##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549




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FORM 10-Q



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(Mark One)

| |  |                                                                                                                             
| |  | ----------------------------------------------------------------------------------------------------------------------------
| |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED MARCH 31, 2003

| |  |                                                                                                           
| |  | ----------------------------------------------------------------------------------------------------------
| |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (No Fee Required)



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
(State or other jurisdiction of
incorporation or organization) |  | 91-1258355
(I.R.S. Employer
Identification No.)

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

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



---

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
 No .

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

Common stock, par value of $.01 per share: 8,523,167 shares of Common
Stock outstanding as of March 31, 2003





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TABLE OF CONTENTS



|                            |                                                                                                |                               |  |  |  |  |  | 
|--------------------------- | ---------------------------------------------------------------------------------------------- | ----------------------------- |  |  |  |  |  | 
|PART I                     
|                            | Item 1  FINANCIAL STATEMENTS                                                                 
|                            |                                                                                                | BALANCE SHEETS               
|                            |                                                                                                | STATEMENTS OF OPERATIONS     
|                            |                                                                                                | STATEMENTS OF CASH FLOWS     
|                            |                                                                                                | NOTES TO FINANCIAL STATEMENTS
|                            | Item 2  Managements Discussion and Analysis of Financial Condition and Results of Operations
|                            | ITEM 3. Quantitative and Qualitative Disclosures about Market Risk                            
|                            | ITEM 4. Controls and Procedures                                                               
|PART II  OTHER INFORMATION
|                            | ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K                                                      
|SIGNATURE                  
|CERTIFICATION              
|EXHIBIT 99.1               
|EXHIBIT 99.2               
|EXHIBIT 99.3               



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##### Table of Contents



PYRAMID BREWERIES INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2003

TABLE OF CONTENTS

|        |  |                                                                                            |  |     
|------- |  | ------------------------------------------------------------------------------------------ |  | ----
|        |  |                                                                                            |  | Page
|        |  |                                                                                            |  |     
|PART I  |  | FINANCIAL INFORMATION                                                                      |  |     
|Item 1. |  | Financial Statements (Unaudited)                                                           |  |     
|        |  | Balance Sheets
     March 31, 2003 and December 31, 2002                                   |  | 3   
|        |  | Statements of Operations
     Quarter Ended March 31, 2003 and 2002                        |  | 4   
|        |  | Statements of Cash Flows
     Quarter Ended March 31, 2003 and 2002                        |  | 5   
|        |  | Notes to Financial Statements                                                              |  | 6   
|Item 2. |  | Managements Discussion and Analysis of Financial Condition
     and Results of Operations |  | 10  
|Item 3. |  | Quantitative and Qualitative Disclosures about Market Risk                                 |  | 14  
|Item 4. |  | Controls and Procedures                                                                    |  | 14  
|PART II |  | OTHER INFORMATION                                                                          |  | 14  
|Item 6. |  | Exhibits and Reports on Form 8-K                                                           |  | 14  
|        |  | SIGNATURE                                                                                  |  | 15  

2



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##### Table of Contents






PART I




Item 1  FINANCIAL STATEMENTS




PYRAMID BREWERIES INC.

BALANCE SHEETS
(Unaudited)

|                                                                                                                  |                               |                                            |             |           |            |              |             |           |            | 
|----------------------------------------------------------------------------------------------------------------- | ----------------------------- | ------------------------------------------ | ----------- | --------- | ---------- | ------------ | ----------- | --------- | ---------- | 
|                                                                                                                  |                               |                                            |             | March 31, |            | December 31,
|                                                                                                                  |                               |                                            |             | 2003      |            | 2002        
|                                                                                                                  |                               |                                            |             |           |            |             
|CURRENT ASSETS:                                                                                                   |                               |                                            |             |           |            |              |             |          
|                                                                                                                  | Cash and cash equivalents     |                                            | $           | 365,835   |            |              | $           | 595,573   |           
|                                                                                                                  | Short term investments        |                                            |             | 2,100,000 |            |              |             | 2,750,000 |           
|                                                                                                                  | Accounts receivable, net      |                                            |             | 1,353,279 |            |              |             | 1,944,393 |           
|                                                                                                                  | Inventories                   |                                            |             | 1,770,478 |            |              |             | 1,589,724 |           
|                                                                                                                  | Prepaid expenses and other    |                                            |             | 548,562   |            |              |             | 626,740   |           
|                                                                                                                  |                               |                                            |             |           |            |              |             |           |           
|                                                                                                                  |                               | Total current assets                       |             |           | 6,138,154  |              |             |           | 7,506,430  | 
|                                                                                                                  |                               |                                            |             |           |            |              |             |           |           
|Long term investments                                                                                             |                               |                                            | 491,742     |           |            |              | 491,742     |          
|Note receivable related party                                                                                     |                               |                                            | 90,791      |           |            |              | 94,239      |          
|Fixed assets, net                                                                                                 |                               |                                            | 20,915,987  |           |            |              | 20,681,508  |          
|Goodwill                                                                                                          |                               |                                            | 414,613     |           |            |              | 414,613     |          
|Other assets                                                                                                      |                               |                                            | 98,477      |           |            |              | 106,023     |          
|                                                                                                                  |                               |                                            |             |           |            |              |             |           |           
|                                                                                                                  |                               | Total assets                               |             | $         | 28,149,764 |              |             | $         | 29,294,555 | 
|                                                                                                                  |                               |                                            |             |           |            |              |             |           |           
|CURRENT LIABILITIES:                                                                                              |                               |                                            |             |           |            |              |             |          
|                                                                                                                  | Accounts payable              |                                            | $           | 753,408   |            |              | $           | 951,685   |           
|                                                                                                                  | Accrued expenses              |                                            |             | 1,916,572 |            |              |             | 1,747,042 |           
|                                                                                                                  | Refundable deposits           |                                            |             | 474,916   |            |              |             | 506,377   |           
|                                                                                                                  | Note payable-current          |                                            |             | 20,000    |            |              |             | 20,000    |           
|                                                                                                                  | Deferred rent - current       |                                            |             | 123,672   |            |              |             | 123,672   |           
|                                                                                                                  | Dividends payable             |                                            |             | 375,019   |            |              |             | 374,173   |           
|                                                                                                                  |                               |                                            |             |           |            |              |             |           |           
|                                                                                                                  |                               | Total current liabilities                  |             |           | 3,663,587  |              |             |           | 3,722,949  | 
|                                                                                                                  | Note payable, net of current  |                                            |             | 31,809    |            |              |             | 30,566    |           
|                                                                                                                  | Deferred rent, net of current |                                            |             | 974,388   |            |              |             | 1,005,306 |           
|                                                                                                                  |                               |                                            |             |           |            |              |             |           |           
|                                                                                                                  |                               | Total liabilities                          |             |           | 4,669,784  |              |             |           | 4,758,821  | 
|                                                                                                                  |                               |                                            |             |           |            |              |             |           |           
|COMMITMENTS AND CONTINGENCIES                                                                                     |                               |                                            |             |           |            |              |             |          
|STOCKHOLDERS EQUITY:                                                                                             |                               |                                            |             |           |            |              |             |          
|Preferred stock, 10,000,000 shares authorized, none issued                                                        |                               |                                            |            |           |            |              |            |          
|Common stock, $.01 par value; 40,000,000 shares authorized,
8,523,167 and 8,503,920 shares issued and outstanding |                               |                                            | 85,232      |           |            |              | 85,039      |          
|Additional paid-in capital                                                                                        |                               |                                            | 36,078,239  |           |            |              | 36,040,268  |          
|Note receivable - related party                                                                                   |                               |                                            | (778,358    | )         |            |              | (781,777    | )        
|Deferred stock-based compensation                                                                                 |                               |                                            | (44,061     | )         |            |              | (46,531     | )        
|Accumulated deficit                                                                                               |                               |                                            | (11,861,072 | )         |            |              | (10,761,265 | )        
|                                                                                                                  |                               |                                            |             |           |            |              |             |           |           
|                                                                                                                  |                               | Total stockholders equity                 |             |           | 23,479,980 |              |             |           | 24,535,734 | 
|                                                                                                                  |                               |                                            |             |           |            |              |             |           |           
|                                                                                                                  |                               | Total liabilities and stockholders equity |             | $         | 28,149,764 |              |             | $         | 29,294,555 | 
|                                                                                                                  |                               |                                            |             |           |            |              |             |           |           

