   |  |   | 2,135 |  |  |   | 2,220  |  |  |   | 2,175 |  
|                                              |  |                                         |        |                     |  |         |        |          |  |             |       |              |  |         |       |          |  |   |       |   |  |   |       |  |  |   |        |  |  |   |       |  
|Operating (loss) income                       |  |                                         | (1,005 | )                   |  |         | (74    | )        |  |             | 340   |              |  |         | (768  | )        |  |   | (197  | ) |  |   | 326   |  |  |   | 464    |  |  |   | (819  | )
|Other income, net                             |  |                                         | 44     |                     |  |         | 118    |          |  |             | 106   |              |  |         | 44    |          |  |   | 61    |   |  |   | 137   |  |  |   | 130    |  |  |   | 52    |  
|                                              |  |                                         |        |                     |  |         |        |          |  |             |       |              |  |         |       |          |  |   |       |   |  |   |       |  |  |   |        |  |  |   |       |  
|(Loss) income before income taxes             |  |                                         | (961   | )                   |  |         | 44     |          |  |             | 446   |              |  |         | (724  | )        |  |   | (136  | ) |  |   | 463   |  |  |   | 594    |  |  |   | (767  | )
|(Provision) benefit for income taxes          |  |                                         |       |                     |  |         |       |          |  |             | (2    | )            |  |         | (1    | )        |  |   | 98    |   |  |   |      |  |  |   |       |  |  |   |      |  
|                                              |  |                                         |        |                     |  |         |        |          |  |             |       |              |  |         |       |          |  |   |       |   |  |   |       |  |  |   |        |  |  |   |       |  
|Net (loss) income                             |  | $                                       | (961   | )                   |  | $       | 44     |          |  | $           | 444   |              |  | $       | (725  | )        |  | $ | (38   | ) |  | $ | 463   |  |  | $ | 594    |  |  | $ | (767  | )
|Basic and diluted net (loss) income per share |  | $                                       | (0.11  | )                   |  | $       | 0.01   |          |  | $           | 0.05  |              |  | $       | (0.09 | )        |  | $ | (0.00 | ) |  | $ | 0.06  |  |  | $ | 0.07   |  |  | $ | (0.09 | )
|                                              |  |                                         |        |                     |  |         |        |          |  |             |       |              |  |         |       |          |  |   |       |   |  |   |       |  |  |   |        |  |  |   |       |  
|Weighted average basic shares outstanding     |  |                                         | 8,492  |                     |  |         | 8,456  |          |  |             | 8,443 |              |  |         | 8,417 |          |  |   | 8,292 |   |  |   | 8,235 |  |  |   | 8,173  |  |  |   | 8,112 |  
|                                              |  |                                         |        |                     |  |         |        |          |  |             |       |              |  |         |       |          |  |   |       |   |  |   |       |  |  |   |        |  |  |   |       |  
|Weighted average diluted shares outstanding   |  |                                         | 8,492  |                     |  |         | 8,655  |          |  |             | 8,665 |              |  |         | 8,417 |          |  |   | 8,292 |   |  |   | 8,294 |  |  |   | 8,242  |  |  |   | 8,112 |  
|                                              |  |                                         |        |                     |  |         |        |          |  |             |       |              |  |         |       |          |  |   |       |   |  |   |       |  |  |   |        |  |  |   |       |  

