<PAGE>   1
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                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                             ----------------------

                                    FORM 10-Q


                QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934


                  FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998


                         COMMISSION FILE NUMBER 0-26542
                           ---------------------------



                        REDHOOK ALE BREWERY, INCORPORATED
             (Exact name of registrant as specified in its charter)


               WASHINGTON                                      91-1141254
    (State or other jurisdiction of                         (I.R.S. Employer
     incorporation or organization)                       Identification No.)



       3400 PHINNEY AVENUE NORTH                               98103-8624
          SEATTLE, WASHINGTON
(Address of principal executive offices)                       (Zip Code)



       Registrant's telephone number, including area code: (206) 548-8000


Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]


                    Common stock, par value $.005 per share:
               7,687,486 shares outstanding as of June 30, 1998.

                    Page 1 of 15 sequentially numbered pages

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<PAGE>   2

                        REDHOOK ALE BREWERY, INCORPORATED

                                    FORM 10-Q

                  FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998

                                TABLE OF CONTENTS


<TABLE>
<CAPTION>

                                                                                                                            PAGE
                                                                                                                          --------
<S>                                                                                                                       <C>
PART I.             FINANCIAL INFORMATION

ITEM 1.             Financial Statements

                          Balance Sheets
                               June 30, 1998 and December 31, 1997 .....................................................     3

                          Statements of Operations
                               Three Months Ended June 30, 1998 and 1997
                               and Six Months Ended June 30, 1998 and 1997 .............................................     4

                          Condensed Statements of Cash Flows
                               Six Months Ended June 30, 1998 and 1997 .................................................     5

                          Notes to Financial Statements.................................................................     6

ITEM 2.             Management's Discussion and Analysis of Financial Condition
                          and Results of Operations ....................................................................     8


PART II.            OTHER INFORMATION

ITEM 6.             Exhibits and Reports on Form 8-K...................................................................     14
</TABLE>

                                       2

<PAGE>   3
PART I
Item 1.  FINANCIAL STATEMENTS

                        REDHOOK ALE BREWERY, INCORPORATED

                                 BALANCE SHEETS

<TABLE>
<CAPTION>

                                                                             JUNE 30,           DECEMBER 31,
                                                                                1998                 1997
                                                                            -----------          -----------
                                                                            (Unaudited)

                                                    ASSETS
<S>                                                                         <C>                  <C>        
Current Assets:
  Cash and Cash Equivalents ..........................................      $ 3,226,434          $   892,165
  Accounts Receivable ................................................        2,193,598            1,588,368
  Inventories ........................................................        2,418,413            2,815,782
  Income Taxes Receivable ............................................          334,156            1,124,813
  Other ..............................................................          416,648              519,515
                                                                            -----------          -----------

    Total Current Assets .............................................        8,589,249            6,940,643
Fixed Assets, Net ....................................................       81,583,014           88,761,436
Assets Held for Sale .................................................        1,184,000                   --
Other Assets .........................................................          849,939            1,067,264
                                                                            -----------          -----------

      Total Assets ...................................................      $92,206,202          $96,769,343
                                                                            ===========          ===========


                                         LIABILITIES, PREFERRED STOCK
                                        AND COMMON STOCKHOLDERS' EQUITY

Current Liabilities:
  Accounts Payable ...................................................      $ 3,029,779          $ 2,290,012
  Accrued Salaries, Wages and Payroll Taxes ..........................        1,394,510            1,322,966
  Refundable Deposits ................................................        1,378,644            1,166,070
  Other Accrued Expenses .............................................          544,762              231,816
  Current Portion of Long-Term Debt ..................................          592,147              591,759
                                                                            -----------          -----------

    Total Current Liabilities ........................................        6,939,842            5,602,623
                                                                            -----------          -----------

Long-Term Debt, Net of Current Portion ...............................        9,580,761            9,873,973
                                                                            -----------          -----------

Deferred Income Taxes ................................................        2,337,360            3,987,519
                                                                            -----------          -----------

Other Liabilities ....................................................               --               40,546
                                                                            -----------          -----------

Convertible Redeemable Preferred Stock ...............................       15,988,455           15,966,255
                                                                            -----------          -----------

Common Stockholders' Equity:
  Common Stock, Par Value $0.005 per Share, Authorized, 50,000,000
    Shares; Issued and Outstanding, 7,687,486 Shares in 1998 and
    7,687,486 Shares in 1997 .........................................           38,438               38,438
  Additional Paid-In Capital .........................................       56,888,633           56,805,633
  Retained Earnings ..................................................          432,713            4,454,356
                                                                            -----------          -----------