The accompanying notes are an integral part of these statements.

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PYRAMID BREWERIES INC.




STATEMENTS OF OPERATIONS
(Unaudited)

|                                             |  |                              |           |      |  |   |           |  
|-------------------------------------------- |  | ---------------------------- | --------- | ---- |  | - | --------- | -
|                                             |  | Three Months Ended March 31,
|                                             |  |                             
|                                             |  | 2003                         |           | 2002
|                                             |  |                              |           |     
|Gross sales                                  |  | $                            | 6,976,100 |      |  | $ | 6,833,879 |  
|Less excise taxes                            |  |                              | 353,025   |      |  |   | 342,173   |  
|                                             |  |                              |           |      |  |   |           |  
|Net sales                                    |  |                              | 6,623,075 |      |  |   | 6,491,706 |  
|Cost of sales                                |  |                              | 5,467,533 |      |  |   | 5,136,011 |  
|                                             |  |                              |           |      |  |   |           |  
|Gross margin                                 |  |                              | 1,155,542 |      |  |   | 1,355,695 |  
|Selling, general and administrative expenses |  |                              | 1,922,938 |      |  |   | 2,175,255 |  
|                                             |  |                              |           |      |  |   |           |  
|Operating loss                               |  |                              | (767,396  | )    |  |   | (819,560  | )
|Other income, net                            |  |                              | 43,864    |      |  |   | 52,162    |  
|                                             |  |                              |           |      |  |   |           |  
|Loss before income taxes                     |  |                              | (723,532  | )    |  |   | (767,398  | )
|Provision for income taxes                   |  |                              | (1,256    | )    |  |   |          |  
|                                             |  |                              |           |      |  |   |           |  
|Net loss                                     |  | $                            | (724,788  | )    |  | $ | (767,398  | )
|                                             |  |                              |           |      |  |   |           |  
|Basic and diluted net loss per share         |  | $                            | (0.09     | )    |  | $ | (0.09     | )
|Weighted average shares outstanding          |  |                              | 8,417,005 |      |  |   | 8,112,136 |  
|Cash dividend declared per share             |  | $                            | 0.044     |      |  | $ | 0.044     |  

The accompanying notes are an integral part of these statements.

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PYRAMID BREWERIES INC.




STATEMENTS OF CASH FLOWS
(Unaudited)

