Summary of PYRAMID BREWERIES INC

Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
Forward-Looking Statements
This report contains forward-looking statements within the meaning of the federal securities laws. All statements that do not concern historical facts are forward-looking statements concerning future performance, developments or events, concerning potential sales, restaurant expansion, production capacity, pending agreements with third parties and any other guidance on future periods, constitute forward-looking statements. These statements may be identified by the use of forward-looking terminology such as "anticipate," "believe," "continue," "could," "estimate," "expect," "intend," "may," "might," "plan," "potential," "predict," "should," or "will," or the negative thereof, or comparable terminology. While we believe these expectations, assumptions, estimates and projections are reasonable, such forward-looking statements are only predictions and involve known and unknown risks and uncertainties, many of which are beyond our control and which could cause actual results or outcomes to differ materially from our stated expectations. Any forward-looking statements are made only as of the date hereof. We do not intend to update any such statements or to publicly announce the results of any revisions to any such statements to reflect future events or developments, except as may be required by law. Our actual future results could differ materially from those projected in the forward-looking statements.
Some important factors that could cause our actual results or outcomes to differ materially from those discussed in forward-looking statements include:
• increased competition from craft and imported beer producers as well as from national brewers with greater financial resources and more extensive distribution networks than ours,

• reductions in distribution options through our independent distributors,

• increased competition from national restaurant chains with greater financial resources and greater economies of scale,

• inability of Pyramid to achieve anticipated cost reductions,

• changes in and compliance with governmental policies and regulations with respect to our products, including the adoption by the TTB of more restrictive application of the excise tax rules,

• competitive pressures that cause decreases in the selling prices of our products,

• declines in our operating margins due to the impact of increasing raw material, fuel costs and other factors,

• seasonal fluctuations due to higher sales during the summer months,

• acquisitions or divestitures that may adversely affect our financial condition, and

• the failure by us to perform under any of our agreements.

Overview
We are engaged in the brewing, marketing and selling of craft beers under the Pyramid and MacTarnahan's labels. We operate two alehouse restaurants adjacent to our full production breweries under the Pyramid Alehouse and MacTarnahan Taproom brand names in Berkeley, California and Portland, Oregon, respectively, and three alehouse restaurants located in Walnut Creek and Sacramento, California and Seattle, Washington. As of June 30, 2008, our products were distributed in approximately 38 states within the U.S. through a network of selected independent distributors and brokers.
Effective August 1, 2008, Independent Brewers United, Inc., through is wholly owned subsidiary, PMID Merger Sub, Inc., completed a tender offer for all of the outstanding common shares of Pyramid common stock for $2.75 per share in cash, at which time a total of 7,803,922 shares, representing 85.2% of the outstanding shares of Pyramid common stock were validly tendered and accepted for purchase. Independent Brewers United intends to acquire the remaining Pyramid shares by means of a merger under Washington law at the same price per share paid in the offer. The merger must be approved by at least 66 2/3% of the outstanding shares of Pyramid. A special meeting of the remaining Pyramid shareholders is expected be held the first part of September to approve the merger. As a holder of 85.2% of Pyramid shares, Independent Brewers United has assured Pyramid that it intends to vote in favor of the merger. Following the merger, Pyramid will become a wholly owned subsidiary of Independent Brewers United.

