##### Table of Contents









UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549




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Form 10-K

|                                                |  |                                                                                             
|----------------------------------------------- |  | --------------------------------------------------------------------------------------------
|þ                                               |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR
    15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934
|                                               
|For the fiscal year ended December 31,
    2002
|or                                             
|                                               
|o                                               |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR
    15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|                                               
|                                               
|For the transition period
    from           to
|Commission File Number 0-26542                 

Redhook Ale Brewery, Incorporated

(Exact name of registrant as specified in its
charter)


|                                                                                                         |  |                                            
|-------------------------------------------------------------------------------------------------------- |  | -------------------------------------------
|Washington                                                                                               |  | 91-1141254                                 
|(State of incorporation)                                                                                 |  | (I.R.S. Employer Identification
    Number)
|                                                                                                        
|14300 NE 145th Street, Suite 210
    Woodinville, Washington(Address of principal executive
    offices) |  | 98072-9045(Zip Code)                       

(425) 483-3232

(Registrants telephone number, including
area code)


Securities registered pursuant to
Section 12(b) of the Act:

None


Securities registered pursuant to
Section 12(g) of the Act:

Common Stock, Par Value $0.005 Per
Share


Rights to Purchase Common Stock

(Title of Class)


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 þ         No o

Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of
the registrants knowledge, in definitive proxy or
information statements incorporated by reference in Part III of
this Form 10-K or any amendment to this
Form 10-K.    þ

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

The aggregate market value of the Common Stock
held by non-affiliates of the Registrant (based on the closing
price of such stock, as reported by The Nasdaq National Market,
on June 30, 2002) was $10,776,817.(1)

The number of shares of the registrants
Common Stock outstanding as of March 14, 2003, was
6,254,446.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrants Proxy Statement
relating to the registrants 2003 Annual Meeting of
Stockholders to be held on May 20, 2003, are incorporated
by reference into Part III of this Report.




|    |                                                                                                                                                                                                                                                                                                                                                                            
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Excludes shares held of record on that date by
    directors and executive officers and greater than 10%
    shareholders of the registrant. Exclusion of such shares should
    not be construed to indicate that any such person directly or
    indirectly possesses the power to direct or cause the direction
    of the management of the policies of the registrant.



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TABLE OF CONTENTS



|              |                                                                                                         |  |  |  |  |  |  | 
|------------- | ------------------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I.      
|              | Item 1. Business                                                                                       
|              | Item 2. Properties                                                                                     
|              | Item 3. Legal Proceedings                                                                              
|              | Item 4. Submission of Matters to a Vote of Security Holders                                            
|              | Item 4A. Executive Officers of the Company                                                             
|PART II.     
|              | Item 5. Market for Registrants Common Equity and Related Stockholder Matters                          
|              | Item 6. Selected Financial Data                                                                        
|              | Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations          
|              | Item 7A. Quantitative and Qualitative Disclosures about Market Risk                                    
|              | Item 8. Financial Statements and Supplementary Data                                                    
|              | Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosures          
|PART III.    
|              | Item 10. Directors and Executive Officers of the Registrant                                            
|              | Item 11. Executive Compensation                                                                        
|              | Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
|              | Item 13. Certain Relationships and Related Transactions                                                
|              | Item 14. Controls and Procedures                                                                       
|PART IV.     
|              | Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K                               
|SIGNATURES   
|EXHIBIT 10.21
|EXHIBIT 23.1 



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REDHOOK ALE BREWERY, INCORPORATED

FORM 10-K

TABLE OF CONTENTS

|          |  |                                                                                                         |  |      |    | 
|--------- |  | ------------------------------------------------------------------------------------------------------- |  | ---- | -- | 
|          |  |                                                                                                         |  | Page
|          |  |                                                                                                         |  |     
|PART I.  
|ITEM 1.   |  | Business                                                                                                |  |      | 1  | 
|ITEM 2.   |  | Properties                                                                                              |  |      | 15 | 
|ITEM 3.   |  | Legal Proceedings                                                                                       |  |      | 15 | 
|ITEM 4.   |  | Submission of Matters to a Vote of Security
    Holders                                                 |  |      | 15 | 
|ITEM 4A.  |  | Executive Officers of the Company                                                                       |  |      | 15 | 
|PART II. 
|ITEM 5.   |  | Market for Registrants Common Equity and
    Related Stockholder Matters                               |  |      | 17 | 
|ITEM 6.   |  | Selected Financial Data                                                                                 |  |      | 18 | 
|ITEM 7.   |  | Managements Discussion and Analysis of
    Financial Condition
    and Results of Operations           |  |      | 19 | 
|ITEM 7A.  |  | Quantitative and Qualitative Disclosures about
    Market Risk                                          |  |      | 29 | 
|ITEM 8.   |  | Financial Statements and Supplementary Data                                                             |  |      | 30 | 
|ITEM 9.   |  | Changes In and Disagreements With Accountants
    on Accounting and Financial Disclosures               |  |      | 50 | 
|PART III.
|ITEM 10.  |  | Directors and Executive Officers of the Registrant                                                      |  |      | 50 | 
|ITEM 11.  |  | Executive Compensation                                                                                  |  |      | 50 | 
|ITEM 12.  |  | Security Ownership of Certain Beneficial Owners
    and Management
    and Related Stockholders Matters |  |      | 50 | 
|ITEM 13.  |  | Certain Relationships and Related Transactions                                                          |  |      | 50 | 
|ITEM 14.  |  | Controls and Procedures                                                                                 |  |      | 50 | 
|PART IV. 
|ITEM 15.  |  | Exhibits, Financial Statement Schedules, and
    Reports on Form 8-K                                    |  |      | 51 | 

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PART I.




Item 1.     Business

Redhook Ale Brewery, Incorporated
(Redhook or the Company) is one of the
leading brewers of craft beers in the United States and has been
at the forefront of the domestic craft brewing segment since the
Companys formation in 1981. Redhook produces its specialty
bottled and draft products in two technologically advanced,
Company-owned breweries, one in the Seattle suburb of
Woodinville, Washington (the Woodinville Brewery)
and the other in Portsmouth, New Hampshire (the Portsmouth
Brewery). By operating its own small-batch breweries, the
Company believes it is better able to control the quantities,
types and flavors of beer produced, while optimizing the quality
and consistency of its products. Management believes that the
Companys significant production capacity is of high
quality and that Redhook is the only domestic craft brewer that
owns and operates substantial production facilities in both a
western region and eastern region of the United States.

The Company currently produces nine styles of
beer, marketed under distinct brand names. The Companys
flagship brand is Redhook E.S.B., and its other principal
products include Redhook India Pale Ale, Redhook Blonde Ale,
Blackhook Porter, Redhook Hefe-weizen, Chinook Copper Ale,
and its seasonal offerings Winterhook, Redhook Sunrye Aleand Redhook Nut Brown Ale. In addition to its
principal products, the Company periodically develops and
markets new products to test and measure consumer response to
varying styles and flavors. The Company distributed its products
through a network of third-party wholesale distributors and a
long-term distribution alliance with Anheuser-Busch,
Incorporated (A-B) (the Distribution
Alliance or the Alliance) in 48 states as
of December 31, 2002.

Industry Background

The Company is a leader in the relatively small
craft brewing segment of the U.S. brewing industry. Craft
beers are distinguishable from other domestically produced beers
by their fuller flavor and adherence to traditional European
brewing styles. Although industry information for 2002 is not
yet available, shipments of beer in the craft beer segment in
2000 and 2001 were approximately 3% of total beer shipped in the
United States according to industry sources. Approximately
6.16 million barrels and 6.24 million barrels were
shipped in the U.S. by the craft beer segment in 2000 and 2001,
respectively, while total beer sold in the U.S., including
imported beer, was approximately 199.2 million and
200.5 million barrels during the same years. The Company
believes that the craft beer segments 2002 market share is
substantially unchanged. While the segments volume growth
has slowed significantly in recent years, the number of craft
brewers in the U.S. has grown dramatically, from 627 at the end
of 1994 to approximately 1,330 as of November 2002.

In the early 1900s, the U.S. brewing
industry was comprised of nearly 2,000 breweries, most of
which were small operations that produced distinctive beers for
local markets. Fewer than 1,000 of these breweries reopened
following Prohibition. During the ensuing decades, the beer
industry concentrated its resources on marketing less
distinctive styles of beer (principally pale lagers and
pilsners) for various reasons, including: to please the broadest
possible segment of the population; to benefit from economies of
scale; to facilitate mass production techniques; to lower costs
and lighten flavor profiles through the use of more corn, rice
and other adjuncts and less barley; to prolong shelf-life
through the use of pasteurization processes; and to take
advantage of mass-media advertising whereby the brewer could
market a few major brand names on a national basis. At the same
time the beer industry was narrowing its product offerings to
compete more effectively, there was also extensive consolidation
occurring in the industry. According to industry sources, the
three largest domestic brewers accounted for approximately 81%
of total beer shipped in the United States, including imports,
in 2001.

Annual per capita domestic beer consumption
declined from the highs experienced in the early 1980s, a result
of an elevated concern over health and safety issues, changing
tastes, and affluence and consumption attitudes of a maturing
generation of beer drinkers born after World War II. A
growing number of consumers began to migrate away from the major
domestic products toward a broader taste and variety in their
malt beverages, mirroring similar trends in other beverage and
cuisine categories. Foreign brewers initially benefited

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from these evolving consumption patterns. Some of
the principal European, Canadian and Mexican imported beers
offered a fuller-flavored alternative to the national brands
produced in the United States, despite also being produced by
large brewers.


By the latter half of the 1980s, a substantial
new domestic industry segment had developed in response to the
increasing consumer demand for specialty beers. Across the
country, a proliferation of regional specialty brewers (annually
selling more than 15,000 barrels but less than
2.0 million barrels of craft beer brewed at their own
facilities), contract brewers (selling craft beer brewed by a
third party to the contract brewers specifications),
microbreweries (selling less than 15,000 barrels per year),
and brewpubs (combination restaurant-breweries) emerged to form
the craft beer industry. This new segment was able to deliver
the fuller flavored products presented by the imported beers
while still offering a fresher product and one that could appeal
to local taste preferences. The strength of consumer demand has
enabled certain craft brewers, such as the Company, to evolve
from microbreweries into regional and national specialty brewers
by constructing larger breweries while still adhering to the
traditional European brewing methods that characterize the craft
brewing segment. Other craft brewers have sought to take
advantage of growing consumer demand and excess industry
capacity by contract brewing at underutilized facilities.

The growth that occurred in the last half of the
1980s and early 1990s in the craft beer segment has
been slowed by the recent success of the larger specialty
category in which the craft beer segment competes. Specialty
beverages include imported beers, fuller-flavored products
produced by national domestic brewers, and the newest segment of
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 this 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
the consumers of the import and craft beer products.

Business Strategy

The Companys principal business objective
is to be the leading brewer of craft beers in the United States.
Redhook seeks to achieve this objective by competing with high
quality products that are marketed responsibly and sold through
a world-class distribution system, resulting in further
penetration of existing markets. The central elements of the
Companys business strategy include:

Production of High-Quality Craft Beers.The Company is committed to the
production of a variety of distinctive, flavorful craft beers.
The Company brews its craft beers according to traditional
European brewing styles and methods, using only high-quality
ingredients and technologically advanced brewing equipment. The
Company does not intend to compete directly in terms of
production style, pricing or extensive mass-media advertising
typical of large national brands.

Control of Production in Company-Owned
Breweries.The Company builds, owns
and operates its own brewing facilities to optimize the quality
and consistency of its products and to achieve the greatest
control over its production costs. Management believes that its
ability to engage in ongoing product innovation and to control
product quality are critical competitive advantages.
Accordingly, the Company does not hire third parties to perform
contract brewing of any of its products.

Production Economies through Technologically
Advanced Equipment.The Companys
technologically advanced, highly automated breweries are
designed to produce beer in small batches, while attaining
production economies through automation rather than scale. The
Company believes that its investment in technology enables it to
optimize employee productivity, to contain operating costs, to
produce innovative beer styles and tastes, and to achieve the
production flexibility afforded by small-batch brewing, with
minimal loss of efficiency and process reliability.

Strategic Distribution Alliance with Industry
Leader.In October 1994, the Company
entered into a long-term distribution agreement with A-B,
pursuant to which Redhook distributes its products in
substantially all of its markets through A-Bs wholesale
distribution network. A-Bs network consists of over

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600 wholesale distributors, most of whom are
geographically contiguous and independently owned and operated.
The Alliance with A-B enabled the Company to expand its
distribution to new markets more quickly and without the delays,
costs and potential gaps or overlaps in coverage associated with
developing a network of distributors on a piecemeal basis. As an
independent company, Redhook maintains complete control over the
production and marketing of its product while utilizing
A-Bs distribution network.


Operation of Regional Brewing Facilities.Management believes that, by locating
its production facilities in proximity to the key regional
markets it serves, the Company is able to enjoy distinct
competitive advantages, including shortened delivery times to
maximize product freshness, reduced shipping costs, established
brand awareness of the Companys products, and enhanced
familiarity with local consumer tastes leading to the
Companys ability to offer select products appealing to
those regional preferences. By pursuing this strategy, Redhook
believes that it will be able to preserve its reputation and
prestige as a regional craft brewer.

Advertising and Promotion of Products.The Company promotes its products
through advertising in select markets, a co-operative
advertising and promotion program with its wholesalers, training
and education of wholesalers and retailers, promotions at local
festivals, venues, and pubs, and utilization of its own pubs. In
1999, after having never participated in any significant
advertising programs, the Company began a brand investment
program that significantly increased advertising and related
costs. During 1999 and 2000, the Company primarily utilized
radio, billboard and print advertising in select markets, while
also participating, to a small degree, in co-operative
advertising where the Companys spending is matched dollar
for dollar by the local distributor. In 2001, the Company
allocated a larger share of its advertising spending to its
co-operative advertising and promotion program. In 2002, the
Company continued its co-operative advertising and promotion
program while reducing even further those advertising
expenditures where the Company funded the entire program. The
Company also markets its products to distributors, retailers and
consumers through a variety of specialized training and
promotional methods. The Company actively trains its
distributors and retailers in understanding the brewing process,
the craft beer segment and Redhook products. Promotional methods
include introducing Redhook products on draft in pubs and
restaurants, using promotional items including tap handles,
glassware and coasters, and participating in local festivals and
sports venues to increase brand name recognition. In addition,
the Companys prominently located breweries feature pubs
and retail outlets and offer guided tours to further increase
consumer awareness of Redhook.

Products

The Company produces a variety of styles of
full-flavored craft beers using traditional European brewing
methods. The Company brews its beers using only high-quality
hops, malted barley, wheat, rye and other natural ingredients,
and does not use any rice, corn, sugar, syrups or other
adjuncts. The Companys beers are marketed on the basis of
freshness and distinctive flavor profiles. To help maintain full
flavor, the Companys products are not pasteurized. As a
result, it is appropriate that they be kept cool so that
oxidation and heat-induced aging will not adversely affect the
original taste, and that they be distributed and served as soon
as possible, generally within three months after packaging to
maximize freshness and flavor. The Company distributes its
products only in glass bottles and kegs, and its products are
freshness dated for the benefit of consumers.

The Company presently produces nine principal
brands, each with its own distinctive combination of flavor,
color and clarity:

Redhook E.S.B.The
Companys flagship brand, Redhook E.S.B.,which
accounted for approximately 59% of the Companys sales in
2002, is a full, rich, well-rounded, amber-colored ale with a
sweet toasted malt flavor balanced by a pleasant floral
liveliness derived from Tettnang hops.

Redhook India Pale Ale.A premium English, pub-style bitter
ale, Redhook IPAis pale and aggressively hopped, has a
brassy color imparted by caramelized malt, an herbal aroma
characteristic of Northwest Cascade hops, and a crisp finish.

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Redhook Blonde Ale.A delicious, thirst-quenching golden
ale. The combination of lightly roasted barley, subtle hops, and
a touch of wheat creates perfectly balanced and distinctively
drinkable ale. Formerly Redhooks summer seasonal ale,
Blonde Aleis now available year-round.

Blackhook Porter.A
London-style porter, Blackhookhas an ebony tone, a
pleasant toasted character produced by highly
roasted black barley, and a dark malt flavor suggesting coffee
and chocolate, balanced by lively hopping.

Redhook Hefe-weizen.This wheat beer is unfiltered and
named Hefe-weizen, which means wheat beer with
yeast. Leaving the yeast in, instead of filtering it out,
accentuates the wheat flavor and adds visual appeal and
distinction.

Chinook Copper Ale.Brewed in small batches exclusively for the Northwest, it is
unfiltered so beer drinkers can enjoy the full flavor
characteristics. Chinook Copperis appetizingly fruity
with light maltiness and a very pleasant piney hint in the
aroma. It has a beautiful opalescence from a small amount of
yeast suspended in the beer.

Winterhook.A rich,
seasonal holiday ale formulated specially each year for
cold-weather enjoyment, Winterhooktypically is deep in
color and rich in flavor, with complex flavors and a warm
finish. Winterhookis available during fall and winter
months.

Redhook Sunrye Ale.Gently roasted barley, delicate hops
and just a touch of rye combine for a very balanced beer.
Slightly unfiltered to exude a pearl glow, Sunryeis the
new member of the Redhook seasonal selection and is styled for
warm weather refreshment. Sunryewill be available from
April through September.

Redhook Nut Brown Ale.A malty ale with a hint of sweetness
in the finish. The combination of six barley malts and two hop
varieties results in a surprisingly smooth, well-balanced dark
beer. Nut Brown Aleis available during the late winter
and early spring.

In an effort to be responsive to varying consumer
style and flavor preferences, the Company also periodically
engages in the development and testing of new products. The
Company believes that the continued success of craft brewers
will be affected by their ability to be innovative and attentive
to consumer desires for new and distinctive taste experiences
while maintaining consistently high product quality. The
Companys technologically advanced breweries allow it to
produce small-batch experimental ales within three weeks.
Experimental products are periodically developed and typically
produced in draft form only for on-premise test marketing at the
Companys pubs and selected retail sites. If the initial
consumer reception of an experimental brew is sufficiently
positive, then its taste and formula are refined, as necessary,
and a new Redhook brand may be created. Redhook India Pale
Ale, Redhook Nut Brown Ale,and Redhook Blonde Aleare examples of products that were developed in this manner.

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, will be 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 Company does not expect that it will have a material impact
the Companys sales or results of operations. In the
Western United States, Redhook and Widmer Brothers Brewing
Company remain competitors in the highly competitive craft beer
market.

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Brewing Operations

The Brewing Process.Beer is made primarily from four
natural ingredients: malted grain, hops, yeast and water. The
grain most commonly used in brewing is barley, owing to its
distinctive germination characteristics that make it easy to
ferment. The Company uses the finest barley malt, typically
using strains of barley having two rows of grain in each ear. A
wide variety of hops may be used to add seasoning to the brew;
some varieties best confer bitterness, while others are chosen
for their ability to impart distinctive aromas to the beer.
Nearly all the yeasts used to induce or augment fermentation of
beer are of the species Saccharomyces cerevisiae,which
includes both the top-fermenting yeasts used in ale production
and the bottom-fermenting yeasts associated with lagers.

The brewing process begins when the malt supplier
soaks the barley grain in water, thereby initiating germination,
and then dries and cures the grain through kilning. This
process, known as malting, breaks down complex
carbohydrates and proteins so that they can be easily extracted.
The malting process also imparts color and flavor
characteristics to the grain. The cured grain, referred to as
malt, is then sold to the brewery. At the brewery,
various malts are cracked by milling, and mixed with warm water.
This mixture, or mash, is heated and stirred in the
mash tun, allowing the simple carbohydrates and proteins to be
converted into fermentable sugars. Naturally occurring enzymes
help facilitate this process. The mash is then strained and
rinsed in the lauter tun to produce a residual liquid, high in
fermentable sugars, called wort, which then flows
into a brew kettle to be boiled, concentrated and clarified.
Hops are added during the boil to impart bitterness, balance and
aroma. The specific mixture of hops and the brewing time and
temperature further affect the flavor of the beer. After the
boil, the wort is strained and cooled before it is moved to a
fermentation cellar, where specially cultured yeast is added to
induce fermentation. During fermentation, the worts sugars
are metabolized by the yeast cells, producing carbon dioxide and
alcohol. Some of the carbon dioxide is recaptured and absorbed
back into the beer, providing a natural source of carbonation.
After fermentation, the beer is cooled for several days while
the beer is clarified and full flavor develops. Filtration, the
final step for a filtered beer, removes unwanted yeast. At this
point, the beer is in its peak condition and ready for bottling
or keg racking. The entire brewing process of ales, from mashing
through filtration, is typically completed in 14 to
21 days, depending on the formulation and style of the
product being brewed.

(REDHOOK ALE BREW PROCESS GRAPHIC)

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Brewing Equipment.The Company uses only technologically
advanced and highly automated small-batch brewing equipment. The
Woodinville Brewery employs a 100-barrel mash tun; lauter tun;
wort receiver; wort kettle; whirlpool kettle; five 70,000-pound,
one 35,000-pound and two 25,000-pound grain silos; two
100-barrel, fifty-four 200-barrel, and ten 600-barrel
fermenters; and two 300-barrel and four 400-barrel bright tanks.
The Portsmouth Brewery employs a 100-barrel mash tun; lauter
tun; wort receiver; wort kettle; whirlpool kettle; three
70,000-pound and two 35,000-pound grain silos; nine 100-barrel
and sixteen 400-barrel fermenters; two 200-barrel and two
400-barrel bright tanks; and an anaerobic waste-water treatment
facility which completes the process cycle. During the first
half of 2003, the Portsmouth Brewery will place in service two
200-barrel and two additional 400-barrel fermenters. Both
breweries use advanced microfiltration technology, including a
diatomaceous earth pad filter, which can extend product shelf
life by eliminating unwanted yeast.

Bottling and Kegging.The Company packages its craft beers
in both bottles and kegs. Both of the Companys breweries
have fully automated, technologically advanced bottling and keg
lines. The bottle filler at both breweries utilizes a carbon
dioxide environment during bottling that is designed to ensure
that minimal oxygen is dissolved in the beer, thereby extending
product shelf life.

Quality Control.The
Company monitors production and quality control of both of its
breweries with central coordination at the Woodinville Brewery.
Both the Woodinville and Portsmouth breweries have an on-site
laboratory where microbiologists and lab technicians supervise
on-site yeast propagation, monitor product quality, test
products, measure color and bitterness, and test for oxidation
and unwanted bacteria. The Company also regularly utilizes
outside laboratories for independent product analysis.

