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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549


FORM 10-Q

(MARK ONE)

x
    
    QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934


FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2003


OR


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


for the transition period from  to


COMMISSION FILE NUMBER 0-26542



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REDHOOK ALE BREWERY, INCORPORATED

(Exact name of registrant as specified in its charter)


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


14300 NE 145th Street, Suite 210Woodinville, Washington
    
    98072-6950(Address of principal executive offices)
    
    (Zip Code)


Registrants telephone number, including area code: (425) 483-3232

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 o

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).  Yes o  No x

The number of shares of the registrants Common Stock outstanding as of
October 31, 2003 was 6,224,706.

Page 1 of 19 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                           
|             | ITEM 4. Controls and Procedures                                                              
|PART II.    
|             | ITEM 6. Exhibits and Reports on Form 8-K                                                     
|SIGNATURES  
|EXHIBIT 31.1
|EXHIBIT 31.2
|EXHIBIT 32.1
|EXHIBIT 32.2



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REDHOOK ALE BREWERY, INCORPORATED

FORM 10-Q

For The Quarterly Period Ended September 30, 2003

TABLE OF CONTENTS

PagePART I.
    
    Financial InformationITEM 1.
    
    Financial StatementsBalance Sheets as of September 30, 2003 and December 31, 2002
    
    
    3Statements of Operations for the Three Months Ended September 30, 2003 and 2002
and Nine Months Ended September 30, 2003 and 2002
    
    
    4Statements of Cash Flows for the Nine Months Ended September 30, 2003 and 2002
    
    
    5Notes to Financial Statements
    
    
    6ITEM 2.
    
    Managements Discussion and Analysis of Financial Condition
and Results of Operations
    
    
    9ITEM 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    18ITEM 4.
    
    Controls and Procedures
    
    
    18PART II.
    
    Other InformationITEM 6.
    
    Exhibits and Reports on Form 8-K
    
    
    18


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PART I.




ITEM 1.Financial Statements

REDHOOK ALE BREWERY, INCORPORATED




BALANCE SHEETS

September 30,
    
    December 31,2003
    
    2002(Unaudited)ASSETSCurrent Assets:Cash and Cash Equivalents
    
    $
    6,582,020
    
    
    $
    7,007,351Accounts Receivable
    
    
    1,700,238
    
    
    
    1,490,517Inventories
    
    
    3,338,609
    
    
    
    2,832,427Other
    
    
    235,263
    
    
    
    238,268Total Current Assets
    
    
    11,856,130
    
    
    
    11,568,563Fixed Assets, Net
    
    
    66,496,697
    
    
    
    68,360,716Other Assets
    
    
    33,976
    
    
    
    52,592Total Assets
    
    $
    78,386,803
    
    
    $
    79,981,871LIABILITIES, PREFERRED STOCK
AND COMMON STOCKHOLDERS EQUITYCurrent Liabilities:Accounts Payable
    
    $
    2,196,752
    
    
    $
    2,270,450Accrued Salaries, Wages and Payroll Taxes
    
    
    1,565,320
    
    
    
    1,635,463Refundable Deposits
    
    
    2,540,566
    
    
    
    2,546,628Other Accrued Expenses
    
    
    422,830
    
    
    
    320,470Current Portion of Long-Term Debt
    
    
    450,000
    
    
    
    450,000Total Current Liabilities
    
    
    7,175,468
    
    
    
    7,223,011Long-Term Debt, Net of Current Portion
    
    
    5,737,500
    
    
    
    6,075,000Deferred Income Taxes, Net
    
    
    446,793
    
    
    
    468,798CommitmentsConvertible Redeemable Preferred Stock
    
    
    16,221,555
    
    
    
    16,188,255Common Stockholders Equity:Common Stock, Par Value $0.005 per Share, Authorized, 50,000,000
Shares; Issued and Outstanding, 6,224,706 Shares in 2003 and
6,326,146 Shares in 2002
    
    
    31,124
    
    
    
    31,631Additional Paid-In Capital
    
    
    54,247,021
    
    
    
    54,477,181Accumulated Deficit
    
    
    (5,472,658
    )
    
    
    (4,482,005
    )Total Common Stockholders Equity
    
    
    48,805,487
    
    
    
    50,026,807Total Liabilities, Preferred Stock and
Common Stockholders Equity
    
    $
    78,386,803
    
    
    $
    79,981,871


See Accompanying Notes to Financial Statements

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REDHOOK ALE BREWERY, INCORPORATED




STATEMENTS OF OPERATIONS

(Unaudited)

Three Months Ended September 30,
    
    Nine Months Ended September 30,2003
    
    2002
    
    2003
    
    2002Sales
    
    $
    11,110,622
    
    
    $
    10,690,846
    
    
    $
    32,113,402
    
    
    $
    31,032,571Less Excise Taxes
    
    
    868,381
    
    
    
    896,854
    
    
    
    2,669,775
    
    
    
    2,660,790Net Sales
    
    
    10,242,241
    
    
    
    9,793,992
    
    
    
    29,443,627
    
    
    
    28,371,781Cost of Sales
    
    
    7,178,361
    
    
    
    7,140,714
    
    
    
    21,288,966
    
    
    
    20,687,644Gross Profit
    
    
    3,063,880
    
    
    
    2,653,278
    
    
    
    8,154,661
    
    
    
    7,684,137Selling, General and
Administrative Expenses
    
    
    3,236,106
    
    
    
    2,986,710
    
    
    
    9,005,919
    
    
    
    8,776,387Operating Income (Loss)
    
    
    (172,226
    )
    
    
    (333,432
    )
    
    
    (851,258
    )
    
    
    (1,092,250
    )Interest Expense
    
    
    45,743
    
    
    
    61,840
    
    
    
    146,488
    
    
    
