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Plan of Operations

          Golden West Brewing Company, Inc. (the "Company" or "GoldenWest") was formed in December 2003 to acquire substantially all of the business assets of Butte Creek Brewing Company, LLC ("Butte Creek" or "Butte"). We are currently a holding company for our wholly-owned subsidiary Golden West Brewing Company, a California corporation, which was formed to complete the acquisition, which is scheduled to occur upon receipt of all necessary regulatory approvals and no later then July 31, 2005. Butte Creek has been operating as a premier regional craft brewery in Chico, California since 1996. It specializes in brewing certified organic craft beers. Upon completion of the acquisition and closing of the proposed initial public offering, we intend to expand our capacity and production, increase sales and reduce its operating losses. Capacity will be increased by the acquisition of two 80 barrel fermentation tanks and one 80 barrel conditioning or "brite" tank. It is anticipated that these capital expenditures will be made immediately upon completion of this offering and will cost approximately $50,000. The new equipment is needed immediately to increase our production levels before the upcoming peak season in 2005. We have found suppliers for the three tanks necessary to fill our needs but there can be no assurances that the tanks will still be available upon completion of this offering and that we will be able to receive and install the tanks soon enough to increase our capacity prior to the upcoming peak season of 2005. We may seek bridge loans from unrelated or related parties to acquire the tanks before the completion of this offering. We hope that production will increase with increased capacity and improved working capital necessary to increase inventories of raw materials and finished goods Sales will increase with the increased market penetration of existing brands and the creation of new brands and products. An increase in net sales and gross profits will reduce net losses only if other operating expenses can be managed effectively. Specifically, general, administration and marketing levels will be increased but are intended to be increased as net sales and gross profits increase. There is no guarantee that we will be able to achieve this plan.

          Both Golden West and Butte Creek have sustained losses from operations, and have net capital and working capital deficits which raise substantial doubts about their ability to continue as a going concern. Both companies' audited financial statements have received going concern qualifications from their Independent Registered Public Accounting Firm.

          The following discussion and analysis has been prepared assuming our acquisition of Butte Creek had been completed as of the beginning of the periods shown and should be read in conjunction with the pro forma Financial Statements and Notes thereto of Golden West Brewing Company, Inc. and Butte Creek Brewing Company, LLC included herein. The discussion and analysis includes pro forma period-to-period comparisons of our financial results. Although period-to-period pro forma comparisons may be helpful in understanding our financial results, we believe that they should not be relied upon as an accurate indicator of future performance.

          In the ordinary course of business, we have made a number of estimates and assumptions relating to the reporting of results of operations and financial condition in the preparation of its financial statements in conformity with accounting principles generally accepted in the United States of America. Actual results could differ significantly from those estimates under different assumptions and conditions. We believe that the following discussion addresses our most critical accounting policies, which are those that are most important to the portrayal of our financial condition and results. We constantly re-evaluate these significant factors and make adjustments where facts and circumstances dictate.

          The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes. The actual results could differ from those estimates. Our financial statements are based upon a number of significant estimates, the allowance for doubtful accounts, obsolescence of inventories and the estimated useful lives selected for property and equipment. Due to the uncertainties inherent in the estimation process, it is at least reasonably possible that the estimates for these items could be further revised in the near term and such revisions could be material.

          Sales in the craft beer industry generally reflect a degree of seasonality, with the first and fourth quarters historically being the slowest and the rest of the year typically demonstrating stronger sales. We have historically operated with little or no backlog and, therefore, its ability to predict sales for future periods is limited.

          Our sales are affected by several factors, including consumer demand, price discounting and competitive considerations. We compete in the craft brewing market as well as in the much larger specialty beer market, which encompasses producers of import beers, major national brewers that produce fuller-flavored products, and large spirit companies and national brewers that produce flavored alcohol beverages. Beyond the beer market, craft brewers also face competition from producers of wines and spirits. The craft beer segment is highly competitive due to the proliferation of small craft brewers, including contract brewers, and the large number of products offered by such brewers. Imported products from foreign brewers have enjoyed a resurgence in demand since the mid-1990s. Certain national domestic brewers have also sought to appeal to this growing demand for craft beers by producing their own fuller-flavored products. In 2001 and 2002, the specialty segment saw the introduction of flavored alcohol beverages, the consumers of which, industry sources generally believe, correlate closely with the consumers of the import and craft beer products. While sales of flavored alcohol beverages were initially very strong, these growth rates slowed in 2003 and 2004. The wine and spirits market has experienced a surge in the past several years, attributable to competitive pricing, increased merchandising, and increased consumer interest in spirits. Because the number of participants and number of different products offered in this segment have increased significantly in the past ten years, the competition for bottled product placements and especially for draft beer placements has intensified.