Ingredients and Raw Materials.The Company currently purchases a
significant portion of its malted barley from a single supplier
and its premium-quality select hops, grown in the Pacific
Northwest, from competitive sources. The Company periodically
purchases small lots of European hops, which it uses to achieve
a special hop character in certain of its beers. In order to
ensure the supply of the hop varieties used in its products, the
Company enters into supply contracts for its hop requirements.
The Company anticipates that it will experience cost increases
for certain raw materials in 2003, the most significant of which
will be malted barley, as a result of a very poor 2002 worldwide
harvest. Redhook believes that alternate sources of comparable
quality malted barley and hops are available although there is
no assurance that pricing would be competitive with current
arrangements. The Company currently cultivates its own
Saccharomyces cerevisiaeyeast supply and maintains a
separate, secure supply in-house. The Company has access to
multiple competitive sources for packing materials, such as
bottles, labels, six-pack carriers, crowns and shipping cases.
The Company anticipates that its packaging costs may increase in
2003 as a result of an apparent increase in demand for glass.

Product Distribution

Redhooks products are available for sale
directly to consumers in draft and bottles at restaurants, bars
and liquor stores, as well as in bottles at supermarkets,
warehouse clubs and convenience stores. Like substantially all
craft brewers, the Companys products are delivered to
these retail outlets through a network of local distributors
whose principal business is the distribution of beer and, in
some cases, other alcoholic beverages, and who traditionally
have local distribution relationships with one or more national
beer brands. The Company, together with its distributors,
markets its products to retail outlets and relies on its
distributors to provide regular delivery to retailers, to
maintain retail shelf space and to oversee timely rotation of
inventory to ensure the freshness of its products. The Company
also offers its products directly to consumers at the
Companys two on-premise retail establishments, the
Forecasters Public Housein Woodinville, Washington and
the Cataqua Public Housein Portsmouth, New Hampshire.

In October 1994, the Company entered into the
Distribution Alliance with A-B pursuant to which Redhook began
distributing its products, for any new markets entered,
exclusively through A-Bs wholesale distribution network.
If the A-B distributor in the market does not agree to carry the
Companys products, the Company may select a non-A-B
distributor for that territory. The exclusivity provisions of
the A-B Distribution Agreement do not apply to territories where
distribution arrangements with non-Alliance

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distributors existed prior to formation of the
Distribution Alliance until such arrangements expire. During
1996, Redhook changed distribution of its products in
substantially all of the significant markets previously served
by non-A-B wholesalers to distribution through the Alliance.


Prior to establishing the Alliance with A-B, the
Company distributed its products regionally through
distributors, many of which were part of the A-B distribution
network, in eight western states: Washington, California
(northern), Oregon, Idaho, Montana, Wyoming, Colorado and
Alaska. The Companys most significant non-Alliance
wholesaler is K&L Distributors, Inc., which although not
part of the Alliance is a distributor in the A-B distribution
network and responsible for distribution of the Companys
products in most of King County, Washington, including Seattle.
K&L Distributors, Inc. accounted for approximately 13%, 14%
and 16% of total sales in 2002, 2001 and 2000, respectively. As
of December 31, 2002, the Company had 19 non-Alliance
distributors. The Company expects the percentage of sales
represented by non-Alliance distributors to continue to decline
as the Company expands its sales through the Alliance.

A-B, whose products accounted for approximately
49.2% of total beer shipped by volume in the U.S., including
imports, in 2002, distributes its products throughout the United
States through a network of over 600 wholesale distributors,
most of whom are geographically contiguous and independently
owned and operated. The Company believes that the typical A-B
distributor is financially stable and has both a long-standing
presence and a substantial market share of beer sales in its
territory.

Redhook chose to align itself with A-B through
the Alliance as an integral part of its growth strategy, and to
provide access to quality distribution throughout the United
States. Redhook was the first and is the largest independent
craft brewer to have a formal distribution agreement with a
major U.S. brewer. The Company believes that access to
A-Bs distribution network enabled it to enter targeted new
markets more rapidly and with more thorough penetration of the
available customer base in the territory. The Distribution
Alliance allowed the Company to retain control over the
selection and timing of new market introductions. The Company
believes that the existence of the Alliance, presentations by
Redhooks management at A-Bs distributor conventions,
A-B communications about Redhook in printed distributor
materials, and A-B-supported opportunities for Redhook to
educate A-B distributors about its specialty products result in
increased awareness of and demand for Redhook products among
A-Bs distributors.

Management believes that the Companys
competitors in the craft beer segment generally negotiate
distribution relationships separately with distributors in each
locality and, as a result, typically distribute through a
variety of wholesalers representing differing national beer
brands with uncoordinated territorial boundaries. Because
A-Bs distributors are assigned territories that generally
are contiguous, the Alliance enables the Company to reduce the
gaps and overlaps in distribution coverage often experienced by
the Companys competitors.

The Companys products were distributed in
48 states at the end of 2002. In 2002, the Company shipped its
products to 532 Alliance distribution points, accounting for
approximately 71% of the Companys sales volume. In
addition, sales through wholesalers that are part of the A-B
distribution network but that are not part of the Alliance
accounted for an additional 24% of the Companys sales
volume in 2002.

Under the Alliance, the Company is responsible
for marketing its products to A-Bs distributors, as well
as to retailers and consumers. The A-B distributors then place
orders with the Company, through A-B, for Redhook products. The
Company separately packages and ships the orders in refrigerated
trucks to the A-B distribution center nearest to the distributor
or, under certain circumstances, directly to the distributor.
Generally, the Company sells its products to A-B at the same
list prices the Company charges non-Alliance distributors in the
respective markets, but it must pay A-B certain fees in
connection with sales to A-B. Such fees are determined by a
formula that effectively reduces the total gross profit margin
earned on sales to A-B. However, management believes that the
benefits of the Alliance, particularly the potential for
increased sales volume, and efficiencies in delivery, state
reporting and licensing, billing and collections created by the
Alliance are significant to the Companys business.

Under the Alliance, the Company has granted A-B
the first right to distribute Redhook products in the United
States and Mexico, except in those territories already subject
to distribution agreements with non-

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Alliance distributors, in which case such right
does not commence until the existing arrangements expire. A-B
additionally has a first right to distribute new Redhook
products in non-Alliance territories. If A-B were to agree to
distribute the products of any U.S.-based small brewer
(producing or distributing less than 1 million barrels
annually) in areas where the Companys products are
distributed without the Companys approval, the Alliance
fee on sales of Redhook products in such areas would be
substantially reduced.


Sales and Marketing

The Company promotes its products through a
co-operative advertising and promotion program with its
wholesalers; media advertising in select markets; training and
education of wholesalers and retailers; promotions at local
festivals, venues, and pubs; utilization of its two breweries;
and price discounting.

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 and 2002, 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. The Company believes that the financial commitment
as well as the distributors knowledge of the local market
result in an advertising and promotion program that is targeted
in a manner that will best promote Redhook. Expenditures for the
co-op program and media advertising program totaled
$2.6 million and $1.9 million in 2001 and 2002,
respectively. 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. The Company
expects to continue to participate in the co-op advertising and
promotion program and limited media advertising in select
markets in 2003. Market and competitive considerations could
require an increase in other promotional costs associated with
developing existing and new markets.

The Companys sales and marketing staff
offers education, training and other support to wholesale
distributors of the Companys products. Because the
Companys wholesalers generally also distribute much higher
volume national beer brands and commonly distribute other
specialty brands, a critical function of the sales and marketing
staff is to elevate each distributors awareness of the
Companys products and to retain the distributors
interest in promoting increased sales of these products. This is
accomplished primarily through personal contact with each
distributor, including on-site sales training, educational tours
of the Companys breweries, and promotional activities and
expenditures shared with the distributors. The Companys
sales representatives also provide other forms of support to
wholesale distributors, such as direct contact with restaurant
and grocery chain buyers, direct involvement in the design of
grocery store displays, stacking and merchandising of beer
inventory and supply of point-of-sale materials.

The Companys sales representatives devote
considerable effort to the promotion of on-premise consumption
at participating pubs and restaurants. The Company believes that
educating retailers about the freshness and quality of the
Companys products will in turn allow retailers to assist
in educating consumers. The Company considers on-premise product
sampling and education to be among its most effective tools for
building brand identity with consumers and establishing
word-of-mouth reputation. On-premise marketing is also
accomplished through a variety of other point-of-sale tools,
such as neon signs, tap handles, coasters, table tents, banners,
posters, glassware and menu guidance. The periodic distribution
of the Companys experimental products in limited
quantities to select pubs and restaurants is another example of
on-premise marketing designed to increase consumer awareness.
The Company seeks to identify its products with local markets by
participating in or sponsoring cultural and community events,
local music and other entertainment venues, local craft beer
festivals and cuisine events, and local professional sporting
events.

The Companys breweries also play a
significant role in increasing consumer awareness of the
Companys products and enhancing Redhooks image as a
craft brewer. Many visitors take tours at the Companys
breweries. Both of the Companys breweries have a retail
pub on-site where the Companys products are

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served. In addition, the breweries have meeting
rooms that the public can rent for business meetings, parties
and holiday events, and that the Company uses to entertain and
educate distributors, retailers and the media about the
Companys products. See Item 2.
Properties. The Company also sells various items of
apparel and memorabilia bearing the Companys trademarks at
its pubs, which creates further awareness of the Companys
beers and reinforces the Companys quality image.


To further promote retail bottled product sales
and in response to local competitive conditions, the Company
regularly offers post-offs, or price discounts, to
distributors in most of its markets. Distributors and retailers
usually participate in the cost of these price discounts.

Seasonality

Sales of the Companys products are somewhat
seasonal, with the first and fourth quarters historically being
the slowest and the rest of the year showing stronger sales. The
volume of sales may also be affected by weather conditions.
Because of the seasonality of the Companys business,
results for any one quarter are not necessarily indicative of
the results that may be achieved for the full fiscal year.

Competition

The Company competes in the highly competitive
craft brewing market as well as in the much larger specialty
beer market, which 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. See
Industry Background.

Competition within the domestic craft beer
segment and the specialty beer market is based on product
quality, taste, consistency and freshness; ability to
differentiate products; promotional methods and product support;
transportation costs; distribution coverage; local appeal; and
price.

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. 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. As the Company has expanded its distribution
network outside the Pacific Northwest region, and as other craft
brewers have expanded their distribution to the Pacific
Northwest, Redhook has encountered increasing competition from
microbreweries, from other regional specialty brewers such as
Sierra Nevada Brewing Company and New Belgium Brewing Company,
as well as from contract brewers such as Boston Beer Company.
Although certain of these competitors distribute their products
nationally and may have greater financial and other resources
than the Company, management believes that the Company possesses
certain competitive advantages, including its technologically
advanced, Company-owned production facilities and distribution
through the Alliance.

A significant portion of the Companys sales
continues to be in the Pacific Northwest region, which the
Company believes is one of the most competitive craft beer
markets in the United States, both in terms of number of market
participants and consumer awareness. Since 1997, the Company has
experienced a decline in sales volume in Washington State, the
Companys largest market, of approximately 3.7%. As this
market matures, the Company expects to face increased
competition, both from increased product introductions and
aggressive price promotions.

In response to the growth of the craft beer
segment, most of the major domestic brewers have introduced
fuller-flavored beers. While these product offerings are
intended to compete with craft beers, many of them are brewed
according to methods used by the major national brewers.
Although increased participation of the major national brewers
increases competition for market share and can heighten price
sensitivity within the craft beer segment, the Company believes
that their participation will tend to increase advertising,
distribution and consumer education and awareness of craft
beers, and thus may contribute to further growth of this
industry segment.

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The Company also competes against producers of
imported beers, such as Bass, Becks, Heineken, and Modelo
(Corona). Most of these foreign brewers have significantly
greater financial resources than the Company. Although imported
beers currently account for a much greater share of the U.S.
beer market than craft beers, the Company believes that craft
brewers possess certain competitive advantages over some
importers, including lower transportation and no importation
costs, proximity to and familiarity with local consumers, a
higher degree of product freshness, eligibility for lower
federal excise taxes and absence of currency fluctuations.

In 2001 and 2002, several major distilled spirits
producers and national brewers introduced flavored alcohol
beverages, also referred to as malternative beverages. These
products, such as Smirnoff Ice, Sky Blue, Bacardi Silver and
Mikes Hard Lemonade, have initially demonstrated strong
sales and appear to have experienced favorable results in
drawing overlapping consumers away from imports and craft beers.
While recent reports indicate that sales of some of these
products appear to have leveled off or even declined slightly,
flavored alcohol beverages, in general, continue to be supported
by significant advertising spending. The producers of many of
these products have significantly greater financial resources
than the Company. The success of the flavored alcohol beverages
will likely subject the Company to increased competition.

Regulation

The Companys business is highly regulated
at federal, state and local levels. Various permits, licenses
and approvals necessary to the Companys brewery and pub
operations and the sale of alcoholic beverages are required from
various agencies, including the U.S. Treasury Department,
Bureau of Alcohol, Tobacco and Firearms (the BATF);
the United States Department of Agriculture; the United States
Food and Drug Administration; state alcohol regulatory agencies
in the states in which the Company sells its products; and state
and local health, sanitation, safety, fire and environmental
agencies. In addition, the beer industry is subject to
substantial federal and state excise taxes, although the Company
benefits from favorable treatment granted to brewers producing
less than 2 million barrels per year.

Management believes that the Company currently
has all licenses, permits and approvals necessary for its
current operations. However, existing permits or licenses could
be revoked if the Company were to fail to comply with the terms
of such permits or licenses, and additional permits or licenses
could be required in the future for the Companys existing
or expanded operations. If licenses, permits or approvals
necessary for the Companys brewery or pub operations were
unavailable or unduly delayed, or if any such permits or
licenses were revoked, the Companys ability to conduct its
business could be substantially and adversely affected.

Alcoholic
Beverage Regulation and Taxation

Both of the Companys breweries and pubs are
subject to licensing and regulation by a number of governmental
authorities. The Company operates its breweries under federal
licensing requirements imposed by the BATF. The BATF requires
the filing of a Brewers Notice upon the
establishment of a commercial brewery. In addition, commercial
brewers are required to file an amended Brewers Notice
every time there is a material change in the brewing process or
brewing equipment, change in the brewerys location, change
in the brewerys management or a material change in the
brewerys ownership. The Companys operations are
subject to audit and inspection by the BATF at any time.

In addition to the regulations imposed by the
BATF, the Companys breweries are subject to various
regulations concerning retail sales, pub operations, deliveries
and selling practices in states in which the Company sells its
products. Failure of the Company to comply with applicable
federal or state regulations could result in limitations on the
Companys ability to conduct its business. The BATFs
permits can be revoked for failure to pay taxes, to keep proper
accounts, to pay fees, to bond premises, or to abide by federal
alcoholic beverage production and distribution regulations, or
if holders of 10% or more of the Companys equity
securities are found to be of questionable character. Permits
from state regulatory agencies can be revoked for many of the
same reasons.

The U.S. federal government currently imposes an
excise tax of $18 per barrel on beer sold for consumption in the
United States. However, any brewer with production under
2 million barrels per year

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instead pays federal excise tax in the amount of
$7 per barrel on the first 60,000 barrels it sells
annually. While the Company is not aware of any plans by the
federal government to reduce or eliminate this benefit to small
brewers, any such reduction in a material amount could have an
adverse effect on the Company. In addition, the Company would
lose the benefit of this rate structure if it exceeded the 2
million barrel production threshold. Individual states also
impose excise taxes on alcoholic beverages in varying amounts,
which have also been subject to change. It is possible that
excise taxes will be increased in the future by both the federal
government and several states. In addition, increased excise
taxes on alcoholic beverages have in the past been considered in
connection with various governmental budget-balancing or funding
proposals. Any such increases in excise taxes, if enacted, could
adversely affect the Company.


In early 2003, a bill was introduced in
Washington State to increase the excise tax paid on beer sales
in Washington State, the Companys largest market, by
approximately 400%. Washington State regulations currently
require beer taxes to be paid by Washington State distributors.
If such a tax were enacted and if Washington State distributors
were to pass the cost of this tax onto consumers in the form of
higher pricing, it could negatively impact demand for the
Companys products, leading to decreased sales. If the
Company were to determine that it was necessary to absorb all or
a portion of the tax and consequently reduced the price charged
to the distributor, it could have a negative impact on results
of operations for the Company. The bill is currently being
considered in the Committee on Finance of the Washington State
House of Representatives.

State and
Federal Environmental Regulation

The Companys brewery operations are subject
to environmental regulations and local permitting requirements
and agreements regarding, among other things, air emissions,
water discharges and the handling and disposal of wastes. While
the Company has no reason to believe the operations of its
facilities violate any such regulation or requirement, if such a
violation were to occur, or if environmental regulations were to
become more stringent in the future, the Company could be
adversely affected.

Dram Shop
Laws

The serving of alcoholic beverages to a person
known to be intoxicated may, under certain circumstances, result
in the servers being held liable to third parties for
injuries caused by the intoxicated customer. The Companys
pubs have addressed this concern by establishing early closing
hours and regularly scheduled employee training. Large uninsured
damage awards against the Company could adversely affect the
Companys financial condition.

Relationship with Anheuser-Busch,
Incorporated

In October 1994, the Company entered into the
Alliance with A-B. The Alliance consists of a long-term national
distribution agreement (the A-B Distribution
Agreement) and an investment by A-B in the Company (the
A-B Investment Agreement). The Alliance gives the
Company access to A-Bs domestic network of over 600
wholesale distributors, while the Company maintains control over
the production and marketing of its products. Pursuant to the
A-B Investment Agreement, A-B invested approximately
$30 million to purchase the Companys Series B
Preferred Stock (the Series B Preferred Stock)
and common stock of the Company (Common Stock),
including newly-issued shares concurrent with the Companys
initial public offering.

A-B
Distribution Agreement

The A-B Distribution Agreement has a stated term
of 20 years, but is subject to earlier termination



| |      |                                                                                                                                                                                                                                                                                               
| | ---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (i)  | by either party without cause on
    December 31, 2004;                                                                                                                                                                                                                                       
|
| | (ii) | by either party upon an uncured material breach
    by the other party of certain provisions of the Series B
    Preferred Stock, the A-B Investment Agreement, the A-B
    Distribution Agreement or certain related A-B investment
    documents, or upon the insolvency of the other party;

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| |       |            
| | ----- | -----------
| | (iii) | by A-B upon



| |     |                                                                                                                                                                                                                         
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a) | acquisition by another large alcoholic beverage
    competitor of 10% or greater equity ownership of the Company and
    a seat on the Companys Board of Directors; or                                                 
|
| | (b) | a deterioration of the Companys financial
    condition that results from a change in ownership of the Company
    and materially adversely affects its ability to perform under
    the A-B Distribution Agreement; or



| |      |                 
| | ---- | ----------------
| | (iv) | by A-B following



| |     |                                                                                                                                                                                                                                                                                                                                                                                           
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a) | any action by the Company that in A-Bs sole
    determination damages the reputation or image of A-B or the
    brewing industry (for example, production of a high-alcohol
    beer, defamation of A-B or its products or contamination of the
    Companys products, but not poor operating results, an
    unsuccessful product introduction or competition with A-Bs
    products);
|
| | (b) | any acquisition of, agreement to acquire, or
    institution of a tender or exchange offer to acquire a
    percentage of the Companys equity securities equal to or
    greater than that held by A-B;                                                                                                                                                                                  
|
| | (c) | certain agreements pursuant to which the Company
    would merge into or consolidate with another corporation or sell
    substantially all of its assets or certain of its trademarks; or                                                                                                                                                                                                
|
| | (d) | the failure to appoint a successor acceptable to
    A-B in the event Paul S. Shipman ceases to function as the
    Companys Chief Executive Officer.                                                                                                                                                                                                                                    

The term Extraordinary Termination
refers to the termination by A-B of the A-B Distribution
Agreement for any of the reasons described under
clause (iv) above.

In the event that the A-B Distribution Agreement
is terminated on or before December 31, 2004, under the
circumstances described in (i), (iii) or (iv) above, or by
A-B under the circumstances described in (ii) above, the
terms of the Series B Preferred Stock held by A-B pursuant
to the A-B Investment Agreement (see A-B Investment Agreementbelow) 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 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. 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.

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 also constitute an event of default under the
Companys bank credit agreement. Upon default, the bank may
declare the entire outstanding term loan balance immediately due
and payable. If the loan balance became due and payable, such
payment would have seniority over the redemption of the
Series B Preferred Stock. 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. 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.

If the A-B Distribution Agreement were terminated
early as described above, it would be extremely difficult for
the Company to rebuild its distribution network without a severe
negative impact on the

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Companys sales and results of operations.
The mandatory redemption would also have a material adverse
effect on the financial position and cash flows of the Company.
It is likely that the Company would need to raise funds to fund
the development of the new distribution network where possible
and continue operations as it uses legally available funds to
pay for the redemption of the Series B Preferred Stock.
There cannot be any guarantee that the Company would be able to
successfully rebuild all, or part, of its distribution network
or that any additional financing would be available when needed,
either from the current or a replacement bank or from the
capital markets, or that any such financing would be on
commercially reasonable terms. If the Distribution Agreement
were terminated, the Companys ability to remain a going
concern would be uncertain.


A-B
Investment Agreement

Pursuant to the A-B Investment Agreement, A-B
purchased 236,756 shares of Common Stock for $7.00 per
share in October 1994 and 1,289,872 shares of Series B
Preferred Stock for $12.61 per share in November 1994.

A-B Preemptive Rights.Pursuant to the A-B Investment
Agreement, A-B exercised its right in connection with the
Companys public offering in August 1995 to purchase
716,714 shares of Common Stock at $17.00 per share in
order to maintain its 25% ownership percentage of the Common
Stock on a Fully Diluted Basis (as defined below). A-B has no
further preemptive rights.

A-B Purchase and Transfer Restrictions.The A-B Investment Agreement provides
that, to the extent A-Bs ownership exceeds 30% of the
outstanding shares of Common Stock, calculated on a Fully
Diluted Basis, as a result of a rights offering, A-B will, in
certain circumstances, take steps to divest itself of such
shares no later than the later of (i) one year from the
date of such purchase or acquisition and (ii) the earliest
period in which such shares may be sold pursuant to
Rule 144 under the Securities Act of 1933, as amended.

The A-B Investment Agreement imposes restrictions
on A-Bs ability to transfer Series B Preferred Stock
and Common Stock, including, subject to certain exceptions
(including sales of less than 3% of the outstanding Common
Stock, or sales pursuant to the exercise of registration
rights), a limited right of first refusal in favor of the
Company on proposed sales of Common Stock by A-B, an outright
prohibition of sales by A-B of more than 12.5% of the Common
Stock on a Fully Diluted Basis to any single person or group, or
of any Common Stock to brewers of malt beverages, and a
prohibition on any sale of Series B Preferred Stock prior
to an Extraordinary Termination of the A-B Distribution
Agreement.

