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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549



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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, 2001

Commission File Number 0-26542



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

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

|                                                                                       |  |                      
|-------------------------------------------------------------------------------------- |  | ---------------------
|3400 Phinney Avenue North
Seattle, Washington
(Address of principal executive offices) |  | 98103-8624
(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: 7,070,286 shares outstanding as of June 30, 2001.

Page 1 of 16 sequentially numbered pages



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TABLE OF CONTENTS



|              |                                                                                               |                               |  |  |  |  |  | 
|------------- | --------------------------------------------------------------------------------------------- | ----------------------------- |  |  |  |  |  | 
|PART I.      
|              | ITEM 1. Financial Statements                                                                 
|              |                                                                                               | BALANCE SHEETS               
|              |                                                                                               | STATEMENTS OF OPERATIONS     
|              |                                                                                               | STATEMENTS OF CASH FLOWS     
|              |                                                                                               | NOTES TO FINANCIAL STATEMENTS
|              | ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|              | ITEM 3. Quantitative and Qualitative Disclosures about Market Risk                           
|PART II.     
|              | ITEM 4. Submission of Matters to a Vote of Security Holders                                  
|              | ITEM 6. Exhibits and Reports on Form 8-K                                                     
|SIGNATURES   
|EXHIBIT 3.2  
|EXHIBIT 10.44



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##### Table of Contents



REDHOOK ALE BREWERY, INCORPORATED

FORM 10-Q

For The Quarterly Period Ended June 30, 2001

TABLE OF CONTENTS

|        |  |                                                                                       |  |     
|------- |  | ------------------------------------------------------------------------------------- |  | ----
|        |  |                                                                                       |  | Page
|        |  |                                                                                       |  |     
|PART I  |  | Financial Information                                                                 |  |     
|       
|       
|       
|       
|ITEM 1. |  | Financial Statements                                                                  |  |     
|       
|       
|       
|       
|        |  | Balance Sheets                                                                        |  |     
|       
|       
|       
|       
|        |  | June 30, 2001 and December 31, 2000                                                   |  | 3   
|       
|       
|       
|       
|        |  | Statements of Operations                                                              |  |     
|       
|       
|       
|       
|        |  | Three Months Ended June 30, 2001 and 2000
and Six Months Ended June 30, 2001 and 2000 |  | 4   
|       
|       
|       
|       
|        |  | Statements of Cash Flows                                                              |  |     
|       
|       
|       
|       
|        |  | Six Months Ended June 30, 2001 and 2000                                               |  | 5   
|       
|       
|       
|       
|        |  | Notes to Financial Statements                                                         |  | 6   
|       
|       
|       
|       
|ITEM 2. |  | Managements Discussion and Analysis of Financial Condition
and Results of Operations |  | 8   
|       
|       
|       
|       
|ITEM 3. |  | Quantitative and Qualitative Disclosures about Market Risk                            |  | 14  
|       
|       
|       
|       
|PART II |  | Other Information                                                                     |  |     
|       
|       
|       
|       
|ITEM 4. |  | Submission of Matters to a Vote of Security Holders                                   |  | 14  
|       
|       
|       
|       
|ITEM 6. |  | Exhibits and Reports on Form 8-K                                                      |  | 15  

2



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##### Table of Contents












PART I.

ITEM 1. Financial Statements

REDHOOK ALE BREWERY, INCORPORATED

BALANCE SHEETS

|                                                             |                                                                                                                                                 |                           |                                   |                                                                    |            |             |            |              |            |            |            | 
|------------------------------------------------------------ | ----------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------- | --------------------------------- | ------------------------------------------------------------------ | ---------- | ----------- | ---------- | ------------ | ---------- | ---------- | ---------- | 
|                                                             |                                                                                                                                                 |                           |                                   |                                                                    |            | June 30,    |            | December 31,
|                                                             |                                                                                                                                                 |                           |                                   |                                                                    |            | 2001        |            | 2000        
|                                                             |                                                                                                                                                 |                           |                                   |                                                                    |            |             |            |             
|                                                             |                                                                                                                                                 |                           |                                   |                                                                    |            | (Unaudited) |            |              |            |           
|ASSETS                                                      
|                                                            
|                                                            
|                                                            
|                                                            
|Current Assets:                                              |                                                                                                                                                 |                           |                                   |                                                                    |            |             |            |             
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Cash and Cash Equivalents                                                                                                                       |                           | $                                 | 5,596,156                                                          |            |             | $          | 7,487,190    |           
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Accounts Receivable                                                                                                                             |                           |                                   | 2,207,661                                                          |            |             |            | 1,075,730    |           
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Inventories                                                                                                                                     |                           |                                   | 2,871,316                                                          |            |             |            | 2,726,071    |           
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Other                                                                                                                                           |                           |                                   | 275,682                                                            |            |             |            | 296,082      |           
|                                                             |                                                                                                                                                 |                           |                                   |                                                                    |            |             |            |             
|                                                             |                                                                                                                                                 | Total Current Assets      |                                   |                                                                    | 10,950,815 |             |            |              | 11,585,073 |           
|                                                            
|                                                            
|                                                            
|                                                            
|Fixed Assets, Net                                            |                                                                                                                                                 |                           | 72,371,565                        |                                                                    |            |             | 73,670,248 |             
|                                                            
|                                                            
|                                                            
|                                                            
|Other Assets                                                 |                                                                                                                                                 |                           | 188,751                           |                                                                    |            |             | 365,181    |             
|                                                             |                                                                                                                                                 |                           |                                   |                                                                    |            |             |            |             
|                                                             |                                                                                                                                                 |                           | Total Assets                      |                                                                    | $          | 83,511,131  |            |              | $          | 85,620,502 |           
|                                                             |                                                                                                                                                 |                           |                                   |                                                                    |            |             |            |             
|LIABILITIES, PREFERRED STOCK
AND COMMON STOCKHOLDERS EQUITY
|                                                            
|                                                            
|                                                            
|                                                            
|Current Liabilities:                                         |                                                                                                                                                 |                           |                                   |                                                                    |            |             |            |             
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Accounts Payable                                                                                                                                |                           | $                                 | 2,366,035                                                          |            |             | $          | 2,664,165    |           
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Accrued Salaries, Wages and Payroll Taxes                                                                                                       |                           |                                   | 1,424,040                                                          |            |             |            | 1,528,739    |           
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Refundable Deposits                                                                                                                             |                           |                                   | 1,951,686                                                          |            |             |            | 1,791,267    |           
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Other Accrued Expenses                                                                                                                          |                           |                                   | 406,545                                                            |            |             |            | 333,805      |           
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Current Portion of Long-Term Debt                                                                                                               |                           |                                   | 450,000                                                            |            |             |            | 450,000      |           
|                                                             |                                                                                                                                                 |                           |                                   |                                                                    |            |             |            |             
|                                                             |                                                                                                                                                 | Total Current Liabilities |                                   |                                                                    | 6,598,306  |             |            |              | 6,767,976  |           
|                                                             |                                                                                                                                                 |                           |                                   |                                                                    |            |             |            |             
|Long-Term Debt, Net of Current Portion                       |                                                                                                                                                 |                           | 6,750,000                         |                                                                    |            |             | 6,975,000  |             
|                                                             |                                                                                                                                                 |                           |                                   |                                                                    |            |             |            |             
|Deferred Income Taxes                                        |                                                                                                                                                 |                           | 829,686                           |                                                                    |            |             | 1,276,149  |             
|                                                             |                                                                                                                                                 |                           |                                   |                                                                    |            |             |            |             
|Convertible Redeemable Preferred Stock                       |                                                                                                                                                 |                           | 16,121,655                        |                                                                    |            |             | 16,099,455 |             
|                                                             |                                                                                                                                                 |                           |                                   |                                                                    |            |             |            |             
|Common Stockholders Equity:                                 |                                                                                                                                                 |                           |                                   |                                                                    |            |             |            |             
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Common Stock, Par Value $0.005 per Share, Authorized, 50,000,000
Shares; Issued and Outstanding, 7,070,286 Shares in 2001 and
7,312,786 in 2000 |                           |                                   | 35,351                                                             |            |             |            | 36,564       |           
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Additional Paid-In Capital                                                                                                                      |                           |                                   | 56,006,175                                                         |            |             |            | 56,407,023   |           
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Accumulated Deficit                                                                                                                             |                           |                                   | (2,830,042                                                         | )          |             |            | (1,941,665   | )         
|                                                             |                                                                                                                                                 |                           |                                   |                                                                    |            |             |            |             
|                                                             |                                                                                                                                                 |                           | Total Common Stockholders Equity |                                                                    |            | 53,211,484  |            |              |            | 54,501,922 |           
|                                                             |                                                                                                                                                 |                           |                                   |                                                                    |            |             |            |             
|                                                             |                                                                                                                                                 |                           |                                   | Total Liabilities, Preferred Stock and
Common Stockholders Equity |            | $           | 83,511,131 |              |            | $          | 85,620,502 | 
|                                                             |                                                                                                                                                 |                           |                                   |                                                                    |            |             |            |             

