<PAGE>

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                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                               ----------------

                                   FORM 10-K

                               ----------------

(MARK ONE)

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
    ACT OF 1934

                      For the Year Ended December 31, 2000

[_] 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)

<TABLE>
<S>                                            <C>
                 Washington                                      91-1258355
       (State or other jurisdiction of                         (IRS Employer
        incorporation or organization)                       Identification No.)
</TABLE>

                           91 So. Royal Brougham Way,
                               Seattle, WA 98134
              (Address of principal executive offices) (Zip Code)

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

       Securities Registered Pursuant to Section 12(b) of the Act: NONE.

          Securities Registered Pursuant to Section 12(g) of the Act:

                          COMMON STOCK $.01 PAR VALUE

                               ----------------

   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 [X] No [_]

   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. [_]

   The aggregate market value of the voting stock held by non-affiliates of the
registrant at March 1, 2001, was $18,445,953.

   The number of shares outstanding of the registrant's common stock as of
March 1, 2001, was 7,869,434.

                      DOCUMENTS INCORPORATED BY REFERENCE

   Portions of the Company's Proxy Statement for the Annual Meeting of
Stockholders to be held on May 3, 2001 are incorporated by reference into Part
III of this Form 10-K.

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<PAGE>

                             PYRAMID BREWERIES INC.

        ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2000

<TABLE>
<CAPTION>
                                                                           Page
                                                                           ----

 <C>      <S>                                                              <C>
 PART I

 Item 1.  Business......................................................     1

 Item 2.  Properties....................................................     4

 Item 3.  Legal Proceedings.............................................     5

 Item 4.  Submission of Matters to a Vote of Security Holders...........     5

 Item 4A. Executive Officers of the Company.............................     5

 PART II

 Item 5.  Market for Registrant's Common Equity and Related Stockholder
           Matters......................................................     7

 Item 6.  Selected Financial Data.......................................     8

 Item 7.  Management's Discussion and Analysis of Financial Condition
           and Results of Operations....................................     9

 Item 8.  Financial Statements..........................................    14

 Item 9.  Change in and Disagreements with Accountants on Accounting and
           Financial Disclosure.........................................    14

 PART III

 Item 10. Directors and Executive Officers of the Company...............    15

 Item 11. Executive Compensation........................................    15

 Item 12. Security Ownership of Certain Beneficial Owners and
           Management...................................................    15

 Item 13. Certain Relationships and Related Transactions................    15

 PART IV

 Item 14. Exhibits, Financial Statement Schedules, and Reports on
           Form 8-K.....................................................    15
</TABLE>
<PAGE>

                                    PART I

Item 1 -- Business

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

   The Company's breweries produce high quality, full-flavored beers in small
batches using traditional brewing methods. The Company also produces old-
fashioned, full-flavored, hand crafted sodas. The Company's two breweries, one
in Seattle, Washington (Seattle Brewery) and one in Berkeley, California
(Berkeley Brewery), had an estimated total annual beer production capacity of
200,000 barrels as of the end of 2000. The Seattle Brewery opened in March
1995 with an initial estimated annual beer capacity of 92,000 barrels. During
2000, ten fermenting vessels were moved from Seattle to the Berkeley Brewery
which reduced the Seattle Brewery annual beer production capacity to 50,000
barrels. The Berkeley Brewery was completed in February 1997 with an initial
estimated annual beer production capacity of 80,000 barrels and was expanded
during 2000 to a total beer capacity of 150,000 barrels. The Company believes
that the breweries and adjacent alehouses provide increased consumer awareness
and loyalty for the Company's brands by increasing opportunities for sampling
and local product promotion.

   The Company's Pyramid and Thomas Kemper beer brands compete primarily in
the craft beer category, and secondarily in the larger "specialty" category
(which includes craft beers, imports and super premium beers). Craft beers are
a small segment of the estimated $50 billion dollar brewing industry. Craft
beers are distinguishable from mass-produced beers by their wide range of
fuller flavors and adherence to traditional European styles and ingredients.
Industry experts estimate that total beer shipments, including imports,
increased 1% in 1999, while craft beer shipments, which comprise approximately
3% of the total, were estimated to have increased by 2%.

   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 ales. Under the Thomas
Kemper brand, the Company brews authentic German styles in addition to styles
popularized in other European countries. 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 $4.99 to $7.49
per six-pack; retail prices are set independently by distributors and
retailers. The Company's retail prices are usually at the high end of this
range. Increased consumer demand for high quality, full-flavored beers allows
for a price premium relative to mass-produced domestic beers. This price
premium results in higher profit margins, which can motivate distributors and
retailers to offer and promote craft beers. The Company's craft beers are sold
primarily in Washington, Oregon and California, which accounted for
approximately 85% of the Company's 2000 beer sales.

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

   The Company currently operates restaurants adjacent to its Seattle and
Berkeley breweries. The restaurants are operated under the Pyramid Alehouse
brand name. In 2000, the restaurants contributed sales of $7,737,000

                                       1
<PAGE>

including approximately $2,300,000 in the Company's beers and sodas and more
than $140,000 in branded clothing and other merchandise. The restaurants have
a total of over 700 seats, plus outdoor eating areas, and are both situated in
highly visible, high traffic locations. The Alehouses had approximately
500,000 guest visits during 2000.

   The Company's beverage operations contributed 73% of net sales in 2000,
with beer comprising 56% and soda 17%. Alehouse operations contributed 27% of
net sales in 2000.

Business Strategy

   As a result of a strategic review in 1999, the Company has developed a
balanced internal and external growth strategy which includes growing the
Company's beverage portfolio in its core western markets; expanding the
Alehouse division through the development of new properties and new
acquisitions; and continuing to improve the Company's cost structure. Key
elements of the Company's strategy are: (i) building a strong portfolio of
craft beer brands, (ii) increasing the focus on the craft soda business, (iii)
building brand awareness and sales through company-owned restaurants, and (iv)
maintaining a direct store delivery (DSD) distribution system.

 Building a Strong Portfolio of Craft Beer Brands

   The Company is committed to producing a portfolio of high quality craft
beers to appeal to a variety of discerning consumer tastes. The Company
currently markets over 20 styles of beer under the Pyramid and Thomas Kemper
brands. The Pyramid brand accounted for 92% of the Company's beer sales and
73% of the Company's beverage sales in 2000. 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 all of 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, beer festivals and targeted charitable donations of its products
to assist in developing its market presence. The Company also has an award-
winning website and an active public relations program. The Company does not
compete directly with the national brands in terms of mass-media advertising.

 Increasing the Focus on the Craft Soda Business

   The Company acquired the Thomas Kemper Soda Company in 1997. Since that
time, the brand has added significant revenues to the Company, with a net
sales growth of 66%. The soda business represented 23% of beverage net sales
in 2000, and 17% of total net sales. During March 2001, the Company introduced
two new flavors, grape and ginger ale, to the Thomas Kemper Soda portfolio.
The craft soda category possesses many characteristics that are similar to the
craft beer category, and the Company believes it can leverage its experience
and existing infrastructure to further develop the Thomas Kemper brands. The
Company will also seek opportunities to expand the craft soda portfolio within
its core western markets.

 Building Brand Awareness and Sales through Company-Owned Restaurants

   The Company's breweries and restaurants are focal points for marketing,
creating brand awareness, and generating sampling opportunities for the
Company's products. Initially, the breweries provided the attraction to

                                       2
<PAGE>

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 extensively used to
entertain the beverage trade and build relationships with distributors. The
breweries' and restaurants' highly knowledgeable employees are an important
source of education and training for the Company's distributors and retailers.

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

 Maintaining a Direct Store Delivery (DSD) System Through Independent
 Distributors

   The Company distributes its products through a network of selected
independent distributors who deliver directly to local grocery stores,
convenience stores, restaurants and taverns. The Company feels that this type
of distribution system is best suited for developing local distribution of
company products, particularly in draft beer accounts, where there are
important sampling and brand building opportunities. The Company has not
aligned itself with the distribution system of a single larger brewer. This
approach allows the Company to select distributors in each market that it
believes will focus the greatest attention on its products and best promote
its high quality craft beers and sodas. Additionally, the ability to change
distribution arrangements for performance related issues is an important
advantage. During 2000, the Company distributed its products through
161 wholesalers in 32 states and Canada.

Products

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

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

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

Competition

   Competition within the craft beer and soda markets is based on product
quality, taste, consistency, freshness, distribution, price, ability to
differentiate products, promotional methods and other product support. The
number of competitors has increased dramatically in the past four years.
Statistics from the latest study of the Institute of Brewing Studies indicate
there were approximately 1,500 craft brewers in the United States at the end
of 2000. Approximately two thirds of these brewers are brewpubs that sell all
of their production at retail on the brewery premises. The remaining brewers
market their products through similar channels to those utilized by the
Company and, although many have limited geographic distribution, the result is
significantly increased competition in all markets.

