##### Table of Contents









UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549




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Form 10-K



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|           |  |                                                                                                 
|---------- |  | ------------------------------------------------------------------------------------------------
|(Mark One) |  |                                                                                                 
|þ          |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR
    15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934    
|          
|           |  | For the year ended December 31,
    2002                                                        
|          
|o          |  | TRANSITION REPORT PURSUANT TO SECTION 13
    OR 15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934
|          
|           |  | For the transition period
    from           to           .                                     

Commission file number 0-27116



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Pyramid Breweries Inc.

(Exact name of registrant as specified in its
charter)


|                                                                   |  |                                      
|------------------------------------------------------------------ |  | -------------------------------------
|Washington                                                         |  | 91-1258355                           
|(State or other jurisdiction of
    incorporation or organization) |  | (IRS Employer
    Identification No.)

91 South Royal Brougham Way,

Seattle, WA 98134


(Address of principal executive
offices)


(206) 682-8322

(Registrants telephone number, including
area code)


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

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

Common Stock, par value $.01 per
share




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

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

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

The aggregate market value of the voting stock
held by non-affiliates of the registrant as of the last business
day of the registrants most recently completed second
quarter, June 28, 2002, was $19,281,977.

The number of shares outstanding of the
registrants common stock as of March 3, 2003, was
8,523,167.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Companys definitive Proxy
Statement for the Annual Meeting of Stockholders (to be filed)
to be held on May 7, 2003 are incorporated by reference
into Part II and Part III of this Form 10-K.



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TABLE OF CONTENTS



|              |                                                                                                 |  |  |  |  |  |  | 
|------------- | ----------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I       
|              | Item 1 -- Business                                                                             
|              | General                                                                                        
|              | Industry Background                                                                            
|              | Business Strategy                                                                              
|              | Products                                                                                       
|              | Competition                                                                                    
|              | Internal Controls                                                                              
|              | Trademarks                                                                                     
|              | Environmental Regulations and Operating Considerations                                         
|              | Employees                                                                                      
|              | Item 2 -- Properties                                                                           
|              | Item 3 -- Legal Proceedings                                                                    
|              | Item 4 -- Submission of Matters to a Vote of the Security Holders                              
|PART II      
|              | Item 5 -- Market for Registrants Common Equity and Related Stockholder Matters                
|              | Item 6 -- Selected Financial Data                                                              
|              | Item 7 -- Managements Discussion and Analysis of Financial Condition and Results of Operations
|              | Item 7A -- Quantitative and Qualitative Disclosures about Market Risk                          
|              | Item 8 -- Financial Statements                                                                 
|              | Item 9 -- Change in and Disagreements with Accountants on Accounting and Financial Disclosure  
|PART III     
|              | Item 10 -- Directors and Executive Officers of the Company                                     
|              | Item 11 -- Executive Compensation                                                              
|              | Item 12 -- Security Ownership of Certain Beneficial Owners and Management                      
|              | Item 13 -- Certain Relationships and Related Transactions                                      
|              | Item 14 -- Controls and Procedures                                                             
|PART IV      
|              | Item 15 -- Exhibits, Financial Statement Schedules, and Reports on Form 8-K                    
|SIGNATURES   
|EXHIBIT INDEX
|Exhibit 10.16
|Exhibit 10.17
|Exhibit 23.1 
|Exhibit 23.2 
|Exhibit 99.1 
|Exhibit 99.2 
|Exhibit 99.3 



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##### Table of Contents



PYRAMID BREWERIES INC.

ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED
DECEMBER 31, 2002

|         |  |                                                                                           |  |      |    | 
|-------- |  | ----------------------------------------------------------------------------------------- |  | ---- | -- | 
|         |  |                                                                                           |  | Page
|         |  |                                                                                           |  |     
|PART I  
|Item 1.  |  | Business                                                                                  |  |      | 1  | 
|         |  | General                                                                                   |  |      | 1  | 
|         |  | Industry Background                                                                       |  |      | 1  | 
|         |  | Business Strategy                                                                         |  |      | 2  | 
|         |  | Products                                                                                  |  |      | 3  | 
|         |  | Competition                                                                               |  |      | 3  | 
|         |  | Internal Controls                                                                         |  |      | 5  | 
|         |  | Government Regulations                                                                    |  |      | 5  | 
|         |  | Trademarks                                                                                |  |      | 6  | 
|         |  | Environmental Regulations and Operating
    Considerations                                |  |      | 7  | 
|         |  | Employees                                                                                 |  |      | 7  | 
|Item 2.  |  | Properties                                                                                |  |      | 7  | 
|Item 3.  |  | Legal Proceedings                                                                         |  |      | 8  | 
|Item 4.  |  | Submission of Matters to a Vote of Security
    Holders                                   |  |      | 8  | 
|PART II 
|Item 5.  |  | Market for Registrants Common Equity and
    Related Stockholder Matters                 |  |      | 8  | 
|Item 6.  |  | Selected Financial Data                                                                   |  |      | 10 | 
|Item 7.  |  | Managements Discussion and Analysis of
    Financial Condition and Results of Operations |  |      | 11 | 
|Item 7A. |  | Qualitative and Quantitative Disclosures about
    Market Risk                            |  |      | 17 | 
|Item 8.  |  | Financial Statements                                                                      |  |      | 18 | 
|Item 9.  |  | Change in and Disagreements with Accountants on
    Accounting and Financial Disclosure   |  |      | 18 | 
|PART III
|Item 10. |  | Directors and Executive Officers of the Company                                           |  |      | 18 | 
|Item 11. |  | Executive Compensation                                                                    |  |      | 19 | 
|Item 12. |  | Security Ownership of Certain Beneficial Owners
    and Management                        |  |      | 19 | 
|Item 13. |  | Certain Relationships and Related Transactions                                            |  |      | 19 | 
|Item 14. |  | Controls and Procedures                                                                   |  |      | 20 | 
|PART IV 
|Item 15. |  | Exhibits, Financial Statement Schedules, and
    Reports on Form 8-K                      |  |      | 20 | 
|         |  | Signatures                                                                                |  |      | 21 | 



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##### Table of Contents






PART I




Item 1 
Business






General


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

The Companys breweries produce high
quality, full-flavored beers in small batches using traditional
brewing methods. The Company also produces high quality,
full-flavored, batch brewed sodas. The Company has two main
breweries, one in Seattle, Washington (Seattle Brewery) which
opened in March 1995, and one in Berkeley, California (Berkeley
Brewery), which opened in February 1997. The Companys
third brewery is located in the Walnut Creek, California
Alehouse and produces products for on-site consumption. The
Company believes that the breweries and adjacent alehouses
provide increased consumer awareness and loyalty for the
Companys brands by increasing opportunities for sampling
and local product promotion. In 2002, the Company sold
approximately 163,700 barrels of its beer and soda products.

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




Industry Background

The Companys Pyramid and Thomas Kemper beer
brands compete primarily in the craft beer category, and
secondarily in the larger specialty category (which
includes craft beers, imports and super premium beers).
Nationally, craft beers represent approximately 3% of total beer
shipments in 2002, including imports. Craft beers are
distinguishable from mass-produced beers by their wide range of
fuller flavors and adherence to traditional European styles and
higher quality ingredients. Industry experts estimate that total
beer shipments, including imports, increased approximately 1% in
2001, craft beer shipments were estimated to have increased 1%,
and imports represented a 9% increase.

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

Craft beers generally sell for retail prices
ranging from $5.99 to $7.99 per six pack. Retail prices are set
independently by distributors and retailers. The Companys
retail prices are usually at the higher end of this range.
Increased consumer demand for high quality, full-flavored beers
allows for a price premium relative to mass-produced domestic
beers. This price premium results in higher profit margins,
which can motivate distributors and retailers to offer and
promote craft beers. The Companys craft beers are sold
primarily in Washington, Oregon and California, which accounted
for approximately 83% of the Companys 2002 beer sales.

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

1



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higher than the mass-produced brands due to their
flavor profile, unique and upscale packaging and flavors, and
strong consumer demand.


The Company currently operates restaurants
adjacent to its Seattle and Berkeley breweries and the Walnut
Creek Alehouse with the brewery situated within the restaurant.
The restaurants are operated under the Pyramid Alehouse brand
name. In 2002, the restaurants contributed sales of $10,327,000
including approximately $3,235,000 in the Companys beers
and sodas and $170,000 in branded clothing and other
merchandise. The restaurants have a total of over
1,000 seats, including outdoor eating areas, and are
situated in highly visible, high traffic locations. The
Alehouses had approximately 640,000 guest visits during 2002. A
fourth restaurant is scheduled to open in Sacramento, California
during the third quarter of 2003. The Sacramento restaurant will
have approximately 300 seats and is located in the
historical downtown district, one block from the state capital.

The Companys beverage operations
contributed 69% of net sales in 2002, with beer comprising 51%
and soda 18%. Alehouse operations contributed 31% of net sales
in 2002.




Business Strategy

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



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

The Company is committed to producing a portfolio
of high quality craft beers to appeal to a variety of discerning
consumer tastes. The Company currently markets over
20 styles of beer under the Pyramid and Thomas Kemper
brands. The Pyramid brand accounted for 96% of the
Companys beer sales and 73% of the Companys beverage
sales in 2002. The Company continues to seek opportunities to
develop or acquire other distinctive regional brands, which may
help broaden the Companys product portfolio and strengthen
the Companys presence geographically. The wide range of
styles enables the Company to obtain better market penetration
through greater shelf space for its packaged products in retail
stores and additional tap handles in draft beer outlets.

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

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



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

The Company acquired the Thomas Kemper Soda
Company in 1997. Since that time, the brand has added
significant revenues to the Company. The soda business
represented 25% of beverage sales in 2002, and 18% 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 Soda brands.
The Company will also seek opportunities to expand the craft
soda portfolio within its core western markets.

2



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

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

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

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



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

The Company distributes its products through a
network of selected independent distributors who deliver
directly to local grocery stores, convenience stores,
restaurants and taverns. The Company feels this type of
distribution system is best suited for developing local
distribution of Company products, particularly in draft beer
accounts where there are important sampling and brand building
opportunities. The Company has not aligned itself with the
distribution system of a single larger brewer. This approach
allows the Company to select distributors in each market that it
believes will focus the greatest attention on its products and
best promote its high quality craft beers and sodas.
Additionally, the ability to change distribution arrangements
for performance related issues is an important advantage. During
2002, the Company distributed its products through
161 wholesalers in 30 states and Canada. Consolidation
in the distribution industry has resulted in a decrease in the
number of distributors to which the Company ships. The Company
expects this trend to continue as additional industry
consolidation is expected.




Products

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

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

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




Competition



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

Competition within the craft beer and soda
markets is based on product quality, taste, consistency,
freshness, distribution, price, ability to differentiate
products, promotional methods and other product support.
Statistics from the latest study of the Institute of Brewing
Studies indicate there were approximately 1,400 craft brewers in
the United States at the end of 2002. Approximately two thirds
of these brewers are brewpubs that sell all of their production
at retail on the brewery premises. The remaining brewers market
their products

3



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


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

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

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



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

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

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



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

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

4



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





Internal Controls

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

Government Regulations



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

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



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

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



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

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

5



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##### Table of Contents



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

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

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

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

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



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

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



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

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




Trademarks

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

6



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##### Table of Contents



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





Environmental Regulations and Operating
Considerations

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

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




Employees

At December 31, 2002, the Company employed
329 people, including 44 in the Brewery Operations, 231 in the
Alehouse Division, 32 in sales and marketing and 22 in
administration capacities (including home office, administrative
and executive personnel). No employee is covered by a collective
bargaining agreement, and the Company has never experienced an
organized work stoppage, strike or labor dispute. The Company
believes it maintains a good working relationship with its
employees and has no reason to believe that a good working
relationship will not continue.




Item 2 
Properties

The Company currently owns and operates three
breweries, each with an adjacent restaurant: one in Seattle,
Washington, one in Berkeley, California and one in Walnut Creek,
California. During April 2002, the Company signed an agreement
to lease a fourth restaurant property in Sacramento, California
which is scheduled to open during the third quarter of 2003. The
estimated total annual beer capacity of the three breweries was
approximately 203,000 barrels at the end of 2002.



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

In March 1995, the Company completed the Seattle
Brewery, Alehouse and corporate offices near downtown Seattle.
This brewery and 340 seat restaurant plus an outdoor seating
area, operated as the Pyramid Alehouse, consists of
approximately 33,000 square feet of leased building area. The
estimated annual beer production capacity was 50,000 barrels at
the end of 2002. The Seattle building lease expires in 2004,
with options to extend the lease term for three five-year
periods. The Company has also leased approximately 11,250 square
feet of warehouse and additional outside storage space adjacent
to the Seattle Brewery and Alehouse for a period of seven years,
also expiring in 2004, and has options to extend the lease term
for three additional five-year periods.

7



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##### Table of Contents





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

Completed and opened in February 1997, the
Berkeley Brewery and its adjacent Pyramid Alehouse are housed in
a leased building of approximately 93,000 square feet.
During January 2000, the Company exercised an option to lease an
additional 29,000 square feet of adjacent space and is
currently subleasing that space. The brewery had an estimated
beer production capacity of 150,000 barrels at the end of
2002. During 2000, fermentation capacity was added which
increased the estimated annual beer capacity to
150,000 barrels from 80,000 barrels. The Berkeley
Brewery has a designed maximum potential capacity in excess of
200,000 barrels, which can be achieved by adding more
fermentation capacity. The Berkeley Alehouse has seating for 350
plus an outdoor seating area. The building was leased commencing
in November 1995 for a 15-year term, with options to extend the
lease term for two five-year periods. The Company also has the
option to purchase the entire building during the lease term at
its fair market value.



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

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



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

Scheduled to open in July 2003, the Sacramento
Alehouse will be located in a leased building of approximately
9,100 square feet. The restaurant has a small, on-site
brewery with an estimated beer production capacity of 1,500
barrels. The Sacramento Alehouse is designed with seating for
295, plus an outdoor seating area. The building was leased
commencing in April 2002 for an initial 10-year and 8-month
term, with options to extend the lease term for two five-year
periods.




Item 3  Legal
Proceedings

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




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

There were no matters submitted to a vote of
security holders during the fourth quarter of 2002.




PART II






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

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

8



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##### Table of Contents



The following table sets forth the high and low
sales prices and the cash dividends paid per share of Pyramid
Breweries Inc.s common stock for the years ended
December 31, 2002 and 2001.

|                         |                |      |   |      |  |          |   |      |  |  |   |       | 
|------------------------ | -------------- | ---- | - | ---- |  | -------- | - | ---- |  |  | - | ----- | 
|                         |                |      |   |      |  | Dividend
|                         |                | High |   | Low  |  | Paid    
|                         |                |      |   |      |  |         
|Calendar Quarters  2002 |                |      |   |      |  |          |   |      |  |  |   |      
|                         | First Quarter  |      | $ | 2.49 |  |          | $ | 2.25 |  |  | $ | 0.044 | 
|                         | Second Quarter |      |   | 2.48 |  |          |   | 2.26 |  |  |   | 0.044 | 
|                         | Third Quarter  |      |   | 2.40 |  |          |   | 2.19 |  |  |   | 0.044 | 
|                         | Fourth Quarter |      |   | 2.99 |  |          |   | 2.11 |  |  |   | 0.044 | 
|Calendar Quarters  2001 |                |      |   |      |  |          |   |      |  |  |   |      
|                         | First Quarter  |      |   | 2.47 |  |          |   | 1.88 |  |  |   | 0.044 | 
|                         | Second Quarter |      |   | 3.00 |  |          |   | 2.19 |  |  |   | 0.044 | 
|                         | Third Quarter  |      |   | 2.75 |  |          |   | 2.15 |  |  |   | 0.044 | 
|                         | Fourth Quarter |      |   | 2.50 |  |          |   | 2.20 |  |  |   | 0.044 | 

On March 3, 2003, the Company had
344 stockholders of record. The last reported sale price
per share on March 3, 2003, was $2.75. The Company had no
sales of unregistered securities during 2002.