See Accompanying Notes

3



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##### Table of Contents






REDHOOK ALE BREWERY, INCORPORATED

STATEMENTS OF OPERATIONS

(Unaudited)

|                                             |  |                             |            |                           |  |      |            |      |  |   |            |   |  |   |            |  
|-------------------------------------------- |  | --------------------------- | ---------- | ------------------------- |  | ---- | ---------- | ---- |  | - | ---------- | - |  | - | ---------- | -
|                                             |  | Three Months Ended June 30, |            | Six Months Ended June 30,
|                                             |  |                             |            |                          
|                                             |  | 2001                        |            | 2000                      |  | 2001 |            | 2000
|                                             |  |                             |            |                           |  |      |            |     
|Sales                                        |  | $                           | 10,756,586 |                           |  | $    | 10,407,707 |      |  | $ | 19,655,215 |   |  | $ | 18,564,181 |  
|                                            
|                                            
|                                            
|                                            
|Less Excise Taxes                            |  |                             | 940,545    |                           |  |      | 984,131    |      |  |   | 1,696,161  |   |  |   | 1,748,946  |  
|                                             |  |                             |            |                           |  |      |            |      |  |   |            |   |  |   |            |  
|Net Sales                                    |  |                             | 9,816,041  |                           |  |      | 9,423,576  |      |  |   | 17,959,054 |   |  |   | 16,815,235 |  
|                                            
|                                            
|                                            
|                                            
|Cost of Sales                                |  |                             | 7,012,384  |                           |  |      | 6,506,026  |      |  |   | 13,231,089 |   |  |   | 11,933,760 |  
|                                             |  |                             |            |                           |  |      |            |      |  |   |            |   |  |   |            |  
|Gross Profit                                 |  |                             | 2,803,657  |                           |  |      | 2,917,550  |      |  |   | 4,727,965  |   |  |   | 4,881,475  |  
|                                            
|                                            
|                                            
|                                            
|Selling, General and Administrative Expenses |  |                             | 3,276,186  |                           |  |      | 2,706,527  |      |  |   | 5,952,858  |   |  |   | 5,348,660  |  
|                                             |  |                             |            |                           |  |      |            |      |  |   |            |   |  |   |            |  
|Operating Income (Loss)                      |  |                             | (472,529   | )                         |  |      | 211,023    |      |  |   | (1,224,893 | ) |  |   | (467,185   | )
|                                            
|                                            
|                                            
|                                            
|Interest Expense                             |  |                             | 106,358    |                           |  |      | 147,900    |      |  |   | 236,620    |   |  |   | 288,444    |  
|                                            
|                                            
|                                            
|                                            
|Other Income  Net                           |  |                             | 67,470     |                           |  |      | 85,016     |      |  |   | 158,988    |   |  |   | 148,297    |  
|                                             |  |                             |            |                           |  |      |            |      |  |   |            |   |  |   |            |  
|Income (Loss) before Income Taxes            |  |                             | (511,417   | )                         |  |      | 148,139    |      |  |   | (1,302,525 | ) |  |   | (607,332   | )
|                                            
|                                            
|                                            
|                                            
|Income Tax Expense (Benefit)                 |  |                             | (171,327   | )                         |  |      | 58,737     |      |  |   | (436,348   | ) |  |   | (194,346   | )
|                                             |  |                             |            |                           |  |      |            |      |  |   |            |   |  |   |            |  
|Net Income (Loss)                            |  | $                           | (340,090   | )                         |  | $    | 89,402     |      |  | $ | (866,177   | ) |  | $ | (412,986   | )
|                                             |  |                             |            |                           |  |      |            |      |  |   |            |   |  |   |            |  
|Basic Earnings (Loss) per Share              |  | $                           | (0.05      | )                         |  | $    | 0.01       |      |  | $ | (0.12      | ) |  | $ | (0.05      | )
|                                             |  |                             |            |                           |  |      |            |      |  |   |            |   |  |   |            |  
|Diluted Earnings (Loss) per Share            |  | $                           | (0.05      | )                         |  | $    | 0.01       |      |  | $ | (0.12      | ) |  | $ | (0.05      | )
|                                             |  |                             |            |                           |  |      |            |      |  |   |            |   |  |   |            |  

