PORTLAND BREWING CO /OR/, 10KSB, 1999-03-31

PORTLAND BREWING CO /OR/
10KSB, 1999-03-31
MALT BEVERAGES

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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549

FORM 10-KSB

[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended: December 31, 1998
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________to __________

COMMISSION FILE NUMBER: 0 - 25836

PORTLAND BREWING COMPANY
(Name of small business issuer in its charter)

OREGON 93-0865997
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)

2730 NW 31ST AVENUE, PORTLAND, OREGON 97210
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (503) 226-7623

SECURITIES REGISTERED UNDER SECTION 12(b) OF THE EXCHANGE ACT: NONE
SECURITIES REGISTERED UNDER SECTION 12(g) OF THE EXCHANGE ACT:
COMMON STOCK, NO PAR VALUE
(Title of Class)
________________

Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the Registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days:
Yes [X] No [ ]

Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB, or any amendment to this Form 10-KSB. [ ]

Revenues for the year ended December 31, 1998: $10,187,554

State the aggregate market value of the voting stock held by
non-affiliates: Not Applicable, the Registrant's stock has no established
trading market.

The number of shares outstanding of the Registrant's Common Stock as of
March 1, 1999 was 3,365,267 shares.

Transitional Small Business Disclosure Format (check one): Yes X No
--- ---

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PORTLAND BREWING COMPANY
1998 FORM 10-KSB
TABLE OF CONTENTS

<TABLE>
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PART I

PAGE
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<S> <C> <C>
Item 6. Description of Business 2

Item 7. Description of Property 9

Item 8. Directors, Executive Officers and Significant Employees 10

Item 9. Remuneration of Directors and Officers 11

Item 10. Security Ownership of Management and Certain Security Holders 13

Item 11. Interest of Management and Others in Certain Transactions 16

PART II

Item 1. Market Price of and Dividends on the Registrant's Common Equity 19
and Other Shareholder Matters

Item 2. Legal Proceedings 19

Item 3. Changes in and Disagreements with Accountants 19

Item 4. Submission of Matters to a Vote of Security Holders 19

Item 5. Compliance with Section 16(a) of the Exchange Act 20

Item 6. Reports on Form 8-K 20

PART F/S

Index to Financial Statements 20

PART III

Item 1. Index to Exhibits 21

Item 2. Description of Exhibits 21
</TABLE>

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PART I

ITEM 6. DESCRIPTION OF BUSINESS

GENERAL

The Company was incorporated in Oregon on November 14, 1983. The Company was
formed to brew and sell specialty beer (i.e., beer which is made in
relatively small batches and which generally sell at retail prices of over
$5.00 per six-pack). The Company's product line includes the following core
brands: MacTarnahan's Amber Ale, Original Honey Beer, Haystack Black Porter,
ZigZag River Lager and Woodstock IPA. In addition, there is a seasonal line
of beers including Icicle Creek Winter Ale, Thunderhead Cream Stout, Portland
Pale Ale and Uncle Otto's Oktoberfest Maerzen. Specialty products are made
periodically to be served at the Company's restaurant, The Taproom, such as
Bavarian Style Weizen. The Company uses distributors to sell principally to
the packaged/bottle market through authorized retail outlets and the
on-premise draft market through establishments licensed to serve alcoholic
beverages. The Company sells beer primarily in its home market of Oregon as
well as in Washington and California. Since 1996, the Company has expanded
sales into other states east of the Rocky Mountains.

The Company opened its first brewery in January 1986 at 1339 NW Flanders
Street in Portland, Oregon. In March 1986 a pub was added which allowed
customers to view various stages of the brewing process, and in July 1996 the
Company completed an expansion which significantly increased the restaurant
area of the pub. In November 1998, the Company sold the Flanders Street
BrewPub. (SEE NOTE 3 OF NOTES TO FINANCIAL STATEMENTS.) The Company opened
its second and main brewery in June 1993 located at 2730 NW 31st Avenue in
Portland, which initially more than doubled its annual production capacity to
approximately 26,000 barrels. Subsequent equipment additions and expansion
have increased capacity to approximately 135,000 barrels of ale per year. In
July 1994, a restaurant, The Taproom, was constructed at the main brewery and
opened to the public.

INDUSTRY OVERVIEW

NATIONAL BEER INDUSTRY. Total beer consumption in the United States has
changed little since 1986. In the early 1980's, when sales of imported beer
were growing, a few entrepreneurs founded micro-breweries to compete with
imported beer. What came to be known as the domestic specialty (craft) beer
market, went on to experience fifteen years of extremely rapid growth. In
addition to new small breweries, large domestic brewers produced craft-style
beers and contract brewers used excess regional brewery capacity to add
brands. Stores and pubs found it difficult to find room for all the brands
that were available, and the consumer was faced with bewildering variety. The
inevitable slow down started in 1996, and with few exceptions, breweries
which had continued to invest in capacity to meet ever increasing demand
found themselves with excess production capability for the first time.

The large national breweries (Anheuser-Busch, Miller Brewing Company, Adolph
Coors Brewing Company, The Stroh Brewing Company, and Pabst Brewing Company)
continue to dominate the market with approximately an aggregate 87% share,
according to BEER MARKETER'S INSIGHTS, JANUARY 1999. Pabst Brewing Company
recently announced plans to purchase The Stroh Brewing Company, closing most
of the its breweries and selling off some of its brands to Miller Brewing
Company, which will eliminate some excess capacity in the industry.
Consolidation in the industry is expected to continue on every level for
another year at least.

In 1998, sales of imported beer increased, with most of the growth in Corona,
Heineken, Molson, Labatts, and Guinness, and the growth of domestic beer
consumption slowed. The specialty and imported beer market is currently
comprised of approximately 26% domestic specialty beer and 74% imported beer,
according to BEER MARKETER'S INSIGHTS, JANUARY 1999. However, with the
exception of Guinness, the growth is primarily in light lager beers, so much
of the growth may be at the expense of the national brewers, rather than the
specialty brewers.

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SPECIALTY BEER INDUSTRY--PACIFIC NORTHWEST. Sales of specialty beers in
Oregon increased by only 2% in 1998 and 1% 1997, compared to 13% in 1996; and
accounted for approximately a 10% and 11% market share in 1998 and 1997,
respectively, according to Oregon Liquor Control Commission's beer sales data
for the respective periods. Additionally, Oregon and Washington are
considered to be mature markets in the U.S. specialty beer segment.
Consequently, the Company believes that future growth will be more difficult
in these two states.

PRODUCTS

The Company offers a wide variety of specialty beers. The complete product
line includes core brands, which are available year-round, a rotating
selection of seasonal brands, and specialty products. Draft product (kegs)
accounted for approximately 39% and 46% of the Company's beer shipments in
1998 and 1997, respectively.

The Company's core brands include:

MACTARNAHAN'S AMBER ALE. MacTarnahan's Amber Ale is a complex,
copper-colored Scottish style ale of great character made with pale and
caramel malts and Cascade hops, and is available in draft, 12 oz. and 22 oz.
packages.

ORIGINAL HONEY BEER. Original (Oregon) Honey Beer is a pale
light-bodied ale made with two-row barley malt, Oregon clover honey, and
Nugget and Willamette hops, and is available in draft, 12 oz. and 22 oz.
packages.

HAYSTACK BLACK PORTER. Haystack Black Porter contains a balance of
domestic pale, caramel and black malts, enhanced with imported English
chocolate malt, and is available in draft, 12 oz. and 22 oz. packages.

ZIGZAG RIVER LAGER. ZigZag River Lager is a full bodied, European style
bottom fermented lager with a slight malty sweetness and subtle hop presence,
available in draft and 12 oz. packages.

WOODSTOCK IPA. The Company's India Pale Ale is aged with natural
untoasted American oak from the Ozarks that has been air dried for two years
and is one of the few India Pale Ales to marry the hop and oak flavors,
available in draft and 12 oz. packages.

The Company's seasonal brands (all available in draft and 12 oz. packages)
include:

THUNDERHEAD CREAM STOUT. The Company's heartiest brew blends the flavor
of pale, crystal, dark malts and roasted barley, balanced with the subtle
aroma of Styrian Golding hops, and is offered from February through April.

PORTLAND PALE ALE. A modified recipe of the founders' original is a
clean light-bodied malt ale with ample hop aroma and a crisp refreshing
finish. The ale is brewed with two-row barley malt and a blend of Northwest
hops, including an aromatic hop oil extract added after filtration, and is
offered from April through August.

UNCLE OTTO'S OKTOBERFEST MAERZEN. This beer, lagered for a full two
months, is created using a blend of pale and select specialty malts, spiced
with Northern Brewer and Bohemian Saaz hops, and is offered in September and
October.

ICICLE CREEK WINTER ALE. The color of old Mahogany, this seasonal ale is
the result of a blend of pale and dark specialty malts well balanced with
Galena and aromatic Saaz hops, and is offered from November through January.

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RESTAURANT

The Company operates one restaurant in Portland, The Taproom, which is
located at the Company's brewery. The Taproom is a tasting room and
restaurant that is upscale in comparison to other brewpubs in the region. In
November 1998, the Company sold its Flanders Street BrewPub. (SEE NOTE 3 OF
NOTES TO FINANCIAL STATEMENTS.)

MARKETING AND SALES

The Company uses both licensed beer and wine distributors/wholesalers to sell
to and service on- and off-premise accounts for specific geographic
territories. These distributors maintain broad distribution in the Company's
core markets i.e., Oregon, Washington and California. Columbia Distributing
Company services almost all of the major markets in Oregon and is expanding
into Washington, having agreed to purchase Sid Eland Distributing, Inc., in
King County, Washington. Columbia Distributing will be the primary
distributor in Washington state when the Sid Eland Distributing, Inc.
acquisition is completed. In California, Wine Warehouse represents the
Company on a state wide basis handling all of the Company's sales. Columbia
Distributing and Wine Warehouse will continue to be large volume distributors
of the Company's products in 1999. Approximately 65 distributors represent
the Company in its Western Markets and the Company employs 12 salespeople to
service its core markets: seven in Oregon, three in Washington, and two in
California. Because of the excess capacity in the industry, the Company has
been expanding sales into other markets for the last two years and is now
being represented in 33 states. Sales for all markets east of the Rocky
Mountains accounted for 8% of total shipments in 1998.

The Company's 1998 marketing plan focused on key northwestern U.S. markets
including Oregon, Washington and Northern California. In 1999, Southern
California is also a focus, making the Interstate 5 Freeway from Canada to
Mexico the Company's core market. Secondary markets include virtually all of
the western United States including Hawaii and Alaska and many states east of
the Rocky Mountains. In 1998, the Company changed its distribution in
California from independent beer wholesalers to one state-wide distributor,
Wine Warehouse, as national beer suppliers increased pressure for exclusivity
of their products. With consolidation of independent distributors
accelerating, especially in light of Pabst Brewing Company's purchase of The
Stroh Brewery Company, the Company may be required to further adjust its
distribution arrangements in the future.

In 1998, the Company focused on its individual brands and especially its
flagship, MacTarnahan's Amber Ale, instead of focusing on the family of
brands approach it had been following. Going forward, a significant portion
of the Company's marketing budget will be directed at promoting MacTarnahan's
Amber Ale while secondary brands will receive less support. The Company
continues to enhance consumer awareness through increased promotional and
advertising activity in selected sports, music and community activities which
offer opportunities for introduction to the Company and sampling of its
brands. These have included and will include opportunities associated with
the Seattle Seahawks and Mariners, the Portland Trailblazers and the Highland
Games throughout the west coast of the U.S. Because of the intense
competition for draft accounts in larger cities, the Company's marketing
efforts have been concentrated on increasing packaged authorizations in chain
retailers. In Oregon, the Company focuses equally on draft and package sales.

TRADEMARKS

The Company has a program to obtain United States trademark registrations for
its key bottled brands. The Company owns federal trademark registrations for
the name MACTARNAHAN'S, the name HAYSTACK BLACK, the name ZIGZAG RIVER LAGER,
the OREGON HONEY BEER and ORIGINAL HONEY BEER label designs and the
MACTARNAHAN'S label design. The Company has pending applications for federal
registration of the brand name WOODSTOCK IPA, THUNDERHEAD CREAM STOUT, and
for the marks PORTLAND BREWING and the RUNNING MAC design icon. To the best
of the Company's knowledge, it has the right to use these marks on a
nationwide basis in connection with malt beverages.

4
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The Company has long maintained a practice of registering its brand names as
trademarks in the State of Oregon. It owns Oregon registrations for numerous
marks, including the brand names HAYSTACK BLACK, UNCLE OTTO'S OKTOBERFEST,
PORTLAND PORTER, PORTLAND BREWING, PORTLAND ALE and MALARKEY'S WILD IRISH
ALE. In addition, the Company owns state registrations in California,
Washington and Colorado for key brand names. To the best of the Company's
knowledge, it has the right to use the brand name of each of its current
products in the areas where those products are currently distributed.

COMPETITION

The specialty brewing industry has experienced significant change in the past
several years. Growth rates have slowed, distribution opportunities have
become limited, and more brewers have entered the industry. The Company
believes that category saturation continues to make growth more difficult for
existing regional specialty brewers, and that competition affecting its
growth will continue to come from imported beers, national breweries,
national specialty breweries, larger regional specialty breweries with
aggressive mass marketing capabilities, and small micro breweries and brew
pubs which have strong local appeal. The proliferation of specialty brewers,
new beers, and brew pubs, efforts by regional craft brewers to expand their
production capacities and distribution, and underutilized domestic brewing
capacity are all competitive factors for specialty brewers. Additionally,
larger national brewers have developed or are developing brands to compete
directly with specialty beers. These national competitors have advantages
such as lower production costs, larger marketing budgets, greater financial
and other resources and more developed and extensive distribution networks
than the Company.

Sales of domestic specialty beer to chain stores increased only an estimated
0.6% in 1998 and 8% percent in 1997, compared to 34% in 1996. (BEER
MARKETER'S INSIGHTS - FEBRUARY 8, 1999) In western U.S. markets, the top
eight domestic specialty brewers experienced mixed performance in 1998 as
four of them reported sales decreases in California and Oregon, and six of
them reported sales decreases in Washington. (BEER MARKETER'S INSIGHTS -
JANUARY 25, 1999)

As distributors and retailers become more selective in accepting new brands,
the rate of brewery openings continues to decline. The ratio of openings to
closures of specialty brewers/brew pubs declined from 3:1 in 1997 to 4:3 in
1998. (INSTITUTE OF BREWING STUDIES, MARCH 1999) Additionally, as the
consolidation trend continues in the specialty beer industry, the Company
believes that price discounting, solidifying distribution, and increasing
sales and marketing efforts will be key to near term and long term survival.

Growing demand for imported beer also negatively impacts sales of domestic
specialty beer. Import sales increased 45% in Oregon and 20% in Washington in
1998, compared to 1997. Although nationally, import beers outsell domestic
specialty beers three to one, in the Northwest, domestic specialty beers
outsell imports two to one. (OREGON LIQUOR CONTROL COMMISSION AND WASHINGTON
STATE LIQUOR CONTROL BOARD NOVEMBER 1998 DATA)

GOVERNMENTAL REGULATION

The production and sale of alcoholic beverages is subject to extensive
regulation by the Federal Bureau of Alcohol, Tobacco and Firearms and
individual states' alcoholic beverage regulatory agencies.

LICENSE DESCRIPTION. The Company operates under a Brewpub license which
allow sales off-premise as well as through up to two retail outlets. The
Company operates one restaurant at its brewery.

TAXES. The Company pays a federal excise tax (FET) of $7.00 per barrel on all
production. This tax increases to $18.00 per barrel on production above
60,000 barrels per year. In addition, the Company pays an Oregon excise tax
of $2.60 per barrel and a Washington excise tax of $4.78 per barrel on beer
sold in those states. In other states, similar excise taxes are levied on
the distributor. Increases in either the federal or state excise taxes would
inevitably raise the price of beer, which may adversely affect sales.

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DRAM SHOP LIABILITY. The Oregon Supreme Court has held that the serving of
alcoholic beverages to a person known to be intoxicated may, under certain
circumstances, result in the server being held liable to third parties for
injuries caused by the intoxicated customer. The Company serves beer and
wine to its customers at its restaurant. If an intoxicated customer is served
wine or beer and subsequently commits a tort such as causing an automobile
accident, the Company may be held liable for damages to the injured person or
persons. The Company has obtained host liquor liability insurance coverage
and will continue such coverage if available at a reasonable cost. However,
future increases in insurance premiums may make it prohibitive for the
Company to maintain adequate insurance coverage. A large damage award against
the Company, not adequately covered by insurance, would adversely affect the
Company's financial position.

RESEARCH AND DEVELOPMENT

The Company had minimal research and development expenditures in 1998 and
1997, and had no customer sponsored research and development activities
during such periods. However, the Company has from time to time, developed
new products at its original brewery. Such products were sold to retail
customers and, accordingly, associated development costs are expensed as cost
of goods sold.

EMPLOYEES

As of December 31, 1998, the Company had 84 employees (73 full time),
including 25 in brewing, bottling and shipping operations, 34 in retail
operations, seven in administration and 18 in sales and marketing. None of
the Company's employees are covered by collective bargaining agreements. The
Company provides its full-time employees with health, dental and life
insurance, short and long term disability, and a 401(k) plan. No
contributions were made by the Company to the 401(k) plan in 1998 or 1997.
The Company believes its employee relations are good.

CONCENTRATIONS OF RISK

GEOGRAPHICAL AND DISTRIBUTOR CONCENTRATION. In 1998, wholesale distributors
accounted for 85% of the Company's shipments, of which 53% were to Oregon
distributors. The Company's largest distributor, Columbia Distributing
Company of Portland, Oregon which distributes the Company's products in
Oregon and Washington accounted for approximately 40% of 1998 revenues. The
next largest distributor accounted for approximately 9% of the Company's
total revenues for the same period. Distribution agreements generally grant
exclusive territories to distributors. Distribution agreements and applicable
state laws limit the ability of the Company to terminate such agreements. The
Company's distributors also market and distribute competing brands. While the
Company believes it has good relationships with most of its distributors, the
Company can give no assurance that each of its distributors will continue to
effectively market and distribute the Company's beer. Because state liquor
laws and/or standard contractual provisions limit the Company's ability to
terminate a distribution agreement, the Company can give no assurance that a
distributor for any given geographic area could be replaced without cost or
replaced immediately, either temporarily or permanently, in the event the
distributor was performing poorly in its efforts to distribute the Company's
products or was otherwise unable to perform (e.g. as a result of an employee
strike or damage caused by fire or natural disaster). The Company's inability
to replace a non-performing or poorly performing distributor in a timely
fashion and/or with minimal cost could have a significant adverse effect on
the Company's results of operations, particularly if the distributor were
Columbia Distributing Company, the Company's largest distributor.

INCREASED COMPETITION AND SATURATION IN THE SPECIALTY BEER INDUSTRY. (SEE
"OVERVIEW" AND "COMPETITION" ABOVE.) Increased competition and the
proliferation of brands in the specialty beer industry has had and may
continue to have an adverse effect on the Company's business, financial
condition and results of operations. There can be no assurance that the
specialty beer industry will experience growth, will not experience a
downturn or that any downturn will not be severe. The Company's future
success will depend upon its ability to continue to build brand awareness and
increase sales and profits.

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OPERATING HAZARDS. The Company's operations, and the brewing industry in
general, are subject to certain hazards such as contamination of brews by
micro-organisms and risk of equipment failure. The Company's products are not
heat pasteurized, irradiated or chemically treated. The Company has product
liability insurance that it believes is adequate to cover risks of
contamination to third-parties. There can be no assurance that such insurance
will continue to be available at a price or on other terms satisfactory to
the Company. The Company carries business interruption insurance to cover
against insured losses to equipment from direct physical damage.

ENVIRONMENTAL MATTERS

The Company is addressing certain waste water treatment issues raised in a
March 1998 letter from the City of Portland, Oregon. The Company has
developed a solution to ensure continued compliance with appropriate
standards and has received written approval from the City of Portland,
Oregon. Implementation of the solution is expected to be completed by April
1999 and expected to cost approximately $50,000.

SOURCES OF LIQUIDITY

The Company requires capital principally to fund its working capital needs.
The Company has met its capital requirements through cash flow from
operations, bank borrowings, loans from shareholders and the private and
public sale of its Common Stock.

In 1998, the Company recorded an extraordinary gain of $1,200,279 related to
a debt restructuring. The Company was relieved of $1,079,257 of debt and
accrued interest originated by Bank of America, NT & SA and $272,915 of trade
accounts payable. The gain was offset by professional fees related to the
restructuring of $151,893. (SEE ITEM 11 - INTEREST OF MANAGEMENT AND OTHERS
IN CERTAIN TRANSACTIONS - PURCHASE AND RESTRUCTURING OF SECURED DEBT".)

In connection with the debt restructuring, the MacTarnahan Limited
Partnership (a related party) purchased approximately $3.1 million of secured
Company debt held by Bank of America, NT & SA. The $3.1 million bank debt
plus accrued interest and other related charges was settled by the
MacTarnahan Limited Partnership which in turn resulted in a net loan payable
from the Company to the MacTarnahan Limited Partnership of $2.1 million. The
$2.1 million term loan ("Term Loan") is secured by receivables, inventory and
equipment of the Company. The Term Loan bears interest at a per annum rate
equal to the prime lending rate of the Bank of the Northwest plus 1%. At
December 31, 1998 the prime lending rate was 7.75%. The Company expects to
place the debt permanently with a financial institution in 1999 or pay off
the debt through the raising of additional capital. There can be no assurance
that the Company will be able to obtain permanent financing from a financial
institution or that the Company will be able to raise additional capital on
commercially reasonable terms or at all. (SEE ITEM 11 - INTEREST OF
MANAGEMENT AND OTHERS IN CERTAIN TRANSACTIONS -PURCHASE AND RESTRUCTURING OF
SECURED DEBT".)

The Company also relies on trade creditors for working capital. The Company
has completed negotiations with its trade creditors in which the trade
creditors were offered the option of receiving a discounted amount of cash
immediately or the entire amount owed to them to be paid over a five-year
period. As a result of such negotiations to date, the Company was relieved of
$272,915 of trade accounts payable and issued notes in the aggregate
principal amount of $148,065 to trade creditors. The notes mature on
September 1, 2003 and bear interest at 6% per annum.

On September 2, 1998, the Company entered into a $600,000 revolving line of
credit with a bank which provides for a fixed interest rate of 7.99%
("Revolving Line"). The Revolving Line matures on August 20, 1999. At
December 31, 1998, $323,626 was outstanding under the Revolving Line. The
Revolving Line is guaranteed by Harmer Mill & Logging Supply Co., whose
limited partners are Mr. Robert M. MacTarnahan and Mrs. Ruth MacTarnahan,
("Harmer") and is secured by a certificate of deposit in the amount of
$600,000

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for which Harmer will receive an accommodation fee in an amount equal to 1%
per year on the outstanding principal loan balance on the Revolving Line.

In December 1997, the Company borrowed a total of $400,000 from two of its
shareholders under 10% Amortizing Subordinated Notes (the "Notes"). On August
25, 1998, the two shareholders agreed to cancel the Notes in exchange for
645,162 shares of the Company's Common Stock, resulting in the issuance of a
total of 1,290,324 shares.

On March 1, 1999, Harmer and the Charles A. Adams Family Trust each purchased
2,885 shares of the Company's Series A Preferred Stock ("Series A") for $52
per share, resulting in aggregate proceeds to the Company of $300,040. Each
share of Series A is convertible on February 25, 2004, into fully paid and
non-assessable shares of Common Stock at a rate of 100 shares of Common Stock
for each share of Series A. The conversion ratio, which is currently 100 to
1, is subject to adjustment in the event of stock splits or stock dividends.
Unless converted, the Company must redeem the Series A shares on February 25,
2004, at $52 per share plus any declared but unpaid dividends, in cash or in
24 equal monthly payments bearing interest at 12% per annum. Each shareholder
of Series A is entitled to the number of votes equal to the number of shares
of Common Stock into which the Series A shares can be converted and the
Series A shares are entitled to vote as a separate class. Each shareholder of
Series A is entitled to receive cumulative dividends at the rate of 8% per
annum, when and if declared by the Board of Directors, prior to payment of
dividends on Common Stock. No dividends have been declared to date. In the
event of any liquidation or dissolution of the Company, either voluntary or
involuntary, each shareholder of Series A shall be entitled to receive, prior
and in preference to any distribution of any assets or surplus funds to the
holders of Common Stock, an amount equal to $52.00 per share for each share
of Series A and, in addition, an amount equal to all declared but unpaid
dividends on Series A.

LIQUIDITY RISKS

The Company operates in the specialty beer industry. Intense competition and
the proliferation of new brands has had and may continue to have an adverse
effect on the Company's business, financial condition and results of
operations. There can be no assurance that the Company will be able to
increase its sales volume or be able to maintain its selling prices in
existing markets or new markets. (SEE "OVERVIEW" AND "COMPETITION" ABOVE.)