   The Company's past sales growth was achieved predominantly through
increasing penetration in Washington, Oregon and California, which the Company
believes comprise one of the largest and most

                                       3
<PAGE>

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 evidence that distributors are consolidating to
improve profit margins. These factors could have the effect of reducing the
distribution options for the Company's products. While such actions have not
at this time denied access to any market for the Company's products, there can
be no guarantee that this will not happen in the future.

Item 2 -- Properties

   The Company currently owns and operates two breweries, each with an
adjacent restaurant; one in Seattle, Washington and one in Berkeley,
California. The estimated total annual beer capacity of the two breweries was
200,000 and 172,000 barrels at the end of 2000 and 1999, respectively. During
August 2000, ten fermenting vessels were moved from the Seattle Brewery to the
Berkeley Brewery and soda equipment was then added to the Seattle Brewery.
This redistribution of production equipment and change in production mix of
beer and soda resulted in increased company-wide brewing capacity.

 The Seattle Brewery and Alehouse

   In March 1995, the Company completed the Seattle Brewery, Alehouse and
corporate offices near downtown Seattle. This brewery and 340 seat restaurant,
operated as the Pyramid Alehouse, consists of approximately 33,000 square feet
of leased building area. The estimated annual beer production capacity was
50,000 and 92,000 barrels at the end of 2000 and 1999, respectively. 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 42,000
square feet of warehouse and outside storage space adjacent to the Seattle
Brewery and Alehouse for a period of seven years, also expiring in 2004, and
has options to extend the lease term for three additional five-year periods.

 The Berkeley Brewery and Alehouse

   Completed and opened in February 1997, the Berkeley Brewery and its
adjacent Pyramid Alehouse are housed in a leased building of approximately
93,000 square feet. During January 2000, the Company exercised an option to
lease an additional 29,000 square feet of adjacent space and is currently sub-
leasing that space. The brewery had an estimated beer production capacity of
150,000 and 80,000 barrels at the end of 2000 and 1999, respectively. During
2000, fermentation capacity was added which increased the estimated annual
beer capacity to 150,000 barrels. The Berkeley Brewery has a designed maximum
potential capacity in excess of 200,000 barrels, which can be achieved by
adding more fermentation capacity. The Berkeley Alehouse has seating for 380
plus an outdoor seating area. The building was leased commencing November 1995
for a 15-year term, with

                                       4
<PAGE>

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.

Item 3 -- Legal Proceedings

   The Company is involved from time to time in claims, proceedings and
litigation arising in the ordinary course of business. Pyramid Breweries Inc.
is named as a defendant in a putative class action lawsuit pending in the
Superior Court of Washington for King County: Jerseys All American Sports Bar,
Inc. v. Alaska Distributors Co., et al., No. 00-2-20485-0SEA, filed on August
3, 2000. The lawsuit purports to allege claims on behalf of all purchasers of
Pyramid Hefeweizen by the keg for retail sale during the period May 1, 1999 to
the present. The lawsuit alleges violations of Washington's Consumer
Protection Act and a civil conspiracy related to sales of the Bavarian
Hefeweizen brand at a lower price than the Pyramid Hefeweizen brand.
Plaintiffs seek injunctive relief and unspecified monetary damages. Pyramid
intends to defend the lawsuit vigorously.

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

   The Company's annual meeting is scheduled for 9 a.m. on May 3, 2001 at the
Hotel Edgewater, 2411 Alaskan Way, Seattle, Washington 98121. Matters to be
voted on will be included in the Company's proxy statement to be filed with
the Securities and Exchange Commission and distributed to stockholders prior
to the meeting.

Item 4A -- Executive Officers of the Company

   Martin Kelly (46) -- President and Chief Executive Officer

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

   Wayne Drury (49) -- Vice President-Finance, Chief Financial Officer and
Secretary

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

   Gary McGrath (41) -- Vice President-Sales

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

                                       5
<PAGE>

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

   Nick Walpert (40) -- Vice President/Chief Operating Officer -- Alehouse
Division

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

                                       6
<PAGE>

                                    PART II

Item 5 -- Market for Registrant's Common Equity and Related Stockholder
Matters

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

   The following table sets forth the high and low sales prices and the cash
dividend paid per share of Pyramid Breweries Inc.'s common stock for the years
ended December 31, 1999 and 2000.

<TABLE>
<CAPTION>
                                                                        Dividend
                                                            High   Low    Paid
                                                            ----- ----- --------
   <S>                                                      <C>   <C>   <C>
   Calendar Quarters--1999
     First Quarter......................................... $2.09 $1.56  $0.00
     Second Quarter........................................  2.38  1.56   0.00
     Third Quarter.........................................  2.06  1.63   0.00
     Fourth Quarter........................................  1.94  1.38   0.00


   Calendar Quarters--2000
     First Quarter.........................................  2.06  1.88   0.04
     Second Quarter........................................  2.00  1.50   0.04
     Third Quarter.........................................  2.63  1.63   0.04
     Fourth Quarter........................................  2.47  1.78   0.04
</TABLE>

   On March 1, 2001, the Company had 315 stockholders of record. The last
reported sale price per share on March 1, 2001, was $2.34. The Company had no
sales of unregistered securities during 2000.

                                DIVIDEND POLICY

   On December 15, 1999, the Company announced a new dividend policy and
declared its first quarterly cash dividend. The Company paid $1,275,000, or
$0.16 per common share, of cash dividends during the fiscal year ended
December 31, 2000. On February 13, 2001, the Board of Directors declared a
quarterly cash dividend of $.044 per common share to shareholders of record on
March 30, 2001. 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. In addition, the Company is
required to maintain a minimum tangible net worth and other covenants under
its line of credit, which may restrict the Company's ability to pay dividends.

                                       7
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                     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)

<TABLE>
<CAPTION>
                                        Years Ended December 31,
                              ------------------------------------------------
                                2000      1999      1998      1997      1996
                              --------  --------  --------  --------  --------
<S>                           <C>       <C>       <C>       <C>       <C>
Income Statement Data:
Gross sales.................  $ 30,275  $ 28,811  $ 27,326  $ 29,447  $ 25,913
Less excise taxes...........     1,704     1,735     1,672     1,971     1,954
                              --------  --------  --------  --------  --------
Net sales...................    28,571    27,076    25,654    27,476    23,959
Cost of sales...............    21,012    20,485    20,026    20,861    14,930
                              --------  --------  --------  --------  --------
Gross margin................     7,559     6,591     5,628     6,615     9,029
Selling, general and
 administrative expenses....     8,112     8,148     7,903     8,320     6,221
Impairment and restructuring
 charge.....................       --      3,288       --      1,600       --
                              --------  --------  --------  --------  --------
Operating (loss) income.....      (553)   (4,845)   (2,275)   (3,305)    2,808
Other income (expense),
 net........................       586       494       580       (70)      934
                              --------  --------  --------  --------  --------
Income (loss) before income
 taxes......................        33    (4,351)   (1,695)   (3,375)    3,742
Benefit (provision) for
 income taxes...............       --        --        559     1,232    (1,050)
                              --------  --------  --------  --------  --------
Net income (loss)...........  $     33  $ (4,351) $ (1,136) $ (2,143) $  2,692
                              ========  ========  ========  ========  ========
Basic net income (loss) per
 share......................  $   0.00  $  (0.53) $  (0.14) $  (0.26) $   0.33
                              ========  ========  ========  ========  ========
Weighted average basic
 shares outstanding.........     7,940     8,231     8,213     8,206     8,200
                              ========  ========  ========  ========  ========
Diluted net income (loss)
 per share..................  $   0.00  $  (0.53) $  (0.14) $  (0.26) $   0.33
                              ========  ========  ========  ========  ========
Weighted average diluted
 shares outstanding.........     7,962     8,231     8,213     8,206     8,200
                              ========  ========  ========  ========  ========

Balance Sheet Data:
  Working capital...........  $  7,431  $  6,972  $  6,453  $  6,499  $ 10,609
  Fixed assets, net.........    21,126    22,739    27,559    28,600    27,924
  Total assets..............    32,110    33,710    37,432    38,747    43,491
  Stockholders' equity......    27,977    29,851    34,586    35,700    37,768
Operating Data (in barrels):
  Beer barrels shipped......   109,900   108,400   105,900   121,200   128,100
  Soda barrels shipped......    38,400    29,600    26,700    22,200       --
                              --------  --------  --------  --------  --------
  Total barrels shipped.....   148,300   138,000   132,600   143,400   128,100
                              ========  ========  ========  ========  ========
  Beer production capacity
   at year-end..............   200,000   172,000   172,000   172,000   193,000
                              ========  ========  ========  ========  ========
</TABLE>


                                       8
<PAGE>

Item 7 -- Management's Discussion and Analysis of Financial Condition and
Results of Operations

Overview

   Pyramid Breweries Inc. was incorporated in 1984 and is engaged in the
brewing and sale of specialty beers and sodas and in restaurant operations.
The Company currently sells its beverage products primarily in Washington,
Oregon and California under the Pyramid and Thomas Kemper brand names and
operates two restaurants, under the Pyramid Alehouse name, each adjacent to
its Seattle, Washington and Berkeley, California breweries. The Company's
revenues consist of sales of beer and soda to third-party distributors and
retail sales of beer, sodas, food, apparel and other items in its restaurants.
For the years ended December 31, 2000 and 1999, approximately 73% of the
Company's net sales were sales of beer and soda to third party distributors.
Total retail alehouse sales accounted for 27% of total net sales in 2000 and
1999.

