##### Table of Contents









UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549




---

Form 10-K

|  |  |                                                                                       
|- |  | --------------------------------------------------------------------------------------
|þ |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR
	15(d)
	OF THE SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended December 31,
2001

Commission File Number 0-26542

Redhook Ale Brewery, Incorporated

(Exact name of registrant as specified in its
charter)


|                                                                                        |  |                                         
|--------------------------------------------------------------------------------------- |  | ----------------------------------------
|Washington                                                                              |  | 91-1141254                              
|(State of incorporation)                                                                |  | (I.R.S. Employer Identification
	Number)
|                                                                                       
|3400 Phinney Avenue North
	Seattle, Washington(Address of principal executive
	offices) |  | 98103(Zip Code)                         

(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 þ          No o

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

The aggregate market value of the Common Stock
held by non-affiliates of the registrant, based on the closing
price on March 15, 2002, as reported on Nasdaq, was
$14,286,748.(1)

The number of shares of the registrants
Common Stock outstanding as of March 15, 2002, was
6,818,146.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrants Proxy Statement
relating to the registrants 2002 Annual Meeting of
Stockholders to be held on May 21, 2002, 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.



---






---

TABLE OF CONTENTS



|              |                                                                                               |  |  |  |  |  |  | 
|------------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I.      
|              | Item 1. Business                                                                             
|              | Item 2. Properties                                                                           
|              | Item 3. Legal Proceedings                                                                    
|              | Item 4. Submission of Matters to a Vote of Security Holders                                  
|              | Item 4A. Executive Officers of the Company                                                   
|PART II.     
|              | Item 5. Market for Registrants Common Equity and Related Stockholder Matters                
|              | Item 6. Selected Financial Data                                                              
|              | Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
|              | Item 7A. Quantitative and Qualitative Disclosures about Market Risk                          
|              | Item 8. Financial Statements and Supplementary Data                                          
|              | Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosures
|PART III.    
|              | Item 10. Directors and Executive Officers of the Registrant                                  
|              | Item 11. Executive Compensation                                                              
|              | Item 12. Security Ownership of Certain Beneficial Owners and Management                      
|              | Item 13. Certain Relationships and Related Transactions                                      
|PART IV.     
|              | Item 14. Exhibits, Financial Statements and Reports on Form 8-K                              
|SIGNATURES   
|Exhibit 10.45
|Exhibit 10.46
|Exhibit 23.1 



---



##### Table of Contents



REDHOOK ALE BREWERY, INCORPORATED

FORM 10-K

TABLE OF CONTENTS

|          |  |                                                                                         |  |      |    | 
|--------- |  | --------------------------------------------------------------------------------------- |  | ---- | -- | 
|          |  |                                                                                         |  | Page
|          |  |                                                                                         |  |     
|PART I.  
|ITEM 1.   |  | Business                                                                                |  |      | 1  | 
|ITEM 2.   |  | Properties                                                                              |  |      | 13 | 
|ITEM 3.   |  | Legal Proceedings                                                                       |  |      | 14 | 
|ITEM 4.   |  | Submission of Matters to a Vote of Security
	Holders                                    |  |      | 14 | 
|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                             |  |      | 26 | 
|ITEM 8.   |  | Financial Statements and Supplementary Data                                             |  |      | 27 | 
|ITEM 9.   |  | Changes In and Disagreements With Accountants
	on Accounting and Financial Disclosures  |  |      | 45 | 
|         
|PART III.
|ITEM 10.  |  | Directors and Executive Officers of the Registrant                                      |  |      | 45 | 
|ITEM 11.  |  | Executive Compensation                                                                  |  |      | 45 | 
|ITEM 12.  |  | Security Ownership of Certain Beneficial Owners
	and Management                         |  |      | 45 | 
|ITEM 13.  |  | Certain Relationships and Related Transactions                                          |  |      | 45 | 
|         
|PART IV. 
|ITEM 14.  |  | Exhibits, Financial Statements and Reports on
	Form 8-K                                 |  |      | 45 | 

i



---



##### Table of Contents






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, 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, 2001.

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, 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. Although
industry information for 2001 is not yet available, shipments of
beer in the craft beer segment in 1999 and 2000 were less than
3% of total beer shipped in the United States according to
industry sources. Approximately 5.7 million barrels and
5.9 million barrels were shipped in the U.S. by the craft
beer segment in 1999 and 2000, respectively, while total beer
sold in the U.S., including imported beer, was approximately
195 million and 197 million during the same years. The
Company believes that the craft beer segments 2001 market
share is substantially unchanged. While the segment volume
growth has slowed significantly in recent years, the number of
craft brewers in the U.S. has grown dramatically, from 627 at
the end of 1994 to approximately 1,456 as of December 31,
2000.

In the early 1900s, the U.S. brewing industry was
comprised of nearly 2,000 breweries, most of which were small
operations that produced distinctive beers for local markets.
Fewer than 1,000 of these breweries reopened following
Prohibition. During the ensuing decades, competition in the beer
industry came to focus on a narrowing of product offerings to
less distinctive beer styles (principally pale lagers and
pilsners) for various reasons including: 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 three largest domestic brewers account for
approximately 79% 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, annual per
capita 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 the major
domestic products toward a broader variety and taste in their
malt beverages, mirroring similar trends in other beverage and
cuisine categories. Initially,

1



---



##### Table of Contents



foreign brewers were the principal beneficiaries
of these evolving consumption patterns. Even though the
principal European, Canadian and Mexican imported beers are also
produced by large brewers, some 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 specialty 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 and national specialty brewers by constructing larger
breweries while still adhering to the traditional European
brewing methods that characterize the craft brewing segment.
Other craft brewers have sought to take advantage of growing
consumer demand and excess industry capacity by contract brewing
at underutilized facilities. Certain national domestic brewers
have also sought to appeal to this growing demand for craft
beers by producing their own fuller-flavored products. In recent
years, imported products from foreign brewers have enjoyed a
resurgence in demand which has contributed to the reduced volume
growth in the craft beer segment. In addition to the growth and
popularity of the imported brands, the recent introductions of
flavored alcohol beverages have delivered initial success.
Industry sources generally believe that the consumers of
flavored alcohol beverages correlate closely with the consumers
of the import and craft beer products.

Business Strategy

The Companys principal business objective
is to be the leading brewer of craft beers in the United States.
Redhook seeks to achieve this objective by 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 large national brands.

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

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

Strategic Distribution Alliance with Industry
Leader.In October 1994, the Company
entered into a long-term distribution agreement with A-B,
pursuant to which Redhook distributes its products in
substantially all of its markets through A-Bs wholesale
distribution network. A-Bs network consists of over 600
wholesale distributors, most of whom are geographically
contiguous and independently owned and operated. The Alliance
with A-B enabled the Company to expand its distribution to new
markets more quickly and without the delays, costs and potential
gaps or overlaps in coverage associated with developing a
network of distributors on a piecemeal basis. As an independent
company, Redhook maintains complete control over the production
and marketing of its product while utilizing A-Bs
distribution network.