DIVIDEND POLICY

On December 15, 1999, the Company announced
a new dividend policy and declared its first quarterly cash
dividend. The Company paid approximately $1,468,000, or $0.176
per common share, of cash dividends during the fiscal year ended
December 31, 2002. On February 6, 2003, the Board of
Directors declared a quarterly cash dividend of $0.044 per
common share to shareholders of record on March 31, 2003.
Any future declaration of dividends will depend, among other
things, on the Companys results of operations, capital
requirements and financial condition, and on such other factors
as the Companys Board of Directors may in its discretion
consider relevant.

9



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##### Table of Contents



SELECTED FINANCIAL AND OPERATING
DATA




Item 6  Selected Financial
Data

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

SELECTED FINANCIAL DATA

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


|                                              |  |                          |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|--------------------------------------------- |  | ------------------------ | ------- | ---- |  | ---- | ------- | ---- |  | ---- | ------- | - |  | - | ------- | - |  | - | ------- | -
|                                              |  |                         
|                                              |  | Years Ended December 31,
|                                              |  |                         
|                                              |  | 2002                     |         | 2001 |  | 2000 |         | 1999 |  | 1998
|                                              |  |                          |         |      |  |      |         |      |  |     
|Income Statement Data:                        |  |                          |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|Gross sales                                   |  | $                        | 35,523  |      |  | $    | 31,995  |      |  | $    | 30,275  |   |  | $ | 28,811  |   |  | $ | 27,326  |  
|Less excise taxes                             |  |                          | 1,711   |      |  |      | 1,572   |      |  |      | 1,704   |   |  |   | 1,735   |   |  |   | 1,672   |  
|                                              |  |                          |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|Net sales                                     |  |                          | 33,812  |      |  |      | 30,423  |      |  |      | 28,571  |   |  |   | 27,076  |   |  |   | 25,654  |  
|Cost of sales                                 |  |                          | 25,360  |      |  |      | 22,877  |      |  |      | 20,802  |   |  |   | 20,053  |   |  |   | 19,578  |  
|                                              |  |                          |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|Gross margin                                  |  |                          | 8,452   |      |  |      | 7,546   |      |  |      | 7,769   |   |  |   | 7,023   |   |  |   | 6,076   |  
|Selling, general and administrative expenses  |  |                          | 8,678   |      |  |      | 9,128   |      |  |      | 8,370   |   |  |   | 8,375   |   |  |   | 8,415   |  
|Impairment charge                             |  |                          |        |      |  |      |        |      |  |      |        |   |  |   | 3,288   |   |  |   |        |  
|                                              |  |                          |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|Operating loss                                |  |                          | (226    | )    |  |      | (1,582  | )    |  |      | (601    | ) |  |   | (4,640  | ) |  |   | (2,339  | )
|Other income, net                             |  |                          | 380     |      |  |      | 542     |      |  |      | 586     |   |  |   | 494     |   |  |   | 580     |  
|                                              |  |                          |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|Income (loss) before income taxes             |  |                          | 154     |      |  |      | (1,040  | )    |  |      | (15     | ) |  |   | (4,146  | ) |  |   | (1,759  | )
|Benefit (provision) for income taxes          |  |                          | 98      |      |  |      | (575    | )    |  |      |        |   |  |   |        |   |  |   | 582     |  
|                                              |  |                          |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|Net income (loss)                             |  | $                        | 252     |      |  | $    | (1,615  | )    |  | $    | (15     | ) |  | $ | (4,146  | ) |  | $ | (1,177  | )
|                                              |  |                          |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|Basic and diluted net income (loss) per share |  | $                        | 0.03    |      |  | $    | (0.20   | )    |  | $    | (0.00   | ) |  | $ | (0.50   | ) |  | $ | (0.14   | )
|                                              |  |                          |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|Weighted average basic shares outstanding     |  |                          | 8,203   |      |  |      | 7,987   |      |  |      | 7,940   |   |  |   | 8,231   |   |  |   | 8,213   |  
|                                              |  |                          |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|Diluted net income (loss) per share           |  | $                        | 0.03    |      |  | $    | (0.20   | )    |  | $    | (0.00   | ) |  | $ | (0.50   | ) |  | $ | (0.14   | )
|                                              |  |                          |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|Weighted average diluted shares outstanding   |  |                          | 8,243   |      |  |      | 7,987   |      |  |      | 7,940   |   |  |   | 8,231   |   |  |   | 8,213   |  
|                                              |  |                          |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|Dividend declared per share                   |  | $                        | 0.176   |      |  | $    | 0.176   |      |  | $    | 0.16    |   |  | $ | 0.04    |   |  | $ |        |  
|                                              |  |                          |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|Balance Sheet Data:                           |  |                          |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|Working capital                               |  | $                        | 3,783   |      |  | $    | 4,728   |      |  | $    | 7,026   |   |  | $ | 6,981   |   |  | $ | 6,258   |  
|Fixed assets, net                             |  |                          | 20,682  |      |  |      | 20,523  |      |  |      | 21,126  |   |  |   | 22,739  |   |  |   | 27,559  |  
|Total assets                                  |  |                          | 29,295  |      |  |      | 29,605  |      |  |      | 32,270  |   |  |   | 33,719  |   |  |   | 37,237  |  
|Stockholders equity                          |  |                          | 24,536  |      |  |      | 25,224  |      |  |      | 27,938  |   |  |   | 29,861  |   |  |   | 34,391  |  
|Operating Data (in barrels):                  |  |                          |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|Beer barrels shipped                          |  |                          | 117,100 |      |  |      | 110,800 |      |  |      | 109,900 |   |  |   | 108,400 |   |  |   | 105,900 |  
|Soda barrels shipped                          |  |                          | 46,600  |      |  |      | 46,000  |      |  |      | 38,400  |   |  |   | 29,600  |   |  |   | 26,700  |  
|                                              |  |                          |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|Total barrels shipped                         |  |                          | 163,700 |      |  |      | 156,800 |      |  |      | 148,300 |   |  |   | 138,000 |   |  |   | 132,600 |  
|                                              |  |                          |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|Beer production capacity at year-end          |  |                          | 203,000 |      |  |      | 200,000 |      |  |      | 200,000 |   |  |   | 172,000 |   |  |   | 172,000 |  
|                                              |  |                          |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  

10



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##### Table of Contents






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

Overview

Pyramid Breweries Inc. was incorporated in 1984
and is engaged in the brewing and sale of specialty beers and
sodas and in restaurant operations. The Company currently sells
its beverage products primarily in Washington, Oregon and
California under the Pyramid and Thomas Kemper brand names and
operates three restaurants, under the Pyramid Alehouse name. The
restaurants in Seattle, Washington and Berkeley, California are
located adjacent to the main production facilities. The third
restaurant, located in Walnut Creek, California is primarily a
restaurant with a brewery capable of providing products for
on-site consumption. For the year ended December 31, 2002,
the Company had gross revenues of $35,523,000, an increase of
11% from 2001. The Companys revenues consist of sales of
beer and soda to third-party distributors and retail sales of
beer, soda, food, apparel and other items in its restaurants.
For the years ended December 31, 2002 and 2001,
approximately 69% and 72% of the Companys net sales were
sales of beer and soda to third party distributors. Total retail
alehouse sales accounted for 31% and 28% of total net sales in
2002 and 2001, respectively.

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

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

The Company sells its craft beers in bottles and
kegs. Although bottled products normally sell for a higher per
barrel selling price, gross margin on the Companys draft
products are typically higher as a percentage. Changes in the
proportion of sales of bottled and draft products therefore will
affect the Companys gross margin. For 2002 and 2001,
approximately 58% 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 in the Risk Factors and Forward Looking Statements
below. The Company assumes no obligation to update the
forward-looking statements for such factors.

Critical Accounting Policies

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



| |   |                                   
| | - | ----------------------------------
| |  | Long-lived assets impairment      
|
| |  | Realization of deferred tax assets
|
| |  | Stock-based compensation          

11



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##### Table of Contents



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

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

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

Results of Operations



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

Gross Sales.Gross
sales increased 11.0% to $35,523,000 in the year ended
December 31, 2002 from $31,995,000 for 2001. The sales
increase was primarily the result of a 7.0% increase in beverage
sales to $25,196,000 in 2002 from $23,539,000 in 2001 and the
new Walnut Creek Alehouse location which contributed $2,091,000
in sales since the opening date in May 2002. Alehouse same store
sales were down $220,000 or 2.6% for the year, primarily
resulting from reduced July and October sales in the Seattle
Alehouse which benefited from the All-Star Game and additional
Seattle Mariners (Major League Baseball) playoff games in 2001,
held directly across the street from the alehouse. Total
beverage shipments in 2002 increased 4.4% to 163,700 barrels
from 156,800 barrels in 2001. Beer shipments increased 5.7% to
117,100 barrels, driven by the Companys top selling
product, Pyramid Hefeweizen, which was up 6% and the newer
Coastline Pilsner which contributed 4.7% of the increase over
2001 shipments. Soda shipments increased 1.3% to 46,600 barrels
in 2002 from 46,000 in 2001 primarily due to increased sales of
the soda sampler pack, which includes all six of the
Companys soda products. Thomas Kemper beer shipments
decreased 25.4% to 4,400 barrels in 2002 from 5,900 in 2001.
Wholesale beverage sales (beer and soda combined) in Washington,
Oregon and California increased by 5.5% in 2002 compared to 2001
sales. Sales in Washington, Oregon and California accounted for
83.2% and 84.2% of the Companys beverage sales in 2002 and
2001, respectively. Sales in the Southern California region,
which is the Companys second largest in terms of barrel
shipments behind Washington State, increased 22.8% to 32,300
barrels over 2001.

12



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##### Table of Contents



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

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

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

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

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

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



| |                                                                          
| | -------------------------------------------------------------------------
| | Year Ended December 31, 2001 Compared
    to Year Ended December 31, 2000

Gross Sales.Gross
sales increased 5.7% to $31,995,000 in the year ended
December 31, 2001 from $30,275,000 for 2000. The sales
increase was primarily the result of a 19.5% increase in soda
sales in 2001 to $5,735,000 from $4,800,000 in 2000 and a 9.3%
increase in alehouse sales in 2001 to $8,456,000 from $7,737,000
in 2000. Total beer sales in 2001 increased slightly to
$17,804,000 from $17,738,000 in 2000. Soda shipments increased
19.8% to 46,000 barrels in 2001 from 38,400 in 2000 primarily
due to increased sales of root beer, orange cream soda, the soda
sampler pack, which includes all four of the soda products, and
the introduction of two new flavors. Alehouse sales increased
mainly as a result of increased sales prices and patronage at
both alehouse restaurants. Beer shipments increased 0.8% to
110,800 barrels in 2001 from 109,900 in 2000. Of wholesale beer
shipments, Pyramid beer increased 2.9% to 104,900 barrels
while Thomas Kemper beer shipments decreased 26.3% to
5,900 barrels for 2001 compared to 2000. Wholesale beverage
sales (beer and soda combined) in Washington, Oregon and
California increased by 4.1% in 2001 compared to 2000 sales.
Sales in Washington, Oregon and California accounted for 84.2%
and 85.0% of the Companys beverage sales in 2001 and 2000,
respectively.

13



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##### Table of Contents



Excise Taxes.Excise
taxes were 4.9% and 5.6% of gross sales in 2001 and 2000,
respectively. Excise taxes were slightly lower as a percentage
of gross sales in 2001 due to a greater proportion of alehouse
and soda sales in 2001 compared to 2000, which do not bear
excise taxes.

Gross Margin.Gross
margin decreased 2.9% to $7,546,000 in 2001 from $7,769,000 in
2000. Gross margin as a percentage of net sales also decreased
to 24.8% in 2001 from 27.2% in 2000. The decrease in gross
margin was due primarily to increased utility and material costs
and a shift in product mix with increasing sales of 12-pack
products in the beverage division.

Selling, General and Administrative
Expenses.Selling, general and
administrative expenses increased 9.1% to $9,128,000 in 2001
from $8,370,000 in 2000. Selling, general and administrative
expenses as a percent of net sales also increased to 30.0% from
29.3% in the prior year. This increase was due primarily to
increased advertising expense, selling expense and a non-cash
stock-based compensation charge of $241,000 related to the new
equity arrangement with the Companys CEO announced in the
second quarter of 2001.

Other Income, net.Other income, net decreased to $542,000 in 2001 from $586,000 in
2000. The 7.5% decrease was due mainly from the interest earned
on cash equivalents and short-term investments. Both lower
investment balances and lower rates of interest income caused
the decline in interest income. This was partially offset by
increased parking income and decreased losses on sales of
assets. Interest income was $271,000 and $418,000 for the years
ended December 31, 2001 and 2000, respectively. Parking
income was $257,000 and $219,000 for the years ended
December 31, 2001 and 2000, respectively.

Income Taxes.As of
December 31, 2001, the Company had deferred tax assets
arising from deductible temporary differences, tax loss carry
forwards, and tax credits offset against certain deferred tax
liabilities. During 2001, the Company determined that its
deferred tax assets no longer meet the recognition criteria of
Statement of Financial Accounting Standards No. 109,
Accounting for Income Taxes, and therefore increased
the valuation allowance by $575,000 to meet this requirement.
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 $1,615,000 for 2001 compared with
a net loss of $15,000 in 2000. The $1,600,000 increase in net
loss was due to higher brewery operating costs, higher selling,
general and administrative expenses and the increase in the tax
valuation allowance mentioned above.

Liquidity and Capital Resources

The Company had $3,346,000 and $5,075,000 of
cash, cash equivalents and short-term investments at
December 31, 2002 and 2001, respectively. At
December 31, 2002, the Companys working capital
decreased to $3,783,000 compared to $4,728,000 at
December 31, 2001. Net cash provided by operating
activities for the year ended December 31, 2002 increased
to $1,619,000 from $1,589,000 for the prior year. The 1.9%
increase was primarily due to the improved results of operations
offset by an increase in net operating assets.

Net cash used in investing activities for the
year ended December 31, 2002 was $366,000 compared to
$1,556,000 for the prior year. The cash used in investing
activities in 2002 included approximately $1,510,000 for the
development of the Walnut Creek and Sacramento Alehouses and the
$772,000 balance being used to upgrade production equipment in
the Berkeley and Seattle Breweries, build portable outdoor
facilities associated with the beer garden and rebuild the bar
for the Seattle Alehouse. The offset to the cash used was
proceeds related to the sale and maturities, net of purchases,
of short-term investments which was $1,900,000.

At December 31, 2002, the Companys
commitment to make future payments under contractual obligations
was as follows:

|                 |  |       |            |             |  |             |           |             |  |           |           |  |  |   |           |  |  |   |           | 
|---------------- |  | ----- | ---------- | ----------- |  | ----------- | --------- | ----------- |  | --------- | --------- |  |  | - | --------- |  |  | - | --------- | 
|                 |  |       |            | Less Than 1 |  |             |           |             |  | More Than
|                 |  | Total |            | Year        |  | 1 - 3 years |           | 3 - 5 years |  | 5 years  
|                 |  |       |            |             |  |             |           |             |  |          
|Operating leases |  | $     | 10,073,000 |             |  | $           | 1,319,000 |             |  | $         | 2,256,000 |  |  | $ | 2,198,000 |  |  | $ | 4,300,000 | 
|Note payable(1)  |  |       | 60,000     |             |  |             | 20,000    |             |  |           | 40,000    |  |  |   |          |  |  |   |          | 

14



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---



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

On December 15, 1999, the Company announced
its first regular quarterly cash dividend and has declared and
paid a quarterly cash dividend each consecutive quarter since
the initial declaration. During the year ended December 31,
2002 the Company declared per share dividends of $0.176 and paid
out $1,468,000 in cash dividends.