   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 calendars 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 recognized a loss on impairment of the Seattle Brewery
assets during 1999 of approximately $3,288,000 as a result of the under-
utilization of the brewery assets that indicated that the carrying amount of
the assets would not be recoverable.

   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 2000 and 1999, approximately 60% and 61%,
respectively, of the Company's sales of craft beers were bottled products.

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

Results of Operations

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

   Gross Sales. Gross sales increased 5.1% to $30,275,000 in the year ended
December 31, 2000 from $28,811,000 for the 1999 year. The sales increase was
primarily the result of a 26.3% increase in soda sales in 2000 to $4,800,000
from $3,800,000 in 1999 and a 6.7% increase in alehouse sales in 2000 to
$7,737,000 from $7,251,000 in 1999. Soda shipments increased 29.7% to 38,400
barrels in 2000 from 29,600 in 1999 primarily due to increased sales of root
beer, orange cream soda and the soda sampler pack, which includes all four of
the

                                       9
<PAGE>

soda products. Alehouse sales increased mainly as a result of increased sales
prices and patronage at both alehouse restaurants. Beer shipments increased
1.4% to 109,900 barrels in 2000 from 108,400 in 1999. Of wholesale beer
shipments, Pyramid beer increased 6.6% to 101,900 barrels while Thomas Kemper
beer shipments decreased 32.9% to 8,000 barrels for 2000 compared to 1999.
Wholesale beverage sales (beer and soda combined) in Washington, Oregon and
California increased by 5.3% in 2000 compared to 1999 sales. Sales in
Washington, Oregon and California accounted for 85.0% and 84.4% of the
Company's beverage sales in 2000 and 1999, respectively.

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

   Gross Margin. Gross margin increased 14.7% to $7,559,000 in 2000 from
$6,591,000 in 1999. Gross margin as a percentage of net sales also increased
to 26.5% in the 2000 year from 24.3% in the 1999 year. The increase in gross
margin was due primarily to increased sales and improved operating
efficiencies in both the alehouse and beverage divisions.

   Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased slightly to $8,112,000 in the 2000 year from
$8,148,000 in the 1999 year. Excluding the $480,000 severance accrual recorded
in the fourth quarter of 1999, selling, general and administrative expenses
increased by approximately $444,000. This increase was due primarily to
increased marketing expense for the development of a brand awareness campaign.
As a percentage of net sales, selling, general and administrative expenses
increased slightly to 28.4% of net sales in the 2000 year from 28.3% of net
sales in the 1999 year (excluding the effect of the 1999 severance charge).

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

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

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

   Net Income (Loss). The Company recorded net income of $33,000 for the 2000
year compared with net loss of $4,351,000 in the 1999 year. Excluding the
effect of the asset impairment charge and severance accruals recorded in 1999
of $3,288,000 and $480,000, respectively, the adjusted net loss would have
been $583,000 or 2.2% of 1999 net sales. The net income for the year was
primarily the result of the increased sales and improved margins for the year
ended December 31, 2000.

 Year Ended December 31, 1999 Compared to Year Ended December 31, 1998

   Gross Sales. Gross sales increased by 5.4% to $28,811,000 in the year ended
December 31, 1999 from $27,326,000 for the 1998 year. The sales increase was
primarily the result of a 15.4% increase in alehouse sales

                                      10
<PAGE>

in 1999 to $7,251,000 from $6,285,000 in 1998 mainly as a result of increased
patronage at the Seattle Alehouse with the opening of the Seattle Mariner's
baseball stadium directly across the street. Soda shipments increased 10.9% to
29,600 barrels in 1999 from 26,700 in 1998 primarily due to increased
distribution and introduction of the soda sampler pack, which includes all
four of the soda products. Beer shipments also increased to 108,400 barrels in
1999 from 105,900 in 1998. Wholesale beverage sales (beer and soda combined)
in Washington, Oregon and California increased by 4.0% in 1999 compared to
1998 sales. Sales in Washington, Oregon and California accounted for 84% of
the Company's beer sales in 1999 and 1998.

   Excise Taxes. Excise taxes were 6.0% and 6.1% of gross sales in 1999 and
1998, respectively. Excise taxes were slightly lower as a percentage of gross
sales in 1999 due to a greater proportion of alehouse and soda sales in 1999
compared to 1998, which do not bear excise taxes.

   Gross Margin. Gross margin increased 17.1% to $6,591,000 in 1999 from
$5,628,000 in 1998. Gross margin as a percentage of net sales also increased
to 24.3% in 1999 from 21.9% in 1998. The increase in gross margin was due
primarily to improved operating efficiencies at the Berkeley Brewery and a
shift in product mix to higher margin products.

   Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by 3.1% to $8,148,000 in 1999 from
$7,904,000 in 1998. As a percentage of net sales, selling, general and
administrative expenses decreased to 30.1% of net sales in 1999 from 30.8% of
net sales in 1998. The decrease in selling, general and administrative
expenses as a percent of net sales was due to higher net sales and decreased
professional, legal and other expenses. Although the decreases in these
expenditures were significant, the net decrease in reported selling, general
and administrative expenses was small as it was offset by a $480,000 severance
accrual recorded during the fourth quarter of 1999. The severance accrual was
the result of a reorganization of executive management.

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

   Other Income, net. Other income, net decreased to $494,000 in 1999 from
$580,000 in 1998. The 14.8% decrease was due mainly from the Company's
insurance carrier's reimbursement of $250,000 in legal costs in 1998 which was
partially offset by increases in other income during 1999. Interest income was
$322,000 and $309,000 for the years ended December 31, 1999 and 1998,
respectively.

   Income Taxes. As of December 31, 1999, the Company had deferred tax assets
arising from deductible temporary differences, tax losses, and tax credits
offset against certain deferred tax liabilities. During 1999, a valuation
allowance was recorded against the deferred tax asset for the benefits of tax
losses which may not be realized which resulted in no income tax benefit being
recorded for the year ended December 31, 1999 as compared to a benefit of
$559,000 for 1998. Realization of the deferred tax asset representing tax loss
and credit carryforwards is dependent on the Company's ability to generate
future U.S. taxable income. The Company will continue to evaluate the
realizability of the deferred tax assets quarterly by assessing the need for
and amount of the valuation allowance.

   Net Loss. The Company incurred a net loss of $4,351,000 for 1999 compared
with net loss of $1,136,000 in 1998. As a percentage of net sales, the net
loss increased to 16.1% for the 1999 year from 4.4% for the 1998 year. The
increase in net loss for the year was primarily the result of the asset
impairment charge of $3,288,000 and severance expense of $480,000, both non-
recurring items. Excluding the non-recurring items, the Company's net loss
would have been $583,000 or 2.2% of 1999 net sales.

                                      11
<PAGE>

Liquidity and Capital Resources

   Net cash provided by operating activities for the year ended December 31,
2000 increased 35.0% to $2,528,000 from $1,872,000 for the prior year. The
increase was primarily due to the improved results of operations partially
offset by an increase in net operating assets. At December 31, 2000, the
Company's working capital increased to $7,431,000 compared to $6,972,000 at
December 31, 1999.

   Net cash used in investing activities for the year ended December 31, 2000
was $465,000 compared to $760,000 for the prior year. The cash used in
investing activities in 2000 included the upgrade of production equipment at
the Berkeley Brewery, remodel of the Seattle Alehouse and various upgrades of
computer equipment, net of proceeds from the sale of equipment and proceeds
from a long-term receivable. Cash used in investing activities during 1999
included the upgrade of production equipment at the Berkeley and Seattle
Breweries, remodel of the Seattle Alehouse kitchen, various upgrades of
computer equipment and new kegs.

