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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 JUNE 30, 2003                                            
|      |  |                                                                                         
|OR   
|      |  |                                                                                         
|[   ] |  | 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
incorporation or organization) |  | (I.R.S. Employer
Identification No.)
|                                                               |  |                                     
|14300 NE 145th Street, Suite 210                               |  |                                     
|Woodinville, Washington                                        |  | 98072-9045                          
|(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 __

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

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

Page 1 of 21 sequentially numbered pages



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TABLE OF CONTENTS



|                              |                                                                                               |                               |  |  |  |  |  | 
|----------------------------- | --------------------------------------------------------------------------------------------- | ----------------------------- |  |  |  |  |  | 
|PART I. FINANCIAL INFORMATION
|                              | 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. OTHER INFORMATION   
|                              | ITEM 4. Submission of Matters to a Vote of Security Holders                                  
|                              | ITEM 5. Other information                                                                    
|                              | 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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##### Table of Contents



REDHOOK ALE BREWERY, INCORPORATED

FORM 10-Q

For The Quarterly Period Ended June 30, 2003

TABLE OF CONTENTS

|        |  |                                                                                                                        |  |     
|------- |  | ---------------------------------------------------------------------------------------------------------------------- |  | ----
|        |  |                                                                                                                        |  | Page
|        |  |                                                                                                                        |  |     
|PART I  |  | Financial Information                                                                                                  |  |     
|ITEM 1. |  | Financial Statements                                                                                                   |  |     
|        |  | Balance Sheets as of June 30, 2003 and December 31, 2002                                                               |  | 3   
|        |  | Statements of Operations for the Three Months Ended June 30, 2003 and 2002
and Six Months Ended June 30, 2003 and 2002 |  | 4   
|        |  | Statements of Cash Flows for the Six Months Ended June 30, 2003 and 2002                                               |  | 5   
|        |  | Notes to Financial Statements                                                                                          |  | 6   
|ITEM 2. |  | Managements Discussion and Analysis of Financial Condition
and Results of Operations                                  |  | 10  
|ITEM 3. |  | Quantitative and Qualitative Disclosures about Market Risk                                                             |  | 19  
|ITEM 4. |  | Controls and Procedures                                                                                                |  | 19  
|PART II |  | Other Information                                                                                                      |  |     
|ITEM 4. |  | Submission of Matters to a Vote of Security Holders                                                                    |  | 19  
|ITEM 5. |  | Other Information                                                                                                      |  | 19  
|ITEM 6. |  | Exhibits and Reports on Form 8-K                                                                                       |  | 20  

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PART I. FINANCIAL INFORMATION