|                                                 |                                                                                           |                                                                 |                                                     |          |                              |          |          |          |           |          |  
|------------------------------------------------ | ----------------------------------------------------------------------------------------- | --------------------------------------------------------------- | --------------------------------------------------- | -------- | ---------------------------- | -------- | -------- | -------- | --------- | -------- | -
|                                                 |                                                                                           |                                                                 |                                                     |          | Three Months Ended March 31,
|                                                 |                                                                                           |                                                                 |                                                     |          |                             
|                                                 |                                                                                           |                                                                 |                                                     |          | 2003                         |          | 2002    
|                                                 |                                                                                           |                                                                 |                                                     |          |                              |          |         
|OPERATING ACTIVITIES:                            |                                                                                           |                                                                 |                                                     |          |                              |          |          |         
|                                                 | Net loss                                                                                  |                                                                 | $                                                   | (724,788 | )                            |          | $        | (767,398 | )        
|                                                 | Adjustments to reconcile net loss to net cash provided by
(used in) operating activities: |                                                                 |                                                     |          |                              |          |          |          |          
|                                                 |                                                                                           | Depreciation and amortization                                   |                                                     |          | 554,392                      |          |          |          | 580,183   |         
|                                                 |                                                                                           | Stock-based compensation expense                                |                                                     |          | 3,856                        |          |          |          | 33,733    |         
|                                                 |                                                                                           | Interest expense                                                |                                                     |          | 1,243                        |          |          |          | 1,409     |         
|                                                 |                                                                                           | (Gain) loss on sales of fixed assets                            |                                                     |          |                             |          |          |          | (856      | )       
|                                                 |                                                                                           | Deferred rent                                                   |                                                     |          | (30,918                      | )        |          |          | (30,918   | )       
|Changes in operating assets and liabilities:     |                                                                                           |                                                                 |                                                     |          |                              |          |          |         
|                                                 |                                                                                           | Accounts receivable                                             |                                                     |          | 591,114                      |          |          |          | (147,421  | )       
|                                                 |                                                                                           | Inventories                                                     |                                                     |          | (180,754                     | )        |          |          | (257,426  | )       
|                                                 |                                                                                           | Prepaid expenses and other                                      |                                                     |          | 63,103                       |          |          |          | (177,415  | )       
|                                                 |                                                                                           | Accounts payable and accrued expenses                           |                                                     |          | (28,747                      | )        |          |          | 365,756   |         
|                                                 |                                                                                           | Refundable deposits                                             |                                                     |          | (31,461                      | )        |          |          | (77,630   | )       
|                                                 |                                                                                           |                                                                 |                                                     |          |                              |          |          |          |          
|                                                 |                                                                                           |                                                                 | Net cash provided by (used in) operating activities |          |                              | 217,040  |          |          |           | (477,983 | )
|INVESTING ACTIVITIES:                            |                                                                                           |                                                                 |                                                     |          |                              |          |          |         
|                                                 |                                                                                           | Purchases of short-term investments                             |                                                     |          | (1,155,049                   | )        |          |          | (774,967  | )       
|                                                 |                                                                                           | Proceeds from the sale and maturities of short-term investments |                                                     |          | 1,805,049                    |          |          |          | 1,574,967 |         
|                                                 |                                                                                           | Acquisitions of fixed assets                                    |                                                     |          | (766,250                     | )        |          |          | (714,233  | )       
|                                                 |                                                                                           | Proceeds from sales of fixed assets                             |                                                     |          |                             |          |          |          | 7,251     |         
|                                                 |                                                                                           |                                                                 |                                                     |          |                              |          |          |          |          
|                                                 |                                                                                           |                                                                 | Net cash (used in) provided by investing activities |          |                              | (116,250 | )        |          |           | 93,018   |  
|FINANCING ACTIVITIES:                            |                                                                                           |                                                                 |                                                     |          |                              |          |          |         
|                                                 |                                                                                           | Proceeds from the sale of common stock and option exercises     |                                                     |          | 36,778                       |          |          |          | 13,715    |         
|                                                 |                                                                                           | Note receivable                                                 |                                                     |          | 6,867                        |          |          |          | 3,448     |         
|                                                 |                                                                                           | Cash dividends paid                                             |                                                     |          | (374,173                     | )        |          |          | (365,178  | )       
|                                                 |                                                                                           | Cash provided by bank overdraft                                 |                                                     |          |                             |          |          |          | 452,102   |         
|                                                 |                                                                                           |                                                                 |                                                     |          |                              |          |          |          |          
|                                                 |                                                                                           |                                                                 | Net cash used in financing activities               |          |                              | (330,528 | )        |          |           | 104,087  |  
|                                                 |                                                                                           |                                                                 |                                                     |          |                              |          |          |          |          
|Decrease in cash and cash equivalents            |                                                                                           |                                                                 | (229,738                                            | )        |                              |          | (280,878 | )       
|Cash and cash equivalents at beginning of period |                                                                                           |                                                                 | 595,573                                             |          |                              |          | 425,454  |         
|                                                 |                                                                                           |                                                                 |                                                     |          |                              |          |          |          |          
|Cash and cash equivalents at end of period       |                                                                                           | $                                                               | 365,835                                             |          |                              | $        | 144,576  |         
|                                                 |                                                                                           |                                                                 |                                                     |          |                              |          |          |          |          

The accompanying notes are an integral part of these statements.

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##### Table of Contents



PYRAMID BREWERIES INC.




NOTES TO FINANCIAL STATEMENTS
(Unaudited)



|1. |  | BASIS OF PRESENTATION:
|-- |  | ----------------------

Pyramid Breweries Inc. (the Company), a Washington corporation, is
engaged in the brewing, marketing and selling of craft beers and premium sodas
and in restaurant operations. The Company operates breweries in Seattle,
Washington, Berkeley, California and Walnut Creek California and is
constructing a fourth alehouse and brewery in Sacramento, California which is
expected to open the third quarter of 2003. The Company sells its beer through
a network of selected independent distributors and alehouse locations primarily
in Washington, Oregon and California under the Pyramid, and to a
lesser extent,
the Thomas Kemper brand. Pyramid also manufactures a line of gourmet sodas
under the Thomas Kemper Soda Company label. As of March 31, 2003, the
Companys products were distributed in 32 states and Canada. The Company also
operates three restaurants adjacent to its breweries under the Pyramid Alehouse
brand name.

The accompanying condensed financial statements have been prepared by the
Company, without audit, in accordance with accounting principles generally
accepted in the United States for interim financial information and pursuant to
the rules and regulations of the Securities and Exchange Commission. In the
opinion of management, the accompanying unaudited financial statements contain
all material adjustments, consisting only of those of a normal recurring
nature, considered necessary for a fair presentation of the Companys financial
position, results of operations and cash flows at the dates and for the periods
presented. The operating results for the interim periods presented are not
necessarily indicative of the results expected for the full year. For a
presentation including all disclosures required by generally accepted
accounting principles, these financial statements should be read in conjunction
with the audited financial statements for the year ended December 31, 2002,
included in the Annual Report on Form 10-K.

Stock Based Compensation

At March 31, 2003, the Company has stock-based compensation plans which
are described more fully in Note 15 of the 2002 Annual report. 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 4. Had compensation cost been recognized based on
the fair value at the date of grant for options awarded under the Plans, the
pro forma amounts of the Companys net loss and net loss per share for the
years ended March 31, 2003 and 2002, would have been as follows:

|                                                                                 |  |                              |          |      |  |   |          |  
|-------------------------------------------------------------------------------- |  | ---------------------------- | -------- | ---- |  | - | -------- | -
|                                                                                 |  | Three Months Ended March 31,
|                                                                                 |  |                             
|                                                                                 |  | 2003                         |          | 2002
|                                                                                 |  |                              |          |     
|Net income (loss) as reported                                                    |  | $                            | (724,788 | )    |  | $ | (767,398 | )
|Add: Stock-based compensation cost as reported                                   |  |                              | 3,856    |      |  |   | 33,733   |  
|Less: Stock-based compensation cost determined under the fair value based
method |  |                              | (52,397  | )    |  |   | (72,158  | )
|                                                                                 |  |                              |          |      |  |   |          |  
|Net income (loss) pro forma                                                      |  | $                            | (773,329 | )    |  | $ | (805,823 | )
|Basic and diluted net income (loss) per share as reported                        |  | $                            | (0.09    | )    |  | $ | (0.09    | )
|Basic and diluted net income (loss) per share pro forma                          |  | $                            | (0.09    | )    |  | $ | (0.10    | )

The fair value of options granted in the first quarter of 2002 was
estimated using the Black-Scholes option-pricing model with the following
weighted average assumptions: risk-free interest rate of 5.13%; expected option
lives of seven years; expected volatility of 52%; and expected future
dividends. The weighted-average fair value of options granted during the first
quarter ended March 31, 2002 was $0.65. There were no options granted in the
first quarter of 2003.