   On December 15, 1999, the Company announced a stock buyback plan to
repurchase up to $2,000,000 of the Company's common stock from time to time on
the open market. Stock purchases are at the discretion of management and
depend, among other things, on the Company's results of operations, capital
requirements and financial condition, and on such other factors as the
Company's management may consider relevant. In addition, the Company is
required to maintain a minimum tangible net worth and other covenants under
its line of credit, which may restrict the Company's ability to repurchase
shares. As of December 31, 2000, the Company has purchased 445,998 shares at
an average price of $1.94 per share.

   The Company has a $5,000,000 line of credit (the Line of Credit) for short-
term operating needs. The Line of Credit revolves through April 30, 2001,
during which time the payments are interest only. At that date, any
outstanding balance will be due in full. Borrowings under the Line of Credit
will accrue interest, at the Company's option, at either the bank's prime rate
or at LIBOR plus 150 basis points. A portion of the line of credit may be used
to finance acquisitions. Amounts used to finance acquisitions may be converted
to a four-year fully amortizing term loan, with an additional option to fix
the rate of interest at the bank's prime rate plus 50 basis points. As of
December 31, 2000, the Company had not borrowed on the Line of Credit.

   Future capital requirements may vary depending on such factors as the cost
of acquisition of businesses, brands and real estate costs in the markets
selected for future expansion, whether such real estate is leased or purchased
and the extent of improvements necessary. Capital expenditures through
December 31, 2000 were approximately $800,000, which includes equipment and
facility upgrades in the Berkeley and Seattle Breweries, upgrades in the
Seattle Alehouse and keg purchases. While there can be no assurance that
current expectations will be realized and plans are subject to change upon
further review, the Company believes that its cash reserves, together with
cash from operations and borrowings under the Line of Credit, will be
sufficient for the Company's working capital needs.

   The Company's future cash requirements and cash flow expectations are
closely related to its expansion plans. The Company generally expects to meet
future financing needs through cash on-hand, cash flow from operations and, to
the extent required and available, additional bank borrowings.

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

                                      12
<PAGE>

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

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

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

   Selling Prices. The future selling prices the Company charges for its craft
beer and other specialty beverages may decrease from historical levels due to
increasing competitive pressures. The Company has and will continue to
participate in price promotions with its wholesalers and their retail
customers. Management believes that the number and frequency of the Company's
promotions will increase during 2001.

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

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

                                      13
<PAGE>

Impact of Inflation

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

Item 8 -- Financial Statements

   Financial statements of Pyramid Breweries Inc. are as follows:

<TABLE>
<CAPTION>
                                                                          Page
                                                                          ----
   <S>                                                                    <C>
   Report of Independent Public Accountants..............................  18
   Balance Sheets as of December 31, 2000 and 1999.......................  19
   Statements of Operations for the Years Ended December 31, 2000, 1999
    and 1998.............................................................  20
   Statements of Stockholders' Equity for the Years Ended December 31,
    2000, 1999 and 1998..................................................  21
   Statements of Cash Flows for the Years Ended December 31, 2000, 1999
    and 1998.............................................................  22
   Notes to Financial Statements.........................................  23
</TABLE>

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

   None.

                                      14
<PAGE>

                                   PART III

Item 10 -- Directors and Executive Officers of the Company

   For information with respect to the executive officers of the Registrant,
see Item 4A -- "Executive Officers of the Company" at the end of Part I of
this report. The information required by this Item concerning the Directors
and nominees for Director of the Company is incorporated herein by reference
to Pyramid Breweries Inc. Proxy Statement for its Annual Meeting of
Stockholders, to be held on May 3, 2001, 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 3, 2001, to be filed with the Commission
pursuant to Regulation 14A.

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

   The information required by this Item is incorporated herein by reference
to Pyramid Breweries Inc. Proxy Statement for its Annual Meeting of
Stockholders, to be held on May 3, 2001, to be filed with the Commission
pursuant to Regulation 14A.

Item 13 -- Certain Relationships and Related Transactions

   The information required by this Item is incorporated herein by reference
to Pyramid Breweries Inc. Proxy Statement for its Annual Meeting of
Stockholders, to be held on May 3, 2001, to be filed with the Commission
pursuant to Regulation 14A.

                                    PART IV

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

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

    1. Financial Statements: See listing of Financial Statements included as
       a part of this Form 10-K on Item 8 of Part II.

    2. Financial Statement Schedules -- None.

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

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

                                      15
<PAGE>

                                  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.

                                          Pyramid Breweries Inc.
                                          (Registrant)

                                          By:       /s/ Wayne Drury
                                             ----------------------------------
                                                        Wayne Drury
                                                    Vice President and
                                                  Chief Financial Officer

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

              /s/ Martin Kelly                         March 12, 2001
   By: ______________________________________
                  Martin Kelly
     President and Chief Executive Officer

              /s/ Wayne Drury                          March 12, 2001
   By: ______________________________________
                  Wayne Drury
       Vice President and Chief Financial
                    Officer
      (Principal Financial and Accounting
                    Officer)

             /s/ Kurt Dammeier                         March 12, 2001
   By: ______________________________________
                 Kurt Dammeier
             Chairman of the Board

            /s/ Scott S. Barnum                        March 12, 2001
   By: ______________________________________
                Scott S. Barnum
                    Director

             /s/ George Hancock                        March 12, 2001
   By: ______________________________________
                 George Hancock
              Director and Founder

              /s/ Nancy Mootz                          March 12, 2001
   By: ______________________________________
                  Nancy Mootz
                    Director

           /s/ Thomas H. Schwalm                       March 12, 2001
   By: ______________________________________
               Thomas H. Schwalm
                    Director

            /s/ John W. Stoddard                       March 12, 2001
   By: ______________________________________
                John W. Stoddard
                    Director

         /s/ George C. Textor, Jr.                     March 12, 2001
   By: ______________________________________
             George C. Textor, Jr.
                    Director

                                      16
<PAGE>

                             PYRAMID BREWERIES INC.

                         INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                           Page
                                                                           ----
<S>                                                                        <C>
Report of Independent Public Accountants.................................   18

Balance Sheets as of December 31, 2000 and 1999..........................   19

Statements of Operations for the Years Ended December 31, 2000, 1999 and
 1998....................................................................   20

Statements of Stockholders' Equity for the Years Ended December 31, 2000,
 1999 and 1998...........................................................   21

Statements of Cash Flows for the Years Ended December 31, 2000, 1999 and
 1998....................................................................   22

Notes to Financial Statements............................................   23
</TABLE>

                                       17
<PAGE>

                   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, 2000 and 1999 and the related statements of operations,
stockholders' equity and cash flows for each of the three years ended December
31, 2000. 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, 2000 and 1999, and the results of its operations and its cash
flows for each of the three years ended December 31, 2000 in conformity with
accounting principles generally accepted in the United States.

                                          /s/ ARTHUR ANDERSEN LLP

Seattle, Washington,
January 23, 2001

                                      18
<PAGE>

                             PYRAMID BREWERIES INC.

                                 BALANCE SHEETS

<TABLE>
<CAPTION>
                                                           December 31,
                                                      ------------------------
                                                         2000         1999
                                                      -----------  -----------
<S>                                                   <C>          <C>
                       ASSETS

CURRENT ASSETS:
  Cash and cash equivalents.......................... $ 6,444,145  $ 6,303,540
  Accounts receivable, net of allowance for doubtful
   accounts of $20,000 and $30,000, respectively.....   1,664,466    1,102,155
  Inventories........................................   1,164,388    1,445,957
  Prepaid expenses and other.........................     710,559      398,697
  Deferred income taxes..............................     332,635      556,831
                                                      -----------  -----------
    Total current assets.............................  10,316,193    9,807,180
  Fixed assets, net..................................  21,125,892   22,739,439
  Deferred income taxes..............................     148,674      377,961
  Other..............................................     518,944      785,020
                                                      -----------  -----------
    Total assets..................................... $32,109,703  $33,709,600
                                                      ===========  ===========

        LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
  Accounts payable................................... $   739,284  $   547,956
  Accrued expenses...................................   1,297,370    1,492,648
  Refundable deposits................................     534,295      465,184
  Dividends payable..................................     314,530      329,735
                                                      -----------  -----------
    Total current liabilities........................   2,885,479    2,835,523
  Deferred rent......................................   1,247,639    1,022,677
                                                      -----------  -----------
    Total liabilities................................   4,133,118    3,858,200
                                                      -----------  -----------
COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY:
  Preferred stock, 10,000,000 shares authorized, none
   issued............................................         --           --
  Common stock, $.01 par value; 40,000,000 shares
   authorized, 7,863,251 and 8,193,580 shares issued
   and outstanding...................................      78,632       81,936
  Additional paid-in capital.........................  34,337,887   34,982,946
  Retained deficit...................................  (6,439,934)  (5,213,482)
                                                      -----------  -----------
    Total stockholders' equity.......................  27,976,585   29,851,400
                                                      -----------  -----------
    Total liabilities and stockholders' equity....... $32,109,703  $33,709,600
                                                      ===========  ===========
</TABLE>


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

                                       19
<PAGE>

                             PYRAMID BREWERIES INC.