    172,203Other Income (Expense)  Net
    
    
    6,965
    
    
    
    (24,174
    )
    
    
    40,393
    
    
    
    8,350Income (Loss) before Income Taxes
    
    
    (211,004
    )
    
    
    (419,446
    )
    
    
    (957,353
    )
    
    
    (1,256,103
    )Income Tax Provision (Benefit)
    
    
    
    
    
    
    (64,534
    )
    
    
    
    
    
    
    (125,610
    )Net Income (Loss)
    
    $
    (211,004
    )
    
    $
    (354,912
    )
    
    $
    (957,353
    )
    
    $
    (1,130,493
    )Basic Earnings (Loss) per Share
    
    $
    (0.04
    )
    
    $
    (0.05
    )
    
    $
    (0.16
    )
    
    $
    (0.17
    )Diluted Earnings (Loss) per Share
    
    $
    (0.04
    )
    
    $
    (0.05
    )
    
    $
    (0.16
    )
    
    $
    (0.17
    )


See Accompanying Notes to Financial Statements

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REDHOOK ALE BREWERY, INCORPORATED




STATEMENTS OF CASH FLOWS

(Unaudited)

Nine Months Ended September 30,2003
    
    2002Operating ActivitiesNet Income (Loss)
    
    $
    (957,353
    )
    
    $
    (1,130,493
    )Adjustments to Reconcile Net Income (Loss) to Net CashProvided by Operating Activities:Depreciation and Amortization
    
    
    2,286,637
    
    
    
    2,334,519Loss on Disposal of Fixed Assets
    
    
    
    
    
    
    94,998Deferred Income Taxes, Net
    
    
    (22,005
    )
    
    
    (117,982
    )Net Change in Operating Assets and Liabilities
    
    
    (333,504
    )
    
    
    1,066,608Net Cash Provided by Operating Activities
    
    
    973,775
    
    
    
    2,247,650Investing ActivitiesExpenditures for Fixed Assets
    
    
    (830,939
    )
    
    
    (420,401
    )Other, Net
    
    
    
    
    
    
    (29,913
    )Net Cash Used in Investing Activities
    
    
    (830,939
    )
    
    
    (450,314
    )Financing ActivitiesPrincipal Payments on Debt
    
    
    (337,500
    )
    
    
    (337,500
    )Repurchase of Common Stock
    
    
    (230,667
    )
    
    
    (746,036
    )Net Cash Used in Financing Activities
    
    
    (568,167
    )
    
    
    (1,083,536
    )Increase (Decrease) in Cash and Cash Equivalents
    
    
    (425,331
    )
    
    
    713,800Cash and Cash Equivalents:Beginning of Period
    
    
    7,007,351
    
    
    
    6,363,786End of Period
    
    $
    6,582,020
    
    
    $
    7,077,586Supplemental Disclosures of Cash Flow Information:Noncash Disposal of Fixed Assets
and Related Deposit Liability
    
    $
    431,337
    
    
    $
    


See Accompanying Notes to Financial Statements

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REDHOOK ALE BREWERY, INCORPORATED




NOTES TO FINANCIAL STATEMENTS
(Unaudited)

1.  Basis of Presentation

The accompanying financial statements and related notes of Redhook Ale
Brewery, Incorporated (the Company) 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, 2002. These financial statements
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 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 Company follows Financial Accounting Standards Board (FASB)
Statement of Financial Accounting Standard (SFAS) No. 128, Earnings per
Share. Basic earnings (loss) per share is calculated using the weighted average
number of shares of Common Stock outstanding. 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 periods when the
Company reports net income. The convertible preferred stock and outstanding
stock options have been excluded from the calculation of diluted loss per share
for all periods presented because their effect is antidilutive. The calculation
uses the treasury stock method and the as if converted method in determining
the resulting incremental average equivalent shares outstanding as applicable.

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

Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2003
    
    2002
    
    2003
    
    2002Basic and diluted earnings (loss)
per share computation:Numerator:Net income (loss)
    
    $
    (211,004
    )
    
    $
    (354,912
    )
    
    $
    (957,353
    )
    
    $
    (1,130,493
    )Preferred stock accretion
    
    
    (11,100
    )
    
    
    (11,100
    )
    
    
    (33,300
    )
    
    
    (33,300
    )Numerator  income (loss) available
to common stockholders
    
    $
    (222,104
    )
    
    $
    (366,012
    )
    
    $
    (990,653
    )
    
    $
    (1,163,793
    )Denominator:Weighted average common shares
    
    
    6,224,706
    
    
    
    6,687,772
    
    
    
    6,249,437
    
    
    
    6,782,279Basic and diluted earnings (loss)
per share
    
    $
    (0.04
    )
    
    $
    (0.05
    )
    
    $
    (0.16
    )
    
    $
    (0.17
    )


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REDHOOK ALE BREWERY, INCORPORATED

NOTES TO FINANCIAL STATEMENTS (Continued)
(Unaudited)

3.  Inventories

Inventories consist of the following:

September 30,
    
    December 31,2003
    
    2002Raw materials
    
    $
    1,032,981
    
    
    $
    1,060,760Work in process
    
    
    1,000,355
    
    
    
    797,712Finished goods
    
    
    563,834
    
    
    
    341,963Promotional merchandise
    
    
    539,619
    
    
    
    413,676Packaging materials
    
    
    201,820
    
    
    
    218,316$
    3,338,609
    
    
    $
    2,832,427


Work in process is beer held in fermentation tanks prior to the filtration
and packaging process.

4.  Stock Repurchase Program

From May 2000 through May 2003, the Company repurchased its Common Stock
in conjunction with a repurchase plan authorized by the Board of Directors. The
plan allowed for the repurchase of 1.5 million outstanding shares of Common
Stock for a total maximum repurchase of $2,750,000. In May 2003, at which time
a total of 1,463,100 shares of Common Stock had been purchased in the open
market for an aggregate expenditure of $2,750,000, the Company ended the
repurchase plan. During the first and second quarters of 2003, 101,400 shares
of Common Stock were purchased for $231,000.