The Company experienced significant operating losses during the years ended
December 31, 1998 and 1997, and has continued to incur losses in the first
quarter of 1999. Operating results have and may continue to fluctuate as a
result of many factors including lower sales volumes and selling prices,
increased depreciation and other fixed operating costs as a percent of sales
during periods when the Company's brewery is at less than full capacity,
changes in product mix, increased selling and marketing costs incurred as the
Company protects its business in existing markets and increased
transportation costs as it develops business in new geographic markets.

YEAR 2000 ISSUE

The Company's approach to the Year 2000 issue is discussed below. In
discussing the Year 2000 issue, the Company necessarily makes certain forward
looking statements. There can be no assurance that actual results will not
differ materially from the projections contained in the forward looking
statements. Factors which may cause actual results to differ materially
include, but are not limited to the failure of Company personnel and outside
consultants to properly assess and address the Company's Year 2000 issues,
inaccurate or incomplete disclosure by third parties regarding the Year 2000
issue, failure to address Year 2000 issue with all vendors,

<PAGE>

including utility vendors, and customers, infrastructure failures, such as
disruptions in the supply of electricity, gas, water or communications
services, or major institutions, such as the government and banking systems,
and failure of the Company to accurately predict the costs to address the
Year 2000 issue or the lost revenues related to interruption in the Company's
or its customers' businesses.

STATE OF READINESS. The Company, in conjunction with outside consultants, has
made an assessment of the effect of the Year 2000 issue on its computer
equipment and software (sometimes referred to as "information technology" or
"IT") and devices with embedded technology (sometimes referred to as
"non-IT"). The Company has identified certain modifications to its IT systems
and non-IT systems which are necessary to address the Year 2000 issue and has
partially implemented those modifications. The Company plans to identify
what, if anything, still needs to be done and to develop a timeline. Based on
this assessment and implementation of the modifications discussed above, the
Company believes its IT systems and non-IT systems will properly recognize
calendar dates beginning in the year 2000.

The Company has not evaluated the IT systems and non-IT systems of its
outside vendors and customers. The Company plans to contact vendors regarding
the Year 2000 issue by the second quarter of 1999.

COSTS TO ADDRESS YEAR 2000 ISSUE. To date, costs directly related to Year
2000 remediation efforts are immaterial. Accordingly, the Company expects the
costs to address the Year 2000 issue will not have a material adverse
financial impact on the Company's financial condition or results of
operations. However, there can be no assurance that additional remediation
costs will not be identified, especially since the Company has not evaluated
the year 2000 readiness of its customers or suppliers.

RISKS OF THE COMPANY'S YEAR 2000 ISSUE. The most reasonably likely worst case
scenario for the Company would involve an extended shutdown in production
and/or a reduction in customer demand. The Company is unable to quantify the
effect of such a scenario. However, the Company plans to identify its
critical vendors and customers and evaluate whether or not any of them
represent a significant risk. In addition, the first part of the fiscal year
is not a critical production period or period of customer demand and
therefore the Company believes it would be able to recover from a temporary
interruption without a material adverse effect on the Company's operations.

COMPANY'S CONTINGENCY PLAN. Based on the Company's assessment of the Year
2000 issue, the Company has not developed and does not intend to develop a
contingency plan to address the reasonably likely worst case scenario.

ITEM 7. DESCRIPTION OF PROPERTY

The Company's brewery, located at 2730 NW 31st Avenue in Portland, showcases
the copper brewing vessels and equipment acquired in 1991 from the Sixenbrau
brewery in Nordlingen, Germany. The brewery opened in 1993 and has a present
annual production capacity of approximately 135,000 barrels of ale. The
brewery has 27,000 square feet of manufacturing, shipping and warehouse space
with a 1,000 square foot, three-story brewhouse (to display the copper
brewing vessels), and 3,000 square feet of offices. Also included is a 3,000
square foot restaurant, The Taproom, complete with an outdoor seating area.
The brewery lease is for a 15 year term which commenced June 15, 1993. The
monthly rent is $24,906 plus property taxes, insurance and maintenance, with
an adjustment for inflation or changes in fair market rental value on July 1,
1998 and July 1, 2003. The increased rental adjustment was determined
subsequent to July 1, 1998, resulting in a $17,076 charge which will be paid
by the Company in twelve monthly installments beginning February 1, 1999. In
December 1997, in connection with the issuance of $400,000 of Notes, the
lease payments were reduced by $5,000 for each of the months of January
through July 1998, and by $3,060 for each of the months of August and
September. (SEE NOTE 8 OF NOTES TO FINANCIAL STATEMENTS AND ITEM 11.)

The Company subleases approximately 10,025 square feet of expansion space at
a building adjoining its brewery located at 2750 NW 31st Avenue in Portland,
Oregon ("Adjacent Building"). The initial term of the

<PAGE>

sublease expires March 31, 1999, with one five year renewal option, with base
rent of $3,307 per month, plus a share of taxes and operating expenses. The
Company had an option agreement, which expired on December 31, 1998, with the
owner of the building, L & L Land Co. (L & L), under which the Company could
have purchased the building for $1,100,000 plus an amount for improvements to
the building consisting of the construction of a shipping dock. The Company
is currently negotiating to lease all of the Adjacent Building and then
sublease a portion of the Adjacent Building to Power Transmission Products,
Inc. In 1996, the Company and L & L paid approximately $480,000, for the
construction of a shipping dock. If the negotiations are successful and
certain conditions are met, L & L has agreed to reimburse the Company
$280,000 for its costs in constructing the shipping dock. (SEE ITEM 11.)

ITEM 8. DIRECTORS, EXECUTIVE OFFICERS AND SIGNIFICANT EMPLOYEES

DIRECTORS. The following lists the persons currently serving as directors
along with certain information. The term of office for each person elected as
a director continues until the next Annual Meeting of Shareholders and until
a successor has been elected and qualified.

<TABLE>
<CAPTION>
NAME OF DIRECTOR AGE
---------------- ---
<S> <C>
Charles A. (Tony) Adams 53
Frederick L. Bowman 54
Robert M. MacTarnahan 84
R. Scott MacTarnahan 53
Howard M. Wall, Jr. 53
</TABLE>

CHARLES A. (TONY) ADAMS. Mr. Adams has been Chairman of the Board of
Directors and President and Chief Executive Officer of the Company since
February 1992. He has been a Director of the Company since October 1988. Mr.
Adams is president of Electra Partners, Inc., a private investment holding
company. Mr. Adams was active in the real estate business beginning in 1973,
including owning and operating his own real estate company until 1983, when
he became a sales associate at CB Commercial Real Estate Group, Inc., where
he was employed until 1992. He holds a B.A. in Geology from the University of
Virginia and has studied graduate level economics and business administration
at the University of San Francisco, Portland State University and Stanford
University.

FREDERICK L. BOWMAN. Mr. Bowman is a founder of the Company and has been
Vice President since February 1992. In July 1997 Mr. Bowman was also elected
Treasurer and Secretary, and in September 1998, Mr. Bowman was appointed to
the Board of Directors. Mr. Bowman serves as corporate liaison to the beer
industry and assists in marketing efforts including public relations and the
Company's distributor support program. He designed the Company's original
products and brewery. Previous to founding Portland Brewing Company, Mr.
Bowman was involved in the wholesale automotive industry as both a technician
and a district service manager. Mr. Bowman has attended Portland State
University, University of Oregon and Oregon State University. In addition,
Mr. Bowman attended the Brewing Microbiology and Microscopy course at the
Siebel Institute in 1988.

ROBERT M. MACTARNAHAN. Mr. MacTarnahan has been a Director since July 1985.
Mr. MacTarnahan has been a partner in Harmer Company and Black Lake
Investments for more than five years. Mr. MacTarnahan has been the president
of Honeyman Aluminum Products Company, a manufacturer of hand trucks for the
beverage industry, for more than 10 years. He is also active in the promotion
of the Company and the Company's MacTarnahan's Ale is named after him. See
"Certain Relationships And Related Transactions". Mr. R. Scott MacTarnahan
is his son.

<PAGE>

R. SCOTT MACTARNAHAN. Mr. MacTarnahan has been a Director since July 1985.
He has been vice president and general manager of Honeyman Aluminum Products
Company and Harmer Company for more than 10 years. Mr. MacTarnahan received a
B.S. in Business Administration from Portland State University in 1968. Mr.
Robert M. MacTarnahan is his father.

HOWARD M. WALL, JR. Mr. Wall has been a Director of the Company since
October 1992. Since 1984 he has been the president and chief executive
officer of Portco Corporation, a Vancouver, Washington manufacturer of paper
and plastic flexible packaging for the produce, fish, and roofing industries.
He has had a long association with the Northwest hop industry as Portco
developed the world's only biodegradable paper hop string. Mr. Wall received
a B.A. in English from the University of Oregon in 1973.

EXECUTIVE OFFICERS. The following lists the names, ages and positions of the
Company's executive officers, at December 31, 1998, along with certain other
information. The Company's officers are elected by the Board of Directors at
its annual meeting, and hold office until the next annual meeting of the
Board of Directors and until their successors are elected and qualified.

<TABLE>
<CAPTION>
NAME AGE POSITION(S) WITH COMPANY
---- --- ------------------------
<S> <C> <C>
Charles A. (Tony) Adams 53 Chairman of the Board, President and Chief
Executive Officer

Glenmore James 44 Executive Vice President, Chief Financial
Officer and Chief Operating Officer

Frederick L. Bowman 54 Vice President, Treasurer and Secretary
</TABLE>

For information on the business background of Mr. Adams and Mr. Bowman, see
"Directors" above.

GLENMORE JAMES. Mr. James has been Executive Vice President and Chief
Financial Officer since June 1994, served as Executive Vice President and
Treasurer from June 1994 until July 1997, and served as Secretary from
September 1996 until July 1997. In July 1997 Mr. James was elected Chief
Operating Officer. He joined the Company full-time in April 1994. Prior to
that, Mr. James acted as a consultant to the Company. Mr. James is
responsible for the financial and operations departments of the Company. Mr.
James has worked for over twenty years in the Portland area business
community, initially in financial accounting management positions in various
manufacturing and distribution companies and more recently as an independent
business consultant. Mr. James received his ICSA certification in 1976 from
Mid-Essex Technical College, England.

ITEM 9. REMUNERATION OF DIRECTORS AND OFFICERS

a. Director and Officer Remuneration

Directors receive no cash compensation for serving on the Board of Directors.
Each Director, with the exception of Mr. Adams, has been granted options
under the Company's Non-Qualified Stock Option Plan ("NQSOP"). To date,
options to purchase 21,000 shares of the Company's Common Stock at $5.3333
per share have been granted to Directors under the NQSOP. No options were
granted under the NQSOP in 1998.

<PAGE>

The following table and notes set forth information regarding all cash
compensation paid by the Company during the year ended December 31, 1998, to
each of the three most highly compensated officers and all officers as a
group.

<TABLE>
<CAPTION>
CAPACITIES IN WHICH AGGREGATE
NAME REMUNERATION WAS RECEIVED REMUNERATION
---- ------------------------- ------------
<S> <C> <C>
Charles A. (Tony) Adams Chairman of the Board, President and Chief
Executive Officer $ 60,000

Glenmore James Executive Vice President, Chief Financial
Officer and Chief Operating Officer $ 91,424

Frederick L. Bowman Vice President, Treasurer and Secretary $ 50,748

All officers as a group (3 persons) $ 202,172
</TABLE>

b. Remuneration Plans

INCENTIVE STOCK OPTION PLAN. In October 1992, the shareholders of the
Company approved the Company's Incentive Stock Option Plan ("ISOP"). The
ISOP is administered by the Company's Board of Directors and provides for
grants to officers and employees of options to acquire shares of the
Company's Common Stock, subject to the limitations set forth in the ISOP. The
ISOP was amended in December 1998 to increase the number of shares available
for issuance thereunder from 163,500 to 400,000. Pursuant to the ISOP, the
granting of options is at the discretion of the Board of Directors, and it
has the authority to set the terms and conditions of the options granted,
including the option exercise price which must be a price equal to at least
100% of the fair market value of the subject shares of Common Stock at the
time the option is granted. As of December 31, 1998, options covering 123,525
shares of the Company's Common Stock were outstanding under the ISOP.

RESTATED CASH INCENTIVE PLAN. The Company may award its officers and
employees, under its Restated Cash Incentive Plan ("the Plan"), bonuses in an
amount up to 10 percent (10%) of net operating profits before taxes. Awards
under the Plan will be allocated among the officers and employees in
accordance with the provisions of the Plan at the discretion of the Board of
Directors. No amounts were awarded in 1998 or 1997 under the Plan.

NON-QUALIFIED STOCK OPTION PLAN. In August 1994, the Board of Directors
adopted the 1994 Non-Qualified Stock Option Plan ("NQSOP"). The NQSOP is
administered by the Board of Directors and provides for grants to officers,
employees, directors and consultants of options to acquire up to 45,000
shares of the Company's Common Stock at an exercise price of at least 85% of
the fair market value of the subject shares of Common Stock at the time the
option is granted. The granting of options is at the discretion of the Board
of Directors. As of December 31, 1998, options covering 21,000 shares of the
Company's Common Stock were outstanding under the NQSOP.

<PAGE>

ITEM 10. SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN SECURITY HOLDERS

The following table sets forth certain information regarding the beneficial
ownership of voting equity securities of the Company as of March 1, 1999 as
to (i) each person who is known by the Company to own beneficially 10% or
more of the outstanding shares of such class of voting equity securities of
the Company, (ii) each of the three most highly compensated officers and
(iii) all Directors and officers as a group. Except as otherwise noted, the
Company believes the persons listed below have sole investment and voting
power with respect to the voting equity securities owned by them.

<TABLE>
<CAPTION>
SERIES A
COMMON STOCK PREFERRED STOCK (10)
-------------------------- --------------------------
SHARES PERCENT OF SHARES PERCENT OF
NAME OF BENEFICIAL OWNER OR BENEFICIALLY SHARES BENEFICIALLY SHARES
NUMBER OF PERSONS IN GROUP OWNED (1) OUTSTANDING OWNED (1) OUTSTANDING
-------------------------- --------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Shareholder Group (9) 1,864,234.5 53.4 % 5,770 100 %

Robert M. MacTarnahan (3) (9) 1,864,234.5 53.4 5,770 100
11416 SW Lynnridge
Portland, Oregon 97225

R. Scott MacTarnahan (4) (9) 1,864,234.5 53.4 5,770 100
11416 SW Lynnridge
Portland, Oregon 97225

Charles A. (Tony) Adams (2) (5) (9) 1,864,234.5 53.4 5,770 100

Frederick L. Bowman (2) (7) 52,445 1.6

Glenmore James (2) (6) 29,500 *

All Officers and Directors as a group,
(six persons) (8) (9) 1,956,829.5 55.5 % 5,770 100 %
</TABLE>

* Less than 1%

(1) Beneficial ownership includes voting power and investment power with
respect to shares and includes shares issuable upon the exercise of
outstanding stock options and warrants.

(2) The business address for these individuals is 2730 NW 31st Avenue,
Portland, Oregon 97210.

(3) Includes 22,860 shares owned individually by Mr. Robert M.
MacTarnahan, 73,335 shares held by Black Lake Investments, 765,162
shares held by Harmer Mill & Logging Supply Co. (dba Harmer Company),
and 30,000 shares held by Harco Products, Inc., each of which is
controlled by Mr. and Mrs. Robert M. MacTarnahan and Mr. R. Scott
MacTarnahan, 43,848.75 shares which may be purchased for $3.3333 per
share upon exercise of a warrant held by MacTarnahan Limited
Partnership, whose general partner is Harmer Mill & Logging Supply Co.
and whose limited partners are Mr. Robert M. MacTarnahan and Mrs. Ruth
MacTarnahan and 6,000 shares which may be purchased for $5.3333 per
share upon exercise of a non-qualified stock option held by Mr.
Robert M. MacTarnahan. The non-qualified options are exercisable. See
note 9.

(4) Includes 73,335 shares held by Black Lake Investments, 765,162 shares
held by Harmer Mill & Logging Supply Co., and 30,000 shares held by
Harco Products, Inc., each of which is controlled by Mr. Robert M.
MacTarnahan and Mr. R. Scott MacTarnahan, 600 shares held by Mr. R.
Scott MacTarnahan's spouse, 43,848.75 shares which may be purchased for
$3.3333 per share upon exercise of a warrant held by MacTarnahan
Limited Partnership, whose general partner is Harmer Mill & Logging
Supply Co. and whose limited partners are Mr. Robert M. MacTarnahan and

<PAGE>

Mrs. Ruth MacTarnahan and 6,000 shares which may be purchased for
$5.3333 per share upon exercise of a non-qualified stock option held by
Mr. R. Scott MacTarnahan. The non-qualified options are exercisable.
See note 9.

(5) Includes 180,300 shares held by Electra Partners, Inc., an entity
controlled by Mr. Adams, 666,192 shares held by Mr. Adams as Trustee of
the Charles A. Adams Family Trust, 525 shares held by Mr. Adams'
daughter and 525 shares held by Mr. Adams' son, 32,886.75 shares which
may be purchased for $3.3333 upon exercise of a warrant held by Electra
Partners, Inc. and 36,000 shares which may be purchased for $5.8666 per
share upon exercise of an incentive stock option held by Mr. Adams. See
note 9.

(6) Includes 12,000, 6,000 and 10,000 shares which may be purchased for
$5.3333, $7.00, and $7.00 per share, respectively, upon exercise of
incentive stock options held by Mr. James.

(7) Includes 44,445 shares owned individually by Mr. Bowman, and 8,000
shares which may be purchased for $7.00 per share upon exercise of
incentive stock options held by Mr. Bowman.

(8) Includes 85,500 shares which may be purchased for prices ranging from
$3.333 to $7.00 per share, upon exercise of stock options held by all
Directors and officers, as a group. Includes 43,848.75 shares which may
be purchased for $3.3333 per share upon exercise of a warrant held by
MacTarnahan Limited Partnership and 32,886.75 shares which may be
purchased for $3.3333 upon exercise of a warrant held by Electra
Partners, Inc.

(9) Robert M. MacTarnahan, Robert S. MacTarnahan, Harmer Mill & Logging
Supply Co. (dba Harmer Company) (11416 SW Lynnridge, Portland, Oregon
97225), Harco Products, Inc. (11416 SW Lynnridge, Portland, Oregon
97225), Black Lake Investments (11416 SW Lynnridge, Portland, Oregon
97225), MacTarnahan Limited Partnership (11416 SW Lynnridge, Portland,
Oregon 97225), Charles A. Adams, Electra Partners, Inc. (1765
Farmington Road, Aloha, Oregon 97007) and the Charles A. Adams Family
Trust (4047 Shattuck Road, Portland, Oregon 97221) are members of a
"group" as that term is used in Section 13(d)(3) of the Securities
Exchange Act of 1934 ("34 Act"). Pursuant to Rule 13d-5 promulgated
under the 34 Act, the group is deemed to beneficially own all shares of
the Company which are beneficially owned by any member of the group and
therefore the group beneficially owns 1,864,234.5 shares of Common
Stock. Because each member of the group shares investment and voting
control of the group shares, each member of the group is deemed to
beneficially own all shares of the group. Therefore, (a) Robert M.
MacTarnahan is deemed to beneficially own 923,028.75 shares of Common
Stock in addition to the shares described in footnote 3, (b) R. Scott
MacTarnahan is deemed to beneficially own 945,288.75 shares of Common
Stock in addition to the shares described in footnote 4, and (c)
Charles A. Adams is deemed to beneficially own 947,805.75 shares of
Common Stock in addition to the shares described in footnote 5.
See footnote 10 for shares of Series A Preferred Stock.

(10) On March 1, 1999, Harmer Mill & Logging Supply Co. (dba Harmer
Company) and the Charles A. Adams Family Trust each purchased 2,885
shares of the Company's Series A Preferred Stock ("Series A") for $52
per share, resulting in aggregate proceeds to the Company of $300,040.
(SEE "ITEM 6- DESCRIPTION OF BUSINESS - SOURCES OF LIQUIDITY" FOR A
DESCRIPTION OF THE SERIES A STOCK.) As noted above in footnote 9,
Harmer Company and the Charles A. Adams Family Trust are members of a
"group" as that term is used in Section 13(d)(3) of the 34 Act.
Pursuant to Rule 13d-5 promulgated under the 34 Act, the group is
deemed to beneficially own all shares of the Company which are
beneficially owned by any member of the group and therefore the group
beneficially owns 5,770 shares of Series A stock. Because each member
of the group shares investment and voting control of the group shares,
each member of the group is deemed to beneficially own all shares of
the group.

<PAGE>

OPTIONS, WARRANTS AND RIGHTS

The following table sets forth certain information regarding outstanding
options and warrants to purchase shares of Common Stock of the Company as of
March 1, 1999 as to (i) each person who is known by the Company to own
beneficially 10% or more of the outstanding shares of the Company's Common
Stock, (ii) each of the three most highly compensated officers and (iii) all
Directors and officers as a group.

<TABLE>
<CAPTION>
NUMBER OF SHARES OF COMMON
STOCK CALLED FOR BY OPTIONS
NAME OF HOLDER AND WARRANTS EXERCISE PRICE DATE OF EXERCISE
-------------- ------------ -------------- ----------------
<S> <C> <C> <C>
MacTarnahan Limited
Partnership(1) 43,848.75 $3.333 (2)
Electra Partners, Inc. (1) 32,886.75 $3.333 (2)
Robert M. MacTarnahan (1) 6,000 $5.333 (2)
R. Scott MacTarnahan (1) 6,000 $5.333 (2)
Charles A. (Tony) Adams (1) 36,000 $5.866 (2)
Frederick L. Bowman 8,000 $7.00 (3)
Glenmore James 28,000 $5.333-$7.00 (4)

All Directors and officers as a
group, (six persons) 162,235.5 $3.333-$7.00 (5)
</TABLE>

(1) As noted above, in footnote 9, MacTarnahan Limited Partnership
and Charles A. Adams members of a "group" as that term is used in
Section 13(d)(3) of the 34 Act. Pursuant to Rule 13d-5
promulgated under the 34 Act, the group is deemed to beneficially
own all shares of the Company which are beneficially owned by any
member of the group and therefore the group beneficially owns
124,735.5 shares of Common Stock which may be acquired under
outstanding options and warrants, as noted in the table above.
Because each member of the group shares investment and voting
control of the group shares, each member of the group is deemed
to beneficially own all shares of the group.

(2) Options and warrants are currently exercisable.

(3) As of March 1, 1999, options to purchase 4,800 shares of Common Stock
were exercisable. Options to purchase the remaining 3,200 shares of
Common Stock become exercisable quarterly, and will be fully
exercisable in January 2001.

(4) As of March 1, 1999, options to purchase 18,800 shares of Common Stock
were exercisable. Options to purchase the remaining 9,200 shares of
Common Stock become exercisable quarterly, and will be fully
exercisable as follows: 1,800 shares in November 1999, 2,400 shares in
January 2001, and 5,000 in March 1999.

(5) As of March 1, 1999, options to purchase 73,100 shares of Common Stock
were exercisable. Options to purchase the remaining 12,400 shares of
Common Stock become exercisable quarterly, and will be fully
exercisable at various dates through January 2001. As of February 28,
1999, warrants to purchase 76,735.5 shares of Common Stock were
exercisable.

<PAGE>

ITEM 11. INTEREST OF MANAGEMENT AND OTHERS IN CERTAIN TRANSACTIONS

LEASE AGREEMENT WITH PORTLAND BREWING BUILDING, L.L.C

In November 1992, the Company executed a triple net, 15 year lease (with
three five-year renewal options) with Portland Brewing Building Partners
("Brewing Partners"), which developed the Company's new brewery at 2730 NW
31st Avenue in Portland. The Company believes that the terms and conditions
of its lease, as amended, are fair and reasonable and are no less favorable
to the Company than could be obtained from unaffiliated parties. Brewing
Partners was an equal 50/50 partnership of Electra Partners, Inc.
("Electra"), a company controlled by Mr. Adams, and Harmer Mill & Logging
Supply Co. ("Harmer"), a company controlled by Mr. and Mrs. Robert M.
MacTarnahan. In 1995, after a series of transactions, the property and the
lease were contributed to Portland Brewing Building, LLC, which is owned 50%
by MacTarnahan Limited Partnership (whose general partner is Harmer and whose
limited partners are Robert M. MacTarnahan and Ruth MacTarnahan); 25.1604% by
Electra; and 24.8396% by L & L Land Co. (a general partnership consisting of
Howard M. Wall, a director of the Company and his wife, Patricia Wall). In
connection with the negotiation of this lease, MacTarnahan Limited
Partnership and Electra Partners, Inc. each were issued warrants for the
purchase of 43,848.75 shares of Common Stock, exercisable at any time through
December 31, 2002, at an exercise price of $3.333 per share.