A-B Board Representation.Under the A-B Investment Agreement,
A-B has the right to designate a number of nominees based on its
percentage ownership, but not less than two, so long as A-B
holds at least 20% of the Common Stock on a Fully Diluted Basis
(which number will be rounded up to the next highest whole
number if not a whole number). A-Bs percentage ownership
on a Fully Diluted Basis, as defined in the A-B
Investment Agreement is calculated based on the assumption that
all outstanding shares of Series B Preferred Stock and
other convertible securities are converted into Common Stock,
that all outstanding warrants and stock options (other than
stock options granted to officers, directors and employees under
the Companys option plans) have been exercised in full,
and that all holdings of A-B and its affiliated companies are
aggregated. Currently, there are no outstanding options or
warrants that would be included in the calculation of
outstanding shares on a Fully Diluted Basis. As of
March 14, 2003, A-B owned 29.7% of the Companys
Common Stock on a Fully Diluted Basis, and therefore was
entitled under the terms of the A-B Investment Agreement to
designate 2 directors to the Companys Board of
Directors. The Company is obligated to use reasonable efforts to
cause the election of the nominees designated by A-B. If the
designees are not elected, the Company is obligated to take
certain remedial measures, and A-B is entitled to elect the same
number of directors by class voting under the terms of the
Series B Preferred Stock. A-B also has a contractual right
to have one of its Board designees sit on each committee of the
Companys Board of Directors.

Covenants Binding the Company.The Company has agreed, pursuant to
the A-B Investment Agreement, that it will not, without
A-Bs consent, (i) enter into any acquisition or
investment transaction involving an aggregate purchase price
exceeding 50% of the book value of the Companys assets
prior to such

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transaction; (ii) enter into any transaction
involving the transfer of specified trademarks or trade names or
the sale of assets representing more than 50% of the book value
of the Companys assets prior to such transaction;
(iii) issue or sell to any person (including A-B), or amend
its capital structure to authorize the issuance of, equity
securities except within certain permitted categories, including
pursuant to (a) the conversion of the Series B
Preferred Stock, (b) a stock split or the exercise of any
outstanding option, (c) other issuances not exceeding in
the aggregate 20% of the shares of Common Stock and
Series B Preferred Stock (as if converted) outstanding at
the beginning of each two-year period commencing on
January 1, 1995 and on January 1 of every second year
thereafter, and (d) issuances under certain antitakeover
plans; (iv) authorize or issue any shares of capital stock
ranking equal or prior to the Series B Preferred Stock as
to dividend or liquidation rights, or entitled to more than one
vote per share or to class voting on any matter (except as
required by Washington corporation law) or to ordinary voting
power in the election of directors (other than Common Stock), or
authorize or issue any new class or series of common shares;
(v) issue or sell any equity securities to persons having
revenues of $100 million or more (subject to adjustment)
from the production or distribution of alcoholic beverages in
North and South America; (vi) afford to any other person or
group the right to designate a number of the Companys
directors equal to or greater than the largest number A-B is
contractually entitled to designate; (vii) issue or sell
any equity securities that would have the effect of reducing the
aggregate percentage ownership of A-B (and its subsidiaries and
nominees) to under 20% of the outstanding Common Stock of the
Company without providing A-B with 10 days written notice;
(viii) enter into any transaction with any affiliate of the
Company except under certain circumstances; (ix) engage in
any material respect in any business other than producing and
distributing beverages; (x) enter into a merger,
consolidation or share exchange with another corporation, except
for transactions meeting multiple criteria (including, among
others, survival of the Company and no change in control); or
(xi) amend its Articles or Bylaws in certain respects.


Certain of these covenants, as well as A-Bs
contractual Board and committee representation rights, terminate
upon the earliest of (i) a reduction in the ownership of
A-B and its affiliates to less than the greater of
(a) 610,000 shares of Common Stock (assuming conversion and
exercise of all convertible securities, options and warrants and
ignoring any stock split or other recapitalization) and
(b) 7.5% of the Common Stock calculated on a Fully Diluted
Basis; (ii) a purchase or acquisition of Common Stock by
A-B that results in an increase in the ownership of A-B and its
affiliates to more than 30% of the Common Stock calculated on a
Fully Diluted Basis, if A-B does not indicate that it will
divest itself of shares to reduce its ownership within a
10 day period; (iii) an Extraordinary Termination of
the A-B Distribution Agreement; (iv) termination of the A-B
Distribution Agreement by Redhook on the basis of an uncured
breach by, or insolvency of, A-B; and (v) termination of
the A-B Distribution Agreement by either party at the end of
2004 or the expiration thereof at the end of 2014.

Trademarks

The Company has obtained U.S. trademark
registrations for the marks and corresponding logo designs for
Ballard Bitter, Blackhook, Redhook, Redhook ESB, Wheathook,
Winterhook, Double Black Stoutand Blueline. The
Company has also obtained U.S. trademark registrations for
Forecasters, Trolleyman,and Cataqua. The
Redhookmark and certain other Company marks are also
registered or pending in various foreign countries. The Company
regards its Redhookand other trademarks as having
substantial value and as being an important factor in the
marketing of its products. The Company is not aware of any
infringing uses that could materially affect its current
business or any prior claim to the trademarks that would prevent
the Company from using such trademarks in its business. The
Companys policy is to pursue registration of its marks in
its markets whenever possible and to oppose vigorously any
infringement of its marks.

Employees

At December 31, 2002, the Company had
194 employees, including 57 in production, 79 in the
pubs, 44 in sales and marketing, and 14 in
administration. Of these, 45 in the pubs and 6 in sales and
marketing were part-time employees. The Company believes its
relations with its employees to be good.

14



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##### Table of Contents






Item 2.     Properties

The Company currently operates two
technologically advanced, highly automated small-batch
breweries, one in the Seattle suburb of Woodinville, Washington
and the other in Portsmouth, New Hampshire. See Notes 4, 5
and 11 of the Notes to Financial Statements included
elsewhere herein.

The Woodinville
Brewery.The Woodinville Brewery,
located on approximately 22 acres (17 of which are
developable) in Woodinville, Washington, a suburb of Seattle, is
across the street from the Chateau Ste. Michelle Winery, next to
the Columbia Winery and visible from a popular bicycle path. The
Woodinville Brewery is comprised of an approximately 88,000
square-foot building, a 40,000 square-foot building and an
outdoor tank farm. The two buildings house a 100-barrel
brewhouse, fermentation cellars, filter rooms, grain storage
silos, a bottling line, a keg filling line, dry storage, two
coolers and loading docks. The brewery includes a retail
merchandise outlet and the Forecasters Public House, a
4,000 square-foot family-oriented pub that seats 200 and
features an outdoor beer garden that seats an additional 200.
Additional entertainment facilities include a
4,000 square-foot special events room accommodating up to
250 people. The brewery also houses office space, a portion
of which is occupied by the Companys corporate office and
the remainder of which is leased through March 2005. The
brewerys current production capacity is approximately
250,000 barrels per year under ideal brewing conditions. The
Company purchased the land in 1993 and believes that its value
has appreciated.

The Portsmouth
Brewery.The Portsmouth Brewery is
located on approximately 23 acres in Portsmouth, New
Hampshire. The land is subleased, the term of which expires in
2047, and contains two seven-year extension options. The
Portsmouth Brewery is modeled after the Woodinville Brewery and
is similarly equipped, but is larger in design, covering 125,000
square feet to accommodate all phases of the Companys
brewing operations under one roof. Also included is a retail
merchandise outlet, the Cataqua Public House, a
4,000 square-foot family-oriented pub with an outdoor beer
garden, and a special events room accommodating up to
250 people. Production began in late October 1996, with an
initial brewing capacity of approximately 100,000 barrels per
year. In 2002, additional brewing capacity was installed,
bringing the current production capacity to 110,000 barrels
per year. During the first half of 2003, the Company plans to
further expand its fermentation capacity in order to accommodate
anticipated growth, bringing the current production capacity to
approximately 125,000 barrels per year. The Company plans
to phase in additional brewing capacity as needed, up to the
maximum designed production capacity of approximately
250,000 barrels per year under ideal brewing conditions.




Item 3.     Legal
Proceedings

The Company is involved from time to time in
claims, proceedings and litigation arising in the normal course
of business. The Company believes that, to the extent that it
exists, any pending or threatened litigation involving the
Company or its properties will not likely have a material
adverse effect on the Companys financial condition or
results of operations.




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

None.




Item 4A.     Executive
Officers of the Company



| |                                                                                            
| | -------------------------------------------------------------------------------------------
| | Paul S. Shipman (50) 
    President, Chief Executive Officer and Chairman of the
    Board

Mr. Shipman is one of the Companys
founders and has served as its President since September 1981,
Chairman of the Board since November 1992, and Chief Executive
Officer since June 1993. Prior to founding the Company,
Mr. Shipman was a marketing analyst for the Chateau
Ste. Michelle Winery from 1978 to 1981. Mr. Shipman
received his Bachelors degree in English from Bucknell
University in 1975 and his Masters degree in Business
Administration from the Darden Business School, University of
Virginia, in 1978.

15



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##### Table of Contents





| |                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------
| | David J. Mickelson (43) 
    Executive Vice President, Chief Financial Officer and Chief
    Operating Officer

Mr. Mickelson was named Chief Financial
Officer in August 2000 in addition to his position of Executive
Vice President and Chief Operating Officer, which he has held
since March 1995. From April 1994 to March 1995, he was the
Companys Vice President and General Manager. From July
1992 to December 1994, he served as its Chief Financial Officer,
and was also named General Manager in January 1994. He served as
the Companys Controller from 1987 to July 1992, and
additionally was elected Treasurer in 1989. From 1985 to 1987,
he was the Controller for Certified Foods, Inc. and from 1981 to
1985 served as a loan officer with Barclays Bank PLC.
Mr. Mickelson received his Bachelors degree in
Business Administration from the University of Washington in
1981.



| |                                                        
| | -------------------------------------------------------
| | Pamela J. Hinckley (49)  Vice
    President, Marketing

Ms. Hinckley has served as Vice President,
Marketing since August 2000, and from March 1995 to May 1996.
From June 1996 to July 2000, Ms. Hinckley served as the
Companys Vice President, Sales and Marketing. She served
as the Companys Marketing Director from August 1992 to
March 1995 and its Retail Tourism Manager from August 1988 to
August 1992. From 1984 to 1988, she was the wine buyer for a
Seattle-area specialty food and wine retailer, and from 1982 to
1984 she was the retail and tourism manager for Stevenot Winery.
Ms. Hinckley received her Bachelors degree in
Psychology from Suffolk University in 1974.



| |                                                     
| | ----------------------------------------------------
| | Gregory J. Marquina (48)  Vice
    President, Sales

Mr. Marquina joined the Company in August
2000 as Vice President, Sales. From 1993 to 2000, he was a
principal of Coast Distributing Company, an A-B distributor in
San Diego, California. From March 1979 to May 1993,
Mr. Marquina held several management positions for A-B,
including Division Manager So. California (1989-1993), Division
Manager Northwest (1986-1989), Region Marketing Coordinator
(1983-1986), Region Administrator (1981-1983), and District
Manager (1979-1981). Mr. Marquina served as Product Manager
from 1977 to 1979, and Regional Account Manager from 1976 to
1977, both with Armour Food Co. He received his Bachelors
degree in Business Administration from the University of Oregon
in 1976.



| |                                                                 
| | ----------------------------------------------------------------
| | Gerard C. Prial (48)  Vice
    President, East Coast Operations

Mr. Prial has served as Vice President, East
Operations since November 2001. From 1996 to November 2001,
Mr. Prial served as the General Manager of the
Companys Portsmouth Brewery. He served as the
Companys Southern California Field Sales Manager from
August 1994 to March 1996. From April 1993 to April 1994,
Mr. Prial served as Vice President of Sales for Brewski
Brewing Company of Culver City, California. From 1979 to 1993,
he served in various positions for Wisdom Import Sales Company
in Irvine, California. From 1977 to 1979, Mr. Prial worked
for the Miller Brewing Company as an Area Manager in the Pacific
Northwest. He received his Bachelors degree in Management
& Economics from Marietta College in Marietta, Ohio in 1977.



| |                                                     
| | ----------------------------------------------------
| | Allen L. Triplett (44)  Vice
    President, Brewing

Mr. Triplett has served as Vice President,
Brewing since March 1995. From 1987 to March 1995, he was the
Companys Production Manager. He has worked in virtually
every facet of production since joining the Company in 1985. Mr.
Triplett has taken coursework at the Siebel Institute of Brewing
and the University of California at Davis. He is a member of the
Master Brewers Association of America, currently serving as
Technical Director in the Northwest district, and a member of
the American Society of Brewing Chemists. He received his
Bachelors degree in Petroleum Engineering from the
University of Wyoming in 1985.

There is no family relationship between any
directors or executive officers of the Company.

16



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##### Table of Contents






PART II.






|        |                                                                          
|------- | -------------------------------------------------------------------------
|Item 5. | Market for Registrants Common Equity
    and Related Stockholder Matters

The Companys Common Stock trades on the
Nasdaq National Market under the trading symbol HOOK. The table
below sets forth, for the fiscal quarters indicated, the
reported high and low sale prices of the Companys Common
Stock, as reported on the Nasdaq National Market.

|     |                |      |   |       |  |  |   |       | 
|---- | -------------- | ---- | - | ----- |  |  | - | ----- | 
|     |                | High |   | Low  
|     |                |      |   |      
|2002 |                |      |   |       |  |  |   |      
|     | First quarter  |      | $ | 3.350 |  |  | $ | 1.670 | 
|     | Second quarter |      | $ | 2.780 |  |  | $ | 2.000 | 
|     | Third quarter  |      | $ | 2.250 |  |  | $ | 1.700 | 
|     | Fourth quarter |      | $ | 2.550 |  |  | $ | 1.790 | 
|2001 |                |      |   |       |  |  |   |      
|     | First quarter  |      | $ | 1.875 |  |  | $ | 1.500 | 
|     | Second quarter |      | $ | 2.500 |  |  | $ | 1.438 | 
|     | Third quarter  |      | $ | 2.080 |  |  | $ | 1.510 | 
|     | Fourth quarter |      | $ | 1.920 |  |  | $ | 1.450 | 

As of March 14, 2003, there were
844 common stockholders of record, although the Company
believes that the number of beneficial owners of its Common
Stock is substantially greater.

The Company has not paid any dividends since
1994. The Company anticipates that for the foreseeable future,
all earnings, if any, will be retained for the operation and
expansion of its business and the potential redemption of the
Series B Preferred Stock, and that it will not pay cash
dividends. The payment of dividends, if any, in the future will
be at the discretion of the Board of Directors and will depend
upon, among other things, future earnings, capital requirements,
restrictions in future financing agreements, the general
financial condition of the Company and general business
conditions. Payment of dividends is also restricted by terms of
the Series B Preferred Stock. See Note 7 of the Notes
to Financial Statements  Convertible Redeemable
Preferred Stock.

Securities Authorized for Issuance Under
Equity Compensation Plans

The following is a summary as of
December 31, 2002 of all equity compensation plans of the
Company that provide for the issuance of equity securities as
compensation. See Note 8 of the Notes to Financial
Statements  Common Stockholders
Equity  for additional discussion.

|                                                               |       |                      |           |                   |  |                             |      |      |  |  |        |        | 
|-------------------------------------------------------------- | ----- | -------------------- | --------- | ----------------- |  | --------------------------- | ---- | ---- |  |  | ------ | ------ | 
|                                                               |       |                      |           |                   |  | Number of Securities       
|                                                               |       | Number of Securities |           | Weighted Average  |  | Remaining Available for    
|                                                               |       | to be Issued Upon    |           | Exercise Price of |  | Future Issuance under      
|                                                               |       | Exercise of          |           | Outstanding       |  | Equity Compensation        
|                                                               |       | Outstanding Options, |           | Options, Warrants |  | Plans (excluding securities
|                                                               |       | Warrants and Rights  |           | and Rights        |  | reflected in column (a))   
|Plan Category                                                  |       | (a)                  |           | (b)               |  | (c)                        
|                                                               |       |                      |           |                   |  |                            
|Equity compensation plans approved by security
    holders     |       |                      | 1,407,602 |                   |  | $                           | 3.73 |      |  |  | 64,399 |       
|Equity compensation plans not approved by
    security holders |       |                      |          |                   |  |                             |     |      |  |  |       |       
|                                                               |       |                      |           |                   |  |                             |      |      |  |  |        |       
|                                                               | Total |                      |           | 1,407,602         |  |                             | $    | 3.73 |  |  |        | 64,399 | 
|                                                               |       |                      |           |                   |  |                             |      |      |  |  |        |       

17



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##### Table of Contents








|        |                        
|------- | -----------------------
|Item 6. | Selected Financial Data

The following selected financial data should be
read in conjunction with the Companys Financial Statements
and the Notes thereto and Managements Discussion and
Analysis of Financial Condition and Results of Operations
included elsewhere in this Form 10-K. The selected
statement of operations and balance sheet data for, and as of
the end of, each of the five years in the period ended
December 31, 2002, are derived from the financial
statements of the Company. The operating data are derived from
unaudited information maintained by the Company.

|                                             |  |                                                     |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|-------------------------------------------- |  | --------------------------------------------------- | ------- | ---- |  | ---- | ------- | ---- |  | ---- | ------- | - |  | - | ------- | - |  | - | ------- | -
|                                             |  |                                                    
|                                             |  | Year Ended December 31,                            
|                                             |  |                                                    
|                                             |  | 2002                                                |         | 2001 |  | 2000 |         | 1999 |  | 1998
|                                             |  |                                                     |         |      |  |      |         |      |  |     
|                                             |  |                                                    
|                                             |  | (In thousands, except per share and operating data)
|Statement of Operations Data:                |  |                                                     |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|Sales                                        |  | $                                                   | 40,913  |      |  | $    | 40,117  |      |  | $    | 37,837  |   |  | $ | 35,459  |   |  | $ | 35,962  |  
|Less Excise Taxes                            |  |                                                     | 3,465   |      |  |      | 3,412   |      |  |      | 3,425   |   |  |   | 3,265   |   |  |   | 3,321   |  
|                                             |  |                                                     |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|Net Sales                                    |  |                                                     | 37,448  |      |  |      | 36,705  |      |  |      | 34,412  |   |  |   | 32,194  |   |  |   | 32,641  |  
|Cost of Sales                                |  |                                                     | 27,597  |      |  |      | 26,740  |      |  |      | 24,581  |   |  |   | 22,613  |   |  |   | 23,917  |  
|                                             |  |                                                     |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|Gross Profit                                 |  |                                                     | 9,851   |      |  |      | 9,965   |      |  |      | 9,831   |   |  |   | 9,581   |   |  |   | 8,724   |  
|Special Valuation Provision(1)               |  |                                                     |        |      |  |      |        |      |  |      |        |   |  |   |        |   |  |   | 5,173   |  
|Selling, General and Administrative Expenses |  |                                                     | 10,910  |      |  |      | 11,817  |      |  |      | 11,747  |   |  |   | 11,290  |   |  |   | 9,086   |  
|                                             |  |                                                     |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|Operating Income (Loss)                      |  |                                                     | (1,059  | )    |  |      | (1,852  | )    |  |      | (1,916  | ) |  |   | (1,709  | ) |  |   | (5,535  | )
|Interest Expense                             |  |                                                     | 230     |      |  |      | 394     |      |  |      | 593     |   |  |   | 533     |   |  |   | 679     |  
|Other Income (Expense)  Net(2)              |  |                                                     | 30      |      |  |      | 249     |      |  |      | 1,453   |   |  |   | (49     | ) |  |   | 127     |  
|                                             |  |                                                     |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|Income (Loss) before Income Taxes            |  |                                                     | (1,259  | )    |  |      | (1,997  | )    |  |      | (1,056  | ) |  |   | (2,291  | ) |  |   | (6,087  | )
|Income Tax Provision (Benefit)               |  |                                                     | (126    | )    |  |      | (679    | )    |  |      | (328    | ) |  |   | (768    | ) |  |   | (2,076  | )
|                                             |  |                                                     |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|Net Income (Loss)                            |  | $                                                   | (1,133  | )    |  | $    | (1,318  | )    |  | $    | (728    | ) |  | $ | (1,523  | ) |  | $ | (4,011  | )
|                                             |  |                                                     |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|                                            
|Basic Earnings (Loss) per Share              |  | $                                                   | (0.18   | )    |  | $    | (0.19   | )    |  | $    | (0.10   | ) |  | $ | (0.20   | ) |  | $ | (0.52   | )
|Diluted Earnings (Loss) per Share            |  | $                                                   | (0.18   | )    |  | $    | (0.19   | )    |  | $    | (0.10   | ) |  | $ | (0.20   | ) |  | $ | (0.52   | )
|                                            
|Operating Data (in barrels):                 |  |                                                     |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|Beer Shipped                                 |  |                                                     | 225,900 |      |  |      | 223,100 |      |  |      | 212,600 |   |  |   | 197,600 |   |  |   | 202,300 |  
|Production Capacity, End of Period(3)        |  |                                                     | 360,000 |      |  |      | 350,000 |      |  |      | 350,000 |   |  |   | 350,000 |   |  |   | 350,000 |  

|                                       |  |              |        |      |  |      |        |      |  |      |        |  |  |   |        |  |  |   |        | 
|-------------------------------------- |  | ------------ | ------ | ---- |  | ---- | ------ | ---- |  | ---- | ------ |  |  | - | ------ |  |  | - | ------ | 
|                                       |  |             
|                                       |  | December 31,
|                                       |  |             
|                                       |  | 2002         |        | 2001 |  | 2000 |        | 1999 |  | 1998
|                                       |  |              |        |      |  |      |        |      |  |     
|Balance Sheet Data (in thousands):     |  |              |        |      |  |      |        |      |  |      |        |  |  |   |        |  |  |   |        | 
|Cash and Cash Equivalents              |  | $            | 7,007  |      |  | $    | 6,364  |      |  | $    | 7,487  |  |  | $ | 5,463  |  |  | $ | 3,010  | 
|Working Capital                        |  |              | 4,346  |      |  |      | 4,640  |      |  |      | 4,817  |  |  |   | 2,635  |  |  |   | 1,666  | 
|Total Assets                           |  |              | 79,982 |      |  |      | 82,155 |      |  |      | 85,621 |  |  |   | 87,707 |  |  |   | 89,528 | 
|Long-term Debt, Net of Current Portion |  |              | 6,075  |      |  |      | 6,525  |      |  |      | 6,975  |  |  |   | 7,425  |  |  |   | 7,875  | 
|Convertible Redeemable Preferred Stock |  |              | 16,188 |      |  |      | 16,144 |      |  |      | 16,099 |  |  |   | 16,055 |  |  |   | 16,011 | 
|Common Stockholders Equity            |  |              | 50,027 |      |  |      | 52,474 |      |  |      | 54,502 |  |  |   | 55,859 |  |  |   | 57,326 | 



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                  
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Represents a non-cash valuation provision to
    write down the production assets of the Fremont Brewery to an
    estimate of their net realizable value in 1998. The Company
    operated the Fremont Brewery as a brewing facility from 1989
    until 1998. As of December 31, 1999, the Company had sold
    substantially all of the equipment for an amount approximately
    equal to its estimated net realizable value.

18



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##### Table of Contents





|    |                                                                                                                                                                                                                                                                                                                                      
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | Includes a gain of approximately
    $1.0 million for the year ended December 31, 2000,
    resulting from the July 2000 sale of a warehousing facility and
    land owned by the Company which was used as the keg filling,
    storage and shipping facility prior to the 1998 curtailment of
    the Fremont Brewery operations.  
|   
|(3) | Based on the Companys estimate of current
    production capacity of equipment, assuming ideal brewing
    conditions, installed as of the end of such period. Amounts do
    not reflect maximum designed production capacity. See
    Managements Discussion and Analysis of Financial
    Condition and Results of Operations.