2



---



##### Table of Contents



Operation of Regional Brewing
Facilities.Management believes that
by locating its production facilities in proximity to the key
regional markets it serves, the Company is able to enjoy
distinct competitive advantages, including shortened delivery
times to maximize product freshness, reduced shipping costs,
established 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 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.Prior to June 1999, the
Company had done very limited advertising. Based upon market and
competitive considerations, the Company determined that a
significant increase in such spending was appropriate.
Accordingly, in June 1999, the Company began a brand investment
program that significantly increased advertising and related
costs. During 1999 and 2000, the Company primarily utilized
radio, billboard and print advertising in select markets, while
also participating, to a small degree, in co-operative
advertising where the Companys spending is matched dollar
for dollar by the local distributor. In 2001, the Company
allocated a larger share of its advertising spending to its
co-operative advertising and promotion program. The advertising
investment is expected to continue for the foreseeable future
with the objective of establishing or maintaining momentum
towards capturing a larger share of the fragmented craft beer
market. In addition, market and competitive considerations could
require an increase in other promotional costs associated with
developing existing and new markets. Expenditures for the brand
investment and co-operative program totaled $2.6 million
and $3.0 million for the years ended December 31, 2001
and 2000, respectively. The Company also markets its products to
distributors, retailers and consumers through a variety of
specialized training and promotional methods. The Company
actively trains its distributors and retailers in understanding
the brewing process, the craft beer segment and Redhook
products. Promotional methods include introducing Redhook
products on draft in pubs and restaurants, using promotional
items including tap handles, glassware and coasters, and
participating in local festivals and sports venues to increase
brand name recognition. In addition, the Companys
prominently located breweries feature pubs and retail outlets
and offer guided tours to further increase consumer awareness of
Redhook. Management believes that its training and promotional
methods are effective in communicating and educating consumers
and are important support to the brand investment and
co-operative program.

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 60% of the Companys sales in
2001, is a full, rich, well-rounded, amber-colored ale with a
sweet toasted malt flavor balanced by a pleasant floral
liveliness derived from Tettnang hops.

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

3



---



##### Table of Contents



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

Double Black Stout.A rich, imperial stout using a variety of dark malts creating 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 Aleis generally available during
the spring and summer months and available in draft year-round
in some markets.

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

Redhook 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 Aleis available during the late winter
and early spring.

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

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

4



---



##### Table of Contents



cellar, where specially cultured yeast is added
to induce fermentation. During fermentation, the worts
sugars are metabolized by the yeast cells, producing carbon
dioxide and alcohol. Some of the carbon dioxide is recaptured
and absorbed back into the beer, providing a natural source of
carbonation. After fermentation, the beer is cooled for several
days while the beer is clarified and full flavor develops.
Filtration, the final step for a filtered beer, removes unwanted
yeast. At this point, the beer is in its peak condition and
ready for bottling or keg racking. The entire brewing process of
ales, from mashing through filtration, is typically completed in
14 to 21 days, depending on the formulation and style of
the product being brewed.


(REDHOOK ALE BREW PROCESS GRAPHIC)

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.

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

5



---



##### Table of Contents



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
purchases its malted barley from several suppliers and its
premium-quality select hops, grown in the Pacific Northwest,
from competitive sources. The Company periodically purchases
small lots of European hops, which it uses to achieve a special
hop character in certain of its beers. 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 cerevisiaeyeast supply.
The Company has access to 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 Pubin the Fremont
neighborhood of Seattle, the Forecasters Public Housein
Woodinville, Washington and the Cataqua Public Housein
Portsmouth, New Hampshire.

In October 1994, the Company entered into the
Distribution Alliance with A-B pursuant to which Redhook
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 part of the A-B distribution
network, in eight western states: Washington, California
(northern), Oregon, Idaho, Montana, Wyoming, Colorado and
Alaska. The Companys most significant non-Alliance
wholesaler is K&L Distributors, Inc., which although not
part of the Alliance is a distributor in the A-B distribution
network and responsible for distribution of the Companys
products in most of King County, Washington, which includes
Seattle. K&L Distributors, Inc. accounted for approximately
14%, 16% and 17% of total sales in 2001, 2000 and 1999,
respectively. As of December 31, 2001, the Company had 20
non-Alliance distributors. The Company expects the percentage of
sales represented by non-Alliance distributors to continue to
decline as the Company expands its sales through the Alliance.

A-B, whose products accounted for approximately
49% of total domestic beer sales by volume in 2001, distributes
its products throughout the United States through a network of
over 600 wholesale distributors, most of whom are geographically
contiguous and independently owned and operated. The Company
believes that the typical A-B distributor is financially stable
and has both a long-standing presence and a substantial market
share of beer sales in its territory.

Redhook chose to align itself with A-B through
the Alliance as an integral part of its growth strategy, and to
provide access to quality distribution throughout the 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

6



---



##### Table of Contents



Company believes that the existence of the
Alliance, presentations by Redhooks management at
A-Bs distributor conventions, A-B communications about
Redhook in printed distributor materials, and A-B-supported
opportunities for Redhook to educate A-B distributors about its
specialty products result in increased awareness of and demand
for Redhook products among A-Bs distributors.


Management believes that the Companys
competitors in the craft beer segment generally negotiate
distribution relationships separately with distributors in each
locality and, as a result, typically distribute through a
variety of wholesalers representing differing national beer
brands with uncoordinated territorial boundaries. Because
A-Bs distributors are assigned territories that generally
are contiguous, the Alliance enables the Company to reduce the
gaps and overlaps in distribution coverage often experienced by
the Companys competitors. As a result, management believes
the Alliance provides the Company with advantages over
competitors in the craft beer industry who may find it difficult
to achieve the distribution efficiencies afforded by the
Alliance network.

The Companys products were distributed in
48 states at the end of 2001. In 2001, the Company shipped its
products to 523 Alliance distribution points, accounting for
approximately 70% of the Companys sales volume. In
addition, sales through wholesalers that are part of the A-B
distribution network but that are not part of the Alliance
accounted for an additional 25% of the Companys sales
volume in 2001.

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, but it must pay A-B certain fees in connection with
sales to A-B. Such fees are determined by a formula that
effectively reduces the total gross profit margin earned on
sales to A-B. However, management believes that the benefits of
the Alliance, particularly the potential for increased sales
volume, and efficiencies in delivery, state reporting and
licensing, billing and collections created by the Alliance are
significant to the Companys business.

Under the Alliance, the Company has granted A-B
the first right to distribute Redhook products in the United
States and Mexico, except in those territories already subject
to distribution agreements with non-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. Based upon
market and competitive considerations, in 1999 the Company
determined that a significant increase in media advertising was
appropriate. Accordingly, in June 1999 the Company began a brand
investment program that significantly increased advertising and
related costs. During 1999 and 2000, the Company primarily
utilized radio, billboard and print advertising in select
markets, while also participating, to a small degree, in
co-operative advertising where the Companys spending is
matched dollar for dollar by the local distributor. In 2001, the
Company allocated a larger share of its advertising spending to
its co-operative advertising and promotion program. The
advertising investment is expected to continue for the
foreseeable future with the objective of establishing or
maintaining momentum towards capturing a larger share of the
fragmented craft beer market. This increased media advertising
significantly increased the Companys selling, general and
administrative expenses in 1999, 2000 and 2001, leading to
increased losses and a reduction in

7



---



##### Table of Contents



stockholders equity. In addition, market
and competitive considerations could require an increase in
other promotional costs associated with developing existing and
new markets.