The monthly rent is $24,906 plus property taxes, insurance and maintenance,
with an adjustment for inflation or changes in fair market rental value on
July 1, 1998 and July 1, 2003. The increased rental adjustment was determined
subsequent to July 1, 1998, resulting in a $19,922 charge which will be paid
by the Company in twelve monthly installments beginning February 1, 1999. In
December 1997, in connection with the issuance of $400,000 of Notes, the
lease payments were reduced by $5,000 for each of the months of January
through July 1998, and by $3,060 for each of the months of August and
September 1998.

LEASE AGREEMENT WITH L & L LAND CO.

In January 1995, the Company entered into a sublease of approximately 10,025
square feet of space (the "sublease") located in the building commonly known
as 2750 N.W. 31st Avenue, Portland, Oregon (the "Adjacent Building"). The
Adjacent Building was owned by an unrelated third party and was leased to
Power Transmission Products, Inc., who executed the sublease in favor of the
Company. The Adjacent Building includes a total of approximately 23,000
square feet of improved space. The term of the sublease expires March 31,
1999.

In December 1995, L & L Land Co. (also appearing of record as L & L Land)
acquired the Adjacent Building. L & L Land Co. is a general partnership
between Howard M. Wall, a director of the Company, and his wife, Patricia
Wall. In acquiring the Adjacent Building, L & L Land Co. also became the
landlord under the lease to Power Transmission Products, Inc.

Contemporaneously with the acquisition of the Adjacent Building, L & L Land
Co. executed an Option to Purchase and Agreement and Option to Lease (the
"Option Agreement") with the Company dated December 28, 1995, pursuant to
which (a) the Company was granted the exclusive and irrevocable right and
option to acquire the Adjacent Building until December 31, 1998, for a total
purchase price of $1,100,000 (the amount paid by L & L Land Co. to acquire
the Adjacent Building), plus the amount, up to $200,000, paid by L & L Land
Co. for the improvements described below, (b) the Company was granted the
right and option to lease the entirety of the Adjacent Building if a written
notice is given by the Company before the later of the Company receiving
written confirmation that Power Transmission Products, Inc. has vacated the
Adjacent Building and that L & L Land Co. has the legal ability to lease the
entirety of the Adjacent Building to the Company or September 30, 1998, in
which event the Adjacent Building would be leased to the Company for a
10-year term at a rent of $10,833 per month for the first five years and at a
fair market rental value rate for the remaining five years, and (c) the
Company agreed to lease the entirety of the Adjacent Building through March
31, 1999 in the event the Power Transmission Products, Inc. lease is
terminated and vacated prior to March 31, 1999.

<PAGE>

As consideration for the Option Agreement, the Company agreed to pay L & L
Land Co. monthly in arrears an amount equal to interest which would accrue at
the annual rate of 10% on the sum expended by L & L Land Co. for the
improvements described below, up to a maximum expenditure of $200,000, with
such amount to commence to accrue upon final completion of the improvements
and to cease upon the earlier of acquisition of the Adjacent Building by the
Company, execution of a direct lease by the Company for the entire Adjacent
Building, the termination of the Option Agreement, or March 31, 1999,
whichever is the earliest of such dates. L & L Land Co. agreed, in the Option
Agreement, to construct certain improvements (consisting of a shipping dock)
to the Adjacent Building. In 1996, the Company and L & L Land Co. paid
approximately $480,000 in total for the construction of the shipping dock.

The Company is currently negotiating to lease all of the Adjacent Building
and then sublease a portion of the Adjacent Building to Power Transmission
Products, Inc. If the negotiations are successful and certain conditions are
met, L & L has agreed to reimburse the Company $280,000 for its costs in
constructing the shipping dock.

LICENSE AGREEMENT WITH ROBERT M. MACTARNAHAN

In July 1994, the Company entered into a License Agreement ("License
Agreement") with Robert M. MacTarnahan, a director of the Company, and Harmer
Mill & Logging Supply Co., a company controlled by Mr. and Mrs. Robert M.
MacTarnahan. Pursuant to the License Agreement, (i) Mr. MacTarnahan conveys
to the Company the right to use his surname and its variation "MacTarnahan"
as a Company trademark, and (ii) the Company has been granted an exclusive
worldwide license to use Mr. MacTarnahan's likeness, image and other personal
attributes to promote the sale of the Company's products, merchandise, and
related materials. The license expires on December 31, 2093. In
consideration of the license grant, the Company must pay a royalty of $1.00
per barrel of MacTarnahan's Ale sold by the Company for the term of the
license. The Company has the right to terminate the License Agreement on
30-days' written notice. The license shall also terminate (a) if, in any
subsequent year after Dilution (as defined below), the Company or its
successors fails to sell a volume of products equal to or greater than 20% of
the average annual value of sales of products in the prior five (5) years, or
(b) if the Company or its successors fail to make any sales of MacTarnahan's
Ale for a period of twelve months. The term "Dilution" means the occurrence
of any of the following: (i) MacTarnahan, his affiliates, Charles A. (Tony)
Adams, Mr. Adams' affiliates, and Portland Brewing Building Partners, L.L.C.,
collectively, cease to own at least ten percent (10%) of the common stock of
the Company (or any successor), including the shares that could be purchased
by any of the foregoing upon exercise of all outstanding warrants or options
granting rights to purchase Company stock; (ii) the Company sells
substantially all of its assets; or (iii) the Company sells or assigns its
right, title and interest to the brands "MacTarnahan's Ale," "MacTarnahan's
Scottish Ale," any other version of the MacTarnahan name used as a brand name
and/or the License Agreement. In the event the license is terminated or
terminates, the Company must assign its rights to the trademark "MacTarnahan"
and the above variations to Mr. MacTarnahan.

Royalties paid to Harmer under the License Agreement for 1998 and 1997 were
$24,426 and $23,430 respectively, based on the sale of 24,426 and 23,430
barrels, respectively, of MacTarnahan's Ale during the same periods.

10% AMORTIZING SUBORDINATED NOTES

In December 1997, the Company borrowed $400,000 under 10% Amortizing
Subordinated Notes (the "Notes"). Of the $400,000, $200,000 was borrowed from
each of (i) Harmer Mill & Logging Supply Co. (dba Harmer Company), an entity
controlled by Robert M. MacTarnahan, a Director of the Company; and (ii)
Charles A. Adams Family Trust, an entity controlled by Charles A. Adams, the
Company's President. On August 25, 1998, the two shareholders agreed to
cancel the Notes in exchange for 645,162 shares of the Company's Common
Stock, resulting in the issuance of a total of 1,290,324 shares.

<PAGE>

SERIES A PREFERRED STOCK

PURCHASE AND RESTRUCTURING OF SECURED DEBT

On August 17, 1998, the MacTarnahan Limited Partnership purchased
approximately $3.5 million of secured Company debt held by Bank of America,
NT&SA ("Debt") and evidenced by a Business Loan Agreement dated as of
December 15, 1995, as amended ("Bank of America Loan Agreement"), a Security
Agreement (receivables, inventory and equipment) dated December 15, 1995 and
related UCC financing statements ("Security Agreement"). In addition, on
August 17, 1998 the Company entered into a Credit and Forbearance Agreement
("Credit and Forbearance Agreement") with the MacTarnahan Limited Partnership
pursuant to which the MacTarnahan Limited Partnership agreed to forbear from
exercising its remedies with respect to the Debt and agreed to make up to an
additional $600,000 in working capital advances to the Company pursuant to a
Promissory Note dated August 17, 1998 ("$600,000 Note") which was secured by
the Security Agreement. Interest under the $600,000 Note accrued on advances
at the rate the MacTarnahan Limited Partnership paid under its bank line of
credit to fund advances, plus 1%. All principal and interest under the
$600,000 Note was payable on demand on or after September 1, 1998.

In connection with the purchase of the Debt, Electra Partners Inc. (an entity
controlled by Mr. Adams) and the Charles A. Adams Family Trust (the "Trust")
entered into a letter voting agreement on August 26, 1998 with Robert M.
MacTarnahan and R. Scott MacTarnahan pursuant to which Electra Partners, Inc.
and the Trust agreed to vote all of their shares of Common Stock at the
direction of Robert M. MacTarnahan and R. Scott MacTarnahan prior to or at
the 1998 Annual Meeting of Shareholders.

On September 2, 1998, the Company entered into a Loan Agreement with the Bank
of the Northwest ("Bank of the Northwest Loan Agreement") which replaced the
$600,000 Note and provided for a revolving $600,000 loan to the Company at an
interest rate of 7.99%. The Bank of the Northwest Loan Agreement is
guaranteed by Harmer Mill & Logging Supply Co. ("Harmer") and the guarantee
is secured by a Harmer $600,000 certificate of deposit for which Harmer will
receive an accommodation fee in an amount equal to 1% per year on the
outstanding principal loan balance, as in effect from time to time, on the
Bank of the Northwest Loan Agreement. In addition, the Company agreed to
reimburse Harmer for any amounts advanced pursuant to the guarantee.

On November 18, 1998, the Company and the MacTarnahan Limited Partnership
entered into a Loan Restructuring Agreement ("Restructuring Agreement") which
replaced the Bank of America Loan Agreement and the Credit and Forbearance
Agreement and reduced the outstanding amount of the loan previously due under
the Bank of America Loan Agreement (which was subsequently assigned to the
MacTarnahan Limited Partnership) to approximately $2,100,000. The
Restructuring Agreement is secured

<PAGE>

by the Security Agreement and provides for per annum interest equal to the
prime lending rate of Bank of the Northwest plus 1% per annum.

In connection with the Restructuring Agreement, Charles A. Adams, the Trust,
Electra Partners, Inc. and Mr. Adams' children ("Adams Parties") entered into
a Voting Agreement with Robert M. MacTarnahan, R. Scott MacTarnahan and
certain entities controlled by them ("MacTarnahan Parties"). The Voting
Agreement replaces the letter voting agreement entered into on August 26,
1998 and provides that the Adams Parties will vote all of their voting
capital stock in the Company at the direction of the MacTarnahan Parties.
The Voting Agreement expires upon termination of the Company's reimbursement
obligation to Harmer and the payment of amounts owing under the Restructuring
Agreement.

PART II

ITEM 1. MARKET PRICE AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
OTHER SHAREHOLDER MATTERS,

There is no public trading market for the Company's Common Stock. The Company
had 5,692 shareholders of record as of March 1, 1999. The Company has never
declared any cash dividends on its Common Stock, nor does the Company intend
to do so in the near future. Pursuant to certain loan agreements, the Company
cannot declare or pay dividends on any of its outstanding stock, except
dividends payable in Common Stock of the Company, without prior written
consent of the bank. Holders of the Company's Series A Preferred Stock are
entitled to receive cumulative dividends at the rate of 8% per annum, when
and if declared by the Board of Directors, prior to payment of dividends on
Common Stock. No Series A Preferred Stock dividends have been declared to
date.

ITEM 2. LEGAL PROCEEDINGS

On December 16, 1998, Lydia Mather filed a lawsuit against the Company in the
Multnomah County Circuit Court of Oregon. The complaint alleges that Ms.
Mather attended a holiday party on the Company's premises and fell and was
injured due to the Company's negligence. Ms. Mather is seeking economic and
noneconomic damages in excess of $145,000. The Company is defending the
lawsuit and does not believe the outcome will have a material adverse effect
on the results of operations, financial condition or liquidity of the Company.

As of the date of this Report on Form 10-KSB, there are no other legal
proceedings pending to which the Company is a party or to which any of its
property is subject, and the Company does not know of any such action being
contemplated.

ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS

None.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

The Company's annual meeting of shareholders was held on December 12, 1998.
The following matters were submitted to shareholders for their consideration:

1. With respect to the five nominees for director identified in the
Company's Proxy Statement; Charles A. (Tony) Adams received 2,333,901
votes and 109,371 votes were withheld, Frederick L. Bowman received
2,406,726 votes and 36,546 votes were withheld, Robert M. MacTarnahan
received 2,411,093 votes and 32,179 votes were withheld, R. Scott
MacTarnahan received 2,410,643 votes and 32,629 votes were withheld and
Howard M. Wall, Jr. received 2,346,026 votes and 97,246 votes were
withheld.

19
<PAGE>
2. The amendment to the Company's Articles of Incorporation to increase
the number of authorized shares of Common Stock to 25,000,000 shares was
approved as follows: 2,373,179 shares were voted in favor, 58,738 shares
were voted in opposition and 11,335 shares abstained.

3. The amendment to the Company's Incentive Stock Option Plan to increase
the number of shares of Common Stock available for issuance thereunder to
400,000 shares was approved as follows: 2,277,522 shares were voted in
favor, 113,558 shares were voted in opposition, 15,480 shares abstained and
there were 36,712 broker non-votes.

4. The appointment of Arthur Andersen LLP as the Company's independent
auditors for the year ending December 31, 1998 was ratified as follows:
2,415,656 shares were voted in favor, 17,474 shares were voted in
opposition and 10,142 votes abstained.

ITEM 5. COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Securities Exchange Act of 1934 (the "Exchange Act")
requires the Company's executive officers and Directors, and persons who own
more than ten percent of a registered class of the Company's equity
securities to file reports of ownership and changes in ownership with the
Securities and Exchange Commission ("SEC"). Executive officers, Directors and
greater than ten percent stockholders are required by SEC regulation to
furnish the Company with copies of all Section 16(a) forms they file. Based
solely on its review of the copies of such forms received by it, or written
representations from certain reporting persons, the Company believes that,
during 1998, all executive officers, Directors and greater than 10%
shareholders complied with all applicable filing requirements, except Charles
A. (Tony) Adams who filed a late report on Form 4 reporting one transaction .

ITEM 6. REPORTS ON FORM 8-K

There were no reports on Form 8-K filed during the quarter ended December 31,
1998.

PART F/S

INDEX TO FINANCIAL STATEMENTS

Report of Independent Public Accountants F-1

Balance Sheets as of December 31, 1998 and 1997 F-2

Statements of Operations for the years ended December 31, 1998 and 1997 F-3

Statements of Stockholders' Equity for the years ended December 31, 1998 and
1997 F-4

Statements of Cash Flows for years ended December 31, 1998 and 1997 F-5

Notes to Financial Statements F-6
</TABLE>

<PAGE>

PART III

ITEM 1. AND ITEM 2. INDEX TO EXHIBITS AND DESCRIPTION OF EXHIBITS

The following exhibits are filed herewith:

Exhibit Exhibit
Number Number
(1-A) (S-B 601) Description
----- --------- -----------
<S> <C> <C>
2.1 3.1 Articles of Incorporation, as amended *
2.2 3.2 Bylaws, as amended *
3.1 4.1 Specimen of Common Stock Certificate (1)
3.2 4.2 Warrant issued to Electra Partners, Inc. dated March 25, 1996 (2)
3.3 4.3 Warrant issued to MacTarnahan Limited Partnership dated March 25, 1996 (2)
6.1 10.1 Indenture of Lease between the Company and Portland Brewing Building Partners
dated November 4, 1992, as amended (1)
6.2 10.2 Sublease between the Company, Power Transmission Products, Inc., and Pacific
Realty Associates, L.P., dated January 26, 1995 (1)
6.3 10.3 License Agreement between the Company, R. M. MacTarnahan and Harmer Company
dated July 1, 1994 (1)
6.4 10.4 The Company's Incentive Stock Option Plan, as amended and Specimen Form Plan
Documents (1) (8)
6.5 10.5 Amendment to the Company's Incentive Stock Option Plan (7)
6.6 10.6 The Company's 1994 Nonqualified Stock Option Plan and Specimen Form Plan
Documents (1) (8)
6.7 10.7 Distribution Agreement between the Company and Columbia Distributing, dated
April 8, 1996 (5)
6.8 10.8 Loan Restructuring Agreement, dated November 18, 1998 *
6.9 10.9 First Amendment to Loan Restructuring Agreement, dated November 18, 1998 *
6.10 10.10 Voting Agreement, dated November 18, 1998 *
6.11 10.11 Reimbursement Agreement, dated November 18, 1998 *
6.12 10.12 Promissory Note, dated November 18, 1998 *
6.13 10.13 Restated Cash Incentive Plan, as amended (1) (8)
6.14 10.14 The Company's Stock Offering Purchase Plan for Employees and Specimen Form
Plan (1) (8)
6.15 10.15 Option to Purchase and Agreement and Option to Lease between the Company and
L&L Land Co., dated December 1995(2)
6.16 10.16 Indenture of Lease between the Company and Western Stations Co. dated May 1,
1995 (3)
6.17 10.17 Manufacturing Services Agreement between the Company and The Stroh Brewery
Company dated January 31, 1996 (4)
6.18 10.18 Loan Agreement dated September 2, 1998 (6)
10.0 23.0 Consent of Arthur Andersen LLP *
12.0 27 Financial Data Schedule *
</TABLE>

(1) Incorporated by reference to the Company's Form SB-1 (Commission File
No. 33-90914-LA) as filed with the Commission on April 4, 1995.

(2) Incorporated by reference to the Company's Form 10-KSB for the year
ended December 31, 1995 as filed with the Commission on March 28,
1996.

(3) Incorporated by reference to the Company's Form 10-QSB for the quarter
ended March 31, 1996 as filed with the Commission on May 2, 1996.

(4) Incorporated by reference to the Company's Form 10-QSB/A No. 1 for the
quarter ended March 31, 1996 as filed with the Commission on July 31,
1996.

(5) Incorporated by reference to the Company's Form 10-QSB for the quarter
ended September 30, 1996 as filed with the Commission on November 12,
1996.

<PAGE>

(6) Incorporated by reference to the Company's Form 10-QSB for the quarter
ended September 30, 1998 as filed with the Commission on November 16,
1998.

(7) Incorporated by reference to the Company's Definitive Proxy Statement
for the 1998 Annual Meeting of Shareholders, as filed with the
Commission on November 17, 1998.

(8) Denotes a management contract or compensatory plan or arrangement.

* Filed herewith.

<PAGE>

SIGNATURES

In accordance with Section 13 or 15 (d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized, on the 29th day of March, 1999.

PORTLAND BREWING COMPANY

By: /s/ CHARLES A. ADAMS
---------------------------------
Charles A. Adams
Chairman of the Board, President and
Chief Executive Officer

In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on
the 29th day of March 1999.

Signature Title
--------- -----
<S> <C>
/s/ CHARLES A. ADAMS
------------------------------ Chairman of the Board, President and Chief Executive Officer
Charles A. Adams (Principal Executive Officer)

/s/ GLENMORE JAMES
----------------------------- Executive Vice President and Chief Financial Officer
Glenmore James (Principal Financial and Accounting Officer)

/s/ FREDERICK L. BOWMAN
----------------------------- Director
Frederick L. Bowman

/s/ ROBERT M. MACTARNAHAN
----------------------------- Director
Robert M. MacTarnahan

/s/ R. SCOTT MACTARNAHAN
----------------------------- Director
R. Scott MacTarnahan

/s/ HOWARD M. WALL, JR.
----------------------------- Director
Howard M. Wall, Jr.
</TABLE>

<PAGE>

Report of Independent Public Accountants

To the Board of Directors and Stockholders of
Portland Brewing Company:

We have audited the accompanying balance sheets of Portland Brewing Company
(an Oregon Corporation) as of December 31, 1998 and 1997, and the related
statements of operations, stockholders' equity and cash flows for each of the
two years in the period ended December 31, 1998. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Portland Brewing Company as
of December 31, 1998 and 1997, and the results of its operations and its cash
flows for each of the two years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles.

Arthur Andersen LLP

Portland, Oregon
March 4, 1999

F-1

<PAGE>

PORTLAND BREWING COMPANY
BALANCE SHEETS

ASSETS

<TABLE>
<CAPTION>
December 31,
------------
1998 1997
---------- -----------
<S> <C> <C>
CURRENT ASSETS:
Cash $ 52,532 $ 52,719
Accounts receivable, net of allowance of $0 (1998), $15,852 (1997) 765,997 652,530
Inventories 554,864 683,733
Prepaid assets 266,452 201,541
--------------- ----------------
Total current assets 1,639,845 1,590,523

Property and equipment, net 7,249,791 8,694,106
Other assets, net 113,933 241,515
--------------- ----------------
Total assets $ 9,003,569 $10,526,144
--------------- ----------------
--------------- ----------------
LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
Accounts payable $ 879,265 $ 1,094,201
Customer deposits held 133,464 165,203
Accrued payroll 134,247 109,979
Other accrued liabilities 70,052 51,867
Line of credit 323,626 203,000
Current portion of long-term debt 26,178 381,947
-------------- ---------------
Total current liabilities 1,566,832 2,006,197

Long-term debt, less current portion 113,334 2,575,777
Stockholder's loans, long-term 2,100,000 400,000

COMMITMENTS AND CONTINGENCIES (Note 11)

STOCKHOLDERS' EQUITY:
Preferred stock, no par value, 100,000 shares authorized, no shares issued -- --
Common stock, no par value, 25,000,000 shares authorized
shares issued and outstanding: 3,365,267 (1998), 2,074,943 (1997) 7,115,798 6,715,798
Stock notes receivable (375) (375)
Accumulated deficit (1,892,020) (1,171,253)
--------------- ----------------
Total stockholders' equity 5,223,403 5,544,170
--------------- ----------------
Total liabilities and stockholders' equity $ 9,003,569 $10,526,144
--------------- ----------------
--------------- ----------------
</TABLE>

The accompanying notes are an integral part of these statements.

F-2

<PAGE>

PORTLAND BREWING COMPANY
STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------
1998 1997
------------ ------------
<S> <C> <C>
Sales $10,187,554 $11,094,678
Less- excise tax 467,875 508,002
------------ ------------
Net sales 9,719,679 10,586,676

Cost of sales 7,327,639 7,542,398
------------ ------------
Gross profit 2,392,040 3,044,278

General and administrative expenses 1,331,730 1,419,483
Sales and marketing expenses 2,099,163 2,425,791
Loss on disposition of assets 406,807 --
------------ ------------
Loss from operations (1,445,660) (800,996)

Other expense, net
Interest expense 289,182 290,858
Other expense, net 186,204 129,408
------------ ------------
Total other expense, net 475,386 420,266
------------ ------------
Net loss before income taxes (1,921,046) (1,221,262)

Provision for income taxes -- 76,332
------------ ------------
Net loss before extraordinary item (1,921,046) (1,297,594)

Extraordinary item - gain on debt restructuring (Note 4 ) 1,200,279 --
------------ ------------
Net loss $ (720,767) $(1,297,594)
------------ ------------
------------ ------------
Basic and diluted net loss per share $ (0.29) $ (0.63)
------------ ------------
------------ ------------
Shares used in per share calculations 2,505,051 2,074,943
------------ ------------
------------ ------------
</TABLE>

The accompanying notes are an integral part of these statements.

F-3

<PAGE>

PORTLAND BREWING COMPANY
STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
Common Stock Retained
------------------- Stock Notes Earnings
Shares Amount Receivable (Deficit) Total
------------ ------------- ----------- -------------- --------------
<S> <C> <C> <C> <C> <C>
December 31, 1996 2,074,943 $6,715,798 $(2,524) $ 126,341 $ 6,839,615

Repayment of stock notes
receivable -- -- 2,149 -- 2,149

Net loss -- -- -- (1,297,594) (1,297,594)
------------ ------------- ---------- -------------- --------------
December 31, 1997 2,074,943 6,715,798 (375) (1,171,253) 5,544,170

Conversion of stockholder
loans to common stock 1,290,324 400,000 -- -- 400,000

Net loss -- -- -- (720,767) (720,767)
------------ ------------- ---------- -------------- --------------
December 31, 1998 3,365,267 $7,115,798 $ (375) $(1,892,020) $ 5,223,403
------------ ------------- ---------- -------------- --------------
------------ ------------- ---------- -------------- --------------
</TABLE>

The accompanying notes are an integral part of these statements.

F-4

<PAGE>

PORTLAND BREWING COMPANY
STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------
1998 1997
------------ ------------
<S> <C> <C>
Cash flows relating to operating activities:
Net loss $ (720,767) $(1,297,594)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities-
Depreciation 1,009,037 1,060,814
Amortization 158,655 177,110
Change in net deferred income taxes -- 107,260
Loss on disposition of assets 406,807 33,595
Extraordinary item (Note 4) (1,200,279)
(Increase) decrease in:
Accounts receivable, net (113,467) 135,400
Inventories 83,041 (53,063)
Prepaid assets (64,911) 129,755
Income tax receivable -- 79,970
(Decrease) increase in:
Accounts payable (93,914) 85,567
Customer deposits held (31,739) (44,902)
Accrued payroll and other accrued liabilities 42,453 10,955
------------ ------------
Net cash (used in) provided by operating activities (525,084) 424,867
------------ ------------
Cash flows relating to investing activities:
Purchase of property and equipment (154,180) (517,967)
Proceeds from sale of property and equipment 232,031 277,740
Changes in other assets (34,625) (138,465)
------------ ------------
Net cash provided by (used in) investing activities 43,226 (378,692)
------------ ------------
Cash flows relating to financing activities:
Net borrowings (repayments) under line of credit 420,781 (97,000)
Issuance of notes payable to distributors 170,353 --
Proceeds from issuance of long-term debt -- 5,076,658
Repayments of long term debt (2,209,463) (5,424,317)
Proceeds from stockholders' loans 2,100,000 400,000
Payments of stock notes receivable -- 2,149
------------ ------------
Net cash provided by (used in) financing activities 481,671 (42,510)
------------ ------------
Net (decrease) increase in cash (187) 3,665
------------ ------------
Cash, beginning of period 52,719 49,054
------------ ------------
Cash, end of period $ 52,532 $ 52,719
------------ ------------
------------ ------------
Noncash transactions:
Conversion of stockholder loans to common stock $ 400,000 $ --
Reclassification of other assets to property and equipment 49,380 --

Supplemental disclosure of cash flow information:
Cash paid during the period for interest, (net of
capitalization in 1997) $ 289,182 $ 265,407
</TABLE>

The accompanying notes are an integral part of these statements.

