24

<R>
Plan of Operations

          Golden West Brewing Company, Inc. (the "Company" or "Golden West") 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 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 increase our production, increase sales and reduce our operating losses. We have recently doubled our production capacity from 4,000 barrels per year to 8,000 barrels per year with the acquisition of two 80 barrel fermentation tanks and one 80 barrel conditioning or "brite" tank. We still face operational challenges as our sales and production levels increase. The following are the key issues and challenges facing the Company:

This offering is critical to our future success to improve our working capital. 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

25

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 our 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, our 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 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

26

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 4,000 barrels per year. We estimate that we will need to increase production volume to at least 6,000 barrels per year in order to achieve break-even operating results. To increase production, we will need to successfully integrate our two new 80 barrel fermentation tanks and our new 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.

SALES Net sales for the first three months of 2005 increased 21.58% or $29,172 to $164,293 from $135,121 for the comparable period in 2004. The increase was due to higher direct sales to retailers as we continue to improve our self-distribution channel, the continued development of our network of independent distributors and a small price increase on January 1, 2005.

COST OF GOODS SOLD Cost of goods sold for the first three months of 2005 was $113,672 or 69.19% of Net Sales as compared to $99,506 or 73.64% of Net Sales for the corresponding period of 2004 due to higher sales, more efficient production levels and the purchase of certain key raw materials in bulk and a price increase on January 1, 2005.

GROSS PROFIT As a result of the higher revenues as described above and the improvement in cost of goods sold because of more efficient and consistent production levels and the continued purchase of certain key raw materials in bulk, gross profit for the first three months of 2005 increased to $50,621 or 30.8% of net sales from $35,615 or 26.38% of net sales in the corresponding period of 2004.

OPERATING EXPENSES Total operating expenses rose $39,574 or 50% to $119,123 for the first three months of 2005 compared to $79,549 in the corresponding period of 2004. 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 the first three months of 2005, Golden West incurred $9,461 in general and administrative expenses. Components of operating expenses were:

27

OPERATING LOSS. The operating loss for the first three months of 2005 increased $24,568 or 56% to $68,502 from $ 43,934 in the corresponding period of 2004 as a result of the increase in total operating expenses exceeding the improved net sales and gross profits.

OTHER INCOME & EXPENSE Total other expense decreased $1,471 or 20.0% to $5,899 for the first three months of 2005 compared to $7,370 for the corresponding period of 2004. The decrease is primarily from less interest expense incurred in the first three months of 2005 compared to the corresponding period of 2004.

NET LOSS Net loss increased $23,097 or 45.0% to $74,401 for the first three months of 2005 compared to $51,304 for the corresponding period of 2004.

SALES Net sales for the fiscal year 2004 increased $225,789 or 51.46% to $664,542 compared to $438,753 in net sales for the fiscal year 2003. The increase in net sales was result of the launch of a new product (Mount Shasta Extra Pale Ale), direct sales efforts in the region surrounding our brewery facility in Chico, California, and an improved working capital compared to fiscal 2003 when a shortage of working capital forced a temporary production shut-down in fiscal 2003.

COST OF SALES Cost of sales for the fiscal year 2004 were $441,171 or 66.4% of net sales as compared to $338,160 or 77% of net sales in fiscal year 2003 because of lower production volumes in 2003 caused by a shortage of working capital in fiscal 2003.

GROSS PROFIT As a result of the higher net sales and the improved cost of sales, gross profit for fiscal year 2004 increased 122% to $223,371 or 33.6% of net sales from $100,593 or 23% of net sales in fiscal year 2003.

OPERATING EXPENSES Total operating expenses increased $205,013 or 86% to $442,657 in fiscal year 2004 compared to $237,644 in fiscal year 2003. The overall increase was the result of increased operations in fiscal 2004, including payroll, insurance and marketing, as compared to fiscal 2003 when operations were shut down for approximately four months as a result of a working capital shortage. There were also significant legal, general and administrative expenses by Golden West related to its trademark dispute regarding Mount Shasta Ale™.

The components consisted of:

OPERATING LOSS The operating loss for the year ended December 31, 2004 was $219,286, compared to an operating loss of $137,051 for the year ended December 31, 2003, an increase in net loss of $82,235, or 60%.

OTHER INCOME AND EXPENSE Total other income and expense for the year ended December 31, 2004 was $29,167, compared to total other expense of $30,082 for the prior year, a decrease of $915 or 3.1%. This change was due to less interest expense incurred in 2004 compared to 2003.

NET LOSS Net loss for the year ended December 31, 2004 was $248,453 compared to a net loss of $167,133 in 2003, an increase in net loss of $81,320, or 48.7% higher. This unfavorable increase in net loss was the result of higher operating expenses in 2004 as the Company focused on developing its distribution channels compared to 2003 when a shortage of working capital forced the company to temporarily curtail operations.

          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.

          Butte Creek had $19,342 of cash and cash equivalents and a negative working capital of $778,198 at March 31, 2005. Cash at May 31, 2005 was $13,686. Butte Creek had long-term debt of $13,159 at March 31, 2005. 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 three months ended March 31, 2005, the Company's capital expenditures totaled $4,773.

          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 $25,220 and $25,542 outstanding on March 31, 2005 and December 31, 2004, respectively.

29

          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 $12,883 and $12,748 outstanding on March 31, 2005 and December 31, 2004, respectively.