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.

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|2. |  | INVENTORIES:
|-- |  | ------------

|                |  |           |           |              |  |   |           | 
|--------------- |  | --------- | --------- | ------------ |  | - | --------- | 
|                |  | March 31, |           | December 31,
|                |  | 2003      |           | 2002        
|                |  |           |           |             
|Raw materials   |  | $         | 943,781   |              |  | $ | 820,908   | 
|Work in
process |  |           | 196,821   |              |  |   | 162,024   | 
|Finished
goods  |  |           | 629,876   |              |  |   | 606,792   | 
|                |  |           |           |              |  |   |           | 
|                |  | $         | 1,770,478 |              |  | $ | 1,589,724 | 
|                |  |           |           |              |  |   |           | 

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. Inventory levels
experience fluctuations in carrying levels and values based on seasonality.



|3. |  | FIXED ASSETS:
|-- |  | -------------

|                               |  |           |             |              |  |   |             |  
|------------------------------ |  | --------- | ----------- | ------------ |  | - | ----------- | -
|                               |  | March 31, |             | December 31,
|                               |  | 2003      |             | 2002        
|                               |  |           |             |             
|Brewery and retail equipment   |  | $         | 15,160,147  |              |  | $ | 15,120,798  |  
|Furniture and fixtures         |  |           | 915,985     |              |  |   | 915,985     |  
|Leasehold improvements         |  |           | 15,524,833  |              |  |   | 15,524,833  |  
|Construction in progress       |  |           | 1,293,513   |              |  |   | 608,608     |  
|                               |  |           |             |              |  |   |             |  
|                               |  |           | 32,894,478  |              |  |   | 32,170,224  |  
|Less: accumulated depreciation |  |           | (11,978,491 | )            |  |   | (11,488,716 | )
|                               |  |           |             |              |  |   |             |  
|                               |  | $         | 20,915,987  |              |  | $ | 20,681,508  |  
|                               |  |           |             |              |  |   |             |  

Construction in progress includes leasehold improvements made to the
Sacramento Alehouse which is scheduled to open mid-2003.



|4. |  | NOTE RECEIVABLE RELATED PARTY
|-- |  | -----------------------------

In June 2001, the Company issued a $787,000 full recourse note to the
Companys Chief Executive Officer (CEO) in exchange for the exercise of options
for 387,400 shares of the Companys common stock. In addition, the Company
issued a $115,000 full recourse note to the CEO to fund his payment of taxes on
the exercise of the options. The notes are due on the earlier of June 30, 2011
or upon the sale of the stock and bear an annual interest rate of 5.6%. A total
of 135,100 of those shares were unrestricted, except for being pledged as
collateral for the loans, and the remaining 252,300 shares become unrestricted
over the next two years. During the quarters ended March 31, 2003 and 2002, the
Company recorded $2,470 and $32,000 in compensation expense, respectively, in
connection with this equity arrangement, which is included in selling, general
and administrative expenses.



|5. |  | ACCRUED EXPENSES
|-- |  | ----------------

Accrued expenses consist of the following:

|                                     |  |           |           |              |  |   |           | 
|------------------------------------ |  | --------- | --------- | ------------ |  | - | --------- | 
|                                     |  | March 31, |           | December 31,
|                                     |  | 2003      |           | 2002        
|                                     |  |           |           |             
|Salaries, wages and related accruals |  | $         | 793,565   |              |  | $ | 962,974   | 
|Barrel taxes                         |  |           | 184,935   |              |  |   | 117,868   | 
|Other accruals                       |  |           | 938,072   |              |  |   | 666,200   | 
|                                     |  |           |           |              |  |   |           | 
|                                     |  | $         | 1,916,572 |              |  | $ | 1,747,042 | 
|                                     |  |           |           |              |  |   |           | 

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|6. |  | OTHER INCOME, NET
|-- |  | -----------------

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

|                       |  |                              |        |      |  |   |        |  
|---------------------- |  | ---------------------------- | ------ | ---- |  | - | ------ | -
|                       |  | Three Months Ended March 31,
|                       |  |                             
|                       |  | 2003                         |        | 2002
|                       |  |                              |        |     
|Interest income        |  | $                            | 24,662 |      |  | $ | 31,206 |  
|Interest expense       |  |                              | (1,243 | )    |  |   | (1,409 | )
|Parking income         |  |                              | 8,230  |      |  |   | 11,478 |  
|Gain on sale of
assets |  |                              |       |      |  |   | 856    |  
|Other income
(expense) |  |                              | 12,215 |      |  |   | 10,031 |  
|                       |  |                              |        |      |  |   |        |  
|Other income, net      |  | $                            | 43,864 |      |  | $ | 52,162 |  
|                       |  |                              |        |      |  |   |        |  



|7. |  | EARNINGS PER SHARE
|-- |  | ------------------

Basic and diluted net loss per share was computed by dividing net loss by
the weighted average number of shares of common stock outstanding during the
quarter. The effect of stock options has not been included in the calculation
of diluted net loss per share as the effect is antidilutive. Options to
purchase approximately 794,200 and 756,900 shares of common stock were
outstanding as of March 31, 2003 and 2002, respectively, but were not included
in the computation of EPS because their effects are antidilutive.

|          |                                             |                            |   |                              |       |      |   |           |       |  
|--------- | ------------------------------------------- | -------------------------- | - | ---------------------------- | ----- | ---- | - | --------- | ----- | -
|          |                                             |                            |   | Three Months Ended March 31,
|          |                                             |                            |   |                             
|          |                                             |                            |   | 2003                         |       | 2002
|          |                                             |                            |   |                              |       |     
|Earnings: |                                             |                            |   |                              |       |      |   |          
|          | Net loss                                    |                            | $ | (724,788                     | )     |      | $ | (767,398  | )    
|Shares:   |                                             |                            |   |                              |       |      |   |          
|          | Weighted average shares outstanding         |                            |   | 8,517,005                    |       |      |   | 8,294,436 |      
|          | Shares subject to repurchase                |                            |   | (100,000                     | )     |      |   | (182,300  | )    
|          | Weighted average basic shares outstanding   |                            |   | 8,417,005                    |       |      |   | 8,112,136 |      
|          |                                             |                            |   |                              |       |      |   |           |      
|          |                                             | Basic earnings per share   |   | $                            | (0.09 | )    |   | $         | (0.09 | )
|          |                                             |                            |   |                              |       |      |   |           |      
|          | Stock option dilution                       |                            |   |                             |       |      |   |          |      
|          |                                             |                            |   |                              |       |      |   |           |      
|          | Weighted average diluted shares outstanding |                            |   | 8,417,005                    |       |      |   | 8,112,136 |      
|          |                                             |                            |   |                              |       |      |   |           |      
|          |                                             | Diluted earnings per share |   | $                            | (0.09 | )    |   | $         | (0.09 | )
|          |                                             |                            |   |                              |       |      |   |           |      