F-5

<PAGE>

PORTLAND BREWING COMPANY
NOTES TO FINANCIAL STATEMENTS

1. DESCRIPTION OF BUSINESS:

Portland Brewing Company ("the Company") was incorporated in Oregon on
November 14, 1983. The Company opened its first brewery in January 1986 at
1339 NW Flanders Street in Portland, Oregon which operated until November
1998, when the Company sold the Flanders Street facility (See Note 3). The
Company continues to operate a brewery at 2730 NW 31st Avenue in Portland,
Oregon, which has a capacity of approximately 135,000 barrels of ale per
year, and includes a restaurant, The Taproom, open to the public.

The Company's working capital requirements over the next year are expected to
be met from cash flow through operations, funds available under the Company's
revolving line and, if appropriate and available, additional equity offerings
and/or borrowings from other lenders. There can be no assurance the Company
will be able to raise additional funds through equity offerings or additional
borrowings. The Company's $2.1 million term loan is due on January 31, 2000.
The Company expects to place the debt permanently with a financial
institution in 1999 or pay off the debt through the raising of additional
capital. However, there can be no assurance that the Company will be able to
obtain permanent financing from a financial institution or that the Company
will be able to raise additional capital on commercially reasonable terms or
at all.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

USE OF ESTIMATES

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

REVENUE RECOGNITION

Revenue from the sale of products is recognized at the time of shipment to
the customer.

F-6

<PAGE>

INVENTORIES

Inventories are stated at the lower of average cost, which approximates the
first-in, first-out (FIFO) method, or market and include materials, labor and
manufacturing overhead. Inventories consist of the following:

<TABLE>
<CAPTION>
December 31,
---------------------------------
1998 1997
----------- -----------
<S> <C> <C>
Raw materials $176,288 $128,561
Work-in-process 164,428 236,710
Finished goods 138,357 148,028
Merchandise 49,685 80,720
Kegs, inventory value 26,106 89,714
----------- -----------
$554,864 $683,733
----------- -----------
----------- -----------
</TABLE>

PROPERTY AND EQUIPMENT

Property and equipment is stated at cost. Interest costs related to the
construction of certain long-term assets are capitalized and amortized over
the related assets' estimated useful lives. The Company capitalized net
interest costs of approximately $0 and $16,000 in 1998 and 1997, respectively.

Property and equipment consists of the following:

<TABLE>
<CAPTION>
December 31,
--------------------------------
1998 1997
---- ----
<S> <C> <C>
Brewing plant and equipment $ 7,456,273 $ 7,721,477
Office and laboratory equipment and vehicles 639,406 647,586
Kegs 813,956 975,287
Construction in progress 63,170 103,243
Leasehold improvements 1,753,415 2,294,131
-------------- --------------
Total property and equipment 10,726,220 11,741,724
Less- Accumulated depreciation (3,476,429) (3,047,618)
-------------- --------------
$ 7,249,791 $ 8,694,106
-------------- --------------
-------------- --------------
</TABLE>

Property and equipment is depreciated using the straight-line method over
estimated useful lives as follows:

<TABLE>
<CAPTION>
Years
-----
<S> <C>
Brewing plant and equipment 10-20
Office and laboratory equipment and vehicles 5-10
Leasehold improvements 5-15
Kegs 5
</TABLE>

PACKAGE DESIGN

Package design costs, which include costs related to design, plates and dyes,
are amortized on a straight-line basis over three years. Package design
costs, net of accumulated amortization were $99,985 and $180,597 at December
31, 1998 and 1997, respectively. Amortization expense related to package
design costs, which is included in selling and marketing expense, was
$113,237 and $113,834 in 1998 and 1997, respectively.

F-7

<PAGE>

INCOME TAXES

The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, ACCOUNTING FOR INCOME TAXES. Deferred
taxes are determined based on the estimated future tax effects of differences
between the financial statement and tax basis of assets and liabilities given
the provisions of enacted tax laws and tax rates. Deferred income tax
expenses or credits are based on the changes in the financial statement basis
versus the tax basis in the Company's assets or liabilities from period to
period. See Note 7.

NET LOSS PER SHARE

The Company has adopted Financial Accounting Standards Board Statement of
Financial Accounting Standard No. 128, "Earnings per Share" ("SFAS 128").
Basic loss per common share is computed by dividing net loss by the weighted
average number of shares of common stock outstanding for the period. Diluted
net loss per common share for all periods presented is the same as basic net
loss per share since all potential dilutive securities are excluded because
they are antidilutive.

The dilutive effect of stock options outstanding for the purchase of 144,525
and 160,500 shares at December 31, 1998 and 1997, respectively, and warrants
for the purchase of 87,697.5 shares at December 31, 1998 and 1997 were not
included in loss per share calculations, because to do so would have been
anti-dilutive.

ADVERTISING COSTS

Advertising costs are expensed as incurred. Total advertising expense was
$350,843 and $241,304 in 1998 and 1997, respectively.

FAIR VALUE OF FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK

All current assets and liabilities are carried at cost, which approximates
fair value because of the short-term nature of those instruments. The
recorded amounts of the Company's long-term debt also approximate fair value,
as estimated using discounted cash flow analysis.

Financial instruments which potentially expose the Company to concentration
of credit risk consist primarily of trade accounts receivable. For the
periods ended December 31, 1998 and 1997, 40% percent and 29%, respectively,
of net sales were through a single distributor. At December 31, 1998, 45% and
19% of total accounts receivable, respectively, was attributable to two
distributors. At December 31, 1997, 59% of total accounts receivable was
attributable to a single distributor.

IMPAIRMENT OF LONG-LIVED ASSETS

SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of", establishes criteria for and requires
recognition of impairment losses on long-lived assets and prescribes the
accounting for long-lived assets that are expected to be disposed of in
future periods. The Company's long-lived assets are reviewed for impairment
when circumstances indicate that the carrying amount may not be recoverable.
If the sum of the expected future cash flows is less than the carrying amount
of the asset, a loss is recognized. As of December 31, 1998, there was no
impairment of long-lived assets.

F-8

<PAGE>

COMPREHENSIVE INCOME (LOSS)

On January 1, 1998, the Company adopted Financial Accounting Standards Board
("FASB") Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" ("SFAS 130"), which establishes requirements for
disclosure of comprehensive income (loss). The objective of SFAS 130 is to
report a measure of all changes in equity that result from transactions and
economic events other than transactions with owners. Comprehensive income
(loss) is the total of net income (loss) and all other non-owner changes in
equity. Comprehensive loss did not differ from reported net loss in the
periods presented.

RECENT ACCOUNTING PRONOUNCEMENTS

In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"), which establishes
accounting and reporting standards requiring that every derivative instrument
be recorded in the balance sheet as either an asset or liability measured at
its fair value. SFAS 133 also requires that changes in the derivative
instrument's fair value be recognized currently in results of operations
unless specific hedge accounting criteria are met. SFAS 133 is effective for
fiscal years beginning after June 15, 1999. The Company's management has
studied the implications of SFAS 133 and based on the initial evaluation,
expects the adoption to have no impact on the Company's financial condition
or results of operations.

3. LOSS ON DISPOSITION OF ASSETS

Results of operations for 1998 include a charge of $402,712 associated with a
plan designed to reduce costs and improve operational efficiencies. The
non-cash charge included the write-down of machinery and equipment used in
the Company's Flander's BrewPub to fair market value. In November 1998, these
assets were sold at market value. The Company plans to focus on its core
business of manufacturing and distributing beer to wholesalers.

4. EXTRAORDINARY ITEM:

In 1998, the Company recorded an extraordinary gain of $1,200,279 related to
a debt restructuring. The Company was relieved of $1,079,257 of debt and
accrued interest originated by Bank of America, NT & SA ("B of A") and
$272,915 of trade accounts payable. The gain was offset by professional fees
related to the restructuring of $151,893. (See Note 5)

5. LONG-TERM DEBT AND LINE OF CREDIT

Of the $1,200,279 extraordinary gain recorded in 1998; $1,079,257 was debt
and accrued interest forgiven by the MacTarnahan Limited Partnership (a
related party) from its purchase of the Company's debt with a bank. (See Note
4) In connection with the troubled debt restructuring, the MacTarnahan
Limited Partnership purchased approximately $3.1 million of secured Company
debt held by B of A. The $3.1 million bank debt plus accrued interest and
other related charges was settled by the MacTarnahan Limited Partnership
which in turn resulted in a net loan payable from the Company to the
MacTarnahan Limited Partnership of $2.1 million. This $2,100,000 term loan,
due on January 31, 2000 is secured by receivables, inventory and equipment of
the Company, and bears interest at a per annum rate equal to the prime
lending rate of the Bank of the Northwest plus 1%. (8.75% at December 31,
1998) The Company expects to place the debt permanently with a financial
institution in 1999 or pay off the debt through the raising of additional
capital. The Company also relies on trade creditors for working capital.

In 1998, the Company offered certain of its trade creditors the option of
receiving a discounted amount of cash immediately or the entire amount owed
to them to be paid over a five-year period. As a result, the Company issued
notes in the aggregate principal amount of $148,065 to trade creditors. The
notes bear interest at 6% per annum and mature on September 1, 2003. Payments
under the notes are due in equal monthly payment of principal and interest.

F-9

<PAGE>

In September 1998, the Company entered into a $600,000 revolving line of
credit with a bank which provides for a fixed interest rate of 7.99% and
matures on August 20, 1999. At December 31 1998, there was $323,626
outstanding under the line of credit. The revolving line of credit is
guaranteed by Harmer Mill & Logging Supply Co., a related party, and is
secured by a certificate of deposit in the amount of $600,000 for which
Harmer will receive an accommodation fee in an amount equal to 1% per year on
the outstanding principal loan balance on the revolving line of credit.

Principal payment requirements on long-term debt are as follows for the years
ending December 31:

6. LEASES:

The following is a schedule of minimum future lease payments for the years
ending December 31:

<TABLE>
<S> <C>
1999 $ 341,222
2000 305,712
2001 305,712
2002 305,712
2003 298,872
Thereafter 1,344,924
-----------
Total minimum lease payments $2,902,154
-----------
-----------
</TABLE>

Rent expense incurred on operating leases was $362,083 and $407,737 in 1998
and 1997, respectively.

7. INCOME TAXES:

The Company is in a net deferred tax asset position and has generated net
operating losses to date. Accordingly, no provision for or benefit from
income taxes has been recorded in the accompanying statements of operations
for 1998. The Company will continue to provide a valuation allowance for its
deferred tax assets until it becomes more likely than not, in management's
assessment, that the Company's deferred tax assets will be realized. The
Company has a pretax net operating loss carryforward of approximately $3.2
million which is available to offset future taxable income, if any, expiring
through the year 2013.

F-10

<PAGE>

The components of the net deferred tax assets and liabilities as of December
31, 1998 and 1997 are as follows:

<TABLE>
<CAPTION>
December 31,
-----------------------------
1998 1997
---- ----
<S> <C> <C>
Deferred tax assets, current-
Basis difference in inventory $ 27,507 $ 40,765
Other 27,495 28,266
----------- -----------
Total current deferred tax assets $ 55,002 $ 69,031
----------- -----------
Deferred tax assets, long-term-
Net operating loss carryforwards $1,391,836 $1,017,013
Tax credits 115,022 115,022
----------- -----------
Total long-term deferred tax assets 1,506,858 1,132,035

Deferred tax liabilities-
Basis difference in property, plant
and equipment (603,545) (542,070)
------------ -----------
Net long-term deferred tax assets 903,313 589,965
------------ -----------
Net deferred tax assets 958,315 658,996
Less: valuation allowance (958,315) (658,996)
------------ -----------
Net deferred taxes $ -- $ --
------------ -----------
------------ -----------
</TABLE>

In 1997, the provision for income taxes was as follows:

<TABLE>
<S> <C>
Current $ (30,928)
Deferred 107,260
----------
$ 76,332
----------
----------
</TABLE>

8. RELATED PARTY TRANSACTIONS:

LEASE AGREEMENT WITH PORTLAND BREWING BUILDING, LLC

The Company leases the property at 2730 NW 31st Avenue in Portland, Oregon
from Portland Brewing Building, L.L.C., which is an entity controlled by an
officer and director and two other directors of the Company. The monthly rent
is $24,906 plus property taxes, insurance and maintenance, with an adjustment
for inflation or changes in fair market rental value on July 1, 1998 and July
1, 2003. The increased rental adjustment was determined subsequent to July 1,
1998, resulting in a $17,076 charge which will be paid by the Company in
twelve monthly installments beginning February 1, 1999. In December 1997, in
connection with the issuance of $400,000 of Notes, the lease payments were
reduced by $5,000 for each of the months of January through July 1998, and by
$3,060 for each of the months of August and September. The lease expires in
August 2008. In connection with the original negotiation of the lease in
1992, the Company granted the lessors a warrant to purchase 87,697.5 shares
of Common Stock. The warrants are exercisable at any time through December
31, 2002, at an exercise price of $3.333 per share.

F-11

<PAGE>

LEASE AGREEMENT WITH L & L LAND CO.

In 1995 the Company entered into a sublease for a portion of the building
adjacent to the main brewery with the current lessee, Power Transmission
Products, Inc. An option agreement was entered into with the owner of the
building, L & L Land Co., which entitled the Company to an option to purchase
the building for $1,100,000 plus an amount paid for improvements to the
building consisting of a shipping dock. The option agreement expired on
December 31, 1998. The Company is currently negotiating to lease the entire
adjacent building and then sublease a portion of it. If the negotiations are
successful and certain conditions are met, L & L Land Co. has agreed to
reimburse the Company $280,000 for its costs in constructing the shipping
dock.

The Company believes that the terms and conditions of its leases are fair and
reasonable and are no less favorable to the Company than could be obtained
from unaffiliated parties.

LICENSE AGREEMENT

The Company entered into a license agreement with one of its board members to
utilize his name and likeness. The amount of the royalty owed is $1 per
barrel of MacTarnahan's Amber Ale sold. Royalties paid under the license
agreement for 1998 and 1997 were $24,426 and $23,450, respectively, based on
the sale of 24,426 and 23,450 barrels, respectively, of MacTarnahan's Amber
Ale during the same periods.

See also Notes 4 and 5.

9. STOCK-BASED COMPENSATION PLANS:

INCENTIVE STOCK OPTION PLAN

The Company's Incentive Stock Option Plan ("ISOP") is administered by the
Board of Directors and provides for grants of options to acquire shares of
the Company's common stock, subject to the limitations set forth in the ISOP.
The number of stock options available for grant under the ISOP is 400,000.
Pursuant to the ISOP, the Board of Directors has the authority to set the
terms and conditions of the options granted, but cannot set the option
exercise price at less than 100 percent of the fair market value of the
subject shares of common stock at the time the option is granted. Options
generally vest quarterly over a 12- to 60-month period.

Activity under the ISOP is summarized as follows:

<TABLE>
<CAPTION>
Shares Subject Exercise Price
to Options Per Share
---------- --------------
<S> <C> <C>

Balances, December 31, 1996 140,500 $3.33-$7.00
Options granted 47,350 $7.00
Options exercised -- --
Options canceled (48,350) $3.33-$7.00
--------- ------------
Balances, December 31, 1997 139,500 $3.33-$7.00
Options granted -- --
Options exercised -- --
Options canceled (15,975) $7.00
--------- ------------
Balances, December 31, 1998 123,525 $3.33-$7.00
--------- ------------
--------- ------------
</TABLE>

F-12

<PAGE>

NONQUALIFIED STOCK OPTION PLAN

In August 1994, the Board of Directors approved a Nonqualified Stock Option
Plan ("NQSOP"). The NQSOP provides for the issuance of 45,000 stock options
to employees, nonemployee members of the Board of Directors, consultants and
other independent contractors who provide valuable service to the Company, at
a minimum of 85 percent of fair market value and have a term of 10 years. At
December 31, 1998 and 1997, options to purchase 21,000 shares at $5.33 were
outstanding and exercisable.

STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 123 (SFAS 123)

During 1995, the Financial Accounting Standards Board issued SFAS 123, which
defines a fair value based method of accounting for employee stock options
and similar equity instruments and encourages all entities to adopt that
method of accounting for all employee stock compensation plans. However, it
also allows an entity to continue to measure compensation cost for those
plans using the method of accounting prescribed by APB 25. Entities electing
to remain with the accounting in APB 25 must make pro forma disclosures of
net income and earnings per share, as if the fair value based method of
accounting defined in SFAS 123 had been applied.

The Company has elected to account for its stock-based compensation plans
under APB 25; however, the Company has computed, for pro forma disclosure
purposes, the value of all options granted using the Black-Scholes
option-pricing model as prescribed by SFAS 123. No options were granted in
1998. Options granted in 1997 were valued using the following weighted
average assumptions.

<TABLE>
<CAPTION>
1997
-----
<S> <C>
Risk-free interest rate 6.25%
Expected dividend yield 0 %
Expected lives 6 years
Expected volatility 68 %
</TABLE>

The total value of options granted during 1997 was computed as approximately
$167,000 and is being amortized on a pro forma basis over the respective
vesting period of the options (two to five years). The weighted average fair
value of options granted during 1997 was $3.85 per share. If the Company had
accounted for its stock-based compensation plans in accordance with SFAS 123,
the Company's pro forma net loss and pro forma net loss per share for the
years ended December 31, 1998 and 1997 would have been as follows:

<TABLE>
<CAPTION>
As Reported Pro Forma
----------- ---------
<S> <C> <C>
1998
Net loss $ (720,767) $ (834,489)
Net loss per share $ (0.29) $ (0.33)

1997
Net loss $ (1,297,594) $ (1,412,888)
Net loss per share $ (0.63) $ (0.68)
</TABLE>

The effect of applying SFAS 123 in this pro forma disclosure is not
indicative of future results. SFAS 123 does not apply to awards prior to
January 1, 1995. Additional awards are anticipated in future years.

F-13

<PAGE>

The following table sets forth the exercise price range, number of shares,
weighted average exercise price, and remaining contractual lives by groups of
similar price and grant date:

<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- -------------------------------------------------------------------- --------------------------------
Weighted
Number Average Weighted Number Weighted
Outstanding at Remaining Average Exercisable at Average
December 31, Contractual Exercise December 31, Exercise
Exercise Price 1998 Life (Years) Price 1998 Price
---- ------------ ----- ---- -----
<S> <C> <C> <C> <C> <C>
$2.80 - $3.50 1,500 4.5 $3.33 1,500 $3.33
$4.90 - $5.60 43,500 4.8 5.33 39,000 5.33
$5.60 - $6.30 36,000 5.9 5.87 36,000 5.87
$6.30 - $7.00 63,525 7.6 7.00 32,975 7.00
--------- ---------
Totals 144,525 109,475
--------- ---------
--------- ---------
</TABLE>

CASH INCENTIVE PLAN

The Company may award its officers and employees, under its Restated Cash
Incentive Plan ("the Plan"), bonuses in an amount up to 10% of net operating
profits before taxes. Awards under the Plan will be allocated among the
officers and employees in accordance with the provisions of the Plan at the
discretion of the Board of Directors. No amounts were awarded in 1998 or 1997
under the Plan.

10. SEGMENT INFORMATION

In 1998, the Company adopted Statement of Financial Accounting Standards No.
131, "Disclosures about Segments of an Enterprise and Related Information,
("SFAS 131") which establishes new standards for defining and reporting
information about a Company's segments. It requires that the information be
reported about the segments of the Company for which separate financial
information is available and for which operating results are regularly
evaluated by executive management to make decisions about resources to be
allocated to each segment and to assess performance. Management evaluates
segment performance based on segment operating (loss) income.

The Company is organized into two product-based segments, its brewery
operations and its restaurant operations. The Company's brewery segment brews
and sells specialty beer in its Portland, Oregon brewery which is sold to
distributors and retail customers. The Company's restaurant segment consisted
of two restaurants in 1997 and until November 1998, when one of the Company's
restaurants was sold. (See Note 3) The Company's remaining restaurant, which
adjoins its brewery, sells the Company's specialty beers along with lunch and
dinner.

All revenues are attributable to, and all long-lived assets are located in
the United States, the Company's country of domicile. The basis of accounting
for transactions between segments is based on the fair market value of the
respective goods or services. Interest expense is considered a corporate
expense and is not allocated to the two segments. In 1998, the extraordinary
item (gain on debt restructuring) is also considered a corporate expense and
is not allocated to the two segments.

F-14

<PAGE>

<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------
1998 1997
----------------- -----------------
<S> <C> <C>
NET SALES:
Brewery $ 7,743,255 $ 8,345,969
Restaurant(s) 2,344,708 2,680,179
------------- --------------
Subtotal 10,087,963 11,026,148
Less: intersegment sales (368,284) (439,472)
------------- --------------
Total net sales $ 9,719,679 $ 10,586,676
------------- --------------
------------- --------------
GROSS PROFIT:
Brewery $ 2,192,138 $ 2,723,882
Restaurant(s) 393,976 542,322
------------- --------------
Subtotal 2,586,114 3,266,204
Intersegment loss (194,074) (221,926)
------------- --------------
Total gross profit $ 2,392,040 $ 3,044,278
------------- --------------
------------- --------------
DEPRECIATION AND AMORTIZATION EXPENSE:
Brewery $ 802,948 $ 824,549
Restaurant(s) 150,651 166,947
Unallocated corporate amounts 214,091 246,428
------------- --------------
Total depreciation and amortization expense $ 1,167,690 $ 1,237,924
------------- --------------
------------- --------------
CAPITAL EXPENDITURES:
Brewery $ 206,839 $ 445,675
Restaurant(s) 3,044 57,211
Unallocated corporate amounts 13,776 14,811
------------- --------------
Total capital expenditures $ 223,659 $ 517,697
------------- --------------
------------- --------------
TOTAL ASSETS:
Brewery $ 7,954,706 $ 8,688,837
Restaurant(s) 667,931 1,391,246
Unallocated corporate amounts 380,932 446,061
------------- --------------
Total assets $ 9,003,569 $ 10,526,144
------------- --------------
------------- --------------
</TABLE>

11. 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 believes
it is not presently a party to any litigation, the outcome of which would
have a material adverse effect on the Company's business, financial
condition, results of operations or cash flows.

F-15

<PAGE>

12. SUBSEQUENT EVENT

On March 1, 1999, two shareholders of the Company purchased 2,885 shares each
of the Company's Series A Convertible Redeemable Preferred Stock ("Series A")
for $52 per share, resulting in aggregate proceeds to the Company of
$300,040.

Each share of Series A is convertible on February 25, 2004, into fully paid
and non-assessable shares of Common Stock at a rate of 100 shares of Common
Stock for each share of Series A. The conversion ratio, which is currently
100 to 1, is subject to adjustment in the event of stock splits or stock
dividends. Unless converted, the Company must redeem the Series A shares on
February 25, 2004, at $52 per share plus any declared but unpaid dividends,
in cash or in 24 equal monthly payments bearing interest at 12% per annum.
Each shareholder of Series A is entitled to the number of votes equal to the
number of shares of Common Stock into which the Series A shares can be
converted and the Series A shares are entitled to vote as a separate class.
Each shareholder of Series A is entitled to receive cumulative dividends at
the rate of 8% per annum, when and if declared by the Board of Directors,
prior to payment of dividends on Common Stock. No dividends have been
declared to date. In the event of any liquidation or dissolution of the
Company, either voluntary or involuntary, each shareholder of Series A shall
be entitled to receive, prior and in preference to any distribution of any
assets or surplus funds to the holders of Common Stock, an amount equal to
$52.00 per share for each share of Series A and, in addition, an amount equal
to all declared but unpaid dividends on Series A.

F-16

<PAGE>

EXHIBIT 2.1

PORTLAND BREWING COMPANY
ARTICLES OF INCORPORATION

ARTICLE I

The name of this corporation is PORTLAND BREWING COMPANY (The corporate name
must contain the word "Corporation", "Company'", "Incorporated" or "Limited" or
an abbreviation of one of such words) and its duration shall be PERPETUITY

ARTICLE II

The purpose or purposes for which the corporation is organized are: THE
CORPORATION MAY ENGAGE IN ANY LAWFUL ACTIVITY FOR WHICH CORPORATIONS MAY BE
ORGANIZED UNDER ORS CHAPTER 57. IN ADDITION, THIS CORPORATION WILL BREW,
DISTRIBUTE AND SELL BEER AND ALE.