See Accompanying Notes

4



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##### Table of Contents






REDHOOK ALE BREWERY, INCORPORATED

STATEMENTS OF CASH FLOWS

(Unaudited)

|                                                                            |                     |                                                |            |                           |            |      |          |           |           |  
|--------------------------------------------------------------------------- | ------------------- | ---------------------------------------------- | ---------- | ------------------------- | ---------- | ---- | -------- | --------- | --------- | -
|                                                                            |                     |                                                |            | Six Months Ended June 30,
|                                                                            |                     |                                                |            |                          
|                                                                            |                     |                                                |            | 2001                      |            | 2000
|                                                                            |                     |                                                |            |                           |            |     
|Operating Activities                                                       
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Net Income (Loss)                                                           |                     | $                                              | (866,177   | )                         |            | $    | (412,986 | )        
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Adjustments to Reconcile Net Loss to Net Cash
Used in Operating Activities: |                     |                                                |            |                           |            |      |          |          
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            |                     | Depreciation and Amortization                  |            |                           | 1,606,311  |      |          |           | 1,646,039 |  
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            |                     | (Gain) Loss on Disposal of Fixed Assets        |            |                           | 2,109      |      |          |           |          |  
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            |                     | Deferred Income Taxes                          |            |                           | (446,463   | )    |          |           | (203,554  | )
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            |                     | Net Change in Operating Assets and Liabilities |            |                           | (1,274,466 | )    |          |           | (333,307  | )
|                                                                            |                     |                                                |            |                           |            |      |          |          
|Net Cash (Used in) Provided by Operating Activities                         |                     |                                                | (978,686   | )                         |            |      | 696,192  |          
|                                                                            |                     |                                                |            |                           |            |      |          |          
|Investing Activities                                                       
|Expenditures for Fixed Assets                                               |                     |                                                | (285,287   | )                         |            |      | (160,321 | )        
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Other, Net                                                                  |                     |                                                |           |                           |            |      | (1,000   | )        
|                                                                            |                     |                                                |            |                           |            |      |          |          
|Net Cash Used in Investing Activities                                       |                     |                                                | (285,287   | )                         |            |      | (161,321 | )        
|                                                                            |                     |                                                |            |                           |            |      |          |          
|Financing Activities                                                       
|Principal Payments on Debt                                                  |                     |                                                | (225,000   | )                         |            |      | (225,000 | )        
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Repurchase of Common Stock                                                  |                     |                                                | (402,061   | )                         |            |      | (66,000  | )        
|                                                                            |                     |                                                |            |                           |            |      |          |          
|Net Cash Used in Financing Activities                                       |                     |                                                | (627,061   | )                         |            |      | (291,000 | )        
|                                                                            |                     |                                                |            |                           |            |      |          |          
|Increase (Decrease) in Cash and Cash Equivalents                            |                     |                                                | (1,891,034 | )                         |            |      | 243,871  |          
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Cash and Cash Equivalents:                                                  |                     |                                                |            |                           |            |      |          |          
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Beginning of Period |                                                |            | 7,487,190                 |            |      |          | 5,462,779 |          
|                                                                            |                     |                                                |            |                           |            |      |          |          
|                                                                            | End of Period       |                                                | $          | 5,596,156                 |            |      | $        | 5,706,650 |          
|                                                                            |                     |                                                |            |                           |            |      |          |          

See Accompanying Notes

5



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##### Table of Contents






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 for the year ended December 31, 2000. The
accompanying financial statements of Redhook Ale Brewery, Incorporated (the
Company) have been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission. Accordingly, certain information and
footnote disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States
have been condensed or omitted pursuant to such rules and regulations. These
financial statements are unaudited but, in the opinion of management, reflect
all material adjustments necessary to present fairly the financial position,
results of operations and cash flows of the Company for the periods presented.
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

The calculation of adjusted weighted-average shares outstanding for
purposes of computing diluted earnings per share includes the dilutive effect of
all outstanding convertible redeemable preferred stock and outstanding stock
options for the periods in which the Company reports net income. The calculation
uses the treasury stock method in determining the resulting incremental average
equivalent shares outstanding when the outstanding convertible redeemable
preferred stock and outstanding stock options have a dilutive effect.