          Our current production rate is approximately 3,500 barrels per year. We estimate that we will need to increase production volume to at least 5,000 barrels per year in order to achieve break-even operating results. To increase production, we will need to purchase two 80 barrel fermentation tanks and one 80 barrel conditioning or "brite" tank and will require additional working capital for raw materials and finished inventory. There is no assurance that we will be able to expand our capacity to a break-even level or that we can generate the sales volume to maintain it.

COST OF GOODS SOLD Cost of goods sold for the first nine months of 2004 was $330,904 or 62.27% of Net Sales as compared to $241,995 or 76% of Net Sales for the corresponding period of 2003 due to higher revenues, more efficient production levels and the purchase of certain key raw materials in bulk.

GROSS PROFIT As a result of the higher net sales from increased direct sales due to self-distribution, the launch of a new brand Mt. Shasta Ale in December of 2003, the improvement in cost of goods sold because of more efficient and consistent production levels and the purchase of certain key raw materials in bulk , gross profit for the first nine months of 2004 increased to $161,002 or 32.73% of net sales from $76,091 or 23.92% of net sales in the corresponding period of 2003.

OPERATING EXPENSES Total operating expenses rose $143,898 or 86.42% to $310,405 for the first nine months of 2004 compared to $166,507 in the corresponding period of 2003. The increase was primarily due to increased sales compensation and other expenses as a result of the increased level of net sales and higher general and administrative expenses. Also in 2004, Golden West incurred $33,526 in general and administrative expenses. Operating expenses in the prior period reflect, in part, curtailed production due to a working capital shortage. Components of operating expenses were:

SALES Net sales for the first nine months of 2004 increased 54.64% to $491,906 from $318,086 for the comparable period in 2003. The increase was due to increased direct sales to retailers as we expanded our area of self-distribution, the introduction of a new brand: Mt Shasta Ale, in December 2003 and the resumption of normal production levels in 2004 after production levels were curtailed in 2003 because of a working capital shortage.

COST OF GOODS SOLD Cost of goods sold for the first nine months of 2004 was $330,904 or 62.27% of Net Sales as compared to $241,995 or 76% of Net Sales for the corresponding period of 2003 due to higher revenues, more efficient production levels and the purchase of certain key raw materials in bulk.

GROSS PROFIT As a result of the higher net sales from increased direct sales due to self-distribution, the launch of a new brand Mt. Shasta Ale in December of 2003, the improvement in cost of goods sold because of more efficient and consistent production levels and the purchase of certain key raw materials in bulk , gross profit for the first nine months of 2004 increased to $161,002 or 32.73% of net sales from $76,091 or 23.92% of net sales in the corresponding period of 2003.

OPERATING EXPENSES Total operating expenses rose $143,898 or 86.42% to $310,405 for the first nine months of 2004 compared to $166,507 in the corresponding period of 2003. The increase was primarily due to increased sales compensation and other expenses as a result of the increased level of net sales and higher general and administrative expenses. Also in 2004, Golden West incurred $33,526 in general and administrative expenses. Operating expenses in the prior period reflect, in part, curtailed production due to a working capital shortage. Components of operating expenses were:

OTHER INCOME & EXPENSE Total other income and expense increased $289,587 or 1184% to $310,687 for the first nine months of 2004 compared to $21,100 for the corresponding period of 2003. The increase is primarily from the reserve for bad debt on the advances to Butte Creek from Golden West.

NET LOSS Net loss increased $348,168 or 272% to $460,090 for the first nine months of 2004 compared to $111,922 for the corresponding period of 2003. The increased net loss was a result of operating expenses and the reserve for bad debt on the advances to Butte Creek from Golden West exceeding the improved sales and gross profits.

SALES Net sales for the fiscal year 2003 decreased $158,903 or 26.58% to $438,753 compared to $597,656 in net sales for the fiscal year 2002. The decrease in net sales was result of lower production volumes as a shortage of working capital forced a temporary production shut-down in fiscal 2003.

COST OF GOODS SOLD Cost of goods sold for the fiscal year 2003 were $338,160 or 77.07% of net sales as compared to $413,678 or 69% of net sales in fiscal year 2002 because of lower production volumes in 2003 caused by a shortage of working capital in fiscal 2003.

GROSS PROFIT As a result of the lower net sales and the higher cost of goods sold, due to reduced production levels caused by a working capital shortage, gross profit for fiscal year 2003 decreased to $100,593 or 22.92% of net sales from $183,978 or 30.78% of net sales in fiscal year 2002.

