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

                                    FORM 10-Q


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


                  FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999


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



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


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



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


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


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


   Common stock, par value $.005 per share: 7,687,786 shares outstanding as of
                                 June 30, 1999.

                    Page 1 of 15 sequentially numbered pages

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<PAGE>   2

                        REDHOOK ALE BREWERY, INCORPORATED

                                    FORM 10-Q

                  FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999

                                TABLE OF CONTENTS



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

ITEM 1.   Financial Statements

                Balance Sheets
                      June 30, 1999 and December 31, 1998 ...........................    3

                Statements of Operations
                      Three Months Ended June 30, 1999 and 1998
                      and Six Months Ended June 30, 1999 and 1998....................    4

                Statements of Cash Flows
                      Six Months Ended June 30, 1999 and 1998........................    5

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

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


PART II.  OTHER INFORMATION

ITEM 4.   Submission of Matters to a Vote of Security Holders........................   14

ITEM 6.   Exhibits and Reports on Form 8-K...........................................   15
</TABLE>


                                       2
<PAGE>   3
                        REDHOOK ALE BREWERY, INCORPORATED

                                 BALANCE SHEETS


<TABLE>
<CAPTION>
                                                                        June 30,        DECEMBER 31,
                                                                          1999              1998
                                                                      ------------      ------------
                                                                       (Unaudited)
<S>                                                                   <C>               <C>
                                     ASSETS
Current Assets:
  Cash and Cash Equivalents .....................................     $  4,431,221      $  3,010,448
  Accounts Receivable ...........................................        2,065,779         1,525,708
  Inventories ...................................................        2,308,387         2,267,410
  Income Taxes Receivable .......................................               --           469,272
  Other .........................................................          339,028           303,623
                                                                      ------------      ------------

    Total Current Assets ........................................        9,144,415         7,576,461
Fixed Assets, Net ...............................................       79,032,558        80,211,312
Assets Held for Sale ............................................          588,701         1,105,475
Other Assets ....................................................          603,219           634,781
                                                                      ------------      ------------

      Total Assets ..............................................     $ 89,368,893      $ 89,528,029
                                                                      ============      ============


                        LIABILITIES, PREFERRED STOCK
                      AND COMMON STOCKHOLDERS' EQUITY

Current Liabilities:
  Accounts Payable ..............................................     $  2,942,633      $  2,231,602
  Accrued Salaries, Wages and Payroll Taxes .....................        1,358,537         1,451,936
  Refundable Deposits ...........................................        1,463,606         1,310,366
  Other Accrued Expenses ........................................          571,074           466,734
  Current Portion of Long-Term Debt .............................          450,000           450,000
                                                                      ------------      ------------

    Total Current Liabilities ...................................        6,785,850         5,910,638
                                                                      ------------      ------------

Long-Term Debt, Net of Current Portion ..........................        7,650,000         7,875,000
                                                                      ------------      ------------

Deferred Income Taxes ...........................................        2,081,715         2,405,889
                                                                      ------------      ------------

Convertible Redeemable Preferred Stock ..........................       16,032,855        16,010,655
                                                                      ------------      ------------

Common Stockholders' Equity:
  Common Stock, Par Value $0.005 per Share, Authorized,
    50,000,000 Shares; Issued and Outstanding, 7,687,786 Shares
    in 1999 and 7,687,486 in 1998 ...............................           38,439            38,438
  Additional Paid-In Capital ....................................       56,989,631        56,888,633
  Retained Earnings (Deficit) ...................................         (209,597)          398,776
                                                                      ------------      ------------

      Total Common Stockholders' Equity .........................       56,818,473        57,325,847
                                                                      ------------      ------------
        Total Liabilities, Preferred Stock and
          Common Stockholders' Equity ...........................     $ 89,368,893      $ 89,528,029
                                                                      ============      ============
</TABLE>


                             See Accompanying Notes


                                       3
<PAGE>   4
                        REDHOOK ALE BREWERY, INCORPORATED

                            STATEMENTS OF OPERATIONS

                                   (Unaudited)