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

|                                             |            |                   |                                                |                                                   |          |                    |           |                  |        |      |           |      |          |   |           |   |          |   |           |  
|-------------------------------------------- | ---------- | ----------------- | ---------------------------------------------- | ------------------------------------------------- | -------- | ------------------ | --------- | ---------------- | ------ | ---- | --------- | ---- | -------- | - | --------- | - | -------- | - | --------- | -
|                                             |            |                   |                                                |                                                   |          | Three Months Ended |           | Six Months Ended
|                                             |            |                   |                                                |                                                   |          | June 30,           |           | June 30,        
|                                             |            |                   |                                                |                                                   |          |                    |           |                 
|                                             |            |                   |                                                |                                                   |          | 2001               |           | 2000             |        | 2001 |           | 2000
|                                             |            |                   |                                                |                                                   |          |                    |           |                  |        |      |           |     
|Basic earnings (loss) per share computation: |            |                   |                                                |                                                   |          |                    |           |                  |        |      |           |      |          |   |           |  
|                                            
|                                            
|                                            
|                                            
|                                             | Numerator: |                   |                                                |                                                   |          |                    |           |                  |        |      |           |      |          |   |           |   |         
|                                            
|                                            
|                                            
|                                            
|                                             |            | Net income (loss) |                                                | $                                                 | (340,090 | )                  |           | $                | 89,402 |      |           | $    | (866,177 | ) |           | $ | (412,986 | )
|                                             |            |                   |                                                |                                                   |          |                    |           |                  |        |      |           |      |          |   |           |  
|                                             |            |                   |                                                | Denominator:                                      |          |                    |           |                  |        |      |           |      |          |   |           |   |          |   |           |  
|                                            
|                                            
|                                            
|                                            
|                                             |            |                   |                                                | Weighted-average common shares                    |          |                    | 7,079,888 |                  |        |      | 7,686,335 |      |          |   | 7,138,376 |   |          |   | 7,687,061 |  
|                                             |            |                   |                                                |                                                   |          |                    |           |                  |        |      |           |      |          |   |           |  
|                                             |            |                   |                                                | Basic earnings (loss) per share                   |          | $                  | (0.05     | )                |        | $    | 0.01      |      |          | $ | (0.12     | ) |          | $ | (0.05     | )
|                                             |            |                   |                                                |                                                   |          |                    |           |                  |        |      |           |      |          |   |           |  
|                                             |            |                   | Diluted earnings (loss) per share computation: |                                                   |          |                    |           |                  |        |      |           |      |          |   |           |   |          |   |          
|                                            
|                                            
|                                            
|                                            
|                                             |            |                   |                                                | Numerator:                                        |          |                    |           |                  |        |      |           |      |          |   |           |   |          |   |           |  
|                                            
|                                            
|                                            
|                                            
|                                             |            |                   |                                                | Net income (loss)                                 |          | $                  | (340,090  | )                |        | $    | 89,402    |      |          | $ | (866,177  | ) |          | $ | (412,986  | )
|                                             |            |                   |                                                |                                                   |          |                    |           |                  |        |      |           |      |          |   |           |  
|                                             |            |                   |                                                | Denominator:                                      |          |                    |           |                  |        |      |           |      |          |   |           |   |          |   |           |  
|                                            
|                                            
|                                            
|                                            
|                                             |            |                   |                                                | Weighted-average common shares                    |          |                    | 7,079,888 |                  |        |      | 7,686,335 |      |          |   | 7,138,376 |   |          |   | 7,687,061 |  
|                                            
|                                            
|                                            
|                                            
|                                             |            |                   |                                                | Effect of dilutive securities:                    |          |                    |           |                  |        |      |           |      |          |   |           |   |          |   |           |  
|                                            
|                                            
|                                            
|                                            
|                                             |            |                   |                                                | Series B convertible preferred stock              |          |                    |          |                  |        |      | 1,289,872 |      |          |   |          |   |          |   |          |  
|                                            
|                                            
|                                            
|                                            
|                                             |            |                   |                                                | Stock Options, Net                                |          |                    |          |                  |        |      | 110       |      |          |   |          |   |          |   |          |  
|                                             |            |                   |                                                |                                                   |          |                    |           |                  |        |      |           |      |          |   |           |  
|                                             |            |                   |                                                | Denominator for diluted earnings (loss)
per share |          |                    | 7,079,888 |                  |        |      | 8,976,317 |      |          |   | 7,138,376 |   |          |   | 7,687,061 |  
|                                             |            |                   |                                                |                                                   |          |                    |           |                  |        |      |           |      |          |   |           |  
|                                             |            |                   |                                                | Diluted earnings (loss) per share                 |          | $                  | (0.05     | )                |        | $    | 0.01      |      |          | $ | (0.12     | ) |          | $ | (0.05     | )
|                                             |            |                   |                                                |                                                   |          |                    |           |                  |        |      |           |      |          |   |           |  

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REDHOOK ALE BREWERY, INCORPORATED

NOTES TO FINANCIAL STATEMENTS (Continued)

(Unaudited)

3. Inventories

Inventories consist of the following:

|                        |  |          |           |              |  |   |           | 
|----------------------- |  | -------- | --------- | ------------ |  | - | --------- | 
|                        |  | June 30, |           | December 31,
|                        |  | 2001     |           | 2000        
|                        |  |          |           |             
|Finished goods          |  | $        | 1,150,464 |              |  | $ | 935,229   | 
|                       
|                       
|                       
|                       
|Raw materials           |  |          | 950,255   |              |  |   | 1,126,772 | 
|                       
|                       
|                       
|                       
|Promotional merchandise |  |          | 546,302   |              |  |   | 444,584   | 
|                       
|                       
|                       
|                       
|Packaging materials     |  |          | 224,295   |              |  |   | 219,486   | 
|                        |  |          |           |              |  |   |           | 
|                        |  | $        | 2,871,316 |              |  | $ | 2,726,071 | 
|                        |  |          |           |              |  |   |           | 

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

4. Stock Repurchase Program

In May 2000, the Board of Directors authorized the repurchase of up to
500,000 shares of the Companys outstanding shares of common stock. In January
2001, the Board of Directors authorized the repurchase of an additional 250,000
shares of its outstanding shares of common stock. As of June 30, 2001, 617,500
shares of common stock had been purchased in the open market for $987,000.
During the six-month period ended June 30, 2001, 242,500 shares of common stock
had been purchased in the open market for $402,000.

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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. The
Company believes that period-to-period comparisons of its financial results
should not be relied upon as an accurate indicator of future performance.

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, 2001, the Company had gross sales of $19,655,000, an increase of 5.9% from
the six months ended June 30, 2000. The Companys sales consist predominantly of
sales of beer to third-party distributors and Anheuser-Busch, Inc. (A-B)
through the Companys long-term distribution alliance with A-B (the
Distribution Alliance). In addition, the Company derives other revenues
primarily 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 in the amount of $7 per barrel on the first 60,000 barrels it sells
annually. The excise tax burden on beer sales increases from $7 to $18 per
barrel on annual sales over 60,000 barrels and thus, if sales volume fluctuates,
federal excise taxes would change as a percentage of sales.