OPERATING EXPENSES Total operating expenses decreased $19,742 or 7.6% to $237,644 in fiscal year 2003 compared to $256,939 in fiscal year 2002. The overall decrease was the result of reduced operations in fiscal 2003 as a result of a working capital shortage.

The components consisted of:

OPERATING LOSS The operating loss for the year ended December 31, 2003 was $(137,051), compared to an operating loss of $(72,961) for the year ended December 31, 2002, an increase in net loss of $64,090, or 87%. This reflected substantially reduced revenues from curtailed operations against substantially equivalent operating expenses.

OTHER INCOME AND EXPENSE Total other income and expense for the year ended December 31, 2003 was $(165,047), compared to total other income of $54,563 for the prior year, a decrease of $219,610. This change was due to a one-time gain on sale of building which occurred in the prior year, and the reserve for bad debt on advances to Butte Creek in 2003.

NET LOSS Net loss for the year ended December 31, 2003 was $(302,098), compared to a net loss of $(18,398), an increase in net loss of $283,700, or over 800%. This unfavorable increase in net loss was due to the combination of reduced revenues in 2003, the one-time gain on sale of building in 2002, and the reserve for bad debt on advances to Butte Creek in 2003.

Liquidity and Capital Resources

          We have required capital principally for the proposed purchase of Butte Creek and the funding of operating losses and working capital. To date, we have financed our capital requirements through the sale of equity and short and long-term borrowings. We expect to meet our future financing needs and working capital and capital expenditure requirements through cash on hand, borrowings and offerings of debt or equity securities, although there can be no assurance that our future financing efforts will be successful beyond this offering. The terms of future financings could be highly dilutive to investors in this offering.

          The net proceeds of the minimum offering should satisfy our working capital requirements for approximately five months; if the maximum offering is sold, the proceeds should be sufficient to satisfy our working capital needs for 12 months. We have no commitments, understandings or arrangements for any additional working capital. If this offering is not successful, or if we are unable to secure additional financing to cover our operating losses until break-even operations can be achieved, we may not be able to continue as a going concern.

          We had $16,879 of cash and cash equivalents and a negative working capital of $199,438 at September 30, 2004. Our long-term debt was $23,788 at September 30, 2004. Golden West and Butte Creek do not have sufficient cash on hand or available credit facilities to continue operations for more than 30 days and are dependent upon the completion of this offering to provide adequate working capital to continue operations. In the interim, Golden West has raised capital through the sales of unregistered securities and advances and/or loans from its officers and directors to fund its operations to date, meet its obligations to Butte Creek under the Acquisition Agreement and to provide funds necessary for Butte Creek to maintain operations. Butte Creek has no other sources for capital other than Golden West. There are no assurances that we will be able to secure additional capital to maintain the operations of Butte Creek until the proposed initial public offering is completed.

          During the nine months ended September 30, 2004, the Company's capital expenditures totaled $17,029.

          We have available a $25,000 line of credit with Wells Fargo Bank, with interest at the rate of 14.25%. The note is uncollateralized and guaranteed by Tom Atmore, one of Butte Creek's managing members. We had $24,322 and $24,441 outstanding on September 30, 2004 and December 31, 2003, respectively.

          We have available a $15,400 line of credit on a Company Credit Card with MBNA with interest at the rate of 27.98%. The note is uncollateralized but guaranteed by Tom Atmore, one of the managing members of Butte Creek. We had $11,326 and $12,089 outstanding on September 30, 2004 and December 31, 2003, respectively.

          At September 30, 2004, we had notes payable in the aggregate amount of $80,167, of which $56,379 was considered current. We have pledged substantially all of our assets to secure some of the notes. Should we default in the payment of these secured notes, the collateral could be subject to forfeiture.

          Butte Creek's Operating Agreement provided certain guarantees to the managers for management fees during the first five years of existence. Portions of these guarantees were not paid during the five year period and portions of these guarantees were deferred for the first two years of the five year period. According to the Operating Agreement, interest at 8% per annum was to be accrued on the deferred portion of the management fees. Also, an original employee accepted a reduced salary while employed and agreed to defer the payment of the reduced salary amount until such time as the managers received their management fees. As of September 30, 2004 and December 31, 2003, the total amount of unpaid management fees and salaries was $229,441 and $226,361, respectively, including accrued interest of $29,780 and $26,700 on the deferred portion as of each date, respectively. Interest expense for the nine months ended September 30, 2004 was $3,080 and $4,107 each for the years ended December 31, 2003 and 2002.