                            STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                             Years Ended December 31,
                                        -------------------------------------
                                           2000         1999         1998
                                        -----------  -----------  -----------
<S>                                     <C>          <C>          <C>
Gross sales............................ $30,274,695  $28,810,887  $27,326,473
Less excise taxes......................   1,704,283    1,734,780    1,672,099
                                        -----------  -----------  -----------
Net sales..............................  28,570,412   27,076,107   25,654,374
Cost of sales..........................  21,011,543   20,484,886   20,025,982
                                        -----------  -----------  -----------
Gross margin...........................   7,558,869    6,591,221    5,628,392
Selling, general and administrative
 expenses..............................   8,111,640    8,148,180    7,904,052
Asset impairment charge................         --     3,287,822          --
                                        -----------  -----------  -----------
Operating loss.........................    (552,771)  (4,844,781)  (2,275,660)
Other income, net......................     585,682      494,234      580,254
                                        -----------  -----------  -----------
Income (loss) before income taxes......      32,911   (4,350,547)  (1,695,406)
Benefit for income taxes...............         --           --       559,337
                                        -----------  -----------  -----------
Net income (loss)...................... $    32,911  $(4,350,547) $(1,136,069)
                                        ===========  ===========  ===========
Basic net income (loss) per share...... $      0.00  $     (0.53) $     (0.14)
                                        ===========  ===========  ===========
Weighted average basic shares
 outstanding...........................   7,939,980    8,230,522    8,213,178
                                        ===========  ===========  ===========
Diluted net income (loss) per share.... $      0.00  $     (0.53) $     (0.14)
                                        ===========  ===========  ===========
Weighted average diluted shares
 outstanding...........................   7,962,421    8,230,522    8,213,178
                                        ===========  ===========  ===========
</TABLE>




        The accompanying notes are an integral part of these statements.

                                       20
<PAGE>

                             PYRAMID BREWERIES INC.

                       STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
                           Common Stock      Additional    Retained        Total
                         ------------------    Paid-in      Earnings   Stockholders'
                          Shares    Amount     Capital     (Deficit)      Equity
                         ---------  -------  -----------  -----------  -------------
<S>                      <C>        <C>      <C>          <C>          <C>
Balance, December 31,
 1997................... 8,207,438  $82,074  $35,014,551  $   602,869   $35,699,494
  Net loss..............       --       --           --    (1,136,069)   (1,136,069)
  Shares issued.........    12,094      121       22,318          --         22,439
                         ---------  -------  -----------  -----------   -----------
Balance, December 31,
 1998................... 8,219,532   82,195   35,036,869     (533,200)   34,585,864
  Net loss..............       --       --           --    (4,350,547)   (4,350,547)
  Dividends declared....       --       --           --      (329,735)     (329,735)
  Shares issued.........    23,848      239       38,642          --         38,881
  Shares repurchased and
   retired..............   (49,800)    (498)     (92,565)         --        (93,063)
                         ---------  -------  -----------  -----------   -----------
Balance, December 31,
 1999................... 8,193,580   81,936   34,982,946   (5,213,482)   29,851,400
  Net income............       --       --           --        32,911        32,911
  Dividends declared....       --       --           --    (1,259,363)   (1,259,363)
  Shares issued.........    65,869      658      124,539          --        125,197
  Shares repurchased and
   retired..............  (396,198)  (3,962)    (769,598)         --       (773,560)
                         ---------  -------  -----------  -----------   -----------
Balance, December 31,
 2000................... 7,863,251  $78,632  $34,337,887  $(6,439,934)  $27,976,585
                         =========  =======  ===========  ===========   ===========
</TABLE>




        The accompanying notes are an integral part of these statements.

                                       21
<PAGE>

                             PYRAMID BREWERIES INC.

                            STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                               Years Ended December 31,
                                          ------------------------------------
                                             2000        1999         1998
                                          ----------  -----------  -----------
<S>                                       <C>         <C>          <C>
OPERATING ACTIVITIES:
 Net income (loss)....................... $   32,911  $(4,350,547) $(1,136,069)
 Adjustments to reconcile net income
  (loss) to net cash provided by
  operating activities:
  Depreciation and amortization..........  2,469,549    2,783,679    2,622,238
  Loss (gain) on sales of fixed assets...     85,150       22,497      (27,782)
  Impairment and restructuring charge....        --     3,218,584     (284,910)
  Deferred income taxes..................    453,483          --      (468,681)
  Deferred rent..........................    224,962      240,432      208,656
 Changes in operating assets and
  liabilities:
  Accounts receivable....................   (562,311)     (98,366)     287,892
  Inventories............................    281,569     (243,164)     (92,037)
  Prepaid expenses and other.............   (521,980)    (212,192)    (506,141)
  Income taxes receivable................        --           --       250,071
  Accounts payable and accrued expenses..     (3,950)     509,047     (113,672)
  Refundable deposits....................     69,111        2,437      (11,953)
                                          ----------  -----------  -----------
  Net cash provided by operating
   activities............................  2,528,494    1,872,407      727,612
                                          ----------  -----------  -----------

INVESTING ACTIVITIES:
 Acquisition of fixed assets.............   (808,485)    (899,612)  (1,586,218)
 Proceeds from sale of fixed assets......    157,707      139,793      688,050
 Proceeds from long-term receivable......    185,820          --           --
                                          ----------  -----------  -----------
 Net cash used in investing activities...   (464,958)    (759,819)    (898,168)
                                          ----------  -----------  -----------

FINANCING ACTIVITIES:
 Proceeds from sale of stock.............    125,197       38,881       22,439
 Cash dividends paid..................... (1,274,568)         --           --
 Shares repurchased and retired..........   (773,560)     (93,063)         --
                                          ----------  -----------  -----------
 Net cash (used in) provided by financing
  activities............................. (1,922,931)     (54,182)      22,439
                                          ----------  -----------  -----------

 Increase (decrease) in cash and cash
  equivalents............................    140,605    1,058,406     (148,117)
 Cash and cash equivalents at beginning
  of year................................  6,303,540    5,245,134    5,393,251
                                          ----------  -----------  -----------
 Cash and cash equivalents at end of
  year................................... $6,444,145  $ 6,303,540  $ 5,245,134
                                          ==========  ===========  ===========
</TABLE>

        The accompanying notes are an integral part of these statements.

                                       22
<PAGE>

                            PYRAMID BREWERIES INC.

                         NOTES TO FINANCIAL STATEMENTS

1. Nature of Operations and Significant Accounting Policies

 The Company

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

   In March 1995, the Company opened the Seattle Brewery near downtown
Seattle. This brewery and 340-seat alehouse has an estimated annual production
capacity of 50,000 barrels as of December 31, 2000.

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

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

   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 November 1997, the Kalama, Washington brewery was closed. A significant
portion of the Kalama production equipment was transferred to the Company's
Berkeley, California brewery. The Company sold the remaining equipment.

 Cash and Cash Equivalents

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

 Inventories

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

 Fixed Assets

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

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

                                      23
<PAGE>

 Preopening Costs

   The Company accounts for preopening costs related to new restaurants in
accordance with Statement of Position (SOP) 98-5 "Recording the Cost of Start-
Up Activities" and accordingly, there were no unamortized preopening costs at
December 31, 2000 and 1999. Prior to the adoption of SOP 98-5, preopening
costs related to new restaurants have historically been capitalized in other
assets and were amortized over a one-year period commencing from the time of
the restaurant opening date. Amortization of preopening costs totaled $0, $0
and $114,168, respectively, for the years ended December 31, 2000, 1999 and
1998.

 Package Design Costs

   Package design costs relate to the development of product packaging and
labels and are capitalized in other current assets and amortized over a one-
year period. Net unamortized package design costs totaled $197,908 and
$116,882 at December 31, 2000 and 1999, respectively. Amortization of package
design costs totaled $210,118, $432,082 and $447,734, respectively, for the
years ended December 31, 2000, 1999 and 1998. Accumulated amortization at
December 31, 2000 and 1999 was $686,869 and $476,751, respectively.

