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

                                   FORM 10-K
                 ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999

                         COMMISSION FILE NUMBER 0-26542

                       REDHOOK ALE BREWERY, INCORPORATED
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

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<S>                                            <C>
                 WASHINGTON                                     91-1141254
          (STATE OF INCORPORATION)                (I.R.S. EMPLOYER IDENTIFICATION NUMBER)

          3400 PHINNEY AVENUE NORTH                                98103
             SEATTLE, WASHINGTON                                (ZIP CODE)
  (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
</TABLE>

                                 (206) 548-8000
              (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 [X]  No [ ]

     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. [X]

     The aggregate market value of the Common Stock held by non-affiliates of
the registrant, based on the closing price on February 29, 2000, as reported on
NASDAQ, was $15,335,595.(1)

     The number of shares of the registrant's Common Stock outstanding as of
February 29, 2000, was 7,687,786.

                      DOCUMENTS INCORPORATED BY REFERENCE

     Portions of the registrant's Proxy Statement relating to the registrant's
2000 Annual Meeting of Stockholders to be held on May 23, 2000, 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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                       REDHOOK ALE BREWERY, INCORPORATED

                                   FORM 10-K

                               TABLE OF CONTENTS

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PART I.
ITEM 1.     Business....................................................      1
ITEM 2.     Properties..................................................     14
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.......................................     16
ITEM 6.     Selected Financial Data.....................................     17
ITEM 7.     Management's Discussion and Analysis of Financial Condition
              and Results of Operations.................................     18
ITEM 7A.    Quantitative and Qualitative Disclosures about Market
              Risk......................................................     23
ITEM 8.     Financial Statements and Supplementary Data.................     24
ITEM 9.     Changes In and Disagreements With Accountants on Accounting
              and Financial Disclosures.................................     42

PART III.
ITEM 10.    Directors and Executive Officers of the Registrant..........     42
ITEM 11.    Executive Compensation......................................     42
ITEM 12.    Security Ownership of Certain Beneficial Owners and
              Management................................................     42
ITEM 13.    Certain Relationships and Related Transactions..............     42

PART IV.
ITEM 14.    Exhibits, Financial Statements and Reports on Form 8-K......     42
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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 and the other in Portsmouth, New Hampshire. 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 the highest quality compared to that of
any domestic craft brewer 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 eight 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 Hefe-Weizen,
Blackhook Porter, Double Black Stout brewed with Starbucks(R) coffee, and its
seasonal offerings Redhook Blonde Ale, Winterhook, and 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, 1999.

INDUSTRY BACKGROUND

     The Company is a leader in the relatively small craft brewing segment of
the U.S. brewing industry, which includes regional specialty brewers such as the
Company, contract brewers, microbreweries and brewpubs. Craft beers are
distinguishable from other domestically produced beers by their fuller flavor
and adherence to traditional European brewing styles. According to industry
sources, shipments in the craft beer segment were essentially flat at
approximately 5.6 million barrels in 1998, yet represented less than 3% of the
approximately 200 million barrels shipped by domestic producers within the
United States. Although 1999 information is not yet available, the 1999 U.S.
craft beer segment volume is expected to be approximately the same as the 1998
volume. While the segment volume growth slowed significantly, the number of
craft brewers in the U.S. has grown dramatically, from 627 at the end of 1994 to
approximately 1,400 as of December 31, 1999. During 1998 and 1999, the number of
craft brewers was substantially unchanged relative to the preceding years.

     At the turn of this century, 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, competition in the
beer industry came to focus on a narrowing of product offerings to less
distinctive beer styles (principally pale lagers and pilsners): to please the
broadest possible segment of the population; for economies of scale; to
facilitate mass production techniques; to lower costs and lighten flavor
profiles through the use of less barley and more corn, rice and other adjuncts;
use of pasteurization processes to prolong shelf-life; and marketing a few major
brand names on a national basis, principally through mass-media advertising. As
a result of these competitive factors, extensive industry consolidation
occurred. Currently, according to industry sources, the five largest domestic
brewers account for approximately 90% of domestic beer shipments.

     By the early 1980s, annual domestic consumption of beer produced by U.S.
brewers had plateaued at approximately 180 million barrels. Over the past
decade, per capita annual domestic beer consumption has declined slightly, due
to increasing health and safety consciousness and the changing tastes, affluence
and consumption attitudes of the maturing generation of beer drinkers born after
World War II. A growing number of consumers began to migrate away from less
flavorful mass-marketed beers toward greater taste and broader variety in their
malt beverages, mirroring similar trends in other beverage and cuisine
categories.

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Initially, foreign brewers were the principal beneficiaries of these evolving
consumption patterns. Even though the principal European, Canadian and Mexican
imported beers are also mass-produced, many represent a fuller-flavored
alternative to the national brands produced in the United States.

     By the latter half of the 1980s, a substantial new domestic industry
segment had developed in response to the increasing consumer demand for
fuller-flavored beers. Across the country, a proliferation of regional specialty
brewers (annually selling more than 15,000 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. The strength of consumer demand has enabled
certain craft brewers, such as the Company, to evolve from microbreweries into
regional 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 by hiring certain brewers of typical American-style lagers to
perform contract brewing at their otherwise underutilized brewing facilities.
Certain national brewers of mass-produced beers have also sought to appeal to
this growing demand for craft beers by introducing their own fuller-flavored
products. Also, in recent years imported products from foreign brewers have
enjoyed a resurgence in demand and that has contributed to the reduced volume
growth in the craft beer segment.

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
expanding penetration in 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 with the mass-marketed 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
       constant product innovation and its control over 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 technological leadership 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 700 wholesale distributors, who are for the most
       part 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.

     - 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

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       shipping costs, established consumer identification with the Company's
       brands, and enhanced familiarity with local consumer tastes. If
       additional capacity is required Redhook may construct additional brewing
       facilities in the future, in select locations in the United States, with
       the capability to produce Redhook's principal products, as well as to
       offer select products to respond to local taste preferences. By pursuing
       this strategy, Redhook believes that it will be able to preserve its
       reputation and prestige as a regional craft brewer.

     - Promotion of Products. While the Company has done very limited
       advertising prior to 1999, based upon market and competitive
       considerations the Company determined that a significant increase in such
       spending is appropriate. Accordingly, in 1999 the Company undertook a
       brand investment program that significantly increased advertising
       expenses with the objective of establishing momentum towards capturing a
       larger share of the fragmented craft beer market. The approximately $2.5
       million in increased spending was focused on key markets and often
       accompanied by significantly increased advertising expenditures by
       certain of our distributors. This increase in advertising expenditures
       could continue indefinitely if the results are sufficiently positive on
       the Company's business. In addition, the Company 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 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. The Company has historically believed that its
       training and promotional methods are as effective in communicating and
       educating consumers as broad-based, less flexible mass-media beer
       advertising campaigns.

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 approximately 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 eight 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 66% of the Company's sales in 1999, is a full, rich,
well-rounded, amber-colored ale with a sweet toasted malt flavor balanced by a
pleasant floral/herbal liveliness derived from Tettnang hops.

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

     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.

     Blackhook Porter. A London-style Porter, Blackhook has an ebony tone, a
pleasant "burnt" character produced by highly roasted black barley, and a dark
malt flavor suggesting coffee and chocolate, balanced by lively hopping.

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     Double Black Stout. A rich, imperial stout enhanced by the addition of an
extract of Starbucks(R) coffee. Dark malts and the coffee create a big roasty
flavor that is rounded out with a touch of honey.

     Redhook Blonde Ale. A delicious, thirst-quenching golden ale. The
combination of lightly roasted barley, subtle hops, and a touch of wheat create
a perfectly balanced and distinctively drinkable ale. Blonde Ale is available
during the spring and summer months.

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

     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 result in a
surprisingly smooth, well-balanced dark beer. Nut Brown Ale is 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 may also consider producing
low-alcohol beer or other low-alcohol or nonalcoholic beverages (such as root
beer, fruit beers, craft sodas and ciders). The Company's
technologically-advanced breweries allow it to produce small-batch experimental
ales within two to three weeks. These 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 Double Black Stout
are examples of products that were developed in this manner. Other such products
have included ales such as Barley Wine, Honey Stout, Oatmeal Stout, Scotch Ale
and Wit, and lagers such as Marzen and Pilsner.

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, which 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
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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

     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; three 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. Both breweries use advanced microfiltration technology, including a
diatomaceous earth pad filter to eliminate unwanted yeast and to extend shelf
life.

     In early 1998, operations at the Fremont Brewery were terminated, the
Fremont production assets were written down to the estimated net realizable
value. During 1999, the Company sold substantially all of that equipment. See
discussion in Item 7. "Management's Discussion and Analysis of Financial
Condition and Results of Operations."

     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 each
brewery utilizes a carbon dioxide environment during bottling designed to ensure
that minimal oxygen is dissolved in the beer, thereby extending shelf life.
Redhook uses the latest keg technology, which is preferred by many draft beer
retailers because the kegs are designed to be easier to handle and lift, to
consume less floor space, to have more consistent flow and to reduce waste.

     Quality Control. The Woodinville Brewery was designed to be the center of
the quality control and analysis function. The Company monitors production and
quality control at 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

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quality, test products, measure color and bitterness, and test for oxidation and
unwanted bacteria. The Company also regularly utilizes independent laboratories
for product analysis.

     Ingredients and Raw Materials. The Company currently obtains all of its
malted barley from three suppliers and its premium-quality select hops, grown in
the Pacific Northwest, from three 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. Redhook believes that alternate sources of
malted barley and hops are available at competitive prices. 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 currently cultivates its
own Saccharomyces cerevisiae yeast supply. The Company has available to it
multiple competitive sources for packing materials, such as bottles, labels,
six-pack carriers, crowns and shipping cases.

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 three on-premise retail
establishments, the Trolleyman pub in Fremont, the Forecasters Public House in
Woodinville, and the Cataqua Public House in Portsmouth, New Hampshire.

     In October 1994, the Company entered into the Distribution Alliance with
A-B pursuant to which Redhook distributes its products in new markets
exclusively through A-B's wholesale distribution network. If an A-B distributor
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 currently subject to
distribution arrangements with non-Alliance distributors until such arrangements
expire. During 1996, Redhook changed the distribution 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 A-B affiliated, in
eight western states: Washington, California (northern), Oregon, Idaho, Montana,
Wyoming, Colorado and Alaska. The Company's most significant non-Alliance
wholesaler, K&L Distributors, Inc., an independent A-B distributor responsible
for distribution in most of King County, Washington, which includes Seattle,
accounted for approximately 17% of total sales in each of 1999, 1998 and 1997.
As of December 31, 1999, the Company had 27 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 47% of total domestic beer
sales by volume in 1999, distributes its products throughout the United States
through a network of about 700 wholesale distributors, which are for the most
part 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 nation. 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-
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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.

     The Company believes that local beer distribution territories have tended
to become dominated by a smaller number of distributors. That belief is based
upon distribution limitations on the number of brands they can effectively
manage and higher expectations for product quality and consistency, and
marketing support. 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. As a result, the Company believes the
Alliance provides the Company with significant advantages over competitors in
the craft beer industry, who generally are unable to achieve the distribution
efficiencies afforded by the Alliance network.

     The Distribution Alliance enabled the Company to accelerate the
distribution of its products into new markets. The Company's products were
distributed in 48 states at the end of 1999. As of December 31, 1999, the
Company had 700 Alliance distributors, accounting for approximately 66% of the
Company's sales volume in 1999. In addition, sales to non-Alliance A-B
affiliated distributors accounted for 28% of the Company's sales volume in 1999.

     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 paid by non-Alliance distributors in
the respective markets, net of the Alliance fee. The Company pays an Alliance
fee to A-B, 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-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. In exchange, prior to October
1997, A-B could not acquire an interest between 10% and 50% of the common stock
of, or distribute the products of, any other U.S.-based small brewer (producing
or distributing less than 1,000,000 barrels annually) that distributes beer in
those areas where the Company distributes its products, without the Company's
approval. After October 1997, if A-B were to agree to distribute the products of
any U.S.-based small brewer in areas where the Company's products are
distributed, without the Company's approval, the Alliance fee would be
substantially reduced on sales of Redhook products in such areas.