44



---



##### Table of Contents



EXHIBIT INDEX

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

|        |    |             |  |                                                                                                                                                                                                                                                                                        
|------- | -- | ----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|No.     |    | Description
|        |    |            
|        | 3  | .1(1)       |  | Amended and Restated Articles of Incorporation of
    Registrant                                                                                                                                                                                                                       
|        | 3  | .2(1)       |  | Form of Amended and Restated Bylaws of Registrant                                                                                                                                                                                                                                      
|        | 3  | .3          |  | Rights Agreement between ChaseMellon Shareholder
    Services LLC and the Registrant dated June 14, 1999.
    (Incorporated by reference to the Current Report on
    Form 8-K dated June 17, 1999.)                                                                                   
|        | 4  | .1(1)       |  | Form of Common Stock Certificate                                                                                                                                                                                                                                                       
|        | 4  | .4          |  | Directors Compensation Plan (Incorporated by
    reference to the Registrants Form S-8 dates
    June 26, 2002)                                                                                                                                                                       
|        | 10 | .1(1)       |  | Lease between Harold W. Hill and the Registrant
    dated April 13, 1994                                                                                                                                                                                                               
|        | 10 | .2(1)       |  | Addendum of Lease between Harold W. Hill and the
    Registrant dated November 28, 1994                                                                                                                                                                                                
|        | 10 | .3(1)       |  | Second Addendum of Lease between 1201
    Building L.L.C. and the Registrant dated June 26, 1995                                                                                                                                                                                       
|        | 10 | .4(1)       |  | Distribution Agreement between the Registrant and
    Western Washington Beverage dated August 24, 1995                                                                                                                                                                                
|        | 10 | .5(1)       |  | Registrants 1995 Employee Stock Option Plan                                                                                                                                                                                                                                           
|        | 10 | .6(1)       |  | Registrants Non-Employee Director Stock
    Option Plan                                                                                                                                                                                                                               
|        | 10 | .7(1)       |  | Form of Non-Qualified Stock Option Agreement                                                                                                                                                                                                                                           
|        | 10 | .8(1)       |  | Commercial Lease between Esther Podlesak, Trustee
    of the John A. and Esther Podlesak 1990 Family Trust and
    Pyramid Breweries California, Inc. dated November 1, 1995                                                                                                           
|        | 10 | .9(1)       |  | Assignment, Assumption and Consent Agreement
    between Esther Podlesak, Trustee of the John A. and Esther
    Podlesak 1990 Family Trust, Pyramid Breweries California, Inc.
    and Pyramid Breweries Inc. dated November 17, 1995                                                  
|        | 10 | .10         |  | Amended and Restated Employment Agreement between
    the Registrant and Martin Kelly dated June 19, 2001
    (Incorporated by reference to the Registrants Quarterly
    Report on Form 10-Q for the quarter ended June 30,
    2001.)                                               
|        | 10 | .11         |  | Employment Agreement between the Registrant and
    Gary McGrath (Incorporated by reference to the Registrants
    Annual Report on Form 10-K for the year ended
    December 31, 1999.)                                                                                              
|        | 10 | .12         |  | Assignment, Assumption and Consent Agreement
    between KLP Properties, Inc., Faultline Brewing Company, Inc.,
    and the Registrant dated October 26, 2001. (Incorporated by
    reference to the Registrants Annual Report on
    Form 10-K for the year ended December 31, 2001.)
|        | 10 | .13         |  | Sublease between KLP Properties, Inc. and
    Faultline Brewing Company, Inc. dated April 3, 1996
    (Incorporated by reference to the Registrants Annual
    Report on Form 10-K for the year ended December 31,
    2001.)                                                         
|        | 10 | .14         |  | Lease between Peter Vasconi and the James and
    Maura Belka Trust dated December 28, 1995. (Incorporated by
    reference to the Registrants Annual Report on
    Form 10-K for the year ended December 31, 2001.)                                                                  
|        | 10 | .15         |  | Stock Purchase Agreement and Promissory Notes
    between the Company and Martin Kelly (Incorporated by reference
    to the Registrants Form 10-Q for the quarter ended
    June 30, 2001.)                                                                                          
|        | 10 | .16         |  | Commercial Lease between County Supervisors
    Association of California and Pyramid Breweries, Inc. dated
    April 15, 2002. (Incorporated by reference to the
    Registrants Annual Report on Form 10-K for the year
    ended December 31, 2002.)                               
|        | 10 | .17         |  | Registrants 2003 Employee Stock Purchase
    Plan. (Incorporated by reference to the Registrants Annual
    Report on Form 10-K for the year ended December 31,
    2002.)                                                                                                           



---



##### Table of Contents



|        |    |             |  |                                                                                                                                                                                                 
|------- | -- | ----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|No.     |    | Description
|        |    |            
|        | 10 | .18         |  | Registrants Non-Employee Director Stock
    Compensation Plan. (Incorporated by reference to the
    Registrants Annual Report on Form 10-K for the year
    ended December 31, 2002.)        
|        | 10 | .19         |  | Asset Purchase Agreement between Pyramid
    Breweries Inc., Portland Brewing Company and PBC
    Acquisition, LLC dated January 26, 2004.                                                      
|        | 23 | .1          |  | Consent of KPMG LLP                                                                                                                                                                             
|        | 31 | .1          |  | Certifications                                                                                                                                                                                  
|        | 31 | .2          |  | Certifications                                                                                                                                                                                  
|        | 31 | .3          |  | Certifications                                                                                                                                                                                  
|        | 32 | .1          |  | Certification Pursuant to 18
    U.S.C. Section 1350, as Adopted Pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002: George
    Hancock, Interim Chief Executive Officer.            
|        | 32 | .2          |  | Certification Pursuant to 18
    U.S.C. Section 1350, as Adopted Pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002: James K.
    Hilger, Vice-President and Chief Financial Officer.
|        | 32 | .3          |  | Certification Pursuant to 18
    U.S.C. Section 1350, as Adopted Pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002: Jason W.
    Rees, Controller and Chief Accounting Officer.     



---



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