ARTICLE III

The aggregate number of shares which the corporation shall have authority to
issue is 30 SHARES OF STOCK. COMMON STOCK VALUE AT $50.00 PER SHARE WITH TOTAL
AUTHORIZED OF $1,500.00.
ARTICLE IV

The address of the initial registered office of the corporation is 5019 SW
LOWELL PORTLAND, OR 97221 and the name of its initial registered agent at
such address is ARTHUR E. LARRANCE.

ARTICLE V

The number of directors constituting the initial board of directors of the
corporation is THREE and the names and addresses of the persons who are to serve
as directors until the first annual meeting of shareholders or until their
successors are elected and shall qualify are:

Name Address
- ----------------------- -------------------------------------------
FREDERICK L. BOWMAN 9965 SW 96TH BEAVERTON, OR 97005
JIM GOODWIN 2534 N. PORTLAND BLVD PORTLAND, OR 97227
ARTHUR E. LARRANCE 5019 SW LOWELL PORTLAND, OR 97221

ARTICLE VI

The name and address of each incorporator is:

Name Address
- ----------------------- ------------------------------------------
FREDERICK L. BOWMAN 9965 SW 96TH BEAVERTON, OR 97005
JIM GOODWIN 2534 N. PORTLAND BLVD PORTLAND, OR 97227
ARTHUR E. LARRANCE 5019 SW LOWELL PORTLAND, OR 97221

ARTICLE VII

THE PROVISIONS FOR REGULATION OF INTERNAL AFFAIRS HAVE NOT BEEN DETERMINED.

<PAGE>

We, the undersigned incorporators, declare under penalties of perjury that we
have examined the foregoing and to the best of our knowledge and belief, it is
true, correct and complete.

/s/ Arthur E. Larrance /s/ Jim Goodwin /s/ Frederick L. Bowman
- ------------------------- ------------------------- ------------------------
Dated November 1, 1983.

<PAGE>

ARTICLES OF AMENDMENT
OF
PORTLAND BREWING COMPANY

Pursuant to ORS 57.360 (1), the undersigned corporation executes the following
Articles of Amendment to its Articles of Incorporation:

The name of the corporation is Portland Brewing Company.

The following amendment of the Articles of Incorporation was adopted by the
shareholders on December 18, 1984:

"RESOLVED, that Article III of the Articles of Incorporation is amended to read
as follows:

"ARTICLE III The aggregate number of shares which the corporation shall have
the authority to issue is 20,000 shares of common stock, with a par value of
$.25 per share.'"

III

The total number of shares outstanding at the time of the adoption of this
amendment was 16 and the number of shares entitled to vote thereon was 16. The
number of shares voted for such amendment was 16 and the number of shares voted
against such amendment was zero.

Each outstanding share with no par value is split up and converted into 200
shares with a par value of $.25 per share.

Such amendment effects no change in the amount of stated capital.

WE, THE UNDERSIGNED, declare under the penalties of perjury that we have
examined the foregoing Articles of Amendment and, to the best of our knowledge
and belief, it is true, correct and complete.

Dated December 18, 1984.

PORTLAND BREWING COMPANY

By /s/ Frederick L. Bowman
--------------------------------
Frederick L. Bowman, President

By /s/ Arthur E. Larrance
--------------------------------
Arthur E. Larrance, Secretary

<PAGE>

ARTICLES OF AMENDMENT
OF
PORTLAND BREWING COMPANY

1. Name of the corporation prior to amendment:
PORTLAND BREWING COMPANY

2. State the article number(s) and set forth the article(s) as it is amended
to read. Add new Article VII (see attached)

3. The amendment was adopted on October 11, 1988.

4. Shareholder action was required to adopt the amendment(s). The shareholder
vote was as follows:

<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Class or Series of Number of Shares Number of Votes Number of Votes Number of Votes
Shares Outstanding Entitled to be Cast Cast For Cast Against
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common 11,000 11,000 8,400 0
- -------------------------------------------------------------------------------------------------------------------
</TABLE>

5. Other provisions, if applicable (Attach additional sheets, if necessary)

Execution: /s/ Arthur E. Larrance Arthur E. Larrance Secretary
-------------------------------------------------------
Signature Printed Name Title

Person to contact about this filing: Delbert A. Weaver 222-9981
----------------------------------------
Name Daytime Phone Number

<PAGE>

Article VII

"A Director of the Corporation shall not be liable to the corporation or
its stockholders for money damages for conduct as a Director except liability
arising from (1) any breach of the Directors' duty of loyalty to the
Corporation or its stockholders; (2) acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law: (3) any
unlawful distribution under the Oregon Business Corporation Act, or (4) any
transaction in which the director derives any improper personal benefit."

<PAGE>

ARTICLES OF AMENDMENT
OF
PORTLAND BREWING COMPANY

1. Name of the corporation prior to amendment:
PORTLAND BREWING COMPANY

2. State the article number(s) and set forth the article(s) as it is amended
to read. (Attach additional sheets if necessary.) See Exhibit A attached
hereto.

3. The amendment was adopted on March 11, 1992. (If more than one
amendment was adopted, identify the date of adoption of each amendment.)

4. Shareholder action WAS required to adopt the amendment(s). The shareholder
vote was as follows:

<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
Class or Series of Number of Shares Number of Votes Number of Votes Number of Votes
Shares Outstanding Entitled to be Cast Cast For Cast Against
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common 26,000 26,000 21,496 0
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>

Execution: /s/ Charles A. Adams Charles A. Adams President
------------------------------------------------------------------
Signature Printed Name Title

Person to contact about this filing: Mark A. Stayer (503) 222-9981
-----------------------------------------
Name Daytime Phone Number

<PAGE>

EXHIBIT A

1. Article III of the Articles of Incorporation is amended to read as follows:

ARTICLE III

The aggregate number of shares which the Corporation shall have
authority to issue is 2,000,000 shares of common stock, without par value.

2. Article VIII is added to the Articles of Incorporation and reads as follows:

ARTICLE VIII

The Corporation elects to waive preemptive rights and the shareholders
of the Corporation shall not have a preemptive right to acquire the
corporation's unissued shares.

<PAGE>

ARTICLES OF AMENDMENT
OF
PORTLAND BREWING COMPANY

Pursuant to ORS 60.437, PORTLAND BREWING COMPANY hereby submits for filing
the following Articles of Amendment to its Articles of Incorporation:

1. The name of the corporation is PORTLAND BREWING COMPANY.

2. The Articles of Incorporation are amended by amending ARTICLE III so
that said article, as amended, reads in its entirety:

"ARTICLE III The aggregate number of shares which the corporation shall
have authority to issue is five million (5,000,000) shares of common stock,
without par value."

3. Shareholder action was required to adopt the amendment. The
corporation's only class of outstanding stock is common stock. The total number
of shares outstanding and votes entitled to be cast by the voting group of the
corporation are 1,101,680. The total number of votes cast for this amendment
was 629,568; the total number of votes cast against this amendment was 44,649.

4. The amendment was adopted on November 8, 1994.

PORTLAND BREWING COMPANY

By: /s/ Charles A. Adams
-----------------------------------
Charles A. Adams, President

Person to contact about this filing:

Brendan R. McDonnell, Esq.
Daytime Phone: (503) 778-2182

<PAGE>

ARTICLES OF AMENDMENT
OF
PORTLAND BREWING COMPANY

Pursuant to ORS 60.437, PORTLAND BREWING COMPANY hereby submits for filing
the following Articles of Amendment to its Articles of Incorporation:

1. The name of the corporation is PORTLAND BREWING COMPANY (the
"Corporation").

2. The Articles of Incorporation are amended by amending ARTICLE III so
that said Article, as amended, is in the form attached hereto as Exhibit A.

3. Shareholder action was required to adopt the Amendment. The
Corporation's only class of outstanding stock is common stock. The total
number of shares outstanding and votes entitled to be cast by the voting group
of the Corporation are 2,069,397. The total number of votes cast for this
Amendment was 1,036,892; the total number of votes cast against this Amendment
was 90,074; and the total number of votes abstaining on this Amendment was
39,200.

4. The Amendment was adopted on April 30,1996.

PORTLAND BREWING COMPANY

By: /s/ Charles A. Adams
-------------------------------------
Charles A. Adams, President

Person to contact about this filing:

Brendan R. McDonnell, Esq.
Daytime Phone: (503) 778-2182

<PAGE>

EXHIBIT A

ARTICLE III
AUTHORIZED SHARES
3.01 COMMON AND PREFERRED STOCK

A. The aggregate number of shares that the Corporation shall have
authority to issue is Five Million (5,000,000) shares of common stock and One
Hundred Thousand (100,000) shares of preferred stock.

B. The preferred stock may be issued in one or more series at such
time or times and for such consideration or considerations as the board of
directors may determine. Each series shall be so designated to distinguish
its shares from the shares of all other series and classes. All shares of a
series of preferred stock shall have preferences, limitations and relative
rights identical with those of other shares of the same series and, except to
the extent otherwise provided in the articles of amendment adopted by the
board of directors creating the series, of those of other series of the same
class. Except as otherwise provided in these articles of incorporation,
different series of preferred stock shall not be construed to constitute
different classes of shares for the purpose of voting by classes.

C. Subject to the foregoing, the board of directors is expressly
authorized to provide for the issuance of all or any shares of the preferred
stock in one or more series, each with such preferences, limitations and
relative rights as shall be stated in the articles of amendment adopted by
the board of directors to create such series and filed with the Oregon
Secretary of State in accordance with the Oregon Business Corporation Act.
The authority of the board of directors with respect to each such series
shall include, without limitation of the foregoing, the right to provide that
the shares of each such series may (1) have special, conditional, or limited
voting rights, or no voting rights; (2) be redeemable or convertible (a) at
the option of the corporation, the shareholder, or another person on the
occurrence of a designated event, (b) for cash, indebtedness, securities, or
other property, or (c) in a designated amount or in an amount determined in
accordance with a designated formula or by reference to extrinsic data or
events; (3) entitle the holders to distributions calculated in any manner,
including dividends that may be cumulative, noncumulative, or partially
cumulative; and (4) have preference over any other classes or series of
shares with respect to distributions, including dividends and distributions
upon the dissolution of the Corporation; all as the board of directors may
deem advisable and as are not inconsistent with the Oregon Business
Corporation Act and the provisions of these articles of incorporation.

3.02 RIGHTS OF COMMON STOCK. Subject to provisions governing preferred
stock that may from time to time come into existence, the holders of the
common stock shall have unlimited voting rights and the unlimited right to
receive the net assets of the Corporation upon dissolution.

3.03 VOTING OF COMMON STOCK. Except as otherwise required by law, each
outstanding share of common stock is entitled to one vote on each matter
voted on at a shareholders' meeting, and each outstanding share of preferred
stock is entitled to such vote or votes, if any, as fixed by the board of
directors in the articles of amendment filed pursuant to paragraph B of
provision 3.01 above.

<PAGE>

ARTICLES OF AMENDMENT
OF
PORTLAND BREWING COMPANY

Pursuant to the Oregon Business Corporation Act, the undersigned
corporation submits for filing the following Articles of Amendment:

1. The name of the corporation is Portland Brewing Company (the
"Company").

2. Paragraph A of Article 3.01 of the Company's Articles of
Incorporation is amended to read as follows:

3.01 COMMON AND PREFERRED STOCK

A. The aggregate number of shares that the
Corporation shall have authority to issue is Twenty-Five
Million (25,000,000) shares of common stock and One Hundred
Thousand (100,000) shares of preferred stock.

3. The amendment was adopted by the shareholders of the corporation on
December 12, 1998.

4. Shareholder action was required to adopt the amendment. The only
class of stock outstanding is common stock. The vote was as follows:

<TABLE>
<CAPTION>
--------------- ---------------- ---------------- ---------------- ------------------- ----------------------
Class or Number of Number of Number of Number of votes Number of ABSTENTIONS
series of shares votes entitled votes cast FOR cast AGAINST
shares outstanding to be cast
--------------- ---------------- ---------------- ---------------- ------------------- ----------------------
<S> <C> <C> <C> <C> <C>
Common 3,365,267 3,365,267 2,373,179 58,738 11,355
--------------- ---------------- ---------------- ---------------- ------------------- ----------------------
</TABLE>

PORTLAND BREWING COMPANY

/s/ Charles A. Adams
-------------------------------------
Charles A. Adams, President

Person to contact about this filing:

Gregory W. Mallory
Schwabe, Williamson & Wyatt, P.C.
(503) 222-9981

<PAGE>

ARTICLES OF AMENDMENT
OF
PORTLAND BREWING COMPANY

Pursuant to ORS 60.134, the undersigned corporation submits for filing
the following Articles of Amendment to its Articles of Incorporation:

1. The name of the corporation is Portland Brewing Company.

2. Article III of the Articles of Incorporation is amended by adding
Section 3.04 which is attached hereto as Exhibit A.

3. The amendment was duly adopted by the Board of Directors on
February 24, 1999.

PORTLAND BREWING COMPANY, an
Oregon corporation

By: /s/ Charles A. Adams
-------------------------------------
Charles A. Adams, President

Person to contact about this filing: Greg Mallory (503) 222-9981

<PAGE>

EXHIBIT A

3.04 Series A Preferred Stock.

A. Number of Shares Included in Series A Preferred Stock. Ten Thousand
(10,000) shares of the Corporation's authorized preferred stock are designated
as Series A Preferred Stock. The Series A Preferred Stock will have a par value
of $52.00 (the "Par Value") per share.

B. Voting Rights.

(1) Each share of Series A Preferred Stock will be entitled to vote at
all meetings of the shareholders of the Corporation in respect to any matter
upon which the vote of the shareholders is required, including, without
limitation, the election of directors. Each share of Series A Preferred
Stock will initially be entitled to 100 votes. If at any time after the date
of issuance of the Series A Preferred Stock, the Corporation issues
additional shares of common stock as a stock dividend, or subdivides or
combines the outstanding shares of common stock, then the number of votes
which the Series A Preferred Stock is entitled shall be proportionally
adjusted.

(2) The Series A Preferred Stock will vote separately as a class.

C. Dividends. The holders of Series A Preferred Stock shall be
entitled to receive out of funds lawfully available for dividends under the
Oregon Business Corporation Act, if and as declared by the Board of
Directors, cumulative dividends at the rate of 8% per annum, and no more,
from the date of issuance, payable quarterly. Such dividends shall be
declared and paid, or set apart for payment, before any dividend or other
distribution is paid or set apart for payment with respect to the
Corporation's common stock.

D. Redemption. Unless converted in accordance with paragraph E below,
the Corporation shall redeem the Series A Preferred Stock on February 25,
2004 (the "Redemption Date"), by paying to the holder the Par Value for each
share plus any accumulated but unpaid dividends thereon (the "Redemption
Price"). The Redemption Price shall be paid, at the sole discretion of the
Corporation, either: (i) in cash on the Redemption Date or (ii) in 24 equal
monthly payments bearing interest at 12% per annum with the first payment due
on the first day of the month following the Redemption Date.

E. Conversion.

(1) On the Redemption Date, holders may convert Series A Convertible
Preferred Stock into fully paid and nonassessable common stock of the
Corporation at the rate of 100 shares of common stock for each share of
Series A Preferred Stock converted.

(2) To convert the shares, the holder must deliver to the Corporation,
within 10 days prior to the Redemption Date, (i) a written notice stating the
number of shares to be converted and (ii) the certificate or certificates
representing the shares to be converted along with the proper instruments of
transfer of the certificate or certificates to be converted.

(3) If at any time after the date of issuance of the Series A Preferred
Stock, the Corporation issues additional shares of common stock as a stock
dividend, or subdivides or combines the outstanding shares of common stock,
then the rate of conversion shall be proportionally adjusted. In lieu of any
fractional share to which the holder would otherwise be entitled, the
Corporation shall round up or down the number of shares of common stock to be
received upon conversion to the nearest whole share.

(4) In the event the Corporation at any time while any of the Series A
Preferred Stock is outstanding shall be consolidated with or merged into any
other corporation or corporations, or shall sell or lease all or
substantially all of its property and business as an entirety, lawful
provision shall be made as part

<PAGE>

of the terms of such consolidation, merger, sale or lease that the holder of
Series A Preferred Stock may thereafter receive in lieu of such common stock
otherwise issuable to the holder upon conversion of his or her shares, but at
the conversion rate which would otherwise be in effect at the time of
conversion, the same kind and amount of securities or assets as may be
issuable, distributable or payable upon such consolidation, merger, sale or
lease with respect to common stock of the Corporation.

F. Liquidation. In the event of liquidation or dissolution of the
Corporation, voluntary or involuntary, the holder of the Series A Preferred
Stock shall be entitled to receive out of the assets of the Company the Par
Value of their respective shares and an amount equal to the dividends accrued
and unpaid thereon to the date of distribution, whether or not earned or
declared, before any distribution shall be made to the holders of common
stock. The foregoing provisions shall not be deemed to require the
distribution of assets among the holder of Series A Preferred Stock in the
event of a consolidation, merger, lease, or sale, which does not in fact
result in the liquidation or dissolution of the Corporation.

<PAGE>

EXHIBIT 2.2

BYLAWS
OF
PORTLAND BREWING COMPANY

AS ADOPTED FEBRUARY 10, 1994 AND
INCORPORATING AMENDMENTS ADOPTED:
AUGUST 29, 1994
DECEMBER 13, 1994
JULY 11, 1995
DECEMBER 18, 1995
MARCH 6, 1996
OCTOBER 23, 1998

<PAGE>

<TABLE>

<S> <C>
1. Shareholders' Meetings. . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.1 Annual Meeting.. . . . . . . . . . . . . . . . . . . . . . . . 1
1.2 Special Meetings.. . . . . . . . . . . . . . . . . . . . . . . 1
1.3 Notice.. . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.4 Waiver of Notice.. . . . . . . . . . . . . . . . . . . . . . . 1
1.5 Voting.. . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.6 Quorum; Vote Required. . . . . . . . . . . . . . . . . . . . . 2
1.7 Action Without Meeting.. . . . . . . . . . . . . . . . . . . . 2
2. Board of Directors. . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
2.1 Number and Election of Directors.. . . . . . . . . . . . . . . 2
2.2 Vacancies. . . . . . . . . . . . . . . . . . . . . . . . . . . 3
2.3 Annual Meeting.. . . . . . . . . . . . . . . . . . . . . . . . 3
2.4 Regular Meetings.. . . . . . . . . . . . . . . . . . . . . . . 3
2.5 Special Meetings.. . . . . . . . . . . . . . . . . . . . . . . 3
2.6 Telephonic Meetings. . . . . . . . . . . . . . . . . . . . . . 3
2.7 Waiver of Notice.. . . . . . . . . . . . . . . . . . . . . . . 4
2.8 Quorum.. . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
2.9 Voting.. . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
2.10 Action Without Meeting. . . . . . . . . . . . . . . . . . . . 4
2.11 Removal of Directors. . . . . . . . . . . . . . . . . . . . . 4
2.12 Powers of Directors.. . . . . . . . . . . . . . . . . . . . . 4
2.13 Committees. . . . . . . . . . . . . . . . . . . . . . . . . . 5
2.14 Chairman of the Board.. . . . . . . . . . . . . . . . . . . . 5
3. Officers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
3.1 Composition. . . . . . . . . . . . . . . . . . . . . . . . . . 5
3.2 President. . . . . . . . . . . . . . . . . . . . . . . . . . . 6
3.3 Vice President(s). . . . . . . . . . . . . . . . . . . . . . . 6
3.4 Secretary. . . . . . . . . . . . . . . . . . . . . . . . . . . 6
3.5 Treasurer. . . . . . . . . . . . . . . . . . . . . . . . . . . 6
3.6 Removal. . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
4. Stock and other Securities. . . . . . . . . . . . . . . . . . . . . . . . 7
4.1 Certificates.. . . . . . . . . . . . . . . . . . . . . . . . . 7
4.2 Transfer Agent and Registrar.. . . . . . . . . . . . . . . . . 7
4.3 Transfer.. . . . . . . . . . . . . . . . . . . . . . . . . . . 7
4.4 Necessity for Registration.. . . . . . . . . . . . . . . . . . 7
4.5 Fixing Record Date.. . . . . . . . . . . . . . . . . . . . . . 8
4.6 Record Date for Adjourned Meeting. . . . . . . . . . . . . . . 8
4.7 Lost Certificates. . . . . . . . . . . . . . . . . . . . . . . 8
5. No Corporate Seal . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
6. Reimbursement of Certain Payments . . . . . . . . . . . . . . . . . . . . 8
7. Fiscal Year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
8. Amendments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
9. Control Share Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
10. Indemnification. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
11. Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
</TABLE>

<PAGE>

ARTICLE I
SHAREHOLDERS' MEETINGS

SECTION 1.1 ANNUAL MEETING.
The annual meeting of the shareholders shall be held on the last Tuesday
in April of every year at the principal office of the Company (2730 N.W. 31st
Avenue, Portland, Oregon 97210) or at such other time, date or place as may
be determined by the Board of Directors. At such meeting the shareholders
entitled to vote shall elect a Board of Directors and transact such other
business as may properly come before the meeting.

SECTION 1.2 SPECIAL MEETINGS.
The Company shall hold special meetings of shareholders at any time on call
of the Chief Executive Officer or the Board of Directors, or on demand in
writing by shareholders of record holding shares with at least 10 percent of the
votes entitled to be cast on any matter proposed to be considered at the special
meeting. Only business within the purpose(s) described in the notice of special
meeting may be conducted at such special meeting.

SECTION 1.3 NOTICE.
Written notice stating the place, date and time of the meeting, and, in
case of a special meeting, the purpose or purposes for which the meeting is
called, shall be delivered not less than ten nor more than sixty days before the
date of the meeting, either personally or by mail, by or at the direction of the
Chief Executive Officer or the Secretary, to each shareholder of record entitled
to vote at such meeting. If mailed, the notice shall be deemed to be delivered
when deposited in the United States mail addressed to the shareholder at the
shareholder's address as it appears on the current shareholder records of the
Company, with postage prepaid.

SECTION 1.4 WAIVER OF NOTICE.
A shareholder may, at any time, waive any notice required by these Bylaws,
the Articles of Incorporation or the Oregon Business Corporation Act. The
waiver must be in writing, be signed by the shareholder, and be delivered to the
Company for inclusion in the minutes and filing in the corporate records. A
shareholder's attendance at a meeting waives any objection to (a) lack of notice
or defective notice, unless the shareholder objects at the beginning of the
meeting to holding the meeting or transacting business at the meeting, and
(b) consideration of any matter at the meeting that is not within the purpose or
purposes described in the notice of a special meeting, unless the shareholder
objects to considering the matter when it is presented.

SECTION 1.5 VOTING.
Except as otherwise provided in the Articles of Incorporation, each
shareholder shall be entitled to one vote, in person or by proxy, on each matter
voted on at a shareholder's meeting for each share of stock entitled to vote
outstanding in such shareholder's name on the records of the Company. Shares
held by a corporation, a majority of the shares entitled to vote for directors
of which are held by this Company, may not be voted unless such shares are held
as trustee or in another fiduciary capacity.

SECTION 1.6 QUORUM; VOTE REQUIRED.
A majority of the shares entitled to vote on a matter, represented in
person or by proxies, shall constitute a quorum with respect to that matter at
any meeting of the shareholders. If a quorum is present, action on a matter,
other than the election of directors, is approved if the votes cast in favor of
the action exceed the votes cast in opposition, unless the vote of a greater
number is required by the Oregon Business Corporation Act or the Articles of
Incorporation.

SECTION 1.7 ACTION WITHOUT MEETING.
Any action required or permitted to be taken at a meeting of shareholders
may be taken without a meeting if a written consent, or consents, describing the
action taken is signed by all of the shareholders entitled to vote on the action
and delivered to the Company for inclusion in the minutes and filing with the
corporate records. The action is effective when the last shareholder signs the
consent, unless the consent

<PAGE>

specifies an earlier or later effective date. A consent signed under this
section has the effect of a meeting vote and may be described as such in any
document. Unless a record date for determining the shareholders entitled to
take action without a meeting is otherwise established, the record date for
that purpose is the date the first shareholder signs the consent. If the
Oregon Business Corporation Act requires that notice of a proposed action be
given to non-voting shareholders and the action is to be taken by unanimous
consent of the shareholders, at least 10 days written notice of the proposed
action shall be given to non-voting shareholders before the action is taken.

ARTICLE II
BOARD OF DIRECTORS

SECTION 2.1 NUMBER AND ELECTION OF DIRECTORS.
The number of directors of the Company shall be at least four (4) and not
more than nine (9). The number of directors shall be fixed or changed, within
the minimum and the maximum, from time to time, by the Board of Directors or the
shareholders pursuant to a resolution adopted at a meeting of the Board of
Directors or shareholders. The directors shall hold office until the next
annual meeting of shareholders, unless the terms are staggered in accordance
with the Articles of Incorporation, and until their successors shall have been
elected and qualified, until earlier death, resignation, or removal or until
there is a decrease in the number of directors. Directors need not be residents
of the State of Oregon or shareholders of the Company. A decrease in the number
of directors shall not shorten the term of any incumbent director.