      Total Common Stockholders' Equity ..............................       57,359,784           61,298,427
                                                                            -----------          -----------
        Total Liabilities, Preferred Stock and
          Common Stockholders' Equity ................................      $92,206,202          $96,769,343
                                                                            ===========          ===========
</TABLE>



                             See Accompanying Notes

                                        3
<PAGE>   4
                        REDHOOK ALE BREWERY, INCORPORATED

                            STATEMENTS OF OPERATIONS

                                   (Unaudited)
<TABLE>
<CAPTION>


                                                               THREE MONTHS ENDED JUNE 30,            SIX MONTHS ENDED JUNE 30,
                                                            --------------------------------       --------------------------------
                                                                1998                1997               1998                1997
                                                            ------------        ------------       ------------        ------------
<S>                                                         <C>                 <C>                <C>                 <C>         
Sales..................................................     $  9,918,427        $  9,976,073       $ 18,423,037        $ 18,844,283
Less Excise Taxes......................................          933,161             974,584          1,742,784           1,848,940
                                                            ------------        ------------       ------------        ------------

Net Sales..............................................        8,985,266           9,001,489         16,680,253          16,995,343
Cost of Sales..........................................        6,224,093           6,354,498         12,364,940          12,726,380
                                                            ------------        ------------       ------------        ------------

Gross Profit...........................................        2,761,173           2,646,991          4,315,313           4,268,963
Special Valuation Provision............................        5,172,650                  --          5,172,650                  --
Selling, General and Administrative Expenses...........        2,504,442           2,518,020          4,833,628           4,939,162
                                                            ------------        ------------       ------------        ------------

Operating Income (Loss)................................       (4,915,919)            128,971         (5,690,965)           (670,199)
Interest Expense.......................................          180,552               5,782            362,010               5,782
Other Income -- Net....................................           26,577              19,234             41,877              37,545
                                                            ------------        ------------       ------------        ------------

Income (Loss) before Income Taxes......................       (5,069,894)            142,423         (6,011,098)           (638,436)
Income Taxes Expense (Benefit).........................       (1,785,767)             71,408         (2,011,655)           (221,414)
                                                            ------------        ------------       ------------        ------------

Net Income (Loss)......................................     $ (3,284,127)       $     71,015       $ (3,999,443)       $   (417,022)
                                                            ============        ============       ============        ============

Basic Earnings (Loss) per Share........................     $      (0.43)       $       0.01       $      (0.52)       $      (0.05)
                                                            ============        ============       ============        ============

Diluted Earnings (Loss) per Share......................     $      (0.43)       $       0.01       $      (0.52)       $      (0.05)
                                                            ============        ============       ============        ============
</TABLE>


                             See Accompanying Notes

                                        4
<PAGE>   5


                        REDHOOK ALE BREWERY, INCORPORATED

                            STATEMENTS OF CASH FLOWS

                                   (Unaudited)

<TABLE>
<CAPTION>

                                                                                                   SIX MONTHS ENDED JUNE 30,
                                                                                             --------------------------------------
                                                                                                 1998                     1997
                                                                                             -----------                -----------
<S>                                                                                          <C>                        <C>         
OPERATING ACTIVITIES
Net Loss .............................................................................       $(3,999,443)               $  (417,022)
Adjustments to Reconcile Net Loss to Net Cash
  Provided by Operating Activities:
    Depreciation and Amortization ....................................................         1,717,988                  1,614,071
    Special Valuation Provision ......................................................         5,172,650                         --
    Deferred Income Tax Provision ....................................................        (1,650,159)                    56,204
    Net Change in Operating Assets and Liabilities ...................................         2,058,468                    (50,353)
                                                                                             -----------                -----------

Net Cash Provided by Operating Activities ............................................         3,299,504                  1,202,900
                                                                                             -----------                -----------

INVESTING ACTIVITIES
Expenditures for Fixed Assets ........................................................          (755,411)                (4,724,609)
Other ................................................................................                --                    (27,278)
                                                                                             -----------                -----------

Net Cash Used in Investing Activities ................................................          (755,411)                (4,751,887)
                                                                                             -----------                -----------

FINANCING ACTIVITIES
Proceeds from Debt ...................................................................                --                  5,350,000
Repayments on Debt ...................................................................          (292,824)                  (915,350)
Officer Note Repayment and Other, Net ................................................            83,000                        215
                                                                                             -----------                -----------

Net Cash (Used in) Provided by Financing Activities ..................................          (209,824)                 4,434,865
                                                                                             -----------                -----------

Increase in Cash and Cash Equivalents ................................................         2,334,269                    885,878
Cash and Cash Equivalents:
  Beginning of Year ..................................................................           892,165                  1,162,352
                                                                                             -----------                -----------

  End of Period ......................................................................       $ 3,226,434                $ 2,048,230
                                                                                             ===========                ===========
</TABLE>