<TABLE>
<CAPTION>
                                                    THREE MONTHS ENDED JUNE 30,        SIX MONTHS ENDED JUNE 30,
                                                   -----------------------------     -----------------------------
                                                        1999             1998             1999            1998
                                                   ------------     ------------     ------------     ------------
<S>                                                <C>              <C>              <C>              <C>
Sales .........................................    $  9,308,704     $  9,918,427     $ 16,983,600     $ 18,423,037
Less Excise Taxes .............................         865,458          933,161        1,568,105        1,742,784
                                                   ------------     ------------     ------------     ------------

Net Sales .....................................       8,443,246        8,985,266       15,415,495       16,680,253
Cost of Sales .................................       5,785,682        6,224,093       10,885,751       12,364,940
                                                   ------------     ------------     ------------     ------------

Gross Profit ..................................       2,657,564        2,761,173        4,529,744        4,315,313
Special Valuation Provision ...................              --        5,172,650               --        5,172,650
Selling, General and Administrative Expenses ..       3,084,414        2,504,442        5,256,833        4,833,628
                                                   ------------     ------------     ------------     ------------

Operating Income (Loss) .......................        (426,850)      (4,915,919)        (727,089)      (5,690,965)
Interest Expense ..............................         127,679          180,552          258,097          362,010
Other Income-- Net ............................          47,623           26,577           83,368           41,877
                                                   ------------     ------------     ------------     ------------

Income (Loss) before Income Taxes .............        (506,906)      (5,069,894)        (901,818)      (6,011,098)
Income Tax Expense (Benefit) ..................        (177,425)      (1,785,767)        (315,645)      (2,011,655)
                                                   ------------     ------------     ------------     ------------

Net Income (Loss) .............................    $   (329,481)    $ (3,284,127)    $   (586,173)    $ (3,999,443)
                                                   ============     ============     ============     ============

Basic Earnings (Loss) per Share ...............    $      (0.04)    $      (0.43)    $      (0.08)    $      (0.52)
                                                   ============     ============     ============     ============

Diluted Earnings (Loss) per Share .............    $      (0.04)    $      (0.43)    $      (0.08)    $      (0.52)
                                                   ============     ============     ============     ============
</TABLE>


                             See Accompanying Notes


                                       4
<PAGE>   5
                        REDHOOK ALE BREWERY, INCORPORATED

                            STATEMENTS OF CASH FLOWS

                                   (Unaudited)


<TABLE>
<CAPTION>
                                                            SIX MONTHS ENDED JUNE 30,
                                                          ----------------------------
                                                              1999             1998
                                                          -----------      -----------
<S>                                                       <C>              <C>
OPERATING ACTIVITIES
Net Loss ............................................     $  (586,173)     $(3,999,443)
Adjustments to Reconcile Net Loss to Net Cash
  Provided by Operating Activities:
    Depreciation and Amortization ...................       1,628,119        1,717,988
    Special Valuation Provision .....................              --        5,172,650
    Deferred Income Tax Provision ...................        (324,174)      (1,650,159)
    Net Change in Operating Assets and Liabilities ..         878,772        2,058,468
                                                          -----------      -----------

Net Cash Provided by Operating Activities ...........       1,596,544        3,299,504
                                                          -----------      -----------

INVESTING ACTIVITIES
Expenditures for Fixed Assets .......................        (537,113)        (755,411)
Proceeds from Sale of Assets and Other ..............         485,343               --
                                                          -----------      -----------

Net Cash Used in Investing Activities ...............         (51,770)        (755,411)
                                                          -----------      -----------

FINANCING ACTIVITIES
Repayments on Debt ..................................        (225,000)        (292,824)
Officer Note Repayment and Other, Net ...............         100,999           83,000
                                                          -----------      -----------

Net Cash Used in Financing Activities ...............        (124,001)        (209,824)
                                                          -----------      -----------