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REDHOOK ALE BREWERY, INCORPORATED

NOTES TO FINANCIAL STATEMENTS (Continued)
(Unaudited)

5.  Stock-Based Compensation

The Company accounts for its employee stock-based compensation plans using
the intrinsic value method, as prescribed by Accounting Principle Board Opinion
(APB) No. 25, Accounting for Stock Issued to Employees. Under APB 25, because
the Companys employee stock options are granted at an exercise price equal to
the fair market value of the underlying Common Stock on the date of the grant,
no compensation expense is recognized. As permitted, the Company has elected to
adopt the disclosure only provisions of SFAS No. 148, Accounting for
Stock-Based Compensation.

The following table illustrates the effect on net income (loss) and
earnings (loss) per share for the quarters and nine months ended September 30,
2003 and 2002 had compensation cost for the Companys stock options been
recognized based upon the estimated fair value on the grant date under the fair
value methodology.

Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2003
    
    2002
    
    2003
    
    2002Net income (loss), as reported
    
    $
    (211,004
    )
    
    $
    (354,912
    )
    
    $
    (957,353
    )
    
    $
    (1,130,493
    )Add: Stock-based employee
compensation expense as
reported under APB 25
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Less: Stock-based employee
compensation expense
determined under fair value
based method for all options,
net of related tax effects
    
    
    (62,745
    )
    
    
    (53,678
    )
    
    
    (195,369
    )
    
    
    (155,808
    )Pro forma net income (loss)
    
    $
    (273,749
    )
    
    $
    (408,590
    )
    
    $
    (1,152,722
    )
    
    $
    (1,286,301
    )Earnings (loss) per share:Basic  as reported
    
    $
    (0.04
    )
    
    $
    (0.05
    )
    
    $
    (0.16
    )
    
    $
    (0.17
    )Basic  pro forma
    
    $
    (0.05
    )
    
    $
    (0.06
    )
    
    $
    (0.19
    )
    
    $
    (0.19
    )Diluted  as reported
    
    $
    (0.04
    )
    
    $
    (0.05
    )
    
    $
    (0.16
    )
    
    $
    (0.17
    )Diluted  pro forma
    
    $
    (0.05
    )
    
    $
    (0.06
    )
    
    $
    (0.19
    )
    
    $
    (0.19
    )


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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
discussion and analysis includes period-to-period comparisons of the Companys
financial results. Although period-to-period comparisons may be helpful in
understanding the Companys financial results, the Company believes that they
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 in the United States. For the
nine months ended September 30, 2003, the Company had gross sales of
$32,113,000, an increase of 3.5% over gross sales of $31,033,000 for the nine
months ended September 30, 2002. 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
from sources including the sale of beer, food, apparel and other retail items
in its two brewery pubs.

The Companys sales volume (shipments) increased 1.6% to 174,300 barrels for
the nine months ended September 30, 2003 as compared to 171,600 barrels in
the same 2002 period. Sales in the craft beer industry generally reflect a
degree of seasonality, with the first and fourth quarters historically being
the slowest and the rest of the year typically demonstrating stronger sales.
The Company has historically operated with little or no backlog and,
therefore, its ability to predict sales for future periods is limited.

The Companys sales are affected by several factors, including consumer
demand, price discounting and competitive considerations. The Company
competes in the highly competitive craft beer market as well as in the much
larger specialty beer market. The craft beer segment is highly competitive
due to the proliferation of small craft brewers, including contract brewers,
and the increase in the number of products offered by such brewers. The
specialty beer market encompasses producers of import beers, major national
brewers that have introduced fuller-flavored products, and large spirit
companies and national brewers that have introduced flavored alcohol
beverages. Imported products from foreign brewers have enjoyed a resurgence
in demand since the mid-1990s. Certain national domestic brewers have also
sought to appeal to the growing demand for craft beers by producing their own
fuller-flavored products. Introductions of flavored alcohol beverages in 2001
and 2002 have delivered initial success. Industry sources generally believe
that the consumers of flavored alcohol beverages correlate closely with
consumers of import and craft beer products. Because the number of
participants and number of different products offered in this segment have
increased significantly in recent years, the competition for bottled product
placements and especially for draft beer placements has intensified.

In January 2003, the Company entered into a licensing agreement with
Widmer Brothers Brewing Company to produce and sell the Widmer Hefeweizen brand
in states east of the Mississippi River. Brewing of this product, which began
in February 2003, is conducted at the Companys brewery in Portsmouth, New
Hampshire (the Portsmouth Brewery) under the supervision and assistance of
Widmers brewing staff to insure their brands quality and matching taste
profile. The term of this agreement is for five years, with an additional
one-year automatic renewal unless either party elects to terminate the
arrangement. The agreement may be terminated by either party at any time
without cause pursuant to 150 days notice. The agreement may be terminated for
cause by either party under certain conditions. During the term of this
agreement, Redhook will not brew, advertise, market, or distribute any product
that is labeled or advertised as a Hefeweizen or any similar product in the
agreed upon eastern territory, once the existing Redhook Hefe-weizen business
is transitioned to Widmers Hefeweizen. This transition may take up to one
year. This agreement, for the Eastern United States only, is expected to
increase capacity utilization and strengthen the Companys product portfolio.
The brewing and sales of Widmer Hefeweizen in the third quarter of 2003 did not
have a material impact on the Companys sales or results of operations. The
Company does not expect that it will have a material impact on the Companys
sales or results of operations in 2003. In the Western United States, Redhook
and Widmer Brothers Brewing Company remain competitors in the highly
competitive craft beer market.