                             See Accompanying Notes

                                        5


<PAGE>   6


                        REDHOOK ALE BREWERY, INCORPORATED

                          NOTES TO FINANCIAL STATEMENTS
                                   (Unaudited)



1.  BASIS OF PRESENTATION

      The accompanying financial statements and related notes should be read in
conjunction with the financial statements and notes thereto included in the
Company's Annual Report on Form 10-K. The accompanying financial statements
include the accounts of Redhook Ale Brewery, Incorporated (the "Company") and
have been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission. These financial statements are unaudited and condensed, and
do not contain all of the information required by generally accepted accounting
principles to be included in a full set of financial statements. In the opinion
of management, all material adjustments necessary to present fairly the
financial position, results of operations and cash flows of the Company, for the
periods presented, have been made. All such adjustments were of a normal,
recurring nature. The results of operations for such interim periods are not
necessarily indicative of the results of operations for the full year.


2.  EARNINGS (LOSS) PER SHARE

      In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, Earnings per Share ("Statement 128").
Statement 128 replaced the previously reported primary and fully diluted
earnings per share with basic and diluted earnings per share. Unlike primary
earnings per share, basic earnings per share excludes any dilutive effects of
options, warrants and convertible securities. Diluted earnings per share is very
similar to the previously reported fully diluted earnings per share. Earnings
per share amounts for all periods have been presented and, where necessary,
restated to conform to the Statement 128 requirements and SEC Staff Accounting
Bulletin No. 98.

      The calculation of adjusted weighted-average shares outstanding for
purposes of computing diluted earnings per share includes the effect of all
outstanding convertible redeemable preferred stock and outstanding stock options
for the three months ended June 30, 1997. The convertible preferred stock and
outstanding stock options have been excluded from the calculation of diluted
loss per share for the three months ended June 30, 1998, and for the six months
ended June 30, 1998 and 1997 because their effect is antidilutive. The
calculation uses the treasury stock method in determining the resulting
incremental average equivalent shares outstanding when they are dilutive.

      The following table sets forth the computation of basic and diluted
earnings (loss) per common share:
<TABLE>
<CAPTION>

                                                                   THREE MONTHS ENDED JUNE 30,          SIX MONTHS ENDED JUNE 30,
                                                                ------------------------------       ------------------------------

                                                                   1998               1997              1998               1997
                                                                -----------        -----------       -----------        -----------
<S>                                                             <C>                <C>               <C>                <C>         
Basic earnings (loss) per share computation:
  Numerator:
    Net income (loss)........................................   $(3,284,127)       $    71,015       $(3,999,443)       $  (417,022)
                                                                -----------        -----------       -----------        -----------

  Denominator:
    Weighted-average common shares...........................     7,687,486          7,686,440         7,687,486          7,686,019
                                                                -----------        -----------       -----------        -----------

        Basic earnings (loss) per share......................   $     (0.43)       $      0.01       $     (0.52)       $     (0.05)
                                                                ===========        ===========       ===========        ===========

Diluted earnings (loss) per share computation:
  Numerator:
    Net income (loss)........................................   $(3,284,127)       $    71,015       $(3,999,443)       $  (417,022)
                                                                -----------        -----------       -----------        -----------

  Denominator:
    Weighted-average common shares...........................     7,687,486          9,010,991         7,687,486          7,686,019
                                                                -----------        -----------       -----------        -----------

          Diluted earnings (loss) per share .................   $     (0.43)       $      0.01       $     (0.52)       $     (0.05)
                                                                ===========        ===========       ===========        ===========
</TABLE>


                                       6

<PAGE>   7
                       REDHOOK ALE BREWERY, INCORPORATED

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
                                  (Unaudited)


3.  INVENTORIES

      Inventories consist of the following:
<TABLE>
<CAPTION>

                                                                                            JUNE 30,                    DECEMBER 31,
                                                                                              1998                           1997
                                                                                          ----------                      ----------
<S>                                                                                       <C>                             <C>       
Finished goods .....................................................                      $1,212,771                      $1,387,933
Raw materials ......................................................                         633,000                         879,836
Promotional merchandise ............................................                         252,764                         328,064
Packaging materials ................................................                         319,878                         219,949
                                                                                          ----------                      ----------
                                                                                          $2,418,413                      $2,815,782
                                                                                          ==========                      ==========
</TABLE>


      Finished goods include beer held in fermentation prior to the filtration
and packaging process.