SALES AND MARKETING

     Prior to 1999, the Company had engaged in very limited media advertising to
market its products, choosing instead to stimulate consumer demand by educating
consumers and wholesalers as to the distinctive qualities of its products, and
by sponsoring localized promotions designed to enhance Redhook's word-of-mouth
reputation. The Company maintains a sales and marketing staff whose efforts are
focused principally on local promotions, programs for on-premise consumer and
retailer education, and distributor training and assistance. 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,
as well as the limited use of print and billboard advertising.

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     While the Company has previously done very limited advertising, based upon
market and competitive considerations the Company determined that a significant
increase in such spending is appropriate. Accordingly, in 1999 the Company
undertook a brand investment program that significantly increased advertising
expenses with the objective of establishing momentum towards capturing a larger
share of the fragmented craft beer market. The increased spending on radio,
print and billboard advertising, as well as sponsorships, was focused in key
markets and was often accompanied by significantly increased advertising
expenditures by certain of our distributors.

     The Company's sales and marketing staff also 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 selected pubs and restaurants is another example of on-premise
marketing designed to increase consumer awareness.

     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 regional
brewer. More than 29,800 visitors participated in tours at the Company's
breweries in 1999. Each of the Company's breweries has a retail pub on-site
where the Company's products are 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 the Company believes create further
awareness of the Company's beers and reinforce 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 in response to local
competitive conditions. Distributors and retailers usually participate in the
cost of these price discounts.

COMPETITION

     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 and the
introduction of fuller-flavored products by major national brewers. The Company
competes primarily with other participants in the craft beer segment, producers
of imported beers and mass-market national brewers. See "Industry Background."
The number of participants and number of different products offered in this
segment have increased significantly in recent years, thereby intensifying
competition for the bottled product placements and especially for draft beer
placements. Competition within the domestic craft beer segment 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. A significant portion of the
Company's past sales growth has been achieved through increasing sales

                                        8
<PAGE>   11

in the Pacific Northwest region, which the Company believes is one of the most
competitive craft beer markets in the United States in terms of number of market
participants and consumer awareness. Craft beers represented approximately 10%
of total beer sales in Washington and Oregon during 1999. Because of the strong
demand for the Company's products in this region, the Company has not
historically encountered significant pricing pressures relative to those found
in other regions, although regular "post-offs" are offered. In 1999, 1998 and
1997, the sales for the Company, and many of its competitors, declined in
Washington State compared to 1996. The Company's Washington State 1999 sales
volumes decreased 3.9% compared to 1998.

     As the Company expanded its distribution network outside the Pacific
Northwest region, and as other craft brewers expanded their distribution to the
Pacific Northwest, Redhook has encountered increasing competition from
microbreweries, other regional specialty brewers such as Sierra Nevada Brewing
Company and Anchor Brewing Company, as well as from contract brewers such as
Pete's Brewing Company and 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 the
availability of a uniform, nation-wide distribution system.

     The Company also competes against producers of imported beers, such as
Heineken, Molson, Modelo (Corona), Becks and Labatts. Most of these foreign
brewers have significantly more financial and other 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 regional 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 response to the growth of the craft beer segment, most of the major
domestic brewers have introduced fuller-flavored beers. Although these product
offerings are intended to compete with craft beers, many of them are brewed
according to methods used by the major national brewers. The Company believes
that certain of the major national brewers, with their superior financial
resources, access to raw materials and established distribution networks, may
seek further participation in the craft beer segment through the acquisition of
equity positions in, or the formation of distribution alliances with, existing
craft brewers. Although increased participation of the major national brewers
will likely increase competition for market share and 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.

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 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 in the
future be required 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.

                                        9
<PAGE>   12

  Alcoholic Beverage Regulation and Taxation

     Each of the Company's breweries and pubs is 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 by 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, and 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 produced for consumption in the United States. However, any
brewer with production under 2 million barrels per year instead pays federal
excise tax in the amount of $7 per barrel on the first 60,000 barrels it
produces 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
exceeds 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.

  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, the
Company's business may be adversely affected. In addition, 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 employee training
and designated-driver programs. 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 700 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
                                       10
<PAGE>   13

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 after 10 years, (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 and certain related A-B investment documents, or upon
the insolvency of the other party, (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.

  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 Standstill and Transfer Restrictions. Pursuant to the A-B Investment
Agreement, A-B has agreed that neither it nor its affiliates will acquire any
Common Stock, or any option, right or warrant to acquire, or security
convertible or exchangeable into Common Stock, if such purchase or acquisition
would result in A-B and its affiliates holding in the aggregate in excess of 30%
(prior to November 16, 2001) of the outstanding shares of Common Stock,
calculated on a Fully Diluted Basis (the "A-B Standstill"). Certain increases in
A-B's beneficial ownership resulting from involuntary acquisitions or decreases
in the number of outstanding shares are excluded from the A-B Standstill.

     The A-B Standstill terminates prior to November 16, 2001 if (i) any person
unaffiliated with A-B directly or indirectly: (a) becomes a beneficial owner of,
or enters into an agreement to acquire, commences a tender offer or exchange
offer to acquire, or announces the intention to acquire and, in A-B's reasonable
judgment, has a reasonable likelihood of acquiring as a result thereof, 30% or
more of the outstanding shares of Common Stock, calculated on a Fully Diluted
Basis; (b) enters into an agreement to consolidate with the Company, to have the
Company merged into or with it or to enter into a share exchange with the
Company (other than any merger, consolidation or share exchange in which the
holders of the Company's outstanding voting securities immediately preceding
such transaction will, immediately after such transaction, own capital stock
possessing more than 50% of the aggregate voting power and economic rights of
the outstanding capital stock of the entities surviving such transaction); or
(c) enters into an agreement to acquire all or substantially all of the
Company's assets or certain trademarks or trade names; (ii) the Company
announces its intention to enter into any agreement described above; or (iii) at
any time continuing directors (defined as directors as of

                                       11
<PAGE>   14

the date of the Company's initial public offering, directors subsequently
elected whose nomination was approved by a majority of the continuing directors,
and directors designated by A-B) cease to constitute at least a majority of the
Company's Board of Directors. If the A-B Standstill is terminated but the
underlying transaction giving rise to termination of the A-B Standstill does not
in fact transpire, the A-B Standstill will be reinstated as if such event had
not occurred if A-B has not increased its ownership above the standstill
limitation in the interim.

     The A-B Investment Agreement further provides that, to the extent A-B's
ownership exceeds the limits permitted under the A-B Standstill as the result of
a rights offering while such obligations are still in effect, 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 further 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. 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
transaction; (ii) enter into any transaction involving the transfer of specified
trademarks or trade names or 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) the issuance of
Common Stock in an initial public offering not exceeding 25% of the Common Stock
outstanding (assuming conversion of all Preferred Stock) as of the closing date
for the sale of the Series B Preferred Stock to A-B, (d) 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 (e) 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 from the production or distribution of
alcoholic beverages in North and South America; (vi) afford to any other person
                                       12
<PAGE>   15

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) enter into any transaction with any affiliate of the Company except under
certain circumstances; (viii) engage in any material respect in any business
other than producing and distributing beverages; (ix) 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 (x) amend its Articles or Bylaws in
certain respects.

     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) 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, (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 Stout and Blueline. The Company has also
obtained U.S. trademark registrations for Forecasters, Trolleyman, and Cataqua.
The Redhook mark and certain other Company marks are also registered or pending
in various foreign countries. The Company regards its Redhook and 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, 1999, the Company had 196 employees, including 58 in
production, 81 in the pubs, 41 in sales and marketing, and 16 in various
corporate office and brewery administration positions. Of these, 2 in
production, 47 in the pubs, 6 in sales and marketing, and 2 in administration
are part-time employees. The Company believes its relations with its employees
to be good.

                                       13
<PAGE>   16

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 3, 4 and 10 of
the Notes to Financial Statements included elsewhere herein.

     The Fremont Brewery. In June 1987, the Company leased the historic Fremont
brewery building and hired German brewery engineers to design and install a
brewery to meet its special requirements. Production began in 1989 with an
annual capacity of approximately 30,000 barrels. As the result of further
expansion that included construction of a kegging and warehousing facility,
capacity increased in stages to approximately 75,000 barrels per year by 1993.
The Company leases the brewery building, which covers approximately 26,000
square feet. The brewery building is currently occupied by the Trolleyman pub
and the Company's corporate offices. The lease expires in October 2002, unless
the five-year extension option is exercised. The Company owns adjacent
warehousing facility and land, which covers approximately 23,000 square feet. In
January 1998, production at the Fremont Brewery was significantly reduced and
the brewery served as a backup facility to the Woodinville Brewery. During the
quarter ended June 30, 1998, the Company analyzed its current and future
production capacity requirements and its plans for the Fremont Brewery
production assets. Based upon that analysis, the Company decided to permanently
curtail the Fremont Brewery operations and sell substantially all of those
production assets. In compliance with Financial Accounting Standards Board
("FASB") Statement No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of ("Statement 121"), the Fremont
production assets were written down to an estimate of their net realizable value
in the quarter ended June 30, 1998. The write-down was recorded through a
non-cash valuation provision totaling $5.2 million. The special valuation
provision, net of the related income tax benefit, totaled $3.4 million. The
Company previously leased approximately 7,600 square feet of adjacent office
space under a lease that originally expired in 2001. During 1998, the Company
exercised its option to terminate that lease and moved its corporate offices
into the Fremont Brewery building.

     The Woodinville Brewery. In 1993, the Company acquired approximately 22
acres (17 of which are developable) in Woodinville, Washington, a suburb of
Seattle, to build a second brewery and packaging facility. The site 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 housed in an
approximately 88,000-square-foot building that currently includes a 100-barrel
brewhouse, fermentation cellars, filter rooms, grain storage silos, a bottling
line, dry storage, a cooler, a water pre-treatment system and loading docks.
This building also 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. This brewery also
has a 4,000 square-foot special events room accommodating up to 250 people. The
Woodinville Brewery began limited operations in September 1994 with an annual
capacity of approximately 60,000 barrels. Completion of an outdoor tank farm
during 1996 brought the Woodinville Brewery to its maximum designed production
capacity of approximately 250,000 barrels per year. During 1997, the Company
completed construction of a 40,000 square-foot keg filling, cold storage,
distribution and office facility adjacent to the brewery building.

     The Portsmouth Brewery. In May 1995, the Company subleased approximately 23
acres in Portsmouth, New Hampshire to build a brewery and a bottling and kegging
facility to supply eastern U.S. markets. The sublease 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. 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 capacity of approximately
100,000 barrels per year. The Company plans to phase in additional capacity as
needed, up to the maximum designed production capacity of approximately 250,000
barrels per year.

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<PAGE>   17

ITEM 3. LEGAL PROCEEDINGS

     The Company believes that neither it nor its properties are currently
involved in, or subject to, any pending legal proceedings, which, if determined
adversely to the Company, would 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 (47) -- 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.

Bradley A. Berg (42) -- Executive Vice President and Chief Financial Officer

     Mr. Berg has served as the Company's Chief Financial Officer since December
1994. He was the Vice President and Chief Financial Officer of Holly Residential
Properties, Inc., a NYSE-listed company engaged in the ownership and operation
of multi-family residential properties, from February 1994 to December 1994. Mr.
Berg served as Vice President and Controller of Burlington Resources Inc., a
NYSE-listed natural resources holding company, from November 1989 to February
1994. Prior to joining Burlington Resources Inc., he was a Partner with the
certified public accounting firm of Coopers & Lybrand. Mr. Berg received his
Bachelor's degree in Accounting from the University of Northern Iowa in 1979.

David J. Mickelson (40) -- Executive Vice President and Chief Operating Officer

     Mr. Mickelson has served in his current position since March 1995, and 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 (46) -- Vice President, Sales and Marketing

     Ms. Hinckley has served in her current position since June 1996. From March
1995 to May 1996 she served as the Company's Vice President, 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.