ITEM 1.Financial Statements




REDHOOK ALE BREWERY, INCORPORATED

BALANCE SHEETS

|                                                             |                                                                                                                                                        |                           |                                   |                                                                    |            |             |            |              |            |            |            | 
|------------------------------------------------------------ | ------------------------------------------------------------------------------------------------------------------------------------------------------ | ------------------------- | --------------------------------- | ------------------------------------------------------------------ | ---------- | ----------- | ---------- | ------------ | ---------- | ---------- | ---------- | 
|                                                             |                                                                                                                                                        |                           |                                   |                                                                    |            | June 30,    |            | December 31,
|                                                             |                                                                                                                                                        |                           |                                   |                                                                    |            | 2003        |            | 2002        
|                                                             |                                                                                                                                                        |                           |                                   |                                                                    |            |             |            |             
|                                                             |                                                                                                                                                        |                           |                                   |                                                                    |            | (Unaudited) |            |              |            |           
|ASSETS                                                       |                                                                                                                                                        |                           |                                   |                                                                    |            |             |            |             
|Current Assets:                                              |                                                                                                                                                        |                           |                                   |                                                                    |            |             |            |             
|                                                             | Cash and Cash Equivalents                                                                                                                              |                           | $                                 | 6,060,123                                                          |            |             | $          | 7,007,351    |           
|                                                             | Accounts Receivable                                                                                                                                    |                           |                                   | 2,647,798                                                          |            |             |            | 1,490,517    |           
|                                                             | Inventories                                                                                                                                            |                           |                                   | 2,971,916                                                          |            |             |            | 2,832,427    |           
|                                                             | Other                                                                                                                                                  |                           |                                   | 203,053                                                            |            |             |            | 238,268      |           
|                                                             |                                                                                                                                                        |                           |                                   |                                                                    |            |             |            |              |           
|                                                             |                                                                                                                                                        | Total Current Assets      |                                   |                                                                    | 11,882,890 |             |            |              | 11,568,563 |           
|Fixed Assets, Net                                            |                                                                                                                                                        |                           | 67,510,027                        |                                                                    |            |             | 68,360,716 |             
|Other Assets                                                 |                                                                                                                                                        |                           | 98,887                            |                                                                    |            |             | 52,592     |             
|                                                             |                                                                                                                                                        |                           |                                   |                                                                    |            |             |            |              |           
|                                                             |                                                                                                                                                        |                           | Total Assets                      |                                                                    | $          | 79,491,804  |            |              | $          | 79,981,871 |           
|                                                             |                                                                                                                                                        |                           |                                   |                                                                    |            |             |            |              |           
|LIABILITIES, PREFERRED STOCK
AND COMMON STOCKHOLDERS EQUITY |                                                                                                                                                        |                           |                                   |                                                                    |            |             |            |             
|Current Liabilities:                                         |                                                                                                                                                        |                           |                                   |                                                                    |            |             |            |             
|                                                             | Accounts Payable                                                                                                                                       |                           | $                                 | 2,775,300                                                          |            |             | $          | 2,270,450    |           
|                                                             | Accrued Salaries, Wages and Payroll Taxes                                                                                                              |                           |                                   | 1,454,137                                                          |            |             |            | 1,635,463    |           
|                                                             | Refundable Deposits                                                                                                                                    |                           |                                   | 2,895,070                                                          |            |             |            | 2,546,628    |           
|                                                             | Other Accrued Expenses                                                                                                                                 |                           |                                   | 374,454                                                            |            |             |            | 320,470      |           
|                                                             | Current Portion of Long-Term Debt                                                                                                                      |                           |                                   | 450,000                                                            |            |             |            | 450,000      |           
|                                                             |                                                                                                                                                        |                           |                                   |                                                                    |            |             |            |              |           
|                                                             |                                                                                                                                                        | Total Current Liabilities |                                   |                                                                    | 7,948,961  |             |            |              | 7,223,011  |           
|                                                             |                                                                                                                                                        |                           |                                   |                                                                    |            |             |            |              |           
|Long-Term Debt, Net of Current Portion                       |                                                                                                                                                        |                           | 5,850,000                         |                                                                    |            |             | 6,075,000  |             
|                                                             |                                                                                                                                                        |                           |                                   |                                                                    |            |             |            |              |           
|Deferred Income Taxes, Net                                   |                                                                                                                                                        |                           | 454,797                           |                                                                    |            |             | 468,798    |             
|                                                             |                                                                                                                                                        |                           |                                   |                                                                    |            |             |            |              |           
|Commitments                                                  |                                                                                                                                                        |                           |                                   |                                                                    |            |             |            |             
|Convertible Redeemable Preferred Stock                       |                                                                                                                                                        |                           | 16,210,455                        |                                                                    |            |             | 16,188,255 |             
|                                                             |                                                                                                                                                        |                           |                                   |                                                                    |            |             |            |              |           
|Common 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                                                             |            |             |            | 31,631       |           
|                                                             | Additional Paid-In Capital                                                                                                                             |                           |                                   | 54,247,021                                                         |            |             |            | 54,477,181   |           
|                                                             | Accumulated Deficit                                                                                                                                    |                           |                                   | (5,250,554                                                         | )          |             |            | (4,482,005   | )         
|                                                             |                                                                                                                                                        |                           |                                   |                                                                    |            |             |            |              |           
|                                                             |                                                                                                                                                        |                           | Total Common Stockholders Equity |                                                                    |            | 49,027,591  |            |              |            | 50,026,807 |           
|                                                             |                                                                                                                                                        |                           |                                   |                                                                    |            |             |            |              |           
|                                                             |                                                                                                                                                        |                           |                                   | Total Liabilities, Preferred Stock and
Common Stockholders Equity |            | $           | 79,491,804 |              |            | $          | 79,981,871 | 
|                                                             |                                                                                                                                                        |                           |                                   |                                                                    |            |             |            |              |           

See Accompanying Notes to Financial Statements

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REDHOOK ALE BREWERY, INCORPORATED

STATEMENTS OF OPERATIONS

(Unaudited)

|                                             |  |                             |            |                           |  |      |            |      |  |   |            |   |  |   |            |  
|-------------------------------------------- |  | --------------------------- | ---------- | ------------------------- |  | ---- | ---------- | ---- |  | - | ---------- | - |  | - | ---------- | -
|                                             |  | Three Months Ended June 30, |            | Six Months Ended June 30,
|                                             |  |                             |            |                          
|                                             |  | 2003                        |            | 2002                      |  | 2003 |            | 2002
|                                             |  |                             |            |                           |  |      |            |     
|Sales                                        |  | $                           | 12,331,580 |                           |  | $    | 11,420,437 |      |  | $ | 21,002,780 |   |  | $ | 20,341,725 |  
|Less Excise Taxes                            |  |                             | 1,068,380  |                           |  |      | 995,104    |      |  |   | 1,801,394  |   |  |   | 1,763,936  |  
|                                             |  |                             |            |                           |  |      |            |      |  |   |            |   |  |   |            |  
|Net Sales                                    |  |                             | 11,263,200 |                           |  |      | 10,425,333 |      |  |   | 19,201,386 |   |  |   | 18,577,789 |  
|Cost of Sales                                |  |                             | 7,843,863  |                           |  |      | 7,397,111  |      |  |   | 14,110,605 |   |  |   | 13,546,930 |  
|                                             |  |                             |            |                           |  |      |            |      |  |   |            |   |  |   |            |  
|Gross Profit                                 |  |                             | 3,419,337  |                           |  |      | 3,028,222  |      |  |   | 5,090,781  |   |  |   | 5,030,859  |  
|Selling, General and Administrative Expenses |  |                             | 2,936,539  |                           |  |      | 2,982,017  |      |  |   | 5,769,813  |   |  |   | 5,789,677  |  
|                                             |  |                             |            |                           |  |      |            |      |  |   |            |   |  |   |            |  
|Operating Income (Loss)                      |  |                             | 482,798    |                           |  |      | 46,205     |      |  |   | (679,032   | ) |  |   | (758,818   | )
|Interest Expense                             |  |                             | 49,733     |                           |  |      | 56,398     |      |  |   | 100,745    |   |  |   | 110,363    |  
|Other Income (Expense)  Net                 |  |                             | 14,806     |                           |  |      | 7,929      |      |  |   | 33,428     |   |  |   | 32,524     |  
|                                             |  |                             |            |                           |  |      |            |      |  |   |            |   |  |   |            |  
|Income (Loss) before Income Taxes            |  |                             | 447,871    |                           |  |      | (2,264     | )    |  |   | (746,349   | ) |  |   | (836,657   | )
|Income Tax Provision (Benefit)               |  |                             |           |                           |  |      | (165       | )    |  |   |           |   |  |   | (61,076    | )
|                                             |  |                             |            |                           |  |      |            |      |  |   |            |   |  |   |            |  
|Net Income (Loss)                            |  | $                           | 447,871    |                           |  | $    | (2,099     | )    |  | $ | (746,349   | ) |  | $ | (775,581   | )
|                                             |  |                             |            |                           |  |      |            |      |  |   |            |   |  |   |            |  
|Basic Earnings (Loss) per Share              |  | $                           | 0.07       |                           |  | $    | 0.00       |      |  | $ | (0.12      | ) |  | $ | (0.12      | )
|                                             |  |                             |            |                           |  |      |            |      |  |   |            |   |  |   |            |  
|Diluted Earnings (Loss) per Share            |  | $                           | 0.06       |                           |  | $    | 0.00       |      |  | $ | (0.12      | ) |  | $ | (0.12      | )
|                                             |  |                             |            |                           |  |      |            |      |  |   |            |   |  |   |            |  