4.  SPECIAL VALUATION PROVISION

      In January 1998, production at the Fremont Brewery was significantly
reduced and the brewery served primarily as a backup facility to the Woodinville
Brewery. In conjunction with this reduction, during the quarter ended June 30,
1998, the Company analyzed its current and future production capacity
requirements and its plans for the Fremont Brewery production assets. Based upon
that analysis, the Company decided to permanently curtail the Fremont Brewery
operations and sell those production assets. In compliance with FASB Statement
No. 121, the Fremont production assets were written down to an estimate of their
net realizable value in the quarter ended June 30, 1998. The write-down was
recorded through a non-cash valuation provision totaling $5.2 million. The
special valuation provision, net of the related income tax benefit, totaled $3.4
million.

      The write-down was recorded in the statement of operations on a separate
line as a Special Valuation Provision. The assets are presented as Assets Held
for Sale on the balance sheet as of June 30, 1998, at their estimated fair
market value.

      The special valuation provision and the related assets held for sale were
recorded as follows:
<TABLE>

<S>                                                                 <C>        
Brewery equipment ...........................................       $ 8,577,598
Building ....................................................         1,068,824
                                                                    -----------

                                                                      9,646,422
Less accumulated depreciation and amortization ..............        (3,389,772)
                                                                    -----------

Net book value ..............................................         6,256,650
Estimated net realizable value of Assets Held for Sale ......         1,184,000
                                                                    -----------

Estimated impairment ........................................         5,072,650
Reserve for disposal related costs ..........................           100,000
                                                                    -----------

Special Valuation Provision .................................         5,172,650
Income tax benefit ..........................................         1,810,428
                                                                    -----------

Special Valuation Provision, net of income tax benefit ......       $ 3,362,222
                                                                    ===========
</TABLE>

                                       7
<PAGE>   8


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

      The following discussion and analysis should be read in conjunction with
the Company's Financial Statements and Notes thereto included herein.

OVERVIEW

      Since its formation, the Company has focused its business activities on
the brewing, marketing and selling of craft beers. For the six months ended June
30, 1998, the Company had gross sales of $18,423,000, a decrease of 2.2% from
the six months ended June 30, 1997. The Company believes that period-to-period
comparisons of its financial results should not be relied upon as an accurate
indicator of future performance. The Company's sales consist predominantly of
sales of beer to third-party distributors and Anheuser-Busch, Inc. ("A-B")
through the Distribution Alliance. In addition, the Company derives other
revenues from the sale of beer, food, apparel and other retail items in its
brewery pubs. The Company is required to pay federal excise taxes on sales of
its beer. The excise tax burden on beer sales increases from $7 to $18 per
barrel on annual production over 60,000 barrels and thus, if sales volume
increases, federal excise taxes would increase as a percentage of sales.

      The Company's sales volume declined 2.5% for the six months ended June 30,
1998, compared to the same period in 1997. In addition to the level of consumer
demand in existing markets, the Company's sales are also affected by other
factors such as competitive considerations, including the increased number of
craft brewers and promotional pricing, the opening of new distribution
territories and new product introductions. Sales in the craft beer industry
generally reflect a degree of seasonality, with the first quarter historically
being the slowest and the rest of the year typically demonstrating relatively
stronger sales in connection with summer activities and fall and early winter
holidays. The Company has historically operated with little or no backlog, and
its ability to predict sales for future periods is limited.

      Under normal circumstances, the Company generally operates its brewing
facilities up to five days per week, two shifts per day. The Company has
increased its company-wide annual production capacity from approximately 3,000
barrels at its first brewery in the Ballard neighborhood of Seattle in 1982 to
approximately 425,000 barrels, prior to the 75,000 barrel decrease related to
the Fremont Brewery (see discussion below). Production capacity of each facility
is added in phases until the facility reaches its maximum designed production
capacity. The timing of each phase is affected by the availability of capital,
construction constraints and sales growth in new and existing markets. The
Portsmouth, New Hampshire brewery began commercial production during October
1996. The Portsmouth Brewery's current production capacity is approximately
100,000 barrels per year and its maximum designed production capacity is
approximately 250,000 barrels per year. Additional capital expenditures and
production personnel will be required to bring the Portsmouth Brewery to its
maximum designed capacity.

      Upon the opening of the Portsmouth Brewery, the Company's maximum designed
production capacity increased from 325,000 barrels per year to 575,000 barrels
per year, prior to the 75,000 barrel decrease related to the Fremont Brewery
(see discussion below), resulting in a significant decline in the company-wide
capacity utilization rate. The Company's capacity utilization has a significant
impact on gross profit. When facilities are operating at their maximum designed
production capacities, profitability is favorably affected by spreading fixed
and semivariable operating costs, such as depreciation and production salaries,
over a larger sales base. Most capital costs associated with building a new
brewery, and fixed and semivariable costs related to operating a new brewery,
are incurred prior to, or upon commencement of, production at a facility.
Because the actual production level may be substantially below the facility's
maximum designed production capacity, gross margins are negatively impacted.
This impact is reduced when actual production increases.