          At March 31, 2005, Butte Creek had notes payable in the aggregate amount of $61,821, of which $48,663 was considered current. A note to a financial institution with an approximate outstanding balance of $35,000 accrues interest at 9% per annum and is due in September 2006. A note to another financial institution with an outstanding balance of approximately $7,000 accrues interest at the rate of 11.5% and is due in October 2005. Notes to related parties in the approximate amount of $18,200 accrue interest at the rate of 8% per annum and were due December 2004. 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 March 31, 2005 and December 31, 2004, the total amount of unpaid management fees and salaries was $231,495 and $230,468, respectively, including accrued interest of $31,834 and $30,807 on the deferred portion as of each date, respectively. Interest expense related to the management fees payable for the three months ended March 31, 2005 was $1,027, and $4,107 each for the years ended December 31, 2004 and 2003.

          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 March 31, 2005 and December 31, 2004 we had outstanding payroll tax liabilities of $33,350 and $20,041, respectively. Of these amounts $22,210 and $10,352 are considered delinquent.

          At March 31, 2005 and December 31, 2004 we had outstanding rent obligations on our operating facility of $20,600 and $17,950, respectively. We have entered into a verbal forbearance 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"), now the TTB, and various state agencies collect excise taxes often referred to as "alcohol taxes" with the amount based on the volume of beer sold. At March 31, 2005 and December 31, 2004, we had CRV and excise taxes payable of $42,458 and $33,747, respectively. Of these amounts, $38,639 and $31,321 are considered delinquent.

30

          These delinquent payables will likely be assumed by us in connection with our acquisition of Butte Creek as the continuation of regulatory compliance is material to our ability to continue as a going concern. Continued operations could be severely impaired should the TTB 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.

          In light of uncertain contingencies relating to our acquisition of Butte Creek, we anticipate that a material impairment charge is reasonably likely to occur in the future, resulting in a material impact on our financial statements and results of operations. Should the acquisition not be consummated, the value and recoverability of our investment in Butte Creek is uncertain. Should the acquisition be consummated, we will be required to determine if a valuation allowance with respect to our investment in Butte Creek will be required. Based upon the financial history of Butte Creek, it appears to us that a valuation allowance is reasonably likely.

          There were various accounting standards and interpretations issued during 2004 and 2003, none of which are expected to have a material impact on the Company's consolidated financial position, operations or cash flows.
</R>

31

       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.

       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:

          In anticipation that he would be participating as a founder and promoter of Golden West in connection with its acquisition of Butte Creek, prior to his formation and organization of Golden West, John C. Power

32

caused to be filed an application with the United States Patent and Trademark Office and Application of Intent to Use for the trademark "Mount Shasta Ale" and registered the domain name www.ales.com. In addition, Mr. Power made advances to Butte Creek in the amount of $59,500 through an entity controlled by him, Nova Redwood LLC. The domain name of www.ales.com was acquired by another company controlled by Mr. Power, Alta California Broadcasting, Inc., and the intent to use trademark application was submitted in the name of a wholly-owned subsidiary of Alta California, Four Rivers Broadcasting, Inc. In October 2004, those assets were then used by Alta California Broadcasting to redeem some of its outstanding equity interests from certain investors, on the condition that those investors assign those assets to Golden West in consideration of an equity investment in Golden West.
</R>

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 benefitted 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.

       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.

33

       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.

<R>
              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 cut-off 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.
</R>

              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.

       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.

34

       The craft beer category consists of:

See Beertown, www.beertown.org

       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:

35

       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.

36

       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.

37

                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.

<R>
        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. Our principal hops suppliers are Hopunion, Fresh Hops and Certified Foods.
</R>

38

       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.

<R>
       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.
</R>

       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.

       We have written distribution agreements with all of our wholesale distributors; however, the agreements are all terminable upon written notice and provide no reliable assurance of future performance.

       Sales are distributed widely over our customer base with only two large customers comprising a significant portion of sales. For the year ending December 31, 2004 and three months ended March 31, 2005, Mountain People's Warehouse (MPW) was responsible for 14% and 17% of Butte Creek's sales, respectively. For the same periods, Ray's is the Place, Inc. was responsible for 11% and 7% of sales, respectively.
</R>

       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.

       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.

       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.

<R>
       On September 29, 2002, Four Rivers Broadcasting, Inc. filed a trademark application with the United States Patent and Trademark Office ("USPTO") for Mount Shasta Ale based on its intent to use the proposed mark. Four Rivers Broadcasting, Inc. is a subsidiary of Alta California Broadcasting, Inc., an affiliate of John C. Power, our Director. Alta California Broadcasting, Inc. also registered the domain name www.ales.com. In 2004, Four Rivers Broadcasting and Alta California Broadcasting assigned their interests in the trademark, and domain name, respectively, to an investor group who in turn assigned those intellectual property rights to the Company in exchange for shares of Company common stock. Documents governing the assignments have been executed but the formal assignments have not been formally registered in the respective registration offices controlling these intellectual property rights.

       Four Rivers Broadcasting was 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 claimed a prior right to use the trademark and that the other is infringing on their intellectual property rights. That litigation has now been resolved under the terms of an agreement in which to the other party has agreed that we may use the trademark "Mount Shasta Ale." However, because we have been advised by Shasta Beverage Company that they would oppose the application if we pursued it (but not our unregistered use of the mark), we have decided to withdraw our trademark application pending with the USPTO, and rather will rely upon common law trademark principles to protect our use of the mark.
</R>

       In addition to the domain name www.ales.com, we have registered the domain name www.organicale.com and www,buttecreek.com. Both domain addresses link to the same website. We

40

believe that our domain name plays an important role in expanding the awareness of our products on the Internet.

       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.

<R>
       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. We do not consider the relationship with Bison to be material at the present time.
</R>

       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

41

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. 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.

       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.

       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.

42

<R>
       As of June 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, general manager, Larry Berlin, master brewer, and two sales persons and one brewing support. Our part time employees are involved in brewing support and sales.
</R>

       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:

________________________________