Increase in Cash and Cash Equivalents ...............       1,420,773        2,334,269
Cash and Cash Equivalents:
  Beginning of Year .................................       3,010,448          892,165
                                                          -----------      -----------

  End of Period .....................................     $ 4,431,221      $ 3,226,434
                                                          ===========      ===========
</TABLE>


                             See Accompanying Notes


                                       5
<PAGE>   6
                        REDHOOK ALE BREWERY, INCORPORATED

                         NOTES TO FINANCIAL STATEMENTS
                                  (Unaudited)


1.  BASIS OF PRESENTATION

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


2.  EARNINGS (LOSS) PER SHARE

       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 they are dilutive.

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

<TABLE>
<CAPTION>
                                                          THREE MONTHS ENDED JUNE 30,        SIX MONTHS ENDED JUNE 30,
                                                          -----------      -----------      -----------      -----------
                                                              1999             1998            1999             1998
                                                          -----------      -----------      -----------      -----------
<S>                                                       <C>              <C>              <C>              <C>
       Basic earnings (loss) per share computation:
         Numerator:
           Net income (loss) ........................     $  (329,481)     $(3,284,127)     $  (586,173)     $(3,999,443)
                                                          -----------      -----------      -----------      -----------

         Denominator:
           Weighted-average common shares ...........       7,687,687        7,687,486        7,687,587        7,687,486
                                                          -----------      -----------      -----------      -----------

               Basic earnings (loss) per share ......     $     (0.04)     $     (0.43)     $     (0.08)     $     (0.52)
                                                          ===========      ===========      ===========      ===========

       Diluted earnings (loss) per share computation:
         Numerator:
           Net income (loss) ........................     $  (329,481)     $(3,284,127)     $  (586,173)     $(3,999,443)
                                                          -----------      -----------      -----------      -----------

         Denominator:
           Weighted-average common shares ...........       7,687,687        7,687,486        7,687,587        7,687,486
                                                          -----------      -----------      -----------      -----------

                 Diluted earnings (loss) per share ..     $     (0.04)     $     (0.43)     $     (0.08)     $     (0.52)
                                                          ===========      ===========      ===========      ===========
</TABLE>


                                       6
<PAGE>   7
                        REDHOOK ALE BREWERY, INCORPORATED

                    NOTES TO FINANCIAL STATEMENTS (Continued)
                                  (Unaudited)



3.  INVENTORIES

       Inventories consist of the following:

<TABLE>
<CAPTION>
                                        JUNE 30,        DECEMBER 31,
                                         1999              1998
                                      ----------         ----------
<S>                                   <C>                <C>
Finished goods .....................  $1,055,237         $  862,246
Raw materials ......................     794,004            998,133
Promotional merchandise ............     228,474            222,042
Packaging materials ................     230,672            184,989
                                      ----------         ----------
                                      $2,308,387         $2,267,410
                                      ==========         ==========
</TABLE>


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


4.  ASSETS HELD FOR SALE

       In January 1998, production at the Fremont Brewery was significantly
reduced and the brewery served as a backup facility to the Woodinville Brewery.
During the quarter ended June 30, 1998, the Company analyzed its current and
future production capacity requirements and its plans for the Fremont Brewery
production assets. Based upon that analysis, the Company decided to permanently
curtail the Fremont Brewery operations and sell substantially all of those
production assets. In accordance with FASB Statement No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of
("Statement 121"), the Fremont production assets were written down to an
estimate of their net realizable value in the quarter ended June 30, 1998. The
write-down was recorded through a non-cash valuation provision totaling $5.2
million. The special valuation provision, net of the related income tax benefit,
totaled $3.4 million.

       The assets are presented as Assets Held for Sale on the balance sheet as
of June 30, 1999, at their estimated fair market value of $589,000. The Company
has received deposits on substantially all of the remaining equipment and
currently expects to sell that equipment during 1999 for an amount approximately
equal to its estimated net realizable value.