SECTION 2.2 VACANCIES.
Unless otherwise provided in the Articles of Incorporation, any vacancy
occurring in the Board of Directors, including a vacancy resulting from an
increase in the number of directors, may be filled by the board of directors or
if the remaining directors do not constitute a quorum, by the affirmative vote
of a majority of the remaining directors. A director elected to fill a vacancy
shall be elected for the unexpired term of the director's predecessor in office,
subject to prior death, resignation or removal.

SECTION 2.3 ANNUAL MEETING.
There shall be an annual meeting of the Board of Directors which may be
held without notice immediately after the adjournment of the annual meeting of
the shareholders or at another time designated by the Board of Directors upon
notice in the same manner as provided in Section 2.5. The annual meeting shall
be held at the principal office of the Company or at such other place as the
Board of Directors may designate.

SECTION 2.4 REGULAR MEETINGS.
The Board of Directors may by resolution provide for regular meetings.
Each director then in office shall be provided written notice of the scheduled
date, hour and place of each regular meeting, personally delivered or mailed by
United States mail, first class postage prepaid, addressed to each director at
the director's address appearing on records of the Company, not less than ten
(10) days prior to the date of the first regular meeting held after the adoption
or modification of the resolution providing for regular meetings.

SECTION 2.5 SPECIAL MEETINGS.
Special meetings of the Board of Directors may be called by the Chief
Executive Officer or any member of the Board of Directors. Each director shall
be given notice of each special meeting which shall be actually delivered,
orally or in writing, not less than two (2) days prior to the meeting or mailed
by deposit in the United States mail, first class postage prepaid, addressed to
the director at the director's address appearing on the records of the Company
not less than four (4) days prior to the meeting. Special meetings of the
directors may also be held at any time when all members of the Board of
Directors are present and consent to a special meeting. Special meetings of the
directors shall be held at the principal office of the Company or at any other
place designated by a majority of the Board of Directors.

<PAGE>

SECTION 2.6 TELEPHONIC MEETINGS.
The Board of Directors may permit directors to participate in a meeting by
any means of communication by which all of the persons participating in the
meeting can hear each other at the same time. Participation in such a meeting
shall constitute presence in person at the meeting.

SECTION 2.7 WAIVER OF NOTICE.
A director may, at any time, waive any notice required by these Bylaws, the
Articles of Incorporation or the Oregon Business Corporation Act. Except as
otherwise provided in this Section, the waiver must be in writing, be signed by
the director, must specify the meeting for which notice is waived, and be
delivered to the Company for inclusion in the minutes and filing in the
corporate records. A director's attendance at a meeting waives any required
notice, unless the director at the beginning of the meeting or promptly upon the
director's arrival objects to holding the meeting or transacting business at the
meeting and does not thereafter vote for or assent to any action taken at the
meeting.

SECTION 2.8 QUORUM.
A majority of the number of directors that has been prescribed by
Section 2.1 of these Bylaws shall constitute a quorum for the transaction of
business.

SECTION 2.9 VOTING.
The act of the majority of the directors present at a meeting at which a
quorum is present shall be the act of the Board of Directors, unless otherwise
provided by the Articles of Incorporation or these Bylaws.

SECTION 2.10 ACTION WITHOUT MEETING.
Unless otherwise provided by the Articles of Incorporation, any action
required or permitted to be taken at a board of directors' meeting may be taken
without a meeting if a written consent, or consents, describing the action taken
is signed by each director and included in the minutes and filed with the
corporate records. The action is effective when the last director signs the
consent, unless the consent specifies an earlier or later effective date. A
consent signed under this section has the effect of a meeting vote and may be
described as such in any document.

SECTION 2.11 REMOVAL OF DIRECTORS.
Unless otherwise provided by the Articles of Incorporation, the
shareholders, at any meeting of the shareholders called expressly for that
purpose, may remove any director from office, with or without cause.

SECTION 2.12 POWERS OF DIRECTORS.
The Board of Directors shall have sole responsibility for the management of
the business of the Company. In the management and control of the property,
business and affairs of the Company, the Board of Directors is vested with all
of the powers possessed by the Company itself, so far as this delegation of
power is not inconsistent with the Oregon Business Corporation Act, the Articles
of Incorporation, or these Bylaws. The Board of Directors shall have power to
determine what amount constitutes net earnings of the Company, what amount shall
be reserved for working capital and for any other purpose, and what amount shall
be declared as dividends, and such determinations by the Board of Directors
shall be final and conclusive except as otherwise provided by the Oregon
Business Corporation Act and the Articles of Incorporation. The Board of
Directors shall designate one or more officers of the Company who shall have the
power to sign all deeds, leases, contracts, mortgages, deeds of trust and other
instruments and documents executed by and binding upon the Company. In the
absence of a designation of any other officer or officers, the Chief Executive
Officer shall be the officer so designated.

<PAGE>

SECTION 2.13 COMMITTEES.
Unless the Articles of Incorporation otherwise provide, a majority of the
Board of Directors may designate from among its members an Executive Committee
or other committees of two or more members each. Each committee shall have such
powers and shall perform such duties as may be delegated and assigned to the
committee by the Board of Directors; however, a committee may not take any
action which the Oregon Business Corporation Act prohibits be taken by a
committee. The provisions of Sections 2.4, 2.5, 2.6, 2.7, 2.8, 2.9, and 2.10 of
the Bylaws shall also apply to all committees. Each committee shall keep
written records of its activities and proceedings. All actions by committees
shall be reported to the Board of Directors at the next meeting following the
action and the Board of Directors may ratify or may revise or alter such action,
provided that no rights or acts of third parties shall be affected by any such
revision or alteration.

SECTION 2.14 CHAIRMAN OF THE BOARD.
The Board of Directors may designate one of its members Chairman of the
Board of Directors. In the absence of a designation of another member of the
Board of Directors, the Chief Executive Officer shall also be the Chairman of
the Board of Directors if the Chief Executive Officer is a member of the Board
of Directors. The Chairman shall advise and consult with the Board of Directors
and the officers of the Company as to the determination of policies of the
Company, shall preside at all meetings of the Board of Directors and of the
shareholders, and shall perform such other functions and responsibilities as the
Board of Directors shall designate from time to time.

ARTICLE III
OFFICERS

SECTION 3.1 COMPOSITION.
The officers of this Company shall consist of a President and Chief
Executive Officer, one or more Vice-Presidents, a Secretary, and a Treasurer,
each of whom shall be elected by the Board of Directors at the annual meeting of
the Board of Directors. Such other officers and assistant officers and agents
as may be deemed necessary may be elected or appointed by or in the manner
directed by the Board of Directors, and any vacancies occurring in any office of
this Company may be filled by election or appointment by the Board of Directors
at any regular meeting or any special meeting called for that purpose; provided,
however, the President and Chief Executive Officer shall have the powers of
appointment and removal set forth herein. All officers shall hold their office
until the next annual meeting of the Board of Directors and until their
successors are elected and qualified, subject to prior death, resignation or
removal. The salaries of all officers shall be fixed by the Board of Directors
or by a committee of the Board of Directors.

SECTION 3.2 PRESIDENT.
The President and Chief Executive Officer shall preside at meetings of the
Board of Directors and of the shareholders. The President and Chief Executive
Officer shall be responsible for implementing the policies and goals of the
Company as stated by the Board of Directors; shall have general supervision and
management over the officers, property, business and affairs of the Company;
shall have authority to hire and fire personnel and take such other actions as
are necessary and appropriate to implement the policies, goals and directions of
the Board of Directors; shall have all authority customary to such office; and
shall perform such other duties as may be prescribed by the Board of Directors.

SECTION 3.3 VICE-PRESIDENT(s).
The Vice-President(s) shall perform such duties as may be prescribed by the
President and Chief Executive Officer, and such other duties as may be
prescribed by the Board of Directors. The President and Chief Executive Officer
may, from time to time, appoint from among the Vice-Presidents of the Company,
an Executive Vice-President, who shall hold both the office of Executive
Vice-President and Vice-President. In the absence or disability of the
President, the Executive Vice-President, if one is then serving, or if one is
not then serving, then the Vice-Presidents, in the order of their rank as fixed
by the Board of Directors, or if not ranked, the Vice-President designated by
the Board of Directors, shall perform the duties and exercise the powers of the
President and Chief Executive Officer.

<PAGE>

SECTION 3.4 SECRETARY.
The Secretary shall record, keep and be custodian of the minutes and
records of all the meetings of the shareholders and directors and other official
records of the Company. The Secretary shall give notice of meetings to the
shareholders and directors and shall perform such other duties as may be
prescribed by the Board of Directors.

SECTION 3.5 TREASURER.
It shall be the duty of the Treasurer to receive all moneys and funds of
the Company and to deposit the same in the name and to the account of the
Company in the bank or banks designated by the Board of Directors. The
Treasurer shall keep accurate books of account and shall make reports of
financial transactions of the Company to the Board of Directors and shall
perform such other duties as may be prescribed by the Board of Directors. If
the Board of Directors elects a Vice-President-Finance, the duties of the office
of Treasurer may rest in that officer and in that event, the Board of Directors
need not appoint a Treasurer. The Treasurer shall perform such other duties as
may be prescribed by the Board of Directors.

SECTION 3.6 REMOVAL.
The directors, at any regular meeting or any special meeting called for
that purpose, may remove any officer from office with or without cause. The
President and Chief Executive Officer may remove any other officer at any time
with or without cause. No removal shall impair the contract rights, if any, of
the officer removed or of this Company or of any other person or entity.

ARTICLE IV
STOCK AND OTHER SECURITIES

SECTION 4.1 CERTIFICATES.
All stock and other securities of this Company shall be represented by
certificates which shall be signed by the Chief Executive Officer and the
Secretary or an Assistant Secretary of the Company.

SECTIN 4.2 TRANSFER AGENT AND REGISTRAR.
The Board of Directors may from time to time appoint one or more Transfer
Agents and one or more Registrars for the stock and other securities of the
Company. The signatures of the Chief Executive Officer and the Secretary or an
Assistant Secretary upon a certificate may be facsimiles if the certificate is
manually signed by a Transfer Agent, or registered by a Registrar, and the
Transfer Agent or Registrar is neither the Company itself nor an employee of the
Company.

SECTION 4.3 TRANSFER.
Title to a certificate and to the interest in this Company represented by
that certificate can be transferred only (a) by delivery of the certificate
endorsed by the person appearing by the certificate to be the owner of the
interest represented thereby either in blank or to a specified person, or (b) by
delivery of the certificate and a separate document containing a written
assignment of the certificate or a power of attorney to sell, assign or transfer
the same, signed by the person appearing by the certificate to be the owner of
the interest represented thereby either in blank or to a specified person.

SECTION 4.4 NECESSITY FOR REGISTRATION.
Prior to presentment for registration upon the transfer books of the
Company of a transfer of stock or other securities of this Company, the Company
or its agent for purposes of registering transfers of its securities may treat
the registered owner of the security as the person exclusively entitled to vote;
to receive any notices; to receive payment of any interest on a security, or of
any ordinary, extraordinary, partial liquidating, final liquidating, or other
dividend, or of any other distribution, whether paid in cash or in securities or
in any other form; and otherwise to exercise or enjoy any or all of the rights
and powers of an owner.

<PAGE>

SECTION 4.5 FIXING RECORD DATE.
The Board of Directors may fix in advance a date as record date for the
purpose of determining the registered owners of stock or other securities
entitled to notice of or to vote at any meeting of the shareholders or any
adjournment thereof; to receive payment of any interest on a security, or of any
ordinary, extraordinary, partial liquidating, final liquidating, or other
dividend, or of any other distribution, whether paid in cash or in securities or
in any other form; to otherwise exercise or enjoy any or all of the rights and
powers of an owner, or in order to make a determination of registered owners for
any other proper purpose. The record date shall be not more than 70 days and,
in case of a meeting of shareholders, not less than l0 days prior to the date on
which the particular action which requires such determination of registered
owners is to be taken.

SECTION 4.6 RECORD DATE FOR ADJOURNED MEETING.
A determination of shareholders entitled to notice of or to vote at a
shareholders' meeting is effective for any adjournment of the meeting unless the
Board of Directors fixes a new record date. A new record date must be fixed if
a shareholders' meeting is adjourned to a date more than 120 days after the date
fixed for the original meeting.

SECTIN 4.7 LOST CERTIFICATES.
In case of the loss or destruction of a certificate of stock or other
security of this Company, a duplicate certificate may be issued in its place
upon such conditions as the Board of Directors shall prescribe.

ARTICLE V
NO CORPORATE SEAL

The Company will not have a corporate seal.

ARTICLE VI
REIMBURSEMENT OF CERTAIN PAYMENTS

Any payments made to an officer or director of this Company, including
payments made as salary, commission, bonus, interest, rent or for expenses
incurred for travel or entertainment by that person, which are subsequently
determined by the Board of Directors to have not been necessary to further
the interests of the Company or paid under fraudulent circumstances shall be
reimbursed by such officer or director to this Company. In making any such
determination, the Board of Directors may consider the tax deductibility of
the subject payment. It shall be the duty of the Board of Directors to
enforce collection from the officer or director of each amount disallowed.
If the Board of Directors shall determine it necessary or desirable, amounts
may be withheld from the future compensation payments of an officer or
director sufficient to equal the amount of any of such amounts.

ARTICLE VII
FISCAL YEAR

The Fiscal Year of the Company shall be from January 1 to December 31.

ARTICLE VIII
AMENDMENTS

Unless otherwise provided in the Articles of Incorporation, the Bylaws of
this Company may be amended, repealed or replaced by the directors, subject to
amendment, repeal or replacement by action of the shareholders, at any regular
meeting or at any special meeting called for that purpose, provided notice of
the proposed change is given in the notice of the meeting or notice thereof is
waived in writing. Provided, Article 9 of the Bylaws, related to Control Share
Acquisitions, may only be amended by compliance with the foregoing and also
compliance with the statutory procedures regarding shareholder approval.

<PAGE>

ARTICLE IX
CONTROL SHARE ACT

The provisions of ORS 60.801 to 60.816, pertaining to control share
acquisitions, shall not apply to acquisitions of the Company's voting shares.

ARTICLE X
INDEMNIFICATION

The Company shall indemnify its directors, officers, agents and employees
for liability and related expenses to the full extent permitted by the Oregon
Business Corporation Act, as the same presently exists or is hereafter amended
from time to time. This Article shall not be deemed exclusive of any other
indemnification rights to which directors, officers, employees or agents may be
entitled. It is the intention of this Article to require indemnification in
cases where the Oregon Business Corporation Act, as presently written or as
hereafter amended, authorizes such indemnification but does not expressly
require nor prohibit such indemnification.

ARTICLE XI
SEVERABILITY

If any provision of these Bylaws is found, in any action, suit or
proceeding, to be invalid or ineffective, the validity and the effect of the
remaining provisions shall not be affected.

<PAGE>

EXHIBIT 6.8

LOAN RESTRUCTURING AGREEMENT

THIS LOAN RESTRUCTURING AGREEMENT (this "Agreement") is made as of the
18th day of November, 1998, by and among the MACTARNAHAN LIMITED PARTNERSHIP,
an Oregon limited partnership ("Lender"), HARMER MILL & LOGGING SUPPLY CO.,
an Oregon corporation ("Guarantor") and PORTLAND BREWING COMPANY, an Oregon
corporation ("Borrower").

RECITALS.

A. Borrower is obligated to Lender, under and pursuant to that certain
Business Loan Agreement dated as of December 15, 1995, between Borrower and
Bank of America NT & SA, as amended (a) in six amendments numbered one
through five, and seven (a number six having never been executed), and dated
as of July 23, 1996, December 19, 1996, March 27, 1997, April 23, 1997,
November 24, 1997, and May, 1998, respectively, the lender's interest in
which was assigned to and assumed by Lender pursuant to an Assignment of
Interest under Loan Documents -Private, dated as of August 17, 1998 (the
"Assumption Agreement"), and as further amended (b) in that certain Credit
and Forbearance Agreement (the "Forbearance Agreement") between Borrower and
Lender dated August 17, 1998. Such Business Loan Agreement, as amended by the
documents listed in clauses (a) and (b), is herein referred to as the "Loan
Agreement."

B. Borrower is the maker of that certain $600,000.00 promissory note
given by Borrower to Lender, dated August 17, 1998 (the "Demand Note"). All
sums advanced by Lender to Borrower pursuant to the Forbearance Agreement, and
evidenced by such Demand Note, together with any and all interests and changes
thereon, have been paid and satisfied in full.

C. The Loan Agreement is secured by that certain Security Agreement
(Receivables, Inventory and Equipment) dated as of December 15, 1995 (the
"Security Agreement"), and by a UCC-1 Financing Statement recorded with the
Oregon Secretary of State on December 21, 1995, and a UCC-1A Financing Statement
recorded in Multnomah County on December 27, 1996 (together with the Security
Agreement, the "Security Instruments"), all of which were assigned to Lender
pursuant to the Assumption Agreement. The Loan Agreement and the Security
Instruments are herein together referred to as the "Loan Documents."

D. Under the Loan Documents Borrower is indebted to Lender under three
facilities, originally consisting of a revolving line of credit (the "Revolving
Line") and two fixed term loans (the "Term Loans"); all of such facilities are
due and payable on Lender's demand made any time on or after September 1, 1998.

E. Pursuant to the Forbearance Agreement, Lender agreed to forebear until
August 31, 1998, from exercising any remedies available to it under the Loan
Documents arising by reason of Borrower's existing defaults thereunder to enable
Borrower to pursue negotiations with other financial institutions to extend
credit to Borrower so that Borrower could pay and retire all or a portion of
Borrower's indebtedness to Lender.

F. Borrower has procured a $600,000 replacement facility for the
Revolving Line (the "BNW Credit Line") from Bank of the Northwest (the "Bank")
as evidenced by that certain note and credit agreement, each dated September 2,
1998, given by Borrower to the Bank (together, the "Bank Loan Documents").

G. By a Commercial Guarantee dated September 2, 1998 (the "Guarantee"),
given by Guarantor to the Bank, Guarantor has agreed to act as a primary
guarantor on the BNW Credit Line, as more particularly set forth in the
Guarantee and in the Bank Loan Documents. The Guarantee is secured by that
certain $600,000

<PAGE>

Certificate of Deposit # 0109006895 issued by the Bank in the name of
Guarantor (the "CD") and pledged by Guarantor to the Bank under that certain
Assignment of Deposit Account dated September 2, 1998 (the "Pledge
Agreement"). Upon a default by Borrower in its obligations to the Bank under
the Bank Loan Documents, the Bank is entitled to redeem the CD and apply sums
payable upon such redemption to cure any default by Borrower in its
obligations under the Bank Loan Documents, which application will be in
discharge, in whole or in part, of Guarantor's obligations under the
Guarantee.

H. Borrower has requested that (i) Lender release and forever
discharge Borrower from its obligations evidenced by the Loan Agreement, in
exchange for Borrower's execution and delivery to Lender of Borrower's term
promissory note in the amount of $2,100,000.00, to be secured by the Security
Instruments, and (ii) Guarantor undertake to keep in effect, and perform its
obligations under, the Guarantee and Pledge Agreement. Lender is willing to
grant such release and discharge, and Guarantor is willing to make such
accommodations, subject, however, to the terms, and satisfaction of the
conditions, stated in this Agreement.

AGREEMENT.

NOW THEREFORE, in consideration of the premises and of the mutual
covenants contained herein, the parties agree:

1. BORROWER'S REPRESENTATIONS AND WARRANTIES. Borrower hereby
represents and warrants to and for the benefit of Lender and Guarantor, and
with the knowledge that Lender and Guarantor are relying hereon in entering
into this Agreement and granting the accommodations herein contained:

1.1 AGREEMENTS IN EFFECT; NO DEFAULTS. Except as set forth in
Schedule 1.1, the Loan Documents, and each of them, is in full force and
effect and unmodified.

1.2 OUTSTANDING OBLIGATIONS. Attached as Schedule 1.2 to this
Agreement is a true and correct summary of the current status of each of the
credit facilities outstanding under the Loan Documents, including, without
limitation, the outstanding principal balance of each such facility, the rate
at which interest is accruing thereunder, the amount of outstanding interest
accrued thereunder and the amount of any payment past due thereunder.

1.3 FINANCIAL STATEMENTS. The Company's financial statements,
consisting of the items listed in Schedule 1.3, dated as of September 30,
1998, in the forms previously provided to Lender and Guarantor, accurately
reflect the Company's financial status and results of operations as of the
date thereof and, except for (a) transactions in the normal course of
business occurring after such date and (b) transactions outside the normal
course of business after such date that have been approved by a vote of the
Company's Board of Directors at a duly convened meeting (or by a unanimous
written consent of the Board in lieu of such a meeting), such September 30,
1998, statements continue to reflect accurately the Company's financial
status and results of operations.

1.4 STOCK OWNERSHIP. There is issued and outstanding, and held of
record in the name of each shareholder identified in Schedule 1.4, that
number of shares of the Company's voting capital stock, or the right to
acquire that number of shares of the Company's voting capital stock, as is
set forth opposite such shareholder's name in said Schedule 1.4. The Company
acknowledges that each of the shareholders identified in said Schedule 1.4 is
a party to a Voting Agreement dated on or about the date of this Agreement
and executed by such Shareholders to and for the benefit of Lender and
Guarantor as a material inducement to Lender and Guarantor to enter into this
Agreement.

2. RELEASE.

2.1 BY LENDER. Subject to completion of the deliveries called for
in Section 4 and further subject to the succeeding sentence, this Agreement
shall be Lender's discharge and release of

<PAGE>

Borrower from each and every obligation evidenced by the Loan Agreement, and
Lender shall make no demand on or claim against Borrower in respect of such
obligations. Nothing herein is intended, nor should it be construed, to
release or terminate the Security Instruments, each which shall remain in
full force and effect.

2.2 BY BORROWER. Subject to completion of the deliveries called
for in Section 4 and further subject to the succeeding sentence, this
Agreement shall be Borrower's discharge and release of Lender from each and
every obligation evidenced by or arising under the Loan Agreement, and
Borrower shall make no demand or claim against Lender in respect of such
obligations. Nothing herein is intended, nor should it be construed, to
release or terminate the Security Instruments, each of which shall remain in
full force and effect.

3. CREDIT ACCOMMODATIONS. Subject to completion of the deliveries
called for in Section 4, and provided that no Event of Default exists
hereunder or under the Reimbursement Agreement (defined at Section 4.1),
Guarantor shall maintain in effect, and shall duly and timely perform each of
its obligations under, the Guarantee and the Pledge Agreement, as and to the
extent necessary to cause the BNW Credit Line to remain available to the
Company for a term ending August 27, 1999.

4. DELIVERIES. Contemporaneously with execution and delivery of this
Agreement, and as a condition precedent to its efficacy:

4.1 BY BORROWER. Borrower shall execute and deliver:

(a) to Lender, Borrower's promissory note in the form of
Exhibit A, in the original principal amount of $2,100,000 (the "Term Note");

(b) to Guarantor, Borrower's Reimbursement Agreement in the
form of Exhibit B (the "Reimbursement Agreement").

4.2 BY LENDER. Lender shall:

(a) execute and deliver to Guarantor an Assignment of
Interest in Security Agreement in the form of Exhibit C;

(b) execute and cause to be filed with the Oregon Secretary
of State and Multnomah County Recorder a UCC-3 financing statement,
reflecting the assignment described in clause (a); and

5. SECURITY AGREEMENT. Borrower hereby acknowledges that (a) by the
Assignment of Interest in Security Agreement required to be executed and
delivered at Section 4.2(a), Lender has assigned to Guarantor an undivided
interest in Lender's rights and interest as the secured party under the
Security Agreement, (b) Lender and Guarantor are both secured parties under
the Security Agreement, each vested with full power and authority thereunder,
whether acting together or unilaterally, to exercise all rights and enjoy all
remedies afforded the secured party thereunder, (c) the Term Note, and all
amounts advanced, accruing or that might otherwise come due thereunder or
under this Agreement, constitute "Indebtedness" under Section 2 of the
Security Agreement and payment and performance thereof is therefore secured
by the Security Instruments, and (d) the Reimbursement Agreement, and all
amounts that come due thereunder from Borrower to Guarantor, constitute
"Indebtedness" under Section 2 of the Security Agreement and payment and
performance thereof is therefore secured by the Security Instruments.

<PAGE>

6. BORROWER'S COVENANTS.

6.1 GRANT OF ADDITIONAL SECURITY INTERESTS. Except with Lender
and Guarantor's prior written consent, (a) Borrower shall not incur any
indebtedness other than (i) trade debt in the normal course of business and
in accordance with all agreements binding on Borrower, and (ii) the Term Note
and BNW Credit Line, and (b) Borrower shall not create, or suffer the
creation or existence of, any pledge, mortgage, lien, hypothecation or
assignment for security of any of its property or assets (including, without
limitation, the collateral under the Security Agreement), except that
Borrower may create or suffer to be created or exist the liens and
encumbrances described in Schedule 6.1 (the "Permitted Encumbrances").

