July 1, 2007

Dear Friends:

As I mentioned in my letter of January of this year, The Claim Jumper chain will be opening their second restaurant in Oregon. This location will begin serving the public July 23rd. The new location is at 18000 SW Lower Boones Ferry Road, Tualitan. Our stockholders in and around Clackamas have been showing great support for that store. This patronage is much appreciated by the management of the Claim Jumper and by Bayhawk. Many of you came by on the first day of operations to have a beer with me. Unfortunately, I only attended the mock opening before access was available to the public. At the Tualitan store, I will be in the bar from late afternoon until early evening on the date of the official opening. The next morning, I will be driving up to the greater Seattle area to visit the Claim Jumpers in Washington State that we began supplying last month. This is another opportunity for our stockholders to show their support for those that support Bayhawk. I recommend that you take opportunity while enjoying great beer and food.

As usual, Bayhawk beers did very well at the California State Fair. We entered seven styles of beer Winning Seven Awards, Four Ribbons, and Honorable Mention for Best of Show. Our Claim Jumper Hefe Weizen is a perennial winner at the fair.

The first part of the year has seen increases in both sales and production of approximately 6%. Although the company is on a pace to have its best year in gross sales, profits are being more than offset by the significant increases in the costs of our raw materials. Shortages of hops have driven costs up nearly 20% and made availability a constant challenge. Drought conditions in Europe have forced malt prices up 14%. Combined these factors with all energy costs and the prospects of profitability are bleak.

The company's greatest challenge over the coming months will be the pending lease negotiations with McCormick & Schmick's. Our present lease expires in February of 2009. The board of directors of Bayhawk has notified the landlord of our intention to exercise our first five-year lease option. Although this may solve a short-term difficulty, it is the general consensus of the company's board that the costs of operating out of an upscale restaurant location will continue to adversely affect any future profitability of Bayhawk. The board is presently exploring a number of ideas to ameliorate this situation. There is no easy or inexpensive solution to this situation.

Thank you for your continued support. I look forward to seeing you in Oregon.

Cheers,

Karl Zappa
General Manager