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REDHOOK ALE BREWERY, INCORPORATED

STATEMENTS OF CASH FLOWS

(Unaudited)

|                                                       |                                   |                                                |          |                           |           |      |          |           |           |  
|------------------------------------------------------ | --------------------------------- | ---------------------------------------------- | -------- | ------------------------- | --------- | ---- | -------- | --------- | --------- | -
|                                                       |                                   |                                                |          | Six Months Ended June 30,
|                                                       |                                   |                                                |          |                          
|                                                       |                                   |                                                |          | 2003                      |           | 2002
|                                                       |                                   |                                                |          |                           |           |     
|Operating Activities                                   |                                   |                                                |          |                           |           |      |          |          
|Net Income (Loss)                                      |                                   | $                                              | (746,349 | )                         |           | $    | (775,581 | )        
|Adjustments to Reconcile Net Income (Loss) to Net Cash |                                   |                                                |          |                           |           |      |          |          
|                                                       | Provided by Operating Activities: |                                                |          |                           |           |      |          |           |          
|                                                       |                                   | Depreciation and Amortization                  |          |                           | 1,537,690 |      |          |           | 1,559,601 |  
|                                                       |                                   | Loss on Disposal of Fixed Assets               |          |                           |          |      |          |           | 22,414    |  
|                                                       |                                   | Deferred Income Taxes, Net                     |          |                           | (14,001   | )    |          |           | (72,439   | )
|                                                       |                                   | Net Change in Operating Assets and Liabilities |          |                           | (597,839  | )    |          |           | 105,149   |  
|                                                       |                                   |                                                |          |                           |           |      |          |          
|Net Cash Provided by Operating Activities              |                                   |                                                | 179,501  |                           |           |      | 839,144  |          
|                                                       |                                   |                                                |          |                           |           |      |          |          
|Investing Activities                                   |                                   |                                                |          |                           |           |      |          |          
|Expenditures for Fixed Assets                          |                                   |                                                | (671,062 | )                         |           |      | (210,192 | )        
|Other, Net                                             |                                   |                                                |         |                           |           |      | (4,912   | )        
|                                                       |                                   |                                                |          |                           |           |      |          |          
|Net Cash Used in Investing Activities                  |                                   |                                                | (671,062 | )                         |           |      | (215,104 | )        
|                                                       |                                   |                                                |          |                           |           |      |          |          
|Financing Activities                                   |                                   |                                                |          |                           |           |      |          |          
|Principal Payments on Debt                             |                                   |                                                | (225,000 | )                         |           |      | (225,000 | )        
|Repurchase of Common Stock                             |                                   |                                                | (230,667 | )                         |           |      | (398,415 | )        
|                                                       |                                   |                                                |          |                           |           |      |          |          
|Net Cash Used in Financing Activities                  |                                   |                                                | (455,667 | )                         |           |      | (623,415 | )        
|                                                       |                                   |                                                |          |                           |           |      |          |          
|Increase (Decrease) in Cash and Cash Equivalents       |                                   |                                                | (947,228 | )                         |           |      | 625      |          
|Cash and Cash Equivalents:                             |                                   |                                                |          |                           |           |      |          |          
|                                                       | Beginning of Period               |                                                |          | 7,007,351                 |           |      |          | 6,363,786 |          
|                                                       |                                   |                                                |          |                           |           |      |          |          
|                                                       | End of Period                     |                                                | $        | 6,060,123                 |           |      | $        | 6,364,411 |          
|                                                       |                                   |                                                |          |                           |           |      |          |          

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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 the periods presented.
All such adjustments were of a normal, recurring nature. The results of
operations for such interim periods are not necessarily indicative of the
results of operations for the full year.