 Goodwill

   The excess of cost over fair value of the net assets of businesses acquired
is capitalized and amortized on a straight-line basis over 10 years. Net
unamortized goodwill of $494,869 and $575,125 at December 31, 2000 and 1999,
respectively is included in other assets. Amortization of goodwill totaled
$80,256 for each of the years ended December 31, 2000, 1999 and 1998.
Accumulated amortization at December 31, 2000 and 1999 was $307,648 and
$227,392, respectively.

 Revenue Recognition

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

 Advertising Costs

   Advertising costs are expensed as incurred. Total advertising expense was
approximately $604,000, $304,000 and $617,000, in 2000, 1999 and 1998,
respectively.

 Income Taxes

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

   Realization of the total deferred tax assets representing tax loss and
credit carryforwards is dependent on the Company's ability to generate future
U.S. taxable income. Management has established a valuation allowance for the
portion of the deferred tax assets that do not meet the recognition criteria
of SFAS No. 109. There can be no assurance that the Company will meet its
expectations of future U.S. taxable income necessary to realize the recognized
deferred tax asset. As a result, the amount of the deferred tax assets
considered realizable could be reduced in the near and long term if estimates
of future taxable U.S. income are reduced. The Company will continue to
evaluate the realizability of the deferred tax assets quarterly by assessing
the need for and amount of a valuation allowance.

                                      24
<PAGE>

 Earnings Per Share

   Basic earnings per share is computed by dividing net income (loss) by the
weighted average number of shares outstanding during the year. Diluted
earnings per share is calculated by adjusting outstanding shares, assuming
conversion of all potentially dilutive stock options. Options to purchase
approximately 370,000, 800,700 and 652,500 shares of common stock were
outstanding during the years ended December 31, 2000, 1999 and 1998,
respectively, but were not included in the computation of diluted EPS because
the exercise price of the options were greater than the average market price
of the common shares. The following represents a reconciliation from basic
earnings per share to diluted earnings per share:

<TABLE>
<CAPTION>
                                                     December 31,
                                          -----------------------------------
                                             2000       1999         1998
                                          ---------- -----------  -----------
   <S>                                    <C>        <C>          <C>
   Net income (loss)..................... $   32,911 $(4,350,547) $(1,136,069)
   Weighted average basic shares
    outstanding..........................  7,939,980   8,230,522    8,213,178
   Stock option dilution.................     22,441         --           --
                                          ---------- -----------  -----------
   Weighted average diluted shares
    outstanding..........................  7,962,421   8,230,522    8,213,178
                                          ---------- -----------  -----------
   Basic earnings per share.............. $     0.00 $     (0.53) $     (0.14)
                                          ========== ===========  ===========
   Diluted earnings per share............ $     0.00 $     (0.53) $     (0.14)
                                          ========== ===========  ===========
</TABLE>

 Use of Estimates

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

 Reclassifications

   Certain amounts have been reclassified to conform with the current year
presentation.

2. Accounting for Impairment of Long-Lived Assets

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

3. Restructuring Charge

   On October 29, 1997, the Company announced a restructuring of the Company's
marketing and brewery operations and recorded a $1,600,000 restructuring
charge. The restructuring included a refocus of marketing resources on Western
and Southwestern markets and the closure of the Kalama, Washington brewery.
The restructuring charge includes $1,100,000 related to the disposal of fixed
assets, $100,000 in severance payments, $215,000 in market realignment costs
and $185,000 in property leases and other plant closure costs. During 1999,
the final assets were sold or disposed of and resulted in approximately
$60,000 of surplus in the restructuring reserve which is reported as a
reduction in selling, general and administrative expenses in the Company's
statements of operations.

                                      25
<PAGE>

   For the period from December 31, 1998 through the year ended December 31,
2000 the restructuring activity is as follows:

<TABLE>
<CAPTION>
                                                      Closeout   December 31,
                               December 31,   1999       of        1999 and
                                   1998     Activity   Reserve       2000
                               ------------ --------  ---------  ------------
   <S>                         <C>          <C>       <C>        <C>
   Estimated proceeds from
    sale of fixed assets......  $(700,000)  $    --   $(700,000)   $   --
   Net proceeds from sale of
    fixed assets..............    732,000    (32,000)   764,000        --
   Assets held for sale.......     32,000     32,000        --         --
   Severance payments.........     (4,832)       --      (4,832)       --
   Market realignment costs...     14,241        --      14,241        --
   Other closure costs........     (4,171)     9,715    (13,886)       --
                                ---------   --------  ---------    -------
                                $  69,238   $  9,715  $  59,523    $   --
                                =========   ========  =========    =======
</TABLE>

4. Investments

   Investment income was approximately $418,000, $322,000 and $309,000 for the
years ended December 31, 2000, 1999 and 1998, respectively. Investment income
is reported as a component of other income, net in the Company's statements of
operations.

5. Inventories

   Inventories consist of the following:

<TABLE>
<CAPTION>
                                                               December 31,
                                                           ---------------------
                                                              2000       1999
                                                           ---------- ----------
   <S>                                                     <C>        <C>
   Raw Materials.......................................... $  481,601 $  483,042
   Work in process........................................    109,510    133,547
   Finished goods.........................................    573,277    829,368
                                                           ---------- ----------
                                                           $1,164,388 $1,445,957
                                                           ========== ==========
</TABLE>

   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.

6. Fixed Assets

   Fixed assets consist of the following:

<TABLE>
<CAPTION>
                                                            December 31,
                                                       ------------------------
                                                          2000         1999
                                                       -----------  -----------
   <S>                                                 <C>          <C>
   Brewery and retail equipment....................... $14,246,061  $13,969,210
   Furniture and fixtures.............................     772,562      825,048
   Leasehold improvements.............................  13,563,615   13,357,641
   Construction in progress...........................     165,555       56,494
   Assets held for sale...............................       3,832      152,560
                                                       -----------  -----------
                                                        28,751,625   28,360,953
   Less accumulated depreciation......................  (7,625,733)  (5,621,514)
                                                       -----------  -----------
                                                       $21,125,892  $22,739,439
                                                       ===========  ===========
</TABLE>

                                      26
<PAGE>

7. Accrued Expenses

   Accrued expenses consist of the following:

<TABLE>
<CAPTION>
                                                              December 31,
                                                          ---------------------
                                                             2000       1999
                                                          ---------- ----------
   <S>                                                    <C>        <C>
   Salaries, wages and related accruals.................. $  364,219 $  320,005
   Severance accrual.....................................    149,962    480,000
   Barrel taxes..........................................    110,264    102,092
   Other accruals........................................    672,925    590,551
                                                          ---------- ----------
                                                          $1,297,370 $1,492,648
                                                          ========== ==========
</TABLE>

8. Line of Credit

   The Company has an agreement with a commercial bank for a line of credit.
Under the line of credit, the Company may borrow up to $5,000,000 for short-
term operating needs. The line of credit revolves through April 30, 2001,
during which time the required payments will be interest only. At that date,
any outstanding balance will be due in full. Borrowings under the line of
credit will incur interest, at the Company's option, at either the bank's
prime rate or at LIBOR plus 150 basis points. A portion of the line of credit
may be used to finance acquisitions. Amounts used to finance acquisitions may
be converted to a four-year fully amortizing term loan, with an additional
option to fix the rate of interest at the bank's prime rate plus 50 basis
points. The line of credit agreement contains provisions that require the
Company to maintain certain financial ratios and a minimum tangible net worth.
The Company was in compliance with these covenants as of December 31, 2000.
There were no outstanding borrowings on the line of credit during fiscal year
ended December 31, 2000.

   The Company had no interest expense during fiscal 2000, 1999 and 1998.