Allen L. Triplett (41) -- Vice President, Brewing

     Mr. Triplett has served in his current position since March 1995, and 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 extensive coursework at the Siebel Institute of Brewing and
the University of California at Davis. He received his Bachelor's degree in
Petroleum Engineering from the University of Wyoming in 1985.

                                       15
<PAGE>   18

                                    PART II.

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

     The Company effected its initial public offering of Common Stock on August
16, 1995, and since that date the Company's Common Stock has traded on the
NASDAQ National Market. 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.

<TABLE>
<CAPTION>
                                                      HIGH      LOW
                                                     ------    ------
<S>                                                  <C>       <C>
1999
  First quarter....................................  $6.563    $4.500
  Second quarter...................................  $4.625    $3.625
  Third quarter....................................  $4.094    $2.750
  Fourth quarter...................................  $3.375    $1.875
1998
  First quarter....................................  $7.625    $4.875
  Second quarter...................................  $7.000    $5.500
  Third quarter....................................  $6.500    $3.813
  Fourth quarter...................................  $5.375    $4.000
</TABLE>

     As of March 17, 2000, there were 797 recordholders of Common Stock,
although the Company believes that the number of beneficial owners of its Common
Stock is substantially greater.

     The Company has not paid any dividends, other than a one-time extraordinary
dividend in 1994 from the proceeds of the sale of Series B Preferred Stock to
A-B. That dividend totaled $9,071,354 ($2.00 per share) and was paid on all
Series A Preferred Stock and common shares outstanding (except those owned by
A-B). The Company anticipates that for the foreseeable future, all earnings, if
any, will be retained for the operation and expansion of its business 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.

                                       16
<PAGE>   19

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, 1999, are derived from the financial statements of the
Company. The operating data are derived from unaudited information maintained by
the Company.

<TABLE>
<CAPTION>
                                                         YEAR ENDED DECEMBER 31,
                                           ---------------------------------------------------
                                            1999       1998       1997       1996       1995
                                           -------    -------    -------    -------    -------
                                           (IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
<S>                                        <C>        <C>        <C>        <C>        <C>
STATEMENT OF OPERATIONS DATA:
Sales....................................  $35,459    $35,962    $37,894    $39,410    $28,426
Less Excise Taxes........................    3,265      3,321      3,608      3,732      2,532
                                           -------    -------    -------    -------    -------
Net Sales................................   32,194     32,641     34,286     35,678     25,894
Cost of Sales............................   22,613     23,917     25,963     23,581     16,970
                                           -------    -------    -------    -------    -------
Gross Profit.............................    9,581      8,724      8,323     12,097      8,924
Special Valuation Provision(1)...........       --      5,173         --         --         --
Selling, General and Administrative
  Expenses...............................   11,290      9,086      9,981      7,853      4,606
                                           -------    -------    -------    -------    -------
Operating Income (Loss)..................   (1,709)    (5,535)    (1,658)     4,244      4,318
Interest Expense.........................      533        679        378         --         24
Other Income (Expense), Net..............      (49)       127         93        615        678
                                           -------    -------    -------    -------    -------
Income (Loss) Before Income Taxes........   (2,291)    (6,087)    (1,943)     4,859      4,972
Income Tax Provision (Benefit)...........     (768)    (2,076)      (544)     1,773      1,790
                                           -------    -------    -------    -------    -------
Net Income (Loss)........................  $(1,523)   $(4,011)   $(1,399)   $ 3,086    $ 3,182
                                           =======    =======    =======    =======    =======

Basic Earnings (Loss) per Share..........  $ (0.20)   $ (0.52)   $ (0.18)   $  0.40    $  0.63
Diluted Earnings (Loss) per Share........  $ (0.20)   $ (0.52)   $ (0.18)   $  0.34    $  0.44

OPERATING DATA (IN BARRELS):

Beer Shipped.............................  197,600    202,300    214,600    224,700    158,700
Production Capacity, End of Period(2)....  350,000    350,000    425,000    425,000    245,000
</TABLE>

<TABLE>
<CAPTION>
                                                                    DECEMBER 31,
                                                   -----------------------------------------------
                                                    1999      1998      1997      1996      1995
                                                   -------   -------   -------   -------   -------
<S>                                                <C>       <C>       <C>       <C>       <C>
BALANCE SHEET DATA (IN THOUSANDS):
Cash and Cash Equivalents........................  $ 5,463   $ 3,010   $   892   $ 1,162   $24,677
Working Capital..................................    2,635     1,666     1,338       850    21,385
Total Assets.....................................   87,707    89,528    96,769    95,124    86,638
Long-term Debt, Net of Current Portion...........    7,425     7,875     9,874     6,191     1,825
Convertible Redeemable Preferred Stock...........   16,055    16,011    15,966    15,922    15,877
Common Stockholders' Equity......................   55,859    57,326    61,298    62,630    59,579
</TABLE>

---------------
(1) Represents a non-cash valuation provision to write-down Fremont production
    assets. See Item 7. "Management's Discussion and Analysis of Financial
    Condition and Results of Operations."

(2) Based on the Company's estimate of normal production capacity of equipment
    installed as of the end of such period. Amounts do not reflect maximum
    designed production capacity. See Item 7. "Management's Discussion and
    Analysis of Financial Condition and Results of Operations."

                                       17
<PAGE>   20

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.

OVERVIEW

     Since its formation, the Company has focused its business activities on the
brewing, marketing and selling of craft beers. For the year ended December 31,
1999, the Company had gross sales of $35,459,000, a decrease of 1.4% from 1998.
Sales for the second half of 1999 increased 5.3% over sales in the comparable
1998 period. Those positive trends were experienced in most of the Company's
regions. The Company believes that period-to-period comparisons of its financial
results should not be relied upon as an accurate indicator of future
performance. 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 is
required to pay federal excise taxes on sales of its beer. The excise tax burden
on beer sales increases from $7 to $18 per barrel on annual production over
60,000 barrels and thus, if sales volume increases, federal excise taxes would
increase as a percentage of sales.

     The Company's sales volume declined 2.3% in 1999, compared to 1998,
although in the last six months of 1999 sales volumes increased by 6.1% compared
to the corresponding 1998 period. In addition to the level of consumer demand in
existing markets, the Company's sales are also affected by other factors such as
competitive considerations, including the increased number of craft brewers and
promotional pricing, the opening of new distribution territories and new product
introductions. 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.

     Under normal circumstances, the Company generally operates its brewing
facilities up to five days per week, two shifts per day. The Company increased
its company-wide annual production capacity from approximately 3,000 barrels in
1982 to approximately 350,000 barrels as of December 31, 1999. Production
capacity of each facility can be added in phases until the facility reaches its
maximum designed production capacity. The timing of each phase is affected by
the availability of capital, construction constraints and anticipated sales in
new and existing markets. The Portsmouth, New Hampshire brewery began commercial
production during October 1996. The Portsmouth Brewery's current production
capacity is approximately 100,000 barrels per year and its maximum designed
production capacity is approximately 250,000 barrels per year. Additional
capital expenditures and production personnel will be required to bring the
Portsmouth Brewery to its maximum designed capacity.

     Upon the opening of the Portsmouth Brewery, the Company's maximum designed
production capacity increased from 325,000 barrels per year to 575,000 barrels
per year, prior to the 75,000 decrease related to the Fremont Brewery (see
discussion below), resulting in a significant decline in the company-wide
capacity utilization rate. The Company's maximum designed capacity was 500,000
barrels per year at December 31, 1999. The Company's capacity utilization has a
significant impact on gross profit. When facilities are operating at their
maximum designed production capacities, profitability is favorably affected by
spreading fixed and semivariable operating costs, such as depreciation and
production salaries, over a larger sales base. Most capital costs associated
with building a new brewery, and fixed and semivariable costs related to
operating a new brewery, are incurred prior to, or upon commencement of,
production at a facility. Because the actual production level may be
substantially below the facility's maximum designed production capacity, gross
margins are negatively impacted. This impact is reduced when actual production
increases.

     In January 1998, production at the Fremont Brewery was significantly
reduced, and the brewery served as a backup facility to the Woodinville Brewery.
During the quarter ended June 30, 1998, the Company analyzed its current and
future production capacity requirements and its plans for the Fremont Brewery
production assets. Based upon that analysis, the Company decided to permanently
curtail the Fremont Brewery operations and sell substantially all of those
production assets. In compliance with FASB Statement No. 121,
                                       18
<PAGE>   21

the Fremont production assets were written down to an estimate of their net
realizable value in the quarter ended June 30, 1998. The write-down was recorded
through a non-cash valuation provision totaling $5.2 million. The special
valuation provision, net of the related income tax benefit, totaled $3.4
million. As of December 31, 1999, the Company has sold substantially all of the
equipment for an amount approximately equal to its estimated net realizable
value.

     In addition to capacity utilization, the Company expects other factors to
influence profit margins, including higher costs associated with the development
of newer distribution territories, such as increased shipping, marketing and
sales personnel costs; fees related to the distribution agreement with A-B;
changes in packaging and other material costs; and changes in product sales mix.

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

RESULTS OF OPERATIONS

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

<TABLE>
<CAPTION>
                                                       YEAR ENDED DECEMBER 31,
                                                      --------------------------
                                                       1999      1998      1997
                                                      ------    ------    ------
<S>                                                   <C>       <C>       <C>
Sales...............................................   110.1%    110.2%    110.5%
Less Excise Taxes...................................    10.1      10.2      10.5
                                                      ------    ------    ------
Net Sales...........................................   100.0     100.0     100.0
Cost of Sales.......................................    70.2      73.3      75.7
                                                      ------    ------    ------
Gross Profit........................................    29.8      26.7      24.3
Special Valuation Provision.........................      --      15.8        --
Selling, General and Administrative Expenses........    35.1      27.8      29.1
                                                      ------    ------    ------
Operating Income (Loss).............................    (5.3)    (16.9)     (4.8)
Interest Expense....................................     1.7       2.1       1.1
Other Income (Expense) -- Net.......................    (0.1)      0.4       0.2
                                                      ------    ------    ------
Income (Loss) before Income Taxes...................    (7.1)    (18.6)     (5.7)
Income Tax Provision (Benefit)......................    (2.4)     (6.3)     (1.6)
                                                      ------    ------    ------
Net Income (Loss)...................................    (4.7)%   (12.3)%    (4.1)%
                                                      ======    ======    ======
</TABLE>

YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998

     Sales. Total sales decreased 1.4% to $35,459,000 in 1999, compared to
$35,962,000 in 1998, as a 2.3% decrease in total sales volumes were partially
offset by a slight increase in other sales and a small increase in average beer
prices. Total sales volumes in 1999 decreased 2.3% to 197,600 barrels from
202,300 barrels in 1998. West Coast sales decreased 4.2% in 1999, including a
3.9% decline in Washington State, the Company's largest market. The competitive
landscape has been affected by the increase in the number of craft beer
companies and the number of different products they offer, as well as increased
competition from imported beers. Sales other than wholesale beer sales,
primarily retail pub revenues, totaled $3,743,000 in 1999, compared to
$3,673,000 in 1998. At December 31, 1999 and 1998, the Company's products were
distributed in 48 states.

     Excise Taxes. Excise taxes decreased to $3,264,000, or 10.1% of net sales
in 1999, compared to $3,321,000, or 10.2% of net sales in 1998.

     Cost of Sales. Cost of sales decreased 5.5% to $22,613,000 in 1999,
compared to $23,917,000 in 1998, primarily due to the lower sales volume,
decreased packaging and other material costs, increased efficiencies and the
positive effect of curtailing production at the Fremont Brewery. Cost of sales,
as a percentage of net sales, decreased to 70.2% in 1999, compared to 73.3% in
1998. The combined utilization rate of maximum

                                       19
<PAGE>   22

designed capacity for the operating breweries was 39.5% and 39.0% for years
ended December 31, 1999 and 1998, respectively.

     Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to $11,290,000 in 1999, compared to $9,086,000
in 1998 due to the advertising and promotional program which began in mid-1999.
As a percentage of net sales, these expenses were 35.1% and 27.8% for years
ended December 31, 1999 and 1998, respectively. The increase is due primarily to
the June 1999 launch of an advertising campaign in three key markets, partially
offset by cost savings such as office rent and compensation.

     Interest Expense. Interest expense decreased to $533,000 in 1999, compared
to $679,000 in 1998, reflecting lower outstanding debt and lower average
interest rates.

     Other Income (Expense) -- Net. The 1999 period includes a non-cash loss of
$260,000 related to the exchange of some one-half barrel kegs for new one-sixth
barrel kegs. Excluding the loss, other income increased to $212,000 in 1999
compared to $127,000 in 1998 due to a higher average balance of interest-
bearing deposits.

     Income Taxes. The Company's effective income tax rate was a 33.5% benefit
in 1999, compared to a 34.1% benefit in 1998. The difference between the 1999
and 1998 effective rates is primarily the result of a significantly lower
pre-tax loss in 1999, 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.

YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997

     Sales. Total sales decreased 5.1% to $35,962,000 in 1998, compared to
$37,894,000 in 1997, as a 5.7% decrease in total sales volumes and a small
decrease in prices were partially offset by an increase in other sales. Total
sales volumes in 1998 decreased 5.7% to 202,300 barrels from 214,600 barrels in
1997. West Coast sales decreased 5.5% for the same period, including a 1.4%
decline in Washington State, the Company's largest market. The competitive
landscape has been affected by the increase in the number of craft beer
companies and the number of different products they offer, as well as increased
competition from imported beers. Sales other than wholesale beer sales,
primarily retail pub revenues, totaled $3,673,000 in 1998, compared to
$3,406,000 in 1997. At December 31, 1998 and 1997, the Company's products were
distributed in 48 states.

     Excise Taxes. Excise taxes decreased to $3,321,000, or 10.2% of net sales
in 1998, compared to $3,608,000, or 10.5% of net sales in 1997.

     Cost of Sales. Cost of sales decreased 7.9% to $23,917,000 in 1998,
compared to $25,963,000 in 1997, primarily due to the lower sales volume,
decreased packaging costs and the positive effect of curtailing production at
the Fremont Brewery, partially offset by an increase in depreciation expense
related to the kegging and cold storage facility completed in June 1997. Cost of
sales, as a percentage of net sales, decreased to 73.3% in 1998, compared to
75.7% in 1997. The combined utilization rate of maximum designed capacity for
the operating breweries was 39.0% and 37.2% for years ended December 31, 1998
and 1997, respectively. The increase reflects the Fremont Brewery shutdown in
the first half of 1998, offset partially by lower total volume.

     Special Valuation Provision. In the quarter ended June 30, 1998, the
Fremont production assets were written down to an estimate of their net
realizable value in compliance with FASB Statement No. 121. The write-down was
recorded through a non-cash valuation provision totaling $5.2 million. The
Company sold substantially all of these assets during 1999.

     Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased to $9,086,000 in 1998, compared to $9,981,000
in 1997 due primarily to cost saving measures that reduced sales and marketing
costs. As a percentage of net sales, these expenses were 27.8% and 29.1% for
years ended December 31, 1998 and 1997, respectively.

                                       20
<PAGE>   23

     Interest Expense. Interest expense increased to $679,000 in 1998, compared
to $378,000 in 1997. Substantially all interest costs incurred in the first six
months of 1997 were capitalized to the Woodinville construction project that was
completed in June 1997.

     Other Income (Expense) -- Net. Other income -- net, increased slightly to
$127,000 in 1998, compared to $93,000 in 1997. The increase was due to an
increase in the average balance of interest-bearing deposits in 1998.

     Income Taxes. The Company's effective income tax rate was a 34.1% benefit
in 1998, compared to a 28.0% benefit in 1997. The difference between the 1998
and 1997 effective rates is primarily the result of a significantly lower
pre-tax loss in 1997, relative to other components of the tax provision
calculation, such as the exclusion of a portion of meals and entertainment
expenses from tax return deductions.

LIQUIDITY AND CAPITAL RESOURCES

     The Company had $5,463,000 and $3,010,000 of cash and cash equivalents at
December 31, 1999 and 1998, respectively. At December 31, 1999, the Company had
working capital of $2,635,000. The Company's long-term debt as a percentage of
total capitalization (long-term debt, preferred stock and common stockholders'
equity) was 9.9% and 10.2% as of December 31, 1999 and 1998, respectively. Cash
provided by operating activities totaled $2,857,000 and $5,035,000 in 1999 and
1998, respectively. The amounts include the collection of income tax refunds
totaling approximately $500,000 and $1 million, in the respective periods.

     On June 5, 1997, the Company converted the $9 million outstanding balance
of its secured bank facility (the "Secured Facility") to a five-year term loan
with a 20-year amortization schedule. As of December 31, 1999, there was $7.9
million outstanding on the Secured Facility, and the Company's one-month LIBOR-
based borrowing rate was approximately 7.7%. In addition, the Company has a $10
million revolving credit facility (the "Revolving Facility") with the same bank
through July 1, 2001, and as of December 31, 1999, there were no borrowings
outstanding on this facility. The Revolving Facility is secured with the same
assets that are collateral for the Secured Facility. Interest accrues at a
variable rate based on the London Inter Bank Offered Rate ("LIBOR"), plus 1.25%
to 2.00% for the Secured Facility depending on the Company's debt-to-tangible
net worth ratio. The interest rate for the Revolving Facility is the applicable
LIBOR plus 1.00% to 2.00%, depending on the Company's debt service-to-cash flow
ratio. The Company can fix the rate by selecting LIBOR for one- to twelve-month
periods as a base.

     The Company has required capital principally for the construction and
development of its technologically-advanced production facilities. To date, the
Company has financed its capital requirements through cash flow from operations,
bank borrowings and the sale of common and preferred stock. The Company expects
to meet its future financing needs, including the significantly higher
advertising expenditures, and working capital and capital expenditure
requirements, through cash on hand, operating cash flow and, to the extent
required and available, bank borrowings and offerings of debt or equity
securities.

     Capital expenditures for 1999 totaled $1,141,000. Capital expenditures for
2000 are expected to total approximately $1,000,000.

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

CERTAIN CONSIDERATIONS: ISSUES AND UNCERTAINTIES

     The Company does not provide forecasts of future financial performance or
sales volumes, although this 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
                                       21
<PAGE>   24

Exchange Act of 1934, as amended. Such forward-looking statements are based on
assumptions that the Company believes are reasonable, but are by their nature
inherently uncertain. In all cases, there can be no assurance that such
assumptions will prove correct or that projected events will occur. Actual
results could differ materially from those projected depending on a variety of
factors, including, but not limited to, the issues discussed below, the
successful execution of market development and other plans and the availability
of financing. While Company management is optimistic about the Company's
long-term prospects, the following issues and uncertainties, among others,
should be considered in evaluating its business prospects and any
forward-looking statements.

     Effect of Competition on Future Sales. The domestic market in which the
Company's craft beers are sold is highly competitive due to the proliferation of
small craft brewers, including contract brewers, the increase in the number of
products offered by such brewers, increased competition from imported beers and
the introduction of fuller-flavored products by major national brewers. The
Company's revenue growth rate began to slow in late 1996, and sales declined in
the subsequent years, due primarily to slower sales in the highly competitive
draft beer market. If negative sales trends were to continue, the Company's
future sales and results of operations would be adversely affected. The Company
has historically operated with little or no backlog and, therefore, its ability
to predict sales for future periods is limited.

     Sales Prices. Future prices the Company charges for its products may
decrease from historical levels, depending on competitive factors in the
Company's various markets. The Company has participated in price promotions with
its wholesalers and their retail customers in most of its markets. The number of
markets in which the Company participates in price promotions and the frequency
of such promotions 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, during periods when the Company's breweries are
producing below maximum designed production capacity. The Company's high level
of fixed and semivariable operating costs causes gross margin to be very
sensitive to relatively small increases or decreases in sales volume. In
addition, other factors that could affect cost of sales include changes in:
shipping costs, availability and prices of raw materials and packaging
materials, mix between draft and bottled product sales, the sales mix of various
bottled product packages and Federal or state excise taxes. Also, as sales
volumes through the Distribution Alliance increase, the alliance fee, and other
staging and administrative costs, would increase.

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

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

     Dependence on Third-Party Distributors. The Company relies heavily on
third-party distributors for the sale of its products to retailers. The
Company's most significant non-Alliance wholesaler, K&L Distributors, Inc., an
A-B affiliated wholesaler in the Seattle area, accounted for approximately 17%
of the Company's sales in 1999. Substantially all of the remaining sales volumes
are now through the Distribution Alliance to A-B
                                       22
<PAGE>   25

affiliated distributors, most of whom 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, or
the loss of K&L Distributors or the termination of the Distribution Alliance
could have a material adverse impact on the Company's sales and results of
operations.

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

     Effect of Sales Trends on Brewery Efficiency and Operations. In recent
years the Company's sales volumes have declined between two to five percent per
year. Those declines coincided with significantly slower sales growth in the
highly competitive craft beer segment. The Company's breweries have been
operating at production levels substantially below their actual and maximum
designed capacities. Operating breweries at low capacity utilization rates
negatively impacts gross margins and operating cash flows generated by the
production facilities. In 1998, the Company permanently curtailed production at
its Fremont Brewery and wrote the related assets down to their estimated net
realizable value. The Company will continue to evaluate whether it expects to
recover the costs of its two remaining production facilities over the course of
their useful lives.

     Impact of Year 2000. The Company previously discussed the nature and
progress of its plans to become Year 2000 ready. In late 1999, the Company
completed software upgrades and testing of systems. The Company experienced no
significant disruptions in critical information technology and operational
systems and believes those systems successfully responded to the Year 2000 date
change. The Company incurred less than $75,000 of costs during 1999 in
connection with upgrades and modifications of its systems. The Company is not
aware of any material problems resulting from Year 2000 issues, either with its
products, its internal systems, or the products and services of third parties.
The Company will continue to monitor its critical computer applications and
those of its suppliers and vendors throughout the Year 2000 to ensure that any
latent Year 2000 matters that may arise are addressed promptly.

RECENT ACCOUNTING PRONOUNCEMENTS

     In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"). This statement establishes accounting and reporting standards for
derivative instruments and for hedging activities. In June 1999, the FASB issued
SFAS 137, "Accounting for Derivative Instruments and Hedging
Activities -- Deferral of the Effective Date of FASB Statement No. 133", to
defer the effective date of SFAS 133 until fiscal years beginning after June 15,
2000. The Company anticipates that the adoption of this new accounting standard
will not have a material impact on its financial position or results of
operations.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     The Company does not have any derivative financial instruments as of
December 31, 1999. However, the Company is exposed to interest rate risk. The
Company's long-term debt bears interest at a rate that is tied to a variable
rate. Information pertaining to the Company's debt balance and terms is set
forth in Item 7. "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and in Note 5 of "Notes to Financial Statements."

                                       23
<PAGE>   26

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                       REDHOOK ALE BREWERY, INCORPORATED

                         INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                              PAGE
                                                              ----
<S>                                                           <C>
AUDITED FINANCIAL STATEMENTS:

Report of Ernst & Young LLP, Independent Auditors...........   25

Balance Sheets as of December 31, 1999 and 1998.............   26

Statements of Operations for the Years Ended December 31,
  1999, 1998 and 1997.......................................   27

Statements of Common Stockholders' Equity for the Years
  Ended December 31, 1999, 1998
  and 1997..................................................   28

Statements of Cash Flows for the Years Ended December 31,
  1999, 1998 and 1997.......................................   29

Notes to Financial Statements...............................   30
</TABLE>

                                       24
<PAGE>   27

               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, 1999 and 1998, and the related statements of
operations, common stockholders' equity, and cash flows for each of the three
years in the period ended December 31, 1999. 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, 1999 and 1998, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
1999, in conformity with accounting principles generally accepted in the United
States.