      In January 1998, production at the Fremont Brewery was significantly
reduced and the brewery served primarily as a backup facility to the Woodinville
Brewery. In conjunction with this reduction, during the quarter ended June 30,
1998, the Company analyzed its current and future production capacity
requirements and its plans for the Fremont Brewery production assets. Based upon
that analysis, the Company decided to permanently curtail the Fremont Brewery
operations and sell those production assets. In compliance with FASB Statement
No. 121, the Fremont production assets were written down to an estimate of their
 


                                       8


<PAGE>   9

net realizable value in the quarter ended June 30, 1998. The write-down was 
recorded through a non-cash valuation provision totaling $5.2 million. The 
special valuation provision, net of the related income tax benefit, totaled $3.4
million.

      In addition to capacity utilization, the Company expects other factors to
influence profit margins, including higher costs associated with the development
of newer distribution territories, such as increased shipping, marketing and
sales personnel costs; fees related to the distribution agreement with A-B;
changes in packaging and other material costs; and changes in product sales mix.
The incremental cost of shipping beer from the Company's breweries will continue
to increase as the volume of beer supplied to more distant markets increases.

      See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Certain Considerations: Issues and Uncertainties."


RESULTS OF OPERATIONS

      The following table sets forth, for the periods indicated, certain items
from the Company's Statements of Operations expressed as a percentage of net
sales.
<TABLE>
<CAPTION>

                                                                          THREE MONTHS ENDED              SIX MONTHS ENDED
                                                                               JUNE 30,                       JUNE 30,
                                                                       -----------------------        -------------------------
                                                                          1998         1997              1998           1997
                                                                       ---------    ----------         --------        -------

<S>                                                                    <C>            <C>             <C>            <C>   
      Sales...........................................................     110.4%        110.8%          110.4%         110.9%
      Less Excise Taxes...............................................      10.4          10.8            10.4           10.9
                                                                       ---------    ----------        --------        -------
      Net Sales.......................................................     100.0         100.0           100.0          100.0
      Cost of Sales...................................................      69.3          70.6            74.1           74.9
                                                                       ---------    ----------        --------        -------
      Gross Profit....................................................      30.7          29.4            25.9           25.1
      Special Valuation Provision.....................................      57.6           0.0            31.0            0.0
      Selling, General and Administrative Expenses....................      27.9          28.0            29.0           29.1
                                                                       ---------    ----------        --------        -------
      Operating Income (Loss).........................................     (54.8)          1.4           (34.1)          (4.0)
      Interest Income (Expense)-- Net ................................      (1.7)          0.2            (1.9)           0.2
                                                                       ---------    ----------        --------        -------
      Income (Loss) Before Income Taxes...............................     (56.5)          1.6           (36.0)          (3.8)
      Provision (Benefit) for Income Taxes............................     (19.9)          0.8           (12.0)          (1.3)
                                                                       ---------    ----------        --------        -------
      Net Income (Loss)...............................................     (36.6)%         0.8%          (24.0)%         (2.5)%
                                                                       =========    ==========        ========        =======
</TABLE>


THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THREE MONTHS ENDED JUNE 30, 1997

      Sales. Total sales decreased 0.6% to $9,918,000 for three months ended
June 30, 1998, compared to $9,976,000 for the comparable 1997 period, as a 0.4%
decrease in total sales volumes and modestly lower prices were partially offset
by a small increase in other sales. Total sales volumes for the second quarter
of 1998 decreased to 56,200 barrels from 56,400 barrels for the same period in
1997. Sales volume in Washington State, the Company's largest market, decreased
slightly in the second quarter of 1998 compared to the second quarter of 1997.
The competitive landscape continues to be affected by the increase in the number
of craft beer companies and the number of different products they offer. The
Company's other sales totaled $953,000 for second quarter of 1998, compared to
$882,000 for second quarter of 1997. At June 30, 1998 and 1997, the Company was
selling beer in 47 states.

      Excise Taxes. Excise taxes decreased to $933,000, or 10.4% of net sales,
for second quarter of 1998, compared to $975,000, or 10.8% of net sales, for the
comparable period of 1997.

      Cost of Sales. Cost of sales decreased to $6,224,000 for three months
ended June 30, 1998 from $6,354,000 for same period in 1997, primarily due to
the positive effect of decreased costs at the Fremont Brewery, partially offset
by an increase in depreciation expense related to the kegging and cold storage
facility 


                                       9


<PAGE>   10

in Woodinville. Cost of sales, as a percentage of net sales, decreased slightly
to 69.3% for the 1998 period, compared to 70.6% for the 1997 period. The
combined utilization rate of maximum designed capacity for the Woodinville and
New Hampshire breweries was unchanged at 45% for three months ended June 30,
1998 and 1997.