On December 15, 1999, the Company also
announced a stock buyback plan to repurchase up to $2,000,000 of
the Companys common stock from time to time on the open
market. Stock purchases are at the discretion of management and
depend, among other things, on the Companys results of
operations, capital requirements and financial condition, and on
such other factors as the Companys management may consider
relevant. As of December 31, 2002, the Company has
purchased a total of 457,724 shares at an average price of
$1.94 per share for a total of $892,000 since the inception of
the program. During the year ended December 31, 2002, the
Company did not purchase any shares.

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. Planned projects include
the Sacramento Alehouse development scheduled to open in the
third quarter of 2003 and the upgrading of brewing equipment and
alehouse facilities in the Seattle and Berkeley locations. The
Company estimates that total Alehouse development costs to be
incurred in 2003 will be approximately $1,400,000. While there
can be no assurance that current expectations will be realized
and plans are subject to change upon further review, the Company
believes that its cash balances, together with cash from
operations, will be sufficient for the Companys working
capital needs.



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

In June 2001, the Financial Accounting Standards
Board (FASB) issued SFAS No. 142, Goodwill and Other
Intangible Assets. SFAS No. 142 requires goodwill to
be tested for impairment on an annual basis and between annual
tests in certain circumstances, and written down when impaired,
rather than being amortized as previous accounting standards
required. Effective January 1, 2002, the Company adopted
SFAS No. 142. The annual amortization of existing goodwill
of approximately $80,000 ceased on December 31, 2001. Based
on the impairment tests performed, there was no impairment of
goodwill during the year ended December 31, 2002. There can
be no assurance that future goodwill impairment tests will not
result in a charge to earnings.

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

In June 2002, the FASB issued SFAS No. 146,
Accounting for Costs Associated with Exit or Disposal
Activities. SFAS No. 146 requires recording costs
associated with exit or disposal activities at their fair values
when a liability has been incurred. Under previous guidance,
certain exit costs were accrued upon managements
commitment to an exit plan, which is generally before an actual
liability has been incurred. Adoption of the statement is
required at the beginning of the 2003 fiscal year. The statement
will impact the timing of exit or disposal activities reported
by the Company after adoption.

In December 2002, the FASB issued SFAS
No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure. SFAS
No. 148 amends SFAS No. 123, Accounting for
Stock-Based Compensation, to provide alternative methods
of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. In
addition, the Statement amends the disclosure requirements of
SFAS No. 123 to require prominent disclosure in both the
annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect
of the

15



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##### Table of Contents



method used on reported results. The Statement is
effective for the 2002 fiscal year. The Company has adopted the
disclosure requirements of the Statement.


In November 2002, the FASB issued FASB
Interpretation No. (FIN) 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others. FIN 45
requires recording of a liability for the fair value of the
guarantee at the inception of guarantees issued after
December 31, 2002. FIN 45 also requires that certain
disclosures about a guarantors obligations under
guarantees to be made. Adoption of the disclosure provision of
the interpretation is effective for the 2002 fiscal year and has
not resulted in additional disclosures by the Company. The
impact on the Companys financial position and results of
operations upon adoption of FIN 45 will depend on the
nature and extent of future issued guarantees. The Company does
not anticipate a material impact.

Risk Factors and Forwarding Looking
Statements

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

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

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

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

Selling Prices.The
future selling prices the Company charges for its craft beer and
other specialty beverages may decrease from historical levels
due to increasing competitive pressures. The Company has and

16



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##### Table of Contents



will continue to participate in price promotions
with its wholesalers and their retail customers. Management
believes that the number and frequency of the Companys
promotions may increase during 2003.


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.

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 7A  Quantitative and
Qualitative Disclosures about Market Risk

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

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

17



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##### Table of Contents






Item 8  Financial
Statements

Financial statements of Pyramid Breweries Inc.
are as follows:

|                                                                                            |  |      |    | 
|------------------------------------------------------------------------------------------- |  | ---- | -- | 
|                                                                                            |  | Page
|                                                                                            |  |     
|Reports of Independent Public Accountants                                                   |  |      | 26 | 
|Balance Sheets as of December 31, 2002 and
    2001                                         |  |      | 28 | 
|Statements of Operations for the Years Ended
    December 31, 2002, 2001 and 2000           |  |      | 29 | 
|Statements of Stockholders Equity for the
    Years Ended December 31, 2002, 2001 and 2000 |  |      | 30 | 
|Statements of Cash Flows for the Years Ended
    December 31, 2002, 2001 and 2000           |  |      | 31 | 
|Notes to Financial Statements                                                               |  |      | 32 | 




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

On May 30, 2002, the Audit Committee of the
Companys Board of Directors engaged KPMG LLP as the
Companys independent auditors for 2002. The information
required by this item was previously reported in the
Companys Form 8-K filed on May 31, 2002 and the
related Form 8-K/A filed on June 6, 2002.




PART III




Item 10  Directors and
Executive Officers of the Company



| |                                                              
| | -------------------------------------------------------------
| | Martin Kelly (48)  President and
    Chief Executive Officer

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



| |                                                                                             
| | --------------------------------------------------------------------------------------------
| | Eric Peterson (55)  Vice
    President  Finance, Chief Financial Officer and
    Secretary

Mr. Peterson was appointed as Vice
President  Finance, Chief Financial Officer and
Secretary in May 2002. Mr. Peterson came to the Company
from Tridia Partners LLC, a Bellevue, Washington based
consulting firm working with emerging growth companies and
companies in transition. Mr. Peterson served as a Partner
with Tridia Partners from 2001 to 2002. Mr. Peterson has
over 20 years of experience helping manage and finance high
growth companies. Within that time, he has helped raise over
$100 million in equity and over $100 million in debt
financing as the Chief Financial Officer for such companies as
Etera Corporation from 1999 to 2001, Sequel Technology
Corporation from 1996 to 1999, MIDCOM Communications Inc. and
Applied Microsystems Corporation. Prior to working with smaller,
high growth companies, Mr. Peterson held a number of
financial analysis and auditing positions with Weyerhaeuser
Company and Price Waterhouse & Co. Mr. Peterson
received his Bachelors Degree from Stanford University and his
Masters Degree in Business Administration from the University of
California at Los Angeles.



| |                                               
| | ----------------------------------------------
| | Gary McGrath (43)  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

18



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##### Table of Contents



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




| |                                                             
| | ------------------------------------------------------------
| | Patrick Coll (40)  Vice
    President  Alehouse Operations

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



| |                                                          
| | ---------------------------------------------------------
| | Mark House (44)  Vice
    President  Brewery Operations

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

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.
definitive Proxy Statement for its Annual Meeting of
Shareholders, to be held on May 7, 2003, 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 7, 2003, to be filed with the Commission pursuant to
Regulation 14A.






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

The information required by this Item is
incorporated herein by reference to Pyramid Breweries Inc.
definitive Proxy Statement for its Annual Meeting of
Stockholders, to be held on May 7, 2003, to be filed with
the Commission pursuant to Regulation 14A.






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

The information required by this Item is
incorporated herein by reference to Pyramid Breweries Inc.
definitive Proxy Statement for its Annual Meeting of
Stockholders, to be held on May 7, 2003, to be filed with
the Commission pursuant to Regulation 14A.

19



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##### Table of Contents








|          |                        
|--------- | -----------------------
|Item 14  | Controls and Procedures

Procedures



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

Based on their evaluation as of a date within
90 days of the filing date of this Annual Report on
Form 10-K, the Companys Chief Executive Officer and
Chief Financial Officer have concluded that the Companys
disclosure controls and procedures (as defined in
Rules 13a-14(c) and 15d-14(c) under the Securities Exchange
Act of 1934 (the Exchange Act) are effective to ensure that
information required to be disclosed by the Company in reports
that it files or submits under the Exchange Act is recorded,
processed, summarized and reported within the time periods
specified in Securities and Exchange Commission rules and forms.



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

There were no significant changes in the
Companys internal controls or in other factors that could
significantly affect these controls subsequent to the date of
their evaluation. There were no significant deficiencies or
material weaknesses, and therefore there were no corrective
actions taken.




PART IV




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

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



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

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

20



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##### Table of Contents






SIGNATURES

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

March 25, 2003



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



| |    |                     
| | -- | --------------------
| | By | /s/ ERIC G. PETERSON

| |                        
| | -----------------------
| |                        
| | Eric G. Peterson       
| | Vice President and     
| | Chief Financial Officer

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

|   |  |                                                                                  |  |               
|-- |  | -------------------------------------------------------------------------------- |  | --------------
|  
|By |  | /s/ MARTIN KELLY                                                                 |  | March 25, 2003
|   |  |                                                                                 
|   |  | Martin Kelly
    President and Chief Executive Officer
    Chairman of the Board |  |               
|  
|By |  | /s/ ERIC G. PETERSON                                                             |  | March 25, 2003
|   |  |                                                                                 
|   |  | Eric G. Peterson
    Vice President and Chief Financial Officer                  |  |               
|  
|By |  | /s/ JASON W. REES                                                                |  | March 25, 2003
|   |  |                                                                                 
|   |  | Jason W. Rees
    Controller and Chief Accounting Officer                        |  |               
|  
|By |  | /s/ KURT DAMMEIER                                                                |  | March 25, 2003
|   |  |                                                                                 
|   |  | Kurt Dammeier
    Director                                                       |  |               
|  
|By |  | /s/ SCOTT S. BARNUM                                                              |  | March 25, 2003
|   |  |                                                                                 
|   |  | Scott S. Barnum
    Director                                                     |  |               
|  
|By |  | /s/ GEORGE HANCOCK                                                               |  | March 25, 2003
|   |  |                                                                                 
|   |  | George Hancock
    Director and Founder                                          |  |               
|  
|By |  | /s/ NANCY MOOTZ                                                                  |  | March 25, 2003
|   |  |                                                                                 
|   |  | Nancy Mootz
    Director                                                         |  |               
|  
|By |  | /s/ SCOTT SVENSON                                                                |  | March 25, 2003
|   |  |                                                                                 
|   |  | Scott Svenson
    Director                                                       |  |               

21



---



##### Table of Contents



CERTIFICATION

I, R. Martin Kelly, President and Chief Executive
Officer of Pyramid Breweries Inc. (registrant),
certify that:



| |                                                                                                                                                                                                                                                                                                                                                         
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1.     I have reviewed
    this annual report on Form 10-K of the registrant;                                                                                                                                                                                                                                                                           
|
| | 2.      Based on my
    knowledge, this annual report does not contain any untrue
    statement of a material fact or omit to state a material fact
    necessary to make the statements made, in light of the
    circumstances under which such statements were made, not
    misleading with respect to the period covered by this annual
    report;
|
| | 3.      Based on my
    knowledge, the financial statements, and other financial
    information included in this annual report, fairly present in
    all material respects the financial condition, results of
    operations and cash flows of the registrant as of, and for, the
    periods presented in this annual report;                       
|
| | 4.      The
    registrants other certifying officers and I are
    responsible for establishing and maintaining disclosure controls
    and procedures (as defined in Exchange Act Rules 13a-14 and
    15d-14) for the registrant and we have:                                                                                                       



| |                                                                                                                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) designed such disclosure controls and
    procedures to ensure that material information relating to the
    registrant, including its consolidated subsidiaries, is made
    known to us by others within those entities, particularly during
    the period in which this annual report is being prepared;
|
| | b) evaluated the effectiveness of the
    registrants disclosure controls and procedures as of a
    date within 90 days prior to the filing date of this annual
    report (the Evaluation Date); and                                                                                                      
|
| | c) presented in this annual report our
    conclusions about the effectiveness of the disclosure controls
    and procedures based on our evaluation as of the Evaluation Date;                                                                                                                                



| |                                                                                                                                                                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 5.     The
    registrants other certifying officers and I have
    disclosed, based on our most recent evaluation, to the
    registrants auditors and the audit committee of
    registrants board of directors (or persons performing the
    equivalent function):



| |                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) all significant deficiencies in the
    design or operation of internal controls which could adversely
    affect the registrants ability to record, process,
    summarize and report financial data and have identified for the
    registrants auditors any material weaknesses in internal
    controls; and
|
| | b) any fraud, whether or not material, that
    involves management or other employees who have a significant
    role in the registrants internal controls; and                                                                                                                                                    



| |                                                                                                                                                                                                                                                                                                                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 6.      The
    registrants other certifying officers and I have indicated
    in this annual report whether or not there were significant
    changes in internal controls or in other factors that could
    significantly affect internal controls subsequent to the date of
    our most recent evaluation, including any corrective actions
    with regard to significant deficiencies and material weaknesses.



| |                                          
| | -----------------------------------------
| | /s/ R. MARTIN KELLY                      
| | R. Martin Kelly                          
| | President and Chief Executive
    Officer

Date: March 25, 2003

22



---



##### Table of Contents



CERTIFICATION

I, Eric G. Peterson, Vice-President and Chief
Financial Officer of Pyramid Breweries Inc.
(registrant), certify that:



| |                                                                                                                                                                                                                                                                                                                                                         
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1.     I have reviewed
    this annual report on Form 10-K of the registrant;                                                                                                                                                                                                                                                                           
|
| | 2.      Based on my
    knowledge, this annual report does not contain any untrue
    statement of a material fact or omit to state a material fact
    necessary to make the statements made, in light of the
    circumstances under which such statements were made, not
    misleading with respect to the period covered by this annual
    report;
|
| | 3.      Based on my
    knowledge, the financial statements, and other financial
    information included in this annual report, fairly present in
    all material respects the financial condition, results of
    operations and cash flows of the registrant as of, and for, the
    periods presented in this annual report;                       
|
| | 4.      The
    registrants other certifying officers and I are
    responsible for establishing and maintaining disclosure controls
    and procedures (as defined in Exchange Act Rules 13a-14 and
    15d-14) for the registrant and we have:                                                                                                       



| |                                                                                                                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) designed such disclosure controls and
    procedures to ensure that material information relating to the
    registrant, including its consolidated subsidiaries, is made
    known to us by others within those entities, particularly during
    the period in which this annual report is being prepared;
|
| | b) evaluated the effectiveness of the
    registrants disclosure controls and procedures as of a
    date within 90 days prior to the filing date of this annual
    report (the Evaluation Date); and                                                                                                      
|
| | c) presented in this annual report our
    conclusions about the effectiveness of the disclosure controls
    and procedures based on our evaluation as of the Evaluation Date;                                                                                                                                



| |                                                                                                                                                                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 5.     The
    registrants other certifying officers and I have
    disclosed, based on our most recent evaluation, to the
    registrants auditors and the audit committee of
    registrants board of directors (or persons performing the
    equivalent function):



| |                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) all significant deficiencies in the
    design or operation of internal controls which could adversely
    affect the registrants ability to record, process,
    summarize and report financial data and have identified for the
    registrants auditors any material weaknesses in internal
    controls; and
|
| | b) any fraud, whether or not material, that
    involves management or other employees who have a significant
    role in the registrants internal controls; and                                                                                                                                                    



| |                                                                                                                                                                                                                                                                                                                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 6.      The
    registrants other certifying officers and I have indicated
    in this annual report whether or not there were significant
    changes in internal controls or in other factors that could
    significantly affect internal controls subsequent to the date of
    our most recent evaluation, including any corrective actions
    with regard to significant deficiencies and material weaknesses.



| |                                               
| | ----------------------------------------------
| | /s/ ERIC G. PETERSON                          
| |                                               
| | Eric G. Peterson                              
| | Vice-President and Chief Financial
    Officer