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Results of Operations
QUARTER ENDED JUNE 30, 2008 COMPARED TO QUARTER ENDED JUNE 30, 2007
Gross Sales. Gross sales increased 14.2%, or $1.9 million, to $15.5 million in the quarter ended June 30, 2008, from $13.5 million in the same quarter in 2007 driven primarily by wholesale beverage segment sales which increased 19.5%, or $1.8 million, to $11.2 million in the second quarter as a result of increased volume as well as an average price increase for beer generally consistent with the craft category. Total beverage shipments increased 7.5% to 69,200 barrels and of the total beverage shipments, beer shipments increased 8.5% to 57,300 barrels for the quarter from 52,800 barrels in the same period in 2007, primarily due to increased Pyramid brand shipments. Pyramid brand shipments increased 8.2% to 51,200 barrels for the quarter, driven by Pyramid Hefeweizen, our top selling product, which was up 12.8% in shipment volume for the quarter. Increases in other beer brand shipments of 10.9% to 6,100 barrels during the quarter also contributed to the increase in beer shipments, primarily attributed to the MacTarnahan's family which increased 7.7%. Contract manufactured shipments increased 300 barrels to 11,900 barrels for the quarter ended June 30, 2008. Alehouse sales increased 2.4% to $4.3 million in the second quarter of 2008 and showed sales growth in four locations.
Excise Taxes. Excise taxes were 9.3% and 10.1%, respectively, of gross beverage sales for the quarters ended June 30, 2008 and 2007. Per beer barrel shipped excise taxes in the second quarter of 2008 increased to $17.93 per beer barrel as compared to $17.82 per beer barrel in the same period in 2007. Federal taxes paid on beer shipments are determined by the level of shipments. For the first 60,000 barrels of production the federal excise tax rate for "small brewers" like Pyramid is $7 per barrel resulting in incremental volume being taxed at an $18 per beer barrel rate. State taxes per barrel vary on a state by state basis.
Gross Margin. Gross margin for the quarter ended June 30, 2008 increased 16.2% to $4.4 million from $3.8 million as compared to the same period in 2007, primarily as a result of top line growth driven by increased volume and increases in beer prices. Additionally, gross margin as a percentage of net sales increased to 30.3% in the quarter ended June 30, 2008, as compared to 29.8% in the same period in 2007.
The following table represents gross margin comparisons and changes by segment for the three months ended June 30, 2008 and 2007 (in thousands):

                                     % of                       % of
                                   Segment                    Segment
  Gross Margin         2008       Net Sales       2007       Net Sales      $ Change       % Change
  Beverage Division   $ 3,876           38.3 %   $ 3,351           39.9 %   $     525           15.7 %
  Alehouse Division       491           11.4 %       407            9.7 %          84           20.6 %

  Total               $ 4,367           30.3 %   $ 3,758           29.8 %   $     609           16.2 %

Selling, General and Administrative Expenses. Selling, general and administrative expenses increased 2.0%, or $73,000, to $3.6 million for the quarter ended June 30, 2008, from $3.6 million in the same period in 2007. The increase in expense was primarily attributed to an increase in general and administrative expense of $222,000 to $1.4 million due primarily to professional fees associated with the Independent Brewers transaction. Selling and marketing expenses were $2.2 million for the quarter, a decrease of $149,000, from a year ago comprised of selling expenses which decreased $88,000 to $1.7 million primarily due to decreases in personnel related costs related to the major expense reduction initiative announced in the first quarter and by a decrease in marketing expenses of $61,000 to $527,000 due to a reduction in advertising.
Other Expense, Net. Other expense, net, increased slightly to $247,000 in the second quarter of 2008 from $27,000 in the second quarter of 2007, primarily attributable to an increase in interest expense associated with our capital lease and a decrease in other miscellaneous income.
Income Taxes. As of June 30, 2008, we had deferred tax assets arising from deductible temporary differences and tax loss carryforwards offset against certain deferred tax liabilities. Realization of the deferred tax assets is dependent on our ability to generate future U.S. taxable income. We do not believe that our net deferred assets meet the "more likely than not" realization criteria and accordingly, a full valuation allowance has been established. We will continue to evaluate the ability to realize the deferred tax assets quarterly by assessing the need for and amount of the valuation allowance.