          Under the terms of the Asset Purchase and Sale Agreement pursuant to which we will acquire Butte Creek, we have agreed to assume a maximum of $300,000 in Butte Creek liabilities. As a result, it is likely that Butte Creek's liabilities for accrued management fees and salaries will not be assumed by us in the transaction, but rather will remain in Butte Creek.

          At September 30, 2004 and December 31, 2003 we had outstanding payroll tax liabilities of $18,187 and $7,062, respectively. Of these amounts $6,639 and $2,988 are considered delinquent.

          At September 30, 2004 and December 31, 2003 we had outstanding rent obligations on our operating facility of $17,950. We have entered into a verbal forebearance agreement with our landlord whereby the landlord will not proceed with collection actions to enforce its rights under the lease as long as we pay current rent and 8% interest on the outstanding rent obligation timely.

          California Redemption Value (CRV) is a tax collected on all package sales to retailers, processed through the California Department of Conservation and refunded through the State's recycling program. The United States Bureau of Alcohol, Tobacco and Firearms ("BATF") and various state agencies collect excise taxes often referred to as "alcohol taxes" with the amount based on the volume of beer sold. At September 30, 2004 and December 31, 2003, we had CRV and excise taxes payable of $34,080 and $19,484, respectively. Of these amounts, $31,383 and $17,869 are considered delinquent.

          These delinquent payables will likely be assumed by us in connection with our acquisition of Butte Creek as the continuation of the relationships involved are material to our ability to continue as a going concern. Continued operations could be severely impaired should BATF or any other governmental agency seek to collect any of the delinquent payables before we are able to pay them.

          Our products are available for sale directly to consumers in draft and bottles at restaurants, bars and liquor stores, as well as in bottles at supermarkets, warehouse clubs and convenience stores. Like substantially all craft brewers, our products are delivered to these retail outlets through a network of local distributors whose principal business is the distribution of beer and, in some cases, other alcoholic beverages, and who traditionally have local distribution relationships with one or more national beer brand.

          Sales in the craft beer industry generally reflect a degree of seasonality, with the first and fourth quarters historically being the slowest and the rest of the year typically demonstrating stronger sales. We have historically operated with little or no backlog and, therefore, our ability to predict sales for future periods is limited.

          We do not provide forecasts of future financial performance or sales volume, although this prospectus contains certain other types of forward-looking statements that involve risks and uncertainties. Those risks and uncertainties are discussed more fully in the section of this prospectus titled "Risk Factors." . While we are optimistic about our long-term prospects, the following issues and uncertainties, among others, should be considered in evaluating its business prospects and any forward-looking statements.

          There were various accounting standards and interpretations issued during 2003, none of which are expected to have a material impact on the Company's consolidated financial position, operations or cash flows
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       Butte Creek Brewing Company, LLC was formed on October 4, 1995 and since that time has been operating a microbrewery in Chico, California. Butte Creek specializes in brewing certified organic craft beers, meaning that at least 95% of the final product has been derived from organic ingredients.

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       To acquire Butte Creek, we formed and organized a company on November 19, 2003 under the name Golden West Brewing Company, a California corporation. That company became our wholly-owned subsidiary after we were formed and organized.

       Effective October 8, 2004, we executed a definitive Asset Purchase and Sale Agreement to acquire Butte Creek. Under the terms of the Acquisition Agreement, we plan to purchase substantially all of the business assets of Butte Creek. In consideration of the Butte Creek assets, we have agreed to pay:

Craft brewers represented the remaining approximate 3.5% of total U.S. sales, or 6.65 million barrels of craft beer.

       While the beers from the major American brewers are brewed to high quality standards, they are relatively neutral in flavor. They are brewed with less hops and malt than traditional European or craft-brewed beers, creating a less bitter, lighter bodied flavor. In addition, these beers are usually brewed with a high percentage of rice, corn or corn syrup, which further dilutes the flavor and body of the beers. Traditional lager beers use 100% malted barley in the mash (with the exception of specialty wheat beers), which ensures a robust, full-bodied character. The major U.S. brewers have been successful in creating products that appeal to a wide consumer base and have spent heavily to advertise and promote their products. As a result, they have achieved a dominant position in the market for their mass-produced beers. The older regional brewers traditionally produced beers similar in style to the products of major breweries, but several have benefited from the recent boom in specialty, craft-brewed beers as both contract producers and marketers of their own products. Imported beers have long been viewed by the beer-drinking public as being more flavorful and "authentic" than the standard American beers. Although this has not always been the case, the high price and foreign origin of the imported beers created a niche category of "specialty" beers. In recent years, craft-brewed beers have further expanded the "specialty" beer market, and have increased in sales and visibility.