                                          ERNST & YOUNG LLP

Seattle, Washington
January 28, 2000

                                       25
<PAGE>   28

                       REDHOOK ALE BREWERY, INCORPORATED

                                 BALANCE SHEETS

<TABLE>
<CAPTION>
                                                              DECEMBER 31,    DECEMBER 31,
                                                                  1999            1998
                                                              ------------    ------------
<S>                                                           <C>             <C>
                                          ASSETS
Current Assets:
  Cash and Cash Equivalents.................................  $ 5,462,779     $ 3,010,448
  Accounts Receivable.......................................    1,174,853       1,525,708
  Inventories...............................................    2,406,797       2,267,410
  Income Taxes Receivable...................................           --         469,272
  Other.....................................................      331,481         303,623
                                                              -----------     -----------
     Total Current Assets...................................    9,375,910       7,576,461
Fixed Assets, Net...........................................   77,739,550      80,211,312
Assets Held for Sale........................................           --       1,105,475
Other Assets................................................      591,431         634,781
                                                              -----------     -----------
          Total Assets......................................  $87,706,891     $89,528,029
                                                              ===========     ===========

LIABILITIES, PREFERRED STOCK
  AND COMMON STOCKHOLDERS' EQUITY
Current Liabilities:
  Accounts Payable..........................................  $ 2,743,971     $ 2,231,602
  Accrued Salaries, Wages and Payroll Taxes.................    1,408,552       1,451,936
  Refundable Deposits.......................................    1,571,028       1,310,366
  Other Accrued Expenses....................................      567,206         466,734
  Current Portion of Long-Term Debt.........................      450,000         450,000
                                                              -----------     -----------
     Total Current Liabilities..............................    6,740,757       5,910,638
                                                              -----------     -----------
Long-Term Debt, Net of Current Portion......................    7,425,000       7,875,000
                                                              -----------     -----------
Deferred Income Taxes.......................................    1,627,067       2,405,889
                                                              -----------     -----------
Convertible Redeemable Preferred Stock......................   16,055,055      16,010,655
                                                              -----------     -----------
Common Stockholders' Equity:
  Common Stock, Par Value $0.005 per Share, Authorized,
     50,000,000
     Shares; Issued and Outstanding, 7,687,786 Shares in
      1999 and 7,687,486 Shares in 1998.....................       38,439          38,438
  Additional Paid-In Capital................................   56,989,631      56,888,633
  Retained Earnings (Deficit)...............................   (1,169,058)        398,776
                                                              -----------     -----------
          Total Common Stockholders' Equity.................   55,859,012      57,325,847
                                                              -----------     -----------
          Total Liabilities, Preferred Stock and Common
             Stockholders' Equity...........................  $87,706,891     $89,528,029
                                                              ===========     ===========
</TABLE>

                             See Accompanying Notes
                                       26
<PAGE>   29

                       REDHOOK ALE BREWERY, INCORPORATED

                            STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                               YEAR ENDED DECEMBER 31,
                                                      -----------------------------------------
                                                         1999           1998           1997
                                                      -----------    -----------    -----------
<S>                                                   <C>            <C>            <C>
Sales...............................................  $35,458,710    $35,962,126    $37,894,468
Less Excise Taxes...................................    3,264,311      3,320,824      3,608,166
                                                      -----------    -----------    -----------
Net Sales...........................................   32,194,399     32,641,302     34,286,302
Cost of Sales.......................................   22,613,468     23,917,360     25,962,672
                                                      -----------    -----------    -----------
Gross Profit........................................    9,580,931      8,723,942      8,323,630
Special Valuation Provision.........................           --      5,172,650             --
Selling, General and Administrative Expenses........   11,290,271      9,086,312      9,981,469
                                                      -----------    -----------    -----------
Operating Income (Loss).............................   (1,709,340)    (5,535,020)    (1,657,839)
Interest Expense....................................      533,360        678,516        378,444
Other Income (Expense) -- Net.......................      (48,192)       126,862         92,998
                                                      -----------    -----------    -----------
Income (Loss) before Income Taxes...................   (2,290,892)    (6,086,674)    (1,943,285)
Income Tax Provision (Benefit)......................     (767,458)    (2,075,494)      (544,319)
                                                      -----------    -----------    -----------
Net Income (Loss)...................................  $(1,523,434)   $(4,011,180)   $(1,398,966)
                                                      ===========    ===========    ===========
Basic Earnings (Loss) per Share.....................  $     (0.20)   $     (0.52)   $     (0.18)
                                                      ===========    ===========    ===========
Diluted Earnings (Loss) per Share...................  $     (0.20)   $     (0.52)   $     (0.18)
                                                      ===========    ===========    ===========
</TABLE>

                             See Accompanying Notes
                                       27
<PAGE>   30

                       REDHOOK ALE BREWERY, INCORPORATED

                   STATEMENTS OF COMMON STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                    COMMON STOCK                                           TOTAL
                               ----------------------    ADDITIONAL                       COMMON
                                                           PAID-IN       RETAINED      STOCKHOLDERS'
                                SHARES      PAR VALUE      CAPITAL       EARNINGS         EQUITY
                               ---------    ---------    -----------    -----------    -------------
<S>                            <C>          <C>          <C>            <C>            <C>
Balance, December 31, 1996...  7,685,486     $38,428     $56,652,764    $ 5,938,659     $62,629,851
  Other, Net.................      2,000          10         152,869        (85,337)         67,542
  Net Loss...................         --          --              --     (1,398,966)     (1,398,966)
                               ---------     -------     -----------    -----------     -----------

Balance, December 31, 1997...  7,687,486      38,438      56,805,633      4,454,356      61,298,427
  Other, Net.................         --          --          83,000        (44,400)         38,600
  Net Loss...................         --          --              --     (4,011,180)     (4,011,180)
                               ---------     -------     -----------    -----------     -----------

Balance, December 31, 1998...  7,687,486      38,438      56,888,633        398,776      57,325,847
  Other, Net.................        300           1         100,998        (44,400)         56,599
  Net Loss...................         --          --              --     (1,523,434)     (1,523,434)
                               ---------     -------     -----------    -----------     -----------

Balance, December 31, 1999...  7,687,786     $38,439     $56,989,631    $(1,169,058)    $55,859,012
                               =========     =======     ===========    ===========     ===========
</TABLE>

                             See Accompanying Notes
                                       28
<PAGE>   31

                       REDHOOK ALE BREWERY, INCORPORATED

                            STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                               YEAR ENDED DECEMBER 31,
                                                      -----------------------------------------
                                                         1999           1998           1997
                                                      -----------    -----------    -----------
<S>                                                   <C>            <C>            <C>
OPERATING ACTIVITIES
Net Income (Loss)...................................  $(1,523,434)   $(4,011,180)   $(1,398,966)
Adjustments to Reconcile Net Income (Loss) to Net
  Cash
     Provided by Operating Activities:
     Depreciation and Amortization..................    3,271,381      3,343,377      3,399,217
     Deferred Income Tax Provision (Benefit)........     (778,822)    (1,581,630)       404,827
     Special Valuation Provision....................           --      5,172,650             --
     Loss on Disposal of Fixed Assets...............      265,415             --             --
     Changes in Operating Assets and Liabilities:
       Accounts Receivable..........................      350,855         62,660        463,223
       Inventories..................................     (139,387)       548,372       (586,406)
       Income Taxes Receivable......................      469,272        655,541       (697,738)
       Other Current Assets.........................      (27,858)       215,892         49,099
       Other Assets.................................       56,249        317,581         83,670
       Accounts Payable and Other Accrued
          Expenses..................................      696,054         38,380       (115,822)
       Accrued Salaries, Wages and Payroll Taxes....      (43,384)       128,970        102,754
       Refundable Deposits..........................      260,662        144,296        215,144
                                                      -----------    -----------    -----------
Net Cash Provided by Operating Activities...........    2,857,003      5,034,909      1,919,002
                                                      -----------    -----------    -----------

INVESTING ACTIVITIES
Expenditures for Fixed Assets.......................   (1,140,603)      (937,419)    (6,401,745)
Proceeds from Sale of Assets and Other, Net.........    1,084,932         78,525        (41,800)
                                                      -----------    -----------    -----------
Net Cash Used in Investing Activities...............      (55,671)      (858,894)    (6,443,545)
                                                      -----------    -----------    -----------

FINANCING ACTIVITIES
Proceeds from Debt..................................           --             --      5,350,000
Repayments on Debt..................................     (450,000)    (2,140,608)    (1,207,586)
Officer Note Repayment and Other, Net...............      100,999         82,876        111,942
                                                      -----------    -----------    -----------
Net Cash Provided by (Used in) Financing
  Activities........................................     (349,001)    (2,057,732)     4,254,356
                                                      -----------    -----------    -----------
Increase (Decrease) in Cash and Cash Equivalents....    2,452,331      2,118,283       (270,187)
Cash and Cash Equivalents:
  Beginning of Year.................................    3,010,448        892,165      1,162,352
                                                      -----------    -----------    -----------
  End of Year.......................................  $ 5,462,779    $ 3,010,448    $   892,165
                                                      ===========    ===========    ===========
</TABLE>

                             See Accompanying Notes
                                       29
<PAGE>   32

                       REDHOOK ALE BREWERY, INCORPORATED

                         NOTES TO FINANCIAL STATEMENTS

 1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES

     Redhook Ale Brewery, Incorporated (the "Company") was incorporated on May
4, 1981 for the purpose of brewing, marketing and selling craft beers. Its
operations consist of corporate headquarters and a pub in the Fremont area of
Seattle, Washington; a brewery in the Seattle suburb of Woodinville, Washington;
and, a brewery in Portsmouth, New Hampshire. As of December 31, 1999, the
Company's products were distributed in 48 states.

     In 1994, the Company signed an agreement (the "Distribution Alliance" or
the "Alliance") with Anheuser-Busch, Incorporated ("A-B"), pursuant to which the
Company utilizes A-B's national distribution network to distribute its products.
In addition, A-B purchased 1,289,872 shares of Series B convertible redeemable
preferred stock (the "Series B Preferred Stock") and 236,756 newly issued shares
of common stock in connection with the Distribution Alliance. As of December 31,
1999, A-B owned 25% of the Company's voting stock.

  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
by 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 statement of
operations. The Company provides for depreciation and amortization using the
straight-line method to recognize the costs over the following estimated useful
lives:

<TABLE>
<S>                                            <C>
Buildings....................................  31 - 40 years
Brewery equipment............................  20 - 25 years
Leasehold improvements.......................  Lesser of lease term or useful life
Furniture, fixtures and other equipment......  2 - 10 years
Vehicles.....................................  5 years
</TABLE>

  Revenue Recognition

     The Company recognizes revenue from product sales when the products are
shipped to customers.

  Income Taxes

     The Company accounts for income taxes under the liability method, 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.

  Advertising Expenses

     Advertising costs, including production costs, are expensed as incurred.
For the years ended December 31, 1999, 1998, and 1997, advertising expenses
totaled $2,753,000, $265,000, and $147,000, respectively.

                                       30
<PAGE>   33
                       REDHOOK ALE BREWERY, INCORPORATED

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

  Segment Information

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

  Earnings (Loss) per Share

     Basic net 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, 1999, 1998 and 1997, 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.

  Comprehensive Income (Loss)

     As of January 1, 1998, the Company has adopted SFAS No. 130, Reporting
Comprehensive Income, which establishes standards for the reporting and display
of comprehensive income and its components in the financial statements. The
Company has no items of comprehensive income (loss).

  Use of Estimates

     The preparation of the financial statements in conformity with generally
accepted accounting principles 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.

  Reclassifications

     Certain reclassifications have been made to the prior years' financial
statements to conform to the current year presentation.

  Recently Issued Accounting Standards

     In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" which establishes
standards for recognition, measurement, and reporting of derivatives and hedging
activities and is effective for the Company's year ending December 31, 2000. The
Company anticipates that the adoption of this new accounting standard will not
have a material impact on the Company's financial statements.