The Companys sales volume (shipments) increased 4.3% to 109,700 barrels
for the six months ended June 30, 2001, as compared to the same period in 2000.
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 significant number of craft brewers and their promotional pricing
and new product introductions as well as increased competition from imported
beers. Sales in the craft beer industry generally reflect a degree of
seasonality, with the first and fourth quarters historically being the slowest.
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 operates its brewing facilities
up to five days per week with multiple shifts per day. While the maximum
designed production capacity for each of the Woodinville and Portsmouth
breweries is approximately 250,000 barrels per year, the current production
capacity is approximately 250,000 barrels per year at the Woodinville facility
and 100,000 barrels per year at the Portsmouth facility. Production capacity at
the Portsmouth facility can be added in phases until the facility reaches its
maximum designed production capacity of 250,000 barrels per year. Such an
increase would require additional capital expenditures, primarily for
fermentation equipment and production personnel. The decision to add capacity is
affected by the availability of capital, construction constraints and
anticipated sales in new and existing markets.

The Companys capacity utilization has a significant impact on gross
profit. Generally, when facilities are operating at their maximum designed
production capacities, profitability is favorably affected because fixed and
semivariable operating costs, such as depreciation and production salaries, are
spread over a larger sales base. Because current period production levels have
been substantially below the Companys current production capacity, gross
margins have been negatively impacted. This impact is expected to be reduced as
actual production increases.

In addition to capacity utilization, the Company expects other factors
to influence profit margins, including: higher costs associated with the
enhancement of existing and 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.

See   Certain Considerations: Issues and Uncertainties.

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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.

|                                             |  |                    |       |                  |  |      |       |      |  |  |       |    |  |  |       |   
|-------------------------------------------- |  | ------------------ | ----- | ---------------- |  | ---- | ----- | ---- |  |  | ----- | -- |  |  | ----- | --
|                                             |  | Three Months Ended |       | Six Months Ended
|                                             |  | June 30,           |       | June 30,        
|                                             |  |                    |       |                 
|                                             |  | 2001               |       | 2000             |  | 2001 |       | 2000
|                                             |  |                    |       |                  |  |      |       |     
|Sales                                        |  |                    | 109.6 | %                |  |      | 110.4 | %    |  |  | 109.4 | %  |  |  | 110.4 | % 
|                                            
|                                            
|                                            
|                                            
|Less Excise Taxes                            |  |                    | 9.6   |                  |  |      | 10.4  |      |  |  | 9.4   |    |  |  | 10.4  |   
|                                             |  |                    |       |                  |  |      |       |      |  |  |       |    |  |  |       |   
|Net Sales                                    |  |                    | 100.0 |                  |  |      | 100.0 |      |  |  | 100.0 |    |  |  | 100.0 |   
|                                            
|                                            
|                                            
|                                            
|Cost of Sales                                |  |                    | 71.4  |                  |  |      | 69.0  |      |  |  | 73.7  |    |  |  | 71.0  |   
|                                             |  |                    |       |                  |  |      |       |      |  |  |       |    |  |  |       |   
|Gross Profit                                 |  |                    | 28.6  |                  |  |      | 31.0  |      |  |  | 26.3  |    |  |  | 29.0  |   
|                                            
|                                            
|                                            
|                                            
|Selling, General and Administrative Expenses |  |                    | 33.4  |                  |  |      | 28.7  |      |  |  | 33.1  |    |  |  | 31.8  |   
|                                             |  |                    |       |                  |  |      |       |      |  |  |       |    |  |  |       |   
|Operating Income (Loss)                      |  |                    | (4.8  | )                |  |      | 2.3   |      |  |  | (6.8  | )  |  |  | (2.8  | ) 
|                                            
|                                            
|                                            
|                                            
|Interest Expense                             |  |                    | 1.1   |                  |  |      | 1.7   |      |  |  | 1.3   |    |  |  | 1.7   |   
|                                            
|                                            
|                                            
|                                            
|Other Income  Net                           |  |                    | 0.7   |                  |  |      | 0.9   |      |  |  | 0.9   |    |  |  | 0.9   |   
|                                             |  |                    |       |                  |  |      |       |      |  |  |       |    |  |  |       |   
|Income (Loss) Before Income Taxes            |  |                    | (5.2  | )                |  |      | 1.5   |      |  |  | (7.2  | )  |  |  | (3.6  | ) 
|                                            
|                                            
|                                            
|                                            
|Income Tax Expense (Benefit)                 |  |                    | (1.7  | )                |  |      | 0.6   |      |  |  | (2.4  | )  |  |  | (1.1  | ) 
|                                             |  |                    |       |                  |  |      |       |      |  |  |       |    |  |  |       |   
|Net Income (Loss)                            |  |                    | (3.5  | )%               |  |      | 0.9   | %    |  |  | (4.8  | )% |  |  | (2.5  | )%
|                                             |  |                    |       |                  |  |      |       |      |  |  |       |    |  |  |       |   

Three Months Ended June 30, 2001 Compared to Three Months Ended June 30, 2000

Sales. Total sales increased 3.4% to $10,757,000 for the three months
ended June 30, 2001, compared to $10,408,000 in the comparable 2000 period,
resulting from a 2.4% increase in sales volume and slightly higher average
pricing net of promotional discounts, and a slight increase in other sales.
Total sales volumes for the second quarter of 2001 increased to 60,100 barrels
from 58,700 barrels for the same period in 2000. While shipments in Washington
State, the Companys largest market, increased 0.9% as compared to 2000 second
quarter shipments, west coast sales decreased 2.7% in the same period. Sales
other than wholesale beer sales, primarily retail pub revenues, totaled
$1,134,000 in the three months ended June 30, 2001, compared to $1,082,000 in
the comparable 2000 period. At June 30, 2001 and 2000, the Companys products
were distributed in 48 states.

Excise Taxes. Excise taxes decreased to $941,000, or 9.6% of net sales
in the 2001 second quarter, compared to $984,000, or 10.4% of net sales in the
comparable 2000 period. In September 2000, Washington State regulations were
modified to require beer taxes previously paid by Washington State brewers now
be paid by Washington State distributors, the effect of which was to decrease
sales prices charged distributors and decrease excise taxes. Accordingly, both
sales and excise taxes decreased as a percentage of net sales for the second
quarter of 2001.