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       The vast majority of existing craft/microbrewed products in the U.S. are ales. According to a survey published in THE NEW BREWER published by the Brewers Association at www.beertown.org, the five most popular beer styles produced in brewpubs are all ales, and among the 130 responding craft/microbrewers, only the fourth most popular style (European Pilsner) is a lager. The cost of building and operating a lager brewery is substantially greater than that for an ale brewery.
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       The following terms are helpful in understanding our business and industry:

              Craft Brewing: Beers produced by microbreweries, regional specialty breweries, brewpubs and contract brewers. The common appeal of these beers is a more robust flavor than the standard domestic beers, and an image based on traditional, European beer styles.

              Microbrewery: Originally used to refer to a small brewery producing less than 10,000 barrels a year, which packages and distributes its beers for sale off site. The cutoff volume has since been increased to 15,000 barrels a year. The new breweries that were founded in the late 1970s and early 1980s were the first to be called microbreweries.

              Regional Specialty Brewery: A term used to describe those breweries which were founded as microbreweries, but have since outgrown the category, having a capacity to brew between 15,000 and 2,000,000 barrels per year. A new category was needed to distinguish these breweries from the older, established regional breweries. Examples of regional specialty breweries are: Sierra Nevada (Chico, California), Anchor Brewing (San Francisco, California), Rockies Brewing (Boulder, Colorado) and Abita Brewing (Abita Springs, Louisiana).

              Brewpub: A brewery that sells its beers exclusively or primarily at its own bar or restaurant. Since the market is restricted to one outlet, brewpubs tend to be quite small (typically in the 500 to 2,000 barrel range). Examples of brewpubs are Zip City (New York, New York), Crescent City Brewhouse (New Orleans, Louisiana), Wynkoop (Denver, Colorado) and Commonwealth (Boston, Massachusetts).

              Contract Brewer: A company that does not have its own brewery but rather markets beer produced "under contract" by an existing (usually regional) brewery. Examples of contract brewers are Boston Beer Company (Samuel Adams brand beers), Pete's Brewing Company and Neuweiler.

              Hard Cider: A fermented apple cider with an alcohol content between 7 and 14 percent.

              Draft Cider: A fermented apple cider with an alcohol content of less than 7 percent.

       Fritz Maytag bought and revived the failing Anchor Brewery in San Francisco in 1965 and is considered the grandfather of the microbrewing movement. However, it wasn't until the late 1970s and early 1980s that the first new microbreweries opened in the U.S., such as New Albion, Redhook, Yakima Brewing & Malting and Sierra Nevada on the West Coast and Newman Brewing Co. (Albany, New York) on the East Coast. By 1983, there were 11 operating microbreweries in the U.S., which were defined as breweries producing less than 10,000 barrels per year (although all were much smaller in 1983). At least one of these (Buffalo Bill's Brewery, Hayward, California) was a brewpub. In the early to mid 1980s, the first contract brewers appeared.

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       What all of the craft-brewed beers have in common is an appeal based on traditional, highly flavored European beer styles. They have benefited from their contrast with the products of the major brewers, which are much lighter in body and flavor. We believe they also were helped by an increasing concern by consumers about how alcoholic beverages fit into a healthy, active, contemporary lifestyle. Like fine wines, we believe that consumers view craft-brewed beers as beverages of moderation.
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       The craft beer category consists of:

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See Beertown, www.beertown.org. 
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       According to Beertown, a trade publication, as of September 30, 2004, there were a total of 1,362 total craft breweries operating in the United States, consisting of:

       Our business strategy includes the following key objectives:

       We currently produce the following principal brands, each with its own distinctive combination of flavor, color and clarity:

For the year ended December 31, 2003 and the nine months ended September 30, 2004, sales of Organic Ale, Porter and India Pale Ale represented 74.7 and 63.5% of our total sales, respectively. During 2003, 88.4% of sales were cases and 11.6% were kegs, compared to sales during the first nine months of 2004 being comprised of 82.1% cases and 17.9% kegs.

       In addition to our current craft brews, we are constantly developing new products in order to be responsive to changing customer tastes. We believe that our continued success will be affected by our ability to be innovative and attentive to consumer desires while maintaining consistently high product quality.

        Beer is produced from four main ingredients: malt, hops, yeast and water. Malt, the main ingredient of beer, is produced when barley is moistened, allowed to germinate and then dried. The malted barley is then crushed and mixed with hot water and strained, producing a clear amber liquid called "wort". Wort is boiled in the brew kettle and hops are added which add bitterness and variety to the brew. The mixture is then strained and placed in a fermentation vessel where yeast is added and the beer is allowed to ferment. During fermentation, yeast metabolizes the sugars in the wort and produces alcohol and carbon dioxide.