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 sales over 60,000 barrels and thus, if sales volume

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increases, federal excise taxes would increase as a percentage of sales. Most states also collect
an excise tax on the sale of beer.

Under normal circumstances, the Company operates its brewing facilities up
to six days per week with multiple shifts per day. Under ideal brewing
conditions (which would include, among other factors, production of a single
brand in a single package), the current production capacity is approximately
250,000 barrels per year at the Woodinville Brewery and 125,000 barrels per
year at the Portsmouth Brewery. Because of various factors, including the
following two, the Company does not believe that it is likely that actual
production volume will approximate current production capacity: (1) the
Companys brewing process, which management believes is similar to its
competitors brewing processes, inherently results in some level of beer loss
attributable to filtering, bottling, and keg filling; and (2) the Company
routinely brews and packages various brands and package sizes during the year.

During the peak sales volume periods of 2002, production capacity at the
Portsmouth Brewery was nearly fully utilized. In order to accommodate volume
growth in the markets served by the Portsmouth Brewery, including anticipated
growth resulting from sales of Widmer Hefeweizen, the Company expanded
fermentation capacity during the first half of 2003. This expansion brought the
production capacity from approximately 110,000 barrels per year at the end of
December 2002 to the current capacity of approximately 125,000 barrels per
year. Production capacity at the Portsmouth Brewery can be added in phases
until the facility reaches its maximum designed production capacity of
approximately 250,000 barrels per year, under ideal brewing conditions. 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
semi-variable operating costs, such as depreciation and production salaries,
are spread over a larger sales base. Because current period production levels
have been below the Companys current production capacity, gross margins have
been negatively impacted. This negative impact could be reduced as actual
production increases.

In addition to capacity utilization, other factors that could affect cost
of sales and gross margin include changes in freight charges, the availability
and price of raw materials and packaging materials, the mix between draft and
bottled product sales, the sales mix of various bottled product packages, and
fees related to the Distribution Alliance with A-B.

See Managements Discussion and Analysis of Financial Condition and
Results of Operations  Certain Considerations: Issues and Uncertainties.

Critical Accounting Policies and Estimates

The Companys financial statements are based upon the selection and
application of significant accounting policies that require management to make
significant estimates and assumptions. Management believes that the following
are some of the more critical judgment areas in the application of the
Companys accounting policies that currently affect its financial condition and
results of operations. Judgments and uncertainties affecting the application of
these policies may result in materially different amounts being reported under
different conditions or using different assumptions.

Income Taxes.The Company records federal and state income taxes in
accordance with Financial Accounting Standards Board (FASB) Statement of
Financial Accounting Standard (SFAS) No. 109, Accounting for Income Taxes.
Deferred income taxes or tax benefits reflect the tax effect of temporary
differences between the amounts of assets and liabilities for financial
reporting purposes and amounts as measured for tax purposes. The Company will
establish a valuation allowance if it is more likely than not that these items
will either expire before the Company is able to realize their benefits or that
future deductibility is uncertain. The valuation allowance is reviewed and
adjusted on a quarterly basis based on managements assessment of the
realizability of the deferred tax assets. As of December 31, 2002, the Company had

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approximately $11.2 million of deferred tax assets, comprised principally of federal net operating
loss carryforwards (NOLs) that expire from 2012 through 2022 and state NOLs
that expire from 2002 through 2017. The recognition of these assets is
dependent upon estimates of future taxable income resulting from future
reversals of existing taxable temporary differences, which have been recorded
as deferred tax liabilities and exceed the deferred tax assets. During 2002,
the Company established a valuation allowance of $271,000. During the first
nine months of 2003, the Company increased its valuation allowance by $306,000
thereby reducing the estimated income tax benefit recorded in its statement of
operations to $0. As of September 30, 2003, the Companys deferred tax assets
include a valuation allowance totaling $577,000. The valuation allowance covers
a portion of the Companys deferred tax assets, specifically certain federal
and state NOLs that may expire before the Company is able to utilize the tax
benefit. To the extent that the Company continues to be unable to generate
adequate taxable income in future periods, the Company will not be able to
recognize additional tax benefits and may be required to record a greater
valuation allowance covering potentially expiring NOLs.

Long-Lived Assets.The Company evaluates potential impairment of
long-lived assets in accordance with SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. SFAS No. 144 establishes
procedures for review of recoverability and measurement of impairment, if
necessary, of long-lived assets, goodwill and certain identifiable intangibles.
When facts and circumstances indicate that the carrying values of long-lived
assets may be impaired, an evaluation of recoverability is performed by
comparing the carrying value of the assets to projected future undiscounted
cash flows in addition to other quantitative and qualitative analyses. Upon
indication that the carrying value of such assets may not be recoverable, the
Company recognizes an impairment loss by a charge against current operations.
Fixed assets are grouped at the lowest level for which there are identifiable
cash flows when assessing impairment. During 2002, the Company performed an
analysis of its brewery assets to determine if an impairment might exist. The
Companys estimate of future undiscounted cash flows indicated that such
carrying values were expected to be recovered. Nonetheless, it is possible that
the estimate of future undiscounted cash flows may change in the future,
resulting in the need to write down those assets to their fair value. No
indicators of impairment have been identified during the nine months ended
September 30, 2003.