      Special Valuation Provision. In the quarter ended June 30, 1998, the
Fremont production assets were written down to an estimate of their net
realizable value in compliance with FASB Statement No. 121. The write-down was
recorded through a non-cash valuation provision totaling $5.2 million.

      Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased to $2,504,000 for the second quarter of 1998
from $2,518,000 for the same period of 1997 due to reductions in sales and
marketing costs. As a percentage of net sales, these expenses were 27.9% and
28.0% for the quarters ended June 30, 1998 and 1997, respectively.

      Interest Expense. Interest expense totaled $181,000 for the second quarter
of 1998, compared to $6,000 for the comparable 1997 period, as the result of
substantially all construction in progress being placed in service on July 1,
1997. Nearly all interest costs incurred in second quarter of 1997 were
capitalized to the construction project.

      Other Income -- Net. Other income -- net, increased slightly to $27,000 in
the second quarter of 1998, compared to $19,000 in the same 1997 quarter due to
a higher average balance of interest-bearing deposits.

      Income Taxes. Excluding the non-cash special valuation provision, the
Company's effective income tax rate decreased to a 24.0% expense for the second
quarter of 1998 from a 50% expense for the second quarter of 1997. The change is
primarily the result of lower estimated pre-tax results for the full year of
1998, relative to other components of the tax provision calculation, such as the
exclusion of a portion of meals and entertainment expenses from tax return
deductions. The special valuation provision was tax-effected at a 35% rate.


SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997

      Sales. Total sales decreased 2.2% to $18,423,000 for six months ended June
30, 1998, compared to $18,844,000 for the comparable 1997 period, as a 2.5%
decrease in total sales volumes and modestly lower prices were partially offset
by a small increase in other sales. Total sales volumes for the first six months
of 1998 decreased to 105,100 barrels from 107,800 barrels for the same period in
1997. Sales volume in Washington State, the Company's largest market, decreased
slightly in 1998 compared to 1997. The Company's other sales totaled $1,643,000
for the six months ended June 30, 1998, compared to $1,510,000 for comparable
1997 period.

      Excise Taxes. Excise taxes decreased to $1,743,000, or 10.4% of net sales,
for the first six months of 1998, compared to $1,849,000, or 10.9% of net sales,
for the comparable period of 1997.

      Cost of Sales. Cost of sales decreased to $12,365,000 for six months ended
June 30, 1998 from $12,726,000 for same period in 1997, primarily due to the
lower sales volume and the positive effect of decreased costs at the Fremont
Brewery, partially offset by an increase in depreciation expense related to the
kegging and cold storage facility in Woodinville. Cost of sales, as a percentage
of net sales, decreased slightly to 74.1% for the 1998 period, compared to 74.9%
for the 1997 period. The combined utilization rate of maximum designed capacity
for the Woodinville and New Hampshire breweries was 42% and 43% for six months
ended June 30, 1998 and 1997, respectively.

      Special Valuation Provision. In the six months ended June 30, 1998, the
Fremont production assets were written down to an estimate of their net
realizable value in compliance with FASB Statement No. 121. The write-down was
recorded through a non-cash valuation provision totaling $5.2 million.


                                       10

<PAGE>   11

      Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased to $4,834,000 for the first six months of 1998
from $4,939,000 for the same period of 1997 due to reductions in sales and
marketing costs. As a percentage of net sales, these expenses were 29.0% and
29.1% for the six months ended June 30, 1998 and 1997, respectively

      Interest Expense. Interest expense totaled $362,000 for the six months of
1998, compared to $6,000 for the comparable 1997 period, as the result of
substantially all construction in progress being placed in service on July 1,
1997. Nearly all interest costs incurred in the 1997 period were capitalized 
to the construction project.

      Other Income -- Net. Other income -- net, increased slightly to $42,000 in
1998, compared to $38,000 in 1997.

      Income Taxes. Excluding the non-cash special valuation provision, the
Company's effective income tax rate decreased to a 24.0% benefit for the six
months ended June 30, 1998 from a 35% expense for the same period in 1997. The
change is primarily the result of lower estimated pre-tax results for the full
year of 1998, relative to other components of the tax provision calculation,
such as the exclusion of a portion of meals and entertainment expenses from tax
return deductions. The special valuation provision was tax-effected at a 35%
rate.