       Upon completion of fermentation, the beer is then transferred to aging tanks where the flavor is developed and matured. The brewing process, from the conversion of raw materials to the serving of beer, is typically completed in 14 to 28 days, depending on the type of beer being brewed. The production schedule for all of our ale products requires a fourteen (14) day cycle. Our lager products requires a twenty-eight (28) day cycle, from brewing through filtration and packaging. The production cycle includes the following steps:

       *       Day 1. Mashing. Weighed amounts of milled, malted barley, a cereal grain that provides the body and color to the beer, are mixed and steeped with hot water in a Mash Tun. This serves to extract fermentable and non-fermentable sugars, thus creating a mash. At the end of the mashing process, the sweet, fermentable liquid from the mash, called wort, is run off through screened plates and then transferred into the brew kettle. While the wort is running off, the grain is sprayed with hot water again, a process called "sparing". (This is a process similar to making coffee.)

                Once the wort run off is completed, the spent grains are given to local farmers for cattle feed or to local mushroom growers.

       *       Day 1. Brewing. When the sweet liquid wort transfer is completed, we start the boil, then add fresh hops that provide bitterness and aroma, thus creating the balance and flavor of our beer.

       *       Day 1. Clarification. After approximately an hour and one half of boiling, the wort and the spent hops are transferred into a whirlpool. A centrifugal force is created inside the vessel during whirlpooling. This force separates the malt proteins and the spent hops from the wort.

       *       Day 1. Cooling. The wort is pumped from the whirlpool through a heat exchanger which rapidly cools the wort. The cool wort is transferred into a fermenter.

       *       Day 1. Inoculation. Pure culture lager yeast or ale yeast is added to the wort in the fermenter and the tank is closed up.

       *       Days 2-7. Fermentation. Within three to five days, the yeast has metabolized and utilized the sugars from the wort, creating alcohol and carbon dioxide. Our ales are made with a top fermenting ale strain that actually floats to the top of the fermenter. Our lagers are made with a bottom fermenting lager strain that settles during fermentation.

                When the yeast completely settles it is collected from the tank and used in the next lager or ale brew cycle.

       *       Days 5-27. Cooling and Conditioning. At the end of the fermentation cycle, our beer is cooled from its fermentation temperature (between 65-70-F for ales and 58-55-F for lagers) to 32- Fahrenheit. Beer flavors mature during this stage. Our beer is then stored for seven to fourteen days. Isinglass finings are added to aid in the clarification process.

       *       Day 14. Filtration for Ales. While under pressure, the beer is transferred through cellulose sheets in a Filter Press in order to remove protein haze and yeast while stabilizing and clarifying the beer. The beer is transferred from the Filter Press into a Serving Tank which is counter pressured, for service directly to draft taps at each bar.

       *       Day 28. Filtration for Pilsners. Our pilsner beer remains in the Cellar Tank for an additional fourteen days of fermentation. It is then processed in the same manner as our ale.

       We package our craft beers in bottles and kegs which are clearly marked with freshness dates. This is to ensure that our products are consumed at the height of their flavor. Bottled products utilize the latest technology in bottle crowns that prevent oxygen from causing deterioration of the beer's fresh taste. Our beer is naturally carbonated and pasteurized to ensure the customers enjoy the full fresh flavour. The shelf life of our bottled beer is 120 days and the shelf life of our keg beer is 90 days.

       There are many different varieties of hops which are used in the production of beers. The selection of particular varieties of hops influences the bitterness and aroma of the finished product. The selection of hops in any particular recipe contributes to the final signature of the microbrew.

        Not all hops are available organically-grown. In fact, in the United States, only one type of hops is organically grown; and all other organically-grown hops must be purchased from international sources, primarily New Zealand.

        For microbrews whose recipes call for hops that are not available organically, those products can still be manufactured and marketed as "organic," since hops comprise less than 5% of the finished product. Nevertheless, there is intense competition for organically-grown hops, and quantities are limited.

        Our Organic Ale is the only product that is 100% organic, including organic hops. Our Organic India Pale Ale and Organic Porter use non-organic hops but are nevertheless marketed as organic microbrews. Our principal competitors in the organic microbrew market: Wolavers and Eel River Brewing Company, use non-organic hops.

       We currently obtain our malted barley (grain) from two sources: Breiss supplies our organic barley and Great Western Malting our non-organic barley. We do not have any supply contracts with any of our vendors to meet our grain or hop requirements.