       The special valuation provision and the related assets held for sale were
recorded in the three-month period ended June 30, 1998, as follows:

<TABLE>
       <S>                                                                    <C>
       Brewery equipment ..................................................   $ 8,577,598
       Building ...........................................................     1,068,824
                                                                              -----------
                                                                                9,646,422

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

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

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

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

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


                                       7
<PAGE>   8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

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

OVERVIEW

       Since its formation, the Company has focused its business activities on
the brewing, marketing and selling of craft beers. For the six months ended June
30, 1999, the Company had gross sales of $16,984,000, a decrease of 7.8% from
the six months ended June 30, 1998. The Company's sales consist predominantly of
sales of beer to third-party distributors and Anheuser-Busch, Inc. ("A-B")
through the Distribution Alliance. In addition, the Company derives other
revenues 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. The excise tax burden on beer sales increases from $7 to $18
per barrel on annual production over 60,000 barrels and thus, if sales volume
fluctuates, federal excise taxes would change as a percentage of sales.

       The Company's sales volume declined 10.0% to 94,600 for the six months
ended June 30, 1999, compared to the same period in 1998. 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
number of craft brewers and promotional pricing, competition from foreign and
large domestic brewers, the opening of new distribution territories and new
product introductions. The competitive landscape has been affected by the number
of craft beer companies and the number of different products they offer, 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 and the rest of the year typically demonstrating
relatively stronger sales. The Company has historically operated with little or
no backlog, and its ability to predict sales for future periods is limited. The
Company believes that period-to-period comparisons of its financial results
should not be relied upon as an accurate indicator of future performance.

       Under normal circumstances, the Company generally operates its brewing
facilities up to five days per week, two shifts per day. The Company has
increased its company-wide annual production capacity from approximately 3,000
barrels at its first brewery in the Ballard neighborhood of Seattle in 1982 to
approximately 350,000 barrels as of June 30, 1999, after the 75,000 barrel
decrease related to the Fremont Brewery (see discussion below). Production
capacity of each facility can be added in phases until the facility reaches its
maximum designed production capacity. The Portsmouth Brewery's current
production capacity is approximately 100,000 barrels per year and its maximum
designed production capacity is approximately 250,000 barrels per year.
Additional capital expenditures and production personnel will be required to
bring the Portsmouth Brewery to its maximum designed capacity.

       The Company's maximum designed production capacity at June 30, 1999,
totaled 500,000 barrels per year, 250,000 barrels at the Woodinville brewery and
the Portsmouth brewery. The Company's capacity utilization has a significant
impact on gross profit. When facilities are operating at their maximum designed
production capacities, profitability is favorably affected by spreading fixed
and semivariable operating costs, such as depreciation and production salaries,
over a larger sales base. Most capital costs associated with building a new
brewery, and fixed and semivariable costs related to operating a new brewery,
are incurred prior to, or upon commencement of, production at a facility.
Because the actual production level may be substantially below the facility's
maximum designed production capacity, gross margins are negatively impacted.
This impact is reduced when actual production levels increase.

       In January 1998, production at the Fremont Brewery was significantly
reduced, and the brewery served as a backup facility to the Woodinville Brewery.
During the quarter ended June 30, 1998, the Company analyzed its current and
future production capacity requirements and its plans for the Fremont Brewery
production assets. Based upon that analysis, the Company decided to permanently
curtail the Fremont Brewery operations and sell substantially all of those
production assets. In compliance with Statement 121, the Fremont production
assets were written down to an estimate of their net realizable value in the
quarter ended June 30, 1998. The write-down was recorded through a non-cash
valuation provision totaling $5.2 million. The special valuation provision, net
of the related income tax benefit, totaled $3.4 million.


                                       8
<PAGE>   9
       In addition to capacity utilization, the Company expects other factors to
influence profit margins, including higher costs associated with the development
of newer distribution territories, such as increased shipping, advertising,
marketing and sales personnel costs; fees related to the distribution agreement
with A-B; changes in packaging and other material costs; and changes in product
sales mix. The incremental cost of shipping beer from the Company's breweries
will increase if the volume of beer supplied to more distant markets increases.