Date: March 25, 2003

23



---



##### Table of Contents



CERTIFICATION

I, Jason W. Rees, Controller and Chief Accounting
Officer of Pyramid Breweries Inc. (registrant),
certify that:



| |                                                                                                                                                                                                                                                                                                                                                          
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1.     I have reviewed
    this annual report on Form 10-K of the registrant;                                                                                                                                                                                                                                                                            
|
| | 2.       Based
    on my knowledge, this annual report does not contain any untrue
    statement of a material fact or omit to state a material fact
    necessary to make the statements made, in light of the
    circumstances under which such statements were made, not
    misleading with respect to the period covered by this annual
    report;
|
| | 3.       Based
    on my knowledge, the financial statements, and other financial
    information included in this annual report, fairly present in
    all material respects the financial condition, results of
    operations and cash flows of the registrant as of, and for, the
    periods presented in this annual report;                       
|
| | 4.       The
    registrants other certifying officers and I are
    responsible for establishing and maintaining disclosure controls
    and procedures (as defined in Exchange Act Rules 13a-14 and
    15d-14) for the registrant and we have:                                                                                                       



| |                                                                                                                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) designed such disclosure controls and
    procedures to ensure that material information relating to the
    registrant, including its consolidated subsidiaries, is made
    known to us by others within those entities, particularly during
    the period in which this annual report is being prepared;
|
| | b) evaluated the effectiveness of the
    registrants disclosure controls and procedures as of a
    date within 90 days prior to the filing date of this annual
    report (the Evaluation Date); and                                                                                                      
|
| | c) presented in this annual report our
    conclusions about the effectiveness of the disclosure controls
    and procedures based on our evaluation as of the Evaluation Date;                                                                                                                                



| |                                                                                                                                                                                                                                                                           
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 5.      The
    registrants other certifying officers and I have
    disclosed, based on our most recent evaluation, to the
    registrants auditors and the audit committee of
    registrants board of directors (or persons performing the
    equivalent function):



| |                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) all significant deficiencies in the
    design or operation of internal controls which could adversely
    affect the registrants ability to record, process,
    summarize and report financial data and have identified for the
    registrants auditors any material weaknesses in internal
    controls; and
|
| | b) any fraud, whether or not material, that
    involves management or other employees who have a significant
    role in the registrants internal controls; and                                                                                                                                                    



| |                                                                                                                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 6.     The
    registrants other certifying officers and I have indicated
    in this annual report whether or not there were significant
    changes in internal controls or in other factors that could
    significantly affect internal controls subsequent to the date of
    our most recent evaluation, including any corrective actions
    with regard to significant deficiencies and material weaknesses.



| |                                            
| | -------------------------------------------
| | /s/ JASON W. REES                          
| |                                            
| | Jason W. Rees                              
| | Controller and Chief Accounting
    Officer

Date: March 25, 2003

24



---



##### Table of Contents



PYRAMID BREWERIES INC.

INDEX TO FINANCIAL STATEMENTS

|                                                                                            |  |      |    | 
|------------------------------------------------------------------------------------------- |  | ---- | -- | 
|                                                                                            |  | Page
|                                                                                            |  |     
|Reports of Independent Public Accountants                                                   |  |      | 26 | 
|Balance Sheets as of December 31, 2002 and
    2001                                         |  |      | 28 | 
|Statements of Operations for the Years Ended
    December 31, 2002, 2001 and 2000           |  |      | 29 | 
|Statements of Stockholders Equity for the
    Years Ended December 31, 2002, 2001 and 2000 |  |      | 30 | 
|Statements of Cash Flows for the Years Ended
    December 31, 2002, 2001 and 2000           |  |      | 31 | 
|Notes to Financial Statements                                                               |  |      | 32 | 

25



---



##### Table of Contents



REPORT OF INDEPENDENT PUBLIC
ACCOUNTANTS

The Board of Directors Pyramid Breweries Inc.:

We have audited the accompanying balance sheet of
Pyramid Breweries Inc. as of December 31, 2002 and the
related statements of operations, stockholders equity and
cash flows for the year then ended. 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 audit. The accompanying financial
statements of Pyramid Breweries Inc. as of December 31,
2001 and for the years ended December 31, 2001 and 2000
were audited by other auditors who have ceased operations. Those
auditors expressed an unqualified opinion on those
financial statements, before the revision described in
Note 1 to the financial statements, in their report dated
January 25, 2002.

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

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

As discussed above, the 2001 and 2000 financial
statements of Pyramid Breweries Inc. were audited by other
auditors who have ceased operations. As described in
Note 1, these financial statements have been revised to
include the transitional disclosures required by Statement of
Financial Accounting Standards No. 142, Goodwill and
Other Intangible Assets, which was adopted by the Company
as of January 1, 2002. In our opinion, the disclosures for
2001 and 2000 in Note 1 are appropriate. However, we were
not engaged to audit, review or apply any procedures to the 2001
and 2000 financial statements of the Company other than with
respect to such disclosures and accordingly, we do not express
an opinion or any other form of assurance on the 2001 and 2000
financial statements taken as a whole.



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

Seattle, Washington,

January 10, 2003


26



---



##### Table of Contents



REPORT OF INDEPENDENT PUBLIC
ACCOUNTANTS

To the Board of Directors of Pyramid Breweries
Inc.:

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

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

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

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



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

Seattle, Washington,

January 25, 2002


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

27



---



##### Table of Contents



PYRAMID BREWERIES INC.

BALANCE SHEETS

|                                         |                                                                                                                       |                                            |   |             |            |  |   |            |            | 
|---------------------------------------- | --------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | - | ----------- | ---------- |  | - | ---------- | ---------- | 
|                                         |                                                                                                                       |                                           
|                                         |                                                                                                                       | December 31,                              
|                                         |                                                                                                                       |                                           
|                                         |                                                                                                                       | 2002                                       |   | 2001       
|                                         |                                                                                                                       |                                            |   |            
|ASSETS                                  
|CURRENT ASSETS:                          |                                                                                                                       |                                            |   |             |            |  |   |           
|                                         | Cash and cash equivalents                                                                                             |                                            | $ | 595,573     |            |  | $ | 425,454    |           
|                                         | Short-term investments                                                                                                |                                            |   | 2,750,000   |            |  |   | 4,650,000  |           
|                                         | Accounts receivable, net of allowance for
    doubtful accounts of $20,000 as of December 31, 2002 and
    2001       |                                            |   | 1,944,393   |            |  |   | 1,425,592  |           
|                                         | Inventories                                                                                                           |                                            |   | 1,589,724   |            |  |   | 1,178,148  |           
|                                         | Prepaid expenses and other                                                                                            |                                            |   | 626,740     |            |  |   | 257,140    |           
|                                         |                                                                                                                       |                                            |   |             |            |  |   |           
|                                         |                                                                                                                       | Total current assets                       |   |             | 7,506,430  |  |   |            | 7,936,334  | 
|                                         | Long term investments                                                                                                 |                                            |   | 491,742     |            |  |   | 491,742    |           
|                                         | Note receivable  related party                                                                                       |                                            |   | 94,239      |            |  |   | 106,965    |           
|                                         | Fixed assets, net                                                                                                     |                                            |   | 20,681,508  |            |  |   | 20,522,560 |           
|                                         | Goodwill                                                                                                              |                                            |   | 414,613     |            |  |   | 414,613    |           
|                                         | Other                                                                                                                 |                                            |   | 106,023     |            |  |   | 132,853    |           
|                                         |                                                                                                                       |                                            |   |             |            |  |   |           
|                                         |                                                                                                                       | Total assets                               |   | $           | 29,294,555 |  |   | $          | 29,605,067 | 
|                                         |                                                                                                                       |                                            |   |             |            |  |   |           
|LIABILITIES AND STOCKHOLDERS
    EQUITY
|CURRENT LIABILITIES:                     |                                                                                                                       |                                            |   |             |            |  |   |           
|                                         | Accounts payable                                                                                                      |                                            | $ | 951,685     |            |  | $ | 662,527    |           
|                                         | Accrued expenses                                                                                                      |                                            |   | 1,747,042   |            |  |   | 1,486,955  |           
|                                         | Refundable deposits                                                                                                   |                                            |   | 506,377     |            |  |   | 550,259    |           
|                                         | Note payable  current                                                                                                |                                            |   | 20,000      |            |  |   | 20,000     |           
|                                         | Deferred rent  current                                                                                               |                                            |   | 123,672     |            |  |   | 123,672    |           
|                                         | Dividends payable                                                                                                     |                                            |   | 374,173     |            |  |   | 365,178    |           
|                                         |                                                                                                                       |                                            |   |             |            |  |   |           
|                                         |                                                                                                                       | Total current liabilities                  |   |             | 3,722,949  |  |   |            | 3,208,591  | 
|                                         | Note payable, net of current                                                                                          |                                            |   | 30,566      |            |  |   | 43,397     |           
|                                         | Deferred rent, net of current                                                                                         |                                            |   | 1,005,306   |            |  |   | 1,128,978  |           
|                                         |                                                                                                                       |                                            |   |             |            |  |   |           
|                                         |                                                                                                                       | Total liabilities                          |   |             | 4,758,821  |  |   |            | 4,380,966  | 
|                                         |                                                                                                                       |                                            |   |             |            |  |   |           
|COMMITMENTS AND CONTINGENCIES            |                                                                                                                       |                                            |   |             |            |  |   |           
|STOCKHOLDERS EQUITY:                    |                                                                                                                       |                                            |   |             |            |  |   |           
|                                         | Preferred stock, 10,000,000 shares authorized,
    none issued                                                        |                                            |   |            |            |  |   |           |           
|                                         | Common stock, $.01 par value; 40,000,000 shares
    authorized, 8,503,920 and 8,299,493 shares issued and outstanding |                                            |   | 85,039      |            |  |   | 82,995     |           
|                                         | Additional paid-in capital                                                                                            |                                            |   | 36,040,268  |            |  |   | 35,649,120 |           
|                                         | Note receivable  related party                                                                                       |                                            |   | (781,777    | )          |  |   | (786,818   | )         
|                                         | Deferred stock-based compensation                                                                                     |                                            |   | (46,531     | )          |  |   | (185,486   | )         
|                                         | Accumulated deficit                                                                                                   |                                            |   | (10,761,265 | )          |  |   | (9,535,710 | )         
|                                         |                                                                                                                       |                                            |   |             |            |  |   |           
|                                         |                                                                                                                       | Total stockholders equity                 |   |             | 24,535,734 |  |   |            | 25,224,101 | 
|                                         |                                                                                                                       |                                            |   |             |            |  |   |           
|                                         |                                                                                                                       | Total liabilities and stockholders equity |   | $           | 29,294,555 |  |   | $          | 29,605,067 | 
|                                         |                                                                                                                       |                                            |   |             |            |  |   |           

See accompanying notes to financial statements.

28



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##### Table of Contents



PYRAMID BREWERIES INC.

STATEMENTS OF OPERATIONS

|                                              |  |                          |            |      |  |      |            |   |  |   |            |  
|--------------------------------------------- |  | ------------------------ | ---------- | ---- |  | ---- | ---------- | - |  | - | ---------- | -
|                                              |  |                         
|                                              |  | Years Ended December 31,
|                                              |  |                         
|                                              |  | 2002                     |            | 2001 |  | 2000
|                                              |  |                          |            |      |  |     
|Gross sales                                   |  | $                        | 35,523,355 |      |  | $    | 31,995,135 |   |  | $ | 30,274,695 |  
|Less excise taxes                             |  |                          | 1,711,359  |      |  |      | 1,571,764  |   |  |   | 1,704,283  |  
|                                              |  |                          |            |      |  |      |            |   |  |   |            |  
|Net sales                                     |  |                          | 33,811,996 |      |  |      | 30,423,371 |   |  |   | 28,570,412 |  
|Cost of sales                                 |  |                          | 25,360,366 |      |  |      | 22,877,076 |   |  |   | 20,801,424 |  
|                                              |  |                          |            |      |  |      |            |   |  |   |            |  
|Gross margin                                  |  |                          | 8,451,630  |      |  |      | 7,546,295  |   |  |   | 7,768,988  |  
|Selling, general and administrative expenses  |  |                          | 8,678,283  |      |  |      | 9,128,866  |   |  |   | 8,369,580  |  
|                                              |  |                          |            |      |  |      |            |   |  |   |            |  
|Operating loss                                |  |                          | (226,653   | )    |  |      | (1,582,571 | ) |  |   | (600,592   | )
|Other income, net                             |  |                          | 380,247    |      |  |      | 542,119    |   |  |   | 585,682    |  
|                                              |  |                          |            |      |  |      |            |   |  |   |            |  
|Income (loss) before income taxes             |  |                          | 153,594    |      |  |      | (1,040,452 | ) |  |   | (14,910    | )
|Benefit (provision) for income taxes          |  |                          | 98,286     |      |  |      | (574,621   | ) |  |   |           |  
|                                              |  |                          |            |      |  |      |            |   |  |   |            |  
|Net income (loss)                             |  | $                        | 251,880    |      |  | $    | (1,615,073 | ) |  | $ | (14,910    | )
|                                              |  |                          |            |      |  |      |            |   |  |   |            |  
|Basic and diluted net income (loss) per share |  | $                        | 0.03       |      |  | $    | (0.20      | ) |  | $ | (0.00      | )
|                                              |  |                          |            |      |  |      |            |   |  |   |            |  
|Weighted average basic shares outstanding     |  |                          | 8,202,985  |      |  |      | 7,986,595  |   |  |   | 7,939,980  |  
|                                              |  |                          |            |      |  |      |            |   |  |   |            |  
|Weighted average diluted shares outstanding   |  |                          | 8,242,790  |      |  |      | 7,986,595  |   |  |   | 7,939,980  |  
|                                              |  |                          |            |      |  |      |            |   |  |   |            |  
|Cash dividend declared per share              |  | $                        | 0.176      |      |  | $    | 0.176      |   |  | $ | 0.160      |  

See accompanying notes to financial statements.

29



---



##### Table of Contents



PYRAMID BREWERIES INC.