Item 7.     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 year ended
December 31, 2002, the Company had gross sales of
$40,913,000, an increase of 2.0% from 2001. The Companys
sales consist predominantly of sales of beer to third-party
distributors and A-B through 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 brewery pubs.

The Companys sales volume
(shipments) increased 1.3% to 225,900 barrels in 2002
as compared to 2001. 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 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.

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. In early
2003, a bill was introduced in Washington State to increase the
excise tax paid on beer sales in Washington State, the
Companys largest market, by approximately 400%. Washington
State regulations currently require beer taxes to be paid by
Washington State distributors. If such a tax were enacted and if
Washington State distributors were to pass the cost of this tax
onto consumers in the form of higher pricing, it could
negatively impact demand for the Companys products,
leading to decreased sales. If the Company were to determine
that it was necessary to absorb all or a portion of the tax and
consequently reduced the price charged to the distributor, it
could have a negative impact on results of operations of the

19



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##### Table of Contents



Company. The bill is currently being considered
in the Committee on Finance of the Washington State House of
Representatives.


Under normal circumstances, the Company operates
its brewing facilities up to six days per week with multiple
shifts per day. The current production capacity, under ideal
brewing conditions, is approximately 250,000 barrels per
year at the Woodinville Brewery and 110,000 barrels per
year at the Portsmouth Brewery. During the peak sales volume
periods of 2002, production capacity at the Portsmouth Brewery
was nearly fully utilized. In order to accommodate anticipated
growth in the markets served by the Portsmouth Brewery,
including growth resulting from sales of Widmer Hefeweizen, the
Company plans to further expand fermentation capacity during the
first half of 2003. This expansion will bring the current
production capacity to 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 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
semivariable operating costs, such as depreciation and
production salaries, are spread over a larger sales base.
Because current period production levels have been substantially
below the Companys current production capacity, gross
margins have been negatively impacted. This negative impact
could be reduced if 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.

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, will be 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 Company does not expect that it will have a material impact
the Companys sales or results of operations. In the
Western United States, Redhook and Widmer Brothers Brewing
Company remain competitors in the highly competitive craft beer
market.

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.

20



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##### Table of Contents



Income Taxes.The
Company records federal and state income taxes in accordance
with Financial Accounting Standards Board (FASB)
Statement of Financial Accounting Standard (SFAS)
No. 109, Accounting for Income Taxes. Deferred
income taxes or tax benefits reflect the tax effect of temporary
differences between the amounts of assets and liabilities for
financial reporting purposes and amounts as measured for tax
purposes. The Company will establish a valuation allowance if it
is more likely than not that these items will either expire
before the Company is able to realize their benefits, or that
future deductibility is uncertain. The valuation allowance is
reviewed and adjusted on a quarterly basis based on
managements assessment of the realizability of the
deferred tax assets. As of December 31, 2002, the Company
had 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 realization 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, thereby
reducing the income tax benefit recorded in its statement of
operations. The valuation allowance covers a portion of the
Companys deferred tax assets, specifically certain 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 is unable to generate adequate taxable income in the
future, the Company may be required to cease recognition of
additional tax benefits and to record a greater valuation
allowance covering NOLs.

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

21



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##### Table of Contents



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.

|                                             |  |                         |       |      |  |      |       |    |  |  |       |   
|-------------------------------------------- |  | ----------------------- | ----- | ---- |  | ---- | ----- | -- |  |  | ----- | --
|                                             |  |                        
|                                             |  | Year Ended December 31,
|                                             |  |                        
|                                             |  | 2002                    |       | 2001 |  | 2000
|                                             |  |                         |       |      |  |     
|Sales                                        |  |                         | 109.3 | %    |  |      | 109.3 | %  |  |  | 110.0 | % 
|Less Excise Taxes                            |  |                         | 9.3   |      |  |      | 9.3   |    |  |  | 10.0  |   
|                                             |  |                         |       |      |  |      |       |    |  |  |       |   
|Net Sales                                    |  |                         | 100.0 |      |  |      | 100.0 |    |  |  | 100.0 |   
|Cost of Sales                                |  |                         | 73.7  |      |  |      | 72.9  |    |  |  | 71.4  |   
|                                             |  |                         |       |      |  |      |       |    |  |  |       |   
|Gross Profit                                 |  |                         | 26.3  |      |  |      | 27.1  |    |  |  | 28.6  |   
|Selling, General and Administrative Expenses |  |                         | 29.1  |      |  |      | 32.2  |    |  |  | 34.2  |   
|                                             |  |                         |       |      |  |      |       |    |  |  |       |   
|Operating Income (Loss)                      |  |                         | (2.8  | )    |  |      | (5.1  | )  |  |  | (5.6  | ) 
|Interest Expense                             |  |                         | 0.6   |      |  |      | 1.1   |    |  |  | 1.7   |   
|Other Income (Expense)  Net                 |  |                         | 0.1   |      |  |      | 0.7   |    |  |  | 4.2   |   
|                                             |  |                         |       |      |  |      |       |    |  |  |       |   
|Income (Loss) before Income Taxes            |  |                         | (3.3  | )    |  |      | (5.5  | )  |  |  | (3.1  | ) 
|Income Tax Provision (Benefit)               |  |                         | (0.3  | )    |  |      | (1.9  | )  |  |  | (1.0  | ) 
|                                             |  |                         |       |      |  |      |       |    |  |  |       |   
|Net Income (Loss)                            |  |                         | (3.0  | )%   |  |      | (3.6  | )% |  |  | (2.1  | )%
|                                             |  |                         |       |      |  |      |       |    |  |  |       |   



| |                                                                          
| | -------------------------------------------------------------------------
| | Year Ended December 31, 2002 Compared
    to Year Ended December 31, 2001

Sales.Total sales
increased 2.0% to $40,913,000 in 2002, compared to $40,117,000
in 2001, attributable to a 1.3% increase in barrels sold and a
3.8% increase in other sales. Total sales volume in 2002
increased to 225,900 barrels from 223,100 barrels in 2001.
A 3.8% decline in shipments in Washington State, the
Companys largest market, was the major factor leading to
the nearly flat sales volume for the West Coast. 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 2002, with 64.3% of 2002 total volume being
package shipments versus 63.2% in 2001. Within package sales,
the 12-pack package also increased to 34% of package sales from
30% in 2001. Sales other than wholesale beer sales, primarily
retail pub revenues, totaled $4,455,000 in 2002, compared to
$4,291,000 in 2001. At December 31, 2002 and 2001, the
Companys products were distributed in 48 states.

Excise Taxes.Excise
taxes increased to $3,465,000, or 9.3% of net sales in 2002,
compared to $3,412,000, or 9.3% of net sales in 2001. In early
2003, a bill was introduced in Washington State to increase the
excise tax paid on beer sales in Washington State, the
Companys largest market, by approximately 400%. Washington
State regulations currently require beer taxes to be paid by
Washington State distributors. If such a tax were enacted and if
Washington State distributors were to pass the cost of this tax
onto consumers in the form of higher pricing, it could
negatively impact demand for the Companys products,
leading to decreased sales. If the Company were to determine
that it was necessary to absorb all or a portion of the tax and
consequently reduced the price charged to the distributor, it
could have a negative impact on results of operations of the
Company. The bill is currently being considered in the Committee
on Finance of the Washington State House of Representatives.

Cost of Sales.Cost
of sales increased 3.2% to $27,597,000 in 2002, compared to
$26,740,000 in 2001, due to higher sales volume, increased raw
material and packaging costs, and a shift in product mix towards
an increasing proportion of package sales, including 12-packs.
Cost of sales, as a percentage of net sales, increased to 73.7%
in 2002, compared to 72.9% in 2001. The utilization rate, based
upon the breweries combined current production capacity,
was 63.4% and 63.8% for the years ended December 31, 2002
and 2001, respectively. The Company anticipates that it will
experience cost increases for certain raw materials in 2003, the
most significant of which will be malted barley, as a result of
a very poor 2002 worldwide harvest.

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##### Table of Contents



The full impact of the reduction in barley supply
is still unknown. As well, the Company anticipates that its
packaging costs may increase in 2003 as a result of an apparent
increase in demand for glass.


Selling, General and Administrative Expenses.Selling, general and administrative
expenses decreased to $10,909,000 in 2002, compared to
$11,817,000 in 2001 due to a reduction in advertising and
promotion expenses as well as sales salaries and incentives
during 2002. The Company significantly reduced its use of media
advertising, particularly print, radio and billboard, during
2002 and moderately reduced spending on its co-operative
advertising and promotion program where desired results were not
being achieved. Expenditures for the co-op program and media
advertising program totaled $1.9 million and
$2.6 million in 2002 and 2001, respectively. As a
percentage of net sales, selling, general and administrative
expenses were 29.1% and 32.2% for years ended December 31,
2002 and 2001, respectively.

Interest Expense.Interest expense decreased to $230,000
in 2002, compared to $394,000 in 2001, reflecting the effect of
lower outstanding debt and lower average interest rates.

Other Income (Expense)  Net.Other income  net,
decreased to income of $30,000 in 2002, compared to income of
$249,000 in the 2001 period. The 2002 statement of operations
reflects a $138,000 decline in interest income, resulting from
lower average interest rates, and a $97,000 loss on the disposal
of assets, most of which were disposed of in conjunction with
the September consolidation of the Companys corporate
offices into the Woodinville Brewery.

Income Taxes.The
Companys effective income tax rate was a 10.0% benefit in
2002, compared to a 34.0% benefit in 2001. During 2002, the
Company established a $271,000 valuation allowance reducing the
income tax benefit. The valuation allowance covers a portion of
the Companys deferred tax assets, specifically certain
state net operating tax loss carryforwards, that may expire
before the Company is able to utilize the tax benefit. The
Company expects that it will not be able to record any tax
benefit in 2003 or 2004 as it does not anticipate it will be
able to generate adequate taxable income.



| |                                                                          
| | -------------------------------------------------------------------------
| | Year Ended December 31, 2001 Compared
    to Year Ended December 31, 2000

Sales.Total sales
increased 6.0% to $40,117,000 in 2001, compared to $37,837,000
in 2000, attributable to a 4.9% increase in barrels sold, an
increase in average revenue per barrel, and a slight increase in
other sales. Total sales volume in 2001 increased to
223,100 barrels from 212,600 barrels in 2000. A 1.9%
decline in shipments in Washington State, the Companys
largest market, was the major factor leading to the nearly flat
sales volume for the West Coast. 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
2001, with 63.2% of 2001 total volume being package shipments
versus 62.0% in 2000. Within package sales, the 12-pack package
also increased to 30% of package sales from 26% in 2000. Sales
other than wholesale beer sales, primarily retail pub revenues,
totaled $4,291,000 in 2001, compared to $4,144,000 in 2000. At
December 31, 2001 and 2000, the Companys products
were distributed in 48 states.

Excise Taxes.Excise
taxes decreased to $3,412,000, or 9.3% of net sales in 2001,
compared to $3,425,000, or 10.0% of net sales in 2000. In
September 2000, Washington State regulations were modified to
require beer taxes previously paid by Washington State brewers
to now be paid by Washington State distributors, the effect of
which was to decrease sales prices charged distributors and
decrease excise taxes. Accordingly, both sales and excise taxes
decreased as a percentage of net sales in 2001.

Cost of Sales.Cost
of sales increased 8.8% to $26,740,000 in 2001, compared to
$24,581,000 in 2000, due to higher sales volume, increased raw
material costs, and a shift in product mix towards an increasing
proportion of package sales, including 12-packs. Cost of sales,
as a percentage of net sales, increased to 72.9% in 2001,
compared to 71.4% in 2000. The utilization rate, based upon the
breweries combined current production capacity, was 63.8%
and 60.7% for the years ended December 31, 2001 and 2000,
respectively.

Selling, General and Administrative Expenses.Selling, general and administrative
expenses increased to $11,817,000 in 2001, compared to
$11,747,000 in 2000 due to the addition of several new sales
positions in key markets during the second half of 2000 and an
increase in expenditures for the co-operative advertising and

23



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##### Table of Contents



promotion program with the Companys
wholesalers. As a percentage of net sales, selling, general and
administrative expenses were 32.2% and 34.2% for years ended
December 31, 2001 and 2000, respectively.


Interest Expense.Interest expense decreased to $394,000
in 2001, compared to $594,000 in 2000, reflecting the effect of
lower outstanding debt and lower average interest rates.

Other Income (Expense)  Net.Other income  net,
decreased to income of $249,000 in 2001, compared to income of
$1,453,000 in the 2000 period. The 2000 period includes a gain
of approximately $1.0 million resulting from the sale of a
real estate parcel which was previously used as the Fremont
Brewery keg filling, storage and shipping facility. 2001
interest income decreased due to lower average interest rates
and lower average interest-bearing deposits.

Income Taxes.The
Companys effective income tax rate was a 34.0% benefit in
2001, compared to a 31.1% benefit in 2000. The difference in the
effective rates is primarily the result of a significantly lower
pre-tax loss in 2000, relative to other components of the tax
provision calculation, such as the exclusion of a portion of
meals and entertainment expenses from tax return deductions.

Liquidity and Capital Resources

The Company had $7,007,000 and $6,364,000 of cash
and cash equivalents at December 31, 2002 and 2001,
respectively. At December 31, 2002, the Company had working
capital of $4,346,000. The Companys long-term debt as a
percentage of total capitalization (long-term debt, preferred
stock and common stockholders equity) was 9.0% and 9.2% as
of December 31, 2002 and 2001, respectively. Cash provided
by operating activities totaling $3,098,000 in 2002 reflects
lower deferred tax benefit as compared to 2001 attributable to a
smaller pre-tax loss and the creation of a valuation allowance,
as well as an increase in refundable deposits resulting from a
greater portion of kegs, and in particular one-sixth barrels
purchased by the Company in 2002, that had not yet been returned
by wholesalers and retail establishments. Cash provided by
operating activities totaling $471,000 in 2001 reflects the
timing of the collections of accounts receivable in December
2000; the timing of payments of certain current liabilities in
January 2001; and an increase in the finished goods inventory to
normal levels following unusually low levels at
December 31, 2000. All three factors resulted in
significant uses of cash during 2001.

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 on 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 December 31, 2002, there was $6.525 million
outstanding on the Term Loan, and the Companys one-month
LIBOR-based borrowing rate was 3.2%. As of December 31,
2002, 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. 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.

24



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##### Table of Contents



In mid-November 2001, the bank notified the
Company that, as of September 30, 2001, the Company was not
in compliance with the Fixed Charge Coverage Ratio covenant as
the ratio had been re-defined in the June 2001 amendment to the
credit agreement. In December 2001, the credit agreement was
again amended to address the following: to waive the
September 30, 2001 covenant violation; to temporarily
modify the time periods used to calculate the Fixed Charge
Coverage Ratio; to modify the minimum Fixed Charge Coverage
Ratio the Company must maintain; and to redefine Fixed Charge
Coverage Ratio to comply with the banks revised internal
guidelines. Under the December 2001 amendment, the Company must
maintain a minimum Fixed Charge Coverage Ratio of 1.00:1 for all
periods after December 31, 2001. Prior to the December 2001
amendment, the minimum Fixed Charge Coverage Ratio was 1.05:1.
The Companys failure to meet the minimum Fixed Charge
Coverage Ratio of 1.05:1 as of September 30, 2001 was
significantly affected by the results of the quarter ended
December 31, 2000, which reduced the twelve-month
cash flow calculation (as defined in the June 2001
amendment) by approximately $360,000. The shortening of the time
periods used in the calculation of the ratio for the last
quarter of 2001 and the first two quarters of 2002, as well as
the lowering of the cash-flow component of the ratio to 1:00:1
from 1:05:1, reduce the likelihood that a violation of the
covenant will occur again. However, if the Company were to
report a significant net loss for one or more quarters within a
time period used to calculate the ratio, the ratio would be
negatively impacted which may cause the Company to not meet the
covenant. 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
December 31, 2001 and all quarters since then through
December 31, 2002.

The Company has required capital principally for
the construction and development of its technologically advanced
production facilities. To date, the Company has financed its
capital requirements through cash flow from operations, bank
borrowings and the sale of common and preferred stock. The
Company expects to meet its future financing needs and working
capital and capital expenditure requirements through cash on
hand, operating cash flow and, to the extent required and
available, bank borrowings and offerings of debt or equity
securities. However, there cannot be any guarantee that any
additional financing will be available when needed or at
commercially reasonable terms.

Capital expenditures for 2002 totaled $705,000.
Capital expenditures for 2003 are expected to total
approximately $1,175,000.

Since May 2000, the Board of Directors has
authorized the repurchase of 1.5 million shares of the
Companys outstanding shares of Common Stock. 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. As of December 31,
2002, a total of 1,362,000 shares of Common Stock had been
purchased in the open market for an aggregate expenditure of
$2,519,000. As of March 14, 2003, a total of 1,433,000
shares of Common Stock had been purchased in the open market for
an aggregate expenditure of $2,684,000.

25



---



##### Table of Contents



The Company has certain commitments,
contingencies and uncertainties relating to its normal
operations. As of December 31, 2002, contractual
commitments associated with the Companys long-term debt,
convertible redeemable preferred stock, operating leases and hop
purchase commitments are as follows:

|                                          |  |                         |     |      |  |      |        |      |  |      |     |            |  |       |     |  |  |   |       |  |  |   |       |  |  |   |        | 
|----------------------------------------- |  | ----------------------- | --- | ---- |  | ---- | ------ | ---- |  | ---- | --- | ---------- |  | ----- | --- |  |  | - | ----- |  |  | - | ----- |  |  | - | ------ | 
|                                          |  |                         |     |      |  |     
|                                          |  | Year Ended December 31, |     |      |  |     
|                                          |  |                         |     |      |  |     
|                                          |  | 2003                    |     | 2004 |  | 2005 |        | 2006 |  | 2007 |     | Thereafter |  | Total
|                                          |  |                         |     |      |  |      |        |      |  |      |     |            |  |      
|                                          |  |                        
|                                          |  | (In thousands)         
|Long-term Debt(1)                         |  | $                       | 450 |      |  | $    | 450    |      |  | $    | 450 |            |  | $     | 450 |  |  | $ | 4,725 |  |  |   |      |  |  | $ | 6,525  | 
|Convertible Redeemable Preferred Stock(2) |  |                         |    |      |  |      | 16,300 |      |  |      |    |            |  |       |    |  |  |   |      |  |  |   |      |  |  |   | 16,300 | 
|Operating Leases(3)                       |  |                         | 267 |      |  |      | 267    |      |  |      | 260 |            |  |       | 253 |  |  |   | 251   |  |  |   | 9,845 |  |  |   | 11,143 | 
|Hop Purchase Commitments(4)               |  |                         | 246 |      |  |      | 401    |      |  |      | 239 |            |  |       | 34  |  |  |   |      |  |  |   |      |  |  |   | 920    | 
|                                          |  |                         |     |      |  |      |        |      |  |      |     |            |  |       |     |  |  |   |       |  |  |   |       |  |  |   |        | 
|                                          |  | $                       | 963 |      |  | $    | 17,418 |      |  | $    | 949 |            |  | $     | 737 |  |  | $ | 4,976 |  |  | $ | 9,845 |  |  | $ | 34,888 | 
|                                          |  |                         |     |      |  |      |        |      |  |      |     |            |  |       |     |  |  |   |       |  |  |   |       |  |  |   |        | 



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Represents annual principal payments required on
    the Companys Term Loan. Interest on the Term Loan accrues
    at LIBOR plus 1.75% to 2.25%, depending on the debt-to-tangible
    net worth ratio. Payment of accrued interest due monthly is not
    reflected above. 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.                                                                                                                                                                                                                                                                                                           
|   
|(2) | In the event that the A-B Distribution
    Agreement is terminated on or before December 31, 2004,
    under circumstances described in Item 1 to this report (see
    Business  Relationship with Anheuser-Busch,
    Incorporated  A-B Distribution Agreement), the terms
    of the Series B Preferred Stock 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 the A-B Distribution Agreement were terminated
    early as described above, distribution of the Companys
    products would suffer significant disruption and would have a
    long-term material adverse effect on the Companys sales
    and results of operations as well as on its financial position
    and cash flows from operations.
|   
|(3) | Represents minimum aggregate future lease
    payments under noncancelable operating leases.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   
|(4) | Represents purchase commitments to ensure that
    the Company has the necessary supply of specialty hops to meet
    future production requirements. Contracts generally provide for
    payment upon delivery of the product with the balance due on any
    unshipped product during the year following the harvest year.
    The Company believes that, based upon its relationships with its
    hop suppliers, the risk of non-delivery is low and that if
    non-delivery of its required supply of hops were to occur, the
    Company would be able to purchase hops to support its operations
    from other competitive sources. Hop commitments in excess of
    future requirements, if any, will not materially affect its
    financial condition or results of operations.                                                                                                                                                       

Certain Considerations: Issues and
Uncertainties

The Company does not provide forecasts of future
financial performance or sales volumes, although this Annual
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, and the availability of
financing and the issues discussed below. While Company
management is optimistic about the Companys long-term
prospects, the

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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 Part 1,
Item 1  Business  Product
Distribution, and Relationship With Anheuser-Busch,
Incorporated for 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 (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 costs will 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 volumes for 2000, 2001 and 2002
increased when compared to the corresponding prior years
volumes, the Company did experience declining sales volumes
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 semivariable 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 semivariable operating costs causes gross margin to be
very sensitive to relatively small increases or decreases in
sales volume. In addition, other factors that could affect cost
of sales include changes in freight charges, the availability
and prices of raw materials and packaging materials, the mix
between draft and bottled product sales, the sales mix of
various bottled product packages, and Federal or state excise
taxes. The Company anticipates that it will experience cost
increases in 2003 for malted barley, due to a poor 2002
worldwide barley harvest. The prices for the glass

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bottles the Company utilizes to bottle its
products are also expected to increase in 2003. Additionally,
there is currently a bill pending in committee in the Washington
State House of Representatives that proposes to increase the
excise tax paid on beer sales in Washington State, the
Companys largest market, by approximately 400%. These
increases in the cost of sales could have a material adverse
impact on the Company. Also, as sales volume through the
Distribution Alliance increase, 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 and 2002, 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 in 2001 and 2002, respectively. 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 2002. 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 wholesalers or
A-Bs ability to distribute products efficiently due to any
significant operational problems, such as wide-spread labor
union strikes, the loss of K&L Distributors as a
customer, or the termination of the Distribution Alliance could
have a material adverse impact on the Companys sales and
results of operations.