                                       31
<PAGE>   34
                       REDHOOK ALE BREWERY, INCORPORATED

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

 2. INVENTORIES

     Inventories consist of the following:

<TABLE>
<CAPTION>
                                                            DECEMBER 31,
                                                      ------------------------
                                                         1999          1998
                                                      ----------    ----------
<S>                                                   <C>           <C>
Finished goods......................................  $1,059,460    $  862,246
Raw materials.......................................     814,106       998,133
Promotional merchandise.............................     342,071       222,042
Packaging materials.................................     191,160       184,989
                                                      ----------    ----------
                                                      $2,406,797    $2,267,410
                                                      ==========    ==========
</TABLE>

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

 3. FIXED ASSETS

     Fixed assets consist of the following:

<TABLE>
<CAPTION>
                                                           DECEMBER 31,
                                                    --------------------------
                                                       1999           1998
                                                    -----------    -----------
<S>                                                 <C>            <C>
Land and improvements.............................  $ 5,263,864    $ 5,172,000
Buildings.........................................   35,454,397     35,328,317
Brewery equipment.................................   44,949,789     44,773,526
Furniture, fixtures and other equipment...........    3,903,916      3,774,972
Leasehold improvements............................      171,466        172,726
Vehicles..........................................      136,568        136,568
Other.............................................       12,333         83,548
                                                    -----------    -----------
                                                     89,892,333     89,441,657
Less accumulated depreciation and amortization....   12,152,783      9,230,345
                                                    -----------    -----------
                                                    $77,739,550    $80,211,312
                                                    ===========    ===========
</TABLE>

 4. SPECIAL VALUATION PROVISION

     In January 1998, production at the Fremont Brewery was significantly
reduced and the brewery served as a backup facility to the Woodinville Brewery.
During the quarter ended June 30, 1998, the Company analyzed its current and
future production capacity requirements and its plans for the Fremont Brewery
production assets. Based upon that analysis, the Company decided to permanently
curtail the Fremont Brewery operations and sell substantially all of those
production assets. In accordance with FASB Statement No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of
("Statement 121"), the Fremont production assets were written down to an
estimate of their net realizable value in the quarter ended June 30, 1998. The
write-down was recorded through a non-cash valuation provision totaling $5.2
million. The special valuation provision, net of the related income tax benefit,
totaled $3.4 million. As of April 1998, the Company stopped depreciating these
assets, thereby reducing the Company's depreciation expense for 1998 by
approximately $330,000.

     The write-down was recorded in the statement of operations on a separate
line as a Special Valuation Provision. These assets are presented as Assets Held
For Sale on the balance sheet as of December 31, 1998, at their estimated net
realizable value of $1.1 million. As of December 31, 1999, the Company has sold
substantially all of the equipment for an amount approximately equal to its
estimated net realizable value.

                                       32
<PAGE>   35
                       REDHOOK ALE BREWERY, INCORPORATED

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

     The special valuation provision and the related assets held for sale were
recorded as follows:

<TABLE>
<S>                                                             <C>
Brewery equipment...........................................    $ 8,577,598
Building....................................................      1,068,824
                                                                -----------
                                                                  9,646,422
Less accumulated depreciation and amortization..............     (3,389,772)
                                                                -----------
Net book value..............................................      6,256,650
Estimated net realizable value of Assets Held for Sale......     (1,184,000)
                                                                -----------
Estimated impairment........................................      5,072,650
Reserve for disposal related costs..........................        100,000
                                                                -----------
Special Valuation Provision.................................      5,172,650
Income tax benefit..........................................     (1,810,428)
                                                                -----------
Special Valuation Provision, net of income tax benefit......    $ 3,362,222
                                                                ===========
</TABLE>

 5. DEBT

     Long-term debt consists of the following:

<TABLE>
<CAPTION>
                                                            DECEMBER 31,
                                                      ------------------------
                                                         1999          1998
                                                      ----------    ----------
<S>                                                   <C>           <C>
Secured Facility, payable to bank monthly at
  $37,500,
  plus accrued interest, interest at 7.7%
  at December 31, 1999, due 2002....................  $7,875,000    $8,325,000
Current portion.....................................    (450,000)     (450,000)
                                                      ----------    ----------
                                                      $7,425,000    $7,875,000
                                                      ==========    ==========
</TABLE>

     Annual principal payments required on long-term debt:

<TABLE>
<S>                                <C>
2000.............................  $  450,000
2001.............................     450,000
2002.............................   6,975,000
                                   ----------
                                   $7,875,000
                                   ==========
</TABLE>

     In June 1997, the Company converted the $9 million outstanding balance of
its secured bank facility (the "Secured Facility") to a five-year term loan with
a 20-year amortization schedule. As of December 31, 1999, there was $7.9 million
outstanding on the Secured Facility, and the Company's one-month LIBOR-based
borrowing rate was approximately 7.7%. In addition, the Company has a $10
million revolving credit facility (the "Revolving Facility") with the same bank
through July 1, 2001, and as of December 31, 1999, there were no borrowings
outstanding on this facility. The Company can elect to extend the borrowing
period for advances on the Revolving Facility to five years on predetermined
terms. The Company agreed to secure the Revolving Facility with the same assets
that are collateral for the Secured Facility. Interest accrues at a variable
rate based on the London Inter Bank Offered Rate ("LIBOR"), plus 1.25% to 2.00%
for the Secured Facility depending on the Company's debt-to-tangible net worth
ratio. The Company can fix the rate by selecting LIBOR for one- to twelve-month
periods as a base. The interest rate for the Revolving Facility is the
applicable LIBOR plus 1.00% to 2.00%, depending on the Company's debt
service-to-cash flow ratio. The fair market value of the Company's variable-rate
approximates its carrying value.

     The Secured Facility and Revolving Facility are secured by substantially
all of the Company's assets. In addition, the Company was in compliance with
applicable covenants including minimum debt service ratios and a minimum
tangible net worth.

                                       33
<PAGE>   36
                       REDHOOK ALE BREWERY, INCORPORATED

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

     The Company made interest payments totaling $530,000, $692,000 and $587,000
for the years ended December 31, 1999, 1998 and 1997, respectively. Interest
capitalized as a part of construction costs for the year ended December 31, 1997
totaled $270,000. No interest was capitalized in 1999 and 1998. Included in
other assets are capitalized loan fees with a net unamortized balance of $26,000
and $17,000 at December 31, 1999 and 1998, respectively.

 6. CONVERTIBLE REDEEMABLE PREFERRED STOCK

     Convertible redeemable preferred stock outstanding is as follows:

<TABLE>
<CAPTION>
                                                           DECEMBER 31,
                                                    --------------------------
                                                       1999           1998
                                                    -----------    -----------
<S>                                                 <C>            <C>
Series B, par value $0.005 per share, issued and
  outstanding 1,289,872 shares; net of unamortized
  offering costs..................................  $16,055,055    $16,010,655
                                                    ===========    ===========
</TABLE>

     There are 10,000,000 shares of preferred stock authorized. During 1993, the
Board of Directors designated 1,242,857 preferred shares as Series A Preferred
Stock. In August 1993, the Company sold all such designated shares of Series A
Preferred Stock to existing common shareholders, institutional investors and
other qualified or accredited investors for approximately $8.7 million, or $7.00
per share. All shares of Series A Preferred Stock 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 shares of
Series B Preferred Stock to A-B for approximately $16.3 million, or $12.61 per
share. A-B's ownership percentage of the Company is limited to 25% of the
outstanding Common Stock, assuming the conversion of all outstanding Preferred
Stock. That percentage limitation increases to 30% for the period November 1999
through November 2001. The Company has reserved shares of common stock to issue
if these Series B Preferred Stock shares were converted to common stock.

     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 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.

     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 issue shares of its capital stock
without prior approval. The holders of Series B Preferred Stock and converted
Series A Preferred Stock also are entitled to certain contractual registration
rights.

     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 prospectively accumulate preferential
dividends 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, 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 other conditions relating to a
termination of the Distribution Alliance by A-B.

                                       34
<PAGE>   37
                       REDHOOK ALE BREWERY, INCORPORATED

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

     The difference between the issuance price, net of offering costs, of the
convertible redeemable preferred stock and the redemption value is accreted
through the redemption date by a charge to retained earnings of $44,000 per
year.

 7. COMMON STOCKHOLDERS' EQUITY

  Note Receivable for Stock Purchase

     The Company's President had an interest-bearing loan for $100,000
outstanding at December 31, 1998 related to the exercise of stock options in
1994. The loan, paid in full during 1999, was secured by Company stock held by
the officer and is included as a reduction in common stockholders' equity.
Principal payments received on the loan have been reflected in the Statement of
Cash Flows as a financing activity and as an increase in common stockholders'
equity. The note, including interest accruing at 5.9% per year, was due no later
than September 30, 2001.

  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.

  Stock Option Plans

     In 1993, the Company's shareholders approved the 1992 Stock Incentive Plan
(the "Plan") and the Directors Stock Option Plan (the "Directors Plan"). Under
the Plan, as amended in May 1996, the approval provides for 1,270,000 shares of
common stock for options. The approval, as amended in May 1996, also provides
for 170,000 shares of common stock for options under the Directors Plan.
Employee options generally vest over a five-year period and director options
vest over a six-month period. Vested options are generally exercisable for ten
years from the date of grant.

     In September 1990, the Company reserved 120,000 shares of common stock for
its 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 are exercisable for
ten years from the date of grant.

     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
no less than 100% of the market price on the date the option is granted. At
December 31, 1999, 1998 and 1997, a total of 67,821, 314,001, and 545,071
options, respectively, were available for future grants under the plans.

                                       35
<PAGE>   38
                       REDHOOK ALE BREWERY, INCORPORATED

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

     In October 1995, the Financial Accounting Standards Board issued Statement
No. 123, Accounting for Stock-Based Compensation ("Statement 123"), which
established accounting and reporting standards for stock-based employee
compensation plans. Statement 123 defines a fair value-based method of
accounting for these equity instruments. This method measures compensation cost
based on the value of the award and recognizes that cost over the service
period. As permitted under Statement 123, the Company has elected to continue
accounting for stock-based compensation in accordance with APB Opinion No. 25,
Accounting for Stock Issued to Employees ("Opinion 25"). Accordingly, because
the grant price equals the market price on the date of grant, no compensation
expense is recognized for stock options issued to employees. 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
Statement 123, the Company's net income (loss) and earnings (loss) per share for
the years ended December 31, 1999, 1998 and 1997 would have been impacted as
indicated in the following table. Pursuant to the provisions of Statement 123,
the pro forma results shown below only reflect the impact of options granted
subsequent to 1994.

<TABLE>
<CAPTION>
                                                       YEAR ENDED DECEMBER 31,
                                              -----------------------------------------
                                                 1999           1998           1997
                                              -----------    -----------    -----------
<S>                                           <C>            <C>            <C>
Reported net income (loss)..................  $(1,523,434)   $(4,011,180)   $(1,398,966)
Pro forma net income (loss).................   (2,083,754)    (4,570,357)    (1,966,482)
Reported basic and diluted earnings (loss)
  per share.................................  $     (0.20)   $     (0.52)   $     (0.18)
Pro forma basic and diluted earnings (loss)
  per share.................................  $     (0.27)   $     (0.59)   $     (0.26)
</TABLE>

     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:

<TABLE>
<CAPTION>
                                                             1999     1998     1997
                                                             -----    -----    -----
<S>                                                          <C>      <C>      <C>
                                                                 5        5        5
Expected life of option                                      yrs...    yrs.     yrs.
Risk-free interest rate....................................  5.25%    4.73%    6.47%
Expected volatility of the Company's stock.................  50.0%    50.0%    50.0%
Expected dividend yield on the Company's stock.............   0.0%     0.0%     0.0%
</TABLE>

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

<TABLE>
<CAPTION>
                                                      1999        1998         1997
                                                    --------    --------    ----------
<S>                                                 <C>         <C>         <C>
Total number of options granted...................   293,950     295,950       294,500
Estimated fair value of each option granted.......  $   1.69    $   2.97    $     5.29
Total estimated fair value of all options
  granted.........................................  $496,776    $878,971    $1,557,905
</TABLE>

     In accordance with Statement 123, 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 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 below for the weighted average grant price
for options granted during 1999, 1998, and 1997.