Cost of Sales. Cost of sales increased 7.8% to $7,012,000 in the three
months ended June 30, 2001, compared to $6,506,000 in the comparable 2000
period, due to higher sales volume, increased raw material, utility and freight
costs, and a shift in product mix towards an increasing proportion of package
sales, including 12-packs. Cost of sales, as a percentage of net sales, was
71.4% for the 2001 period compared to 69.0% for the 2000 period. The utilization
rate, based upon the breweries combined current production capacity, was 68.7%
and 67.1% for quarters ended June 30, 2001 and 2000, respectively. The
utilization rate, based upon the breweries combined maximum designed capacity,
was 48.1% and 47.0% for the quarters ended June 30, 2001 and 2000, respectively.

Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to $3,276,000 in the 2001 second quarter,
compared to $2,707,000 in the 2000 second quarter due to the addition of several
new sales positions in key markets during the second half of 2000 and an
increase in expenditures for the co-op advertising and promotion program with
the Companys wholesalers. As a percentage of net sales, these expenses were
33.4% and 28.7% for the quarters ended June 30, 2001 and 2000, respectively.

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Interest Expense. Interest expense decreased to $106,000 for the second
quarter of 2001, compared to $148,000 for the comparable 2000 period, reflecting
the effect of lower outstanding debt and lower average interest rates.

Other Income  Net. Other income  net, decreased to $67,000 in the 2001
second quarter, compared to $85,000 in the 2000 second quarter. The decrease is
due to the decline in interest income resulting from lower average interest
rates offset by an increase in average balance of interest-bearing deposits.

Income Taxes. The Companys effective income tax rate was a 33.5%
benefit for the second quarter of 2001 compared to 39.6% for the second quarter
of 2000. The second quarter 2001 estimated effective tax rate is based upon an
estimate of the full-year pretax result, 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.

Six Months Ended June 30, 2001 Compared to Six Months Ended June 30, 2000

Sales. Total sales increased 5.9% to $19,655,000 for the six months
ended June 30, 2001, compared to $18,564,000 in the comparable 2000 period,
resulting from a 4.3% increase in sales volume and slightly higher average
pricing net of promotional discounts. Total sales volumes for the first six
months of 2001 increased to 109,700 barrels from 105,200 barrels for the same
period in 2000. While shipments in Washington State, the Companys largest
market, increased 0.7% as compared to the first six months of 2000, west coast
sales decreased 0.8% in the same period. Sales other than wholesale beer sales,
primarily retail pub revenues, totaled $1,946,000 in the six months ended June
30, 2001, compared to $1,917,000 in the comparable 2000 period. At June 30, 2001
and 2000, the Companys products were distributed in 48 states.

Excise Taxes. Excise taxes decreased to $1,696,000, or 9.4% of net sales
in the first six months of 2001, compared to $1,749,000, or 10.4% of net sales
in the comparable 2000 period. In September 2000, Washington State regulations
were modified to require beer taxes previously paid by Washington State brewers
now be paid by Washington State distributors, the effect of which was to
decrease sales prices charged distributors and decrease excise taxes.
Accordingly, both sales and excise taxes decreased as a percentage of net sales
for the first six months of 2001.

Cost of Sales. Cost of sales increased 10.9% to $13,231,000 in the first
six months of 2001, compared to $11,934,000 in the comparable 2000 period, due
to higher sales volume, increased raw material and utility costs, and a shift in
product mix towards an increasing proportion of package sales, including
12-packs. Cost of sales, as a percentage of net sales, was 73.7% for the 2001
period compared to 71.0% for the 2000 period. The utilization rate, based upon
the breweries combined current production capacity, was 62.7% and 60.1% for the
six months ended June 30, 2001 and 2000, respectively. The utilization rate,
based upon the breweries combined maximum designed capacity, was 43.9% and
42.1% for the six months ended June 30, 2001 and 2000, respectively.

Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to $5,953,000 in the first six months of 2001,
compared to $5,349,000 in the 2000 period due to the addition of several new
sales positions in key geographic markets during the second half of 2000 and an
increase in expenditures for the co-op advertising and promotion program with
the Companys wholesalers. As a percentage of net sales, these expenses were
33.1% and 31.8% for the six months ended June 30, 2001 and 2000, respectively.

Interest Expense.Interest expense decreased to $237,000 for the six
months ended June 30, 2001, compared to $288,000 for the comparable 2000 period,
reflecting the effect of lower outstanding debt and lower average interest
rates.

Other Income  Net. Other income  net, increased to $159,000 in the
first half of 2001, compared to $148,000 in the 2000 period. The increase is
primarily due to an increase in interest income earned on a higher average
balance of interest-bearing deposits offset by lower average interest rates.

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Income Taxes.The Companys effective income tax rate was a 33.5%
benefit for the six months ended June 30, 2001 compared to 32.0% for the 2000
period. The 2001 estimated effective tax rate is based upon an estimate of the
full-year pretax result, 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.

Liquidity and Capital Resources

The Company had $5,596,000 and $7,487,000 of cash and cash equivalents
at June 30, 2001 and December 31, 2000, respectively. At June 30, 2001, the
Company had working capital of $4,353,000. The Companys long-term debt as a
percentage of total capitalization (long-term debt, convertible redeemable
preferred stock and common stockholders equity) was 9.4% at June 30, 2001,
compared to 9.5% at December 31, 2000. Cash used in operating activities was
$979,000 for the six months ended June 30, 2001, and cash provided by operating
activities was $696,000 for the six months ended June 30, 2000. The decrease in
operating cash flow in the six months ended June 30, 2001, was due to the timing
of the collection of accounts receivable in December 2000 and payment of certain
current liabilities in January 2001.

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. On June 19, 2001, the term loan
was amended to allow for a second five-year term, maturing on June 5, 2007. As
of June 30, 2001, there was $7.2 million outstanding on the Secured Facility,
and the Companys one-month LIBOR-based borrowing rate was approximately 5.3%.
In addition, the Company has a $10 million revolving credit facility (the
Revolving Facility) with the same bank through July 1, 2002, and as of June
30, 2001, there were no borrowings outstanding on this facility. The Secured
Facility and the Revolving Facility are secured by substantially all of the
Companys assets. Through June 5, 2002, interest will accrue at a variable rate based
on the London Inter Bank Offered Rate (LIBOR), plus 1.25% to 2.00% for the
Secured Facility depending on the Companys debt-to-tangible net worth ratio.
Effective June 5, 2002, interest on the Secured Facility will accrue at LIBOR
plus 1.75% to 2.25%, depending on the debt-to-tangible net worth ratio. The
interest rate for the Revolving Facility is the applicable LIBOR plus 1.00% to
2.00%, depending on the Companys debt service-to-cash flow ratio. The Company
has the option to fix the applicable interest rate for up to twelve months by
selecting LIBOR 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 the advertising expenditures
associated with the brand investment advertising and promotion program and
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 first
six months of 2001 totaled $285,000. Capital expenditures for 2001 are expected
to total approximately $500,000.