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
    
    Nine Months EndedSeptember 30,
    
    September 30,2003
    
    2002
    
    2003
    
    2002Sales
    
    
    108.5
    %
    
    
    109.2
    %
    
    
    109.1
    %
    
    
    109.4
    %Less Excise Taxes
    
    
    8.5
    
    
    
    9.2
    
    
    
    9.1
    
    
    
    9.4Net Sales
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0Cost of Sales
    
    
    70.1
    
    
    
    72.9
    
    
    
    72.3
    
    
    
    72.9Gross Profit
    
    
    29.9
    
    
    
    27.1
    
    
    
    27.7
    
    
    
    27.1Selling, General and Administrative Expenses
    
    
    31.6
    
    
    
    30.5
    
    
    
    30.6
    
    
    
    30.9Operating Income (Loss)
    
    
    (1.7
    )
    
    
    (3.4
    )
    
    
    (2.9
    )
    
    
    (3.8
    )Interest Expense
    
    
    0.4
    
    
    
    0.6
    
    
    
    0.5
    
    
    
    0.6Other Income (Expense)  Net
    
    
    
    
    
    
    (0.3
    )
    
    
    0.1
    
    
    
    Income (Loss) before Income Taxes
    
    
    (2.1
    )
    
    
    (4.3
    )
    
    
    (3.3
    )
    
    
    (4.4
    )Income Tax Provision (Benefit)
    
    
    
    
    
    
    (0.7
    )
    
    
    
    
    
    
    (0.4
    )Net Income (Loss)
    
    
    (2.1
    )%
    
    
    (3.6
    )%
    
    
    (3.3
    )%
    
    
    (4.0
    )%


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Three Months Ended September 30, 2003 Compared to Three Months Ended
September 30, 2002

Sales.Total sales increased 3.9% to $11,111,000 for the three months
ended September 30, 2003 compared to $10,691,000 for the three months ended
September 30, 2002, attributable to a 0.5% increase in barrels sold, some
strength in pricing and an increase in sales in the pubs located in the
Companys two breweries. Total sales volume for the third quarter of 2003
increased to 58,700 barrels from 58,400 barrels for the same period in 2002,
the result of a 1.7% increase in shipments of its packaged products offset by a
1.5% decrease in shipments of the Companys draft products. The mix of package
sales to draft sales generally affects overall revenue per barrel, with package
product generating a higher revenue per barrel but also an increased cost of
sales per barrel. The sales mix continued to migrate towards an increasing
proportion of package sales, with 63.5% of total shipments in the third quarter
2003 being package shipments versus 62.8% in the same 2002 quarter. Sales
volume for the 12-pack package, which is more costly to produce, decreased in
the third quarter of 2003 to 32.7% of package sales from 34.1% in the third
quarter of 2002. West Coast sales decreased 1.1% largely due to a 3.9% decrease
in sales in Washington State, the Companys largest market. Sales other than
wholesale beer sales, primarily retail pub revenues, increased to $1,514,000 in
the third quarter of 2003 from $1,374,000 in the third quarter of 2002. At
September 30, 2003 and 2002, the Companys products were distributed in 48
states.

Excise Taxes. Excise taxes decreased to $868,000, or 8.5% of net sales,
in the 2003 third quarter compared to $897,000, or 9.2% of net sales, in the
comparable 2002. The comparability of excise taxes as a percentage of net sales
is impacted by many factors, including average revenue per barrel, the
proportion of pub sales to total sales, and the estimated annual average
federal and state excise tax rates.

Cost of Sales. Cost of sales increased 0.5% to $7,178,000 in the three
months ended September 30, 2003 compared to $7,141,000 in the same 2002 period,
but remained flat on a per barrel basis and decreased as a percentage of net
sales. The Company continued to experience an increase in some of its primary
direct costs, including raw materials and packaging, as well as an increase in
some of its indirect costs following the expansion of its brewing capacity in
its Portsmouth Brewery. As a percentage of net sales, cost of sales decreased
to 70.1% in the 2003 third quarter from 72.9% in the comparable 2002 quarter.
Based upon the breweries combined current production capacity of 93,800
barrels and 89,000 barrels for the quarters ended September 30, 2003 and 2002,
the utilization rates were 62.6% and 65.6%, respectively.

Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to $3,236,000 in the 2003 third quarter
compared to $2,987,000 in the 2002 third quarter. Significant components
continue to be expenditures for the Companys promotion programs as well as
salaries for the national sales force. As a percentage of net sales, these
expenses were 31.6% and 30.5% for the quarters ended September 30, 2003 and
2002, respectively.

Interest Expense.Interest expense was $46,000 for the third quarter of
2003, down from $62,000 for the comparable 2002 period, reflecting the effect
of lower outstanding debt and lower average interest rates.

Other Income (Expense)- Net. Other income (expense)  net increased to
income of $7,000 in the 2003 third quarter compared to expense of $24,000 in
the 2002 third quarter. Interest income declined $42,000 in the same period as
a result of a lower average balance of interest-bearing deposits and lower
average interest rates. The 2002 third quarter included a $73,000 loss on
disposal of fixed assets which were disposed of in conjunction with the
September 2002 consolidation of the Companys corporate offices into the
Woodinville Brewery.

Income Taxes. The Companys effective income tax rate was 0.0% for the
third quarter of 2003 compared to a 15.4% benefit for the third quarter of
2002. Both periods reflect the recording of an income tax benefit, 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, reduced fully in 2003 and
partially in 2002 by a valuation allowance. The valuation allowance covers a
portion of the Companys deferred tax assets, specifically certain federal and
state net operating tax loss carryforwards created by the current year benefit
that may expire before the Company is able to utilize the tax benefit. To the
extent that the Company continues to be unable to generate adequate taxable
income in future periods, the

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Company will not be able to recognize additional
tax benefits and may be required to record a greater valuation allowance
covering potentially expiring NOLs.