                                       36
<PAGE>   39
                       REDHOOK ALE BREWERY, INCORPORATED

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

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

<TABLE>
<CAPTION>
                                                      WEIGHTED     OPTIONS     WEIGHTED
                                       SHARES OF      AVERAGE    EXERCISABLE   AVERAGE
                                      COMMON STOCK    EXERCISE       AT        EXERCISE
                                     UNDER THE PLAN    PRICE     END OF YEAR    PRICE
                                     --------------   --------   -----------   --------
<S>                                  <C>              <C>        <C>           <C>
Balance at December 31, 1996.......       589,472                  291,312      $11.84
  Granted..........................       294,500      $ 9.92
  Exercised........................        (2,000)       3.33
  Canceled.........................       (96,390)      13.84
                                        ---------
Balance at December 31, 1997.......       785,582                  346,592       12.37
  Granted..........................       295,950        5.73
  Exercised........................            --          --
  Canceled.........................       (64,880)      12.87
                                        ---------
Balance at December 31, 1998.......     1,016,652                  478,872       12.39
  Granted..........................       293,950        3.97
  Exercised........................          (300)       3.33
  Canceled.........................       (47,770)      10.22
                                        ---------
Balance at December 31, 1999.......     1,262,532                  631,272       11.84
                                        =========
</TABLE>

     The following table summarizes information for options currently
outstanding and exercisable at December 31, 1999:

<TABLE>
<CAPTION>
                           OPTIONS OUTSTANDING             OPTIONS EXERCISABLE
                   ------------------------------------   ----------------------
                                  WEIGHTED
                                   AVERAGE     WEIGHTED                 WEIGHTED
                                  REMAINING    AVERAGE                  AVERAGE
RANGE OF EXERCISE    NUMBER      CONTRACTUAL   EXERCISE     NUMBER      EXERCISE
     PRICES        OUTSTANDING   LIFE (YRS)     PRICE     EXERCISABLE    PRICE
-----------------  -----------   -----------   --------   -----------   --------
<S>                <C>           <C>           <C>        <C>           <C>
$ 1.65 to
  $ 3.33.........      70,500       2.28        $2.92        70,500      $ 2.92
  3.97 to
    3.97.........     287,400       9.38         3.97        24,000        3.97
  5.73 to
    5.73.........     272,960       8.38         5.73        74,560        5.73
  7.00 to
   10.13.........     311,820       6.43         9.53       179,220        9.09
 11.50 to
   25.50.........     319,852       5.39        18.55       282,992       18.07
                    ---------                               -------
$ 1.65 to
  $25.50.........   1,262,532       7.03        $9.36       631,272      $11.84
                    =========                               =======
</TABLE>

     The Company has reserved approximately 1.3 million shares of common stock
for future issuance related to potential stock option exercises.

                                       37
<PAGE>   40
                       REDHOOK ALE BREWERY, INCORPORATED

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

  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 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.

 8. EARNINGS (LOSS) PER SHARE

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

<TABLE>
<CAPTION>
                                               YEAR ENDED DECEMBER 31,
                                      -----------------------------------------
                                         1999           1998           1997
                                      -----------    -----------    -----------
<S>                                   <C>            <C>            <C>
Basic and diluted earnings (loss)
  per share computation:
  Numerator:
     Net income (loss)..............  $(1,523,434)   $(4,011,180)   $(1,398,966)
                                      -----------    -----------    -----------
  Denominator:
     Weighted-average common
       shares.......................    7,687,687      7,687,486      7,686,510
                                      -----------    -----------    -----------
       Basic and diluted earnings
          (loss) per share..........  $     (0.20)   $     (0.52)   $     (0.18)
                                      ===========    ===========    ===========
</TABLE>

                                       38
<PAGE>   41
                       REDHOOK ALE BREWERY, INCORPORATED

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

 9. INCOME TAXES

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

<TABLE>
<CAPTION>
                                                YEAR ENDED DECEMBER 31,
                                         -------------------------------------
                                           1999          1998          1997
                                         ---------    -----------    ---------
<S>                                      <C>          <C>            <C>
Current................................  $  11,364    $  (493,864)   $(949,146)
Deferred...............................   (778,822)    (1,581,630)     404,827
                                         ---------    -----------    ---------
                                         $(767,458)   $(2,075,494)   $(544,319)
                                         =========    ===========    =========
</TABLE>

     The Company's effective income tax rate was 33.5%, 34.1% and 28.0% for the
years ended December 31, 1999, 1998 and 1997, respectively. In 1997, the
effective rate was lower than the federal statutory rate due primarily to lower
pre-tax results 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. In 1998 and 1999, the effect of state income taxes was
substantially offset by items such as the excluded deductions.

     Deferred income taxes reflect the net tax effects of temporary differences
between the bases of assets and liabilities for financial reporting purposes and
the bases used for income tax return purposes. Significant components of the
Company's deferred tax liabilities and assets are as follows:

<TABLE>
<CAPTION>
                                                            DECEMBER 31,
                                                      ------------------------
                                                         1999          1998
                                                      ----------    ----------
<S>                                                   <C>           <C>
Deferred tax liabilities:
  Tax-over-book depreciation........................  $9,239,665    $7,444,840
  Other.............................................     377,173       405,785
                                                      ----------    ----------
                                                       9,616,838     7,850,625
Deferred tax assets:
  NOL and AMT credit carryforwards..................   7,815,813     5,124,426
  Other.............................................     173,958       320,310
                                                      ----------    ----------
                                                       7,989,771     5,444,736
                                                      ----------    ----------
Net deferred tax liability..........................  $1,627,067    $2,405,889
                                                      ==========    ==========
</TABLE>

     As of December 31, 1999, the Company had net operating loss carryforwards
of $20.0 million and alternative minimum tax credit carryforwards of $184,000
which can be utilized to offset regular tax liabilities in future years. The
alternative minimum tax credit carryforwards, which have no expiration date, and
the tax benefit of the net operating loss carryforwards, substantially all of
which expire from 2012 through 2019, are the primary components of the Company's
deferred tax asset presented above.

                                       39
<PAGE>   42
                       REDHOOK ALE BREWERY, INCORPORATED

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

10. COMMITMENTS

     In 1999, the Company had operating leases for its Fremont Brewery facility
and certain office premises. During 1998, the Company exercised its option to
terminate the office lease early and moved its corporate offices into the
Fremont Brewery building. Terms of the brewery premises lease include annual
rental payment adjustments to reflect changes in the Consumer Price Index. In
1997, the Company exercised its option to extend the lease through October 2002.
The Company has an option to extend the lease for one additional five-year
period

     In May 1995, the Company entered into an agreement to lease the land on
which the New Hampshire Brewery was 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 sublease also provides the Company with the
first right of refusal to purchase the premises should the sublessor 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, 1999, 1998 and 1997 totaled
$536,000, $862,000 and $845,000, respectively. For a portion 1998, and all of
1997, rent expense included a fee in lieu of property taxes on the New Hampshire
Brewery.

     Minimum aggregate future lease payments under noncancelable operating
leases as of December 31, 1999 are as follows:

<TABLE>
<S>                               <C>
2000............................  $   527,498
2001............................      527,498
2002............................      482,262
2003............................      256,082
2004............................      255,163
Thereafter......................   10,596,943
                                  -----------

                                  $12,645,446
                                  ===========
</TABLE>

     The Company periodically enters into commitments to purchase certain raw
materials in the normal course of business. The Company has entered into
purchase commitments to ensure it has the necessary supply of hops to meet
future production requirements. Those commitments are for crop years through
2003. The Company believes that hop commitments in excess of future
requirements, if any, will not materially affect its financial condition or
results of operations.

11. 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. The maximum employee contribution is
15% of the participant's compensation. The Company matches 100% of each dollar
contributed by a participant, with a maximum matching contribution of 4% of a
participant's compensation. The Company's contributions to the plan vest at
varying rates up to five years depending upon the employee's years of service
and totaled $178,000, $189,000 and $197,000 in 1999, 1998 and 1997,
respectively.

                                       40
<PAGE>   43
                       REDHOOK ALE BREWERY, INCORPORATED

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

12. 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. Wholesale distributors and A-B account for substantially all
accounts receivable; therefore, 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 17% of total
sales in 1999, 1998 and 1997. The sales to A-B through the Distribution Alliance
represented 58%, 58% and 60% of total sales, or $20,712,000, $20,878,000 and
$22,647,000 (net of an approximate 2% alliance fee), in 1999, 1998 and 1997,
respectively. Additional fees incurred by the Company for A-B administrative and
handling charges totaled $188,000, $183,000 and $191,000 in 1999, 1998 and 1997,
respectively. The Company purchased certain materials through A-B totaling
$3,999,000, $4,462,000 and $2,420,000 in 1999, 1998, and 1997, respectively. Net
amount due to A-B was $415,000 and $74,000, as of December 31, 1999 and December
31, 1998, respectively.

13. INTERIM FINANCIAL DATA (UNAUDITED)

<TABLE>
<CAPTION>
                                                 1999 QUARTER ENDED                           1998 QUARTER ENDED
                                      -----------------------------------------    -----------------------------------------
                                      DEC. 31    SEPT. 30    JUNE 30    MAR. 31    DEC. 31    SEPT. 30    JUNE 30    MAR. 31
                                      -------    --------    -------    -------    -------    --------    -------    -------
                                                             (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S>                                   <C>        <C>         <C>        <C>        <C>        <C>         <C>        <C>
Sales...............................  $8,853      $9,623     $9,309     $7,675     $8,387      $9,152     $ 9,918    $8,505
Less Excise Taxes...................     803         894        866        703        740         838         933       810
                                      ------      ------     ------     ------     ------      ------     -------    ------
Net Sales...........................   8,050       8,729      8,443      6,972      7,647       8,314       8,985     7,695
Cost of Sales.......................   5,878       5,850      5,785      5,100      5,752       5,800       6,224     6,141
                                      ------      ------     ------     ------     ------      ------     -------    ------
Gross Profit........................   2,172       2,879      2,658      1,872      1,895       2,514       2,761     1,554
Special Valuation Provision.........      --          --         --         --         --          --       5,173        --
Selling, General and Administrative
  Expenses..........................   2,976       3,058      3,085      2,172      2,042       2,211       2,504     2,329
                                      ------      ------     ------     ------     ------      ------     -------    ------
Operating Income (Loss).............    (804)       (179)      (427)      (300)      (147)        303      (4,916)     (775)
Interest Expense and Other Income,
  Net...............................     (78)       (328)       (80)       (95)      (107)       (125)       (154)     (166)
                                      ------      ------     ------     ------     ------      ------     -------    ------
Income (Loss) Before Taxes..........    (882)       (507)      (507)      (395)      (254)        178      (5,070)     (941)
Income Tax Provision (Benefit)......    (274)       (177)      (178)      (138)       (93)         29      (1,786)     (226)
                                      ------      ------     ------     ------     ------      ------     -------    ------
Net Income (Loss)...................  $ (608)     $ (330)    $ (329)    $ (257)    $ (161)     $  149     $(3,284)   $ (715)
                                      ======      ======     ======     ======     ======      ======     =======    ======
Basic and Diluted Earnings (Loss)
  per Share.........................  $(0.08)     $(0.04)    $(0.04)    $(0.03)    $(0.02)     $ 0.02     $ (0.43)   $(0.09)
                                      ======      ======     ======     ======     ======      ======     =======    ======
Barrels Shipped.....................    49.6        53.5       51.4       43.1       46.8        50.4        56.2      48.9
</TABLE>

                                       41
<PAGE>   44

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

     Information regarding the Company's directors and executive officers is
incorporated by reference from the Company's definitive proxy statement for its
2000 Annual Meeting of Stockholders (the "2000 Proxy Statement") under the
captions "Board of Directors" or "Executive Compensation."