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


RESULTS OF OPERATIONS

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

<TABLE>
<CAPTION>
                                                            THREE MONTHS ENDED          SIX MONTHS ENDED
                                                                 JUNE 30,                   JUNE 30,
                                                          ---------------------       ---------------------
                                                            1999          1998         1999           1998
                                                          -------       -------       -------       -------
<S>                                                       <C>           <C>           <C>           <C>
       Sales .........................................      110.3%        110.4%        110.2%        110.4%
       Less Excise Taxes .............................       10.3          10.4          10.2          10.4
                                                          -------       -------       -------       -------
       Net Sales .....................................      100.0         100.0         100.0         100.0
       Cost of Sales .................................       68.5          69.3          70.6          74.1
                                                          -------       -------       -------       -------
       Gross Profit ..................................       31.5          30.7          29.4          25.9
       Special Valuation Provision ...................        0.0          57.6           0.0          31.0
       Selling, General and Administrative Expenses ..       36.5          27.9          34.1          29.0
                                                          -------       -------       -------       -------
       Operating Income (Loss) .......................       (5.0)        (54.8)         (4.7)        (34.1)
       Interest Income (Expense) -- Net ..............       (1.0)         (1.7)         (1.2)         (1.9)
                                                          -------       -------       -------       -------
       Income (Loss) Before Income Taxes .............       (6.0)        (56.5)         (5.9)        (36.0)
       Provision (Benefit) for Income Taxes ..........       (2.1)        (19.9)         (2.1)        (12.0)
                                                          -------       -------       -------       -------
       Net Income (Loss) .............................       (3.9)%       (36.6)%        (3.8)%       (24.0)%
                                                          =======       =======       =======       =======
</TABLE>


THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THREE MONTHS ENDED JUNE 30, 1998

       Sales. Sales decreased 6.1% to $9,309,000 for three months ended June 30,
1999, compared to $9,918,000 for the comparable 1998 period, resulting from an
8.5% decrease in sales volume partially offset by slightly higher average sales
prices. Sales volumes for the second quarter of 1999 decreased to 51,400 barrels
from 56,200 barrels for the same period in 1998. Sales volume in Washington
State, the Company's largest market, was approximately the same in the second
quarter of 1999 as volume in the second quarter of 1998. Sales other than
wholesale beer sales, primarily retail pub revenues, totaled $978,000 in the
three months ended June 30, 1999, compared to $953,000 in comparable 1998
period. At June 30, 1999 and 1998, the Company's products were distributed in 48
and 47 states, respectively.

       Excise Taxes. Excise taxes decreased to $865,000, or 10.3% of net sales,
for the second quarter of 1999, compared to $933,000, or 10.4% of net sales, for
the comparable period of 1998.

       Cost of Sales. Cost of sales decreased to $5,786,000 for three months
ended June 30, 1999 from $6,224,000 for same period in 1998, primarily due to
the lower sales volume, decreased packaging and other material costs, and
increased efficiency. The combined utilization rate of maximum designed capacity
for the operating breweries was 41.1% and 45.0% for quarters ended June 30, 1999
and 1998, respectively. Despite the decrease in capacity utilization, cost of
sales, as a percentage of net sales, decreased to 68.5% for the 1999 period,
compared to 69.3% for the 1998 period.


                                       9
<PAGE>   10
       Special Valuation Provision. In the quarter ended June 30, 1998, the
Fremont production assets were written down to an estimate of their net
realizable value in compliance with FASB Statement No. 121. The write-down was
recorded through a non-cash valuation provision totaling $5.2 million.

       Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to $3,084,000 for the second quarter of 1999
from $2,504,000 for the same period of 1998. As a percentage of net sales, these
expenses were 36.5% and 27.9% for the quarters ended June 30, 1999 and 1998,
respectively. The increase is due primarily to the June 1999 launch of an
advertising campaign in three key markets, partially offset by cost savings in
general and administrative costs such as office rent and compensation. The
Company expects to continue its significantly increased advertising spending for
the remainder of 1999.