LIQUIDITY AND CAPITAL RESOURCES

      The Company had $3,226,000 and $892,000 of cash and cash equivalents at
June 30, 1998 and December 31, 1997, respectively. At June 30, 1998, the Company
had working capital of $1,649,000. The Company's long-term debt as a percentage
of total capitalization (long-term debt, preferred stock and common
stockholders' equity) was 12.2% and 11.9% as of June 30, 1998 and December 31,
1997, respectively. Cash provided by operating activities totaled $3,300,000 and
$1,203,000 for the six months ended June 30, 1998 and 1997, respectively. The
1998 amount includes the April collection of an income tax receivable totaling
approximately $1 million.

      On June 5, 1997, the Company converted the $9 million outstanding balance
of its secured bank facility (the "Secured Facility") to a five-year term loan
with a 20-year amortization schedule. As of June 30, 1998, there was $8.6
million outstanding on the Secured Facility and the Company's one-month
IBOR-based borrowing rate was approximately 6.9%. In addition, the Company has a
$10 million unsecured revolving credit facility with the same bank through June
5, 1999, and as of June 30, 1998, there were no borrowings outstanding on this
facility. Interest accrues at a variable rate based on the Inter Bank Offered
Rate ("IBOR"), plus 1.25% to 2.75% for the Secured Facility, and plus 1.00% to
2.50% on the unsecured facility, depending on the Company's debt-to-tangible net
worth ratio. The Company can fix the rate by selecting IBOR for one- to
twelve-month periods as a base.

      The Company has required capital principally for the construction and
development of its technologically advanced production facilities. To date, the
Company has financed its capital requirements through cash flow from operations,
bank borrowings and the sale of common and preferred stock. The Company expects
to meet its future financing needs, including working capital and capital
expenditure requirements, through cash on hand, operating cash flow and, to the
extent required and available, bank borrowings and offerings of debt or equity
securities.

      Capital expenditures for the six months ended June 30, 1998, totaled
$755,000. Capital expenditures for 1998 are expected to total approximately
$1,000,000.

      The Company has certain commitments, contingencies and uncertainties
relating to its normal operations. Management believes that any such
commitments, contingencies or uncertainties, including any environmental
uncertainties, will not have a material adverse effect on the Company's
financial position or results of operations.

                                       11

<PAGE>   12

CERTAIN CONSIDERATIONS: ISSUES AND UNCERTAINTIES

      The Company does not provide forecasts of future financial performance or
sales volumes, although this Quarterly Report contains certain other types of
forward-looking statements that involve risks and uncertainties. The Company
may, in discussions of its future plans, objectives and expected performance in
periodic reports filed by the Company with the Securities and Exchange
Commission (or documents incorporated by reference therein) and in written and
oral presentations made by the Company, include forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, or
Section 21E of the Securities Exchange Act of 1934, as amended. Such
forward-looking statements are based on assumptions that the Company believes
are reasonable, but are by their nature inherently uncertain. In all cases,
there can be no assurance that such assumptions will prove correct or that
projected events will occur. Actual results could differ materially from those
projected depending on a variety of factors, including, but not limited to, the
issues discussed below, the successful execution of market development and other
plans and the availability of financing. While Company management is optimistic
about the Company's long-term prospects, the following issues and uncertainties,
among others, should be considered in evaluating its growth outlook and any
forward-looking statements.

      Effect of Competition on Future Sales. The domestic market in which the
Company's craft beers are sold is highly competitive due to the proliferation of
small craft brewers, including contract brewers, the increase in the number of
products offered by such brewers and the introduction of fuller-flavored
products by major national brewers. The Company's revenue growth rate began to
slow in late 1996 and sales have declined in 1997 and in the first six months of
1998, due primarily to slower sales in the highly competitive draft beer market.
If negative sales trends were to continue, the Company's future sales and
results of operations would be adversely affected. The Company has historically
operated with little or no backlog and, therefore, its ability to predict sales
for future periods is limited.

      Sales Prices. Future prices the Company charges for its products may
decrease from historical levels, depending on competitive factors in the
Company's various markets. The Company has participated in price promotions with
its wholesalers and their retail customers in most of its markets. The number of
markets in which the Company participates in price promotions and the frequency
of such promotions is expected to increase in the future.

      Variability of Gross Margin and Cost of Sales. The Company anticipates
that its future gross margins will fluctuate and may decline as a result of many
factors, including disproportionate depreciation and other fixed and
semivariable operating costs, during periods when the Company's breweries are
producing below maximum designed production capacity. The Company's high level
of fixed and semivariable operating costs causes gross margin to be very
sensitive to relatively small increases or decreases in sales volume. In
addition, other factors that could affect cost of sales include changes in:
shipping costs, availability and prices of raw materials and packaging
materials, mix between draft and bottled product sales, and Federal or state
excise taxes. Also, as sales volumes through the Distribution Alliance increase,
the alliance fee, and other staging and administrative costs, would increase.