STATEMENTS OF STOCKHOLDERS
EQUITY

|                           |                                                                                  |              |           |            |   |             |        |             |   |              |            |               |   |        |          |          |   |   |          |          |   |   |             |            |   |   |            |            |  
|-------------------------- | -------------------------------------------------------------------------------- | ------------ | --------- | ---------- | - | ----------- | ------ | ----------- | - | ------------ | ---------- | ------------- | - | ------ | -------- | -------- | - | - | -------- | -------- | - | - | ----------- | ---------- | - | - | ---------- | ---------- | -
|                           |                                                                                  |              |           |            |   | Note        |        |             |   |              |            |              
|                           |                                                                                  | Common Stock |           | Additional |   | Receivable- |        | Deferred    |   |              |            | Total        
|                           |                                                                                  |              |           | Paid-in    |   | Related-    |        | Stock-Based |   | Accumulated  |            | Stockholders
|                           |                                                                                  | Shares       |           | Amount     |   | Capital     |        | Party       |   | Compensation |            | Deficit       |   | Equity
|                           |                                                                                  |              |           |            |   |             |        |             |   |              |            |               |   |       
|Balance, December 31, 1999 |                                                                                  |              | 8,193,580 |            |   | $           | 81,936 |             |   | $            | 34,982,946 |               |   | $      |         |          |   | $ |         |          |   | $ | (5,204,335  | )          |   | $ | 29,860,547 |           
|                           | Net loss                                                                         |              |           |           |   |             |        |            |   |              |            |              |   |        |          |         |   |   |          |         |   |   |             | (14,910    | ) |   |            | (14,910    | )
|                           | Dividends declared                                                               |              |           |           |   |             |        |            |   |              |            |              |   |        |          |         |   |   |          |         |   |   |             | (1,259,363 | ) |   |            | (1,259,363 | )
|                           | Shares issued                                                                    |              |           | 38,269     |   |             |        | 383         |   |              |            | 59,004        |   |        |          |         |   |   |          |         |   |   |             |           |   |   |            | 59,387     |  
|                           | Exercised stock options                                                          |              |           | 27,600     |   |             |        | 275         |   |              |            | 65,535        |   |        |          |         |   |   |          |         |   |   |             |           |   |   |            | 65,810     |  
|                           | Shares repurchased and retired                                                   |              |           | (396,198   | ) |             |        | (3,962      | ) |              |            | (769,598      | ) |        |          |         |   |   |          |         |   |   |             |           |   |   |            | (773,560   | )
|                           |                                                                                  |              |           |            |   |             |        |             |   |              |            |               |   |        |          |          |   |   |          |          |   |   |             |            |   |   |            |           
|Balance, December 31, 2000 |                                                                                  |              | 7,863,251 |            |   |             | 78,632 |             |   |              | 34,337,887 |               |   |        |         |          |   |   |         |          |   |   | (6,478,608  | )          |   |   | 27,937,911 |           
|                           | Net loss                                                                         |              |           |           |   |             |        |            |   |              |            |              |   |        |          |         |   |   |          |         |   |   |             | (1,615,073 | ) |   |            | (1,615,073 | )
|                           | Dividends declared                                                               |              |           |           |   |             |        |            |   |              |            |              |   |        |          |         |   |   |          |         |   |   |             | (1,442,029 | ) |   |            | (1,442,029 | )
|                           | Shares issued                                                                    |              |           | 32,268     |   |             |        | 322         |   |              |            | 62,769        |   |        |          |         |   |   |          |         |   |   |             |           |   |   |            | 63,091     |  
|                           | Exercised stock options                                                          |              |           | 415,700    |   |             |        | 4,158       |   |              |            | 841,158       |   |        |          | (786,818 | ) |   |          |         |   |   |             |           |   |   |            | 58,498     |  
|                           | Stock-based compensation including amortization
    of stock-based compensation  |              |           |           |   |             |        |            |   |              |            | 186,371       |   |        |          |         |   |   |          | 60,738   |   |   |             |           |   |   |            | 247,109    |  
|                           | Deferred compensation                                                            |              |           |           |   |             |        |            |   |              |            | 246,224       |   |        |          |         |   |   |          | (246,224 | ) |   |             |           |   |   |            |           |  
|                           | Shares repurchased and retired                                                   |              |           | (11,726    | ) |             |        | (117        | ) |              |            | (25,289       | ) |        |          |         |   |   |          |         |   |   |             |           |   |   |            | (25,406    | )
|                           |                                                                                  |              |           |            |   |             |        |             |   |              |            |               |   |        |          |          |   |   |          |          |   |   |             |            |   |   |            |           
|Balance, December 31, 2001 |                                                                                  |              | 8,299,493 |            |   |             | 82,995 |             |   |              | 35,649,120 |               |   |        | (786,818 | )        |   |   | (185,486 | )        |   |   | (9,535,710  | )          |   |   | 25,224,101 |           
|                           | Net income                                                                       |              |           |           |   |             |        |            |   |              |            |              |   |        |          |         |   |   |          |         |   |   |             | 251,880    |   |   |            | 251,880    |  
|                           | Dividends declared                                                               |              |           |           |   |             |        |            |   |              |            |              |   |        |          |         |   |   |          |         |   |   |             | (1,477,435 | ) |   |            | (1,477,435 | )
|                           | Shares issued                                                                    |              |           | 35,406     |   |             |        | 354         |   |              |            | 70,539        |   |        |          |         |   |   |          |         |   |   |             |           |   |   |            | 70,893     |  
|                           | Exercised stock options                                                          |              |           | 169,021    |   |             |        | 1,690       |   |              |            | 315,065       |   |        |          |         |   |   |          |         |   |   |             |           |   |   |            | 316,755    |  
|                           | Stock-based compensation including amortization
    of stock- based compensation |              |           |           |   |             |        |            |   |              |            | 5,544         |   |        |          |         |   |   |          | 138,955  |   |   |             |           |   |   |            | 144,499    |  
|                           | Note repayment                                                                   |              |           |           |   |             |        |            |   |              |            |              |   |        |          | 5,041    |   |   |          |         |   |   |             |           |   |   |            | 5,041      |  
|                           |                                                                                  |              |           |            |   |             |        |             |   |              |            |               |   |        |          |          |   |   |          |          |   |   |             |            |   |   |            |           
|Balance, December 31, 2002 |                                                                                  |              | 8,503,920 |            |   | $           | 85,039 |             |   | $            | 36,040,268 |               |   | $      | (781,777 | )        |   | $ | (46,531  | )        |   | $ | (10,761,265 | )          |   | $ | 24,535,734 |           
|                           |                                                                                  |              |           |            |   |             |        |             |   |              |            |               |   |        |          |          |   |   |          |          |   |   |             |            |   |   |            |           

See accompanying notes to financial statements.

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PYRAMID BREWERIES INC.

STATEMENTS OF CASH FLOWS

|                      |                                                                                              |                                                                     |   |         |            |      |   |            |            |   |   |         |            |  
|--------------------- | -------------------------------------------------------------------------------------------- | ------------------------------------------------------------------- | - | ------- | ---------- | ---- | - | ---------- | ---------- | - | - | ------- | ---------- | -
|                      |                                                                                              |                                                                    
|                      |                                                                                              | Years Ended December 31,                                           
|                      |                                                                                              |                                                                    
|                      |                                                                                              | 2002                                                                |   | 2001    |            | 2000
|                      |                                                                                              |                                                                     |   |         |            |     
|OPERATING ACTIVITIES: |                                                                                              |                                                                     |   |         |            |      |   |            |            |   |   |        
|                      | Net income (loss)                                                                            |                                                                     | $ | 251,880 |            |      | $ | (1,615,073 | )          |   | $ | (14,910 | )         
|                      | Adjustments to reconcile net income
    (loss) to net cash provided by operating activities: |                                                                     |   |         |            |      |   |            |            |   |   |         |           
|                      |                                                                                              | Depreciation and amortization                                       |   |         | 2,201,737  |      |   |            | 2,141,096  |   |   |         | 2,259,430  |  
|                      |                                                                                              | Stock-based compensation expense                                    |   |         | 144,499    |      |   |            | 247,109    |   |   |         |           |  
|                      |                                                                                              | Interest expense                                                    |   |         | 7,169      |      |   |            |           |   |   |         |           |  
|                      |                                                                                              | (Gain) loss on sale of fixed assets                                 |   |         | (3,889     | )    |   |            | 9,876      |   |   |         | 85,150     |  
|                      |                                                                                              | Deferred income taxes                                               |   |         |           |      |   |            | 574,621    |   |   |         | 453,483    |  
|                      |                                                                                              | Deferred rent                                                       |   |         | (123,672   | )    |   |            | 5,011      |   |   |         | 224,962    |  
|                      | Changes in operating assets and liabilities:                                                 |                                                                     |   |         |            |      |   |            |            |   |   |         |           
|                      |                                                                                              | Accounts receivable                                                 |   |         | (518,801   | )    |   |            | 238,874    |   |   |         | (562,311   | )
|                      |                                                                                              | Inventories                                                         |   |         | (411,576   | )    |   |            | (13,760    | ) |   |         | 281,569    |  
|                      |                                                                                              | Prepaid expenses and other                                          |   |         | (433,799   | )    |   |            | 47,085     |   |   |         | (264,040   | )
|                      |                                                                                              | Accounts payable and accrued expenses                               |   |         | 549,245    |      |   |            | (61,486    | ) |   |         | (3,950     | )
|                      |                                                                                              | Refundable deposits                                                 |   |         | (43,882    | )    |   |            | 15,964     |   |   |         | 69,111     |  
|                      |                                                                                              |                                                                     |   |         |            |      |   |            |            |   |   |        
|                      |                                                                                              | Net cash provided by operating activities                           |   |         | 1,618,911  |      |   |            | 1,589,317  |   |   |         | 2,528,494  |  
|                      |                                                                                              |                                                                     |   |         |            |      |   |            |            |   |   |        
|INVESTING ACTIVITIES: |                                                                                              |                                                                     |   |         |            |      |   |            |            |   |   |        
|                      |                                                                                              | Purchases of short-term investments                                 |   |         | (5,044,297 | )    |   |            | (5,569,369 | ) |   |         | (9,750,773 | )
|                      |                                                                                              | Proceeds from the sale and maturities of
    short-term investments |   |         | 6,944,297  |      |   |            | 5,569,369  |   |   |         | 9,750,773  |  
|                      |                                                                                              | Acquisitions of fixed assets                                        |   |         | (2,281,685 | )    |   |            | (1,079,250 | ) |   |         | (808,485   | )
|                      |                                                                                              | Proceeds from sale of fixed assets                                  |   |         | 15,918     |      |   |            | 15,147     |   |   |         | 157,707    |  
|                      |                                                                                              | Long-term investments                                               |   |         |           |      |   |            | (491,742   | ) |   |         |           |  
|                      |                                                                                              | Proceeds from long-term receivable                                  |   |         |           |      |   |            |           |   |   |         | 185,820    |  
|                      |                                                                                              |                                                                     |   |         |            |      |   |            |            |   |   |        
|                      |                                                                                              | Net cash used in investing activities                               |   |         | (365,767   | )    |   |            | (1,555,845 | ) |   |         | (464,958   | )
|                      |                                                                                              |                                                                     |   |         |            |      |   |            |            |   |   |        
|FINANCING ACTIVITIES: |                                                                                              |                                                                     |   |         |            |      |   |            |            |   |   |        
|                      |                                                                                              | Proceeds from sale of common stock and option
    exercises         |   |         | 387,648    |      |   |            | 121,589    |   |   |         | 125,197    |  
|                      |                                                                                              | Notes receivable                                                    |   |         | 17,767     |      |   |            | (106,965   | ) |   |         |           |  
|                      |                                                                                              | Repayment on note payable                                           |   |         | (20,000    | )    |   |            |           |   |   |         |           |  
|                      |                                                                                              | Cash dividends paid                                                 |   |         | (1,468,440 | )    |   |            | (1,391,381 | ) |   |         | (1,274,568 | )
|                      |                                                                                              | Shares repurchased and retired                                      |   |         |           |      |   |            | (25,406    | ) |   |         | (773,560   | )
|                      |                                                                                              |                                                                     |   |         |            |      |   |            |            |   |   |        
|                      |                                                                                              | Net cash used in financing activities                               |   |         | (1,083,025 | )    |   |            | (1,402,163 | ) |   |         | (1,922,931 | )
|                      |                                                                                              |                                                                     |   |         |            |      |   |            |            |   |   |        
|                      |                                                                                              | Increase (decrease) in cash and cash equivalents                    |   |         | (170,119   | )    |   |            | (1,368,691 | ) |   |         | 140,605    |  
|                      |                                                                                              | Cash and cash equivalents at beginning of year                      |   |         | 425,454    |      |   |            | 1,794,145  |   |   |         | 1,653,540  |  
|                      |                                                                                              |                                                                     |   |         |            |      |   |            |            |   |   |        
|                      |                                                                                              | Cash and cash equivalents at end of year                            |   | $       | 595,573    |      |   | $          | 425,454    |   |   | $       | 1,794,145  |  
|                      |                                                                                              |                                                                     |   |         |            |      |   |            |            |   |   |        
|                      |                                                                                              | Non-cash transactions:                                              |   |         |            |      |   |            |            |   |   |         |            |  
|                      |                                                                                              | Note payable for acquisition of assets                              |   | $       |           |      |   | $          | 63,397     |   |   | $       |           |  
|                      |                                                                                              | Note receivable for exercise of stock options                       |   |         |           |      |   |            | 786,818    |   |   |         |           |  

See accompanying notes to financial statements.

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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, and Walnut Creek, California. The
Company sells its products through a network of selected
independent distributors primarily in Washington, Oregon and
California under the Pyramid and Thomas Kemper brands. The
Company also manufactures a line of gourmet sodas under the
Thomas Kemper Soda Company label.

In March 1995, the Company opened the Seattle,
Washington Brewery near downtown Seattle. This brewery and
340-seat alehouse has an estimated annual production capacity of
50,000 barrels as of December 31, 2002.

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

In February 1997, the Company opened the Berkeley
Brewery in Berkeley, California. This brewery and 350-seat
alehouse has an estimated annual beer production capacity of
150,000 barrels as of December 31, 2002.

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 April 2002, the Company announced that it had
finalized plans to open a Pyramid Alehouse in Sacramento,
California. The Sacramento Alehouse will have seating for 295
and an estimated brewing capacity of 1,500 barrels.

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



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

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



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

The Companys investments are primarily
comprised of Taxable Auction Variable Rate Notes with
28 day reset periods. Investments are custodied with major
financial institutions. The specific identification method is
used to determine the cost basis of notes disposed of. At
December 31, 2002 and December 31, 2001, substantially
all of the Companys short-term investments were classified
as available for sale. These investments are recorded on the
balance sheet at fair value. During the year ended
December 31, 2002, the Company realized cash proceeds, net
of purchases, on the sales and maturities of short-term
investments in the amount of $1,900,000. There were no
unrealized or realized gains or losses during the years ended
December 31, 2002, 2001 and 2000.

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

The Companys accounts receivable balance
includes balances from trade sales and other miscellaneous
receivables. At December 31, 2002, the $98,286 of tax
refund was included in the accounts receivable balance.



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

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



| |                      
| | ---------------------
| | Long Term Investments

The Company invests in some long term
certificates of deposit that are stated at cost, which
approximates fair value. These investments have maturities
through 2004 with an average rate of 4%.



| |             
| | ------------
| | 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 the estimated useful life
of five to ten years, and are included in fixed assets.
Refundable deposits represent the Companys liability for
deposits charged to customers for returnable containers.

|                             |  |                                                   
|---------------------------- |  | --------------------------------------------------
|Estimated Useful Lives       |  |                                                   
|Brewery and retail equipment |  | 5 to 25 years                                     
|Furniture and fixtures       |  | 3 to 5 years                                      
|Leasehold improvements       |  | Shorter of lease term or life of 3 to
    15 years



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

The Company accounts for preopening costs related
to new restaurants in accordance with Statement of
Position 98-5, Recording the Cost of Start-Up
Activities and accordingly, there were no unamortized
preopening costs at December 31, 2002 and 2001. All
preopening costs are expensed as incurred.



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

Website design costs related to the development
and programming and customizing applications of the
Companys website, www.PyramidBrew.com, are capitalized in
other assets and amortized over a two-year period. Net
unamortized website design costs totaled approximately $52,000
and $83,000 at December 31, 2002 and 2001, respectively.
Amortization of website design costs totaled approximately
$49,000, $40,000 and $0, respectively, for the years ended
December 31, 2002, 2001 and 2000. Website design costs
relating to development, programming and customizing
applications are capitalized and amortized in accordance with
Emerging Issues Task Force (EITF) 00-2, Accounting
for Website Development Costs. Costs of operating and
maintaining the website are expensed as incurred.



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

The excess of cost over fair value of the net
assets of businesses acquired was capitalized as goodwill and
amortized on a straight-line basis over 10 years, prior to
the 2002 fiscal year. Amortization of goodwill totaled
approximately $80,000 for the years ended December 31, 2001
and 2000. Accumulated amortization at

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December 31, 2002 and 2001 was approximately
$388,000 and relates entirely to the Companys previous
acquisition of Thomas Kemper Soda. The goodwill is included in
the Beverage Operations Segment.