|8. |  | STOCKHOLDERS EQUITY
|-- |  | --------------------



|                             |                                                                 |  |              |        |            |   |         |     |            |   |              |        |               |   |          |       |  |   |         |       |  |   |             |          |   |   |            |          |  
|---------------------------- | --------------------------------------------------------------- |  | ------------ | ------ | ---------- | - | ------- | --- | ---------- | - | ------------ | ------ | ------------- | - | -------- | ----- |  | - | ------- | ----- |  | - | ----------- | -------- | - | - | ---------- | -------- | -
|                             |                                                                 |  | Common Stock |        | Additional |   |         |     |            |   |              |        |               |   |          |       |  |   | Total  
|                             |                                                                 |  |              |        | Paid-In    |   | Note    |     | Deferred   |   | Retained     |        | Stockholders
|                             |                                                                 |  | Shares       |        | Amount     |   | Capital |     | Receivable |   | Compensation |        | Deficit       |   | Equity  
|                             |                                                                 |  |              |        |            |   |         |     |            |   |              |        |               |   |         
|Balance at December 31, 2002 |                                                                 |  | 8,503,920    |        |            | $ | 85,039  |     |            | $ | 36,040,268   |        |               | $ | (781,777 | )     |  | $ | (46,531 | )     |  | $ | (10,761,265 | )        |   | $ | 24,535,734 |         
|                             | Net loss                                                        |  |              |       |            |   |         |    |            |   |              |       |               |   |          |      |  |   |         |      |  |   |             | (724,788 | ) |   |            | (724,788 | )
|                             | Shares issued                                                   |  |              | 19,247 |            |   |         | 193 |            |   |              | 36,585 |               |   |          |      |  |   |         |      |  |   |             |         |   |   |            | 36,778   |  
|                             | Stock compensation including amortization of stock compensation |  |              |       |            |   |         |    |            |   |              | 1,386  |               |   |          |      |  |   |         | 2,470 |  |   |             |         |   |   |            | 3,856    |  
|                             | Note repayment                                                  |  |              |       |            |   |         |    |            |   |              |       |               |   |          | 3,419 |  |   |         |      |  |   |             |         |   |   |            | 3,419    |  
|                             | Dividends declared                                              |  |              |       |            |   |         |    |            |   |              |       |               |   |          |      |  |   |         |      |  |   |             | (375,019 | ) |   |            | (375,019 | )
|                             |                                                                 |  |              |        |            |   |         |     |            |   |              |        |               |   |          |       |  |   |         |       |  |   |             |          |   |   |            |         
|Balance at March 31, 2003    |                                                                 |  | 8,523,167    |        |            | $ | 85,232  |     |            | $ | 36,078,239   |        |               | $ | (778,358 | )     |  | $ | (44,061 | )     |  | $ | (11,861,072 | )        |   | $ | 23,479,980 |         
|                             |                                                                 |  |              |        |            |   |         |     |            |   |              |        |               |   |          |       |  |   |         |       |  |   |             |          |   |   |            |         



|9. |  | 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.

8



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##### Table of Contents





|10. |  | CASH DIVIDEND:
|--- |  | --------------

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. The Board of Directors also announced, on May 8,
2003, the declaration of a $0.044 per common share dividend payable on July 11,
2003 to shareholders of record on June 30, 2003. The cash dividends declared
totaled approximately $375,000 for all common stock outstanding as of each
record date.

Cash dividends declared per common share:

|     |  |                    |       | 
|---- |  | ------------------ | ----- | 
|     |  | Three Months Ended
|     |  | March 31,         
|     |  |                   
|2003 |  | $                  | 0.044 | 
|2002 |  | $                  | 0.044 | 

Although the Company has declared and paid a dividend every quarter since
the fourth quarter of 1999, continued 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 and in the
best long term interest of the shareholders.



|11. |  | SEGMENT INFORMATION:
|--- |  | --------------------

The Company follows the provisions of Statement of Financial Accounting
Standards (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 Company 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
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 included in the Companys current Form 10-K. 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.

9



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##### Table of Contents



Segment profit and segment assets are as follows:

|                             |                                        |  |            |        |          |  |                        |       |       |  |   |       |   |  |   |        |  
|---------------------------- | -------------------------------------- |  | ---------- | ------ | -------- |  | ---------------------- | ----- | ----- |  | - | ----- | - |  | - | ------ | -
|                             |                                        |  | Beverage   |        |          |  |                        |       |       |  |   |       |   |  |  
|                             |                                        |  | Operations |        | Alehouse |  | Other                  |       | Total
|                             |                                        |  |            |        |          |  |                        |       |      
|                             |                                        |  |            |        |          |  | (Dollars in thousands) |       |       |  |  
|Quarter ended March 31, 2003 |                                        |  |            |        |          |  |                        |       |       |  |   |       |   |  |   |       
|                             | Gross revenues from external customers |  | $          | 4,622  |          |  | $                      | 2,354 |       |  | $ |      |   |  | $ | 6,976  |  
|                             | Net revenues from external customers   |  |            | 4,269  |          |  |                        | 2,354 |       |  |   |      |   |  |   | 6,623  |  
|                             | Intersegment revenues                  |  |            | 73     |          |  |                        |      |       |  |   | (73   | ) |  |   |       |  
|                             | Interest income                        |  |            |       |          |  |                        |      |       |  |   | 25    |   |  |   | 25     |  
|                             | Depreciation and amortization          |  |            | 388    |          |  |                        | 114   |       |  |   | 52    |   |  |   | 554    |  
|                             | Operating (loss) income                |  |            | (58    | )        |  |                        | 116   |       |  |   | (825  | ) |  |   | (767   | )
|                             | Capital expenditures                   |  |            | 248    |          |  |                        | 487   |       |  |   | 31    |   |  |   | 766    |  
|                             | Total
assets                           |  |            | 18,546 |          |  |                        | 5,249 |       |  |   | 4,355 |   |  |   | 28,150 |  
|Quarter ended March 31, 2002 |                                        |  |            |        |          |  |                        |       |       |  |   |       |   |  |   |       
|                             | Gross revenues from external customers |  | $          | 4,983  |          |  | $                      | 1,851 |       |  | $ |      |   |  | $ | 6,834  |  
|                             | Net revenues from external customers   |  |            | 4,641  |          |  |                        | 1,851 |       |  |   |      |   |  |   | 6,492  |  
|                             | Intersegment revenues                  |  |            | 64     |          |  |                        |      |       |  |   | (64   | ) |  |   |       |  
|                             | Interest income                        |  |            |       |          |  |                        |      |       |  |   | 31    |   |  |   | 31     |  
|                             | Depreciation and amortization          |  |            | 437    |          |  |                        | 98    |       |  |   | 45    |   |  |   | 580    |  
|                             | Operating (loss) income                |  |            | (146   | )        |  |                        | 85    |       |  |   | (759  | ) |  |   | (820   | )
|                             | Capital expenditures                   |  |            | 75     |          |  |                        | 621   |       |  |   | 18    |   |  |   | 714    |  
|                             | Total
assets                           |  |            | 16,041 |          |  |                        | 4,066 |       |  |   | 8,497 |   |  |   | 28,604 |  