      Advertising and Promotional Costs. While the Company has historically done
very limited advertising, market and competitive considerations could make a
significant increase in such spending appropriate. In addition, market and
competitive considerations could require an increase in other promotional costs
associated with developing existing and new markets.

      Relationship with Anheuser-Busch, Incorporated. Most of the Company's
future sales are expected to be through the Distribution Alliance with A-B. If
the Distribution Alliance were to be terminated, or if the relationship between
A-B and the Company were to deteriorate, the Company's sales and results of
operations could be materially adversely affected. While the Company believes
that the benefits of the Distribution Alliance, in particular access to
distributors and distribution efficiencies, offset costs associated with the
Alliance, there can be no assurance that these costs will not have a negative
impact on the Company's profit margins in the future.


                                       12

<PAGE>   13

      Dependence on Third-Party Distributors. The Company relies heavily on
third-party distributors for the sale of its products to retailers. The
Company's most significant non-Alliance wholesaler, K&L Distributors, Inc., an
A-B affiliated wholesaler in the Seattle area, accounted for approximately 16%
of the Company's sales during the first six months of 1998. Substantially all of
the remaining sales volumes are now through the Distribution Alliance to A-B
affiliated distributors, most of whom are independent wholesalers. The loss of
K&L or the termination of the Distribution Alliance could have a material
adverse impact on the Company's sales and results of operations.

      Customer Acceptance, Consumer Trends and Public Attitudes. If consumers
were unwilling to accept the Company's products or if the recent trends toward
drinking craft beers were to change further, it could adversely impact the
Company's sales and results of operations. The alcoholic beverage industry has
become the subject of considerable societal and political attention in recent
years due to increasing public concern over alcohol-related social problems,
including drunk driving, underage drinking and health consequences from the
misuse of alcohol. If beer consumption in general were to come into disfavor
among domestic consumers, or if the domestic beer industry were subjected to
significant additional governmental regulation, the Company's sales and results
of operations could be adversely affected.

      Impact of Year 2000. Some of the Company's computer programs were written
using two digits rather than four to define the applicable year. As a result,
those computer programs have time-sensitive software that recognize a date using
"00" as the year 1900 rather than the year 2000. This could cause a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities.

      The Company has completed an assessment and will have to upgrade or modify
portions of its software so that its computer systems will function properly
with respect to dates in the year 2000 and thereafter. The costs related to
software upgrades or modifications are not expected to be material to the
Company's financial position or results of operations.

      The project is estimated to be completed prior to any negative impact on
its information systems. The Company believes that with modifications to its
existing software or conversions to new software, the Year 2000 Issue will not
pose significant operational problems for its computer systems. However, if such
modifications and conversions are not made, or are not completed timely, the
Year 2000 Issue could have a significant impact on the operations of the
Company.

      The costs and timing of the project are based on management's best
estimates, which were derived utilizing numerous assumptions of future events,
including the continued availability of certain resources and other factors.
However, there can be no guarantee that these estimates will be achieved and
actual results could differ materially from those anticipated. Specific factors
that might cause such material difference include, but are not limited to, the
availability and cost of personnel trained in this area, the ability to locate
and correct all relevant computer codes, and similar uncertainties.


NEW ACCOUNTING STANDARD

      In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, Reporting Comprehensive Income
("Statement 130"). Statement 130 establishes new rules for the reporting and
display of comprehensive income and its components in a full set of
general-purpose financial statements. The new rules require that all items that
are recognized under accounting standards as components of comprehensive income
be reported in a financial statement that is displayed with the same prominence
as other financial statements. Statement 130 is effective for fiscal years
beginning after December 15, 1997.

      The Company has evaluated this statement and has determined that it will
have no impact on the Company's financial statements.


                                       13
<PAGE>   14


PART II.

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

(a)   EXHIBITS
      The following exhibits are filed as part of this report.

           27 Financial Data Schedule for the six months ended June 30, 1998.

(b)   REPORTS ON FORM 8-K
      None were filed during the quarter ended June 30, 1998.


ITEMS 1, 2, 3, 4 AND 5 OF PART II ARE NOT APPLICABLE AND HAVE BEEN OMITTED.


                                       14
<PAGE>   15

                                    SIGNATURE


Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Seattle,
State of Washington, on August 12, 1998.


                                 REDHOOK ALE BREWERY, INCORPORATED




                                 BY: /s/  Bradley A. Berg
                                     --------------------------------------
                                          Bradley A. Berg
                                          Executive Vice President and
                                          Chief Financial Officer



                                 BY: /s/  David H. Kirske
                                     --------------------------------------
                                          David H. Kirske
                                          Controller and Treasurer,
                                          Principal Accounting Officer





DATE: August 12, 1998


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