2. Earnings (Loss) per Share

The 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 the 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 the three month period ended June 30, 2002 and the six month periods ended
June 30, 2003 and 2002 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.

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REDHOOK ALE BREWERY, INCORPORATED

NOTES TO FINANCIAL STATEMENTS (Continued)
(Unaudited)

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

|                                               |              |                                                   |                                |                                                            |           |                    |           |                  |           |           |         |      |           |           |          |   |           |           |          |  
|---------------------------------------------- | ------------ | ------------------------------------------------- | ------------------------------ | ---------------------------------------------------------- | --------- | ------------------ | --------- | ---------------- | --------- | --------- | ------- | ---- | --------- | --------- | -------- | - | --------- | --------- | -------- | -
|                                               |              |                                                   |                                |                                                            |           | Three Months Ended |           | Six Months Ended
|                                               |              |                                                   |                                |                                                            |           | June 30,           |           | June 30,        
|                                               |              |                                                   |                                |                                                            |           |                    |           |                 
|                                               |              |                                                   |                                |                                                            |           | 2003               |           | 2002             |           | 2003      |         | 2002
|                                               |              |                                                   |                                |                                                            |           |                    |           |                  |           |           |         |     
|Basic earnings (loss) per share computation:   |              |                                                   |                                |                                                            |           |                    |           |                  |           |           |         |      |           |           |          |  
|                                               | Numerator:   |                                                   |                                |                                                            |           |                    |           |                  |           |           |         |      |           |           |          |   |          
|                                               |              |                                                   | Net income (loss)              |                                                            | $         | 447,871            |           |                  | $         | (2,099    | )       |      | $         | (746,349  | )        |   | $         | (775,581  | )       
|                                               |              |                                                   | Preferred stock accretion      |                                                            |           | (11,100            | )         |                  |           | (11,100   | )       |      |           | (22,200   | )        |   |           | (22,200   | )       
|                                               |              |                                                   |                                |                                                            |           |                    |           |                  |           |           |         |      |           |           |          |  
|                                               |              |                                                   |                                | Numerator  income (loss) available
to common stockholders |           | $                  | 436,771   |                  |           | $         | (13,199 | )    |           | $         | (768,549 | ) |           | $         | (797,781 | )
|                                               |              |                                                   |                                |                                                            |           |                    |           |                  |           |           |         |      |           |           |          |  
|                                               | Denominator: |                                                   |                                |                                                            |           |                    |           |                  |           |           |         |      |           |           |          |   |          
|                                               |              |                                                   | Weighted average common shares |                                                            |           | 6,232,429          |           |                  |           | 6,792,320 |         |      |           | 6,262,008 |          |   |           | 6,830,315 |         
|                                               |              |                                                   |                                |                                                            |           |                    |           |                  |           |           |         |      |           |           |          |  
|                                               |              |                                                   |                                | Basic earnings (loss) per share                            |           | $                  | 0.07      |                  |           | $         | 0.00    |      |           | $         | (0.12    | ) |           | $         | (0.12    | )
|                                               |              |                                                   |                                |                                                            |           |                    |           |                  |           |           |         |      |           |           |          |  
|Diluted earnings (loss) per share computation: |              |                                                   |                                |                                                            |           |                    |           |                  |           |           |         |      |           |           |          |  
|                                               | Numerator:   |                                                   |                                |                                                            |           |                    |           |                  |           |           |         |      |           |           |          |   |          
|                                               |              |                                                   | Net income (loss)              |                                                            | $         | 447,871            |           |                  | $         | (2,099    | )       |      | $         | (746,349  | )        |   | $         | (775,581  | )       
|                                               |              |                                                   | Preferred stock accretion      |                                                            |           |                   |           |                  |           | (11,100   | )       |      |           | (22,200   | )        |   |           | (22,200   | )       
|                                               |              |                                                   |                                |                                                            |           |                    |           |                  |           |           |         |      |           |           |          |  
|                                               |              |                                                   |                                | Numerator  income (loss) available
to common stockholders |           | $                  | 447,871   |                  |           | $         | (13,199 | )    |           | $         | (768,549 | ) |           | $         | (797,781 | )
|                                               |              |                                                   |                                |                                                            |           |                    |           |                  |           |           |         |      |           |           |          |  
|                                               | Denominator: |                                                   |                                |                                                            |           |                    |           |                  |           |           |         |      |           |           |          |   |          
|                                               |              |                                                   | Weighted average common shares |                                                            |           | 6,232,429          |           |                  |           | 6,792,320 |         |      |           | 6,262,008 |          |   |           | 6,830,315 |         
|                                               |              |                                                   | Effect of dilutive securities: |                                                            |           |                    |           |                  |           |           |         |      |           |           |          |   |           |           |         
|                                               |              |                                                   |                                | Series B convertible preferred stock                       |           |                    | 1,289,872 |                  |           |           |        |      |           |           |         |   |           |           |         |  
|                                               |              |                                                   |                                | Stock options, net                                         |           |                    | 86,815    |                  |           |           |        |      |           |           |         |   |           |           |         |  
|                                               |              |                                                   |                                |                                                            |           |                    |           |                  |           |           |         |      |           |           |          |  
|                                               |              | Denominator for diluted earnings (loss)
per share |                                |                                                            | 7,609,116 |                    |           |                  | 6,792,320 |           |         |      | 6,262,008 |           |          |   | 6,830,315 |          
|                                               |              |                                                   |                                |                                                            |           |                    |           |                  |           |           |         |      |           |           |          |  
|                                               |              |                                                   |                                | Diluted earnings (loss) per share                          |           | $                  | 0.06      |                  |           | $         | 0.00    |      |           | $         | (0.12    | ) |           | $         | (0.12    | )
|                                               |              |                                                   |                                |                                                            |           |                    |           |                  |           |           |         |      |           |           |          |  