ITEM 11. EXECUTIVE COMPENSATION

     Information regarding executive compensation is incorporated by reference
from the 2000 Proxy Statement caption "Executive Compensation."

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     Information regarding security ownership of certain beneficial owners and
management is incorporated by reference from the 2000 Proxy Statement under the
caption "Security Ownership of Certain Beneficial Owners and Management."

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     Information regarding certain relationships and related transactions is
incorporated by reference from the 2000 Proxy Statement under the caption
"Certain Transactions."

                                    PART IV.

ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K

     The following documents are filed as part of this report:

          1. Financial Statements and Financial Statement Schedules. See Index
     to Financial Statements at Item 8 on page 24 of this report. 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. Exhibit Index is included in the Form 10-K filed with Securities
     and Exchange Commission.

                                       42
<PAGE>   45

                           [INTENTIONALLY LEFT BLANK]

                                       43
<PAGE>   46

                           [INTENTIONALLY LEFT BLANK]

                                       44
<PAGE>   47

                                   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, 2000.

                                          REDHOOK ALE BREWERY, INCORPORATED

                                          By: /s/ BRADLEY A. BERG
                                            ------------------------------------
                                            Bradley A. Berg
                                            Executive Vice President and
                                            Chief Financial Officer

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

<TABLE>
<CAPTION>
                      SIGNATURE                                     TITLE                    DATE
                      ---------                                     -----                    ----
<S>                                                    <C>                              <C>

/s/ PAUL S. SHIPMAN                                    President, Chief Executive       March 28, 2000
-----------------------------------------------------  Officer and Chairman of the
Paul S. Shipman                                        Board (Principal Executive
                                                       Officer)

/s/ BRADLEY A. BERG                                    Executive Vice President and     March 28, 2000
-----------------------------------------------------  Chief Financial Officer
Bradley A. Berg                                        (Principal Financial Officer)

/s/ ANNE M. MUELLER                                    Controller and Treasurer         March 28, 2000
-----------------------------------------------------  (Principal Accounting Officer)
Anne M. Mueller

/s/ M. COLLEEN BECKEMEYER                              Director                         March 28, 2000
-----------------------------------------------------
M. Colleen Beckemeyer

/s/ GORDON A. BOWKER                                   Director                         March 28, 2000
-----------------------------------------------------
Gordon A. Bowker

/s/ JOHN T. CARLETON                                   Director                         March 28, 2000
-----------------------------------------------------
John T. Carleton

/s/ FRANK H. CLEMENT                                   Director                         March 28, 2000
-----------------------------------------------------
Frank H. Clement

/s/ JERRY D. JONES                                     Director                         March 28, 2000
-----------------------------------------------------
Jerry D. Jones

/s/ BRUCE M. SANDISON                                  Director                         March 28, 2000
-----------------------------------------------------
Bruce M. Sandison

/s/ WALTER F. WALKER                                   Director                         March 28, 2000
-----------------------------------------------------
Walter F. Walker

/s/ DENNIS P. WESTON                                   Director                         March 28, 2000
-----------------------------------------------------
Dennis P. Weston
</TABLE>

                                       45
<PAGE>   48

                       REDHOOK ALE BREWERY, INCORPORATED

                              REPORT OF MANAGEMENT

To the Stockholders and Directors of Redhook Ale Brewery, Incorporated:

     The accompanying financial statements have been prepared by management in
conformity with generally accepted accounting principles. The fairness and
integrity of these financial statements, including any judgments, estimates and
selection of appropriate generally accepted accounting principles, are the
responsibility of management, as is all other information presented in this
Annual Report.

     In the opinion of management, the financial statements are fairly stated,
and, to that end, the Company maintains a system of internal control which:
provides reasonable assurance that transactions are recorded properly for the
preparation of financial statements; safeguards assets against loss or
unauthorized use; maintains accountability for assets; and requires proper
authorization and accounting for all transactions. Management is responsible for
the effectiveness of internal control. This is accomplished through established
accounting and other control systems, policies and procedures, employee
selection and training, appropriate delegation of authority and segregation of
responsibilities.

     Our independent auditors provide an objective independent review by their
audit of the Company's financial statements. Their audit is conducted in
accordance with generally accepted auditing standards and includes a review of
internal accounting control to the extent deemed necessary for the purposes of
their audit.

     The Audit Committee of the Board of Directors is composed entirely of
Directors who are not employees of the Company. They meet regularly with the
independent auditors and management to review the work of each and to ensure
that each is properly discharging its financial reporting and internal control
responsibilities. To ensure complete independence, the independent auditors have
full and free access to the Audit Committee to discuss the results of their
audits, the adequacy of internal auditing controls and the quality of financial
reporting.

March 28, 2000

                                               /s/ BRADLEY A. BERG
                                               Bradley A. Berg
                                               Executive Vice President and
                                               Chief Financial Officer

                                               /s/ ANNE M. MUELLER
                                               Anne M. Mueller

                                               Controller and Treasurer
                                               Principal Accounting Officer

                                       46
<PAGE>   49

                                 EXHIBIT INDEX

<TABLE>
<CAPTION>
    EXHIBIT
    NUMBER                             DESCRIPTION
    -------                            -----------
    <C>        <S>
         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(1)
         3.2   Amended and Restated Bylaws of Registrant, dated April 2,
               1991; Amendment to the Bylaws of Registrant, dated August 9,
               1993; Amendments to Bylaws of Registrant, dated October 11,
               1994(1)
        10.1   Securities Purchase Agreement dated as of July 21, 1993,
               between the Registrant and GE Capital Redhook Investment
               Corp.(1)
        10.2   Securities Purchase Agreement dated as of July 21, 1993,
               among Registrant and certain investors(1)
        10.3   Amendment No. 2 dated as of October 18, 1994, to Securities
               Purchase Agreement dated as of July 21, 1993 (see Exhibits
               10.1 and 10.2)(1)
        10.4   Investment Agreement dated as of October 18, 1994, between
               the Registrant and Anheuser-Busch, Incorporated(1)
        10.5   Registration Rights Agreement dated as of August 9, 1993,
               between the Registrant and Purchasers (as defined
               therein)(1)
        10.6   Amendment No. 1 dated as of October 18, 1994, to
               Registration Rights Agreement dated as of August 9, 1993(1)
        10.7   Registration Rights Agreement dated as of October 18, 1994,
               between Registrant and Anheuser-Busch, Incorporated(1)
        10.8   Employment Agreement between Registrant and Paul Shipman,
               dated October 18, 1994(1)
        10.9   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(1)
        10.10  Lease Agreement between Lake Union Center Phase One Limited
               Partnership and Registrant, dated December 15, 1994(1)
        10.11  Sublease between Pease Development Authority as Sublessor
               and Registrant as Sublessee, dated May 30, 1995(1)
        10.12  Agreement between Owner (Registrant) and Construction
               Manager (Seattle Construction Services, Inc.) for Phase I of
               the New Brewery; Woodinville, Washington, dated May 1,
               1993(1)
        10.13  Agreement Between Owner (Registrant) and Construction
               Manager (Seattle Construction Services, Inc.) for Redhook's
               New Hampshire Brewery Facility, dated September 14, 1994(1)
        10.14  Amended and Restated Registrant's Directors Stock Option
               Plan(1)
        10.15  Registrant's Incentive Stock Option Plan, dated September
               12, 1990(1)
        10.16  1992 Stock Incentive Plan, approved October 20, 1992, as
               amended, October 11, 1994 and May 25, 1995(1)
        10.17  New York Life Insurance Policy No. 44 939 338 for Paul
               Shipman, dated July 1, 1993(1)
        10.18  Amended and Restated Credit Agreement between U.S. Bank of
               Washington, National Association and Registrant, dated June
               5, 1995(1)
        10.19  Loan Agreement between the City of Seattle Industrial
               Development Corporation and Registrant, dated November 1,
               1991(1)
</TABLE>
<PAGE>   50

<TABLE>
<CAPTION>
    EXHIBIT
    NUMBER                             DESCRIPTION
    -------                            -----------
    <C>        <S>
        10.20  Deed of Trust, Assignment of Leases and Rents, Security
               Agreement and Fixture Filing, dated November 1, 1991, as
               amended, June 5, 1995(1)
        10.21  Master Distributor Agreement between Registrant and
               Anheuser-Busch, Incorporated, dated October 18, 1994(1)(8)
        10.22  Amendment No. 3 dated as of July 27, 1995, to Securities
               Purchase Agreement dated as of July 21, 1993 (see Exhibits
               10.1 and 10.2)(1)
        10.23  Amendment dated as of July 25, 1995, between the Registrant
               and GE Capital Redhook Investment Corp.(1)
        10.24  Assignment of Sublease and Assumption Agreement dated as of
               July 1, 1995, between Registrant and Redhook of New
               Hampshire, Inc. (see Exhibit 10.11)(1)
        10.25  Letter Agreement dated as of July 31, 1995, between
               Registrant and Anheuser-Busch, Incorporated(1)
        10.26  Employment Agreement between Registrant and Bradley A. Berg,
               dated December 20, 1999
        10.27  Employment Agreement between Registrant and David J.
               Mickelson, dated December 20, 1999
        10.28  Employment Agreement between Registrant and Allen L
               Triplett, dated December 20, 1999
        10.29  Employment Agreement between Registrant and Pamela J.
               Hinckley, dated December 20, 1999
        10.30  Amendment No. 1 dated as of June 26, 1996, to Master
               Distribution Agreement between Registrant and
               Anheuser-Busch, Incorporated, dated October 18, 1994(3)
        10.31  Amendment dated as of February 27, 1996, to Registrant's
               1992 Stock Incentive Plan, as amended(3)
        10.32  Amendment dated as of February 27, 1996, to Amended and
               Restated Registrant's Directors Stock Option Plan(3)
        10.33  Amendment dated as of July 25, 1996, to Registrant's 1992
               Stock Incentive Plan, as amended(3)
        10.34  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(4)
        10.35  Second Amendment to Amended and Restated Credit Agreement
               between U.S. Bank of Washington, National Association and
               Registrant, dated September 15, 1997(5)
        10.36  Consent, Waiver and Amendment, dated September 19, 1997, to
               Master Distributor Agreement between Registrant and
               Anheuser-Busch, Incorporated, dated October 18, 1994(5)
        10.37  Purchasing Agreement dated as of March 27, 1998, between and
               Anheuser-Busch, Incorporated(6)(8)
        10.38  Third Amendment to Amended and Restated Credit Agreement
               between U.S. Bank of Washington, National Association and
               Registrant, dated February 22, 1999(7)
        10.39  Amended and Restated Rights Agreement between Registrant and
               ChaseMellon Shareholder Services, LLC, dated as of May 12,
               1999(7)
        10.40  First Amendment to Employment Agreement between Registrant
               and Paul Shipman, dated May 6, 1999(7)
</TABLE>
<PAGE>   51

<TABLE>
<CAPTION>
    EXHIBIT
    NUMBER                             DESCRIPTION
    -------                            -----------
    <C>        <S>
        21.1   Subsidiaries of the Registrant(1)
        23.1   Consent of Ernst & Young LLP, Independent Auditors
        27     Financial Data Schedule for the year ended December 31, 1999
</TABLE>

---------------
 (1) Incorporated by reference to same exhibit number as in the Company's
     Registration Statement on Form S-1, Registrant No. 33-94166.

 (2) Incorporated by reference to same exhibit number as in the Company's Form
     10-K for the year ended December 31, 1995.

 (3) Incorporated by reference to same exhibit number as in the Company's Form
     10-Q for the quarter ended June 30, 1996.

 (4) Incorporated by reference to same exhibit number as in the Company's Form
     10-Q for the quarter ended September 30, 1996.

 (5) Incorporated by reference to same exhibit number as in the Company's Form
     10-Q for the quarter ended September 30, 1997.

 (6) Incorporated by reference to same exhibit number as in the Company's Form
     10-Q for the quarter ended March 31, 1998.

 (7) Incorporated by reference to same exhibit number as in the Company's Form
     10-Q for the quarter ended March 31, 1999.

 (8) Confidential treatment has been granted for portions of this document.