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

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

The Companys breweries also play a
significant role in increasing consumer awareness of the
Companys products and enhancing Redhooks image as a
craft brewer. Many visitors take tours at the Companys
breweries annually. 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 creates further
awareness of the Companys beers and reinforces the
Companys quality image.

To further promote retail bottled product sales
and in response to local competitive conditions, the Company
regularly offers post-offs, or price discounts, to
distributors in most of its markets 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 large 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 and
local appeal; and price. A significant portion of the
Companys sales growth prior to 1997 was achieved through
increasing sales 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. During the years 1997
through 1999, the Company experienced, along with many of its
competitors, a decline in its Washington State sales as compared
to its 1996 sales. While this trend was reversed for the
Companys 2000

8



---



##### Table of Contents



Washington State sales, reporting a 7.6% volume
increase as compared to 1999, the Company experienced a 1.9%
decline in its 2001 Washington State sales volume when compared
to 2000.


As the Company has expanded its distribution
network outside the Pacific Northwest region, and as other craft
brewers have expanded their distribution to the Pacific
Northwest, Redhook has encountered increasing competition from
microbreweries, other regional specialty brewers such as Sierra
Nevada Brewing Company and New Belgium 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 distribution through the
Alliance.

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

While it is too early to determine its success,
the new category of flavored alcohol beverages, which includes
Smirnoff Ice and Mikes Hard Lemonade, has initially
demonstrated strong sales. The flavored alcohol beverage segment
appears to be experiencing favorable results in drawing
overlapping consumers away from imports and craft beers. The
number of brands in the flavored alcohol beverage segment is
increasing as numerous new brand introductions were announced in
early 2002.

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



---



##### Table of Contents





| |                                            
| | -------------------------------------------
| | 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 sold 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
sells annually. While the Company is not aware of any plans by
the federal government to reduce or eliminate this benefit to
small brewers, any such reduction in a material amount could
have an adverse effect on the Company. In addition, the Company
would lose the benefit of this rate structure if it 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 600
wholesale distributors, while the Company maintains control over
the production and marketing of its products. Pursuant to the
A-B Investment Agreement, A-B invested approximately
$30 million to purchase the Companys Series B
Preferred Stock (the Series B Preferred Stock)
and

10



---



##### Table of Contents



common stock of the Company (Common
Stock), including newly-issued shares concurrent with the
Companys initial public offering.




| |                           
| | --------------------------
| | A-B Distribution Agreement

The A-B Distribution Agreement has a stated term
of 20 years, but is subject to earlier termination
(i) by either party without cause on December 31, 2004,
(ii) by either party upon an uncured material breach by the
other party of certain provisions of the Series B Preferred
Stock, the A-B Investment Agreement, the A-B Distribution
Agreement 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.

In the event that the A-B Distribution Agreement
is terminated on or before December 31, 2004, under the
circumstances described in (i), (iii) or (iv) above,
or by A-B under the circumstances described in (ii) above,
the terms of the Series B Preferred Stock purchased by A-B
pursuant to the A-B Investment Agreement (see A-B Investment
Agreementbelow) require the mandatory redemption of the
Series B Preferred Stock on December 31, 2004, at a
redemption price equal to $12.61 per share (approximately
$16.3 million in the aggregate), plus an amount equal to
accumulated and unpaid dividends thereon. The terms of the
Series B Preferred Stock further provide that if at the
time of the mandatory redemption the Company has insufficient
legally available funds to redeem the shares of Series B
Preferred Stock as a whole, those funds that are legally
available shall be used to redeem the maximum number of shares
of Series B Preferred Stock. At any time thereafter when
additional funds of the Company become legally available for the
redemption of Series B Preferred Stock, such funds shall be
immediately used to redeem shares of Series B Preferred
Stock that have not been previously redeemed. The Company would
not be legally able to redeem shares of Series B Preferred
Stock if, after giving effect to such redemption, the Company
would not be able to pay its debts when due in the usual course
of business or the Companys total assets would be less
than the sum of its total liabilities.

If the A-B Distribution Agreement were terminated
early as described above, it would be extremely difficult for
the Company to develop a distribution network and would have a
long-term material adverse effect on the Companys sales
and results of operations. The mandatory redemption could also
have a material adverse effect on the financial position and
cash flows of the Company. Additionally, the Company may need to
raise funds to fund the development of the new distribution
network and continue operations as it uses other available funds
to pay for the redemption of the Series B Preferred Stock.
There cannot be any guarantee that the Company would be able to
successfully rebuild its distribution network or that any
additional financing would be available when needed, or on
commercially reasonable terms.

The termination of the A-B Distribution Agreement
for any reason or the failure by the Company to perform any of
its material obligations under the A-B Investment Agreement
would constitute an event of default under a credit agreement
the Company has with a bank and the bank may declare the entire
outstanding loan balance immediately due and payable.

11



---



##### Table of Contents





| |                         
| | ------------------------
| | 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 agreed that, prior to November 16, 2001,
neither it nor its affiliates would 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% 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 were excluded from the A-B
Standstill. Pursuant to the terms of the A-B Investment
Agreement, the A-B Standstill automatically terminated on
November 16, 2001.

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

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

A-B Board Representation.Under the A-B Investment Agreement,
A-B has the right to designate a number of nominees based on its
percentage ownership, but not less than two, so long as A-B
holds at least 20% of the Common Stock on a Fully Diluted Basis
(which number will be rounded up to the next highest whole
number if not a whole number). A-Bs percentage ownership
on a Fully Diluted Basis, as defined in the A-B
Investment Agreement is calculated based on the assumption that
all outstanding shares of Series B Preferred Stock and
other convertible securities are converted into Common Stock,
that all outstanding warrants and stock options (other than
stock options granted to officers, directors and employees under
the Companys option plans) have been exercised in full,
and that all holdings of A-B and its affiliated companies are
aggregated. Currently, there are no outstanding options or
warrants that would be included in the calculation of
outstanding shares on a Fully Diluted Basis. 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

12



---



##### Table of Contents



Series B Preferred Stock, (b) a stock
split or the exercise of any outstanding option, (c) other
issuances not exceeding in the aggregate 20% of the shares of
Common Stock and Series B Preferred Stock (as if converted)
outstanding at the beginning of each two-year period commencing
on January 1, 1995 and on January 1 of every second year
thereafter, and (d) issuances under certain antitakeover
plans; (iv) authorize or issue any shares of capital stock
ranking equal or prior to the Series B Preferred Stock as
to dividend or liquidation rights, or entitled to more than one
vote per share or to class voting on any matter (except as
required by Washington corporation law) or to ordinary voting
power in the election of directors (other than Common Stock), or
authorize or issue any new class or series of common shares;
(v) issue or sell any equity securities to persons having
revenues of $100 million or more from the production or
distribution of alcoholic beverages in North and South America;
(vi) afford to any other person or group the right to
designate a number of the Companys directors equal to or
greater than the largest number A-B is contractually entitled to
designate; (vii) 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 Stoutand Blueline. The
Company has also obtained U.S. trademark registrations for
Forecasters, Trolleyman, and Cataqua.The
Redhookmark and certain other Company marks are also
registered or pending in various foreign countries. The Company
regards its Redhookand other trademarks as having
substantial value and as being an important factor in the
marketing of its products. The Company is not aware of any
infringing uses that could materially affect its current
business or any prior claim to the trademarks that would prevent
the Company from using such trademarks in its business. The
Companys policy is to pursue registration of its marks in
its markets whenever possible and to oppose vigorously any
infringement of its marks.