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REDHOOK ALE BREWERY, INCORPORATED

NOTES TO FINANCIAL STATEMENTS (Continued)
(Unaudited)

3. Inventories

Inventories consist of the following:

|                        |  |          |           |              |  |   |           | 
|----------------------- |  | -------- | --------- | ------------ |  | - | --------- | 
|                        |  | June 30, |           | December 31,
|                        |  | 2003     |           | 2002        
|                        |  |          |           |             
|Raw materials           |  | $        | 913,631   |              |  | $ | 1,060,760 | 
|Work in process         |  |          | 852,804   |              |  |   | 797,712   | 
|Finished goods          |  |          | 634,750   |              |  |   | 341,963   | 
|Promotional merchandise |  |          | 410,347   |              |  |   | 413,676   | 
|Packaging materials     |  |          | 160,384   |              |  |   | 218,316   | 
|                        |  |          |           |              |  |   |           | 
|                        |  | $        | 2,971,916 |              |  | $ | 2,832,427 | 
|                        |  |          |           |              |  |   |           | 

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

4. Stock Repurchase Program

Since May 2000, the Board of Directors has authorized the repurchase of up
to 1.5 million shares of the Companys outstanding shares of Common Stock for a
total maximum repurchase of $2,750,000. In May 2000, the Board of Directors
initially authorized the repurchase of up to 500,000 shares. Three subsequent
resolutions were passed by the Board of Directors authorizing the repurchase of
additional shares: in January 2001 for an additional 250,000 shares, in
November 2001 for an additional 250,000 shares and in August 2002 for an
additional 500,000 shares. During the six-month period ended June 30, 2003,
101,400 shares of Common Stock were purchased in the open market for $231,000.
During the quarter ended June 30, 2003, the Company completed the repurchase of
its Common Stock as authorized by the Board of Directors. Since the inception
of the repurchase program, the Company has repurchased 1,463,100 shares in the
open market for $2,750,000.

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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 six months ended June 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 June 30, |      | Six Months Ended June 30,
|                                                                                                                                     |                            |                       |         |                             |      |                          
|                                                                                                                                     |                            |                       |         | 2003                        |      | 2002                      |         | 2003 |       | 2002
|                                                                                                                                     |                            |                       |         |                             |      |                           |         |      |       |     
|Net income (loss), as reported                                                                                                       |                            | $                     | 447,871 |                             |      | $                         | (2,099  | )    |       | $    | (746,349 | ) |       | $ | (775,581 | )
|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 |                            |                       | (65,008 | )                           |      |                           | (50,283 | )    |       |      | (132,624 | ) |       |   | (101,675 | )
|                                                                                                                                     |                            |                       |         |                             |      |                           |         |      |       |      |          |   |       |   |          |  
|Pro forma net income (loss)                                                                                                          |                            | $                     | 382,863 |                             |      | $                         | (52,382 | )    |       | $    | (878,973 | ) |       | $ | (877,256 | )
|                                                                                                                                     |                            |                       |         |                             |      |                           |         |      |       |      |          |   |       |   |          |  
|                                                                                                                                     | Earnings (loss) per share: |                       |         |                             |      |                           |         |      |       |      |          |   |       |   |          |   |      
|                                                                                                                                     |                            | Basic  as reported   |         | $                           | 0.07 |                           |         | $    | 0.00  |      |          | $ | (0.12 | ) |          | $ | (0.12 | )
|                                                                                                                                     |                            | Basic  pro forma     |         | $                           | 0.06 |                           |         | $    | (0.01 | )    |          | $ | (0.14 | ) |          | $ | (0.13 | )
|                                                                                                                                     |                            | Diluted  as reported |         | $                           | 0.06 |                           |         | $    | 0.00  |      |          | $ | (0.12 | ) |          | $ | (0.12 | )
|                                                                                                                                     |                            | Diluted  pro forma   |         | $                           | 0.05 |                           |         | $    | (0.01 | )    |          | $ | (0.14 | ) |          | $ | (0.13 | )

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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
six months ended June 30, 2003, the Company had gross sales of $21,003,000,
an increase of 3.2% over gross sales of $20,342,000 for the six months ended
June 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 2.0% to 115,600 barrels for
the six months ended June 30, 2003, as compared to 113,300 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 recently 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 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 second 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.

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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 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 for an entire period), 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 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 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 facility 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 prices 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.

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

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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 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 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 six months of
2003, the Company increased its valuation allowance by $239,000 thereby
reducing the estimated income tax benefit recorded in its statement of
operations to $0. As of June 30, 2003, the Companys
deferred tax assets include a valuation allowance totaling $510,000. 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.