Other

Other consists of interest income, general, administrative and marketing
expense, 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.

Certain 2002 operating income balances have been reclassified to conform
to the 2003 presentation.



|12. |  | NEW 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 is now effective.
The adoption of SFAS 143 did not have a material impact on the Companys
financial position or results of operations.




Item 2  Managements Discussion and Analysis of Financial Condition and Results of Operations

RESULTS OF OPERATIONS

The following table sets forth, for the periods indicated, certain
selected unaudited operating data, expressed as a percentage of net sales.

10



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##### Table of Contents



SELECTED UNAUDITED OPERATING DATA

|                                             |                            |   |           |         |           |  |                              |   |           |   |           |         |      |  |       |   | 
|-------------------------------------------- | -------------------------- | - | --------- | ------- | --------- |  | ---------------------------- | - | --------- | - | --------- | ------- | ---- |  | ----- | - | 
|                                             |                            |   |           |         |           |  | Three Months Ended March 31, |   |           |   |          
|                                             |                            |   |           |         |           |  |                              |   |           |   |          
|                                             |                            |   |           |         |           |  | % of                         |   |           |   |           |         | % of
|                                             |                            |   | 2003      |         | Net Sales |  | 2002                         |   | Net Sales
|                                             |                            |   |           |         |           |  |                              |   |          
|Gross sales                                  |                            | $ | 6,976,100 |         |           |  |                              |   |           | $ | 6,833,879 |         |      |  |       |  
|Less excise taxes                            |                            |   | 353,025   |         |           |  |                              |   |           |   | 342,173   |         |      |  |       |  
|                                             |                            |   |           |         |           |  |                              |   |           |   |           |         |      |  |       |  
|Net sales                                    |                            |   | 6,623,075 |         |           |  | 100.0                        |   |           |   | 6,491,706 |         |      |  | 100.0 |  
|Cost of sales                                |                            |   | 5,467,533 |         |           |  | 82.6                         |   |           |   | 5,136,011 |         |      |  | 79.1  |  
|                                             |                            |   |           |         |           |  |                              |   |           |   |           |         |      |  |       |  
|Gross margin                                 |                            |   | 1,155,542 |         |           |  | 17.4                         |   |           |   | 1,355,695 |         |      |  | 20.9  |  
|Selling, general and administrative expenses |                            |   | 1,922,938 |         |           |  | 29.0                         |   |           |   | 2,175,255 |         |      |  | 33.5  |  
|                                             |                            |   |           |         |           |  |                              |   |           |   |           |         |      |  |       |  
|Operating loss                               |                            |   | (767,396  | )       |           |  | (11.6                        | ) |           |   | (819,560  | )       |      |  | (12.6 | )
|Other income, net                            |                            |   | 43,864    |         |           |  | 0.7                          |   |           |   | 52,162    |         |      |  | 0.8   |  
|                                             |                            |   |           |         |           |  |                              |   |           |   |           |         |      |  |       |  
|Loss before income taxes                     |                            |   | (723,532  | )       |           |  | (10.9                        | ) |           |   | (767,398  | )       |      |  | (11.8 | )
|Benefit for income taxes                     |                            |   | (1,256    | )       |           |  | (0.0                         | ) |           |   |          |         |      |  |      |  
|                                             |                            |   |           |         |           |  |                              |   |           |   |           |         |      |  |       |  
|Net loss                                     |                            | $ | (724,788  | )       |           |  | (10.9                        | ) |           | $ | (767,398  | )       |      |  | (11.8 | )
|                                             |                            |   |           |         |           |  |                              |   |           |   |           |         |      |  |       |  
|Basic and diluted net loss per share         |                            | $ | (0.09     | )       |           |  |                              |   |           | $ | (0.09     | )       |      |  |       |  
|                                             |                            |   |           |         |           |  |                              |   |           |   |           |         |      |  |       |  
|Weighted average shares outstanding          |                            |   | 8,417,005 |         |           |  |                              |   |           |   | 8,112,136 |         |      |  |       |  
|                                             |                            |   |           |         |           |  |                              |   |           |   |           |         |      |  |       |  
|Operating data (in barrels):                 |                            |   |           |         |           |  |                              |   |           |   |           |         |      |  |       |  
|                                             | Beer barrels shipped       |   |           | 23,000  |           |  |                              |   |           |   |           | 23,200  |      |  |       |   | 
|                                             | Soda barrels shipped       |   |           | 7,300   |           |  |                              |   |           |   |           | 9,300   |      |  |       |   | 
|                                             |                            |   |           |         |           |  |                              |   |           |   |           |         |      |  |       |  
|                                             | Total barrels shipped      |   |           | 30,300  |           |  |                              |   |           |   |           | 32,500  |      |  |       |   | 
|                                             |                            |   |           |         |           |  |                              |   |           |   |           |         |      |  |       |  
|                                             | Annual production capacity |   |           | 203,000 |           |  |                              |   |           |   |           | 200,000 |      |  |       |   | 
|                                             |                            |   |           |         |           |  |                              |   |           |   |           |         |      |  |       |  