Customer Acceptance, Consumer Trends and
Public Attitudes.If consumers were
unwilling to accept the Companys products or if general
consumer trends caused a decrease in the demand for beer,
including craft beer, it could adversely impact the
Companys sales and results of operations. If the flavored
alcohol beverage market continues to grow, it could draw
consumers away from the Companys products and have an
adverse effect of the Companys sales and results of
operations. Further, the alcoholic beverage industry has become
the subject of considerable societal and political attention in
recent years due to increasing public concern over
alcohol-related social problems, including drunk driving,
underage drinking and health consequences from the misuse of
alcohol. If beer consumption in general were to come into
disfavor among domestic consumers, or if the domestic beer
industry were subjected to significant additional governmental
regulation, the Companys sales and results of operations
could be adversely affected.

Effect of Sales Trends on Brewery Efficiency
and Operations.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.

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Income Tax Benefits.As of December 31, 2002, the Company had approximately
$11.2 million of deferred tax assets, comprised principally
of federal net operating loss carryforwards 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 five to 15 years, can be used to offset
regular tax liabilities in future years. The realization 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, thereby
reducing the income tax benefit recorded in its statement of
operations. The valuation allowance covers a portion of the
Companys deferred tax assets, specifically certain 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 is unable to generate adequate taxable income in the
future, the Company may be required to cease recognition of
additional tax benefits and to record a greater valuation
allowance covering NOLs.

Recent Accounting Pronouncements

In June 2002, the FASB issued Statement of
Financial Accounting Standards No. 146, Accounting for
Costs Associated with Exit or Disposal Activities. This
statement provides guidance on the recognition, measurement and
reporting of certain costs related to exit or disposal
activities and is effective for exit or disposal activities
initiated after December 31, 2002. Adoption of SFAS 146 did
not have an impact on the Companys financial condition or
results of operations.

In January 2003, 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.




Item 7A.     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 does not have any derivative
financial instruments as of December 31, 2002.

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Item 8.     Financial
Statements and Supplementary Data

REDHOOK ALE BREWERY, INCORPORATED

INDEX TO FINANCIAL STATEMENTS

|                                                                                                       |  |      |    | 
|------------------------------------------------------------------------------------------------------ |  | ---- | -- | 
|                                                                                                       |  | Page
|                                                                                                       |  |     
|Audited Financial Statements:                                                                          |  |      |    | 
|                                                                                                      
|Report of Ernst & Young LLP, Independent
    Auditors                                                  |  |      | 31 | 
|                                                                                                      
|Balance Sheets as of December 31, 2002 and
    2001                                                    |  |      | 32 | 
|                                                                                                      
|Statements of Operations for the Years Ended
    December 31, 2002, 2001 and 2000                      |  |      | 33 | 
|                                                                                                      
|Statements of Common Stockholders Equity
    for the Years Ended
    December 31, 2002, 2001 and 2000 |  |      | 34 | 
|                                                                                                      
|Statements of Cash Flows for the Years Ended
    December 31, 2002, 2001 and 2000                      |  |      | 35 | 
|                                                                                                      
|Notes to Financial Statements                                                                          |  |      | 36 | 

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##### Table of Contents



REPORT OF ERNST & YOUNG LLP, INDEPENDENT
AUDITORS

The Board of Directors

Redhook Ale Brewery, Incorporated


We have audited the accompanying balance sheets
of Redhook Ale Brewery, Incorporated as of December 31,
2002 and 2001, and the related statements of operations, common
stockholders equity, and cash flows for each of the three
years in the period ended December 31, 2002. These
financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted our audits in accordance with
auditing standards generally accepted in the United States.
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.

In our opinion, the financial statements referred
to above present fairly, in all material respects, the financial
position of Redhook Ale Brewery, Incorporated as of
December 31, 2002 and 2001, and the results of its
operations and its cash flows for each of the three years in the
period ended December 31, 2002, in conformity with
accounting principles generally accepted in the United States.



| |              
| | -------------
| | ERNST & YOUNG

Seattle, Washington

January 24, 2003


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REDHOOK ALE BREWERY, INCORPORATED

BALANCE SHEETS

|                                                                 |                                                                                                                                                                |                                   |                                                                        |              |            |            |            |            |            |            | 
|---------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------- | ---------------------------------------------------------------------- | ------------ | ---------- | ---------- | ---------- | ---------- | ---------- | ---------- | 
|                                                                 |                                                                                                                                                                | December 31,                      |                                                                        | December 31,
|                                                                 |                                                                                                                                                                | 2002                              |                                                                        | 2001        
|                                                                 |                                                                                                                                                                |                                   |                                                                        |             
|ASSETS                                                          
|Current Assets:                                                  |                                                                                                                                                                |                                   |                                                                        |              |            |            |            |           
|                                                                 | Cash and Cash Equivalents                                                                                                                                      |                                   | $                                                                      | 7,007,351    |            |            | $          | 6,363,786  |           
|                                                                 | Accounts Receivable                                                                                                                                            |                                   |                                                                        | 1,490,517    |            |            |            | 1,406,329  |           
|                                                                 | Inventories                                                                                                                                                    |                                   |                                                                        | 2,832,427    |            |            |            | 3,139,290  |           
|                                                                 | Other                                                                                                                                                          |                                   |                                                                        | 238,268      |            |            |            | 168,349    |           
|                                                                 |                                                                                                                                                                |                                   |                                                                        |              |            |            |            |           
|                                                                 |                                                                                                                                                                | Total Current Assets              |                                                                        |              | 11,568,563 |            |            |            | 11,077,754 |           
|Fixed Assets, Net                                                |                                                                                                                                                                |                                   | 68,360,716                                                             |              |            |            | 70,968,503 |           
|Other Assets                                                     |                                                                                                                                                                |                                   | 52,592                                                                 |              |            |            | 108,955    |           
|                                                                 |                                                                                                                                                                |                                   |                                                                        |              |            |            |            |           
|                                                                 |                                                                                                                                                                |                                   | Total Assets                                                           |              | $          | 79,981,871 |            |            | $          | 82,155,212 | 
|                                                                 |                                                                                                                                                                |                                   |                                                                        |              |            |            |            |           
|LIABILITIES, PREFERRED STOCK AND COMMON
    STOCKHOLDERS EQUITY
|Current Liabilities:                                             |                                                                                                                                                                |                                   |                                                                        |              |            |            |            |           
|                                                                 | Accounts Payable                                                                                                                                               |                                   | $                                                                      | 2,270,450    |            |            | $          | 1,939,565  |           
|                                                                 | Accrued Salaries, Wages and Payroll Taxes                                                                                                                      |                                   |                                                                        | 1,635,463    |            |            |            | 1,657,618  |           
|                                                                 | Refundable Deposits                                                                                                                                            |                                   |                                                                        | 2,546,628    |            |            |            | 2,000,280  |           
|                                                                 | Other Accrued Expenses                                                                                                                                         |                                   |                                                                        | 320,470      |            |            |            | 389,847    |           
|                                                                 | Current Portion of Long-Term Debt                                                                                                                              |                                   |                                                                        | 450,000      |            |            |            | 450,000    |           
|                                                                 |                                                                                                                                                                |                                   |                                                                        |              |            |            |            |           
|                                                                 |                                                                                                                                                                | Total Current Liabilities         |                                                                        |              | 7,223,011  |            |            |            | 6,437,310  |           
|                                                                 |                                                                                                                                                                |                                   |                                                                        |              |            |            |            |           
|Long-Term Debt, Net of Current Portion                           |                                                                                                                                                                |                                   | 6,075,000                                                              |              |            |            | 6,525,000  |           
|                                                                 |                                                                                                                                                                |                                   |                                                                        |              |            |            |            |           
|Deferred Income Taxes, Net                                       |                                                                                                                                                                |                                   | 468,798                                                                |              |            |            | 575,340    |           
|                                                                 |                                                                                                                                                                |                                   |                                                                        |              |            |            |            |           
|Commitments                                                      |                                                                                                                                                                |                                   |                                                                        |              |            |            |            |           
|                                                                
|Convertible Redeemable Preferred Stock                           |                                                                                                                                                                |                                   | 16,188,255                                                             |              |            |            | 16,143,855 |           
|                                                                 |                                                                                                                                                                |                                   |                                                                        |              |            |            |            |           
|Common Stockholders Equity:                                     |                                                                                                                                                                |                                   |                                                                        |              |            |            |            |           
|                                                                 | Common Stock, Par Value $0.005 per Share,
    Authorized, 50,000,000 Shares; Issued and Outstanding,
    6,326,146 Shares in 2002 and 6,920,046 Shares in 2001 |                                   |                                                                        | 31,631       |            |            |            | 34,600     |           
|                                                                 | Additional Paid-In Capital                                                                                                                                     |                                   |                                                                        | 54,477,181   |            |            |            | 55,743,429 |           
|                                                                 | Retained Earnings (Deficit)                                                                                                                                    |                                   |                                                                        | (4,482,005   | )          |            |            | (3,304,322 | )         
|                                                                 |                                                                                                                                                                |                                   |                                                                        |              |            |            |            |           
|                                                                 |                                                                                                                                                                | Total Common Stockholders Equity |                                                                        |              | 50,026,807 |            |            |            | 52,473,707 |           
|                                                                 |                                                                                                                                                                |                                   |                                                                        |              |            |            |            |           
|                                                                 |                                                                                                                                                                |                                   | Total Liabilities, Preferred Stock and Common
    Stockholders Equity |              | $          | 79,981,871 |            |            | $          | 82,155,212 | 
|                                                                 |                                                                                                                                                                |                                   |                                                                        |              |            |            |            |           

See Accompanying Notes to Financial Statements

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REDHOOK ALE BREWERY, INCORPORATED

STATEMENTS OF OPERATIONS

|                                             |  |                         |            |      |  |      |            |   |  |   |            |  
|-------------------------------------------- |  | ----------------------- | ---------- | ---- |  | ---- | ---------- | - |  | - | ---------- | -
|                                             |  |                        
|                                             |  | Year Ended December 31,
|                                             |  |                        
|                                             |  | 2002                    |            | 2001 |  | 2000
|                                             |  |                         |            |      |  |     
|Sales                                        |  | $                       | 40,912,532 |      |  | $    | 40,116,667 |   |  | $ | 37,836,882 |  
|Less Excise Taxes                            |  |                         | 3,464,762  |      |  |      | 3,411,922  |   |  |   | 3,425,046  |  
|                                             |  |                         |            |      |  |      |            |   |  |   |            |  
|Net Sales                                    |  |                         | 37,447,770 |      |  |      | 36,704,745 |   |  |   | 34,411,836 |  
|Cost of Sales                                |  |                         | 27,597,345 |      |  |      | 26,739,965 |   |  |   | 24,580,536 |  
|                                             |  |                         |            |      |  |      |            |   |  |   |            |  
|Gross Profit                                 |  |                         | 9,850,425  |      |  |      | 9,964,780  |   |  |   | 9,831,300  |  
|Selling, General and Administrative Expenses |  |                         | 10,909,476 |      |  |      | 11,817,041 |   |  |   | 11,747,095 |  
|                                             |  |                         |            |      |  |      |            |   |  |   |            |  
|Operating Income (Loss)                      |  |                         | (1,059,051 | )    |  |      | (1,852,261 | ) |  |   | (1,915,795 | )
|Interest Expense                             |  |                         | 229,916    |      |  |      | 393,853    |   |  |   | 593,628    |  
|Other Income (Expense)  Net                 |  |                         | 30,074     |      |  |      | 248,754    |   |  |   | 1,453,090  |  
|                                             |  |                         |            |      |  |      |            |   |  |   |            |  
|Income (Loss) before Income Taxes            |  |                         | (1,258,893 | )    |  |      | (1,997,360 | ) |  |   | (1,056,333 | )
|Income Tax Provision (Benefit)               |  |                         | (125,610   | )    |  |      | (679,103   | ) |  |   | (328,126   | )
|                                             |  |                         |            |      |  |      |            |   |  |   |            |  
|Net Income (Loss)                            |  | $                       | (1,133,283 | )    |  | $    | (1,318,257 | ) |  | $ | (728,207   | )
|                                             |  |                         |            |      |  |      |            |   |  |   |            |  
|Basic Earnings (Loss) per Share              |  | $                       | (0.18      | )    |  | $    | (0.19      | ) |  | $ | (0.10      | )
|                                             |  |                         |            |      |  |      |            |   |  |   |            |  
|Diluted Earnings (Loss) per Share            |  | $                       | (0.18      | )    |  | $    | (0.19      | ) |  | $ | (0.10      | )
|                                             |  |                         |            |      |  |      |            |   |  |   |            |  

See Accompanying Notes to Financial Statements

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REDHOOK ALE BREWERY, INCORPORATED

STATEMENTS OF COMMON STOCKHOLDERS
EQUITY

|                           |                            |              |           |            |   |          |        |           |   |               |            |            |   |   |            |            |   |   |            |            |  
|-------------------------- | -------------------------- | ------------ | --------- | ---------- | - | -------- | ------ | --------- | - | ------------- | ---------- | ---------- | - | - | ---------- | ---------- | - | - | ---------- | ---------- | -
|                           |                            |              |           |            |   |          |        |          
|                           |                            | Common Stock |           |            |   |          |        | Total    
|                           |                            |              |           | Additional |   | Retained |        | Common   
|                           |                            |              |           | Par        |   | Paid-In  |        | Earnings  |   | Stockholders
|                           |                            | Shares       |           | Value      |   | Capital  |        | (Deficit) |   | Equity       
|                           |                            |              |           |            |   |          |        |           |   |              
|Balance, January 1, 2000   |                            |              | 7,687,786 |            |   | $        | 38,439 |           |   | $             | 56,989,631 |            |   | $ | (1,169,058 | )          |   | $ | 55,859,012 |           
|                           | Repurchase of Common Stock |              |           | (375,000   | ) |          |        | (1,875    | ) |               |            | (582,608   | ) |   |            |           |   |   |            | (584,483   | )
|                           | Other                      |              |           |           |   |          |        |          |   |               |            |           |   |   |            | (44,400    | ) |   |            | (44,400    | )
|                           | Net Loss                   |              |           |           |   |          |        |          |   |               |            |           |   |   |            | (728,207   | ) |   |            | (728,207   | )
|                           |                            |              |           |            |   |          |        |           |   |               |            |            |   |   |            |            |   |   |            |           
|Balance, December 31, 2000 |                            |              | 7,312,786 |            |   |          | 36,564 |           |   |               | 56,407,023 |            |   |   | (1,941,665 | )          |   |   | 54,501,922 |           
|                           | Repurchase of Common Stock |              |           | (392,740   | ) |          |        | (1,964    | ) |               |            | (663,594   | ) |   |            |           |   |   |            | (665,558   | )
|                           | Other                      |              |           |           |   |          |        |          |   |               |            |           |   |   |            | (44,400    | ) |   |            | (44,400    | )
|                           | Net Loss                   |              |           |           |   |          |        |          |   |               |            |           |   |   |            | (1,318,257 | ) |   |            | (1,318,257 | )
|                           |                            |              |           |            |   |          |        |           |   |               |            |            |   |   |            |            |   |   |            |           
|Balance, December 31, 2001 |                            |              | 6,920,046 |            |   |          | 34,600 |           |   |               | 55,743,429 |            |   |   | (3,304,322 | )          |   |   | 52,473,707 |           
|                           | Repurchase of Common Stock |              |           | (593,900   | ) |          |        | (2,969    | ) |               |            | (1,266,248 | ) |   |            |           |   |   |            | (1,269,217 | )
|                           | Other                      |              |           |           |   |          |        |          |   |               |            |           |   |   |            | (44,400    | ) |   |            | (44,400    | )
|                           | Net Loss                   |              |           |           |   |          |        |          |   |               |            |           |   |   |            | (1,133,283 | ) |   |            | (1,133,283 | )
|                           |                            |              |           |            |   |          |        |           |   |               |            |            |   |   |            |            |   |   |            |           
|Balance, December 31, 2002 |                            |              | 6,326,146 |            |   | $        | 31,631 |           |   | $             | 54,477,181 |            |   | $ | (4,482,005 | )          |   | $ | 50,026,807 |           
|                           |                            |              |           |            |   |          |        |           |   |               |            |            |   |   |            |            |   |   |            |           

See Accompanying Notes to Financial Statements

34



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##### Table of Contents



REDHOOK ALE BREWERY, INCORPORATED

STATEMENTS OF CASH FLOWS

|                                                                                             |                                              |                                             |            |           |         |      |            |           |          |   |            |           |          |  
|-------------------------------------------------------------------------------------------- | -------------------------------------------- | ------------------------------------------- | ---------- | --------- | ------- | ---- | ---------- | --------- | -------- | - | ---------- | --------- | -------- | -
|                                                                                             |                                              |                                            
|                                                                                             |                                              | Year Ended December 31,                    
|                                                                                             |                                              |                                            
|                                                                                             |                                              | 2002                                        |            | 2001      |         | 2000
|                                                                                             |                                              |                                             |            |           |         |     
|Operating Activities                                                                         |                                              |                                             |            |           |         |      |            |           |          |   |            |          
|Net Income (Loss)                                                                            |                                              | $                                           | (1,133,283 | )         |         | $    | (1,318,257 | )         |          | $ | (728,207   | )        
|Adjustments to Reconcile Net Income (Loss) to Net
    Cash Provided by Operating Activities: |                                              |                                             |            |           |         |      |            |           |          |   |            |          
|                                                                                             | Depreciation and Amortization                |                                             |            | 3,092,441 |         |      |            | 3,182,661 |          |   |            | 3,240,484 |         
|                                                                                             | Deferred Income Taxes                        |                                             |            | (106,542  | )       |      |            | (700,809  | )        |   |            | (350,918  | )       
|                                                                                             | Loss (Gain) on Disposal of Fixed Assets      |                                             |            | 97,122    |         |      |            | 13,864    |          |   |            | (898,155  | )       
|                                                                                             | Changes in Operating Assets and Liabilities: |                                             |            |           |         |      |            |           |          |   |            |           |         
|                                                                                             |                                              | Accounts Receivable                         |            |           | (84,188 | )    |            |           | (330,599 | ) |            |           | 99,123   |  
|                                                                                             |                                              | Inventories                                 |            |           | 306,863 |      |            |           | (413,219 | ) |            |           | (319,274 | )
|                                                                                             |                                              | Other Current Assets                        |            |           | (69,919 | )    |            |           | 127,733  |   |            |           | 35,399   |  
|                                                                                             |                                              | Other Assets                                |            |           | 53,765  |      |            |           | 259,021  |   |            |           | 215,436  |  
|                                                                                             |                                              | Accounts Payable and Other Accrued Expenses |            |           | 417,658 |      |            |           | (686,843 | ) |            |           | 36,518   |  
|                                                                                             |                                              | Accrued Salaries, Wages and Payroll Taxes   |            |           | (22,155 | )    |            |           | 128,879  |   |            |           | 120,187  |  
|                                                                                             |                                              | Refundable Deposits                         |            |           | 546,348 |      |            |           | 209,013  |   |            |           | 220,239  |  
|                                                                                             |                                              |                                             |            |           |         |      |            |           |          |   |            |          
|Net Cash Provided by Operating Activities                                                    |                                              |                                             | 3,098,110  |           |         |      | 471,444    |           |          |   | 1,670,832  |          
|                                                                                             |                                              |                                             |            |           |         |      |            |           |          |   |            |          
|Investing Activities                                                                         |                                              |                                             |            |           |         |      |            |           |          |   |            |          
|Expenditures for Fixed Assets                                                                |                                              |                                             | (705,416   | )         |         |      | (434,415   | )         |          |   | (425,056   | )        
|Proceeds from Sale of Assets and Other, Net                                                  |                                              |                                             | (29,912    | )         |         |      | (44,875    | )         |          |   | 1,813,118  |          
|                                                                                             |                                              |                                             |            |           |         |      |            |           |          |   |            |          
|Net Cash (Used in) Provided by Investing
    Activities                                      |                                              |                                             | (735,328   | )         |         |      | (479,290   | )         |          |   | 1,388,062  |          
|                                                                                             |                                              |                                             |            |           |         |      |            |           |          |   |            |          
|Financing Activities                                                                         |                                              |                                             |            |           |         |      |            |           |          |   |            |          
|Principal Payments on Debt                                                                   |                                              |                                             | (450,000   | )         |         |      | (450,000   | )         |          |   | (450,000   | )        
|Repurchase of Common Stock                                                                   |                                              |                                             | (1,269,217 | )         |         |      | (665,558   | )         |          |   | (584,483   | )        
|                                                                                             |                                              |                                             |            |           |         |      |            |           |          |   |            |          
|Net Cash Used in Financing Activities                                                        |                                              |                                             | (1,719,217 | )         |         |      | (1,115,558 | )         |          |   | (1,034,483 | )        
|                                                                                             |                                              |                                             |            |           |         |      |            |           |          |   |            |          
|Increase (Decrease) in Cash and Cash Equivalents                                             |                                              |                                             | 643,565    |           |         |      | (1,123,404 | )         |          |   | 2,024,411  |          
|Cash and Cash Equivalents:                                                                   |                                              |                                             |            |           |         |      |            |           |          |   |            |          
|                                                                                             | Beginning of Year                            |                                             |            | 6,363,786 |         |      |            | 7,487,190 |          |   |            | 5,462,779 |         
|                                                                                             |                                              |                                             |            |           |         |      |            |           |          |   |            |          
|                                                                                             | End of Year                                  |                                             | $          | 7,007,351 |         |      | $          | 6,363,786 |          |   | $          | 7,487,190 |         
|                                                                                             |                                              |                                             |            |           |         |      |            |           |          |   |            |          

See Accompanying Notes to Financial Statements

35



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##### Table of Contents



REDHOOK ALE BREWERY, INCORPORATED

NOTES TO FINANCIAL STATEMENTS

1.     Nature of
Operations

Redhook Ale Brewery, Incorporated (the
Company) was formed in 1981 to brew and sell craft
beer. The Company produces its specialty bottled and draft
products in its two technologically advanced, Company-owned
breweries, one in the Seattle suburb of Woodinville, Washington
and the other in Portsmouth, New Hampshire. Each brewery also
operates a pub on the premises, promoting the Companys
products, offering dining and entertainment facilities, and
selling retail merchandise. Since 1997, the Companys
products have been distributed in the United States in
48 states.

In 1994, the Company completed the initial phase
of construction on its Woodinville Brewery and began operations.
Prior to 1994, all brewing was completed by the Companys
Fremont Brewery.

In October 1994, the Company executed an
agreement (the Distribution Alliance or the
Alliance) with Anheuser-Busch, Incorporated
(A-B). The Alliance consists of a long-term national
distribution agreement (the A-B Distribution
Agreement) and an investment by A-B in the Company (the
A-B Investment Agreement). The Alliance gives the
Company access to A-Bs national distribution network to
distribute its products. Pursuant to the A-B Investment
Agreement, A-B invested approximately $30 million to
purchase 1,289,872 shares of the Companys convertible
redeemable Series B Preferred Stock (the
Series B Preferred Stock) and 953,470 shares of
the Companys Common Stock (Common Stock),
including 716,714 shares issued concurrent with the
Companys initial public offering. As of December 31,
2002, A-B held 29.5% of the Companys outstanding shares of
Common Stock, calculated on a Fully Diluted Basis.