Employees

At December 31, 2001, the Company had 204
employees, including 57 in production, 87 in the pubs, 46 in
sales and marketing, and 14 in administration. Of these, 1 in
production, 53 in the pubs and 6 in sales and marketing are
part-time employees. The Company believes its relations with its
employees to be good.




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 Former 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

13



---



##### Table of Contents



approximately 75,000 barrels per year by 1993. 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 leases the brewery building, which covers
approximately 26,000 square feet. The brewery building is
currently occupied by the Trolleymanpub and the
Companys corporate offices. The lease expires in October
2002, unless the five-year extension option is exercised. 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. Adjacent to the Fremont Brewery, the Company
owned a warehousing facility and land, which was used as the keg
filling, storage and shipping facility prior to curtailing the
Fremont Brewery operations. In July 2000, the Company sold the
real estate parcel for approximately $1.7 million in cash
and recorded a gain of approximately $1.0 million during
the quarter ended September 30, 2000.


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 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 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 brewing
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 brewing capacity of approximately 100,000 barrels per
year. The Company plans to phase in additional brewing capacity
as needed, up to the maximum designed production capacity of
approximately 250,000 barrels per year.




Item 3.     Legal
Proceedings

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




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

None.

14



---



##### Table of Contents






Item 4A.     Executive
Officers of the Company



| |                                                                                     
| | ------------------------------------------------------------------------------------
| | Paul S. Shipman (49)  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.



| |                                                                                                          
| | ---------------------------------------------------------------------------------------------------------
| | David J. Mickelson (42) 
	Executive Vice President, Chief Financial Officer and Chief
	Operating Officer

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

Gregory J.
Marquina (47)  Vice President, Sales

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

Pamela J.
Hinckley (48)  Vice President,
Marketing

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

Allen L.
Triplett (43)  Vice President, Brewing

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



| |                                                        
| | -------------------------------------------------------
| | Gerard C. Prial (47)  Vice
	President, East Operations

Mr. Prial has served as Vice President, East
Operations since November 2001. From 1996 to November 2001,
Mr. Prial served as the General Manager of the
Companys Portsmouth Brewery. He served as the
Companys Southern California Field Sales Manager from
August 1994 to March 1996. From April 1993 to

15



---



##### Table of Contents



April 1994, Mr. Prial served as Vice
President of Sales for Brewski Brewing Company of Culver City,
California. From 1979 to 1993, he served in various positions
for Wisdom Import Sales Company in Irvine, California. From 1977
to 1979, Mr. Prial worked for the Miller Brewing Company as
an Area Manager in the Pacific Northwest. He received his
Bachelors degree in Management & Economics from
Marietta College in Marietta, Ohio in 1977.





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

|     |                |      |   |       |  |  |   |       | 
|---- | -------------- | ---- | - | ----- |  |  | - | ----- | 
|     |                | High |   | Low  
|     |                |      |   |      
|2001 |                |      |   |       |  |  |   |      
|     | First quarter  |      | $ | 1.875 |  |  | $ | 1.500 | 
|     | Second quarter |      | $ | 2.500 |  |  | $ | 1.438 | 
|     | Third quarter  |      | $ | 2.080 |  |  | $ | 1.510 | 
|     | Fourth quarter |      | $ | 1.920 |  |  | $ | 1.450 | 
|    
|2000 |                |      |   |       |  |  |   |      
|     | First quarter  |      | $ | 3.750 |  |  | $ | 1.750 | 
|     | Second quarter |      | $ | 2.000 |  |  | $ | 1.156 | 
|     | Third quarter  |      | $ | 1.938 |  |  | $ | 1.438 | 
|     | Fourth quarter |      | $ | 1.875 |  |  | $ | 1.375 | 

As of March 15, 2002, there were
830 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



---



##### Table of Contents






Item 6.     Selected
Financial Data

The following selected financial data should be
read in conjunction with the Companys Financial Statements
and the Notes thereto and Managements Discussion and
Analysis of Financial Condition and Results of Operations
included elsewhere in this Form 10-K. The selected
statement of operations and balance sheet data for, and as of
the end of, each of the five years in the period ended
December 31, 2001, are derived from the financial
statements of the Company. The operating data are derived from
unaudited information maintained by the Company.

|                                             |  |                                                     |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|-------------------------------------------- |  | --------------------------------------------------- | ------- | ---- |  | ---- | ------- | ---- |  | ---- | ------- | - |  | - | ------- | - |  | - | ------- | -
|                                             |  |                                                    
|                                             |  | Year Ended December 31,                            
|                                             |  |                                                    
|                                             |  | 2001                                                |         | 2000 |  | 1999 |         | 1998 |  | 1997
|                                             |  |                                                     |         |      |  |      |         |      |  |     
|                                             |  |                                                    
|                                             |  | (In thousands, except per share and operating data)
|Statement of Operations Data:                |  |                                                     |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|Sales                                        |  | $                                                   | 40,117  |      |  | $    | 37,837  |      |  | $    | 35,459  |   |  | $ | 35,962  |   |  | $ | 37,894  |  
|Less Excise Taxes                            |  |                                                     | 3,412   |      |  |      | 3,425   |      |  |      | 3,265   |   |  |   | 3,321   |   |  |   | 3,608   |  
|                                             |  |                                                     |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|Net Sales                                    |  |                                                     | 36,705  |      |  |      | 34,412  |      |  |      | 32,194  |   |  |   | 32,641  |   |  |   | 34,286  |  
|Cost of Sales                                |  |                                                     | 26,740  |      |  |      | 24,581  |      |  |      | 22,613  |   |  |   | 23,917  |   |  |   | 25,963  |  
|                                             |  |                                                     |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|Gross Profit                                 |  |                                                     | 9,965   |      |  |      | 9,831   |      |  |      | 9,581   |   |  |   | 8,724   |   |  |   | 8,323   |  
|Special Valuation Provision(1)               |  |                                                     |        |      |  |      |        |      |  |      |        |   |  |   | 5,173   |   |  |   |        |  
|Selling, General and Administrative Expenses |  |                                                     | 11,817  |      |  |      | 11,747  |      |  |      | 11,290  |   |  |   | 9,086   |   |  |   | 9,981   |  
|                                             |  |                                                     |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|Operating Income (Loss)                      |  |                                                     | (1,852  | )    |  |      | (1,916  | )    |  |      | (1,709  | ) |  |   | (5,535  | ) |  |   | (1,658  | )
|Interest Expense                             |  |                                                     | 394     |      |  |      | 593     |      |  |      | 533     |   |  |   | 679     |   |  |   | 378     |  
|Other Income (Expense)  Net(2)              |  |                                                     | 249     |      |  |      | 1,453   |      |  |      | (49     | ) |  |   | 127     |   |  |   | 93      |  
|                                             |  |                                                     |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|Income (Loss) before Income Taxes            |  |                                                     | (1,997  | )    |  |      | (1,056  | )    |  |      | (2,291  | ) |  |   | (6,087  | ) |  |   | (1,943  | )
|Income Tax Provision (Benefit)               |  |                                                     | (679    | )    |  |      | (328    | )    |  |      | (768    | ) |  |   | (2,076  | ) |  |   | (544    | )
|                                             |  |                                                     |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|Net Income (Loss)                            |  | $                                                   | (1,318  | )    |  | $    | (728    | )    |  | $    | (1,523  | ) |  | $ | (4,011  | ) |  | $ | (1,399  | )
|                                             |  |                                                     |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|Basic Earnings (Loss) per Share              |  | $                                                   | (0.19   | )    |  | $    | (0.10   | )    |  | $    | (0.20   | ) |  | $ | (0.52   | ) |  | $ | (0.18   | )
|Diluted Earnings (Loss) per Share            |  | $                                                   | (0.19   | )    |  | $    | (0.10   | )    |  | $    | (0.20   | ) |  | $ | (0.52   | ) |  | $ | (0.18   | )
|                                            
|Operating Data (in barrels):                 |  |                                                     |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|Beer Shipped                                 |  |                                                     | 223,100 |      |  |      | 212,600 |      |  |      | 197,600 |   |  |   | 202,300 |   |  |   | 214,600 |  
|Production Capacity, End of Period(3)        |  |                                                     | 350,000 |      |  |      | 350,000 |      |  |      | 350,000 |   |  |   | 350,000 |   |  |   | 425,000 |  