QUARTER ENDED MARCH 31, 2003 COMPARED TO QUARTER ENDED MARCH 31, 2002

Gross Sales.Gross sales increased 2.1% to $6,976,000 in the first
quarter ended March 31, 2003 from $6,834,000 in the same quarter of 2002.
Wholesale beverage sales decreased 7.2% to $4,622,000 in the first quarter
ended March 31, 2003 from $4,983,000 in the same quarter of 2002. Total
beverage barrel shipments decreased 6.8% compared to prior year. Pyramid beer
brand shipments increased 0.9% to 22,300 barrels, while Thomas Kemper beer
continued its expected decline. Total beer shipments, including Thomas Kemper
beer, decreased by 0.9% to 23,000 barrels. Shipments of Thomas Kemper Soda
decreased by 21.5% to 7,300 barrels from 9,300 barrels in the same quarter of
the prior year. The reduction in soda volume is the result of softening demand
for specialty sodas, as measured by Nielsen supermarket data, a reduction in
Thomas Kemper Soda promotional activity during the first quarter, and
distributor reductions in inventory carrying levels. Alehouse sales increased
27.2%, to $2,354,000 in the first quarter ended March 31, 2003, from $1,851,000
in the same quarter of 2002 due to the addition of the Walnut Creek Alehouse,
which opened in May 2002, contributing $628,000 in revenues for the quarter.
On a same store basis, alehouse sales decreased $125,000 or 6.8% largely due to
decreased patronage at the Berkeley, California Alehouse which has been
negatively impacted by the economic conditions of the San Francisco Bay region.

Excise Taxes.Excise taxes totaled 5.1% and 5.0% of gross sales for the
quarters ended March 31, 2003 and 2002, respectively. The increase in excise
taxes as a percentage of gross sales was due mainly to a greater portion of
beer sales.

Gross Margin. Gross margin decreased $200,000 to $1,156,000, down 14.7%,
and as a percentage of net sales decreased 3.5% to 17.4% in the first quarter
ended March 31, 2003. This decrease as a percentage of net sales was due in
part to increased alehouse sales as a percentage of the total, which has a
lower gross margin than the beverage sales. In addition, the decrease in
percentage margin was due to increasing operating costs such as insurance and
benefit costs, which have increased 48%, and beverage material price increases
of approximately 5.3%. Collectively, these two items reduced gross margins by
3.2%.

|                    |  |      |           |           |  |           |      |           |  |                               |           |           |  |  |      |   |  |   |          |   |  |  |       |  
|------------------- |  | ---- | --------- | --------- |  | --------- | ---- | --------- |  | ----------------------------- | --------- | --------- |  |  | ---- | - |  | - | -------- | - |  |  | ----- | -
|                    |  |      |           |           |  |           |      |           |  | First Quarter Ended March 31, |           |           |  |  |      |   |  |  
|                    |  |     
|                    |  |      |           |           |  | % of Div. |      |           |  |                               |           | % of Div. |  |  |      |   |  |   |          |  
|Gross Margin        |  | 2003 |           | Net Sales |  | 2002      |      | Net Sales |  | $ Change                      |           | % Change 
|                    |  |      |           |           |  |           |      |           |  |                               |           |          
|Beverage
Operations |  | $    | 987,000   |           |  |           | 23.1 | %         |  | $                             | 1,210,000 |           |  |  | 26.1 | % |  | $ | (223,000 | ) |  |  | -18.4 | %
|Alehouse
Operations |  |      | 169,000   |           |  |           | 7.2  | %         |  |                               | 146,000   |           |  |  | 7.9  | % |  |   | 23,000   |   |  |  | 15.8  | %
|                    |  |      |           |           |  |           |      |           |  |                               |           |           |  |  |      |   |  |   |          |   |  |  |       |  
|Total Operations    |  | $    | 1,156,000 |           |  |           | 17.4 | %         |  | $                             | 1,356,000 |           |  |  | 20.9 | % |  | $ | (200,000 | ) |  |  | -14.7 | %
|                    |  |      |           |           |  |           |      |           |  |                               |           |           |  |  |      |   |  |   |          |   |  |  |       |  

11



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Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased 11.6% to $1,923,000 or 29.0% of net sales for
the first quarter ended March 31, 2003 from $2,175,000 or 33.5% of net sales
for the same quarter of 2002. This decrease as a percentage of net sales was
due mainly to the receipt of a Washington State sales and use tax refund in the
amount of $99,000 net of expenses, received during the first quarter of 2003.

Other Income, net. Other income, net was approximately $44,000 and 0.7% of
net sales for the first quarter ended March 31, 2003 compared to $52,000 and
0.8% of net sales in the same quarter of 2002. See footnote #6  Other Income,
Net for greater detail.

Income Taxes. The Company recorded approximately $1,000 of income tax
expense in the first quarter related to certain state tax expense. For the most
part, however, the Company recorded no income tax for the quarters ended March
31, 2003 and 2002. As of December 31, 2002, the Company had approximately $6.8
million in deferred tax assets arising from deductible temporary differences
and tax loss carryforwards. A valuation allowance was recorded against the
deferred tax asset for the benefits of tax losses which may not be realized.
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 a valuation allowance.

Net Loss. The Company reported a net loss of $725,000 for the first
quarter ended March 31, 2003 compared to a net loss of $767,000 in the same
quarter of 2002.

Other.In April 2002, the Company announced plans for a new alehouse
located in Sacramento, California. The 295 seat restaurant and brewery will
occupy approximately 9,500 square feet on the first floor of a historical
building. As of March 31, 2003 approximately $875,000 has been spent on the
build-out of the new alehouse location.

LIQUIDITY AND CAPITAL RESOURCES

The Company had approximately $2,466,000 of cash, cash equivalents and
short-term investments at March 31, 2003 compared to $3,346,000 at December
2002. At March 31, 2003, the Company had working capital of $2,475,000 compared
to $3,783,000 at December 31, 2002. The $1,308,000 decrease in working capital
is a result of the capital spending related to the build-out costs of the
Sacramento Alehouse, reflected in an approximate $880,000 decrease in cash and
short-term investments, and a $591,000 decrease in accounts
receivable, offset
by other various current asset and liability changes.

Net cash provided by operating activities during the first quarter ended
March 31, 2003 was approximately $217,000 compared to net cash used in
operating activities of $478,000 for the same period of the prior year. The net
cash provided by operating activities was due primarily to the decrease in
accounts receivable resulting from the reduction in trade sales and related
receivables between the fourth quarter of 2002 and the first quarter of 2003
and the Washington State sales and use tax refund in the amount of $99,000 net
of expenses, received during the first quarter of 2003. Net cash used in
investing activities for the quarter ended March 31, 2003 was $116,000 compared
to net cash provided by investing activities of $93,000 for the same period of
the prior year. The cash used in investing activities in 2003 included
approximately $468,000 used to build-out the new Sacramento Alehouse which is
scheduled to open in mid-2003. The cash used in investing activities in 2002
included approximately $621,000 used to build-out the new Walnut Creek Alehouse
which opened in May 2002.