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. No indicators of impairment have
been identified during the six months ended June 30, 2003. 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.

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 JUNE 30, |      | SIX MONTHS ENDED JUNE 30,
|                                    |          |  |                             |      |                          
|                                    |          |  | 2003                        |      | 2002                      |  | 2003  |      | 2002
|                                    |          |  |                             |      |                           |  |       |      |     
|Sales                               |          |  | 109.5                       | %    |                           |  | 109.5 | %    |      |  | 109.4 | %    |  |  | 109.5 | %   
|Less Excise Taxes                   |          |  | 9.5                         |      |                           |  | 9.5   |      |      |  | 9.4   |      |  |  | 9.5   |     
|                                    |          |  |                             |      |                           |  |       |      |      |  |       |      |  |  |       |     
|Net Sales                           |          |  | 100.0                       |      |                           |  | 100.0 |      |      |  | 100.0 |      |  |  | 100.0 |     
|Cost of Sales                       |          |  | 69.6                        |      |                           |  | 71.0  |      |      |  | 73.5  |      |  |  | 72.9  |     
|                                    |          |  |                             |      |                           |  |       |      |      |  |       |      |  |  |       |     
|Gross Profit                        |          |  | 30.4                        |      |                           |  | 29.0  |      |      |  | 26.5  |      |  |  | 27.1  |     
|Selling, General and Administrative |          |  |                             |      |                           |  |       |      |      |  |       |      |  |  |       |     
|                                    | Expenses |  |                             | 26.1 |                           |  |       | 28.6 |      |  |       | 30.0 |  |  |       | 31.2 | 
|                                    |          |  |                             |      |                           |  |       |      |      |  |       |      |  |  |       |     
|Operating Income (Loss)             |          |  | 4.3                         |      |                           |  | 0.4   |      |      |  | (3.5  | )    |  |  | (4.1  | )   
|Interest Expense                    |          |  | 0.4                         |      |                           |  | 0.5   |      |      |  | 0.5   |      |  |  | 0.6   |     
|Other Income (Expense) Net         |          |  | 0.1                         |      |                           |  | 0.1   |      |      |  | 0.1   |      |  |  | 0.2   |     
|                                    |          |  |                             |      |                           |  |       |      |      |  |       |      |  |  |       |     
|Income (Loss) before Income Taxes   |          |  | 4.0                         |      |                           |  | 0.0   |      |      |  | (3.9  | )    |  |  | (4.5  | )   
|Income Tax Provision (Benefit)      |          |  |                            |      |                           |  |      |      |      |  |      |      |  |  | (0.3  | )   
|                                    |          |  |                             |      |                           |  |       |      |      |  |       |      |  |  |       |     
|Net Income (Loss)                   |          |  | 4.0                         | %    |                           |  | 0.0   | %    |      |  | (3.9  | )%   |  |  | (4.2  | )%  
|                                    |          |  |                             |      |                           |  |       |      |      |  |       |      |  |  |       |     

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

Sales.Total sales increased 8.0% to $12,332,000 for the three months
ended June 30, 2003, compared to $11,420,000 for the three months ended June
30, 2002, attributable to a 7.6% increase in barrels sold. Total sales volume
for the second quarter of 2003 increased to 67,900 barrels from 63,100 barrels
for the same period in 2002, the result of a 6.8% increase in shipments of the
Companys draft products and an 8.0% increase in shipments of its packaged
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 in the second quarter
of 2003, with 64.2% of total shipments in the second quarter 2003 being package
shipments versus 63.9% in the same 2002 quarter. Sales volume for the 12-pack
package decreased in the second quarter of 2003 to 32.3% of package sales from
34.6% in the second quarter of 2002. Despite a 4.9% increase in shipments to
distributors in Washington State, the Companys largest market, West coast
sales decreased 4.2% largely impacted by the ongoing economic struggles in the
State of California. Sales other than wholesale beer sales, primarily retail
pub revenues, decreased to $1,185,000 in the second quarter of 2003 from
$1,195,000 in the second quarter of 2002. The September 2002 closure of the
Companys Trolleyman Pub, located in the former Fremont Brewery, led to this
decrease but was largely offset by an increase in sales in the pubs located in
the Companys Woodinville and Portsmouth breweries. At June 30, 2003 and 2002,
the Companys products were distributed in 48 states.

Excise Taxes. Excise taxes increased to $1,068,000, or 9.5% of net sales,
in the 2003 second quarter compared to $995,000, or 9.5% of net sales, in the
comparable 2002 period due to increased sales volume.

Cost of Sales. Cost of sales increased 6.0% to $7,844,000 in the three
months ended June 30, 2003, compared to $7,397,000 in the same 2002 period, but
decreased on a per barrel basis and 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. Cost of sales benefited from increased sales volume in the
2003 second quarter as fixed and semi-variable operating costs, such as
depreciation and production salaries, were spread over a higher production
base, resulting in improved capacity utilization and a decline in the cost of
sales per barrel. As a percentage of net sales, cost of sales decreased to
69.6% in the 2003 second quarter from 71.0% 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 June 30, 2003 and 2002, the
utilization rates were 72.4% and 71.0%, respectively.

Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased to $2,937,000 in the 2003 second quarter
compared to $2,982,000 in the 2002 second quarter due primarily to a decrease
in rent and related expenses incurred in conjunction with the 2002 lease of the
Companys former Fremont Brewery in Seattle and its former corporate offices.
As a percentage of net sales, these expenses were 26.1% and 28.6% for the
quarters ended June 30, 2003 and 2002, respectively.

Interest Expense.Interest expense was $50,000 for the second quarter of
2003, down from $56,000 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 $15,000 in the 2003 second quarter, compared to income of $8,000 in
the 2002 second quarter. Interest income declined $12,000 in the same period as
a result of a lower average balance of interest-bearing deposits and lower
average interest rates. The 2002 second quarter included a $22,000 loss on
disposal of fixed assets.

Income Taxes. The Companys effective income tax rate was 0.0% for the
second quarter of 2003 compared to a 7.3% benefit for the second 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 (NOLs) created by the current year
benefit that may expire before the Company is able to utilize the tax benefit.

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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.

Six Months Ended June 30, 2003 Compared to Six Months Ended June 30, 2002

Sales. Total sales increased 3.2% to $21,003,000 for the six months ended
June 30, 2003, compared to $20,342,000 for the 2002 six-month period,
attributable to a 2.0% increase in sales volume. Total sales volume for the
first six months of 2003 increased to 115,600 barrels from 113,300 barrels for
the same period in 2002. Shipments in Washington State, the Companys largest
market, increased 1.5% in the first six months of 2003 as compared to shipments
in Washington State in the first six months of 2002. Sales other than wholesale
beer sales, primarily retail pub revenues, totaled $2,029,000 in the six months
ended June 30, 2003, compared to $2,083,000 in the comparable 2002 period. The
September 2002 closure of the Companys Trolleyman Pub, located in the former
Fremont Brewery, led to this decrease but was largely offset by an increase in
sales in the pubs located in the Companys Woodinville and Portsmouth
breweries.

Excise Taxes. Excise taxes increased to $1,801,000, or 9.4% of net sales
in the first six months of 2003, up from $1,764,000, or 9.5% of net sales in
the comparable 2002 period due to increased sales volume.

Cost of Sales. Cost of sales increased 4.2% to $14,111,000 in the first
six months of 2003 versus $13,547,000 in the same 2002 period, but also
increased on a per barrel basis and as a percentage of net sales. Increases in
the cost of raw materials, packaging and brewing supplies, as well as higher
freight costs driven by fuel surcharges were the primary factors contributing
to the increase. Cost of sales, as a percentage of net sales, was 73.5% for the
2003 period compared to 72.9% for the 2002 period. The utilization rate, based
upon the breweries combined current production capacity of 184,000 barrels and
177,000 barrels, was 62.9% and 64.2% for the six months ended June 30, 2003 and
2002, respectively.

Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased to $5,770,000 in the first six months of 2003
compared to $5,790,000 in the 2002 period due primarily to a decrease in rent
and related expenses incurred in conjunction with the 2002 lease of the
Companys former Fremont Brewery in Seattle and its former corporate offices.
As a percentage of net sales, these expenses were 30.0% and 31.2% for the six
months ended June 30, 2003 and 2002, respectively.

Interest Expense.Interest expense was $101,000 for the six months ended
June 30, 2003, down from $110,000 for the comparable 2002 period, reflecting
the effect of lower outstanding debt and lower average interest rates.

Other Income Net. Other income  net remained flat at $33,000 in the
first half of 2003 and 2002. Interest income declined $20,000 in the first six
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 $22,000
loss on disposal of fixed assets.

Income Taxes. The Companys effective income tax rate was 0.0% for the
six months ended June 30, 2003 compared to a 7.3% 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 (NOLs) 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.

14



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##### Table of Contents



Liquidity and Capital Resources

The Company had $6,060,000 and $7,007,000 of cash and cash equivalents at
June 30, 2003 and December 31, 2002, respectively. At June 30, 2003, the
Company had working capital of $3,934,000. The Companys long-term debt as a
percentage of total capitalization (long-term debt, convertible redeemable
preferred stock and common stockholders equity) was 8.8% at June 30, 2003
compared to 9.0% at December 31, 2002. Cash provided by operating activities
totaled $180,000 and $839,000 for the six months ended June 30, 2003 and
2002, respectively. Cash provided by operating activities decreased in the
six-month period ended June 30, 2003 compared to the same 2002 period as a
result of reduction of inventory to more normal levels in the first six
months of 2002 after significantly higher inventory at December 31, 2001.
During the first six months of 2003, the Company repurchased 101,400 shares
of its Common Stock totaling $231,000 and had capital expenditures totaling
$671,000 related primarily to the expansion of fermentation cellars in the
Portsmouth, New Hampshire 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%. Effective 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 June 30, 2003, there was
$6.3 million outstanding on the Term Loan, and the Companys one-month
LIBOR-based borrowing rate was approximately 3.13%. As of June 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. The December 2001 and the
March 2003 revisions to the credit agreement 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 June 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 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
15Table of Contentscannot be any guarantee that any additional financing will be available
when needed or at commercially reasonable terms.
Capital expenditures for the first six months of 2003 totaled $671,000.
Capital expenditures for 2003 are expected to total approximately $1,175,000.Since May 2000, the Board of Directors has authorized the repurchase of up to
1.5 million shares of the Companys outstanding shares of Common Stock for a
total maximum repurchase of $2,750,000. In May 2000, the Board of Directors
initially authorized the repurchase of up to 500,000 shares. Three subsequent
resolutions were passed by the Board of Directors authorizing the repurchase
of additional shares: in January 2001 for an additional 250,000 shares, in
November 2001 for an additional 250,000 shares, and in August 2002 for an
additional 500,000 shares. During the six-month period ended June 30, 2003,
101,400 shares of Common Stock were purchased in the open market for
$231,000. During the quarter ended June 30, 2003, the Company completed the
repurchase of its Common Stock as authorized by the Board of Directors. As of
June 30, 2003, 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.Certain Considerations: Issues and UncertaintiesThe 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 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 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 mandatory redemption of the Series B
Preferred Stock on December 31, 2004, at a redemption price equal to $12.61 per
share (approximately $16.3 million in the aggregate), plus an amount equal to
accumulated and unpaid dividends thereon, 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 costs16Table of Contentswill not have a negative impact on the Companys
profit margins in the future. Notice of intention to 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 recent introductions of flavored alcohol beverages by
large spirit companies and national brewers. While the Companys sales volume
for 2000, 2001 and 2002 increased when compared to the corresponding prior
year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 $791,000 for the six months ended June 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 six 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 craft17Table of Contents