|                                       |  |              |        |      |  |      |        |      |  |      |        |  |  |   |        |  |  |   |        | 
|-------------------------------------- |  | ------------ | ------ | ---- |  | ---- | ------ | ---- |  | ---- | ------ |  |  | - | ------ |  |  | - | ------ | 
|                                       |  |             
|                                       |  | December 31,
|                                       |  |             
|                                       |  | 2001         |        | 2000 |  | 1999 |        | 1998 |  | 1997
|                                       |  |              |        |      |  |      |        |      |  |     
|Balance Sheet Data (in thousands):     |  |              |        |      |  |      |        |      |  |      |        |  |  |   |        |  |  |   |        | 
|Cash and Cash Equivalents              |  | $            | 6,364  |      |  | $    | 7,487  |      |  | $    | 5,463  |  |  | $ | 3,010  |  |  | $ | 892    | 
|Working Capital                        |  |              | 4,640  |      |  |      | 4,817  |      |  |      | 2,635  |  |  |   | 1,666  |  |  |   | 1,338  | 
|Total Assets                           |  |              | 82,155 |      |  |      | 85,621 |      |  |      | 87,707 |  |  |   | 89,528 |  |  |   | 96,769 | 
|Long-term Debt, Net of Current Portion |  |              | 6,525  |      |  |      | 6,975  |      |  |      | 7,425  |  |  |   | 7,875  |  |  |   | 9,874  | 
|Convertible Redeemable Preferred Stock |  |              | 16,144 |      |  |      | 16,099 |      |  |      | 16,055 |  |  |   | 16,011 |  |  |   | 15,966 | 
|Common Stockholders Equity            |  |              | 52,474 |      |  |      | 54,502 |      |  |      | 55,859 |  |  |   | 57,326 |  |  |   | 61,298 | 



---



|    |                                                                                                                                                                                                                                                                                                                     
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Represents a non-cash valuation provision to
	write down the production assets of the Fremont Brewery to an
	estimate of their net realizable value. As of December 31,
	1999, the Company had sold substantially all of the equipment
	for an amount approximately equal to its estimated net
	realizable value.   
|   
|(2) | Includes a gain of approximately
	$1.0 million for the year ended December 31, 2000,
	resulting from the July 2000 sale of a warehousing facility and
	land owned by the Company which was used as the keg filling,
	storage and shipping facility prior to the 1998 curtailment of
	the Fremont Brewery operations.

17



---



##### Table of Contents





|    |                                                                                                                                                                                                                                                                                          
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(3) | 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.






|        |                                                                                        
|------- | ---------------------------------------------------------------------------------------
|Item 7. | Managements
	Discussion and Analysis of Financial Condition and Results of
	Operations

The following discussion and analysis should be
read in conjunction with the Companys Financial Statements
and Notes thereto included herein. The discussion and analysis
includes period-to-period comparisons of the Companys
financial results. Although period-to-period comparisons may be
helpful in understanding the Companys financial results,
the Company believes that they should not be relied upon as an
accurate indicator of future performance.

Overview

Since its formation, the Company has focused its
business activities on the brewing, marketing and selling of
craft beers. For the year ended December 31, 2001, the Company
had gross sales of $40,117,000, an increase of 6.0% from 2000.
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
sales 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
(shipments) increased 4.9% in 2001, compared to 2000. 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 significant number
of craft brewers and their promotional pricing and new product
introductions as well as increased competition from imported
beers and flavored alcohol beverages. 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 operates
its brewing facilities up to five days per week with multiple
shifts per day. While the maximum designed production capacity
for each of the Woodinville and Portsmouth breweries is
approximately 250,000 barrels per year, the current production
capacity is approximately 250,000 barrels per year at the
Woodinville facility and 100,000 barrels per year at the
Portsmouth facility. Production capacity at the Portsmouth
facility can be added in phases until the facility reaches its
maximum designed production capacity of 250,000 barrels per
year. Such an increase would require additional capital
expenditures, primarily for fermentation equipment and
production personnel. The decision to add capacity is affected
by the availability of capital, construction constraints and
anticipated sales in new and existing markets.

The Companys capacity utilization has a
significant impact on gross profit. Generally, when facilities
are operating at their maximum designed production capacities,
profitability is favorably affected because fixed and
semivariable operating costs, such as depreciation and
production salaries, are spread over a larger sales base.
Because current period production levels have been substantially
below the Companys current production capacity, gross
margins have been negatively impacted. This impact is expected
to be reduced as actual production increases.

In addition to capacity utilization, the Company
expects other factors to influence profit margins, including:
higher costs associated with the enhancement of existing and 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.

18



---



##### Table of Contents



Critical Accounting Policies and
Estimates

The Companys financial statements are based
upon the selection and application of significant accounting
policies which require management to make significant estimates
and assumptions. Management believes that the following are some
of the more critical judgment areas in the application of the
Companys accounting policies that currently affect its
financial condition and results of operations.

Income Taxes.As of
December 31, 2001, the Company had approximately
$10.4 million of deferred tax assets, comprised principally
of net operating loss carryforwards that expire from 2012
through 2021, and for which no valuation allowance has been
recorded. The realization of these assets is dependent upon
estimates of future taxable income resulting from future
reversals of existing taxable temporary differences, which have
been recorded as deferred tax liabilities and exceed the
deferred tax assets. If the Company continues to generate tax
losses, the Company may not be able to record any future tax
benefits.