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

|                 |  |       |           |        |  |             |           |             |  |         |           |  |  |   |           |           |  |   |           | 
|---------------- |  | ----- | --------- | ------ |  | ----------- | --------- | ----------- |  | ------- | --------- |  |  | - | --------- | --------- |  | - | --------- | 
|                 |  |       |           |        |  | Less Than   |           |             |  |         |           |  |  |   |           | More Than
|                 |  | Total |           | 1 Year |  | 1 - 3 years |           | 3 - 5 years |  | 5 years
|                 |  |       |           |        |  |             |           |             |  |        
|Operating
leases |  | $     | 9,771,800 |        |  | $           | 1,017,585 |             |  | $       | 2,256,202 |  |  | $ | 2,197,675 |           |  | $ | 4,300,338 | 
|Note payable
(1) |  |       | 60,000    |        |  |             | 20,000    |             |  |         | 40,000    |  |  |   |          |           |  |   |          | 



|(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 quarter ended
March 31, 2003 the Company declared per share dividends of $0.044 and paid out
$374,000 in cash dividends. Although the Company has declared and paid a
dividend every quarter since the fourth quarter of 1999, continued 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 and in the best long term interest of the shareholders.

12



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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 March 31, 2003, the Company
has purchased a total of 457,724 shares at an average price of $1.94 per share
for a total of $892,000 since the inception of the program. During the quarter
ended March 31, 2003, 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.

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          

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. Effective in the fiscal year 2002, the Company accounts for
long-lived assets in accordance with Statement of Financial Accounting
Standards 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 Statement of Financial Accounting Standards 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.

RISK FACTORS AND FORWARD LOOKING STATEMENTS

The Company does not provide forecasts of future financial performance.
However, this report contains forward looking statements: discussions of a
number of matters and subject areas that are not historical or current facts
but that address potential future
circumstances, operations, and prospects. These forward-looking
statements are subject to the safe harbor created by Section 21E of the
Securities Exchange Act of 1934, are qualified by the inherent risks and
uncertainties surrounding future expectations generally and may differ
materially from the Companys actual future experience as a result of such
factors as: the effects of increased competition from regional craft brewers
and major breweries, the Companys ability to gain and continue access to the
markets through independent distributors and chain stores, the effects of
governmental regulation and the Companys ability to obtain and maintain
necessary permits, licenses and approvals, the Companys ability to maintain or
increase the price of its products without decreasing demand and the Companys
ability to maintain or increase operating margins which may decline as a result
of lower sales volumes or selling prices and increased production,
transportation and promotions costs. Investors are cautioned that all
forward-looking statements involve a high degree of risk and

13



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uncertainty.
Additional information concerning those and other factors is contained in the
Companys Securities and Exchange Commission filings including its Form 10-K
for the year ended December 31, 2002.




ITEM 3.  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.




ITEM 4.  Controls and Procedures

Procedures

Evaluation of disclosure controls and procedure

The Company maintains a set of disclosure controls and procedures and
internal controls designed to ensure that information required to be disclosed
in its filings under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commissions rules and forms. Based on their evaluation
as of a date within 90 days of the filing date of this Quarterly Report on Form
10-Q, 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 II  OTHER INFORMATION




ITEM 6.  EXHIBITS AND
REPORTS ON FORM 8-K



|(A) |  | EXHIBITS                                                
|--- |  | --------------------------------------------------------
|   
|    |  | The following exhibits are filed as part of this report.



| | 3.1* |  | Amended and Restated Articles of Incorporation                                                                                                                                      
| | ---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | 3.2* |  | Amended and Restated Bylaws                                                                                                                                                         
|
| | 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      



|    |  | * Incorporated by reference to the exhibits filed as part of the
Companys Registration Statement on Form S-1 (File No. 33-97834).
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------
|   
|(B) |  | REPORTS ON FORM 8-K                                                                                                               
|   
|    |  | None filed during the quarter ended March 31, 2003.                                                                               

Items 1, 2, 3, 4 and 5 of PART II are not applicable and have been omitted

14



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##### Table of Contents






SIGNATURE

Pursuant to the requirements of Section 13 or 15(d) 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, in the City of
Seattle, State of Washington, on May 15, 2003.

|                   |                        |                                                             
|------------------ | ---------------------- | ------------------------------------------------------------
|                   | PYRAMID BREWERIES INC.
|                   |                        |                                                             
|                   | By:                    | /s/ R. MARTIN KELLY                                         
|                   |                        |                                                             
|                   |                        | R. Martin Kelly, President and Chief Executive Officer      
|                   |                        |                                                             
|                   | By:                    | /s/ ERIC G. PETERSON                                        
|                   |                        |                                                             
|                   |                        | Eric G. Peterson, Vice-President and Chief Financial Officer
|                   |                        |                                                             
|                   | By:                    | /s/ JASON W. REES                                           
|                   |                        |                                                             
|                   |                        | Jason W. Rees, Controller and Chief Accounting Officer      
|                   |                        |                                                             
|DATE: May 15, 2003 |                        |                                                             

15



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##### 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 quarterly report on Form 10-Q of the registrant;

2.  Based on my knowledge, this quarterly 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 quarterly
report;

3.  Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly 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 quarterly 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 quarterly report (the Evaluation Date); and                                                                                                   
|                                                                                                                                                                                                                                                                                                    
|c)  presented in this quarterly 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
quarterly 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.

Date: May 15, 2003

|                                                                          
|--------------------------------------------------------------------------
|/s/ R. Martin Kelly

R. Martin Kelly
President and Chief Executive Officer

16



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##### 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 quarterly report on Form 10-Q of the registrant;

2.       Based on my knowledge, this quarterly 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 quarterly
report;

3.       Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly 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 quarterly 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 quarterly report (the Evaluation Date); and                                                                                                  
|                                                                                                                                                                                                                                                                                                   
|c)   presented in this quarterly 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
quarterly 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.

Date: May 15, 2003

|                                                                                 
|---------------------------------------------------------------------------------
|/s/ Eric G. Peterson

Eric G. Peterson
Vice-President and Chief Financial Officer

17



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##### 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 quarterly report on Form 10-Q of the registrant;

2.       Based on my knowledge, this quarterly 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 quarterly
report;

3.       Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly 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 quarterly 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 quarterly report (the Evaluation Date); and                                                                                                 
|                                                                                                                                                                                                                                                                                                   
|c)  presented in this quarterly 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
quarterly 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.

Date: May 15, 2003

|                                                                        
|------------------------------------------------------------------------
|/s/ Jason W. Rees

Jason W. Rees
Controller and Chief Accounting Officer

18