In August 1995, the Company completed the sale of
2,193,492 shares of common stock through an initial public
offering in addition to the 716,714 common shares purchased by
A-B. The net proceeds of the Offerings totaled approximately
$46 million.

In 1996, construction on the Portsmouth Brewery
was completed and brewing operations began. Additional phases of
construction on the Woodinville Brewery were completed in 1996
and 1997.

In 1998, the Company curtailed its brewing
operations at its Fremont Brewery, located in a Seattle, but
continued to operate its Trolleyman Pub at the Fremont location
as well as house the Companys corporate offices. In
September 2002, the Company closed the Trolleyman Pub and moved
its corporate offices to the Woodinville Brewery location.

2.     Significant
Accounting Policies



| |                          
| | -------------------------
| | Cash and Cash Equivalents

The Company considers all highly liquid
investments with original maturities of three months or less to
be cash equivalents. The carrying amount of cash equivalents
approximates fair value because of the short-term maturity of
these instruments.



| |            
| | -----------
| | Inventories

Inventories are stated at the lower of cost or
market. Cost is determined using the first-in, first-out method.



| |             
| | ------------
| | Fixed Assets

Fixed assets are stated at cost. Significant
additions and improvements are capitalized. Maintenance and
repairs are expensed as incurred. Upon disposition of fixed
assets, any gains or losses are reflected in the

36



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##### Table of Contents



REDHOOK ALE BREWERY, INCORPORATED


NOTES TO FINANCIAL STATEMENTS 
(Continued)

statement of operations. Depreciation and
amortization is computed using the straight-line method over the
following estimated useful lives:

|                                        |  |  |                                     | 
|--------------------------------------- |  |  | ----------------------------------- | 
|Buildings                               |  |  | 31 - 40 years                       | 
|Brewery equipment                       |  |  | 20 - 25 years                       | 
|Furniture, fixtures and other equipment |  |  | 2 - 10 years                        | 
|Leasehold improvements                  |  |  | Lesser of lease term or useful life | 
|Vehicles                                |  |  | 5 years                             | 



| |                  
| | -----------------
| | Long-Lived Assets

The Company evaluates potential impairment of
long-lived assets in accordance with Financial Accounting
Standards Board (FASB) Statement of Financial
Accounting Standard (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.



| |                    
| | -------------------
| | Revenue Recognition

The Companys revenue recognition practices
are in compliance with SEC Staff Accounting Bulletin
No. 101, Revenue Recognition in Financial
Statements. The Company recognizes revenue from product
sales, net of excise taxes and certain fees the Company must pay
in connection with sales to A-B, when the products are shipped
to customers.



| |             
| | ------------
| | Income Taxes

The Company records federal and state income
taxes in accordance with SFAS No. 109, Accounting
for Income Taxes, whereby deferred taxes are provided for
the temporary differences between the financial reporting basis
and the tax basis of the Companys assets and liabilities.
These deferred tax assets and liabilities are measured under the
provisions of the currently enacted tax laws. 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.



| |                     
| | --------------------
| | Advertising Expenses

Advertising costs, including production costs,
are expensed as incurred. For the years ended December 31,
2002, 2001, and 2000, advertising expenses totaled $788,000,
$1,333,000, and $2,460,000 respectively.



| |                    
| | -------------------
| | Segment Information

The Company operates in one principal business
segment as a manufacturer of beer and ales across domestic
markets.

37



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##### Table of Contents



REDHOOK ALE BREWERY, INCORPORATED


NOTES TO FINANCIAL STATEMENTS 
(Continued)



| |                         
| | ------------------------
| | 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 148, Accounting for Stock-Based
Compensation.

The following table illustrates the effect on net
income (loss) and earnings (loss) per share for the years ended
December 31, 2002, 2001 and 2000 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 prescribed by SFAS 148.

|                                                                                                                                                      |  |                         |            |      |  |      |            |   |  |   |          |  
|----------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------- | ---------- | ---- |  | ---- | ---------- | - |  | - | -------- | -
|                                                                                                                                                      |  |                        
|                                                                                                                                                      |  | Year Ended December 31,
|                                                                                                                                                      |  |                        
|                                                                                                                                                      |  | 2002                    |            | 2001 |  | 2000
|                                                                                                                                                      |  |                         |            |      |  |     
|Reported net income (loss)                                                                                                                            |  | $                       | (1,133,283 | )    |  | $    | (1,318,257 | ) |  | $ | (728,207 | )
|Add: Stock-based employee compensation expense as
    reported under APB 25                                                                           |  |                         |           |      |  |      |           |   |  |   |         |  
|Less: Stock-based employee compensation expense
    determined under SFAS 148 fair value based method for all
    options, net of related tax effects |  |                         | (219,518   | )    |  |      | (154,761   | ) |  |   | (235,249 | )
|                                                                                                                                                      |  |                         |            |      |  |      |            |   |  |   |          |  
|Pro forma net income (loss)                                                                                                                           |  | $                       | (1,352,801 | )    |  | $    | (1,473,018 | ) |  | $ | (963,456 | )
|                                                                                                                                                      |  |                         |            |      |  |      |            |   |  |   |          |  
|Reported basic and diluted earnings (loss) per
    share                                                                                              |  | $                       | (0.18      | )    |  | $    | (0.19      | ) |  | $ | (0.10    | )
|Pro forma basic and diluted earnings (loss) per
    share                                                                                             |  | $                       | (0.21      | )    |  | $    | (0.21      | ) |  | $ | (0.13    | )

The fair value of options granted (which is
amortized to expense over the option vesting period in
determining the pro forma impact) is estimated on the date of
grant using the Black-Scholes option-pricing model with the
following weighted average assumptions:

|                                      |  |      |        |      |  |      |        |   |  |  |        |  
|------------------------------------- |  | ---- | ------ | ---- |  | ---- | ------ | - |  |  | ------ | -
|                                      |  | 2002 |        | 2001 |  | 2000
|                                      |  |      |        |      |  |     
|Expected life of option               |  |      | 5 yrs. |      |  |      | 5 yrs. |   |  |  | 5 yrs. |  
|Risk-free interest rate               |  |      | 3.25   | %    |  |      | 4.63   | % |  |  | 6.75   | %
|Volatility of the Companys stock     |  |      | 63.3   | %    |  |      | 54.4   | % |  |  | 82.3   | %
|Dividend yield on the Companys stock |  |      | 0.0    | %    |  |      | 0.0    | % |  |  | 0.0    | %

The weighted average estimated fair value of
options granted during the years ended December 31, is as
follows:

|                                                  |  |      |         |      |  |      |         |  |  |   |         | 
|------------------------------------------------- |  | ---- | ------- | ---- |  | ---- | ------- |  |  | - | ------- | 
|                                                  |  | 2002 |         | 2001 |  | 2000
|                                                  |  |      |         |      |  |     
|Total number of options granted                   |  |      | 296,800 |      |  |      | 590,600 |  |  |   | 95,000  | 
|Estimated fair value of each option granted       |  | $    | 1.04    |      |  | $    | 0.90    |  |  | $ | 1.06    | 
|Total estimated fair value of all options granted |  | $    | 308,000 |      |  | $    | 531,000 |  |  | $ | 100,700 | 

In accordance with SFAS 148, the weighted average
estimated fair value of stock options granted is required to be
based on a theoretical statistical model using the preceding
Black-Scholes assumptions. In actuality, because Company stock
options do not trade on a secondary exchange, employees can
receive no value nor derive any benefit from holding stock
options under these plans without an increase, above the grant

38



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##### Table of Contents



REDHOOK ALE BREWERY, INCORPORATED


NOTES TO FINANCIAL STATEMENTS 
(Continued)

price, in the market price of the Companys
stock. Such an increase in stock price would benefit all
stockholders commensurately. Refer to the table of options
currently outstanding in Note 8 for the weighted average
exercise price for options granted during 2002, 2001 and 2000.

Earnings (Loss)
per Share

The Company follows SFAS No. 128,
Earnings per Share. Basic 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 years
ended December 31, 2002, 2001 and 2000, 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.

Use of
Estimates

The preparation of the financial statements in
conformity with accounting principles generally accepted in the
United States requires management to make estimates and
assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results may differ
from those estimates.

Fair Value of
Financial Instruments

The Companys balance sheets include the
following financial instruments: cash and cash equivalents,
accounts receivable, inventory, accounts payable, accrued
expenses, long-term debt and convertible redeemable preferred
stock. The Company believes the carrying amounts of current
assets and liabilities and indebtedness in the balance sheets
approximate the fair value. The carrying value of convertible
redeemable preferred stock in the balance sheets is based upon
the anticipated redemption value, which the Company believes
approximates fair value.

Recently Issued
Accounting Standards

In June 2002, the FASB issued Statement of
Financial Accounting Standards No. 146, Accounting for
Costs Associated with Exit or Disposal Activities. This
statement provides guidance on the recognition, measurement and
reporting of certain costs related to exit or disposal
activities and is effective for exit or disposal activities
initiated after December 31, 2002. SFAS 146 is effective as
of January 1, 2003. Management does not expect adoption of
SFAS 146 to have a material impact on the Companys
financial condition or results of operations.

39



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##### Table of Contents



REDHOOK ALE BREWERY, INCORPORATED


NOTES TO FINANCIAL STATEMENTS 
(Continued)



|   |            
|-- | -----------
|3. | Inventories

Inventories consist of the following:

|                        |  |              |           |      |  |   |           | 
|----------------------- |  | ------------ | --------- | ---- |  | - | --------- | 
|                        |  |             
|                        |  | December 31,
|                        |  |             
|                        |  | 2002         |           | 2001
|                        |  |              |           |     
|Raw materials           |  | $            | 1,060,760 |      |  | $ | 960,817   | 
|Work in process         |  |              | 797,712   |      |  |   | 858,710   | 
|Finished goods          |  |              | 341,963   |      |  |   | 404,027   | 
|Promotional merchandise |  |              | 413,676   |      |  |   | 630,554   | 
|Packaging materials     |  |              | 218,316   |      |  |   | 285,182   | 
|                        |  |              |           |      |  |   |           | 
|                        |  | $            | 2,832,427 |      |  | $ | 3,139,290 | 
|                        |  |              |           |      |  |   |           | 

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



|   |             
|-- | ------------
|4. | Fixed Assets

Fixed assets consist of the following:

|                                               |  |              |            |      |  |   |            | 
|---------------------------------------------- |  | ------------ | ---------- | ---- |  | - | ---------- | 
|                                               |  |             
|                                               |  | December 31,
|                                               |  |             
|                                               |  | 2002         |            | 2001
|                                               |  |              |            |     
|Land and improvements                          |  | $            | 4,599,282  |      |  | $ | 4,599,282  | 
|Buildings                                      |  |              | 35,717,678 |      |  |   | 35,674,357 | 
|Brewery equipment                              |  |              | 45,244,253 |      |  |   | 44,911,502 | 
|Furniture, fixtures and other equipment        |  |              | 3,605,166  |      |  |   | 3,640,925  | 
|Leasehold improvements                         |  |              |           |      |  |   | 176,651    | 
|Vehicles                                       |  |              | 81,730     |      |  |   | 81,730     | 
|Construction in progress                       |  |              | 51,881     |      |  |   |           | 
|                                               |  |              |            |      |  |   |            | 
|                                               |  |              | 89,299,990 |      |  |   | 89,084,447 | 
|Less accumulated depreciation and amortization |  |              | 20,939,274 |      |  |   | 18,115,944 | 
|                                               |  |              |            |      |  |   |            | 
|                                               |  | $            | 68,360,716 |      |  | $ | 70,968,503 | 
|                                               |  |              |            |      |  |   |            | 



|   |                
|-- | ---------------
|5. | Fremont Brewery

In 1998, the Company decided to permanently
curtail the Fremont Brewery operations and sell substantially
all of its Fremont production assets. The Company recorded a
$5.2 million special valuation provision to write down the
Fremont production assets to an estimate of their net realizable
value of $1,184,000. As of December 31, 1999, the Company
had sold substantially all of the equipment for an amount
approximately equal to its estimated net realizable value.

Adjacent to the Fremont Brewery, the Company
owned a warehousing facility and land, which was used as the keg
filling, storage and shipping facility prior to curtailing the
Fremont Brewery operations. In July 2000, the Company sold the
warehouse facility and related real estate parcel for
approximately $1.7 million in cash and recorded a gain of
approximately $1.0 million. The gain is reflected as Other
Income (Expense)  Net in the statement of operations.

40



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##### Table of Contents



REDHOOK ALE BREWERY, INCORPORATED


NOTES TO FINANCIAL STATEMENTS 
(Continued)



|   |     
|-- | ----
|6. | Debt

Long-term debt consists of the following:

|                                                                                                                                      |  |              |           |      |  |   |           |  
|------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | --------- | ---- |  | - | --------- | -
|                                                                                                                                      |  |             
|                                                                                                                                      |  | December 31,
|                                                                                                                                      |  |             
|                                                                                                                                      |  | 2002         |           | 2001
|                                                                                                                                      |  |              |           |     
|Term Loan, payable to bank monthly at $37,500,
    plus accrued interest, interest at 3.2% at December 31,
    2002, due June 5, 2007 |  | $            | 6,525,000 |      |  | $ | 6,975,000 |  
|Current portion                                                                                                                       |  |              | (450,000  | )    |  |   | (450,000  | )
|                                                                                                                                      |  |              |           |      |  |   |           |  
|                                                                                                                                      |  | $            | 6,075,000 |      |  | $ | 6,525,000 |  
|                                                                                                                                      |  |              |           |      |  |   |           |  

Annual principal payments required on debt:

|     |  |   |           | 
|---- |  | - | --------- | 
|2003 |  | $ | 450,000   | 
|2004 |  |   | 450,000   | 
|2005 |  |   | 450,000   | 
|2006 |  |   | 450,000   | 
|2007 |  |   | 4,725,000 | 
|     |  |   |           | 
|     |  | $ | 6,525,000 | 
|     |  |   |           | 

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 on 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 December 31, 2002, there were no borrowings outstanding
on the Revolving Facility. The Company was in compliance with
all covenants mandated by the credit agreement for all quarters
and the year ended December 31, 2002. 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.

The Company made interest payments totaling
$233,000, $425,000 and $594,000 for the years ended
December 31, 2002, 2001 and 2000, respectively.

41



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##### Table of Contents



REDHOOK ALE BREWERY, INCORPORATED


NOTES TO FINANCIAL STATEMENTS 
(Continued)

7.     Convertible
Redeemable Preferred Stock

Convertible redeemable preferred stock
outstanding is as follows:

|                                                                                                                         |  |              |            |      |  |   |            | 
|------------------------------------------------------------------------------------------------------------------------ |  | ------------ | ---------- | ---- |  | - | ---------- | 
|                                                                                                                         |  |             
|                                                                                                                         |  | December 31,
|                                                                                                                         |  |             
|                                                                                                                         |  | 2002         |            | 2001
|                                                                                                                         |  |              |            |     
|Series B, par value $0.005 per share, issued
    and outstanding 1,289,872 shares; net of unamortized offering
    costs |  | $            | 16,188,255 |      |  | $ | 16,143,855 | 
|                                                                                                                         |  |              |            |      |  |   |            | 

There are 10,000,000 shares of preferred stock
authorized. All shares of Series A Preferred Stock
previously issued by the Company were automatically converted to
an equal number of common shares upon the closing of the
Companys initial public offering in August 1995.

During 1994, the Board of Directors designated
1,289,872 preferred shares as Series B Preferred Stock. In
November 1994, the Company sold all authorized shares of
Series B Preferred Stock to A-B for approximately
$16.3 million, or $12.61 per share. The difference between
the issuance price, net of offering costs, of the convertible
redeemable preferred stock and the redemption value is accreted
periodically through the redemption date of December 31,
2004 by a charge of $44,000 per year to retained earnings.

The A-B Investment Agreement provides that, to
the extent A-Bs ownership exceeds 30% of the outstanding
shares of Common Stock, calculated on a Fully Diluted Basis, as
a result of a rights offering, A-B will, in certain
circumstances, take steps to divest itself of such shares no
later than the later of (i) one year from the date of such
purchase or acquisition and (ii) the earliest period in
which such shares may be sold pursuant to Rule 144 under
the Securities Act of 1933, as amended. As of December 31,
2002, A-B held 29.5% of the Companys outstanding shares of
Common Stock, calculated on a Fully Diluted Basis.

Under the terms of the Series B Preferred
Stock purchase agreement, the Company is required to meet
various affirmative and negative covenants. These covenants
limit the Companys ability to declare dividends on, or
purchase, any of its capital stock without prior approval from
the Series B Stockholders. The holders of Series B
Preferred Stock and converted Series A Preferred Stock also
are entitled to certain contractual registration rights.

Each share of Series B Preferred Stock is
entitled to as many votes as the number of shares of Common
Stock into which it is convertible. The conversion rate is one
share of Common Stock for each share of Series B Preferred
Stock, subject to antidilution adjustment under certain
circumstances. The Series B Preferred Stock is convertible
to Common Stock at any time by its holder and is subject to
automatic conversion under certain circumstances on
December 31, 2004 or December 31, 2014. The Company
has reserved a sufficient number of shares of Common Stock to
issue if these Series B Preferred Stock shares were
converted to Common Stock.

Holders of Series B Preferred Stock
generally are entitled to receive dividends at a rate equal to
any dividends declared on common stock, when and if dividends
are declared by the Companys Board of Directors. In
addition, under certain circumstances relating to the
termination of the Distribution Alliance by A-B, the
Series B Preferred Stock would accumulate preferential
dividends from the date of such termination until stock
redemption at a fixed annual rate based on the ten-year U.S.
Treasury rate, plus 2.75%. Holders of Series B Preferred
Stock also have mandatory redemption rights and liquidation
preferences equal to $12.61 per share (approximately
$16.3 million in the aggregate), plus any accumulated and
unpaid dividends.

The Company is required to redeem all shares of
outstanding Series B Preferred Stock on December 31,
2004, or on December 31, 2014, under certain conditions
relating to a termination of the Distribution Alliance by A-B.
In the event that the A-B Distribution Agreement is terminated
by A-B for cause, as defined in the A-B Distribution Agreement,
the Company may, at its option, at any time, elect to redeem all
or a portion of the Series B Preferred Stock at a
redemption price equal to $12.61 per share, plus any accumulated
and unpaid dividends.

42



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##### Table of Contents



REDHOOK ALE BREWERY, INCORPORATED


NOTES TO FINANCIAL STATEMENTS 
(Continued)

The A-B Distribution Agreement has a stated term
of 20 years, but is subject to one-time early termination
by either party without cause on December 31, 2004. The A-B
Distribution Agreement is also terminable at any time by either
party for cause. In the event that the A-B Distribution
Agreement is terminated on or before December 31, 2004, the
terms of the Series B Preferred Stock held by A-B 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 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 also constitute an event of default under the
Companys bank credit agreement. Upon default, the bank may
declare the entire outstanding term loan balance immediately due
and payable. If the loan balance became due and payable, such
payment would have seniority over the redemption of the
Series B Preferred Stock. 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. 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.

In addition, if the A-B Distribution Agreement
were terminated, it would be extremely difficult for the Company
to rebuild its distribution network without a severe negative
impact on the Companys sales and results of operations.
There cannot be any guarantee that the Company would be
successful in rebuilding all, or part, of its distribution
network.

43



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##### Table of Contents



REDHOOK ALE BREWERY, INCORPORATED


NOTES TO FINANCIAL STATEMENTS 
(Continued)

8.     Common
Stockholders Equity



| |                     
| | --------------------
| | Sale of Common Stock

In August 1995, the Company completed the sale of
2,193,492 shares of common stock through an initial public
offering and 716,714 common shares in a concurrent private
placement to A-B (collectively, the Offerings) at a
price of $17.00 per share. The net proceeds of the Offerings
totaled approximately $46 million. All of the 1,242,857
shares of Series A convertible preferred stock
automatically converted to an equal number of common shares upon
closing of the Offerings.



| |                           
| | --------------------------
| | Repurchase of Common Stock

Since May 2000, the Board of Directors has
authorized the repurchase of 1.5 million shares of the
Companys outstanding shares of Common Stock. 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 2002, 594,000
shares of Common Stock were purchased in the open market for
$1,269,000. As of December 31, 2002, a total of 1,362,000
shares of Common Stock had been purchased in the open market for
an aggregate expenditure of $2,519,000.



| |                   
| | ------------------
| | Stock Option Plans

In 2002, the Companys shareholders approved
the 2002 Stock Option Plan (the 2002 Plan). The
maximum number of shares of common stock for which options may
be granted during the term of the 2002 Plan is 346,000. The
Compensation Committee of the Board of Directors administers the
2002 Plan, determining to whom options are to be granted, the
number of shares of common stock for which the options are
exercisable, the purchase prices of such shares, and all other
terms and conditions. In 2002, options granted to employees of
the Company under the 2002 Plan vest over a five-year period and
options granted to the Companys Board of Directors under
the 2002 Plan become exercisable six months after the grant
date. Options were granted at an exercise price equal to fair
market value of the underlying Common Stock on the grant date
and will terminate on the tenth anniversary of the grant date.

In 1993, the Companys shareholders approved
the 1992 Stock Incentive Plan (the 1992 Plan) and
the Directors Stock Option Plan (the Directors
Plan). The plans, amended in May 1996, provide for
1,270,000 and 170,000 shares of common stock for option grants,
respectively. Employee options generally vest over a five-year
period while director options become exercisable six months
after the grant date. Vested options are generally exercisable
for ten years from the date of grant. Although the expiration of
the 1992 Plan and the Directors Plan in October 2002 prevents
any further option grants under these plans, the provisions of
these plans remain in effect until all options terminate or are
exercised. As of December 31, 2002, there were no options
available for future grant under the 1992 Plan or Directors Plan.

In September 1990, the Company reserved 120,000
shares of common stock for the shareholder approved 1990
Incentive Stock Option Plan. Options for 120,000 shares were
granted at that time with an exercise price equal to the
estimated fair market value. The exercise price increased from
the original price by 5% per year until full vesting occurred.
These options vested over five years and were exercisable for
ten years from the date of grant. As of December 31, 2000,
no options remained outstanding under this plan.