Long-Lived Assets.When facts and circumstances indicate
that the carrying values of long-lived assets may be impaired,
an evaluation of recoverability is performed in accordance with
FASB Statement No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of,by comparing the carrying value of the assets to projected
future undiscounted cash flows in addition to other quantitative
and qualitative analyses. Upon indication that the carrying
value of such assets may not be recoverable, the Company
recognizes an impairment loss by a charge against current
operations. During 2001, the Company performed an analysis of
its brewery assets to determine if an impairment might exist.
The Companys estimate of future undiscounted cash flows
indicated that such carrying values were expected to be
recovered. Nonetheless, it is possible that the estimate of
future undiscounted cash flows may change in the future,
resulting in the need to write down those assets to their fair
value.

Results of Operations

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

|                                             |  |                         |       |      |  |      |       |    |  |  |       |   
|-------------------------------------------- |  | ----------------------- | ----- | ---- |  | ---- | ----- | -- |  |  | ----- | --
|                                             |  |                        
|                                             |  | Year Ended December 31,
|                                             |  |                        
|                                             |  | 2001                    |       | 2000 |  | 1999
|                                             |  |                         |       |      |  |     
|Sales                                        |  |                         | 109.3 | %    |  |      | 110.0 | %  |  |  | 110.1 | % 
|Less Excise Taxes                            |  |                         | 9.3   |      |  |      | 10.0  |    |  |  | 10.1  |   
|                                             |  |                         |       |      |  |      |       |    |  |  |       |   
|Net Sales                                    |  |                         | 100.0 |      |  |      | 100.0 |    |  |  | 100.0 |   
|Cost of Sales                                |  |                         | 72.9  |      |  |      | 71.4  |    |  |  | 70.2  |   
|                                             |  |                         |       |      |  |      |       |    |  |  |       |   
|Gross Profit                                 |  |                         | 27.1  |      |  |      | 28.6  |    |  |  | 29.8  |   
|Selling, General and Administrative Expenses |  |                         | 32.2  |      |  |      | 34.2  |    |  |  | 35.1  |   
|                                             |  |                         |       |      |  |      |       |    |  |  |       |   
|Operating Income (Loss)                      |  |                         | (5.1  | )    |  |      | (5.6  | )  |  |  | (5.3  | ) 
|Interest Expense                             |  |                         | 1.1   |      |  |      | 1.7   |    |  |  | 1.7   |   
|Other Income (Expense)  Net                 |  |                         | 0.7   |      |  |      | 4.2   |    |  |  | (0.1  | ) 
|                                             |  |                         |       |      |  |      |       |    |  |  |       |   
|Income (Loss) before Income Taxes            |  |                         | (5.5  | )    |  |      | (3.1  | )  |  |  | (7.1  | ) 
|Income Tax Provision (Benefit)               |  |                         | (1.9  | )    |  |      | (1.0  | )  |  |  | (2.4  | ) 
|                                             |  |                         |       |      |  |      |       |    |  |  |       |   
|Net Income (Loss)                            |  |                         | (3.6  | )%   |  |      | (2.1  | )% |  |  | (4.7  | )%
|                                             |  |                         |       |      |  |      |       |    |  |  |       |   



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

Sales.Total sales
increased 6.0% to $40,117,000 in 2001, compared to $37,837,000
in 2000, attributable to a 4.9% increase in barrels sold, an
increase in average beer prices, and a slight increase in other
sales. Total sales volume in 2001 increased to 223,100 barrels
from 212,600 barrels in 2000. Sales volumes in Washington State,
the Companys largest market, decreased 1.9% as compared to
2000, contributing negatively to nearly flat West Coast sales
volumes. The competitive landscape has been affected by the
number of craft beer

19



---



##### Table of Contents



companies, their promotional pricing and new
product introductions, as well as increased competition from
imported beers and, very recently, flavored alcohol beverages.
Sales other than wholesale beer sales, primarily retail pub
revenues, totaled $4,291,000 in 2001, compared to $4,144,000 in
2000. At December 31, 2001 and 2000, the Companys
products were distributed in 48 states.


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

Cost of Sales.Cost
of sales increased 8.8% to $26,740,000 in 2001, compared to
$24,581,000 in 2000, due to higher sales volume, increased raw
material costs, and a shift in product mix towards an increasing
proportion of package sales, including 12-packs. Cost of sales,
as a percentage of net sales, increased to 72.9% in 2001,
compared to 71.4% in 2000. The utilization rate, based upon the
breweries combined current production capacity, was 63.8%
and 60.7% for the years ended December 31, 2001 and 2000,
respectively. The utilization rate, based upon the
breweries combined maximum designed capacity, was 44.6%
and 42.5% for years ended December 31, 2001 and 2000,
respectively.

Selling, General and Administrative
Expenses.Selling, general and
administrative expenses increased to $11,817,000 in 2001,
compared to $11,747,000 in 2000 due to the addition of several
new sales positions in key markets during the second half of
2000 and an increase in expenditures for the co-operative
advertising and promotion program with the Companys
wholesalers. As a percentage of net sales, selling, general and
administrative expenses were 32.2% and 34.2% for years ended
December 31, 2001 and 2000, respectively.

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

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

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



| |                                                                       
| | ----------------------------------------------------------------------
| | Year Ended December 31, 2000 Compared
	to Year Ended December 31, 1999

Sales.Total sales
increased 6.7% to $37,837,000 in 2000, compared to $35,459,000
in 1999, attributable to a 7.6% increase in barrels sold and an
increase in other sales offset by a slight decrease in average
beer prices. Total sales volume in 2000 increased to 212,600
barrels from 197,600 barrels in 1999. West Coast sales increased
4.5% in 2000, including a 7.6% increase in Washington State, the
Companys largest market. The competitive landscape has
been affected by the number of craft beer companies, their
promotional pricing and new product introductions, as well as
increased competition from imported beers. Sales other than
wholesale beer sales, primarily retail pub revenues, totaled
$4,144,000 in 2000, compared to $3,743,000 in 1999. At
December 31, 2000 and 1999, the Companys products
were distributed in 48 states.

Excise Taxes.Excise
taxes increased to $3,425,000, or 10.0% of net sales in 2000,
compared to $3,264,000, or 10.1% of net sales in 1999. In
September 2000, Washington State regulations were modified to
require beer taxes previously paid by Washington State brewers
now be paid by Washington State distributors, the effect of
which was to decrease sales prices charged distributors and
decrease excise taxes in 2000. Accordingly, both sales and
excise taxes decreased as a percentage of net sales in 2000.

20



---



##### Table of Contents



Cost of Sales.Cost
of sales increased 8.7% to $24,581,000 in 2000, compared to
$22,613,000 in 1999, primarily due to higher sales volume,
increased raw material costs and freight charges, and a shift in
the product mix towards increasing proportion of 12-pack sales.
Cost of sales, as a percentage of net sales, increased to 71.4%
in 2000, compared to 70.2% in 1999. The utilization rate, based
upon the breweries combined current production capacity,
was 60.7% and 56.5% for 2000 and 1999, respectively. The
utilization rate, based upon the breweries combined
maximum designed capacity, was 42.5% and 39.5% for 2000 and
1999, respectively.