       Interest Expense. Interest expense totaled $128,000 for the second
quarter of 1999, compared to $181,000 for the comparable 1998 period, reflecting
lower outstanding debt and lower interest rates.

       Other Income -- Net. Other income increased to $48,000 in the second
quarter of 1999, compared to $27,000 in the same 1998 quarter due to a higher
average balance of interest-bearing deposits.

       Income Taxes. The Company's effective income tax rate was 35.0% for the
second quarter of 1999 compared to 35.2% for the second quarter of 1998.


SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998

       Sales. Sales decreased 7.8% to $16,984,000 for the six months ended June
30, 1999, compared to $18,423,000 for the comparable 1998 period, as a 10.0%
decrease in total sales volumes was partially offset by a slight increase in
average sales prices. Sales volumes for the first six months of 1999 decreased
to 94,600 barrels from 105,100 barrels for the same period in 1998. Sales volume
in Washington State, the Company's largest market, decreased in the first six
months of 1999 compared to the same 1998 period. The Company's other sales
totaled $1,679,000 for the six months ended June 30, 1999, compared to
$1,643,000 for comparable 1998 period.

       Excise Taxes. Excise taxes decreased to $1,568,000, or 10.2% of net
sales, for the first six months of 1999, compared to $1,743,000, or 10.4% of net
sales, for the comparable period of 1998.

       Cost of Sales. Cost of sales decreased to $10,886,000 for six months
ended June 30, 1999 from $12,365,000 for same period in 1998, primarily due to
the lower sales volume, the positive effect of decreased costs at the Fremont
Brewery and decreased packaging and other material costs. The combined
utilization rate of maximum designed capacity for the operating breweries was
37.8% and 39.1% for six months ended June 30, 1999 and 1998, respectively. Cost
of sales, as a percentage of net sales, decreased to 70.6% for the 1999 period,
compared to 74.1% for the 1998 period.

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

       Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to $5,257,000 for the first six months of 1999
from $4,834,000 for the same period of 1998. As a percentage of net sales, these
expenses were 34.1% and 29.0% for the six months ended June 30, 1999 and 1998,
respectively. The increase was primarily due to the June 1999 launch of an
advertising campaign in three key markets, offset partially by reductions in
sales personnel and other marketing costs in early 1998, in addition to lower
rent and compensation expenses.

       Interest Expense. Interest expense totaled $258,000 for the six months of
1999, compared to $362,000 for the comparable 1998 period, reflecting lower
outstanding debt and lower interest rates.


                                       10
<PAGE>   11
       Other Income -- Net. Other income increased to $83,000 in 1999, compared
to $42,000 in 1998 due to a higher average balance of interest-bearing deposits.

       Income Taxes. The Company's effective income tax rate increased to 35.0%
benefit for the six months ended June 30, 1999 from 33.5% for the same period in
1998.


LIQUIDITY AND CAPITAL RESOURCES

       The Company had $4,431,000 and $3,010,000 of cash and cash equivalents at
June 30, 1999 and December 31, 1998, respectively. At June 30, 1999, the Company
had working capital of $2,359,000. The Company's long-term debt as a percentage
of total capitalization (long-term debt, preferred stock and common
stockholders' equity) was 10.0% and 10.2% as of June 30, 1999 and December 31,
1998, respectively. Cash provided by operating activities totaled $1,597,000 and
$3,300,000 for the six months ended June 30, 1999 and 1998, respectively. The
amounts include the collection of income tax refunds totaling approximately
$500,000 and $1 million, in the respective periods.