Nine Months Ended September 30, 2003 Compared to Nine Months Ended
September 30, 2002

Sales. Total sales increased 3.5% to $32,113,000 for the nine months
ended September 30, 2003 compared to $31,033,000 for the 2002 nine-month
period, attributable to a 1.6% increase in sales volume. Total sales volume for
the first nine months of 2003 increased to 174,300 barrels from 171,600 barrels
for the same period in 2002. Shipments in Washington State, the Companys
largest market, decreased 0.5% in the first nine months of 2003 as compared to
shipments in Washington State in the first nine months of 2002. Sales other
than wholesale beer sales, primarily retail pub revenues, totaled $3,543,000 in
the nine months ended September 30, 2003, compared to $3,457,000 in the
comparable 2002 period. This increase was due to increasing sales in the
Companys pubs located in its two breweries, partially offset by the September
2002 closure of the Companys Trolleyman Pub, located in the Companys former
Fremont Brewery.

Excise Taxes. Excise taxes totaled $2,670,000, or 9.1% of net sales in
the first nine months of 2003, as compared to $2,661,000, or 9.4% of net sales
in the corresponding 2002 period. The comparability of excise taxes as a
percentage of net sales is impacted by many factors, including average revenue
per barrel, the proportion of pub sales to total sales, and the estimated
annual average federal and state excise tax rates.

Cost of Sales. Cost of sales increased 2.9% to $21,289,000 in the first
nine months of 2003 versus $20,688,000 in the same 2002 period, but decreased
slightly as a percentage of net sales. Cost of sales increased on a per barrel
basis, impacted by increases in the cost of raw materials, packaging and
brewing supplies, as well as higher freight costs driven by fuel surcharges. As
a percentage of net sales, cost of sales was 72.3% for the 2003 period compared
to 72.9% for the 2002 period. The utilization rate, based upon the breweries
combined current production capacity was 62.8% and 64.6% for the nine months
ended September 30, 2003 and 2002, respectively.

Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to $9,006,000 in the first nine months of
2003 compared to $8,776,000 in the 2002 period. As a percentage of net sales,
these expenses were 30.6% and 30.9% for the nine months ended September 30,
2003 and 2002, respectively. Significant components continue to be
expenditures for the Companys promotion programs as well as salaries for the
national sales force. Redhook continues to focus on effective sales and
marketing programs, supported by the effort and commitment of its wholesalers.

Interest Expense.Interest expense was $146,000 for the nine months ended
September 30, 2003, down from $172,000 for the comparable 2002 period,
reflecting the effect of lower outstanding debt and lower average interest
rates.

Other Income- Net. Other income  net increased to income of $40,000 for
the nine months ended September 30, 2003 from income of $8,000 for the
comparable 2002 period. Interest income declined $62,000 in the first nine
months of 2003 as a result of a lower average balance of interest-bearing
deposits and lower average interest rates. The 2002 period included a $95,000
loss on the disposal of assets, most of which were disposed of in conjunction
with the September 2002 consolidation of the Companys corporate offices into
the Woodinville Brewery.

Income Taxes. The Companys effective income tax rate was 0.0% for the
nine months ended September 30, 2003 compared to a 10.0% benefit for same
period in 2002. Both periods reflect the recording of an income tax benefit,
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, reduced fully
in 2003 and partially in 2002 by a valuation allowance. The valuation allowance
covers a portion of the Companys deferred tax assets, specifically certain
federal and state net operating tax loss carryforwards created by the current
year benefit that may expire before the Company is able to utilize the tax
benefit. To the extent that the Company continues to be unable to generate
adequate taxable income in future periods, the Company will not be able to
recognize additional tax benefits and may be required to record a greater
valuation allowance covering potentially expiring NOLs.

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Liquidity and Capital Resources

The Company had $6,582,000 and $7,007,000 of cash and cash equivalents at
September 30, 2003 and December 31, 2002, respectively. At September 30,
2003, the Company had working capital of $4,681,000. The Companys long-term
debt as a percentage of total capitalization (long-term debt, convertible
redeemable preferred stock and common stockholders equity) was 8.7% at September 30,
2003 compared to 9.0% at December 31, 2002. Cash provided by operating
activities totaled $974,000 and $2,248,000 for the nine months ended
September 30, 2003 and 2002, respectively. Cash provided by operations in the
nine-month period of 2003 was lower than in the comparable 2002 period as a
result of an increase in beer and promotional inventories to levels necessary
to meet the demands of the Companys Winterhook seasonal ale program, as well
as the timing of payment of certain current liabilities. During the first
nine months of 2003, the Company repurchased 101,400 shares of its Common
Stock totaling $231,000 and had capital expenditures totaling $831,000
related primarily to the expansion of fermentation cellars in the Portsmouth
Brewery to accommodate the anticipated increase in East Coast volume.

The Company has a credit agreement with a bank under which a term loan (the
Term Loan) and a $10 million revolving credit facility (the Revolving
Facility) are provided. The Term Loan, which originated in June 1997 upon
the conversion of a $9 million secured credit facility, had a five-year term
with a 20-year amortization schedule. In June 2001, the credit agreement was
amended to extend the maturity date on the Term Loan to June 5, 2007. In June
2002, the credit agreement was amended to extend the commitment period for
the Revolving Facility to July 1, 2004. The Term Loan and the Revolving
Facility are secured by substantially all of the Companys assets. Through
June 4, 2002, interest on the Term Loan accrued at a variable rate based on
the London Inter Bank Offered Rate (LIBOR) plus 1.25%. Since June 5, 2002,
interest on the Term Loan accrued at LIBOR plus 1.75%. The interest rate for
the Revolving Facility is the applicable LIBOR plus 1.00% to 2.00%, depending
on the Companys funded debt 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. As of September 30, 2003, there was $6.2
million outstanding on the Term Loan, and the Companys one-month LIBOR-based
borrowing rate was approximately 2.88%. As of September 30, 2003, there were
no borrowings outstanding on the Revolving Facility. The termination of the
A-B Distribution Agreement for any reason or the failure by the Company to
perform any of its material obligations under the A-B Investment Agreement
would constitute an event of default under the credit agreement and the bank
may declare the entire outstanding loan balance immediately due and payable.
See - Certain Considerations: Issues and Uncertainties below. If this were
to occur, it would be unlikely that the Company could satisfy its obligations
under the Term Loan. In all events, unless additional capital were raised,
the Company would not have sufficient liquidity to satisfy both its
obligation under the Term Loan and its obligation to redeem the Series B
Preferred Stock under the A-B Investment Agreement. The Company could seek to
refinance its Term Loan with one or more banks or obtain additional equity
capital; however, there can be no assurance the Company would be able to
access additional capital to meet its needs or that such additional capital
would be at commercially reasonable terms.