44



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##### Table of Contents



REDHOOK ALE BREWERY, INCORPORATED


NOTES TO FINANCIAL STATEMENTS 
(Continued)

Presented below is a summary of stock option
plans activity for the years shown:

|                             |           |           |           |          |   |             |      |          |  |  |         |  |  |   |       |  | 
|---------------------------- | --------- | --------- | --------- | -------- | - | ----------- | ---- | -------- |  |  | ------- |  |  | - | ----- |  | 
|                             |           | Shares of |           |          |   |             |      |         
|                             |           | Common    |           | Weighted |   | Options     |      | Weighted
|                             |           | Stock     |           | Average  |   | Exercisable |      | Average 
|                             |           | Under the |           | Exercise |   | at End of   |      | Exercise
|                             |           | Plans     |           | Price    |   | Year        |      | Price   
|                             |           |           |           |          |   |             |      |         
|Balance at January 1, 2000   |           |           | 1,262,532 |          |   | $           | 9.36 |          |  |  | 631,272 |  |  | $ | 11.84 | 
|                             | Granted   |           |           | 95,000   |   |             |      | 1.55     |  |  |         |  |  |   |       |  | 
|                             | Exercised |           |           |         |   |             |      |         |  |  |         |  |  |   |       |  | 
|                             | Canceled  |           |           | (610,780 | ) |             |      | 11.47    |  |  |         |  |  |   |       |  | 
|                             |           |           |           |          |   |             |      |          |  |  |         |  |  |   |       | 
|Balance at December 31, 2000 |           |           | 746,752   |          |   |             | 6.64 |          |  |  | 395,702 |  |  |   | 8.75  | 
|                             | Granted   |           |           | 590,600  |   |             |      | 1.86     |  |  |         |  |  |   |       |  | 
|                             | Exercised |           |           |         |   |             |      |         |  |  |         |  |  |   |       |  | 
|                             | Canceled  |           |           | (129,260 | ) |             |      | 7.00     |  |  |         |  |  |   |       |  | 
|                             |           |           |           |          |   |             |      |          |  |  |         |  |  |   |       | 
|Balance at December 31, 2001 |           |           | 1,208,092 |          |   |             | 4.27 |          |  |  | 439,622 |  |  |   | 7.57  | 
|                             | Granted   |           |           | 296,800  |   |             |      | 2.03     |  |  |         |  |  |   |       |  | 
|                             | Exercised |           |           |         |   |             |      |         |  |  |         |  |  |   |       |  | 
|                             | Canceled  |           |           | (97,290  | ) |             |      | 5.16     |  |  |         |  |  |   |       |  | 
|                             |           |           |           |          |   |             |      |          |  |  |         |  |  |   |       | 
|Balance at December 31, 2002 |           |           | 1,407,602 |          |   | $           | 3.73 |          |  |  | 555,631 |  |  | $ | 6.17  | 
|                             |           |           |           |          |   |             |      |          |  |  |         |  |  |   |       | 

During the year ended December 31, 2000,
officers of the Company voluntarily returned 567,000 options
previously granted to them under the 1992 Stock Incentive Plan.
No consideration or additional options were given or promised in
exchange for this forfeiture. This activity is reflected as
Canceled in the summary of stock option plans activity
above.

The following table summarizes information for
options currently outstanding and exercisable at
December 31, 2002:

|                         |                |                     |           |                     |  |          |      |             |  |          |       |       |  |  |         |         |  |   |       |       | 
|------------------------ | -------------- | ------------------- | --------- | ------------------- |  | -------- | ---- | ----------- |  | -------- | ----- | ----- |  |  | ------- | ------- |  | - | ----- | ----- | 
|                         |                |                     |           |                    
|                         |                | Options Outstanding |           | Options Exercisable
|                         |                |                     |           |                    
|                         |                |                     |           | Weighted            |  |          |      |            
|                         |                |                     |           | Average             |  | Weighted |      |             |  | Weighted
|                         |                |                     |           | Remaining           |  | Average  |      |             |  | Average 
|                         |                | Number              |           | Contractual         |  | Exercise |      | Number      |  | Exercise
|Range of Exercise Prices |                | Outstanding         |           | Life (Yrs)          |  | Price    |      | Exercisable |  | Price   
|                         |                |                     |           |                     |  |          |      |             |  |         
|$ 1.49 to $ 1.82         |                |                     | 107,000   |                     |  |          | 7.64 |             |  | $        | 1.58  |       |  |  | 68,250  |         |  | $ | 1.58  |      
|                         | 1.87 to   1.87 |                     |           | 552,710             |  |          |      | 8.59        |  |          |       | 1.87  |  |  |         | 110,990 |  |   |       | 1.87  | 
|                         | 2.02 to   2.02 |                     |           | 281,601             |  |          |      | 9.66        |  |          |       | 2.02  |  |  |         |        |  |   |       |      | 
|                         | 2.43 to   5.73 |                     |           | 311,349             |  |          |      | 6.23        |  |          |       | 4.36  |  |  |         | 221,449 |  |   |       | 4.43  | 
|                         | 7.00 to  22.75 |                     |           | 136,842             |  |          |      | 3.15        |  |          |       | 12.18 |  |  |         | 136,842 |  |   |       | 12.18 | 
|25.50 to  25.50          |                |                     | 18,100    |                     |  |          | 2.91 |             |  |          | 25.50 |       |  |  | 18,100  |         |  |   | 25.50 |      
|                         |                |                     |           |                     |  |          |      |             |  |          |       |       |  |  |         |         |  |   |       |      
|$ 1.49 to $25.50         |                |                     | 1,407,602 |                     |  |          | 7.61 |             |  | $        | 3.73  |       |  |  | 555,631 |         |  | $ | 6.17  |      
|                         |                |                     |           |                     |  |          |      |             |  |          |       |       |  |  |         |         |  |   |       |      

45



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##### Table of Contents



REDHOOK ALE BREWERY, INCORPORATED


NOTES TO FINANCIAL STATEMENTS 
(Continued)

Under the terms of the Companys incentive
stock option plans, employees and directors may be granted
options to purchase the Companys common stock at the
market price on the date the option is granted. At
December 31, 2002, 2001 and 2000, a total of 64,399,
104,261 and 565,601 options, respectively, were available for
future grants under the plans.

The Company has reserved approximately
2.8 million shares of common stock for future issuance
related to potential stock option exercises and conversion of
the Series B Preferred Stock.



| |                             
| | ----------------------------
| | Shareholder Rights Agreement

In September 1995, the Companys Board of
Directors adopted a shareholder rights agreement (the
Rights Agreement). Pursuant to the Rights Agreement,
holders of common stock have certain rights to purchase common
stock that are exercisable only in certain circumstances (the
Rights). The Rights trade together with the common
stock until the Distribution Date. The Distribution
Date shall occur on the earlier of: (i) ten days
following the date that the Company learns that a person or
group of affiliated or associated persons (an Acquiring
Person) has acquired beneficial ownership of 20% or more
of the outstanding common stock and (ii) such date as may
be designated by the Companys Board following the
commencement of, or announcement of an intention to make, a
tender or exchange offer, the consummation of which would result
in the beneficial ownership by a person or group of 20% or more
of such outstanding common stock. Each Right will not be
exercisable until the Distribution Date. If any person becomes
an Acquiring Person, the Rights will entitle each holder of a
Right (other than those held by an Acquiring Person (or any
affiliate or associate of any Acquiring Person)) to purchase,
for $120 per Right (the Purchase Price), that number
of shares of common stock which at the time of the transaction
would have a market value of twice the Purchase Price. The
Rights Agreement provides certain exceptions for beneficial
ownership by A-B for up to 30% of the Companys common
stock. The Rights, which are not currently exercisable, expire
on September 22, 2005, but may be redeemed at any time by
the Company for $0.001 per Right.

9.     Earnings
(Loss) Per Share

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

|                                                             |              |                                |                                                                |      |            |            |   |   |            |            |   |   |           |          |  
|------------------------------------------------------------ | ------------ | ------------------------------ | -------------------------------------------------------------- | ---- | ---------- | ---------- | - | - | ---------- | ---------- | - | - | --------- | -------- | -
|                                                             |              |                               
|                                                             |              | Year Ended December 31,       
|                                                             |              |                               
|                                                             |              | 2002                           |                                                                | 2001 |            | 2000      
|                                                             |              |                                |                                                                |      |            |           
|Basic and diluted earnings (loss) per share
    computation: |              |                                |                                                                |      |            |            |   |   |            |            |   |  
|                                                             | Numerator:   |                                |                                                                |      |            |            |   |   |            |            |   |   |          
|                                                             |              | Net income (loss)              |                                                                | $    | (1,133,283 | )          |   | $ | (1,318,257 | )          |   | $ | (728,207  | )       
|                                                             |              | Preferred stock accretion      |                                                                |      | (44,400    | )          |   |   | (44,400    | )          |   |   | (44,400   | )       
|                                                             |              |                                |                                                                |      |            |            |   |   |            |            |   |  
|                                                             |              |                                | Numerator  income (loss) available to
    common stockholders |      | $          | (1,177,683 | ) |   | $          | (1,362,657 | ) |   | $         | (772,607 | )
|                                                             |              |                                |                                                                |      |            |            |   |   |            |            |   |  
|                                                             | Denominator: |                                |                                                                |      |            |            |   |   |            |            |   |   |          
|                                                             |              | Weighted-average common shares |                                                                |      | 6,689,189  |            |   |   | 7,070,801  |            |   |   | 7,632,628 |         
|                                                             |              |                                |                                                                |      |            |            |   |   |            |            |   |  
|                                                             |              |                                | Basic and diluted earnings (loss) per share                    |      | $          | (0.18      | ) |   | $          | (0.19      | ) |   | $         | (0.10    | )
|                                                             |              |                                |                                                                |      |            |            |   |   |            |            |   |  

The convertible redeemable preferred stock and
outstanding stock options have been excluded from the
calculation of diluted loss per share for the years ended
December 31, 2002, 2001 and 2000 because their effect is
antidilutive.

46



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##### Table of Contents



REDHOOK ALE BREWERY, INCORPORATED


NOTES TO FINANCIAL STATEMENTS 
(Continued)

10.     Income
Taxes

The components of income tax expense
(benefit) are as follows:

|         |  |                         |          |      |  |      |          |   |  |   |          |  
|-------- |  | ----------------------- | -------- | ---- |  | ---- | -------- | - |  | - | -------- | -
|         |  |                        
|         |  | Year Ended December 31,
|         |  |                        
|         |  | 2002                    |          | 2001 |  | 2000
|         |  |                         |          |      |  |     
|Current  |  | $                       | 30,344   |      |  | $    | 21,706   |   |  | $ | 22,792   |  
|Deferred |  |                         | (155,954 | )    |  |      | (700,809 | ) |  |   | (350,918 | )
|         |  |                         |          |      |  |      |          |   |  |   |          |  
|         |  | $                       | (125,610 | )    |  | $    | (679,103 | ) |  | $ | (328,126 | )
|         |  |                         |          |      |  |      |          |   |  |   |          |  

The current tax expense is attributable to state
taxes.

A reconciliation between the U.S. federal
statutory tax rate and the Companys effective tax rate is
presented below:

|                                                             |  |                         |       |      |  |      |      |   |  |  |      |  
|------------------------------------------------------------ |  | ----------------------- | ----- | ---- |  | ---- | ---- | - |  |  | ---- | -
|                                                             |  |                        
|                                                             |  | Year Ended December 31,
|                                                             |  |                        
|                                                             |  | 2002                    |       | 2001 |  | 2000
|                                                             |  |                         |       |      |  |     
|Federal statutory rate                                       |  |                         | 34.0  | %    |  |      | 34.0 | % |  |  | 34.0 | %
|State taxes, net of federal benefit                          |  |                         | 2.6   |      |  |      | 2.5  |   |  |  | 2.4  |  
|Permanent differences, primarily meals and
    entertainment |  |                         | (4.8  | )    |  |      | (2.8 | ) |  |  | (4.9 | )
|Other items, net                                             |  |                         | (0.3  | )    |  |      | 0.3  |   |  |  | (0.4 | )
|Valuation allowance                                          |  |                         | (21.5 | )    |  |      |     |   |  |  |     |  
|                                                             |  |                         |       |      |  |      |      |   |  |  |      |  
|                                                             |  |                         | 10.0  | %    |  |      | 34.0 | % |  |  | 31.1 | %
|                                                             |  |                         |       |      |  |      |      |   |  |  |      |  

Significant components of the Companys
deferred tax liabilities and assets are as follows:

|                           |                                  |              |            |            |   |   |            |            | 
|-------------------------- | -------------------------------- | ------------ | ---------- | ---------- | - | - | ---------- | ---------- | 
|                           |                                  |             
|                           |                                  | December 31,
|                           |                                  |             
|                           |                                  | 2002         |            | 2001      
|                           |                                  |              |            |           
|Deferred tax liabilities:  |                                  |              |            |            |   |   |            |           
|                           | Tax-over-book depreciation       |              | $          | 11,252,106 |   |   | $          | 10,832,992 | 
|                           | Other                            |              |            | 119,213    |   |   |            | 138,837    | 
|                           |                                  |              |            |            |   |   |            |           
|                           |                                  |              | 11,371,319 |            |   |   | 10,971,829 |           
|Deferred tax assets:       |                                  |              |            |            |   |   |            |           
|                           | NOL and AMT credit carryforwards |              |            | 10,923,999 |   |   |            | 10,160,532 | 
|                           | Other                            |              |            | 249,461    |   |   |            | 235,957    | 
|                           | Valuation allowance              |              |            | (270,939   | ) |   |            |           | 
|                           |                                  |              |            |            |   |   |            |           
|                           |                                  |              | 10,902,521 |            |   |   | 10,396,489 |           
|                           |                                  |              |            |            |   |   |            |           
|Net deferred tax liability |                                  | $            | 468,798    |            |   | $ | 575,340    |           
|                           |                                  |              |            |            |   |   |            |           

As of December 31, 2002, the primary
components of the Companys deferred tax asset presented
above were: federal operating loss carryforwards of $28.7
million, or $9.8 million tax-effected; federal alternative
minimum tax credit carryforwards of $135,000; and state
operating loss carryforwards of $994,000 tax-effected. The
federal operating loss carryforwards expire from 2012 through
2022; alternative minimum tax credit carryforwards can be
utilized to offset regular tax liabilities in future years and
have no expiration date; and state net operating loss
carryforwards expire from 2002 through 2017. In 2002, the
Company received a $49,000 refund resulting from the carryback
of a federal alternative minimum tax credit to reduce a prior
years tax liability. The alternative minimum tax credit
had been reflected as a deferred tax asset as of
December 31, 2001.

47



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##### Table of Contents



REDHOOK ALE BREWERY, INCORPORATED


NOTES TO FINANCIAL STATEMENTS 
(Continued)

In accordance with SFAS No. 109, the Company
established a valuation allowance of $271,000 in 2002 related to
state net operating tax loss carryforwards. The Company
evaluates the potential recoverability of its deferred tax
assets on a quarterly basis and, to the extent necessary,
records a valuation allowance when circumstances indicate that
the deferred tax asset may expire before the Company is able to
utilize the tax benefit. Realization of the benefit is dependent
on the Companys ability to generate future U.S. taxable
income.

11.     Commitments

In November 2002, the Companys lease of its
Fremont Brewery facility expired. The corporate office, located
in the facility, was relocated to vacant office space at the
Woodinville Brewery, and the Trolleyman Pub, also located in the
Fremont Brewery facility, was closed. In conjunction with the
closure and subsequent relocation, the Company recorded a
$73,000 loss on disposal of assets.

In May 1995, the Company entered into an
agreement to lease the land on which the New Hampshire Brewery
was subsequently constructed. The initial lease period runs
through April 2047 and may be extended at the Companys
option for two additional seven-year terms. The lease also
provides the Company with the first right of refusal to purchase
the premises should the lessor receive an offer to sell the
property to a third party. The monthly rent commenced upon the
completion of the facility, and can escalate up to 5% at the end
of every five-year period.

Rent expense for the years ended
December 31, 2002, 2001 and 2000 totaled $527,000, $567,000
and $553,000, respectively.

Minimum aggregate future lease payments under
noncancelable operating leases as of December 31, 2002 are
as follows:

|           |  |   |            | 
|---------- |  | - | ---------- | 
|2003       |  | $ | 267,449    | 
|2004       |  |   | 266,529    | 
|2005       |  |   | 260,229    | 
|2006       |  |   | 252,652    | 
|2007       |  |   | 250,568    | 
|Thereafter |  |   | 9,845,239  | 
|           |  |   |            | 
|           |  | $ | 11,142,666 | 
|           |  |   |            | 

The Company periodically enters into commitments
to purchase natural gas and certain raw materials in the normal
course of business. Furthermore, the Company has entered into
purchase commitments to ensure it has the necessary supply of
hops to meet future production requirements. Hop commitments are
for crop years through 2006. The Company believes that hop
commitments in excess of future requirements, if any, will not
materially affect its financial condition or results of
operations.

12.     Employee
Benefit Plan

The Company maintains a 401(k) savings plan for
employees age 21 years or older with at least six months of
service. Employee contributions may not exceed a specific dollar
amount determined by law and rules of the Internal Revenue
Service. The Company matches 100% of each dollar contributed by
a participant employed by the Company on the last day of the
calendar year, with a maximum matching contribution of 4% of a
participants compensation. The Companys
contributions to the plan vest incrementally over five years of
service by the employee. The Companys contributions to the
plan totaled $214,000, $203,000 and $186,000 in 2002, 2001 and
2000, respectively.

48



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##### Table of Contents



REDHOOK ALE BREWERY, INCORPORATED


NOTES TO FINANCIAL STATEMENTS 
(Continued)

13.     Financial
Instruments, Major Customers, and Related-Party
Transactions

Financial instruments that potentially subject
the Company to credit risk consist principally of trade
receivables and interest-bearing deposits. The Companys
interest-bearing deposits are placed with major financial
institutions. While wholesale distributors and A-B account for
substantially all accounts receivable, this concentration risk
is limited due to the number of distributors, their geographic
dispersion, and state laws regulating the financial affairs of
distributors of alcoholic beverages.

The Companys most significant non-Alliance
wholesaler, K&L Distributors, Inc., an independent A-B
distributor, accounted for approximately 13%, 14% and 16% of
total sales in 2002, 2001 and 2000, respectively. Sales to A-B
through the Distribution Alliance represented 63%, 62% and 60%
of total sales, or $25,914,000, $24,990,000 and $22,582,000 (net
of certain fees the Company must pay to A-B in connection with
sales to A-B), in 2002, 2001 and 2000, respectively. Additional
fees incurred by the Company related to A-B administrative and
handling charges totaled $268,000, $238,000 and $216,000 in
2002, 2001 and 2000, respectively. The Company purchased certain
materials through A-B totaling $4,115,000, $4,527,000 and
$3,989,000 in 2002, 2001 and 2000, respectively. The net amount
due to A-B was $281,000 as of December 31, 2002 and the net
amount due from A-B was $199,000 as of December 31, 2001.

14.     Quarterly
Financial Data (Unaudited)

|                                             |  |                                          |       |                    |  |         |        |         |  |         |        |          |  |         |       |         |  |   |       |   |  |   |        |   |  |   |        |   |  |   |       |  
|-------------------------------------------- |  | ---------------------------------------- | ----- | ------------------ |  | ------- | ------ | ------- |  | ------- | ------ | -------- |  | ------- | ----- | ------- |  | - | ----- | - |  | - | ------ | - |  | - | ------ | - |  | - | ----- | -
|                                             |  |                                          |       |                   
|                                             |  | 2002 Quarter Ended                       |       | 2001 Quarter Ended
|                                             |  |                                          |       |                   
|                                             |  | Dec. 31                                  |       | Sept. 30           |  | June 30 |        | Mar. 31 |  | Dec. 31 |        | Sept. 30 |  | June 30 |       | Mar. 31
|                                             |  |                                          |       |                    |  |         |        |         |  |         |        |          |  |         |       |        
|                                             |  |                                         
|                                             |  | (In thousands, except per share amounts)
|Sales                                        |  | $                                        | 9,880 |                    |  | $       | 10,691 |         |  | $       | 11,420 |          |  | $       | 8,921 |         |  | $ | 9,944 |   |  | $ | 10,518 |   |  | $ | 10,757 |   |  | $ | 8,899 |  
|Less Excise Taxes                            |  |                                          | 804   |                    |  |         | 897    |         |  |         | 995    |          |  |         | 769   |         |  |   | 831   |   |  |   | 886    |   |  |   | 941    |   |  |   | 756   |  
|                                             |  |                                          |       |                    |  |         |        |         |  |         |        |          |  |         |       |         |  |   |       |   |  |   |        |   |  |   |        |   |  |   |       |  
|Net Sales                                    |  |                                          | 9,076 |                    |  |         | 9,794  |         |  |         | 10,425 |          |  |         | 8,152 |         |  |   | 9,113 |   |  |   | 9,632  |   |  |   | 9,816  |   |  |   | 8,143 |  
|Cost of Sales                                |  |                                          | 6,910 |                    |  |         | 7,141  |         |  |         | 7,397  |          |  |         | 6,150 |         |  |   | 6,557 |   |  |   | 6,952  |   |  |   | 7,012  |   |  |   | 6,219 |  
|                                             |  |                                          |       |                    |  |         |        |         |  |         |        |          |  |         |       |         |  |   |       |   |  |   |        |   |  |   |        |   |  |   |       |  
|Gross Profit                                 |  |                                          | 2,166 |                    |  |         | 2,653  |         |  |         | 3,028  |          |  |         | 2,002 |         |  |   | 2,556 |   |  |   | 2,680  |   |  |   | 2,804  |   |  |   | 1,924 |  
|Selling, General and Administrative Expenses |  |                                          | 2,133 |                    |  |         | 2,987  |         |  |         | 2,982  |          |  |         | 2,807 |         |  |   | 2,577 |   |  |   | 3,286  |   |  |   | 3,276  |   |  |   | 2,677 |  
|                                             |  |                                          |       |                    |  |         |        |         |  |         |        |          |  |         |       |         |  |   |       |   |  |   |        |   |  |   |        |   |  |   |       |  
|Operating Income (Loss)                      |  |                                          | 33    |                    |  |         | (334   | )       |  |         | 46     |          |  |         | (805  | )       |  |   | (21   | ) |  |   | (606   | ) |  |   | (472   | ) |  |   | (753  | )
|Interest Expense                             |  |                                          | (58   | )                  |  |         | (62    | )       |  |         | (56    | )        |  |         | (54   | )       |  |   | (66   | ) |  |   | (92    | ) |  |   | (106   | ) |  |   | (130  | )
|Other Income (Expense)  Net                 |  |                                          | 22    |                    |  |         | (24    | )       |  |         | 8      |          |  |         | 25    |         |  |   | 29    |   |  |   | 61     |   |  |   | 67     |   |  |   | 92    |  
|                                             |  |                                          |       |                    |  |         |        |         |  |         |        |          |  |         |       |         |  |   |       |   |  |   |        |   |  |   |        |   |  |   |       |  
|Income (Loss) before Income Taxes            |  |                                          | (3    | )                  |  |         | (420   | )       |  |         | (2     | )        |  |         | (834  | )       |  |   | (58   | ) |  |   | (637   | ) |  |   | (511   | ) |  |   | (791  | )
|Income Tax Provision (Benefit)               |  |                                          |      |                    |  |         | (65    | )       |  |         |       |          |  |         | (61   | )       |  |   | (20   | ) |  |   | (223   | ) |  |   | (171   | ) |  |   | (265  | )
|                                             |  |                                          |       |                    |  |         |        |         |  |         |        |          |  |         |       |         |  |   |       |   |  |   |        |   |  |   |        |   |  |   |       |  
|Net Income (Loss)                            |  | $                                        | (3    | )                  |  | $       | (355   | )       |  | $       | (2     | )        |  | $       | (773  | )       |  | $ | (38   | ) |  | $ | (414   | ) |  | $ | (340   | ) |  | $ | (526  | )
|                                             |  |                                          |       |                    |  |         |        |         |  |         |        |          |  |         |       |         |  |   |       |   |  |   |        |   |  |   |        |   |  |   |       |  
|                                            
|Basic Earnings (Loss) per Share              |  | $                                        | 0.00  |                    |  | $       | (0.05  | )       |  | $       | 0.00   |          |  | $       | (0.11 | )       |  | $ | (0.01 | ) |  | $ | (0.06  | ) |  | $ | (0.05  | ) |  | $ | (0.07 | )
|                                             |  |                                          |       |                    |  |         |        |         |  |         |        |          |  |         |       |         |  |   |       |   |  |   |        |   |  |   |        |   |  |   |       |  
|Diluted Earnings (Loss) per Share            |  | $                                        | 0.00  |                    |  | $       | (0.05  | )       |  | $       | 0.00   |          |  | $       | (0.11 | )       |  | $ | (0.01 | ) |  | $ | (0.06  | ) |  | $ | (0.05  | ) |  | $ | (0.07 | )
|                                             |  |                                          |       |                    |  |         |        |         |  |         |        |          |  |         |       |         |  |   |       |   |  |   |        |   |  |   |        |   |  |   |       |  
|                                            
|Barrels Shipped                              |  |                                          | 54.3  |                    |  |         | 58.4   |         |  |         | 63.1   |          |  |         | 50.1  |         |  |   | 55.5  |   |  |   | 57.9   |   |  |   | 60.1   |   |  |   | 49.6  |  

49



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|        |                                                                                              
|------- | ---------------------------------------------------------------------------------------------
|Item 9. | Changes In and Disagreements With
    Accountants on Accounting and Financial
    Disclosures

None.