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

The annual amortization of existing goodwill of
approximately $80,000 ceased on December 31, 2001. The
following table presents the impact of SFAS No. 142 on net
income (loss) and the net income (loss) per share had the
accounting standard been in effect for the 2001 and 2000 fiscal
years.

|                                                |                          |                          |         |      |  |      |            |        |  |   |         |        | 
|----------------------------------------------- | ------------------------ | ------------------------ | ------- | ---- |  | ---- | ---------- | ------ |  | - | ------- | ------ | 
|                                                |                          |                         
|                                                |                          | Years Ended December 31,
|                                                |                          |                         
|                                                |                          | 2002                     |         | 2001 |  | 2000
|                                                |                          |                          |         |      |  |     
|Net income (loss) as reported                   |                          | $                        | 251,880 |      |  | $    | (1,615,073 | )      |  | $ | (14,910 | )     
|Adjustments:                                    |                          |                          |         |      |  |      |            |        |  |   |         |       
|                                                | Amortization of goodwill |                          |         |     |  |      |            | 80,256 |  |   |         | 80,256 | 
|                                                |                          |                          |         |      |  |      |            |        |  |   |         |       
|Net income (loss) adjusted                      |                          | $                        | 251,880 |      |  | $    | (1,534,817 | )      |  | $ | 65,346  |       
|                                                |                          |                          |         |      |  |      |            |        |  |   |         |       
|Basic net income (loss) per share as reported   |                          | $                        | 0.03    |      |  | $    | (0.20      | )      |  | $ | (0.00   | )     
|Basic net income (loss) per share adjusted      |                          | $                        | 0.03    |      |  | $    | (0.19      | )      |  | $ | 0.01    |       
|Diluted net income (loss) per share as reported |                          | $                        | 0.03    |      |  | $    | (0.20      | )      |  | $ | (0.00   | )     
|Diluted net income (loss) per share adjusted    |                          | $                        | 0.03    |      |  | $    | (0.19      | )      |  | $ | 0.01    |       



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

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



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

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



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

Advertising costs are expensed as incurred. Total
advertising expense was approximately $252,000, $560,000 and
$604,000 in 2002, 2001 and 2000, respectively.

The Company engages in cooperative advertising
programs and buy-down programs with resellers. The expenditures
associated with buy down programs are included as an offset in
gross sales. The costs of cooperative advertising programs are
included in the selling, general and administrative expenses
category. The costs of cooperative advertising amounts for the
years ended December 31, 2002, 2001 and 2000 totaled
approximately $76,000, $91,000 and $88,000, respectively. The
EITF issued EITF No. 01-9 Accounting for
Consideration Given by a Vendor to a Customer (Including a
Reseller of the Vendors Products). EITF 01-9
addresses the timing, recognition and classification in the
income statement of certain promotional costs paid to a retailer
or wholesaler by a vendor in connection with the sale of the
vendors products or promotion of sales of the
vendors products by the retailer or wholesaler. The
Company adopted EITF 01-9 in the first

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##### Table of Contents



quarter of the fiscal year 2002. The advertising
costs meet the requirements of EITF 01-9 to be included in
expenses rather than as an offset to revenues and therefore, the
adoption of EITF 01-9 does not have an effect on the
results of operations of the Company.




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

Other income, net consists of interest income,
parking fee income and other insignificant non-operating income
and expenses.

|                              |  |                          |         |      |  |      |         |   |  |   |         |  
|----------------------------- |  | ------------------------ | ------- | ---- |  | ---- | ------- | - |  | - | ------- | -
|                              |  |                         
|                              |  | Years Ended December 31,
|                              |  |                         
|                              |  | 2002                     |         | 2001 |  | 2000
|                              |  |                          |         |      |  |     
|Interest income               |  | $                        | 102,305 |      |  | $    | 270,691 |   |  | $ | 417,858 |  
|Interest expense              |  |                          | (7,169  | )    |  |      |        |   |  |   |        |  
|Parking income                |  |                          | 233,609 |      |  |      | 257,161 |   |  |   | 219,226 |  
|Gain/(loss) on sale of assets |  |                          | 3,889   |      |  |      | (9,876  | ) |  |   | (85,150 | )
|Other income                  |  |                          | 47,613  |      |  |      | 24,143  |   |  |   | 33,748  |  
|                              |  |                          |         |      |  |      |         |   |  |   |         |  
|Other income, net             |  | $                        | 380,247 |      |  | $    | 542,119 |   |  | $ | 585,682 |  
|                              |  |                          |         |      |  |      |         |   |  |   |         |  



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

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

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



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

Basic earnings per share is computed by dividing
net income (loss) available to common shareholders by the
weighted average number of shares outstanding less shares
subject to repurchase during the year. Options outstanding as of
December 31, 2002 and not included in the diluted earnings
per share calculation because the exercise price of the options
were greater than the average market price of the common shares
were approximately 261,000 options. Options outstanding as of
December 31, 2001 and 2000 totaled approximately 810,000
and 1,211,000, respectively, were not included in the diluted
earnings per share calculation because their effects are
anti-dilutive. Diluted earnings per share is calculated by
adjusting outstanding shares,

35



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assuming conversion of all potentially dilutive
stock options. The following represents a reconciliation from
basic earnings per share to diluted earnings per share:


|          |                                             |                            |   |           |      |      |   |            |       |   |   |           |       |  
|--------- | ------------------------------------------- | -------------------------- | - | --------- | ---- | ---- | - | ---------- | ----- | - | - | --------- | ----- | -
|          |                                             |                           
|          |                                             | Years Ended December 31,  
|          |                                             |                           
|          |                                             | 2002                       |   | 2001      |      | 2000
|          |                                             |                            |   |           |      |     
|Earnings: |                                             |                            |   |           |      |      |   |            |       |   |   |          
|          | Net income (loss)                           |                            | $ | 251,880   |      |      | $ | (1,615,073 | )     |   | $ | (14,910   | )    
|Shares:   |                                             |                            |   |           |      |      |   |            |       |   |   |          
|          | Weighted average shares outstanding         |                            |   | 8,362,543 |      |      |   | 8,117,437  |       |   |   | 7,939,980 |      
|          | Shares subject to repurchase                |                            |   | (159,558  | )    |      |   | (130,842   | )     |   |   |          |      
|          | Weighted average basic shares outstanding   |                            |   | 8,202,985 |      |      |   | 7,986,595  |       |   |   | 7,939,980 |      
|          |                                             |                            |   |           |      |      |   |            |       |   |   |          
|          |                                             | Basic earnings per share   |   | $         | 0.03 |      |   | $          | (0.20 | ) |   | $         | (0.00 | )
|          |                                             |                            |   |           |      |      |   |            |       |   |   |          
|          | Stock option dilution                       |                            |   | 39,805    |      |      |   |           |       |   |   |          |      
|          |                                             |                            |   |           |      |      |   |            |       |   |   |          
|          | Weighted average diluted shares outstanding |                            |   | 8,242,790 |      |      |   | 7,986,595  |       |   |   | 7,939,980 |      
|          |                                             |                            |   |           |      |      |   |            |       |   |   |          
|          |                                             | Diluted earnings per share |   | $         | 0.03 |      |   | $          | (0.20 | ) |   | $         | (0.00 | )
|          |                                             |                            |   |           |      |      |   |            |       |   |   |          



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

At December 31, 2002, the Company has
stock-based compensation plans which are described more fully in
Note 15. The Company accounts for those plans under the
recognition and measurement principles of Accounting Principles
Board (APB) Opinion No. 25, Accounting for Stock
Issued to Employees, and related interpretations. The
Company has adopted the disclosure-only provisions of SFAS
No. 123 Accounting for Stock-Based
Compensation. Accordingly, no compensation cost has been
recognized for the fair value of options issued under the
Employee and Director Plans (the Plans) except as described in
Note 5. Had compensation cost been recognized based on the fair
value at the date of grant for options awarded under the Plans,
the pro forma amounts of the Companys net loss and net
loss per share for the years ended December 31, 2002, 2001
and 2000, would have been as follows:

|                                                                                     |  |                          |          |      |  |      |            |   |  |   |          |  
|------------------------------------------------------------------------------------ |  | ------------------------ | -------- | ---- |  | ---- | ---------- | - |  | - | -------- | -
|                                                                                     |  |                         
|                                                                                     |  | Years Ended December 31,
|                                                                                     |  |                         
|                                                                                     |  | 2002                     |          | 2001 |  | 2000
|                                                                                     |  |                          |          |      |  |     
|Net income (loss) as reported                                                        |  | $                        | 251,880  |      |  | $    | (1,615,073 | ) |  | $ | (14,910  | )
|Add: Stock-based compensation cost as reported                                       |  |                          | 144,499  |      |  |      | 247,109    |   |  |   |         |  
|Less: Stock-based compensation cost determined
    under the fair value based method |  |                          | (303,173 | )    |  |      | (570,496   | ) |  |   | (451,186 | )
|                                                                                     |  |                          |          |      |  |      |            |   |  |   |          |  
|Net income (loss) pro forma                                                          |  | $                        | 93,206   |      |  | $    | (1,938,460 | ) |  | $ | (466,096 | )
|Basic and diluted net income (loss) per
    share as reported                        |  | $                        | 0.03     |      |  | $    | (0.20      | ) |  | $ | (0.00    | )
|Basic and diluted net income (loss) per share pro
    forma                          |  | $                        | 0.01     |      |  | $    | (0.24      | ) |  | $ | (0.06    | )

The fair value of options granted was estimated
using the Black-Scholes option-pricing model with the following
weighted average assumptions: risk-free interest rate of 4.76%;
expected option lives of seven years; expected volatility of
51%; and expected future dividends. The weighted-average fair
value of options granted during the years 2002, 2001 and 2000
was $0.63, $1.46 and $1.27, respectively. The effect of applying
SFAS No. 123 for providing pro-forma disclosures is not
indicative of future results.



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

The Company has not and does not currently have
any intention to hold any derivative instruments or engage in
hedging activities. Also, the Company does not have any
outstanding variable rate debt and does not enter into
significant transactions denominated in foreign currency.
Therefore, the Companys direct exposure

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to risks arising from changes in interest rates,
foreign currency exchange rates, commodity prices, equity
prices, and other market changes that affect market risk
sensitive instruments is not material.


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



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

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



| |                  
| | -----------------
| | Reclassifications

Certain 2001 and 2000 balances have been
reclassified to conform to the 2002 presentation.



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

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

In June 2002, the FASB issued SFAS No. 146,
Accounting for Costs Associated with Exit or Disposal
Activities. SFAS No. 146 requires recording costs
associated with exit or disposal activities at their fair values
when a liability has been incurred. Under previous guidance,
certain exit costs were accrued upon managements
commitment to an exit plan, which is generally before an actual
liability has been incurred. Adoption of the statement is
required at the beginning of the 2003 fiscal year. The statement
will impact the timing of exit or disposal activities reported
by the Company after adoption.

In December 2002, the FASB issued SFAS
No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure. SFAS
No. 148 amends SFAS No. 123, Accounting for
Stock-Based Compensation, to provide alternative methods
of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. In
addition, the Statement amends the disclosure requirements of
SFAS No. 123 to require prominent disclosure in both the
annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect
of the method used on reported results. The Statement is
effective for the 2002 fiscal year. The Company has adopted the
disclosure requirements of the Statement.

In November 2002, the FASB issued FASB
Interpretation No. (FIN) 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others. FIN 45
requires recording of a liability for the fair value of the
guarantee at the inception of guarantees issued after
December 31, 2002. FIN 45 also requires that certain
disclosures about a guarantors obligations under
guarantees to be made. Adoption of the disclosure provision of
the interpretation is effective for the 2002 fiscal year and has
not resulted in additional disclosures by the Company. The
impact on the Companys financial position and results of
operations upon adoption of FIN 45 will depend on the
nature and extent of future issued guarantees. The Company does
not anticipate a material impact.

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2.     Accounting for
Impairment of Long-Lived Assets

Effective January 1, 2002, the Company
adopted SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets, which supersedes SFAS
No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of and the
accounting and reporting provisions of APB Opinion No. 30
Reporting the Results of Operations  Reporting
the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and
Transactions for the disposal of a segment of a business.
SFAS No. 144 requires that long-lived assets to be held and
used 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. 144, 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. SFAS
No. 144 also requires that long-lived assets to be disposed
of by sale be measured at the lower of carrying amounts or fair
value less cost to sell, whether reported in continuing
operations or in discontinued operations. SFAS No. 144 also
expands the reporting of discontinued operations to include
portions of an entity that have been or will be disposed of
rather than limiting such discontinuance to a segment of a
business. There was no impact on the Companys financial
position, results of operations or cash flows upon adoption of
SFAS No. 144.

3.     Inventories

Inventories consist of the following:

|                |  |              |           |      |  |   |           | 
|--------------- |  | ------------ | --------- | ---- |  | - | --------- | 
|                |  |             
|                |  | December 31,
|                |  |             
|                |  | 2002         |           | 2001
|                |  |              |           |     
|Raw materials   |  | $            | 820,908   |      |  | $ | 522,226   | 
|Work in process |  |              | 162,024   |      |  |   | 138,231   | 
|Finished goods  |  |              | 606,792   |      |  |   | 517,691   | 
|                |  |              |           |      |  |   |           | 
|                |  | $            | 1,589,724 |      |  | $ | 1,178,148 | 
|                |  |              |           |      |  |   |           | 

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.

4.     Fixed
Assets

Fixed assets consist of the following:

|                              |  |              |             |      |  |   |            |  
|----------------------------- |  | ------------ | ----------- | ---- |  | - | ---------- | -
|                              |  |             
|                              |  | December 31,
|                              |  |             
|                              |  | 2002         |             | 2001
|                              |  |              |             |     
|Brewery and retail equipment  |  | $            | 15,120,798  |      |  | $ | 14,465,637 |  
|Furniture and fixtures        |  |              | 915,985     |      |  |   | 918,879    |  
|Leasehold improvements        |  |              | 15,524,833  |      |  |   | 14,108,247 |  
|Construction in progress      |  |              | 608,608     |      |  |   | 584,855    |  
|                              |  |              |             |      |  |   |            |  
|                              |  |              | 32,170,224  |      |  |   | 30,077,618 |  
|Less accumulated depreciation |  |              | (11,488,716 | )    |  |   | (9,555,058 | )
|                              |  |              |             |      |  |   |            |  
|                              |  | $            | 20,681,508  |      |  | $ | 20,522,560 |  
|                              |  |              |             |      |  |   |            |  

Total depreciation expense was approximately
$2,111,000, $2,021,000 and $2,179,000 for the years ended
December 31, 2002, 2001 and 2000, respectively.

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5.     Note
Receivable  Related Party

In June 2001, the Company issued a $787,000 full
recourse note to the Companys Chief Executive
Officer (CEO) in exchange for the exercise of options for
387,400 shares of the Companys common stock. In
addition, the Company issued a $115,000 full recourse note to
the CEO to fund his payment of taxes on the exercise of the
options. The notes are due on the earlier of June 30, 2011
or upon the sale of the stock and bear an annual interest rate
of 5.6%. A total of 135,100 of those shares were unrestricted,
except for being pledged as collateral for the loans, and the
remaining 252,300 shares would become unrestricted over the
next two years. As of December 31, 2002,
100,000 shares remained restricted. Compensation expense on
the shares are accounted for under the variable accounting
method until the shares become unrestricted. During the years
ended December 31, 2002 and 2001, the Company recorded
approximately $139,000 and $241,000, respectively, in
compensation expense in connection with this equity arrangement,
which is included in selling, general and administrative
expenses.

6.     Walnut
Creek

In October 2001, the Company purchased assets of
an alehouse in Walnut Creek, California for $268,000. In
addition, the Company assumed the sublease of the location. The
purchase was made by a $205,000 cash payment and the balance was
financed through an $80,000 non-interest bearing note due in
four annual equal payments beginning October 2002. The note
payable was recorded using a 10% discount rate. As of
December 31, 2002, a net balance of approximately $51,000
remained payable on the note.