       On June 5, 1997, the Company converted the $9 million outstanding balance
of its secured bank facility (the "Secured Facility") to a five-year term loan
with a 20-year amortization schedule. As of June 30, 1999, there was $8.1
million outstanding on the Secured Facility, and the Company's one-month
IBOR-based borrowing rate was approximately 6.3%. In addition, the Company has a
$10 million revolving credit facility (the "Revolving Facility") with the same
bank through July 1, 2001, and as of June 30, 1999, there were no borrowings
outstanding on this facility. The Revolving Facility is secured with the same
assets that are collateral for the Secured Facility. Interest accrues at a
variable rate based on the Inter Bank Offered Rate ("IBOR"), plus 1.25% to 2.00%
for the Secured Facility, depending on the Company's debt-to-tangible net worth
ratio. The Company can fix the rate by selecting IBOR for one- to twelve-month
periods as a base. The interest rate for the Revolving Facility is the
applicable LIBOR plus 1.00% to 2.00%, depending on the Company's debt-to-cash
flow ratio.

       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 significant increase in
advertising expenditures, and working capital and capital expenditure
requirements, through cash on hand, operating cash flow, proceeds from the sale
of Assets Held for Sale and, to the extent required and available, bank
borrowings and offerings of debt or equity securities.

       Capital expenditures for the six months ended June 30, 1999, totaled
$537,000. Capital expenditures for 1999 are expected to total approximately
$900,000.

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


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


                                       11
<PAGE>   12
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, the introduction of fuller-flavored products
by major national brewers and increased competition from imported beers. The
Company's revenue growth rate began to slow in late 1996, and sales declined in
1997, 1998 and in the first six months of 1999, due primarily to slower sales in
the highly competitive draft beer market. If negative sales trends were to
continue, the Company's future sales and results of operations would be
adversely affected. The Company has historically operated with little or no
backlog and, therefore, its ability to predict sales for future periods is
limited.

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

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

       Advertising and Promotional Costs. While the Company has previously done
very limited advertising, based upon market and competitive considerations the
Company has determined that a significant increase in such spending is
appropriate. Accordingly, in June 1999 the Company began a brand investment
program that significantly increased advertising and related costs in the 1999
second quarter. The increased advertising expenses are expected to continue into
the year 2000 with the objective of establishing momentum towards capturing a
larger share of the fragmented craft beer market. This increased spending is
expected to significantly increase the Company's net losses and decrease its
stockholders' equity. In addition, market and competitive considerations could
require an increase in other promotional costs associated with developing
existing and new markets.

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

       Dependence on Third-Party Distributors. The Company relies heavily on
third-party distributors for the sale of its products to retailers. The
Company's most significant non-Alliance wholesaler, K&L Distributors, Inc., an
A-B affiliated wholesaler in the Seattle area, accounted for approximately 16.3%
of the Company's sales in the first six months of 1999. Substantially all of the
remaining sales volumes are now through the Distribution Alliance to A-B
affiliated distributors, most of whom are independent wholesalers. A disruption


                                       12
<PAGE>   13
of 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 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.

       Impact of Year 2000. Some of the Company's computer programs were written
using two digits rather than four to define the applicable year. As a result,
those computer programs have time-sensitive software that recognize a date using
"00" as the year 1900 rather than the year 2000. In addition, some of the
microprocessors and control systems integrated in the Company's operations are
not programmed to recognize dates beyond the year 1999. This could cause a
system failure or miscalculations causing disruptions of operations, including,
among other things, a temporary inability to process transactions, send
invoices, operate certain production equipment or engage in similar normal
business activities.

       The Company completed an assessment on a significant portion of its
information systems and completed a software upgrade so that those computer
systems will function properly with respect to dates in the year 2000 and
thereafter. In addition, the Company has completed the assessment of the
remaining critical systems, primarily related to production operations, and
expects that it will have all critical systems tested and compliant before the
end of 1999. The costs associated with all software upgrades or modifications
are currently expected to be approximately $50,000.