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Net Income. We reported net income of $472,000 for the quarter ended June 30, 2008 compared to a net income of $156,000 in the same quarter of 2007. The net income for the quarter ended June 30, 2008 is primarily as a result of top line growth driven by increased volume and increases in beer prices, offset by transaction costs.
SIX MONTH PERIOD ENDED JUNE 30, 2008 COMPARED TO SIX MONTH PERIOD ENDED JUNE 30, 2007 Gross Sales. Gross sales increased 10.8%, or $2.7 million, to $27.2 million for the six months ended June 30, 2008, from $24.5 million in the same period in 2007 driven primarily by wholesale beverage segment sales which increased 13.9%, or $2.4 million, to $19.5 million for the six months ended June 30, 2008 as a result of increased volume as well as an average price increase for beer generally consistent with the craft category. Total beverage shipments increased 4.2% to 122,700 barrels and of the total beverage shipments, beer shipments increased 6.5% to 102,300 barrels in the six months ended June 30, 2008 from 96,100 barrels in the same period in 2007, primarily due to increased Pyramid beer brand shipments. Pyramid brand shipments increased 5.8% to 90,700 barrels in the six months ended June 30, 2008, driven by Pyramid Hefeweizen, our top selling product, which was up 8.1% in shipment volume for the period. The increase in beer shipments was offset by a decline contract manufactured shipments of 1,300 barrels to 20,400 barrels for the six months ended June 30, 2008. Alehouse sales increased 3.7% to $7.7 million for the first six months of 2008 and showed sales growth in all locations.
Excise Taxes. Excise taxes were 9.4% and 10.1%, respectively, of gross beverage sales for the six months ended June 30, 2008 and 2007. Per beer barrel shipped excise taxes in the first half of the year of 2008 increased slightly to $17.81 per beer barrel as compared to $17.78 per beer barrel in the same period in 2007. Federal taxes paid on beer shipments are determined by the level of shipments. For the first 60,000 barrels of production the federal excise tax rate for "small brewers" like Pyramid is $7 per barrel resulting in incremental volume being taxed at an $18 per beer barrel rate. State taxes per barrel vary on a state by state basis.
Gross Margin. Gross margin for the six months ended June 30, 2008 increased 14.7% to $6.9 million from $6.0 million as compared to the same period in 2007, primarily as a result of top line growth driven by increased volume and increases in beer prices. Additionally, gross margin as a percentage of net sales increased to 27.3% in the six months ended June 30, 2008 as compared to 26.4% in the same period in 2007.
The following table represents gross margin comparisons and changes by segment for the six months ended June 30, 2008 and 2007 (in thousands):

                                     % of                       % of
                                   Segment                    Segment
  Gross Margin         2008       Net Sales       2007       Net Sales      $ Change       % Change
  Beverage Division   $ 6,565           37.2 %   $ 5,692           37.0 %   $     873           15.3 %
  Alehouse Division       346            4.5 %       332            4.5 %          14            4.2 %

  Total               $ 6,911           27.3 %   $ 6,024           26.4 %   $     887           14.7 %

Selling, General and Administrative Expenses. Selling, general and administrative expenses increased 16.4%, or $1.1 million, to $8.1 million for the six months ended June 30, 2008 from $7.0 million in the same period in 2007. The increase in expense was primarily attributed to an increase in general and administrative expense of $1.3 million to $3.9 million due primarily to the estimated amount of approximately $1.1 million recorded pursuant to the mediation settlement and to the professional fees associated with the Independent Brewers transaction. Selling and marketing expenses were $4.3 million for the six months ended June 30, 2008 a decrease of $175,000 from a year ago comprised of a decrease in marketing expenses of $257,000 to $901,000 due to a reduction in promotions and sponsorships and offset by selling expenses which increased $82,000 to $3.4 million primarily due to increases in sponsorships in conjunction with brand building efforts for our Pyramid brand.
Gain on Sale. We recognized a gain on sale of $2.4 million in the first half of 2007 as the result of the sale of the TK Soda Assets.
Other Expense, Net. Other expense, net, increased to $376,000 in the first six months of 2008 from $57,000 in the first six months of 2007, primarily attributable to an increase in interest expense associated with our capital lease and a decrease in other miscellaneous income.
Income Taxes. As of June 30, 2008, we had deferred tax assets arising from deductible temporary differences and tax loss carryforwards offset against certain deferred tax liabilities. Realization of the deferred tax assets is dependent on our ability to generate future U.S. taxable income. We do not believe that our net deferred assets meet the "more likely than not" realization criteria