6.2 MISREPRESENTATIONS. Borrower shall not make to Lender or
Guarantor, and Borrower shall not furnish to Lender or Guarantor any
certificate or other document that contains, any untrue statement of a
material fact, nor shall any such certificate or other document omit a
material fact necessary to make the statements made therein not misleading.

6.3 FINANCIAL STATEMENTS AND REPORTS.

6.3.1 FINANCIAL STATEMENTS. On or before March 31 of each
year, commencing March 31, 1999, Borrower shall deliver to Lender and
Guarantor Financial Statements (defined below) for the preceding year ended
December 31. On or before the tenth day of each October, January, April and
July, commencing upon execution of this Agreement for the report due October
10, 1998, or at such other times as Borrower, Lender and Guarantor may agree,
Borrower shall deliver to Lender and Guarantor interim Financial Statements
for the preceding calendar quarter together with Borrower's cash flow
projections for the ensuing twelve (12) months.

6.3.2 DEFINITION. "Financial Statements" shall in each
case be prepared in reasonable detail and in accordance with generally
accepted accounting principles applied consistently with past periods, if
pertaining to a fiscal year end shall be prepared and certified by Borrower's
independent public accountants, such certification to contain no
qualifications concerning the scope of the audit and only such other
qualifications as are reasonably acceptable to Lender and Guarantor, and
shall include Borrower's balance sheet, statements of income and expense, of
changes in equity, and of changes in financial position, cash flow, reserves,
and comparison to budget(s), in each case together with all notes and
schedules thereto.

6.4 PRESERVATION OF EXISTENCE. Borrower shall preserve and
maintain, and cause to be preserved and maintained, the existence, licenses,
rights, franchises and privileges of the Borrower, in the jurisdiction(s) of
its formation, and all material authorizations, consents, approvals, orders,
licenses, permits, or exemptions from, or registrations with, any
governmental agency that are necessary for the transaction of Borrower's
business.

6.5 COMPLIANCE WITH LAWS. Borrower shall comply with the
requirements of all applicable laws, and orders of any governmental agency,
noncompliance with which could materially and adversely affect the business,
operations or condition (financial or otherwise) of Borrower, or Borrower's
business or assets.

6.6 COMPLIANCE WITH AGREEMENTS, DUTIES AND OBLIGATIONS. Borrower
shall promptly and fully comply with all its agreements, duties and
obligations under any material agreements, indentures, leases or instruments
to which it is a party.

6.7 PAYMENT OF TAXES AND CLAIMS. Borrower shall pay, before they
become delinquent:

(a) All taxes, assessments and governmental charges or levies
imposed upon Borrower or any of the assets of Borrower; and

<PAGE>

(b) All claims or demands of materialmen, mechanics,
carriers, warehousemen, landlords, and other like persons that, if unpaid,
might result in the creation of a lien upon the property or assets of
Borrower; PROVIDED, however, that none of the foregoing need be paid while
being contested in good faith so long as Borrower's title to, and its right
to use, its assets is not materially and adversely affected thereby, and so
long as adequate reserves are maintained for such claims.

6.8 INSPECTION. Borrower shall permit Lender and Guarantor, upon
reasonable notice to Borrower, to examine or audit Borrower's books of
account and records and to copy and take extracts therefrom and to discuss
Borrower's affairs, finances or accounts with Borrower and Borrower's
financial and legal advisors, and to be advised as to the same by the
officers of Borrower, in such detail and through such agents and
representatives as Lender or Guarantor may reasonably desire.

6.9 NOTICE OF DEFAULT. Borrower shall promptly notify Lender and
Guarantor if it learns that an Event of Default (defined at Section 8) has
occurred or that there exists any fact or circumstance that, with notice, the
passage of time, or both, would constitute an Event of Default, and shall
specify with particularity the nature of such Event of Default, the period of
existence of such Event of Default, and the actions Borrower is taking or
proposes to take with respect thereto. Without limiting the generality of
the foregoing, Borrower shall notify Lender and Guarantor under this Section
6.9 in the following circumstances:

(a) of any material delay in Borrower's performance of any of
its obligations owing to any creditor or customer, and of any assertion of
any claims, offsets, defenses or counterclaims by any creditor or customer
other than offsets that are customary and ordinary in Borrower's business;

(b) of any material adverse information relating to the
financial or other condition of any customer of Borrower including, without
limitation, any customer's insolvency, inability to pay its debts as they
come due, filing for protection from creditors, or voluntary or involuntary
filing of a bankruptcy or similar petition under any state or federal law;

(c) if Borrower receives notice of deficiency in the payment
of any tax, or of lien, levy, or assessment of record with respect to all or
any substantial portion of assets by the United States, any department,
agency, or instrumentality thereof, of by any state, county, municipal, or
other governmental agency.

6.10 DISCLOSURE OF MATERIAL LITIGATION. Borrower shall promptly
notify Lender and Guarantor of any litigation or other action, suit or
proceeding, before any court or governmental agency, to which Borrower is a
party if the amount at risk in connection therewith that is not fully covered
by insurance exceeds $25,000.00; if such litigation, regardless of the amount
in controversy, relates to or arises from the collateral under the Security
Agreement; or if, in the reasonable opinion of Borrower, such litigation
otherwise is material. Thereafter, Borrower shall keep Lender and Guarantor
apprised of the status of such litigation or other such action, suit or
proceeding in such manner as Lender and Guarantor may reasonably request.

6.11 ADDITIONAL ACTS. In addition to the acts that Borrower is
obligated to perform under this Agreement, Borrower shall from time to time
perform, execute and deliver to Lender and/or Guarantor any and all such
further acts, additional documents, or further assurances as may be
reasonably necessary or proper to: (a) implement the intent of the parties
to this Agreement; (b) correct any errors in this Agreement, under the Term
Note, under the Reimbursement Agreement or under the Security Instruments;
(c) assure Lender and Guarantor of the validity and priority of the liens
they hold pursuant to this Agreement and the Security Instruments; (d)
create, perfect, preserve, maintain and protect the liens and security
interests created or intended to be created by the Security Instruments; or
(e) provide the rights and remedies to Lender and Guarantor that are
contemplated by this Agreement, the Term Note, the Reimbursement Agreement
and the Security Instruments.

7. FEES AND EXPENSES. Borrower shall pay directly when due, or shall
reimburse to Lender and/or Guarantor on demand, all of Lender and Guarantor's
reasonable out-of-pocket costs and expenses, to the

<PAGE>

extent incurred by Lender or Guarantor in connection with the negotiation,
preparation, review, carrying out, amendment, waiver, refinancing,
restructuring, reorganization and enforcement of, and collection pursuant to,
this Agreement, any advance or disbursement under the Term Note, any advance
to Bank in respect of the Guarantee, any substitution of security under this
Agreement or the Security Instruments, and any amendment of any financing
statement made or given pursuant to this Agreement or the Security Agreement
including, without limitation, Lender and Guarantor's reasonable attorneys'
fees; fees of Lender and Guarantor's certified public accountants and other
outside experts; credit reports; appraisal fees; lien searches; escrow
charges; recording or filing fees; insurance premiums; inspection, due
diligence and/or audit fees before execution hereof and periodically during
the term hereof; and any and all other expenses or charges incurred in
connection hereof.

8. EVENTS OF DEFAULT. Any of the following events is an Event of
Default:

8.1 If any payment due under this Agreement is not paid
within five (5) days of the date upon which notice of default in the making
of such payment was given to Borrower.

8.2 If there occurs an Event of Default under the Term Note,
the Reimbursement Agreement or the Security Instruments, or any of them, as
the term Event of Default is defined in such document.

8.3 If any representation made herein, or under any other
document or instrument delivered by Borrower to Lender or Guarantor in
connection herewith or pursuant hereto, shall be false in any material
respect when made, or if any warranty made herein, or under any other
document or instrument delivered by Borrower to Lender or Guarantor in
connection herewith or pursuant hereto, shall be breached in any material
respect.

8.4 If Borrower shall breach a covenant set forth at Section
6.1, 6.9 or 6.10.

8.5 If any of the following should occur: (i) Borrower
becomes insolvent, makes a transfer in fraud to, or an assignment for the
benefit of, creditors, or admits in writing its inability, or is unable, to
pay debts as they become due; or (ii) a receiver, custodian, liquidator, or
trustee is appointed for all or substantially all of the assets of Borrower
or for any portion of Borrower's accounts receivable, or any such receiver or
trustee is appointed in any proceeding brought against Borrower or Borrower's
accounts receivable and such appointment is not promptly contested or is not
dismissed or discharged within one hundred twenty (120) days after such
appointment, or Borrower consents or acquiesces in such appointment; or (iii)
Borrower files a petition for relief under the Federal Bankruptcy Code, as
amended, or under any similar law or statute of the United States or any
state thereof; or (iv) a petition against Borrower is filed commencing an
involuntary case under any present or future Federal or state bankruptcy or
similar law and such petition is not dismissed or discharged within one
hundred twenty (120) days after the filing thereof; or (v) any composition,
rearrangement, liquidation, extension, reorganization, or other relief of
debtors now or hereafter existing is requested by Borrower; or (vi) Borrower
is dissolved and liquidated or all or substantially all of the assets of
Borrower are sold or otherwise transferred.

8.6 If Borrower fails to comply with any requirement of any
governmental authority, of which Borrower receives written notice, within the
time period specified for compliance in such notice or, if no time period is
specified, within thirty (30) days following Borrower's receipt of such
notice.

8.7 If Borrower shall fail to perform any other obligation
contained in this Agreement within fifteen (15) days after notice from Lender
or Guarantor specifying the nature of the failure or default or, if the
failure or default cannot be cured within fifteen (15) days, failure within
such time to commence and pursue with reasonable diligence curative action.
No notice of default and opportunity to cure shall be required or given if
during the preceding twelve (12) calendar months Lender or Guarantor has sent
a notice to Borrower concerning a default in performance of the same
obligation.

<PAGE>

8.8 If a default shall occur under any material agreement,
indenture, lease or instrument to which Borrower is a party or to which any
of its properties or assets is subject, after giving effect to any notice and
cure period to which Borrower may be entitled thereunder.

9. GENERAL PROVISIONS.

9.1 GOVERNING LAW. This Agreement shall be enforced and construed
in accordance with the laws of Oregon and Borrower waives the right to be
sued elsewhere.

9.2 SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon
Borrower and the successors and legal representatives of Borrower, and shall
inure to the benefit of Lender and Guarantor and the successors, assigns and
legal representatives of each. All references herein to Lender or Guarantor
shall include, as applicable, any subsequent owner and/or holder of this
Agreement, the Term Note, the Reimbursement Agreement and the Security
Instruments, or any interest in any of them.

9.3 CUMULATIVE REMEDIES. Each of Lender and Guarantor's rights,
remedies and recourse under this Agreement, the Term Note, the Reimbursement
Agreement and the Security Instruments is separate and cumulative and may be
pursued separately, successively or concurrently, is non-exclusive and the
exercise of any one or more of them shall in no way limit or prejudice any
other legal or equitable right, remedy or recourse to which Lender or
Guarantor may be entitled.

9.4 MODIFICATIONS. No provision hereof shall be modified or
limited by course of conduct, usage of trade, by the law merchant or in any
other manner except by a written agreement expressly referring hereto and to
the provision so modified or limited and signed by Borrower, Lender and
Guarantor.

9.5 SEVERALTY. In case any one or more of the provisions
contained in this Agreement shall for any reason be held to be invalid,
illegal or unenforceable in any respect, such invalidity, illegality or
unenforceability shall not affect any other provision hereof, and this
Agreement shall be construed as if such invalid, illegal or unenforceable
provision had never been contained herein.

9.6 NOTICES. All notices or other communications required or
permitted hereunder shall be in writing, and shall be personally delivered
(including by means of professional messenger service) or sent by registered
or certified mail, postage prepaid, return receipt requested, or by facsimile
transmission followed by delivery of a "hard" copy, and shall be deemed
received upon the date of receipt thereof, as follows:

If to Lender
or Guarantor: c/o Robert M. "Mac" MacTarnahan
11416 SW Lynnridge Ave.
Portland, OR 97225
Telecopy: (503) 646-3782

With a copy to: Parisi & Parisi, LLP
1630 S.W. Morrison, Suite 100
Portland, OR 97205
Telecopy: (503) 721-2300
Attn: Robin B. Parisi

If to Borrower: Portland Brewing Company
2730 NW 31st Ave.
Portland, OR 97210
Telecopy: (503) 226-2702
Attn: Charles Adams

<PAGE>

With a copy to: Schwabe Williamson & Wyatt PC
1600-1800 PacWest Center
1211 SW 5th Ave
Portland, OR 97204
Telecopy: (503) 796-2900
Attn: John D. Guinasso

Notice of change of address shall be given by written notice in the manner
specified in this Section 9.6.

9.7 ATTORNEYS' FEES. Should any litigation be commenced between
the parties concerning this Agreement or the transactions contemplated
hereby, the prevailing party in such litigation shall be entitled, in
addition to such other relief as may be granted, to receive from the losing
party a reasonable sum as and for its attorneys' fees, at trial, on appeal,
in connection with any petition for review, or in any proceeding before a
U.S. Bankruptcy Court, said amount to be set by the court before which the
matter is heard.

9.8 NO SEPARATE AGREEMENTS. This Agreement, the Term Note, the
Reimbursement Agreement and the Security Instruments contain all of the
agreements of Borrower, Lender and Guarantor concerning their subject matter
and the rights and obligations of Borrower with respect thereto, and there
are no other agreements or understandings concerning the same between
Borrower, Lender and Guarantor.

9.9 ENTIRE AGREEMENT. This Agreement, together with the exhibits
listed below and any other document to be furnished pursuant to the
provisions hereof embody the entire agreement and understanding of the
parties hereto as to the subject matter contained herein. There are no
restrictions, promises, representations, warranties, covenants, or
undertakings other than those expressly set forth or referred to in such
documents. This Agreement and such documents supersede all prior agreements
and understandings among the parties with respect to the subject matter
hereof.

Exhibit A - Form of Term Note
Exhibit B - Form of Reimbursement Agreement
Exhibit C - Form of Assignment of Interest under
Security Agreement
Schedule 1.1 - Status of Loan Documents
Schedule 1.2 - Status of Credit Facilities
Schedule 1.3 - List of Financial Statements
Schedule 1.4 - List of Certain Shareholders
Schedule 6.1 - Permitted Encumbrances

<PAGE>

In witness whereby, the parties have executed this Agreement by and
through their duly authorized officers as of the date and year first written
above.

MACTARNAHAN LIMITED PARTNERSHIP,
an Oregon limited partnership

By: Harmer Mill & Logging Supply Co., dba Harmer Company,
its general partner

By: /s/ Robert M. MacTarnahan
-----------------------------
Name: Robert M. MacTarnahan
Title: President

HARMER MILL & LOGGING SUPPLY CO.,
an Oregon corporation

By: /s/ Robert M. MacTarnahan
-----------------------------
Title: President

PORTLAND BREWING COMPANY,
an Oregon corporation

By: /s/ Charles A. Adams
-----------------------------
Name: Charles A. Adams
Title: President

<PAGE>

SCHEDULE 1.4
LIST OF CERTAIN SHAREHOLDERS

<TABLE>
<CAPTION>
NAME NUMBER OF SHARES OWNED
---- ----------------------
<S> <C>
Electra Partners, Inc. 180,300 shares plus an option to purchase 43,848.75
shares

Charles A. Adams Family Trust 666,192 shares

Charles A. Adams Option to purchase 36,000 shares

Charles Francis Adams III 525 shares

Katherine Maxwell Adams 525 shares

R. M. MacTarnahan 22,860 shares plus an option to purchase 6,000
shares

Jean MacTarnahan 600 shares

R. S. MacTarnahan Option to purchase 6,000 shares

MacTarnahan Limited Partnership Warrant to purchase 43,848.75 shares

Black Lake Investments 73,335 shares

Harmer Mill & Logging Co. 765,162 shares

Harco Products, Inc. 30,000 shares
</TABLE>

<PAGE>

EXHIBIT 6.9

FIRST AMENDMENT TO
LOAN RESTRUCTURING AGREEMENT

THIS FIRST AMENDMENT TO LOAN RESTRUCTURING AGREEMENT (this "Agreement") is
made as of the 18th day of November, 1998, by and among the MACTARNAHAN LIMITED
PARTNERSHIP, an Oregon limited partnership ("Lender"), HARMER MILL & LOGGING
SUPPLY CO., an Oregon corporation ("Guarantor") and PORTLAND BREWING COMPANY, an
Oregon corporation ("Borrower").

RECITALS.

A. Lender, Guarantor and Borrower are parties a Loan Restructuring
Agreement of even date herewith (the "Loan Agreement"), pursuant to which, among
other things, Borrower has executed and delivered to Lender Borrower's
$2,100,000 promissory note and Borrower has executed and delivered to Guarantor
Borrower's reimbursement agreement. Terms with initial capitals, if not
otherwise defined herein, shall have the meanings given them in the Loan
Agreement.

B. By a Voting Agreement of even date herewith, certain of the
shareholders of the Borrower have agreed to vote their shares in accordance with
instructions given by a representative of Lender and Guarantor (the "Voting
Agreement"). As used in this Agreement, the term "MacTarnahan Parties" shall
have the meaning given it in the Voting Agreement, and the term "Voting Stock"
shall mean, at any given time, the issued voting capital stock of Borrower
outstanding at such time. Giving effect to the Voting Agreement, the
MacTarnahan Parties have the right to vote in excess of fifty percent (50%) of
the issued an outstanding voting capital stock (the "Voting Stock") in Borrower.

C. The parties desire to amend the Loan Agreement to provide that an
Event of Default shall exist thereunder if the MacTarnahans no longer have such
voting control.

AGREEMENT.

NOW THEREFORE, in consideration of the premises and of the mutual covenants
contained herein, the parties agree:

1. EVENTS OF DEFAULT. Section 8 of the Loan Agreement is hereby amended
to add the following as an additional event constituting an Event of the Default
thereunder: If at any time the MacTarnahan parties have the right to vote
(including, without limitation, by reason of Voting Stock ownership or by reason
of voting rights enjoyed under the Voting Agreement) fifty percent (50%) or less
of all Voting Stock.

2. NOTE AND REIMBURSEMENT AGREEMENT. References in the Note and
Reimbursement Agreement to the Loan Agreement shall mean the Loan Agreement as
the same has been amended hereby.

3. RATIFICATION. Except as amended hereby, the Loan Agreement, Note and
Reimbursement Agreement are ratified and confirmed in all respects.

In witness whereby, the parties have executed this Agreement by and through
their duly authorized officers as of the date and year first written above.

<PAGE>

MACTARNAHAN LIMITED PARTNERSHIP,
an Oregon limited partnership

By: Harmer Mill & Logging Supply Co., dba Harmer Company,
its general partner

By: /s/ Robert M. MacTarnahan
-----------------------------
Name: Robert M. MacTarnahan
Title: President

HARMER MILL & LOGGING SUPPLY CO.,
an Oregon corporation

By: Robert S. MacTarnahan
Title: President

PORTLAND BREWING COMPANY,
an Oregon corporation

By: /s/ Charles A. Adams
-----------------------------
Name: Charles A. Adams
Title: President

<PAGE>

EXHIBIT 6.10

VOTING AGREEMENT

THIS VOTING AGREEMENT (this "Agreement"), is made and entered into as
of November 18, 1998, by and among ELECTRA PARTNERS, INC., an Oregon corporation
("Electra"), CHARLES A. ADAMS, Trustee of the Charles A. Adams Family Trust
("Trustee"), CHARLES A. ADAMS, an individual ("Adams"), CHARLES FRANCIS ADAMS
III, an individual ("Charlie Adams"), and KATHERINE MAXWELL ADAMS, an individual
("Katherine Adams") (Electra, Trustee, Adams, Charlie Adams, and Katherine
Adams) are sometimes together referred to in this Agreement as the "Adams
Parties"), and ROBERT M. MACTARNAHAN, an individual ("R. M. MacTarnahan"),
ROBERT S. MACTARNAHAN, an individual ("R. S. MacTarnahan"), JEAN MACTARNAHAN, an
individual ("J. MacTarnahan"), MACTARNAHAN LIMITED PARTNERSHIP, an Oregon
limited partnership (the "Limited Partnership"), BLACK LAKE INVESTMENTS, a
general partnership ("Black Lake"), HARMER MILL & LOGGING SUPPLY CO., an Oregon
corporation, doing business as the Harmer Company ("Harmer"), and HARCO
PRODUCTS, INC., an Oregon corporation ("Harco") (R. M. MacTarnahan, R. S.
MacTarnahan, J. MacTarnahan, the Limited Partnership, Black Lake, Harmer, and
Harco, are sometimes together referred to in this Agreement as the "MacTarnahan
Parties").

RECITALS.

A. The Adams Parties and the MacTarnahan Parties own, or have the right
to acquire, that number of shares of the voting common stock of Portland
Brewing, Inc., an Oregon corporation (the "Company"), listed opposite the name
of each in Schedule 1.

B. The Company is obligated to the Limited Partnership under and pursuant
to that certain Business Loan Agreement dated as of December 15, 1995, between
Borrower and Bank of America NT & SA, as amended (a) in six amendments numbered
one through five, and seven (a number six having never been executed), and dated
as of July 23, 1996, December 19, 1996, March 27, 1997, April 23, 1997, November
24, 1997, and May, 1998, respectively, the lender's interest in which was
assigned to and assumed by Lender pursuant to an Assignment of Interest under
Loan Documents - Private, dated as of August 17, 1998 (the "Assumption
Agreement"), and as further amended (b) in that certain Credit and Forbearance
Agreement (the "Forbearance Agreement") between Borrower and Lender dated August
17, 1998. Such Business Loan Agreement, as amended by the documents listed in
clauses (a) and (b), is herein referred to as the "Loan Agreement."

C. Pursuant to an agreement of even date herewith (the "Loan
Restructuring Agreement"), between the Company, the Limited Partnership and
Harmer, among other things (i) the Limited Partnership has agreed to forgive a
portion of the Company's indebtedness evidenced by the Loan Agreement, and the
Company has agreed to execute and deliver to the Limited Partnership its
$2,100,000 Promissory Note (the "Term Note"), and (ii) in consideration for
Harmer's guarantee and pledge of collateral given to Bank of the Northwest (the
"Bank"), each as security for a $600,000 line of credit made by the Bank to the
Company, the Company has agreed to execute and deliver to Harmer the Company's
Reimbursement Agreement (the "Reimbursement Agreement"). The Limited
Partnership and Harmer's willingness to execute and deliver the Loan
Restructuring Agreement and to grant the accommodations and/or make the
undertaking set forth therein is conditioned upon the Adams Parties' execution
and delivery of this Agreement.

D. Adams, as the President and a current shareholder of the Company, and
each of the other Adams Parties, as current shareholders of the Company, have a
direct and material interest in both the loan restructuring effected under and
pursuant to the Loan Restructuring Agreement and in the credit accommodations
described in the Reimbursement Agreement, and expect to be directly and
materially benefited thereby.

<PAGE>

AGREEMENT.

NOW THEREFORE, in consideration of the premises, as a material inducement
to the Limited Partnership and Harmer to enter into, execute and deliver the
Loan Restructuring Agreement, and in consideration of the mutual covenants set
forth herein, the parties agree:

1. SHARES. As used in this Agreement, the term "Shares" means the issued
and outstanding voting capital stock in the Company currently owned (either
beneficially or of record), or subsequently acquired during the term of this
Agreement, by the Adams Parties, or by any of them, including any Shares that
the Adams Parties do not own (either beneficially or of record) but as to which
the Adams Parties, or any of them, exercises voting control.

2. TERM. The term of this Agreement shall commence on the date hereof
and shall terminate when (a) all obligations evidenced by the Term Note have
been paid and satisfied in full, AND (b) the Reimbursement Agreement has
terminated in accordance with Section 1 thereof.

3. AGREEMENTS TO VOTE SHARES. At each annual meeting of the shareholders
of the Company, at each special meeting of the shareholders of the Company
regardless of the purpose for which called, and at any other time that
shareholders of the Company have the right to, or shall, vote on any matter
submitted to the shareholders for vote, then the Adams Parties, and each of
them, will vote all of the Shares (or shall consent in writing in lieu of a
meeting of shareholders of the Company, if applicable) in the manner prescribed
by the MacTarnahan Representative (defined below).

4. MACTARNAHAN REPRESENTATIVE. For purposes of this Agreement, the
"MacTarnahan Representative" shall be a person designated from time to time in
accordance with this Section 4 to exercise the MacTarnahan Parties' rights under
this Agreement. The initial MacTarnahan Representative hereunder shall be
Robert S. "Scott" MacTarnahan. The MacTarnahan Parties may, from time to time,
change the initial MacTarnahan Representative by so-stating in a written notice
given to the Adams Parties and to the Company in accordance with Section 5.
Unless and until a written notice signed by all of the MacTarnahan Parties shall
be given in accordance with Section 5, the initial MacTarnahan Representative,
or the MacTarnahan Representative last designated in accordance with this
Section 4, shall be the MacTarnahan Representative hereunder.