9. Income Taxes

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

<TABLE>
<CAPTION>
                                                      December 31,
                                                ----------------------------
                                                 2000      1999       1998
                                                -------   -------   --------
   <S>                                          <C>       <C>       <C>
   Current..................................... $   --    $   --    $    --
   Deferred....................................     --        --     559,337
                                                -------   -------   --------
                                                $   --    $   --    $559,337
                                                =======   =======   ========

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

<CAPTION>
                                                      December 31,
                                                ----------------------------
                                                 2000      1999       1998
                                                -------   -------   --------
   <S>                                          <C>       <C>       <C>
   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.....................   158.9      (1.3)      (2.9)
   Other, net..................................     --       (0.1)      (0.2)
   Valuation allowance.........................  (195.0)    (34.7)       --
                                                -------   -------   --------
                                                    0.0 %     0.0 %     33.0 %
                                                =======   =======   ========
</TABLE>

                                      27
<PAGE>

   Deferred income tax assets and liabilities are included in the balance
sheet at December 31, 2000 and 1999, as follows:

<TABLE>
<CAPTION>
                                                           December 31,
                                                      ------------------------
                                                         2000         1999
                                                      -----------  -----------
   <S>                                                <C>          <C>
   Accelerated depreciation.......................... $(1,578,973) $(1,277,084)
   Package design costs..............................     163,511      167,400
   Accrued vacation..................................      54,918       65,034
   Severance accrual.................................      43,211      170,833
   Deferred rent.....................................     450,772      369,493
   Net operating loss carryforwards..................   2,103,441    1,846,085
   Tax credit carryforwards..........................      98,286      551,769
   Other, net........................................     143,423      202,122
   Valuation allowance...............................    (997,280)  (1,160,860)
                                                      -----------  -----------
                                                      $   481,309  $   934,792
                                                      ===========  ===========
</TABLE>

   At December 31, 2000, the Company had operating loss carryforwards for
federal income tax purposes of approximately $5,822,000, which are available
to offset future federal taxable income through 2020. In addition, the Company
had alternative minimum tax credit carryforwards of approximately $98,000,
which are available to reduce future federal income taxes over an indefinite
period.

10. 401(k) Plan

   The Company has a profit-sharing 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 15% of their eligible compensation to
the 401(k) plan. The Company generally matches employee contributions (that do
not exceed 6% of the employee's compensation) at the rate of 50%. The Company
may also make additional discretionary contributions. The Company's matching
contributions for the years ended December 31, 2000, 1999 and 1998, totaled
$70,387, $28,256 and $16,354, respectively.

11. Operating Leases

   The Company leases its office, warehouse and plant facilities under
operating leases in Seattle and Berkeley. The Seattle brewery lease agreement
expires in 2004 and contains options to extend the lease term for three
additional five-year periods. The Seattle warehouse lease agreement expires in
2004 and contains options to extend the lease term for three additional five-
year periods. The Berkeley brewery lease agreement expires in 2010 and
contains options to extend the lease term for two additional five-year
periods. These lease agreements contain provisions for free rent periods and
scheduled rent increases. Accordingly, the Company has recorded deferred rent
of $1,247,639 and $1,022,677 at December 31, 2000 and 1999, respectively,
representing the pro rata rent which would have been due if equal payments had
been required under the lease terms. The Company also leases office, storage
and distribution facilities under month-to-month lease agreements.

   At December 31, 2000, future minimum rental payments are as follows:

<TABLE>
   <S>                                                                <C>
   2001..............................................................    862,743
   2002..............................................................    970,166
   2003..............................................................    970,166
   2004..............................................................    811,942
   2005..............................................................    575,450
   Thereafter........................................................  3,243,550
                                                                      ----------
                                                                      $7,434,017
                                                                      ==========
</TABLE>

   Total rent expense was approximately $731,000, $777,000 and $718,000 in
2000, 1999 and 1998, respectively.

                                      28
<PAGE>

12. Commitments and Contingencies

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

13. Cash Dividend

   The Board of Directors announced on November 27, 2000, the declaration of a
$0.04 per common share dividend payable on January 15, 2001 to shareholders of
record on December 29, 2000. The cash dividends declared totaled approximately
$315,000 for all common stock outstanding as of the date of record. During the
year ended December 31, 2000, the Company paid approximately $1,275,000, or
$0.16 per common share, of cash dividends.

14. Stock Buyback Plan

   On December 15, 1999, the Board of Directors authorized a stock buyback
plan to repurchase up to $2,000,000 of the Company's outstanding common stock
on the open market. For the year ended December 31, 2000, the Company
repurchased 396,198 shares of common stock at a cost of $773,560.

15. Major Customers and Financial Instruments

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

   During the years ended December 31, 2000, 1999 and 1998, one customer
comprised approximately 29%, 24% and 21% of the Company's revenue,
respectively. Accounts receivable at December 31, 2000 and 1999 include
approximately $447,000 and $346,000, respectively, due from this customer.

16. Segment Information

   The Company adopted SFAS No. 131 "Disclosures about Segments of an
Enterprise and Related Information", during 1998. Following the provisions of
SFAS No. 131, the Company is reporting segment information in the same format
as reviewed by the Company's management (the "Management Approach"), which is
organized around products and services. During 1999, management changed their
approach to managing the business by combining soda and beer operations into
the beverage operations segment. Also during 1999, the internal transfer
pricing of beverage products to the alehouse operations changed from wholesale
price to cost. Both of these changes have been applied retroactively for
segment presentation purposes.

 Products and Services

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

 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.

                                      29
<PAGE>

 Measurement of segment profit and segment assets

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

   Segment profit and segment assets are as follows:

<TABLE>
<CAPTION>
                                           Beverage
                                          Operations Alehouse Other    Total
                                          ---------- -------- ------  -------
                                                (Dollars in thousands)
     <S>                                  <C>        <C>      <C>     <C>
     Year ended December 31, 2000
      Revenues from external customers...  $22,538    $7,737  $  --   $30,275
      Intersegment revenues..............      259      (259)    --       --
      Interest income....................      --        --      418      418
      Depreciation and amortization......    1,873       408     189    2,470
      Operating (loss) income............    1,243       671  (2,467)    (553)
      Capital expenditures...............      373       273     162      808
      Total assets.......................   17,239     3,333  11,538   32,110

     Year ended December 31, 1999
      Revenues from external customers...  $21,560    $7,251  $  --   $28,811
      Intersegment revenues..............      279      (279)    --       --
      Interest income....................      --        --      322      322
      Depreciation and amortization......    2,207       431     146    2,784
      Impairment and restructuring
       charge............................    3,288       --      --     3,288
      Operating (loss) income............   (2,493)      626  (2,978)  (4,845)
      Capital expenditures...............      350       337     213      900
      Total assets.......................   18,558     3,454  11,698   33,710

     Year ended December 31, 1998
      Revenues from external customers...  $21,041    $6,285  $  --   $27,326
      Intersegment revenues..............      261      (261)    --       --
      Interest income....................      --        --      309      309
      Depreciation and amortization......    2,128       409      85    2,622
      Operating income (loss)............      445       272  (2,993)  (2,276)
      Income tax benefit.................      --        --      559      559
      Capital expenditures...............    1,013       282     291    1,586
      Total assets.......................   23,223     3,474  10,735   37,432
</TABLE>

 Other

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

17. Stock Option Plans

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

   The Company's Non-Employee Director Stock Option Plan (the Director Plan)
provides for the granting of stock options covering 5,000 shares of common
stock to be made automatically on the date of each annual

                                      30
<PAGE>

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,
2000 and 1999, 92,500 and 52,500 options have been granted, respectively. Each
outstanding option granted under this plan has a term of 10 years from the
date of grant and vests immediately.

   The Company has adopted the disclosure-only provision of the SFAS No. 123
"Accounting for Stock-Based Compensation." Accordingly no compensation cost
has been recognized for options issued under the Employee and Director Plans
(the Plans). Had compensation cost been recognized based on the fair value at
the date of grant for options awarded under the Plans, the pro forma amounts
of the Company's net income (loss) and net income (loss) per share for the
years ended December 31, 2000, 1999 and 1998, would have been as follows:

<TABLE>
<CAPTION>
                                                    December 31,
                                          -----------------------------------
                                            2000        1999         1998
                                          ---------  -----------  -----------
   <S>                                    <C>        <C>          <C>
   Net income (loss)--as reported........ $  32,911  $(4,350,547) $(1,136,069)
                                          =========  ===========  ===========
   Net loss--pro forma................... $(418,275) $(5,168,734) $(1,606,807)
                                          =========  ===========  ===========
   Net income (loss) per share--as
    reported............................. $    0.00  $     (0.53) $     (0.14)
                                          =========  ===========  ===========
   Net loss per share--pro forma......... $   (0.05) $     (0.63) $     (0.20)
                                          =========  ===========  ===========
</TABLE>

   The fair value of options granted was estimated using the Black-Scholes
option-pricing model with the following weighted average assumptions: risk-
free interest rates ranging from 4.49% to 6.87%; expected option lives of six
to eight years; expected volatility of 40% to 75%; and expected future
dividends. The weighted-average fair value of options granted during the years
2000, 1999 and 1998 was $1.87, $1.46 and $1.76, respectively. The effect of
applying SFAS No. 123 for providing pro-forma disclosures is not indicative of
future results.