In May 2000, the Board of Directors authorized the repurchase of up to
500,000 shares of the Companys outstanding shares of common stock. In January
2001, the Board of Directors authorized the repurchase of an additional 250,000
shares of its outstanding shares of common stock. As of June 30, 2001, 617,500
shares of common stock had been purchased in the open market for $987,000.
During the six-month period ended June 30, 2001, 242,500 shares of common stock
had been purchased in the open market for $402,000. No additional shares of
common stock were purchased in July 2001.

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.

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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 business prospects 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, increased competition from imported beers and
the introduction of fuller-flavored products by major national brewers. The
Companys revenue growth rate began to slow in late 1996, and declines in sales
volume ranged from 2.3% to 5.7% during the years 1997 through 1999, due to the
highly competitive draft beer market. Sales volumes for the year ended December
31, 2000 increased 7.6% as compared to the corresponding prior year, and sales
volumes for all quarters from September 30, 1999 through June 30, 2001 increased
from 2.0% to 14.2% as compared to corresponding prior year quarters. However, if
the Company were to experience negative sales trends, 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 may 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, depending on the level of production at the
Companys breweries in relation to current and 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 freight charges, the availability and prices of raw
materials and packaging materials, the mix between draft and bottled product
sales, the sales mix of various bottled product packages 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.Prior to June 1999 the Company had
done very limited advertising. Based upon market and competitive considerations,
the Company determined that a significant increase in such spending was
appropriate. Accordingly, in June 1999 the Company began a brand investment
program that significantly increased advertising and related costs. The
increased advertising investment, which includes a co-op program with the
Companys wholesalers, continued through 1999, 2000 and the first six months of
2001 and is expected to continue for the foreseeable future with the objective
of establishing or maintaining momentum towards capturing a larger share of the
fragmented craft beer market. This increased spending significantly increased
the Companys selling, general and administrative expenses in 1999, 2000 and the
first six months of 2001, leading to increased losses and a reduction in
stockholders equity. In addition, market and

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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. In the event that the A-B
Distribution Agreement is terminated on or before December 31, 2004, under
circumstances described in the Companys Annual Report on Form 10-K for the year
ended December 31, 2000. (see Item 1. Business  Relationship with
Anheuser-Busch, Incorporated  A-B Distribution Agreement), the terms of the
Series B Preferred Stock purchased by A-B pursuant to the A-B Investment
Agreement require the mandatory redemption of the Series B Preferred Stock on
December 31, 2004, at a redemption price equal to $12.61 per share
(approximately $16.3 million in the aggregate), plus an amount equal to
accumulated and unpaid dividends thereon, from legally available funds. Such a
mandatory redemption could have a material adverse effect on the financial
position and cash flows of the Company. While the Company believes that the
benefits of the Distribution Alliance, in particular distribution and material
cost 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.

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-Distribution Alliance wholesaler, K&L
Distributors, Inc., an A-B affiliated wholesaler in the Seattle area, accounted
for approximately 14% of the Companys sales in the first six months of 2001.
Substantially all of the remaining sales were made through the Distribution
Alliance to A-B affiliated distributors, most of whom are independent
wholesalers. A disruption of the wholesalers or A-Bs ability to distribute
products efficiently due to any significant operational problems, such as
wide-spread labor union strikes, or the loss of K&L Distributors as a customer,
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 general consumer trends
caused a decrease in the demand for beer, including craft beer, 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.

Effect of Sales Trends on Brewery Efficiency and Operations.Even though
sales volumes for 2000 increased 7.6% as compared to 1999, and sales volumes for
all quarters from September 30, 1999 through June 30, 2001 increased from 2.0%
to 14.2% as compared to corresponding prior year quarters, the Companys sales
volumes declined modestly in 1997, 1998 and the first half of 1999. Those
declines coincided with significantly slower sales growth in the highly
competitive craft beer segment. The Companys breweries have been operating at
production levels substantially below their actual and maximum designed
capacities. Operating breweries at low capacity utilization rates negatively
impacts gross margins and operating cash flows generated by the production
facilities. In 1998, the Company permanently curtailed production at its Fremont
Brewery and wrote the related assets down to their estimated net realizable
value. The Company will continue to evaluate whether it expects to recover the
costs of its two remaining production facilities over the course of their useful
lives.

Income Tax Benefits.As of December 31, 2000, the Company had federal
income tax net operating loss carryforwards (NOLs) of approximately $23.5
million, substantially all of which expire from 2012 through 2020. NOLs can
generally be utilized to offset regular tax liabilities in future years, and
carried back no more than 2 years and forward no more than 20 years. Should the
Company incur significant operating losses in the future, thus generating
additional NOLs, the Company may be required to establish a valuation allowance
if it is more likely than not that all, or a portion, of an NOL would either
expire before the Company is able to

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realize its benefit, or that future
utilization is uncertain. Such a valuation allowance would reduce the income tax
benefit recorded in the statement of operations.

Recent Accounting Pronouncements

In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for
Derivative Instruments and Hedging Activities. In June 2000, the FASB issued
SFAS No. 138, which amends certain provisions of SFAS 133 to clarify specific
areas presenting difficulties in implementation. The Company has adopted the
provisions of FAS 133/138 as of January 1, 2001. Adoption of SFAS 133/138 did
not have a material impact on the Companys results of operations, financial
position or cash flows.

In December 1999, the staff of the Securities and Exchange Commission
released Staff Accounting Bulletin No. 101 (SAB 101), Revenue Recognition,
to provide guidance on the recognition, presentation and disclosure of revenues
in financial statements. The Company believes that its revenue recognition
practices are in conformity with the guidelines in SAB 101, as revised, and that
this pronouncement did not have a material impact on its financial statements.