5. RESTRICTIVE LEGEND. The Company will cause all certificates
representing Shares to bear the following legend:

"THE SHARES OF STOCK REPRESENTED BY THIS CERTIFICATE ARE
SUBJECT TO A CERTAIN VOTING AGREEMENT DATED AS OF ________,
1998, BY AND AMONG THE COMPANY AND CERTAIN SHAREHOLDERS OF
THE COMPANY, A COPY OF WHICH AGREEMENT WILL BE FURNISHED TO
THE REGISTERED HOLDER HEREOF, WITHOUT CHARGE, UPON WRITTEN
REQUEST TO THE COMPANY THEREFOR."

6. MISCELLANEOUS PROVISIONS.

(a) NOTICES. All notices, demands or other communications hereunder
shall be in writing and shall be deemed to have been duly given if delivered in
person, or by United States mail, certified or registered, with return receipt
requested, or by telex or facsimile copy and confirmed, or otherwise actually
delivered:

(i) if to Electra to: Electra Partners, Inc.
c/o Portland Brewing, Inc.
2730 NW 31st Avenue

<PAGE>

Portland, OR 97210
Attention: Charles A. Adams
Telecopy: (503) 226-2702

(ii) if to Trustee: Charles A. Adams Family Trust
c/o Portland Brewing, Inc.
2730 NW 31st Avenue
Portland, OR 97210
Attention: Charles A. Adams
Telecopy: (503) 226-2702

(iii) if to Adams,
Charlie Adams or
Katherine Adams: Charles A. Adams
c/o Portland Brewing, Inc.
2730 NW 31st Avenue
Portland, OR 97210
Telecopy: (503) 226-2702

with a copy to: Del Weaver, Esq.
1207 SW Sixth Avenue
Portland, OR 97204
Telecopy: (503) 228-4529

(iv) if to the Company: Portland Brewing, Inc.
2730 NW 31st Avenue
Portland, OR 97210
Attention: Tony Adams
Telecopy: (503) 226-2702

with copy to: Schwabe Williamson & Wyatt P.C.
Suites 1600-1800 Pacwest Center
1211 SW Fifth Avenue
Portland, Oregon 97204
Attention: John D. Guinasso, Esq.
Telecopy: (503) 796-2900

(v) if to R. M. MacTarnahan,
R. S. MacTarnahan, the
Limited Partnership, Black
Lake, Harmer, or Harco to:

c/o Robert M. "Mac" MacTarnahan
11416 SW Lynnridge Ave.
Portland, OR 97225
Telecopy:
---------------------------

with copy to: Parisi & Parisi, LLP
Suite 100
1630 S.W. Morrison
Portland, Oregon 97205
Attention: Robin B. Parisi, Esq.
Telecopy: (503) 721-2300

<PAGE>

or at such other address as may have been furnished by such person or entity
in writing to the other parties. Any such notice, demand or other
communication shall be deemed to have been given on the date actually
delivered by hand or three days after the date mailed or on the date sent by
telex or facsimile, as the case may be.

(b) SEVERABILITY AND GOVERNING LAW. If any Section or any part of
a Section within this Agreement is rendered void, invalid or unenforceable by
any court of law for any reason, such invalidity or unenforceability shall
not void or render invalid or unenforceable any other Section or part of a
Section in this Agreement and this Agreement shall be construed in a manner
which, as nearly as possible, reflects the original intent of the parties.
This Agreement is made and entered into in the State of Oregon and the laws
of that state shall govern the validity and interpretation hereof and the
performance by the parties hereto of their respective duties and obligations
hereunder.

(c) COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original and all of which
together shall constitute a single instrument.

(d) COSTS AND ATTORNEYS' FEES. In the event that any action,
suit, or other proceeding is instituted concerning or arising out of this
Agreement, the prevailing party shall recover all of such party's costs, and
attorneys' fees incurred in each and every such action, suit, or other
proceeding, including any and all appeals or petitions or petitions for
review therefrom, and any proceeding before a U.S. Bankruptcy Court.

(e) AMENDMENTS AND WAIVERS. The terms of this Agreement may be
amended, waived, discharged or terminated only by the written consent of all
of the Adams Parties and all of the MacTarnahan Parties.

(f) SUCCESSORS AND ASSIGNS. All rights, covenants and agreements
of each of the parties contained in this Agreement shall, except as otherwise
provided herein, be binding upon and inure to the benefit of that party's
respective heirs, successors and assigns, including without limitation any
transferee of any of the Shares.

(g) ENTIRE AGREEMENT. This Agreement, together with the exhibit
listed below, contains the entire understanding of the parties and there are
no further or other agreements or understandings, written or oral, in effect
between the parties relating to the subject matter hereof unless expressly
referred to herein.

Schedule 1 - Ownership of the Company Shares

(h) INJUNCTIVE RELIEF. The parties acknowledge that in the event of
any breach of this Agreement by the Adams Parties, remedies at law will be
inadequate, and the MacTarnahan Parties shall be entitled to specific
performance of the obligations of the Adams Parties, and each of them, and to
such appropriate injunctive relief as may be granted by a court of competent
jurisdiction.

<PAGE>

IN WITNESS WHEREOF, the parties hereto have executed this Agreement
as of the date and year first above written.

Electra: ELECTRA PARTNERS, INC.,
an Oregon corporation

By: /s/ Charles A. Adams
----------------------------------
Title: President

Trustee: CHARLES A. ADAMS FAMILY TRUST

By: /s/ Charles A. Adams
----------------------------------
Charles A. Adams, Trustee

Adams:

/s/ Charles A. Adams
----------------------------------
CHARLES A. ADAMS

Charlie Adams: /s/ Charles A. Adams
----------------------------------
CHARLES FRANCIS ADAMS III

Katherine Adams /s/ Katherine Maxwell Adams
----------------------------------
KATHERINE MAXWELL ADAMS

"Adams Parties"

R. M. MacTarnahan:

/s/ Robert M. MacTarnahan
----------------------------------
ROBERT M. MACTARNAHAN

R. S. MacTarnahan:

/s/ R. Scott MacTarnahan
----------------------------------
/s/ R. SCOTT MACTARNAHAN

Limited Partnership: MACTARNAHAN LIMITED PARTNERSHIP,
an Oregon limited partnership

By: Harmer Mill & Logging Supply Co.,
an Oregon corporation, dba Harmer
Company, its general partner

By: /s/ Robert M. MacTarnahan
----------------------------------
Title: President

Black Lake: BLACK LAKE INVESTMENTS,
a general partnership

By: /s/ R. Scott MacTarnahan
----------------------------------
Title:
-------------------------------

Harmer: HARMER MILL & LOGGING SUPPLY CO.,
an Oregon corporation, dba Harmer Company

<PAGE>

By: /s/ R. Scott MacTarnahan
----------------------------------
Title:
-------------------------------

Harco: HARCO PRODUCTS, INC.,
an Oregon corporation

By: /s/ R. Scott MacTarnahan
----------------------------------
Title:
-------------------------------

"MacTarnahan Parties"

<PAGE>

SCHEDULE 1 TO VOTING AGREEMENT

OWNERSHIP OF THE COMPANY SHARES

<TABLE>
<CAPTION>
NAME NUMBER OF SHARES OWNED
---- ----------------------
<S> <C>

Electra Partners, Inc. 180,300 shares plus an option to purchase 43,848.75
shares

Charles A. Adams Family Trust 666,192 shares

Charles A. Adams Option to purchase 36,000 shares

Charles Francis Adams III 525 shares

Katherine Maxwell Adams 525 shares

R. M. MacTarnahan 22,860 shares plus an option to purchase 6,000
shares

Jean MacTarnahan 600 shares

R. S. MacTarnahan Option to purchase 6,000 shares

MacTarnahan Limited Partnership Warrant to purchase 43,848.75 shares

Black Lake Investments 73,335 shares

Harmer Mill & Logging Co. 765,162 shares

Harco Products, Inc. 30,000 shares
</TABLE>

<PAGE>

EXHIBIT 6.11

REIMBURSEMENT AGREEMENT

THIS REIMBURSEMENT AGREEMENT (this "Agreement") is made as of the 18th
day of November, 1998, by PORTLAND BREWING COMPANY, an Oregon corporation
("Borrower"), to and for the benefit of HARMER MILL & LOGGING SUPPLY CO., an
Oregon corporation ("Guarantor").

RECITALS

A. By a Commercial Guarantee dated September 2, 1998 (the
"Guarantee"), given by Guarantor to the Bank of the Northwest (the "Bank"),
Guarantor has agreed to act as a primary guarantor on a $600,000 revolving
credit line (the "Credit Line") made available by the Bank to Borrower, as
more particularly set forth in the Guarantee and in that certain $600,000
note and Credit Agreement dated September 2, 1998, and given by Borrower to
the Bank (the "Bank Loan Documents"). The Guarantee is secured by that
certain $600,000 Certificate of Deposit # 0109006895 issued by Bank in the
name of Guarantor (the "CD") and pledged by Guarantor to the Bank under that
certain Assignment of Deposit Account dated September 2, 1998 (the "Pledge
Agreement"). Upon a default by Borrower in its obligations to the Bank under
the Bank Loan Documents, the Bank is entitled to redeem the CD and apply sums
payable upon such redemption to cure any default by Borrower in its
obligations under the Bank Loan Documents, which application will be in
discharge, in whole or in part, of Guarantor's obligations under the
Guarantee.

B. Guarantor's willingness to give and continue in effect the
Guarantee and the pledge of the CD that secures the Guarantee, as set forth
in that certain Loan Restructuring Agreement of even date herewith among
Borrower, Guarantor and MacTarnahan Limited Partnership (the "Loan
Restructuring Agreement"), is conditioned upon Borrower's execution and
delivery of this Agreement, whereby Borrower undertakes to pay the standby
fee described at Section 2.1 hereof, and Borrower undertakes to reimburse
Guarantor in connection with any advance that Guarantor makes on the
Guarantee, including by and through the Bank's redemption of the CD and
application of the proceeds thereof.

AGREEMENT

NOW, THEREFORE, in consideration of the premises, Borrower agrees:

1. TERM. This Agreement shall remain in effect until (a) Guarantor is
released and discharged from all of its obligations under the Guarantee and
the Pledge Agreement, and (b) if applicable, Borrower has paid and discharged
to Guarantor all of its obligations hereunder.

2. STANDBY FEES AND INTEREST.

2.1 STANDBY FEE. Monthly, on or before the 15th day of each
month, Borrower shall pay Guarantor a standby fee equal to one percent (1%)
per annum of the average daily balance outstanding under the Credit Line
during the preceding month, as such outstanding balance is calculated by the
Bank in connection with fees charged to Borrower on the Credit Line.

2.2 INTEREST. Any amount that Guarantor is required to advance to
the Bank in respect of a call on the Guarantee (including all amounts payable
upon the Bank's redemption of the CD) shall, from the date of such advance
(or, if applicable, redemption), bear interest until paid at the CD Rate
(defined below) plus one percent (1%) per annum. "CD Rate" means (a) before
August 27, 1999 (the expiration date of the CD) the maximum rate of interest
payable on the face amount of the CD assuming that the same is held for, and
redeemed only upon expiration of, its term, or (b) following such date, the
greater of the rate determined under clause (a) or the maximum rate of
interest that would be available, as of August 27, 1999, on a

<PAGE>

replacement certificate of deposit, with a one-year term, and assuming that
the replacement certificate were held for, and redeemed only on expiration
of, such term.

3. REIMBURSEMENT. Any amount that Guarantor is required to advance to
the Bank in respect of a call on the Guarantee (including all amounts applied
by the Bank upon the Bank's redemption of the CD) shall be due and payable,
together with interest thereon calculated in accordance with Section 2.2, by
Borrower to Guarantor on Guarantor's demand therefor. Borrower shall be
entitled to prepay all or any portion of the amount payable to Guarantor
under this Section 3, provided, that all payments made to Guarantor hereunder
shall first be applied to interest accrued to the date of such payment, and
the balance shall be applied to the principal obligation.

4. SECURITY. This Agreement is made pursuant to the Loan
Restructuring Agreement and is secured by that certain Security Agreement
(Receivables, Inventory and Equipment) given by Borrower to Bank of America,
Oregon, dated December 15, 1995 (the "Security Agreement"), the secured
party's interest under which was transferred and assigned (a) in full to
MacTarnahan Limited Partnership by instrument dated August 17, 1998, and (b)
as to an undivided interest, to Guarantor by instrument of even date
herewith. The Security Agreement also secures Borrower's obligations under
the Loan Restructuring Agreement and the Term Note (as defined in the Loan
Restructuring Agreement).

5. DEFAULT.

5.1 EVENTS OF DEFAULT. If:

(a) for any payment due hereunder to Guarantor the entire
amount due (including principal, interest and any applicable premiums and
late charges) is not paid within five (5) days of the date upon which demand
for payment was made,

(b) whether or not the Bank has made a call on the Guarantee
and/or exercised its rights to redeem the CD, there exists an event of
default under the Bank Loan Documents, or any of them (determined after
giving effect to applicable notice and cure periods, if any), or

then an Event of Default shall exist hereunder. Upon the
occurrence of an Event of Default, or at any time thereafter, at the option
of Guarantor, (i) Guarantor shall be released and discharged from any further
obligations under Section 1, (ii) the whole of the principal sum (if any)
then remaining unpaid under Section 3, together with accrued interest
thereon, shall become immediately due and payable without notice, and (c)
Guarantor may exercise any remedy available to Guarantor under the Security
Agreement. Failure to exercise any right Guarantor may, in the Event of
Default, be entitled to, shall not constitute a waiver of the right to
exercise such option or any other right in the event of a continuing or
subsequent default.

5.2 DEFAULT CHARGES. At its option Guarantor may accept
delinquent payments. Following any Event of Default, due but unpaid interest
shall become a part of the principal and shall bear interest at the rate
provided at Section 2.2. In addition, Borrower shall pay, during the period
an Event of Default continues, default interest on the unpaid principal
balance (including the amount of any unpaid interest added thereto) at the
rate provided at Section 2.2 plus two percent (2%) per annum. Any such
default interest which has accrued, and late charges, if any, shall be paid
at the time of and as a condition precedent to the curing of an Event of
Default. Guarantor's acceptance of delinquent payments, and/or any default
interest thereon calculated pursuant to this Section 5 shall not constitute a
waiver of Guarantor's right to declare the whole principal sum and all
interest accrued thereon immediately due and payable upon or following the
occurrence of any subsequent Event of Default.

<PAGE>

5.3 COSTS OF DEFAULT. Borrower shall pay all reasonable costs of
collection when incurred by Guarantor, including, but not limited to,
reasonable attorneys' fees. Guarantor is authorized to consult with, employ
and pay attorneys upon Borrower's default or upon institution of legal
proceedings by or against Guarantor in connection with this Agreement or any
related document, and Borrower shall reimburse Guarantor for all of
Guarantor's legal fees and costs in such amount as the court in any such
proceeding and on any appeals from any judgment or decree entered therein may
adjudge reasonable. Borrower shall pay all other reasonable costs incurred
by Guarantor in collecting or attempting to collect any sums due under this
Agreement or protecting or enforcing any rights of Guarantor under this
Agreement, including, without limitation, Guarantor's attorneys' fees and
costs in such amount as the court in any such proceeding and on any appeals
from any judgment or decree entered therein may adjudge reasonable.

5.4 WAIVERS. Borrower waives demand, protest and notice of
demand, protest and nonpayment and hereby consents to: (i) any and all
extensions in the time for making payments under this Agreement as Guarantor,
in its sole discretion, may grant from time to time, and (ii) the release of
any party liable for payment of the obligations hereunder. Borrower waives
exhaustion of legal remedies and the right to plead any and all statutes of
limitation as a defense to any demand on this Agreement, to any agreement to
pay the same. All of the obligations herein contained shall be binding upon
Borrower and Borrower's distributees, personal representatives, successors
and assigns. All obligations of Borrower shall inure to the benefit of the
distributees, personal representatives, successors and assigns of Guarantor.
In any action or proceeding to recover any sums herein provided for, no
defense of adequacy of security or that resort must first be had to security
or to any other person shall be asserted.

6. GOVERNING LAW. This Agreement is made and delivered in Oregon and
shall be governed by the laws of the state of Oregon. Time is of the essence
of this Agreement and of each and every provision hereof.

PORTLAND BREWING COMPANY,
an Oregon corporation

By: /s/ Charles A. Adams
-------------------------------
Name: Charles A. Adams
Title: President

<PAGE>

EXHIBIT 6.12

PROMISSORY NOTE

$2,100,000.00 Portland, Oregon
November 18, 1998

FOR VALUE RECEIVED, PORTLAND BREWING COMPANY, an Oregon corporation
("Borrower"), promises to pay to the order of MACTARNAHAN LIMITED
PARTNERSHIP, an Oregon limited partnership ("Lender"), the principal sum of
TWO MILLION ONE HUNDRED THOUSAND AND 00/100 DOLLARS ($2,100,000.00), with
interest from the date funds are advanced hereunder, until the date paid, at
a per annum rate equal to the Prime Rate (defined below), plus one percent
(1%) (calculated on the basis of a 360 year composed of twelve 30-day
months), the same to be paid in lawful money of the United States of America.
Principal, interest, late charges, default interest and any other amounts
payable hereunder to Lender are payable at 11416 SW Lynnridge Ave., Portland,
OR 97225, or such other place as the holder may direct. As used in this
Note, "Prime Rate" at any time means the highest "Prime Rate" of interest
announced by Bank of the Northwest and in effect at such time for credit
extended by Bank of the Northwest.

1. PAYMENTS.

1.1 INTEREST. Interest only, from the date of this Note, to and
including October 31, 1998, shall be payable on November 1, 1998.
Thereafter, Borrower shall pay interest in consecutive monthly payments
commencing on December 1, 1998, and continuing on the first day of each month
thereafter until the entire principal balance, and all accrued interest
thereon, shall have been paid in full.

1.2 MATURITY. All principal and outstanding interest, if not
sooner paid as required or permitted by the terms of this Note, shall be due
and payable on January 31, 2000 (the "Maturity Date").

1.3 LATE CHARGES. To cover the extra expense involved in handling
delinquent payments, Borrower shall pay Lender, on demand, a late charge in
the amount of ten percent (10%) of any monthly interest payment not paid in
full within five (5) days of its due date.

2. PREPAYMENTS. All or any portion of the principal amount of this
Note may be prepaid at any time, provided that any such prepayment of
principal must be accompanied by payments of all interest accrued to the date
of such prepayment. Any amount prepaid by Borrower shall not affect
Borrower's obligation to continue to make the interest payments computed on
the unpaid principal sum from time to time outstanding, at the times
described in Section 1.1.

3. SECURITY. This Note is made pursuant to that certain Agreement of
even date herewith between Borrower and Lender (the "Agreement") and is
secured by that certain Security Agreement (Receivables, Inventory and
Equipment) given by Borrower to Bank of America, Oregon, dated December 15,
1995 (the "Security Agreement"), the secured party's interest under which was
transferred and assigned to Lender by instrument dated August 17, 1998. The
Security Agreement also secures Borrower's obligations under the Agreement.

4. DEFAULT. If

(a) the entire principal balance of this Note is not paid in
full when due, or

(b) for any payment of interest due hereunder the entire
amount due (including any applicable default interest and late charges) is
not paid within five (5) days of the date upon which notice of default in the
making of such payment was given to Borrower, or

<PAGE>

then an Event of Default shall exist hereunder. Upon the occurrence of an
Event of Default, or at any time thereafter, at the option of Lender, the
whole of the principal sum then remaining unpaid, together with all interest
accrued thereon, shall become immediately due and payable without notice, and
the lien or liens given to secure its payment may be foreclosed. Failure to
exercise the acceleration or foreclosure option, or any other right that
Lender may, in an Event of Default, be entitled to, shall not constitute a
waiver of the right to exercise either such option or any other right for a
continuing or subsequent Event of Default.

5. DEFAULT CHARGES. At its option Lender may accept delinquent
payments. Following any Event of Default, due but unpaid interest shall
become a part of the principal and shall bear interest at the rate provided
in this Note. In addition, Borrower shall pay, during the period an Event of
Default continues, default interest on the unpaid principal balance
(including the amount of any unpaid interest added thereto) at the rate
provided in this Note plus two percent (2%) per annum. Any such default
interest which has accrued, and late charges, if any, shall be paid at the
time of and as a condition precedent to the curing of an Event of Default.
Lender's acceptance of delinquent payments, any late charge thereon as
calculated pursuant to Section 1.3 and/or any default interest thereon
calculated pursuant to this Section 5 shall not constitute a waiver of
Lender's right to declare the whole principal sum and all interest accrued
thereon immediately due and payable upon or following the occurrence of any
subsequent Event of Default.

6. COSTS OF DEFAULT. Borrower shall pay all costs of collection when
incurred by Lender, including, but not limited to, reasonable attorneys'
fees. Lender is authorized to consult with, employ, and pay attorneys upon an
Event of Default or upon institution of legal proceedings by or against
Lender in connection with this Note, the Security Agreement, or the
Agreement, and Borrower shall reimburse Lender for all of Lender's legal fees
and costs in such amount as the court in any such proceeding and on any
appeals from any judgment or decree entered therein may adjudge reasonable.
Borrower shall pay all other costs incurred by Lender in collecting or
attempting to collect any sums due under this Note or protecting or enforcing
any rights of Lender under this Note and/or the Security Agreement or
Agreement, including, without limitation, Lender's attorneys' fees and costs
in such amount as the court in any such proceeding and on any appeals from
any judgment or decree entered therein may adjudge reasonable. All such
amounts paid by Lender shall have equal priority with, and be secured by, the
Security Agreement. All such amounts shall bear interest from the date of
expenditure until paid at the interest rate provided in this Note.

7. WAIVERS. Borrower and all endorsers and all persons liable or to
become liable on this Note waive demand, protest and notice of demand,
protest and nonpayment, and hereby consent to: (i) any and all extensions in
the time for making payments under this Note as Lender, in its sole
discretion, may grant from time to time, (ii) the release of all or any part
of the collateral subject to the Security Agreement, and (iii) the release of
any party liable for payment of the obligations hereunder. Borrower and all
endorsers and all persons liable hereto further waive exhaustion of legal
remedies and the right to plead any and all statutes of limitation as a
defense to any demand on this Note, to any agreement to pay the same, or to
any demands secured by the Security Agreement. If Borrower consists of two or
more persons or entities, all of the obligations herein contained shall be
considered joint and several obligations of them. All of the obligations
herein contained shall be binding upon Borrower and Borrower's distributees,
personal representatives, successors, and assigns. All obligations of
Borrower shall inure to the benefit of the distributees, personal
representatives, successors and assigns of Lender. In any action or
proceeding to recover any sums herein provided for, no defense of adequacy of
security or that resort must first be had to security or to any other person
shall be asserted.

8. GOVERNING LAW. This Note shall be governed by the laws of the
state of Oregon.

9. NOTICES. Notices hereunder shall be given in the manner, and shall
be effective at the times, provided in the Agreement.

"BORROWER"

PORTLAND BREWING COMPANY, an Oregon corporation
By: /s/ Charles A. Adams
-------------------------------
Title: President

<PAGE>

EXHIBIT 23

CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

As independent public accountants, we hereby consent to the incorporation of
our report dated March 4, 1999, included in this Form 10-KSB, into the
Company's previously filed Registration Statement File No. 33-93754 on Form
S-8.

ARTHUR ANDERSEN LLP

Portland, Oregon
March 26, 1999

<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS FOUND IN THE COMPANY'S REPORT ON FORM 10-KSB FOR THE YEAR
ENDED DECEMBER 31, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 52,532
<SECURITIES> 0
<RECEIVABLES> 765,997
<ALLOWANCES> 0
<INVENTORY> 554,864
<CURRENT-ASSETS> 1,639,845
<PP&E> 10,726,220
<DEPRECIATION> 3,476,429
<TOTAL-ASSETS> 9,003,569
<CURRENT-LIABILITIES> 1,566,832
<BONDS> 0
0
0
<COMMON> 7,115,798
<OTHER-SE> (1,892,395)
<TOTAL-LIABILITY-AND-EQUITY> 9,003,569
<SALES> 10,187,554
<TOTAL-REVENUES> 9,719,679
<CGS> 7,327,639
<TOTAL-COSTS> 7,327,639
<OTHER-EXPENSES> 4,023,904
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 289,182
<INCOME-PRETAX> (1,921,046)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,921,046)
<DISCONTINUED> 0
<EXTRAORDINARY> 1,200,279
<CHANGES> 0
<NET-INCOME> (720,767)
<EPS-PRIMARY> (0.29)
<EPS-DILUTED> (0.29)

</TABLE>