7.     Accrued
Expenses

Accrued expenses consist of the following:

|                                     |  |              |           |      |  |   |           | 
|------------------------------------ |  | ------------ | --------- | ---- |  | - | --------- | 
|                                     |  |             
|                                     |  | December 31,
|                                     |  |             
|                                     |  | 2002         |           | 2001
|                                     |  |              |           |     
|Salaries, wages and related accruals |  | $            | 962,974   |      |  | $ | 537,570   | 
|Barrel taxes                         |  |              | 117,868   |      |  |   | 94,447    | 
|Other accruals                       |  |              | 666,200   |      |  |   | 854,938   | 
|                                     |  |              |           |      |  |   |           | 
|                                     |  | $            | 1,747,042 |      |  | $ | 1,486,955 | 
|                                     |  |              |           |      |  |   |           | 

8.     Income
Taxes

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

|         |  |              |        |      |  |      |          |   |  |   |   | 
|-------- |  | ------------ | ------ | ---- |  | ---- | -------- | - |  | - | - | 
|         |  |             
|         |  | December 31,
|         |  |             
|         |  | 2002         |        | 2001 |  | 2000
|         |  |              |        |      |  |     
|Current  |  | $            | 98,286 |      |  | $    |         |   |  | $ |  | 
|Deferred |  |              |       |      |  |      | (574,621 | ) |  |   |  | 
|         |  |              |        |      |  |      |          |   |  |   |   | 
|         |  | $            | 98,286 |      |  | $    | (574,621 | ) |  | $ |  | 
|         |  |              |        |      |  |      |          |   |  |   |   | 

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

|                                               |  |              |       |      |  |      |       |    |  |  |        |  
|---------------------------------------------- |  | ------------ | ----- | ---- |  | ---- | ----- | -- |  |  | ------ | -
|                                               |  |             
|                                               |  | December 31,
|                                               |  |             
|                                               |  | 2002         |       | 2001 |  | 2000
|                                               |  |              |       |      |  |     
|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                        |  |              | (41.1 | )    |  |      | (6.0  | )  |  |  | (350.7 | )
|Other, net                                     |  |              |      |      |  |      |      |    |  |  |       |  
|Valuation allowance                            |  |              | 141.2 |      |  |      | (85.3 | )  |  |  | 314.6  |  
|                                               |  |              |       |      |  |      |       |    |  |  |        |  
|                                               |  |              | 64.0  | %    |  |      | (55.2 | )% |  |  | 0.0    | %
|                                               |  |              |       |      |  |      |       |    |  |  |        |  

Deferred income tax assets and liabilities are
included in the balance sheet at December 31, 2002 and
2001, as follows:

|                                 |  |              |            |      |  |   |            |  
|-------------------------------- |  | ------------ | ---------- | ---- |  | - | ---------- | -
|                                 |  |             
|                                 |  | December 31,
|                                 |  |             
|                                 |  | 2002         |            | 2001
|                                 |  |              |            |     
|Accelerated depreciation         |  | $            | (1,670,998 | )    |  | $ | (1,666,581 | )
|Package design costs             |  |              | 161,254    |      |  |   | 178,029    |  
|Accrued vacation                 |  |              | 61,021     |      |  |   | 73,227     |  
|Deferred rent                    |  |              | 407,900    |      |  |   | 452,582    |  
|Net operating loss carryforwards |  |              | 2,451,832  |      |  |   | 2,481,946  |  
|Tax credit carryforwards         |  |              |           |      |  |   | 98,286     |  
|Other, net                       |  |              | 203,398    |      |  |   | 217,743    |  
|Valuation allowance              |  |              | (1,614,407 | )    |  |   | (1,835,232 | )
|                                 |  |              |            |      |  |   |            |  
|                                 |  | $            |           |      |  | $ |           |  
|                                 |  |              |            |      |  |   |            |  

At December 31, 2002, the Company had
operating loss carryforwards for federal income tax purposes of
approximately $6,786,000, which are available to offset future
federal taxable income through 2021 and begins to expire in
2017. During 2002, the Company was able to recognize a $98,286
tax refund resulting from the Job Creation and Worker Assistance
Act of 2002. This Act provided for an increase to the limit on
net operating loss deductions for alternative minimum
tax (AMT) purposes from 90% of AMT income to 100% for net
operating losses generated in tax years ending in 2001. During
2002, the valuation allowance against deferred tax assets
decreased by approximately $221,000, which included a decrease
of $98,286 for the AMT refund and a decrease in net deferred tax
assets before valuation allowance. The Company does not believe
that its net deferred tax assets meet the more likely than
not realization criteria of SFAS No. 109.
Accordingly, a full valuation allowance has been established.

9.     Operating
Leases

The Company leases its office, warehouse and
plant facilities under operating leases in Seattle, Washington
and Berkeley, Walnut Creek and Sacramento, California.

|                         |  |            |      |                   |  |                                                                           
|------------------------ |  | ---------- | ---- | ----------------- |  | --------------------------------------------------------------------------
|                         |  | Expiration |      |                  
|Location                 |  | Year       |      | Extension Options
|                         |  |            |      |                  
|Berkeley, California     |  |            | 2010 |                   |  | Two additional five year periods                                          
|Sacramento, California   |  |            | 2015 |                   |  | Two additional five year periods                                          
|Seattle, Washington      |  |            | 2004 |                   |  | Three additional five year periods                                        
|Walnut Creek, California |  |            | 2012 |                   |  | Three additional five year periods and one
    additional four year period

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These lease agreements contain provisions for
free rent periods and scheduled rent increases. Accordingly, the
Company has recorded deferred rent of approximately $1,129,000
and $1,253,000 at December 31, 2002 and 2001, 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 storage and distribution facilities under
month-to-month lease agreements.

At December 31, 2002, future minimum rental
payments are as follows:

|           |  |   |            | 
|---------- |  | - | ---------- | 
|2003       |  | $ | 1,319,000  | 
|2004       |  |   | 1,233,000  | 
|2005       |  |   | 1,023,000  | 
|2006       |  |   | 1,098,000  | 
|2007       |  |   | 1,100,000  | 
|Thereafter |  |   | 4,300,000  | 
|           |  |   |            | 
|           |  | $ | 10,073,000 | 
|           |  |   |            | 

Total rent expense was approximately $908,000,
$732,000 and $731,000 in 2002, 2001 and 2000, respectively.

10.     Commitments
and Contingencies

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

11.     Cash
Dividend

The Board of Directors announced on
November 21, 2002, the declaration of a $0.044 per common
share dividend payable on January 10, 2003 to shareholders
of record on December 31, 2002. The cash dividends declared
in November 2002 totaled approximately $374,000 for all common
stock outstanding as of the dates of record. During the years
ended December 31, 2002 and 2001, the Company paid
approximately $1,468,000 and $1,391,000, or $0.176 and $0.172
per common share, of cash dividends, respectively.

Cash dividends declared per common share:

|     |  |   |       | 
|---- |  | - | ----- | 
|2002 |  | $ | 0.176 | 
|2001 |  | $ | 0.176 | 
|2000 |  | $ | 0.160 | 

12.     Stock Buyback
Plan

On December 15, 1999, the Board of Directors
authorized a stock buyback plan to repurchase up to $2,000,000
of the Companys outstanding common stock on the open
market. For the years ended December 31, 2002, 2001 and
2000, the Company repurchased 0, 11,726 and 396,198 shares
of common stock at costs of approximately $0, $25,000 and
$774,000, respectively.

13.     Major
Customers and Financial Instruments

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

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During the years ended December 31, 2002,
2001 and 2000, one customer comprised approximately 21%, 24% and
29% of the Companys revenue, respectively. Accounts
receivable at December 31, 2002 and 2001 include
approximately $498,000 and $323,000, respectively, due from this
customer.

As of December 31, 2002 and 2001, the
carrying amounts for cash and cash equivalents, short term
investments, notes receivable and notes payable approximate
their fair values.

14.     Segment
Information

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



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

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



| |                                                 
| | ------------------------------------------------
| | Factors Used to Identify Reportable
    Segments

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



| |                                                     
| | ----------------------------------------------------
| | Measurement of Segment Profit and Segment
    Assets

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

Segment profit and segment assets are as follows:

|                             |                                        |                        |   |          |  |       |   |        |  |  |   |        |   |  |   |        |  
|---------------------------- | -------------------------------------- | ---------------------- | - | -------- |  | ----- | - | ------ |  |  | - | ------ | - |  | - | ------ | -
|                             |                                        | Beverage               |   |          |  |       |   |       
|                             |                                        | Operations             |   | Alehouse |  | Other |   | Total 
|                             |                                        |                        |   |          |  |       |   |       
|                             |                                        |                       
|                             |                                        | (Dollars in thousands)
|Year ended December 31, 2002 |                                        |                        |   |          |  |       |   |        |  |  |   |        |   |  |   |       
|                             | Gross revenues from external customers |                        | $ | 25,196   |  |       | $ | 10,327 |  |  | $ |       |   |  | $ | 35,523 |  
|                             | Net revenues from external customers   |                        |   | 23,485   |  |       |   | 10,327 |  |  |   |       |   |  |   | 33,812 |  
|                             | Intersegment revenues                  |                        |   | 359      |  |       |   |       |  |  |   | (359   | ) |  |   |       |  
|                             | Interest income                        |                        |   |         |  |       |   |       |  |  |   | 102    |   |  |   | 102    |  
|                             | Depreciation and amortization          |                        |   | 1,601    |  |       |   | 439    |  |  |   | 162    |   |  |   | 2,202  |  
|                             | Operating income (loss)                |                        |   | 1,671    |  |       |   | 975    |  |  |   | (2,873 | ) |  |   | (227   | )
|                             | Capital expenditures                   |                        |   | 421      |  |       |   | 1,605  |  |  |   | 256    |   |  |   | 2,282  |  
|                             | Total assets                           |                        |   | 18,952   |  |       |   | 4,871  |  |  |   | 5,472  |   |  |   | 29,295 |  

42



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|                             |                                        |                        |   |          |  |       |   |       |  |  |   |        |   |  |   |        |  
|---------------------------- | -------------------------------------- | ---------------------- | - | -------- |  | ----- | - | ----- |  |  | - | ------ | - |  | - | ------ | -
|                             |                                        | Beverage               |   |          |  |       |   |      
|                             |                                        | Operations             |   | Alehouse |  | Other |   | Total
|                             |                                        |                        |   |          |  |       |   |      
|                             |                                        |                       
|                             |                                        | (Dollars in thousands)
|Year ended December 31, 2001 |                                        |                        |   |          |  |       |   |       |  |  |   |        |   |  |   |       
|                             | Gross revenues from external customers |                        | $ | 23,539   |  |       | $ | 8,456 |  |  | $ |       |   |  | $ | 31,995 |  
|                             | Net revenues from external customers   |                        |   | 21,967   |  |       |   | 8,456 |  |  |   |       |   |  |   | 30,423 |  
|                             | Intersegment revenues                  |                        |   | 292      |  |       |   |      |  |  |   | (292   | ) |  |   |       |  
|                             | Interest income                        |                        |   |         |  |       |   |      |  |  |   | 271    |   |  |   | 271    |  
|                             | Depreciation and amortization          |                        |   | 1,582    |  |       |   | 414   |  |  |   | 145    |   |  |   | 2,141  |  
|                             | Operating income (loss)                |                        |   | 257      |  |       |   | 944   |  |  |   | (2,784 | ) |  |   | (1,583 | )
|                             | Capital expenditures                   |                        |   | 354      |  |       |   | 533   |  |  |   | 192    |   |  |   | 1,079  |  
|                             | Total assets                           |                        |   | 19,220   |  |       |   | 3,642 |  |  |   | 6,743  |   |  |   | 29,605 |  
|Year ended December 31, 2000 |                                        |                        |   |          |  |       |   |       |  |  |   |        |   |  |   |       
|                             | Gross revenues from external customers |                        | $ | 22,538   |  |       | $ | 7,737 |  |  | $ |       |   |  | $ | 30,275 |  
|                             | Net revenues from external customers   |                        |   | 20,833   |  |       |   | 7,737 |  |  |   |       |   |  |   | 28,570 |  
|                             | Intersegment revenues                  |                        |   | 259      |  |       |   |      |  |  |   | (259   | ) |  |   |       |  
|                             | Interest income                        |                        |   |         |  |       |   |      |  |  |   | 418    |   |  |   | 418    |  
|                             | Depreciation and amortization          |                        |   | 1,662    |  |       |   | 408   |  |  |   | 189    |   |  |   | 2,259  |  
|                             | Operating income (loss)                |                        |   | 1,195    |  |       |   | 671   |  |  |   | (2,467 | ) |  |   | (601   | )
|                             | Capital expenditures                   |                        |   | 373      |  |       |   | 273   |  |  |   | 162    |   |  |   | 808    |  
|                             | Total assets                           |                        |   | 20,751   |  |       |   | 3,439 |  |  |   | 8,080  |   |  |   | 32,270 |  

Other

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



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



| |                             
| | ----------------------------
| | 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. The total number
of shares issuable under the plan is 500,000. There were 29,356,
25,344 and 26,686 shares issued under the Purchase Plan
during 2002, 2001 and 2000 at a weighted-average price of
approximately $1.90, $1.78 and $1.44 per share, respectively.



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

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

The Companys Non-Employee Director Stock
Option Plan (the Director Plan) provides for the granting of
stock options covering 5,000 shares of common stock to be
made automatically on the date of each annual meeting of
stockholders to each non-employee director of the Company, so
long as shares of common stock remain available under the
Director Plan. A total of 250,000 shares have been reserved
under the Director Plan. As of December 31, 2002 and 2001,
152,500 and 127,500 options have been granted, respectively. Each

43



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##### Table of Contents



outstanding option granted under this plan has a
term of 10 years from the date of grant and vests
immediately.


Information with respect to the Plans follows:

|                                         |             |               |           |             |   |                |              |              |  |   |      |      | 
|---------------------------------------- | ----------- | ------------- | --------- | ----------- | - | -------------- | ------------ | ------------ |  | - | ---- | ---- | 
|                                         |             | Share Subject |           | Option      |   | Average       
|                                         |             | to Option     |           | Price Range |   | Exercise Price
|                                         |             |               |           |             |   |               
|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 |     
|                                         | Granted     |               |           | 260,000     |   |                | $            | 2.13 -  2.67 |  |   | $    | 2.33 | 
|                                         | Forfeitures |               |           | (246,034    | ) |                | $            | 1.82 - 10.75 |  |   | $    | 3.25 | 
|                                         | Exercised   |               |           | (415,700    | ) |                | $            | 1.56 -  2.67 |  |   | $    | 2.03 | 
|                                         |             |               |           |             |   |                |              |              |  |   |      |     
|Options outstanding at December 31, 2001 |             |               | 809,700   |             |   | $              | 1.56 - 12.25 |              |  | $ | 2.55 |     
|                                         | Granted     |               |           | 380,000     |   |                | $            | 2.19 -  2.48 |  |   | $    | 2.30 | 
|                                         | Forfeitures |               |           | (188,700    | ) |                | $            | 1.70 - 12.25 |  |   | $    | 2.29 | 
|                                         | Exercised   |               |           | (169,021    | ) |                | $            | 1.70 -  2.00 |  |   | $    | 1.87 | 
|                                         |             |               |           |             |   |                |              |              |  |   |      |     
|Options outstanding at December 31, 2002 |             |               | 831,979   |             |   | $              | 1.56 - 10.75 |              |  | $ | 2.63 |     

Shares available for future grants at
December 31, 2002 totaled 370,700.