The terms of the credit agreement require the Company to meet certain
financial covenants. In December 2001 and March 2003, the credit agreement was
amended to modify several financial covenants. These revisions have reduced the
likelihood that a violation of the covenants by the Company will occur;
however, if the Company were to report a significant net loss for one or more
quarters within a time period covered by the financial covenants, one or more
of the covenants would be negatively impacted and could cause a violation.
Failure to meet the covenants required by the credit agreement is an event of
default and, at its option, the Bank could deny a request for a waiver and
declare the entire outstanding loan balance immediately due and payable. In
such a case, the Company would seek to refinance the loan with one or more
banks, potentially at less desirable terms. However, there can be no guarantee
that additional financing would be available at commercially reasonable terms,
if at all. The Company was in compliance with all covenants for the quarter
ended September 30, 2003.

The Company has required capital principally for the construction and
development of its 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

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needs 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. However,
there cannot be any guarantee that any additional financing will be available
when needed or at commercially reasonable terms. Capital expenditures for the
first nine months of 2003 totaled $831,000. Capital expenditures for 2003 are
expected to total approximately $1,175,000.

From May 2000 through May 2003, the Company repurchased its Common Stock in
conjunction with a repurchase plan authorized by the Board of Directors. The
plan allowed for the repurchase of 1.5 million
outstanding shares of Common Stock for a total maximum repurchase of
$2,750,000. In May 2003, at which time a total of 1,463,100 shares of Common
Stock had been purchased in the open market for an aggregate expenditure of
$2,750,000, the Company ended the repurchase plan. During the first and
second quarters of 2003, 101,400 shares of Common Stock were purchased for
$231,000.

Certain Considerations: Issues and Uncertainties

The Company does not provide forecasts of future financial performance or
sales volume, 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 successful execution of market development
and other plans, the availability of financing and the issues discussed
below. 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.

Relationship with Anheuser-Busch, Incorporated.Most of the Companys
future sales are expected to be through the Distribution Alliance with A-B. See
the Companys Annual Report on Form 10-K for the year ended December 31, 2002
Part 1, Item 1  Business  Product Distribution and Relationship with
Anheuser-Busch, Incorporatedfor a further description of the Companys
relationship with A-B. If the Distribution Alliance were to be terminated, or
if the relationship between A-B and the Company were to deteriorate,
distribution of the Companys products would suffer significant disruption and
such event and would have a long-term severe negative impact on the Companys
sales and results of operations, as it would be extremely difficult for the
Company to rebuild its own distribution network. Further, in the event that the
A-B Distribution Agreement is terminated on or before December 31, 2004, under
circumstances described in Item 1 of the Companys Annual Report on Form 10-K
for the year ended December 31, 2002 (see Business  Relationship with
Anheuser-Busch, Incorporated  A-B Distribution Agreement), the terms of the
Series B Preferred Stock held by A-B pursuant to the A-B Investment Agreement
require the Company to redeem 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, if any. The terms of the Series B Preferred Stock further provide
that, if at the time of the mandatory redemption the Company has insufficient
legally available funds to redeem all shares of Series B Preferred Stock, then
all funds that are legally available must be used to redeem Series B Preferred
Stock. At any time thereafter when additional funds of the Company become
legally available, such funds must be immediately used to redeem additional
shares of Series B Preferred Stock. The Company would not be legally able to
redeem shares of Series B Preferred Stock if, after giving effect to such
redemption, the Company would not be able to pay its debts when due in the
usual course of business or the Companys total assets would be less than the
sum of its total liabilities. 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. Notice of
intention to

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terminate the Distribution Agreement must be made by the party
electing to do so no less than six months prior to the termination date.

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 wine, spirits
and imported beers, the introduction of fuller-flavored products by major
national brewers and introductions of flavored alcohol beverages by large
spirit companies and national brewers. While the Companys sales volume for the
fiscal years ended 2000, 2001, 2002 and the first nine months of 2003 increased
when compared to the corresponding prior periods volume, the Company did experience declining sales volume ranging from
2.3% to 5.7% for the years 1997 through 1999. If the Company were to again
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
semi-variable operating costs, depending on the level of production at the
Companys breweries in relation to current production capacity. The Companys
high level of fixed and semi-variable 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 volume through the Distribution Alliance increases, the related fees
would increase.

Advertising and Promotional Costs.The Company has participated in
advertising programs to varying degrees over the past five years. Prior to
1999, the Company engaged in very limited advertising to market its products.
In order to increase brand awareness and capture a larger share of the
fragmented craft beer market, the Company determined that a significant
increase in spending on advertising and promotion was necessary. In 1999 and
2000, the Company primarily utilized radio, billboard and print advertising in
key markets, while also participating to a smaller degree in a co-operative
program with its distributors. In 2001, 2002 and 2003, the Company allocated a
larger share of its advertising spending to this co-operative program whereby
the Companys spending is matched dollar for dollar by the distributor.
Expenditures for the co-op program and media advertising program totaled $2.6
million and $1.9 million for the years ended December 31, 2001 and 2002,
respectively, and $979,000 for the nine months ended September 30, 2003. This
increased advertising spending has significantly increased the Companys
selling, general and administrative expense since 1998, leading to increased
losses and a reduction in stockholders equity. Market and competitive
considerations could require an increase in other promotional costs associated
with developing existing and new markets.