PART III.






|         |                                                       
|-------- | ------------------------------------------------------
|Item 10. | Directors and Executive Officers of the
    Registrant

The response to this Item is contained in part in
the Companys definitive proxy statement for its 2003
Annual Meeting of Stockholders (the 2003 Proxy
Statement) under the captions Board of
Directors and Section 16(a) Beneficial
Ownership Reporting Compliance, and the information
contained therein is incorporated herein by reference.
Information regarding executive officers is set forth in
Part I, Item 4A, under the caption Executive
Officers of the Company.






|         |                       
|-------- | ----------------------
|Item 11. | Executive Compensation

The response to this Item is contained in the
2003 Proxy Statement under the caption Executive
Compensation, and the information contained therein is
incorporated herein by reference.






|         |                                                                                                       
|-------- | ------------------------------------------------------------------------------------------------------
|Item 12. | Security Ownership of Certain Beneficial
    Owners and Management and Related Stockholder
    Matters

The response to this Item is contained in part in
the 2003 Proxy Statement under the caption Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters, and the information contained
therein is incorporated herein by reference.

The balance of the response to this Item is found
in Part II, Item 5, under the caption Securities
Authorized for Issuance Under Equity Compensation Plans.






|         |                                                   
|-------- | --------------------------------------------------
|Item 13. | Certain Relationships and Related
    Transactions

The response to this Item is contained in the
2003 Proxy Statement under the caption Certain
Transactions, and the information contained therein is
incorporated herein by reference.






|         |                        
|-------- | -----------------------
|Item 14. | Controls and Procedures

Within 90 days prior to the filing date of
this report, the Company 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-14c). 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.

50



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##### Table of Contents






PART IV.




Item 15.Exhibits,
Financial Statement Schedules and Reports on
Form 8-K

The following documents are filed as part of this
report:



| |                                                                          
| | -------------------------------------------------------------------------
| | 1.     Audited
    Financial Statements and Financial Statement Schedules

|                                                                                                   |  |      |    | 
|-------------------------------------------------------------------------------------------------- |  | ---- | -- | 
|                                                                                                   |  | Page
|                                                                                                   |  |     
|Report of Ernst & Young LLP, Independent
    Auditors                                              |  |      | 31 | 
|Balance Sheets as of December 31, 2002 and
    2001                                                |  |      | 32 | 
|Statements of Operations for the Years Ended
    December 31, 2002, 2001 and 2000                  |  |      | 33 | 
|Statements of Common Stockholders Equity
    for the Years Ended December 31, 2002, 2001 and 2000 |  |      | 34 | 
|Statements of Cash Flows for the Years Ended
    December 31, 2002, 2001 and 2000                  |  |      | 35 | 
|Notes to Financial Statements                                                                      |  |      | 36 | 



| |                                                                                                                                                                                     
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | All other financial statement schedules are
    omitted because they were not required or the required
    information is included in the Financial Statements or Notes
    thereto.



| |                                                                                                                                    
| | -----------------------------------------------------------------------------------------------------------------------------------
| | 2.     Exhibits                                                                                                                    
|
| | The following exhibits are filed with or
    incorporated by reference into this report pursuant to
    Item 601 of Regulation S-K:
|
| | EXHIBIT NO. 3 Articles of Incorporation
    and Bylaws                                                                             

|    |  |                                                                                                                                                                                                                                                                                                                                                          
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.1 |  | Articles of Amendment to and Second Restatement
    of Articles of Incorporation of Registrant dated
    November 15, 1994; Articles of Amendment, dated
    November 15, 1994; and Articles of Amendment, dated
    June 15, 1995 (Incorporated by reference from
    Exhibit 3.1 to the Companys Registration Statement on
    Form S-1, No. 33-94166)
|3.2 |  | Amended and Restated Bylaws of Registrant, dated
    May 22, 2001 (Incorporated by reference from
    Exhibit 3.2 to the Companys Form 10-Q for the
    quarter ended June 30, 2001);                                                                                                                                                                   



| |                                            
| | -------------------------------------------
| | EXHIBIT NO. 10 Material Contracts          
|
| | Executive Compensation Plans and Agreements

|     |  |                                                                                                                                                                                                                                                     
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.1 |  | Registrants Incentive Stock Option Plan,
    dated September 12, 1990 (Incorporated by reference from
    Exhibit 10.15 to the Companys Registration Statement
    on Form S-1, No. 33-94166)                                                     
|10.2 |  | Amended and Restated Registrants Directors
    Stock Option Plan (Incorporated by reference from
    Exhibit 10.14 to the Companys Registration Statement
    on Form S-1, No. 33-94166)                                                          
|10.3 |  | Amendment dated as of February 27, 1996, to
    Amended and Restated Registrants Directors Stock Option
    Plan (Incorporated by reference from Exhibit 10.32 to the
    Companys Form 10-Q for the quarter ended
    June 30, 1996, No. 0-26542)
|10.4 |  | 1992 Stock Incentive Plan, approved
    October 20, 1992, as amended, October 11, 1994 and
    May 25, 1995 (Incorporated by reference from
    Exhibit 10.16 to the Companys Registration Statement
    on Form S-1, No. 33-94166)                
|10.5 |  | Amendment dated as of July 25, 1996, to
    Registrants 1992 Stock Incentive Plan, as amended
    (Incorporated by reference from Exhibit 10.33 to the
    Companys Form 10-Q for the quarter ended
    June 30, 1996, No. 0-26542)               
|10.6 |  | Amendment dated as of February 27, 1996, to
    Registrants 1992 Stock Incentive Plan, as amended
    (Incorporated by reference from Exhibit 10.31 to the
    Companys Form 10-Q for the quarter ended
    June 30, 1996, No. 0-26542)           

51



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##### Table of Contents



|      |  |                                                                                                                                                                                                                    
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.7  |  | 2002 Stock Option Plan (Incorporated by reference
    from the Addendum to the Companys Proxy Statement for 2002
    Annual Meeting of Shareholders)                                                              
|10.8  |  | Employment Agreement between Registrant and Paul
    Shipman, dated November 1, 2000 (Incorporated by reference
    from Exhibit 10.43 to the Companys Form 10-K for
    the year ended December 31, 2000)        
|10.9  |  | Employment Agreement between Registrant and David
    J. Mickelson, dated August 1, 2000 (Incorporated by
    reference from Exhibit 10.27 to the Companys
    Form 10-Q for the quarter ended September 30, 2000)
|10.10 |  | Employment Agreement between Registrant and Allen
    L Triplett, dated August 1, 2000 (Incorporated by reference
    from Exhibit 10.28 to the Companys Form 10-Q for
    the quarter ended September 30, 2000)  
|10.11 |  | Employment Agreement between Registrant and
    Pamela J. Hinckley, dated August 1, 2000 (Incorporated by
    reference from Exhibit 10.29 to the Companys
    Form 10-Q for the quarter ended September 30, 2000)
|10.12 |  | Employment Agreement between Registrant and Greg
    Marquina, dated August 1, 2000 (Incorporated by reference
    from Exhibit 10.41 to the Companys Form 10-Q for
    the quarter ended September 30, 2000)     
|10.13 |  | Employment Agreement between Registrant and
    Gerard C. Prial, dated August 1, 2000 (Incorporated by
    reference from Exhibit 10.46 to the Companys
    Form 10-K for the year ended December 31, 2001)       



| |                         
| | ------------------------
| | Other Material Contracts

|      |  |                                                                                                                                                                                                                                                                                                                                                                                                         
|----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.14 |  | Investment Agreement dated as of October 18,
    1994, between the Registrant and Anheuser-Busch, Incorporated
    (Incorporated by reference from Exhibit 10.4 to the
    Companys Registration Statement on Form S-1,
    No. 33-94166)                                                                                                                                                              
|10.15 |  | Registration Rights Agreement dated as of
    October 18, 1994, between Registrant and Anheuser-Busch,
    Incorporated (Incorporated by reference from Exhibit 10.7
    to the Companys Registration Statement on Form S-1,
    No. 33-94166)                                                                                                                                                         
|10.16 |  | Master Distributor Agreement between Registrant
    and Anheuser-Busch, Incorporated, dated October 18, 1994
    (Incorporated by reference from Exhibit 10.21 to the
    Companys Registration Statement on Form S-1,
    No. 33-94166)*                                                                                                                                                              
|10.17 |  | Amendment No. 1 dated as of June 26,
    1996, to Master Distribution Agreement between Registrant and
    Anheuser-Busch, Incorporated, dated October 18, 1994
    (Incorporated by reference from Exhibit 10.30 to the
    Companys Form 10-Q for the quarter ended June 30,
    1996, No. 0-26542)                                                                                                  
|10.18 |  | Letter Agreement dated as of July 31, 1995,
    between Registrant and Anheuser-Busch, Incorporated
    (Incorporated by reference from Exhibit 10.25 to the
    Companys Registration Statement on Form S-1,
    No. 33-94166)                                                                                                                                                                        
|10.19 |  | Consent, Waiver and Amendment, dated
    September 19, 1997, to Master Distributor Agreement between
    Registrant and Anheuser-Busch, Incorporated, dated
    October 18, 1994 (Incorporated by reference from
    Exhibit 10.36 to the Companys Form 10-Q for the
    quarter ended September 30, 1997, No. 0-26542)                                                                                
|10.20 |  | Purchasing Agreement dated as of March 27,
    1998, between Registrant and Anheuser-Busch, Incorporated
    (Incorporated by reference from Exhibit 10.37 to the
    Companys Form 10-Q for the quarter ended March 31,
    1998)                                                                                                                                                                     
|10.21 |  | Purchasing Agreement dated as of
    November 21, 2002, between Registrant and Anheuser-Busch,
    Incorporated                                                                                                                                                                                                                                                                                         
|10.22 |  | Multi-Tenant Lease between the Quadrant
    Corporation and Registrant, dated June 1, 1987, as amended,
    November 5, 1987, February 1, 1988, March 29,
    1988, June 27, 1988, October 27, 1988, June 18,
    1991, October 1, 1991, December 22, 1992 and
    March 31,1993 (Incorporated by reference from
    Exhibit 10.9 to the Companys Registration Statement
    on Form S-1, No. 33-94166)
|10.23 |  | Sublease between Pease Development Authority as
    Sublessor and Registrant as Sublessee, dated May 30, 1995
    (Incorporated by reference from Exhibit 10.11 to the
    Companys Registration Statement on Form S-1,
    No. 33-94166)                                                                                                                                                              

52



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##### Table of Contents



|      |  |                                                                                                                                                                                                                                                                                                                                 
|----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.24 |  | Assignment of Sublease and Assumption Agreement
    dated as of July 1, 1995, between Registrant and Redhook of
    New Hampshire, Inc. (Incorporated by reference from
    Exhibit 10.24 to the Companys Registration Statement
    on Form S-1, No. 33-94166)                                                                
|10.25 |  | Amended and Restated Credit Agreement between
    U.S. Bank of Washington, National Association and Registrant,
    dated June 5, 1995 (Incorporated by reference from
    Exhibit 10.18 to the Companys Registration Statement
    on Form S-1, No. 33-94166)                                                                 
|10.26 |  | First Amendment dated as of July 25, 1996,
    to Amended and Restated Credit Agreement between U.S. Bank of
    Washington, National Association and Registrant, dated
    June 5, 1995 (Incorporated by reference from
    Exhibit 10.34 to the Companys Form 10-Q for the
    quarter ended September 30, 1996, No. 0-26542)
|10.27 |  | Second Amendment to Amended and Restated Credit
    Agreement between U.S. Bank of Washington, National Association
    and Registrant, dated September 15, 1997 (Incorporated by
    reference from Exhibit 10.35 to the Companys Form
    10-Q for the quarter ended September 30, 1997,
    No. 0-26542)                    
|10.28 |  | Third Amendment to Amended and Restated Credit
    Agreement between U.S. Bank of Washington, National Association
    and Registrant, dated February 22, 1999 (Incorporated by
    reference from Exhibit 10.38 to the Companys Form
    10-Q for the quarter ended March 31, 1999)                                           
|10.29 |  | Fourth Amendment to Amended and Restated Credit
    Agreement between U.S. Bank National Association and Registrant,
    dated August 10, 2000 (Incorporated by reference from
    Exhibit 10.42 to the Companys Form 10-Q for the
    quarter ended September 30, 2000)                                                       
|10.30 |  | Fifth Amendment to Amended and Restated Credit
    Agreement between U.S. Bank National Association and Registrant,
    dated June 19, 2001 (Incorporated by reference from
    Exhibit 10.44 to the Companys Form 10-Q for the
    quarter ended June 30, 2001)                                                               
|10.31 |  | Sixth Amendment to Amended and Restated Credit
    Agreement between U.S. Bank National Association and
    Registrant, dated December 31, 2001 (Incorporated by
    reference from Exhibit 10.45 to the Companys
    Form 10-K for the year ended December 31, 2001)                                                          
|10.32 |  | Seventh Amendment to Amended and Restated Credit
    Agreement between U.S. Bank National Association and
    Registrant, dated June 21, 2002 (Incorporated by reference
    from Exhibit 10.47 to the Companys Form 10-Q for
    the quarter ended June 30, 2002)                                                             



| |                                                  
| | -------------------------------------------------
| | EXHIBIT NO. 21 Subsidiaries of the
    Registrant

|     |  |                                                                                                                                                       
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------
|21.1 |  | Subsidiaries of the Registrant (Incorporated by
    reference from Exhibit 21.1 to the Companys
    Registration Statement on Form S-1, No. 33-94166)



| |                                                   
| | --------------------------------------------------
| | EXHIBIT NO. 23 Consents of Experts and
    Counsel

|     |  |                                                       
|---- |  | ------------------------------------------------------
|23.1 |  | Consent of Ernst & Young LLP, Independent
    Auditors



| | 
| | 
| | 



| |     |                                                                           
| | --- | --------------------------------------------------------------------------
| | (*) | Confidential treatment has been granted for
    portions of this document.

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SIGNATURES

Pursuant to the requirements of Section 13
or 15(d) of the Securities Exchange Act of 1934, the Registrant
has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Seattle,
State of Washington, on March 28, 2003.



| |                                  
| | ---------------------------------
| | REDHOOK ALE BREWERY, INCORPORATED



| |    |                       
| | -- | ----------------------
| | By | /s/ DAVID J. MICKELSON

| |                            
| | ---------------------------
| |                            
| | David J. Mickelson         
| | Executive Vice President,  
| | Chief Financial Officer and
| | Chief Operating Officer    

Pursuant to the requirements of the Securities
Exchange Act of 1934, this Report has been signed below by the
following persons on behalf of the Registrant and in the
capacities and on the dates indicated.

|                                           |  |                                                                                                                     |  |               
|------------------------------------------ |  | ------------------------------------------------------------------------------------------------------------------- |  | --------------
|Signature                                  |  | Title                                                                                                               |  | Date          
|                                           |  |                                                                                                                     |  |               
|/s/ PAUL S. SHIPMANPaul S. Shipman         |  | President, Chief Executive Officer and Chairman
    of the Board
    (Principal Executive Officer)                  |  | March 28, 2003
|                                          
|/s/ DAVID J. MICKELSONDavid J. Mickelson   |  | Executive Vice President, Chief Financial Officer
    and Chief Operating Officer
    (Principal Financial Officer) |  | March 28, 2003
|                                          
|/s/ ANNE M. MUELLERAnne M. Mueller         |  | Controller and Treasurer
    (Principal Accounting Officer)                                                         |  | March 28, 2003
|                                          
|/s/ FRANK H. CLEMENTFrank H. Clement       |  | Director                                                                                                            |  | March 28, 2003
|                                          
|/s/ JERRY D. JONESJerry D. Jones           |  | Director                                                                                                            |  | March 28, 2003
|                                          
|/s/ PATRICK J. MCGAULEYPatrick J. McGauley |  | Director                                                                                                            |  | March 28, 2003
|                                          
|/s/ ANTHONY J. SHORTAnthony J. Short       |  | Director                                                                                                            |  | March 28, 2003
|                                          
|/s/ WALTER F. WALKERWalter F. Walker       |  | Director                                                                                                            |  | March 28, 2003

54



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##### Table of Contents



CERTIFICATIONS

I, Paul S. Shipman, certify that:



| | 1. |  | I have reviewed this annual report on Form 10-K of Redhook Ale
Brewery, Incorporated;                                                                                                                                                                                                                                   
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | 2. |  | Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report;
|
| | 3. |  | Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly present in
all material respects the financial condition, results of operations
and cash flows of the registrant as of, and for, the periods presented
in this annual report;                   
|
| | 4. |  | The registrants other certifying officers and I are responsible
for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:                                                                                                  



| | a) |  | designed such disclosure controls and procedures to
ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in
which this annual report is being prepared;
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | evaluated the effectiveness of the registrants
disclosure controls and procedures as of a date within 90 days
prior to the filing date of this annual report (the Evaluation
Date); and                                                                                                  
|
| | c) |  | presented in this annual report our conclusions about
the effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;                                                                                                                        



| | 5. |  | The registrants other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrants auditors and
the audit committee of registrants board of directors (or persons
performing the equivalent functions):
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) |  | all significant deficiencies in the design or operation
of internal controls which could adversely affect the
registrants ability to record, process, summarize and report
financial data and have identified for the registrants auditors
any material weaknesses in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrants internal controls; and                                                                                                                                        



| | 6. |  | The registrants other certifying officers and I have indicated in
this annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
| | -- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                     |  |     |  |                                                                     
|-------------------- |  | --- |  | --------------------------------------------------------------------
|Date: March 28, 2003 |  |     |  |                                                                     
|                     |  |     |  |                                                                     
|                     |  | BY: |  | /s/ Paul S. Shipman                                                 
|                     |  |     |  |                                                                     
|                     |  |     |  | Paul S. ShipmanPresident and  
              Chief Executive Officer

54



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##### Table of Contents



CERTIFICATIONS

I, David J. Mickelson, certify that:



| | 1. |  | I have reviewed this annual report on Form 10-K of Redhook Ale
Brewery, Incorporated;                                                                                                                                                                                                                                   
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | 2. |  | Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report;
|
| | 3. |  | Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly present in
all material respects the financial condition, results of operations
and cash flows of the registrant as of, and for, the periods presented
in this annual report;                   
|
| | 4. |  | The registrants other certifying officers and I are responsible
for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:                                                                                                  



| | a) |  | designed such disclosure controls and procedures to
ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in
which this annual report is being prepared;
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | evaluated the effectiveness of the registrants
disclosure controls and procedures as of a date within 90 days
prior to the filing date of this annual report (the Evaluation
Date); and                                                                                                  
|
| | c) |  | presented in this annual report our conclusions about
the effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;                                                                                                                        



| | 5. |  | The registrants other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrants auditors and
the audit committee of registrants board of directors (or persons
performing the equivalent functions):
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | d) |  | all significant deficiencies in the design or operation
of internal controls which could adversely affect the
registrants ability to record, process, summarize and report
financial data and have identified for the registrants auditors
any material weaknesses in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | e) |  | any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrants internal controls; and                                                                                                                                        



| | 6. |  | The registrants other certifying officers and I have indicated in
this annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
| | -- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                     |  |     |  |                                                                                                                    
|-------------------- |  | --- |  | -------------------------------------------------------------------------------------------------------------------
|Date: March 28, 2003 |  |     |  |                                                                                                                    
|                     |  | BY: |  | /s/ David J. Mickelson                                                                                             
|                     |  |     |  |                                                                                                                    
|                     |  |     |  | David J. MickelsonExecutive Vice President,
              Chief Financial Officer and
      Chief Operating Officer

55



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##### Table of Contents



CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
(SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002)

In connection with the Annual Report of Redhook Ale Brewery, Incorporated
(the Company) on Form 10-K for the period ending December 31, 2002 as filed
with the Securities and Exchange Commission on the date hereof (the Report),
I, Paul S. Shipman, President and Chief Executive Officer of the Company,
certify, pursuant to 18 U.S.C. Section 1350, that:



| | 1. |  | The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and                               
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------
|
| | 2. |  | The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.

|                     |  |     |  |                                                                     
|-------------------- |  | --- |  | --------------------------------------------------------------------
|Date: March 28, 2003 |  |     |  |                                                                     
|                     |  | BY: |  | /s/ Paul S. Shipman                                                 
|                     |  |     |  |                                                                     
|                     |  |     |  | Paul S. ShipmanPresident and   
             Chief Executive Officer

56



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##### Table of Contents



CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
(SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002)

In connection with the Annual Report of Redhook Ale Brewery, Incorporated
(the Company) on Form 10-K for the period ending December 31, 2002 as filed
with the Securities and Exchange Commission on the date hereof (the Report),
I, David J. Mickelson, Chief Financial Officer of the Company, certify,
pursuant to 18 U.S.C. Section 1350, that:



| | 1. |  | The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and                               
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------
|
| | 2. |  | The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.

|                     |  |     |  |                                                                                                                       
|-------------------- |  | --- |  | ----------------------------------------------------------------------------------------------------------------------
|Date: March 28, 2003 |  |     |  |                                                                                                                       
|                     |  | BY: |  | /s/ David J. Mickelson                                                                                                
|                     |  |     |  |                                                                                                                       
|                     |  |     |  | David J. MickelsonExecutive Vice President,
       Chief Financial Officer
                and Chief Operating Officer

57