44



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##### Table of Contents



Information about options outstanding at
December 31, 2002 follows:

|            |         |                  |  |             |            |                |  |  |         |  |  |   |       | 
|----------- | ------- | ---------------- |  | ----------- | ---------- | -------------- |  |  | ------- |  |  | - | ----- | 
|            |         | Weighted-        |  |             |            |               
|            |         | Average          |  |             |            | Weighted-     
|Options     |         | Remaining        |  | Options     |            | Average       
|Outstanding |         | Contractual Life |  | Exercisable |            | Exercise Price
|            |         |                  |  |             |            |               
|            | 32,500  |                  |  |             | 41 months  |                |  |  | 32,500  |  |  | $ | 10.75 | 
|            | 5,000   |                  |  |             | 48 months  |                |  |  | 5,000   |  |  | $ | 4.75  | 
|            | 6,000   |                  |  |             | 50 months  |                |  |  | 6,000   |  |  | $ | 4.13  | 
|            | 7,500   |                  |  |             | 58 months  |                |  |  | 7,500   |  |  | $ | 3.09  | 
|            | 90,000  |                  |  |             | 66 months  |                |  |  | 90,000  |  |  | $ | 2.56  | 
|            | 1,700   |                  |  |             | 69 months  |                |  |  | 1,700   |  |  | $ | 1.56  | 
|            | 50,000  |                  |  |             | 82 months  |                |  |  | 50,000  |  |  | $ | 2.00  | 
|            | 17,700  |                  |  |             | 84 months  |                |  |  | 17,400  |  |  | $ | 1.82  | 
|            | 10,000  |                  |  |             | 88 months  |                |  |  | 10,000  |  |  | $ | 1.75  | 
|            | 17,300  |                  |  |             | 89 months  |                |  |  | 14,600  |  |  | $ | 1.82  | 
|            | 3,267   |                  |  |             | 91 months  |                |  |  | 3,267   |  |  | $ | 1.70  | 
|            | 1,612   |                  |  |             | 91 months  |                |  |  | 1,612   |  |  | $ | 2.00  | 
|            | 19,400  |                  |  |             | 91 months  |                |  |  | 15,000  |  |  | $ | 1.82  | 
|            | 100,000 |                  |  |             | 95 months  |                |  |  | 69,200  |  |  | $ | 2.00  | 
|            | 15,000  |                  |  |             | 100 months |                |  |  | 15,000  |  |  | $ | 2.67  | 
|            | 75,000  |                  |  |             | 102 months |                |  |  | 35,700  |  |  | $ | 2.57  | 
|            | 5,000   |                  |  |             | 108 months |                |  |  | 1,500   |  |  | $ | 2.45  | 
|            | 10,000  |                  |  |             | 110 months |                |  |  |        |  |  | $ | 2.30  | 
|            | 15,000  |                  |  |             | 110 months |                |  |  |        |  |  | $ | 2.29  | 
|            | 25,000  |                  |  |             | 112 months |                |  |  | 25,000  |  |  | $ | 2.48  | 
|            | 225,000 |                  |  |             | 112 months |                |  |  |        |  |  | $ | 2.33  | 
|            | 100,000 |                  |  |             | 117 months |                |  |  |        |  |  | $ | 2.19  | 
|            |         |                  |  |             |            |                |  |  |         |  |  |   |       | 
|            | 831,979 |                  |  |             |            |                |  |  | 400,979 |  |  | $ | 3.00  | 
|            |         |                  |  |             |            |                |  |  |         |  |  |   |       | 

The Company had options exercisable of 492,900
with a weighted-average exercise price of $2.87 and options
exercisable of 604,900 with a weighted-average exercise price of
$3.17 as of December 31, 2001 and 2000, respectively.



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

The Company has a 401(k) plan for all eligible
employees and had 329 employees as of December 31,
2002. Employees who are at least age 21 become eligible to
participate following the first plan quarter in which they
perform at least 250 hours of service. Employees can elect
to contribute up to 50% of their eligible compensation to the
401(k) plan subject to Internal Revenue Services limitations.
The Company generally matches employee contributions (that do
not exceed 6% of the employees compensation) at the rate
of 50%. The Company may also make additional discretionary
contributions. The Companys matching contributions for the
years ended December 31, 2002, 2001 and 2000, totaled
approximately $77,000, $93,000 and $70,000, respectively.



|    |                             
|--- | ----------------------------
|16. | Subsequent Event (Unaudited)

The Board of Directors announced on
February 11, 2003, the declaration of a $0.044 per common
share dividend payable on April 11, 2003 to shareholders of
record on March 31, 2003.

45



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##### Table of Contents





|    |                                   
|--- | ----------------------------------
|17. | Interim Financial Data (Unaudited)

The following table presents the results of
operations for each of the four quarters in 2002 and 2001. 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.

|                                              |  |                                         |       |                     |  |         |       |          |  |             |        |              |  |         |       |          |  |   |        |   |  |   |       |   |  |   |       |  |  |   |       |  
|--------------------------------------------- |  | --------------------------------------- | ----- | ------------------- |  | ------- | ----- | -------- |  | ----------- | ------ | ------------ |  | ------- | ----- | -------- |  | - | ------ | - |  | - | ----- | - |  | - | ----- |  |  | - | ----- | -
|                                              |  |                                         |       |                    
|                                              |  | 2002 Quarters Ended                     |       | 2001 Quarters Ended
|                                              |  |                                         |       |                    
|                                              |  | December 31                             |       | September 30        |  | June 30 |       | March 31 |  | December 31 |        | September 30 |  | June 30 |       | March 31
|                                              |  |                                         |       |                     |  |         |       |          |  |             |        |              |  |         |       |         
|                                              |  |                                        
|                                              |  | (In thousands except per share amounts)
|Gross sales                                   |  | $                                       | 8,641 |                     |  | $       | 9,871 |          |  | $           | 10,177 |              |  | $       | 6,834 |          |  | $ | 7,622  |   |  | $ | 8,429 |   |  | $ | 9,366 |  |  | $ | 6,578 |  
|Less excise taxes                             |  |                                         | 434   |                     |  |         | 463   |          |  |             | 472    |              |  |         | 342   |          |  |   | 443    |   |  |   | 404   |   |  |   | 447   |  |  |   | 278   |  
|                                              |  |                                         |       |                     |  |         |       |          |  |             |        |              |  |         |       |          |  |   |        |   |  |   |       |   |  |   |       |  |  |   |       |  
|Net sales                                     |  |                                         | 8,207 |                     |  |         | 9,408 |          |  |             | 9,705  |              |  |         | 6,492 |          |  |   | 7,179  |   |  |   | 8,025 |   |  |   | 8,919 |  |  |   | 6,300 |  
|Cost of sales                                 |  |                                         | 6,255 |                     |  |         | 6,947 |          |  |             | 7,021  |              |  |         | 5,136 |          |  |   | 5,548  |   |  |   | 6,217 |   |  |   | 6,220 |  |  |   | 4,892 |  
|                                              |  |                                         |       |                     |  |         |       |          |  |             |        |              |  |         |       |          |  |   |        |   |  |   |       |   |  |   |       |  |  |   |       |  
|Gross margin                                  |  |                                         | 1,952 |                     |  |         | 2,461 |          |  |             | 2,684  |              |  |         | 1,356 |          |  |   | 1,631  |   |  |   | 1,808 |   |  |   | 2,699 |  |  |   | 1,408 |  
|Selling, general and administrative expenses  |  |                                         | 2,149 |                     |  |         | 2,135 |          |  |             | 2,220  |              |  |         | 2,175 |          |  |   | 2,338  |   |  |   | 1,999 |   |  |   | 2,516 |  |  |   | 2,275 |  
|                                              |  |                                         |       |                     |  |         |       |          |  |             |        |              |  |         |       |          |  |   |        |   |  |   |       |   |  |   |       |  |  |   |       |  
|Operating (loss) income                       |  |                                         | (197  | )                   |  |         | 326   |          |  |             | 464    |              |  |         | (819  | )        |  |   | (707   | ) |  |   | (191  | ) |  |   | 183   |  |  |   | (867  | )
|Other income, net                             |  |                                         | 61    |                     |  |         | 137   |          |  |             | 130    |              |  |         | 52    |          |  |   | 79     |   |  |   | 200   |   |  |   | 162   |  |  |   | 101   |  
|                                              |  |                                         |       |                     |  |         |       |          |  |             |        |              |  |         |       |          |  |   |        |   |  |   |       |   |  |   |       |  |  |   |       |  
|(Loss) income before income taxes             |  |                                         | (136  | )                   |  |         | 463   |          |  |             | 594    |              |  |         | (767  | )        |  |   | (628   | ) |  |   | 9     |   |  |   | 345   |  |  |   | (766  | )
|Benefit (provision) for income taxes          |  |                                         | 98    |                     |  |         |      |          |  |             |       |              |  |         |      |          |  |   | (575   | ) |  |   |      |   |  |   |      |  |  |   |      |  
|                                              |  |                                         |       |                     |  |         |       |          |  |             |        |              |  |         |       |          |  |   |        |   |  |   |       |   |  |   |       |  |  |   |       |  
|Net (loss) income                             |  | $                                       | (38   | )                   |  | $       | 463   |          |  | $           | 594    |              |  | $       | (767  | )        |  | $ | (1,203 | ) |  | $ | 9     |   |  | $ | 345   |  |  | $ | (766  | )
|Basic and diluted net (loss) income per share |  | $                                       | (0.00 | )                   |  | $       | 0.06  |          |  | $           | 0.07   |              |  | $       | (0.09 | )        |  | $ | (0.15  | ) |  | $ | 0.00  |   |  | $ | 0.04  |  |  | $ | (0.10 | )
|                                              |  |                                         |       |                     |  |         |       |          |  |             |        |              |  |         |       |          |  |   |        |   |  |   |       |   |  |   |       |  |  |   |       |  
|Weighted average basic shares outstanding     |  |                                         | 8,292 |                     |  |         | 8,235 |          |  |             | 8,173  |              |  |         | 8,112 |          |  |   | 8,089  |   |  |   | 8,069 |   |  |   | 7,920 |  |  |   | 7,868 |  
|                                              |  |                                         |       |                     |  |         |       |          |  |             |        |              |  |         |       |          |  |   |        |   |  |   |       |   |  |   |       |  |  |   |       |  
|Weighted average diluted shares outstanding   |  |                                         | 8,292 |                     |  |         | 8,294 |          |  |             | 8,242  |              |  |         | 8,112 |          |  |   | 8,089  |   |  |   | 8,195 |   |  |   | 8,077 |  |  |   | 7,868 |  
|                                              |  |                                         |       |                     |  |         |       |          |  |             |        |              |  |         |       |          |  |   |        |   |  |   |       |   |  |   |       |  |  |   |       |  

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EXHIBIT INDEX

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

|        |    |             |  |                                                                                                                                                                                                                                                                                       
|------- | -- | ----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|No.     |    | Description
|        |    |            
|        | 3  | .1(1)       |  | Amended and Restated Articles of Incorporation of
    Registrant                                                                                                                                                                                                                      
|        | 3  | .2(1)       |  | Form of Amended and Restated Bylaws of Registrant                                                                                                                                                                                                                                     
|        | 3  | .3          |  | Rights Agreement between ChaseMellon Shareholder
    Services LLC and the Registrant dated June 14, 1999.
    (Incorporated by reference to the Current Report on
    Form 8-K dated June 17, 1999.)                                                                                  
|        | 4  | .1(1)       |  | Form of Common Stock Certificate                                                                                                                                                                                                                                                      
|        | 4  | .4          |  | Directors Compensation Plan (Incorporated by
    reference to the Registrants Form S-8 dated
    June 26, 2002.)                                                                                                                                                                     
|        | 10 | .1(1)       |  | Lease between Harold W. Hill and the Registrant
    dated April 13, 1994                                                                                                                                                                                                              
|        | 10 | .2(1)       |  | Addendum of Lease between Harold W. Hill and the
    Registrant dated November 28, 1994                                                                                                                                                                                               
|        | 10 | .3(1)       |  | Second Addendum of Lease between 1201 Building
    L.L.C. and the Registrant dated June 26, 1995                                                                                                                                                                                      
|        | 10 | .4(1)       |  | Distribution Agreement between the Registrant and
    Western Washington Beverage dated August 24, 1995                                                                                                                                                                               
|        | 10 | .5(1)       |  | Registrants 1995 Employee Stock Option Plan                                                                                                                                                                                                                                          
|        | 10 | .6(1)       |  | Registrants Non-Employee Director Stock
    Option Plan                                                                                                                                                                                                                              
|        | 10 | .7(1)       |  | Form of Non-Qualified Stock Option Agreement                                                                                                                                                                                                                                          
|        | 10 | .8(1)       |  | Commercial Lease between Esther Podlesak, Trustee
    of the John A. and Esther Podlesak 1990 Family Trust and Pyramid
    Breweries California, Inc. dated November 1, 1995                                                                                                          
|        | 10 | .9(1)       |  | Assignment, Assumption and Consent Agreement
    between Esther Podlesak, Trustee of the John A. and Esther
    Podlesak 1990 Family Trust, Pyramid Breweries California, Inc.
    and Pyramid Breweries Inc. dated November 17, 1995                                                 
|        | 10 | .10         |  | 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         |  | Assignment, Assumption and Consent Agreement
    between KLP Properties, Inc., Faultline Brewing Company, Inc.,
    and the Registrant dated October 26, 2001 (Incorporated by
    reference to the Registrants Annual Report on
    Form 10-K for the year ended December 31, 2001.)
|        | 10 | .13         |  | Sublease between KLP Properties, Inc. and
    Faultline Brewing Company, Inc. dated April 3, 1996
    (Incorporated by reference to the Registrants Annual
    Report on Form 10-K for the year ended December 31,
    2001.)                                                        
|        | 10 | .14         |  | Lease between Peter Vasconi and the James and
    Maura Belka Trust dated December 28, 1995 (Incorporated by
    reference to the Registrants Annual Report on
    Form 10-K for the year ended December 31, 2001.)                                                                  
|        | 10 | .15         |  | Stock Purchase Agreement and Promissory Notes
    between the Company and Martin Kelly (Incorporated by reference
    to the Registrants Form 10-Q for the quarter ended
    June 30, 2001.)                                                                                         
|        | 10 | .16         |  | Commercial Lease between County Supervisors
    Association of California and Pyramid Breweries, Inc. dated
    April 15, 2002                                                                                                                                                        
|        | 10 | .17         |  | Registrants 2003 Employee Stock Purchase
    Plan                                                                                                                                                                                                                                    
|        | 23 | .1          |  | Consent of Independent Public Accountants                                                                                                                                                                                                                                             
|        | 23 | .2          |  | Notice Regarding Lack of Consent of Arthur
    Andersen LLP                                                                                                                                                                                                                           



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##### Table of Contents



|        |    |             |  |                                                                                                                                                                                                  
|------- | -- | ----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|No.     |    | Description
|        |    |            
|        | 99 | .1          |  | Certification Pursuant to 18 U.S.C.
    Section 1350, as Adopted Pursuant to Section 906 of
    the Sarbanes-Oxley Act of 2002: R. Martin Kelly, President and
    Chief Executive Officer.      
|        | 99 | .2          |  | Certification Pursuant to 18 U.S.C.
    Section 1350, as Adopted Pursuant to Section 906 of
    the Sarbanes-Oxley Act of 2002: Eric G. Peterson, Vice-President
    and Chief Financial Officer.
|        | 99 | .3          |  | Certification Pursuant to 18 U.S.C.
    Section 1350, as Adopted Pursuant to Section 906 of
    the Sarbanes-Oxley Act of 2002: Jason W. Rees, Controller and
    Chief Accounting Officer.      



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