Dependence on Third-Party Distributors.The Company also relies heavily
on non-Alliance third-party distributors for the sale of its products to
retailers. The Companys most significant non-Alliance wholesaler, K&L
Distributors, Inc., that although not part of the Alliance is a distributor in
the A-B distribution network, accounted for approximately 13% of the Companys
sales in the first nine months of 2003. Substantially all of the remaining
sales volume is through the Distribution Alliance to wholesalers that are part
of the A-B distribution network, most of which are independent wholesalers. A
disruption of the Companys, the wholesalers or A-Bs ability to distribute
products efficiently due to any significant operational problems, such as
wide-spread labor union strikes, 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. If the flavored
alcohol beverage

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market continues to grow, it could draw consumers away from
the Companys products and have an adverse effect on the Companys sales and
results of operations. Further, the alcohol 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. The
Companys breweries have been operating at production levels substantially
below their current 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, after performing an
analysis of the Companys current and future production
capacity requirements, production at the Fremont Brewery was permanently
curtailed and the assets were written down to an estimate of their 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. If facts and circumstances indicate that the carrying value
of these long-lived assets may be impaired, an evaluation of recoverability
will be performed in accordance with FASB Statement No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, by comparing the carrying value of
the assets to projected future undiscounted cash flows in addition to other
quantitative and qualitative analyses. If management believes that the carrying
value of such assets may not be recoverable, the Company will recognize an
impairment loss by a charge against current operations.

Income Tax Benefits. As of December 31, 2002, the Company had
approximately $11.2 million of deferred tax assets, comprised principally of
federal NOLs that expire from 2012 through 2022 and state NOLs that expire from
2002 through 2017. Federal NOLs, generally permitted to be carried forward no
more than 20 years, and state NOLs, generally permitted to be carried forward 5
to 15 years, can be used to offset regular tax liabilities in future years. The
recognition of these assets is dependent upon estimates of future taxable
income resulting from future reversals of existing taxable temporary
differences, which have been recorded as deferred tax liabilities and exceed
the deferred tax assets. During 2002, the Company established a valuation
allowance of $271,000. During the first nine months of 2003, the Company
increased its valuation allowance by $306,000 thereby reducing the estimated
income tax benefit recorded in its statement of operations to $0. As of
September 30, 2003, the Companys deferred tax assets include a valuation
allowance totaling $577,000. The valuation allowance covers a portion of the
Companys deferred tax assets, specifically certain federal and state net
operating tax loss carryforwards that may expire before the Company is able to
utilize the tax benefit. To the extent that the Company continues to be unable
to generate adequate taxable income in future periods, the Company will not be
able to recognize additional tax benefits and may be required to record a
greater valuation allowance covering potentially expiring NOLs.

Recent Accounting Pronouncements

In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation-Transition and Disclosure. SFAS No. 148 amends FASB Statement
No. 123, Accounting for Stock-Based Compensation, to require prominent
disclosures in both interim and annual financial statements about the method
of accounting for stock-based employee compensation and the effect of the
method used on reported results. SFAS No. 148 also amends SFAS No. 123 to
provide alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation. SFAS
No. 148 is effective for fiscal years ended after December 15, 2002 and for
interim periods beginning after December 15, 2002. As the Company has not
voluntarily adopted the SFAS No. 123 fair value method of accounting for
stock-based employee compensation, the new transition alternatives of SFAS
No. 148 did not have a material impact on the Companys financial condition
or results of operations.

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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
September 30, 2003.




ITEM 4.Controls and Procedures

The Company has carried out an evaluation of the effectiveness of the
design and operation of the Companys disclosure controls and procedures (as
defined in Exchange Act Rule 13a-15(e) or 15d-15(e)) as of the end of the
period covered by this quarterly report on Form 10-Q. Based upon that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that the Companys disclosure controls and procedures are effective.

There were no significant changes in the Companys internal controls or in
other factors that could significantly affect these controls subsequent to the
date of their evaluation.




PART II.




ITEM 6.Exhibits and Reports on Form 8-K

(a)   Exhibits

The following exhibits are filed as part of this report.

31.1
    
    Certification of
Chief Executive
Officer of Redhook
Ale Brewery,
Incorporated
pursuant to Section
302 of the
Sarbanes-Oxley Act
of 200231.2
    
    Certification of
Chief Financial
Officer of Redhook
Ale Brewery,
Incorporated
pursuant to Section
302 of the
Sarbanes-Oxley Act
of 200232.1
    
    Certification of
Chief Executive
Officer of Redhook
Ale Brewery,
Incorporated
pursuant to Section
906 of the
Sarbanes-Oxley Act
of 2002, 18 U.S.C.
Section 135032.2
    
    Certification of
Chief Financial
Officer of Redhook
Ale Brewery,
Incorporated
pursuant to Section
906 of the
Sarbanes-Oxley Act
of 2002, 18 U.S.C.
Section 1350


(b)   Reports on Form 8-K

During the quarter ended September 30, 2003, and between such date and
the filing of this Form 10-Q, the Company furnished the following
report on Form 8-K:

Current report dated November 4, 2003 furnishing a press release
announcing certain financial results for the quarter ended September 30,
2003.

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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.

REDHOOK ALE BREWERY, INCORPORATEDNovember 13, 2003
    
    
    BY: /s/ David J. MickelsonDavid J. MickelsonExecutive Vice President,
Chief Financial Officer and
Chief Operating OfficerNovember 13, 2003
    
    
    BY: /s/ Anne M. MuellerAnne M. MuellerController and Treasurer,
Principal Accounting Officer


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