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and accordingly, a full valuation allowance has been established. We will continue to evaluate the ability to realize the deferred tax assets quarterly by assessing the need for and amount of the valuation allowance.
Net (Loss)Income. We reported net loss of $1.6 million for the six months ended June 30, 2008 compared to a net income of $1.4 million in the same period of 2007. Net loss for the six months ended June 30, 2008 was negatively impacted by a one-time impact of $1.1 million relating to a mediation settlement as well as transaction costs while the net income in the same period a year ago was positively impacted by the one-time gain on the sale of the TK Soda Assets of $2.4 million.
Liquidity and Capital Resources and Commitments We had a $628,000 and $201,000 balance of cash and cash equivalents and a $4.6 million and $3.3 million accounts receivable balance at June 30, 2008 and December 31, 2007, respectively. At June 30, 2008, our working capital was negative at $2.7 million compared to negative $1.9 million at December 31, 2007. Our working capital was primarily impacted by the $1.1 million mediation settlement as well as an increase in short term financing related to our capital lease financing agreement.
Net cash provided by operating activities for the six months ended June 30, 2008 was $380,000, compared to net cash used in operating activities of $1.3 million for the six months ended June 30, 2007. Excluding the effects of the non-cash gain related to the sale of the TK Soda Assets in 2007 and the estimated mediation settlement in 2008, the increase to net cash provided by operating activities is primarily attributed to profitable first half of 2008 versus the net loss in the same period of 2007 as a result of higher sales volumes combined with a price increase in beer and the expense reduction initiative taken in 2008. As the beverage segment operates with relatively short accounts receivable terms and the alehouse segment operates essentially as a cash business, as such we typically tend to collect within 30 days of a sale or immediately upon sale. Therefore, we generally do not require significant cash on hand to meet operating needs.
Net cash used in investing activities totaled approximately $86,000 for the six months ended June 30, 2008 compared to net cash provided of $1.6 million for the same period of the prior year. The net cash provided by investing activities in the prior year primarily reflects the $2.4 million we received in conjunction with the sale of the TK Soda Assets offset by capital asset purchases in the first half of 2007, as compared to the first half of 2008.
Net cash provided by financing activities totaled approximately $133,000 during the six months ended June 30, 2008, compared to net cash used of approximately $290,000 for the same period during 2007. The net cash provided by financing activities in the six months ending June 30, 2008 was primarily due to the proceeds received in conjunction with the capital lease agreement relating to assets acquired during 2007, and the first quarter of 2008, offset by payments on the line of credit.
In February 2008, we entered into a non-cancelable capital lease agreement for the lease of up to $2.5 million in brewery equipment which includes previous purchases made during 2007, in addition to the new bottling line filler and other 2008 planned improvements. The debt is payable over a 30-month period. We are required by the terms of the lease agreement to furnish a standby letter of credit in the amount of $995,000. This letter of credit replaces a $345,000 letter of credit previously provided in conjunction with our February 2006 purchase of kegs.
Additionally in February 2008, we renegotiated our line of credit agreement which makes available a $3.25 million line of credit, stepping down to $2.5 million effective September 2008 through the maturity on March 31, 2009. A portion of the line of credit, $995,000, has been reserved to support a standby letter of credit for the brewery equipment financing. In conjunction with obtaining the bank's consent to the merger, we agreed to reduce the line of credit to $995,000 effective upon the close of the merger. Any borrowings are subject to an interest rate of prime plus 0.5%, fully floating, with a 0.8% commitment fee. Under the terms of the agreement, we must limit annual capital expenditures, annually, to $2.5 million and adhere to certain financial performance covenants with a restriction on the payment of future dividends.
We have taken measures to streamline our cost structure and work toward achieving profitability during a period where there have been major cost increases and availability challenges of key raw materials in 2008. These measures include:
• A significant pricing increase on beer across all brands/packages for the retail market and on food/beer in our Alehouses,

• A major expense reduction initiative projected to reduce our 2008 expenses that included targeted staff reductions affecting approximately 10% of our salaried workforce,

• A delay in our Eastern expansion to be even more focused on our core Western markets,

• Investment in a new bottling line filler in our Berkeley brewery, which will generate significant efficiencies, and

• Securing critical raw materials availability and pricing over the next several years.