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       We have multiple competitive sources for packing materials, such as bottles, labels, six-pack carriers, crowns and shipping cases, as well as kegs. However, California Glass Company of Oakland, CA is currently the only company offering reasonable bottle pricing for Butte Creek's current production level. Purchases of bottles, six-pack carriers and case boxes from California Glass Company amount to over 40% of the total purchases from all unaffiliated vendors. Also, in 2002 and 2003 organic grain purchases from Certified Foods, Inc. amounted to 18% and 14% of all vendor purchases.
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       In each state where our beer is distributed, we must satisfy the state's regulatory requirements for beer sales. Those requirements generally consist of completing an application and paying a distribution fee. Some states also impose product quality standards which must be met as a condition to distribution. We have not experienced any difficulties in obtaining approvals to distribute in states where we have sought that approval.

       Wholesale distributors sell our products to supermarkets, warehouse stores, liquor stores, taverns and bars, restaurants and convenience stores. Most of our brands are also available on draft' and these are delivered directly to retail outlets. Our independent distributors also distribute a variety of other alcoholic beverages, including other craft beers, import beers and national beer brands. We rely on our distributors not only to provide product sales and deliveries but also to maintain retail shelf space and to oversee timely rotation of inventory. Favorable consumer demand for microbrewed products and higher profit margins are the two primary factors that contribute to strong interest from distributors in handling our regional microbrewed products. Our success is dependent upon our ability to maintain and develop our third party distributor, bar and restaurant accounts.

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       Sales are distributed widely over our customer base with only two large customers comprising a significant portion of sales. For the years ending December 31, 2002 and 2003, Mountain People's Warehouse (MPW) was responsible for 25% and 18% of Butte Creek's sales, respectively. For the nine months ending, September 30, 2004, MPW was responsible for 17% of sales and a retailer, Ray's is the Place, Inc. was responsible for 13% of sales.
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       We have designed slogans, logos and trade names for use in radio, television and printing advertising. To create additional name recognition and customer identification, we plan to sell T-shirts, sweatshirts and other merchandise featuring our name and logo. Distributors and package store locations are provided with point-of-purchase cards, banners, static stickers and shelf channels.

       Sales of beer in general are seasonal in nature and are at their highest level in the second and third calendar quarters and at their lowest in the first and fourth calendar quarters. This seasonality has historically had a significant impact on our operations on a quarter to quarter basis.

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       During 2003 and for the first nine months of 2004, wholesale distributors were responsible for 63.9% and 52.5% of our sales, respectively. Three distributors accounted for 22.8% of our sales in 2003 and two distributors accounted for 30% of our sales for the nine months ending September 30, 2004.
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       We claim common law trademark protection to all of our trademarks, words and design. However, we have not applied for any federal or state registrations of those trademarks.

       Four Rivers Broadcasting is currently involved in trademark infringement litigation with a third party over the use of that trademark. In that litigation, both Four Rivers and the third party claim a prior right to use the trademark and that the other is infringing on their intellectual property rights. Given the uncertainty of the outcome of that litigation, it is possible that we will be compelled to discontinue our use of that mark. Moreover, should it be determined that our use of the mark infringed upon the intellectual property rights of a third party, we could be found liable to pay monetary damages as well as be subject to a prohibition against further use of the mark.

       Notwithstanding our efforts to develop and protect our intellectual property rights, trademark protection and the uncertainty surrounding the legal protections of domain names, may be unenforceable or limited. As a result, we may not be able to maintain our current trademarks or domain name if they are subject to challenge. We believe that any successful challenge to our use of a trademark or our domain name could have a material adverse impact upon our business, financial condition and future operations.

       We compete with other craft brewers on the basis of product quality and freshness, packaging design, distribution, marketing support and regional identification. The beer industry in general and the craft brewing segment in particular is highly competitive and we experience stiff competition and expect that competition to increase in the future. Our products compete with products from large and small domestic and foreign breweries and from and increasing number of regional specialty breweries, microbreweries, brew pubs and contract brewers. Many of these competing breweries, including some existing microbreweries, have significantly greater financial, production, distribution and marketing resources than ours.

       In the organic microbrew market, our principal competitors are Wolavers and Eel River Brewing Company. As both are privately held, there is little information available concerning their relative financial strength and resources. Both Wolavers and Eel River produce a variety of organic beers, all of which use non-organic hops, as previously discussed. However, we believe that Wolavers has broader distribution and greater market penetration than either we or Eel River enjoy.