beer, it could
adversely impact the Companys sales and results of operations. If the flavored
alcohol beverage 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 six months of 2003, the Company
increased its valuation allowance by $239,000 thereby reducing the estimated
income tax benefit recorded in its statement of operations to $0. As of June
30, 2003, the Companys deferred tax assets include a valuation allowance
totaling $510,000. 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.

18



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##### Table of Contents






ITEM 3.Quantitative and Qualitative Disclosures about Market Risk

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

The Company did not have any derivative financial instruments as of June
30, 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 From 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. OTHER INFORMATION




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

The Companys Annual Meeting of Shareholders was held on May 20, 2003. The
following matters were voted upon by the shareholders with the results as
follows:



| |  | (1) The following directors were duly elected to serve until the next Annual
Meeting of Shareholders or until his earlier retirement, resignation or
removal:
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------

|                   |  |           |           |                |  |  |         | 
|------------------ |  | --------- | --------- | -------------- |  |  | ------- | 
|Director           |  | Votes For |           | Votes Withheld
|Frank H. Clement   |  |           | 6,935,834 |                |  |  | 278,474 | 
|Jerry D. Jones     |  |           | 7,029,809 |                |  |  | 184,499 | 
|David R. Lord      |  |           | 7,032,369 |                |  |  | 181,939 | 
|Patrick J
McGauley |  |           | 6,933,109 |                |  |  | 281,199 | 
|Paul S. Shipman    |  |           | 7,031,564 |                |  |  | 182,744 | 
|Anthony J. Short   |  |           | 7,027,870 |                |  |  | 186,438 | 



| |  | (2)  The ratification of the appointment of Ernst & Young as independent
auditors for the Companys fiscal year ending December 31, 2003 was approved
as follows:
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------

|          |  |               |         |             |  |  |        | 
|--------- |  | ------------- | ------- | ----------- |  |  | ------ | 
|Votes For |  | Votes Against |         | Abstentions
|7,059,790 |  |               | 123,796 |             |  |  | 30,723 | 




ITEM 5.Other information

Under the A-B Investment Agreement, A-B has the right to designate one of
its Board designees to sit on each committee of the Board, as described more
fully in the Companys Annual Report on Form 10-K for the year ended December
31, 2002, Part 1, Item 1  Business  Relationship with Anheuser-Busch,
Incorporated  A-B Investment Agreement. In July 2003, A-B notified the Company
that it would no longer designate an A-B Board designee to sit on the Audit
Committee, but instead would have its Board designee participate in the Audit
Committee in an advisory capacity. The Audit Committee is currently composed of
three members, Messrs. Clement, Jones and Lord. Mr. Anthony J. Short is
currently A-Bs designee and will participate in an advisory capacity on the
Audit Committee.

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##### Table of Contents






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 2002                        
| | ---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | 31.2 |  | Certification of
Chief Financial
Officer of Redhook
Ale Brewery,
Incorporated
pursuant to Section
302 of the
Sarbanes-Oxley Act
of 2002                        
|
| | 32.1 |  | 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 1350
|
| | 32.2 |  | 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 June 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 July 29, 2003 furnishing a press release announcing
certain financial results for the quarter ended June 30, 2003.
| |  |  | ---------------------------------------------------------------------------------------------------------------------------------------

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##### Table of Contents






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, INCORPORATED
|                |  |                                   |  |     |  |                                                                              
|August 14, 2003 |  |                                   |  | BY: |  | /s/ David J. Mickelson                                                       
|                |  |                                   |  |    
|                |  |                                   |  |     |  | David J. Mickelson                                                           
|                |  |                                   |  |     |  | Executive Vice President,
Chief Financial Officer and Chief Operating Officer
|                |  |                                   |  |     |  |                                                                              
|August 14, 2003 |  |                                   |  | BY: |  | /s/ Anne M. Mueller                                                          
|                |  |                                   |  |    
|                |  |                                   |  |     |  | Anne M. Mueller                                                              
|                |  |                                   |  |     |  | Controller and Treasurer,
Principal Accounting Officer                       

21