       The Company is working directly with key vendors, service providers and
business partners, such as A-B, malt and packaging suppliers, and utilities, in
order to avoid any business interruptions in the year 2000 and thereafter. Steps
are being taken to understand key third parties' ability to continue providing
services and products through the change to 2000. The Company sent out detailed
questionnaires to key third parties to verify Year 2000 readiness and is
conducting on-going risk analysis based upon the responses to those
questionnaires. However, the Company has no means of ensuring that external
agents will be Year 2000 ready. The inability of third parties to complete their
Year 2000 compliance process in a timely fashion could have a material adverse
effect on the Company's results of operations.

       In addition, the Company is in the process of completing its contingency
planning for all risk areas. The contingency plans include, among other things,
manual "work-arounds" for potential software and hardware failures, and an
increase in year-end inventory to allow for production disruptions that could
occur in January 2000.

       The project is expected to be completed prior to any potential negative
impact on the Company's operations or information systems. The Company believes
that the new software will not pose significant operational problems for its
computer systems. However, if such modifications and conversions are not made,
or if the upgrades do not function properly, or are not completed timely, the
Year 2000 compliance issue could have a significant negative adverse impact on
the results of operations of the Company.

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


                                       13
<PAGE>   14
RECENT ACCOUNTING PRONOUNCEMENTS

       In June 1997, the FASB issued Statement No. 130, Reporting Comprehensive
Income, and Statement No. 131, Disclosures about Segments of an Enterprise and
Related Information. In February 1998, the FASB issued Statement No. 132,
Disclosures about Pensions and Other Postretirement Benefits. All of those
statements were effective for the year ended December 31, 1998. Statement Nos.
130 and 132 are not applicable to the Company's operations. The disclosures
prescribed by Statement No. 131 are not required for the Company because retail
pub revenues, the largest component of sales other than wholesale beer sales, do
not meet the minimum quantitative thresholds.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

       The Company does not have any derivative financial instruments as of June
30, 1999. However, the Company is exposed to interest rate risk. The Company's
long-term debt bears interest at a rate that is tied to a variable rate.
Information pertaining to the Company's debt balance and terms is set forth in
Item 7. "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and in Note 5 of "Notes to Financial Statements" included in the
Company's Annual Report on Form 10-K.


PART II.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

The Company's Annual Meeting of Shareholders was held on May 20, 1999. 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, Gordan A. Bowker, John
       T. Carleton, Frank H. Clement, Jerry D. Jones, Bruce M. Sandison, Walter
       F. Walker and Dennis P. Weston.

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

<TABLE>
<CAPTION>
       NOMINEE                                FOR                    WITHHELD
       -------                                ---                    --------
<S>                                        <C>                       <C>
       Paul S. Shipman                     8,377,153                  50,525
       M. Colleen Beckemeyer               8,344,208                  53,470
       Gordon A. Bowker                    8,339,258                  48,420
       John T. Carleton                    8,337,473                  50,205
       Frank H. Clement                    8,340,308                  47,370
       Jerry D. Jones                      8,339,748                  47,930
       Bruce M. Sandison                   8,307,728                  79,950
       Walter F. Walker                    8,341,228                  46,450
       Dennis P. Weston                    8,337,773                  49,905
</TABLE>

       (2) The shareholders voted 8,352,375 shares in the affirmative, 23,539
       shares in the negative and 11,764 shares abstained to ratify the
       appointment of Ernst & Young LLP, as independent auditors for the
       Company's year ending December 31, 1999.


                                       14
<PAGE>   15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a)    EXHIBITS

       The following exhibits are filed as part of this report.

            27   Financial Data Schedule for the six months ended June 30, 1999.

(b)    REPORTS ON FORM 8-K
       None were filed during the quarter ended June 30, 1999.


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




                                    SIGNATURE


Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Seattle,
State of Washington, on August 11, 1999.


                                             REDHOOK ALE BREWERY, INCORPORATED




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








                                             BY: /s/  Anne M. Mueller
                                             ----------------------------------
                                                 Anne M. Mueller
                                                 Controller and Treasurer,
                                                 Principal Accounting Officer





DATE: August 11, 1999


                                       15