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       In addition, we contract microbrew for Bison Brewing Company, of Berkeley, California. One of the beers that we make for Bison is marketed as organic, although it too uses non-organic hops. Bison Brewing has a California Department of Alcohol Beverage Control license at our facility as part of this contract brewing arrangement.
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       The Company's United States operations are subject to licensing by both state and federal governments, as well as to regulation by a variety of state and local governments and agencies. The Company is licensed to manufacture and sell beer by the Department of Alcoholic Beverage Control in California. A federal permit from the United States Bureau of Alcohol, Tobacco and Firearms ("BATF") allows the Company to manufacture fermented malt beverages. To keep these licenses and permits in force, the Company must pay annual fees and submit timely production reports and excise tax returns. Prompt notice of any changes in the operations, ownership, management or company structure must also be made to these regulatory agencies. BATF must also approve all product labels, which must include and alcohol use warning. These agencies require that individuals owning equity securities in the aggregate of 10% or more in the Company be investigated as to their suitability. The Company's production operations must also comply with the Occupational Safety and Health Administrations' workplace safety and worker health regulations and comparable state laws. Management believes that the Company is presently in compliance with the aforementioned laws and regulations.

       In the United States, taxation of alcohol has increased significantly in recent years. Currently, the federal tax rate is $7.00 per bbl. For up to 60,000 bbl. Per year and $18.00 per bbl. For over 60,000 bbl. The California tax rate is $6.20 per bbl. Federal and state excise taxes on alcoholic beverages are subject to change. It is possible that excise taxes will be increased in the future by both the federal government and State of California. In addition, increased excise taxes on alcoholic beverages have in the past been considered in connection with various governmental budget balancing or funding proposals. Any such increased in excise taxes, if enacted, could adversely affect our business. We believe that we currently have all licenses, permits and approvals necessary for our current operations. However, existing permits or licenses could be revoked if we were to fail to comply with the terms of such permits or licenses, and additional permits or licenses could in the future be required for our existing or expanded operations.

       Various federal and state labor laws If licenses, permits or approvals necessary for our brewery were unavailable or unduly delayed, or if any such permits or licenses were revoked, our ability to conduct our business could be substantially and adversely affected.

       Various federal and state labor laws govern our relationship with our employees, including minimum wage requirements, overtime, working conditions and immigration requirements. Significant additional government-imposed increased in minimum wages, paid leaves of absence and mandated health benefits, or increased tax reporting and tax payment requirements for employees could have an adverse effect on our results of operations.

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Research and Development

       During the last two fiscal years, except for $928 expended in the nine months ended September 30, 2004 for hops rhizomes, we have not expended any working capital on product research and development.
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       We are subject to various federal, state and local environmental laws which regulate the use, storage, handling and disposal of various substances.

       Our waste products consist of water, spent grains, hops, glass and cardboard. We have instituted a recycling program for our/ office paper, newspapers, magazines, glass and cardboard at minimal cost to us. We sell or give away our spent grain to local cattle ranchers. We have not purchased any special equipment and do not incur any identifiable fees in connection with our environmental compliance.

       The Chico facility is subject to various federal, state and local environmental laws which regulate use, storage and disposal of various materials. The Company pays approximately $190 per month towards sewer fees for liquid waste. The sewer discharge from the brewery is monitored and is within the standards set by the Butte County Sewer Department.

       Various states in which the Company sells its products in the U.S., including California, have adopted certain restrictive packaging laws and regulations for beverages that require deposits on packages. The Company continues to do business in these states, and such laws have not had a significant effect on the Company's sales. The adoption of similar legislation by Congress or a substantial number of states or additional local jurisdictions might require the Company to incur significant capital expenditures to comply.

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       As of January 1, 2005, we had a total of nine employees, five of whom were full time and four of whom were part time. The full time employees include Tom Atmore, Larry Berlin and two sales persons and one brewing support . Our part time employees are involved in brewing support and sales.
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       In addition, we utilize the services of two independent contractors, one in marketing and sales and the other who performs accounting services.

       Given adequate capital, we would like to hire additional marketing and sales personnel.

       Our executive offices and main brewery are located at 945 West 2^nd Street, Chico, California. The entire building consists of approximately 8,600 square feet, of which 1,000 square feet is used for executive offices, 4,600 square feet for our brewery and 3,000 square feet for bottling and shipping. The property is an industrial building which we lease from a former Butte Creek member. The lease has a term of five years, expiring in 2007, and provides for monthly rental of $2,650 per month. We believe that our ability to occupy the present facility under the existing lease is secure and that the facilities are adequate for the foreseeable future.

       There are no material legal proceedings in which either we or any of our affiliates are involved which could have a material adverse effect on our business, financial condition or future operations.

       Our executive officers, key employees and directors and their respective ages and positions are set forth below:

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