Selling, General and Administrative
Expenses.Selling, general and
administrative expenses increased to $11,747,000 in 2000,
compared to $11,290,000 in 1999 due to the decision to add
several new sales positions in important geographic markets.
Expenditures for the brand investment and co-operative
advertising programs totaled $3.0 million and
$2.5 million for the years ended December 31, 2000 and
1999, respectively. As a percentage of net sales, selling,
general and administrative expenses were 34.2% and 35.1% for
years ended December 31, 2000 and 1999, respectively.

Interest Expense.Interest expense increased to $594,000 in 2000, compared to
$533,000 in 1999, reflecting the effect of higher average
interest rates partially offset by the effect of lower
outstanding debt.

Other Income (Expense) 
Net.Other income
(expense)  net increased to income of $1,453,000 in
2000 compared to a net expense of $48,000 in 1999. The 2000
period includes a gain of approximately $1.0 million
resulting from the sale of a real estate parcel which was
previously used as the Fremont Brewery keg filling, storage and
shipping facility. 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 2000 gain and 1999
loss, other income increased due to a higher average balance of
interest-bearing deposits.

Income Taxes.The
Companys effective income tax rate was a 31.1% benefit in
2000, compared to a 33.5% benefit in 1999. The difference
between the 2000 and 1999 effective rates is primarily the
result of a significantly lower pre-tax loss in 2000, relative
to other components of the tax provision calculation, such as
the exclusion of a portion of meals and entertainment expenses
from tax return deductions.

Liquidity and Capital Resources

The Company had $6,364,000 and $7,487,000 of cash
and cash equivalents at December 31, 2001 and 2000,
respectively. At December 31, 2001, the Company had working
capital of $4,640,000. The Companys long-term debt as a
percentage of total capitalization (long-term debt, preferred
stock and common stockholders equity) was 9.2% and 9.5% as
of December 31, 2001 and 2000, respectively. Cash provided
by operating activities totaled $471,000 and $1,671,000 in 2001
and 2000, respectively. The decrease in operating cash flow for
the year ended December 31, 2001, was due to the timing of
the collection of accounts receivable in December 2000 and
payment of certain current liabilities in January 2001.

The Company has a credit agreement with a bank
under which a term loan (the Term Loan) and a
$10 million revolving credit facility (the Revolving
Facility) are provided. The Term Loan, which originated in
June 1997 upon the conversion of a $9 million secured
credit facility, has a five-year term with a 20-year
amortization schedule. On June 19, 2001, the credit
agreement was amended to extend the maturity date on the Term
Loan to June 5, 2007. As of December 31, 2001, there
was $7.0 million outstanding on the Term Loan, and the
Companys one-month LIBOR-based borrowing rate was
approximately 3.13%. The Companys Revolving Facility
expires on July 1, 2002 and had no borrowings outstanding
as of December 31, 2001. The Term Loan and the Revolving
Facility are secured by substantially all of the Companys
assets. Through June 5, 2002, interest on the Term Loan
will accrue at a variable rate based on the London Inter Bank
Offered Rate (LIBOR), plus 1.25% to 2.00%, depending
on the Companys debt-to-tangible net worth ratio.
Effective June 5, 2002, interest on the Term Loan will
accrue at LIBOR plus 1.75% to 2.25%, depending on the
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 has the option to fix the applicable interest rate
for up to twelve months by selecting LIBOR for one- to
twelve-month periods as a base. The termination of the A-B
Distribution Agreement for any reason or the failure by the
Company to perform any of its material obligations under the A-B
Investment Agreement would

21



---



##### Table of Contents



constitute an event of default under the credit
agreement and the bank may declare the entire outstanding loan
balance immediately due and payable.


In mid-November 2001, the bank notified the
Company that, as of September 30, 2001, the Company was not
in compliance with the Fixed Charge Coverage Ratio covenant as
the ratio had been re-defined in the June 2001 amendment to the
credit agreement. The ratio is calculated at the end of every
quarter for the twelve-month period ending the last day of such
quarter and is then reported to the bank. The cash
flow component in the Fixed Charge Coverage Ratio, which
computes the ratio of cash flow to debt service for the
immediately preceding twelve-month period, was modified by the
June 2001 amendment to exclude the income tax provision
(benefit). Prior to such amendment, the cash flow
component included the expense or benefit associated with income
taxes. For the twelve-month period ended September 30,
2001, the Company had calculated the ratio using the definition
that existed before the amendment, which indicated that the
Company was in compliance under that definition. In December
2001, the credit agreement was again amended to address the
following: to waive the September 30, 2001 covenant
violation; to temporarily modify the time periods used to
calculate the Fixed Charge Coverage Ratio; to modify the minimum
Fixed Charge Coverage Ratio the Company must maintain; and to
redefine Fixed Charge Coverage Ratio to comply with the
banks revised internal guidelines. Under the December 2001
amendment, the periods used for the ratio calculation are as
follows: as of December 31, 2001, the ratio shall be
computed for the three-month period ending December 31,
2001; as of March 31, 2002, the ratio shall be computed for
the six-month period ending March 31, 2002; as of
June 30, 2002, the ratio shall be computed for the
nine-month period ending June 30, 2002; as of
September 30, 2002, the ratio shall be computed for the
twelve-month period ending September 30, 2002; and, for all
quarters thereafter, the ratio shall be computed for the
twelve-month period ending such quarter. Under the December 2001
amendment, the Company must maintain a minimum Fixed Charge
Coverage Ratio of 1.00:1 for all periods after December 31,
2001. Prior to the December 2001 amendment, the minimum Fixed
Charge Coverage Ratio was 1.05:1.

The Companys failure to meet the minimum
Fixed Charge Coverage Ratio of 1.05:1 as of September 30,
2001 was significantly affected by the results of the quarter
ended December 31, 2000, which reduced the twelve-month
cash flow calculation (as defined in the June 2001
amendment) by approximately $360,000. The shortening of the time
periods used in the calculation of the ratio for the last
quarter of 2001 and the first two quarters of 2002, as well as
the lowering of the cash-flow component of the ratio to 1:00:1
from 1:05:1, reduce the likelihood that a violation of the
covenant will occur again. However, if the Company were to
report a significant net loss for one or more quarters within a
time period used to calculate the ratio, or if the interest
rates were to increase significantly, the ratio would be
negatively impacted which may cause the Company to not meet the
covenant. Failure to meet the covenants required by the credit
agreement is an event of default and, at its option, the Bank
could deny a request for a waiver and declare the entire
outstanding loan balance immediately due and payable. In such a
case, the Company would seek to refinance the loan with one or
more banks, potentially at less desirable terms. However, there
can be no guarantee that additional financing would be available
at commercially reasonable terms, if at all. The Company was in
compliance with all covenants for the quarter ended
December 31, 2001.

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 advertising expenditures associated with the brand
investment and co-operative advertising programs, and working
capital and capital expenditure requirements, through cash on
hand, operating cash flow and, to the extent required and
available, bank borrowings and offerings of debt or equity
securities. However, there cannot be any guarantee that any
additional financing will be available when needed or at
commercially reasonable terms.

Capital expenditures for 2001 totaled $434,000.
Capital expenditures for 2002 are expected to total
approximately $675,000.