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As a result of our major expense reduction initiative, we initiated targeted staff reductions that were concentrated on aligning our sales headcount with a strategic refocus to our core Western markets, as well as lowering the overall cost structure in supporting departments. The staff reductions were completed in early March 2008. The expense reduction initiative will allow us to provide both the necessary support to our core products and markets while affording an opportunity for an improvement in profitability.
As a result of the measures described above, we believe that our cash flow from operating activities, tighter management of capital spending for 2008 and cash management in combination with various financing options, including the line of credit and capital asset leasing, should provide adequate working capital to meet our future needs. However, it is possible that some or all of our cash requirements may not be met by these activities, which would require us to seek additional capital from other sources, which may not be available to us on attractive terms or at all.
Contractual Obligations
As of March 31, 2008, we had obtained $2.4 million in connection with a capital lease agreement for the lease of up to $2.5 million in brewery equipment which includes previous purchases made during 2007, in addition to the new bottling line filler and other 2008 planned improvements. The debt is payable over a 30-month period, of which $780,000 is classified as current. Contingencies
A former alehouse employee had commenced an action against us in California state court (Taylor v. Pyramid Breweries Inc., et al, Case No. 07AS02039, Sacramento California Superior Court) alleging that he and other employees were denied adequate opportunity to take meal and rest breaks as required by California law. The suit was filed as a potential class action, but no motion requesting certification of the case as a class action had been filed. We entered into mediation proceedings with the plaintiff on April 1, 2008, and on that date, entered into a Memorandum of Understanding as a result of mediation. The parties stipulated to class certification for purposes of settlement only. The settlement is subject to final court approval, which is scheduled for consideration by the court on October 3, 2008, and provides for a settlement payment of not more than $1.3 million, including specified fees and costs. For the quarter ended March 31, 2008, we recognized approximately $1.1 million as a charge to earnings as a result of this settlement, which represents our current estimate of the amount that is probable to be paid pursuant to the settlement, but there can be no assurance that such amount will not be greater (up to $1.3 million) or less than the amount accrued. We anticipate that our current operating cash flows and other sources of liquidity will be sufficient to enable us to satisfy our payment obligation under the settlement agreement.
In addition to the matter discussed above, we are involved from time to time in claims, proceedings and litigation arising in the ordinary course of business. We do not believe that any such claim, proceeding or litigation, either alone or in the aggregate, will have a material adverse effect on our financial position or results of operations. Critical Accounting Policies
See the information concerning our critical accounting policies included under Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operation-Critical Accounting Policies in our Annual Report on Form 10-K for the fiscal year ended December 31, 2007 as filed with the SEC. There have been no significant changes in our critical accounting policies during the six months ended June 30, 2008.
ITEM 4. Controls and Procedures
Procedures
Procedures
(a) Evaluation of disclosure controls and procedure We maintain a set of disclosure controls and procedures and internal controls designed to ensure that information required to be disclosed in our filings under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time

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periods specified in the Securities and Exchange Commission's rules and forms. Based on their evaluation as of the end of the period covered by this Quarterly Report on Form 10-Q, our Chief Executive Officer and Chief Financial Officer and Treasurer, have concluded that as of the end of the period covered by this Quarterly Report on Form 10-Q, our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the Exchange Act)) are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.
(b) Changes in internal controls There were no significant changes in the Company's internal control over financial reporting during the three months ended June 30, 2008 in connection with this evaluation that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.