In March 2000, the FASB issued Interpretation No. 44, Accounting for
Certain Transactions involving Stock Compensation: an interpretation of APB
Opinion No. 25. Interpretation No. 44 provides clarification of certain issues,
such as the determination of who is an employee, the criteria for determining
whether a plan qualifies as a non-compensatory plan, the accounting consequence
of various modifications to the terms of a previously fixed stock option or
award and the accounting for an exchange of stock compensation awards in a
business combination. The Company believes that its accounting for stock-based
compensation is in conformity with this guidance, and therefore Interpretation
No. 44 did not have an impact on the Companys financial condition or results of
operations.

In June 2001, the FASB issued SFAS No. 141, Business Combinations, and
No. 142, Goodwill and Other Intangible Assets, effective for fiscal years
beginning after December 15, 2001. Under the new rules, goodwill and intangible
assets deemed to have indefinite lives will no longer be amortized but will be
subject to annual impairment tests in accordance with the Statements. Other
intangible assets will continue to be amortized over their useful lives.
Adoption of FAS 141/142 did not have an impact on the Companys financial
condition or results of operations.




ITEM 3.Quantitative and Qualitative Disclosures about Market Risk

The Company has assessed its vulnerability to certain market risks,
including interest rate risk associated with financial instruments included in
cash and cash equivalents and long-term debt. Due to the nature of these
investments and the Companys investment policies, the Company believes that the
risk associated with interest rate fluctuations related to these financial
instruments does not pose a material risk.

The Company did not have any derivative financial instruments as of June
30, 2001.







PART II.

ITEM 4. Submission of Matters to a Vote of Security Holders

The Companys Annual Meeting of Shareholders was held on May 22, 2001. The
following matters were voted upon by the shareholders with the results as
follows:



| |  |  | (1) The following persons were nominated by the Board of Directors and each was
elected to serve as a director until the next Annual Meeting of Shareholders or
until his or her earlier retirement, resignation or removal: Paul S. Shipman, M.
Colleen Beckemeyer, Frank H. Clement, Jerry D. Jones, Anthony J. Short, Walter
F. Walker.
| |  |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| |  |  | The number of votes cast for or withheld for each director nominee was as
follows:
| |  |  | ----------------------------------------------------------------------------------

|                      |  |     |           |          |  |  |        | 
|--------------------- |  | --- | --------- | -------- |  |  | ------ | 
|Nominee               |  | For |           | Withheld
|Paul S. Shipman       |  |     | 6,998,158 |          |  |  | 34,983 | 
|                     
|                     
|                     
|                     
|M. Colleen Beckemeyer |  |     | 6,990,088 |          |  |  | 43,053 | 
|                     
|                     
|                     
|                     
|Frank H. Clement      |  |     | 6,998,083 |          |  |  | 35,058 | 
|                     
|                     
|                     
|                     
|Jerry D. Jones        |  |     | 6,999,343 |          |  |  | 33,798 | 
|                     
|                     
|                     
|                     
|Anthony J. Short      |  |     | 6,989,988 |          |  |  | 43,153 | 
|                     
|                     
|                     
|                     
|Walter F. Walker      |  |     | 6,996,267 |          |  |  | 36,874 | 



| |  |  | Ms. Colleen Beckemeyer,
an A-B designee to the Companys Board of Directors, has
resigned from the Companys Board of Directors, and the new
A-B designee, Mr. Steve Bagwell, has been appointed to the
Companys Board of Directors to fill the vacancy created by
Ms. Beckemeyers resignation.
| |  |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |  |                                                                                                                                                                                                                                                                                                  
| |  |  | (2) The shareholders voted 7,016,847 shares in the affirmative, 11,024 shares in
the negative and 5,270 shares abstained to ratify the appointment of Ernst &
Young LLP, as independent auditors for the Companys fiscal year ending December
31, 2001.                                         

Audit Committee Membership.Rule 4350(d)(2)(A) of the National
Association of Securities Dealers (the NASD) generally requires an audit
committee to be composed of at least three members of the Board of Directors who
are independent directors as defined in NASD Rule 4200(a)(14). However, NASD
Rule 4350(d)(2)(B), allows an audit committee to have one non-independent
director if the Board of Directors determines, in exceptional and limited
circumstances, that membership on the audit committee by the director is
required by the best interests of the Company and its shareholders.

Mr. Anthony Short, a member of the Companys Audit Committee, is an
employee of A-B, which beneficially owns more 25% of the Companys voting
securities. Therefore, Mr. Short is not an independent director.

The Board of Directors has determined that for a number of reasons, Mr.
Shorts membership on the Companys Audit Committee is required by the best
interests of the Company and its shareholders. First, the Company has agreed
with A-B that one of the directors designated by A-B serve as a member on each
committee of the Board of Directors, including the Audit Committee. Mr. Short is
A-Bs designee to the Audit Committee. In addition, the Board of
Directors has determined that Mr. Short is a valuable member of
the audit committee.




ITEM 6. Exhibits and Reports on Form 8-K

(a)  Exhibits

The following exhibits are filed as part of this report.

|      |  |                                                                                                                                    
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------
|3.2   |  | Amended and Restated Bylaws of Registrant, dated May 22, 2001                                                                      
|     
|     
|     
|     
|10.44 |  | Fifth Amendment to Amended and Restated Credit Agreement between U.S. Bank
National Association and Registrant, dated June 19, 2001

(b)  Reports on Form 8-K

None were filed during the quarter ended June 30, 2001.

ITEMS 1, 2, 3 and 5 of PART II are not applicable and have been omitted.

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SIGNATURES

Pursuant to the requirements 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.

|                |  |                                   |  |                                                                                                
|--------------- |  | --------------------------------- |  | -----------------------------------------------------------------------------------------------
|August 13, 2001 |  | REDHOOK ALE BREWERY, INCORPORATED
|               
|               
|               
|               
|                |  | BY:                               |  | /s/ David J. Mickelson                                                                         
|                |  |                                   |  |                                                                                                
|                |  |                                   |  | David J. MickelsonExecutive Vice President,
Chief Financial Officer
and Chief Operating
Officer
|               
|               
|               
|               
|                |  |                                   |  |                                                                                                
|                |  | BY:                               |  | /s/ Anne M. Mueller                                                                            
|                |  |                                   |  |                                                                                                
|                |  |                                   |  | Anne M. MuellerController and Treasurer,Principal Accounting
Officer                           

16