   Information with respect to the Plans follows:

<TABLE>
<CAPTION>
                                                                  Weighted-
                                    Share Subject    Option        Average
                                      to Option    Price Range  Exercise Price
                                    ------------- ------------- --------------
   <S>                              <C>           <C>           <C>
   Options outstanding at December
    31, 1997......................      649,500   $2.50 - 19.00     $10.03
     Granted......................      254,000   $1.56 -  2.63     $ 2.54
     Forfeitures..................     (251,000)  $3.09 - 19.00     $17.59
                                      ---------   -------------     ------
   Options outstanding at December
    31, 1998......................      652,500   $1.56 - 19.00     $ 4.33
     Granted......................      305,000   $2.00 -  2.50     $ 2.05
     Forfeitures..................     (156,834)  $2.56 - 19.00     $ 6.00
                                      ---------   -------------     ------
   Options outstanding at December
    31, 1999......................      800,666   $1.56 - 12.25     $ 3.14
     Granted......................      610,000   $1.70 -  2.00     $ 1.87
     Forfeitures..................     (171,632)  $1.82 - 12.25     $ 2.81
     Exercised....................      (27,600)  $1.75 -  2.13     $ 1.85
                                      ---------   -------------     ------
   Options outstanding at December
    31, 2000......................    1,211,434   $1.56 - 12.25     $ 2.56
                                      =========   =============     ======
</TABLE>

   Shares available for future grants at December 31, 2000 and 1999 totaled
326,000 and 495,000, respectively.


                                      31
<PAGE>

   Information about options outstanding at December 31, 2000 follows:

<TABLE>
<CAPTION>
                            Weighted-Average                           Weighted-
             Options           Remaining             Options            Average
           Outstanding      Contractual Life       Exercisable       Exercise Price
           -----------      ----------------       -----------       --------------
           <S>              <C>                    <C>               <C>
               47,500           65 months             47,500             $10.75
                5,000           65 months              5,000             $12.25
                5,000           72 months              5,000             $ 4.75
                6,000           74 months              6,000             $ 4.13
                5,000           77 months              5,000             $ 3.25
              175,000           80 months            175,000             $ 2.88
                7,500           82 months              7,500             $ 3.09
                5,000           89 months              5,000             $ 2.63
              138,834           90 months            106,167             $ 2.56
                5,000           93 months              3,333             $ 1.56
               20,000          101 months             20,000             $ 2.13
              200,000          104 months             89,100             $ 2.00
               50,000          106 months             19,600             $ 2.00
               61,600          108 months             13,000             $ 1.82
              120,000          111 months             33,300             $ 2.00
               30,000          112 months             30,000             $ 1.75
               25,000          113 months              4,500             $ 1.82
              120,000          115 months             16,600             $ 1.70
               50,000          115 months              7,000             $ 2.00
               35,000          115 months              3,500             $ 1.82
              100,000          119 months              2,800             $ 2.00
           ---------                                 -------
            1,211,434                                604,900
           =========                                 =======
</TABLE>

   The Company had options exercisable of 384,120 with weighted-average
exercise prices ranging from $1.56 to $12.25 and options exercisable of
215,783 with weighted-average exercise prices ranging from $1.56 to $19.00 as
of December 31, 1999 and 1998, respectively.

18. Employee Stock Purchase Plan

   The Company's Employee Stock Purchase Plan (the Purchase Plan) allows
eligible employees to acquire shares of common stock of the Company at a
discount. Eligible employees may contribute up to 10% of their base earnings
toward the quarterly purchase of the Company's common stock. The employee's
purchase price is 85% of the lesser of the fair market value of the stock on
the first business day or the last business day of the quarterly offering
period. Discounts related to employee stock purchases during 2000, 1999 and
1998 were insignificant. The total number of shares issuable under the plan is
500,000. There were 26,686, 15,376 and 12,094 shares issued under the Purchase
Plan during 2000, 1999 and 1998 at a weighted-average price of approximately
$1.44, $1.36 and $1.86 per share, respectively.

                                      32
<PAGE>

19. Interim Financial Data (Unaudited)

     The following table presents the results of operations for each of the
four quarters in 2000 and 1999. 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.

<TABLE>
<CAPTION>
                                     2000 Quarters Ended                       1999 Quarters Ended
                          ----------------------------------------- ------------------------------------------
                          December 31 September 30 June 30 March 31 December 31 September 30 June 30  March 31
                          ----------- ------------ ------- -------- ----------- ------------ -------  --------
                           (in thousands except per share amounts)   (in thousands except per share amounts)
<S>                       <C>         <C>          <C>     <C>      <C>         <C>          <C>      <C>
Gross sales.............    $7,179       $8,148    $8,425   $6,523    $ 7,035      $7,811    $7,738    $6,227
Less excise taxes.......       397          446       506      355        417         472       489       357
                            ------       ------    ------   ------    -------      ------    ------    ------
Net sales...............     6,782        7,702     7,919    6,168      6,618       7,339     7,249     5,870
Cost of sales...........     5,128        5,460     5,714    4,710      5,058       5,492     5,334     4,601
                            ------       ------    ------   ------    -------      ------    ------    ------
Gross margin............     1,654        2,242     2,205    1,458      1,560       1,847     1,915     1,269
Selling, general and
 administrative
 expenses...............     2,334        2,036     1,981    1,760      2,404       1,978     1,927     1,839
Impairment and
 restructure charge.....       --           --        --       --       3,288         --        --        --
                            ------       ------    ------   ------    -------      ------    ------    ------
Operating (loss)
 income.................      (680)         206       224     (302)    (4,132)       (131)      (12)     (570)
Other income, net.......       115          159       219       92        104         189       101       100
                            ------       ------    ------   ------    -------      ------    ------    ------
Income (loss) before
 income taxes...........      (565)         365       443     (210)    (4,028)         58        89      (470)
Benefit for income
 taxes..................       --           --        --       --         --          --        --        --
                            ------       ------    ------   ------    -------      ------    ------    ------
Net (loss) income.......    $ (565)      $  365    $  443   $ (210)   $(4,028)     $   58    $   89    $ (470)
Basic and diluted net
 (loss) income per
 share..................    $(0.07)      $ 0.05    $ 0.06   $(0.03)   $ (0.49)     $ 0.01    $ 0.01    $(0.06)
                            ======       ======    ======   ======    =======      ======    ======    ======
Weighted average basic
 shares outstanding.....     7,857        7,830     7,925    8,149      8,231       8,239     8,229     8,223
                            ======       ======    ======   ======    =======      ======    ======    ======
Weighted average diluted
 shares outstanding.....     7,857        7,885     7,926    8,149      8,231       8,239     8,229     8,223
                            ======       ======    ======   ======    =======      ======    ======    ======
</TABLE>


                                      33
<PAGE>

                                 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.

<TABLE>
<CAPTION>
 Exhibit
   No.                                Description
 -------                              -----------
 <C>     <S>
  3.1(1) Amended and Restated Articles of Incorporation of Registrant
  3.2(1) Form of Amended and Restated Bylaws of Registrant

  3.3    Rights Agreement between ChaseMellon Shareholder Services LLC and the
         Registrant dated June 14, 1999. (Incorporated by reference to the
         Current Report on Form 8-K dated June 17, 1999.)
  4.1(1) Form of Common Stock Certificate
 10.1(1) Lease between Harold W. Hill and the Registrant dated April 13, 1994
 10.2(1) Addendum of Lease between Harold W. Hill and the Registrant dated
         November 28, 1994
 10.3(1) Second Addendum of Lease between 1201 Building L.L.C. and the
         Registrant dated June 26, 1995
 10.4(1) Distribution Agreement between the Registrant and Western Washington
         Beverage dated August 24,1995
 10.5(1) Registrant's 1995 Employee Stock Option Plan
 10.6(1) Registrant's Non-Employee Director Stock Option Plan
 10.7(1) Form of Non-Qualified Stock Option Agreement


 10.8(1) Commercial Lease between Esther Podlesak, Trustee of the John A. and
         Esther Podlesak 1990 Family Trust and Pyramid Breweries California,
         Inc. dated November 1, 1995
 10.9(1) Assignment, Assumption and Consent Agreement between Esther Podlesak,
         Trustee of the John A. and Esther Podlesak 1990 Family Trust, Pyramid
         Breweries California, Inc. and Pyramid Breweries Inc. dated November
         17, 1995
 10.10   Employment Agreement and First Amendment between the Registrant and
         Martin Kelly (Incorporated by reference to the Registrant's Annual
         Report on Form 10-K for the year ended December 31, 1999.)
 10.11   Employment Agreement between the Registrant and Gary McGrath
         (Incorporated by reference to the Registrant's Annual Report on Form
         10-K for the year ended December 31, 1999.)
 10.12   Employment Agreement between the Registrant and Wayne Drury
 23.1    Consent of Independent Public Accountants
</TABLE>
--------
(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).