In May 2000, the Board of Directors authorized
the repurchase of up to 500,000 shares of the Companys
outstanding shares of common stock. Two further resolutions were
passed by the Board of Directors in January

22



---



##### Table of Contents



and November 2001, each authorizing the
repurchase of an additional 250,000 shares of its outstanding
shares of common stock, bringing the total authorization to 1.0
million shares. As of December 31, 2001, 768,000 shares of
common stock had been purchased in the open market for
$1,250,000. As of March 15, 2002, 870,000 outstanding
shares of common stock had been purchased in the open market for
$1,480,000.


The Company has certain commitments,
contingencies and uncertainties relating to its normal
operations. As of December 31, 2001, contractual
commitments associated with the Companys long-term debt,
convertible redeemable preferred stock, operating leases and hop
purchase commitments are as follows:

|                                          |  |                         |       |      |  |      |       |      |  |      |        |            |  |       |     |  |  |   |     |  |  |   |        |  |  |   |        | 
|----------------------------------------- |  | ----------------------- | ----- | ---- |  | ---- | ----- | ---- |  | ---- | ------ | ---------- |  | ----- | --- |  |  | - | --- |  |  | - | ------ |  |  | - | ------ | 
|                                          |  |                         |       |      |  |     
|                                          |  | Year Ended December 31, |       |      |  |     
|                                          |  |                         |       |      |  |     
|                                          |  | 2002                    |       | 2003 |  | 2004 |       | 2005 |  | 2006 |        | Thereafter |  | Total
|                                          |  |                         |       |      |  |      |       |      |  |      |        |            |  |      
|                                          |  |                        
|                                          |  | (In thousands)         
|Long-term Debt(1)                         |  | $                       | 450   |      |  | $    | 450   |      |  | $    | 450    |            |  | $     | 450 |  |  | $ | 450 |  |  | $ | 4,725  |  |  | $ | 6,975  | 
|Convertible Redeemable Preferred Stock(2) |  |                         |      |      |  |      |      |      |  |      | 16,300 |            |  |       |    |  |  |   |    |  |  |   |       |  |  |   | 16,300 | 
|Operating Leases(3)                       |  |                         | 494   |      |  |      | 267   |      |  |      | 267    |            |  |       | 260 |  |  |   | 253 |  |  |   | 10,095 |  |  |   | 11,636 | 
|Hop Purchase Commitments(4)               |  |                         | 260   |      |  |      | 351   |      |  |      | 342    |            |  |       | 112 |  |  |   |    |  |  |   |       |  |  |   | 1,065  | 
|                                          |  |                         |       |      |  |      |       |      |  |      |        |            |  |       |     |  |  |   |     |  |  |   |        |  |  |   |        | 
|                                          |  | $                       | 1,204 |      |  | $    | 1,068 |      |  | $    | 17,359 |            |  | $     | 822 |  |  | $ | 703 |  |  | $ | 14,820 |  |  | $ | 35,976 | 
|                                          |  |                         |       |      |  |      |       |      |  |      |        |            |  |       |     |  |  |   |     |  |  |   |        |  |  |   |        | 



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Represents annual principal payments required on
	the Companys Term Loan. Through June 5, 2002,
	interest on the Term Loan will accrue at a variable rate based
	on the LIBOR, plus 1.25% to 2.00%, depending on the
	Companys debt-to-tangible net worth ratio. Effective
	June 5, 2002, interest on the Term Loan will accrue at
	LIBOR plus 1.75% to 2.25%, depending on the debt-to-tangible net
	worth ratio. Payment of accrued interest due monthly is not
	reflected above. The termination of the A-B Distribution
	Agreement for any reason or the failure by the Company to
	perform any of its material obligations under the A-B Investment
	Agreement would constitute an event of default under the credit
	agreement and the bank may declare the entire outstanding loan
	balance immediately due and payable.                                                                                                                               
|   
|(2) | In the event that the A-B Distribution Agreement
	is terminated on or before December 31, 2004, under
	circumstances described in Item 1 to this report (see
	Business  Relationship with Anheuser-Busch,
	Incorporated  A-B Distribution Agreement), the terms
	of the Series B Preferred Stock purchased by A-B pursuant
	to the A-B Investment Agreement require the mandatory redemption
	of the Series B Preferred Stock on December 31, 2004,
	at a redemption price equal to $12.61 per share (approximately
	$16.3 million in the aggregate), plus an amount equal to
	accumulated and unpaid dividends thereon. If the A-B
	Distribution Agreement were terminated early as described above,
	distribution of the Companys products would suffer
	significant disruption and would have a long-term material
	adverse effect on the Companys sales and results of
	operations as well as on its financial position and cash flows
	from operations.
|   
|(3) | Represents minimum aggregate future lease
	payments under noncancelable operating leases.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   
|(4) | Represents purchase commitments to ensure that
	the Company has the necessary supply of specialty hops to meet
	future production requirements. Contracts generally provide for
	payment upon delivery of the product with the balance due on any
	unshipped product during the year following the harvest year.
	The Company believes that hop commitments in excess of future
	requirements, if any, will not materially affect its financial
	condition or results of operations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

Certain Considerations: Issues and
Uncertainties

The Company does not provide forecasts of future
financial performance or sales volumes, although this Annual
Report contains certain other types of forward-looking
statements that involve risks and uncertainties. The Company
may, in discussions of its future plans, objectives and expected
performance in periodic reports filed by the Company with the
Securities and Exchange Commission (or documents incorporated by
reference therein) and in written and oral presentations made by
the Company, include forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as
amended, or Section 21E of the Securities

23



---



##### Table of Contents



Exchange Act of 1934, as amended. Such
forward-looking statements are based on assumptions that the
Company believes are reasonable, but are by their nature
inherently uncertain. In all cases, there can be no assurance
that such assumptions will prove correct or that projected
events will occur. Actual results could differ materially from
those projected depending on a variety of factors, including,
but not limited to, the successful execution of market
development and other plans, and the availability of financing
and the issues discussed below. While Company management is
optimistic about the Companys long-term prospects, the
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, the
introduction of fuller-flavored products by major national
brewers and recent introductions of flavored alcohol beverages.
While the Companys sales volumes for 2000 and 2001
increased 7.6% and 4.9%, respectively, as compared to the
corresponding prior years volumes, the Company did
experience declining sales volumes ranging from 2.3% to 5.7% for
the years 1997 through 1999. If the Company were to again
experience negative sales trends, the Companys future
sales and results of operations would be adversely affected. The
Company has historically operated with little or no backlog and,
therefore, its ability to predict sales for future periods is
limited.

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

Variability of Gross Margin and Cost of Sales.The Company anticipates that its
future gross margins will fluctuate and may decline as a result
of many factors, including disproportionate depreciation and
other fixed and semivariable operating costs, depending on the
level of production at the Companys breweries in relation
to current and 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
freight charges, the availability and prices of raw materials
and packaging materials, the mix between draft and bottled
product sales, the sales mix of various bottled product
packages, and Federal or state excise taxes. Also, as sales
volumes through the Distribution Alliance increase, the alliance
fee and other staging and administrative costs would increase.

Advertising and Promotional Costs.Prior to June 1999 the Company had
done very limited advertising. Based upon market and competitive
considerations, the Company determined that a significant
increase in such spending was appropriate. Accordingly, in June
1999 the Company began a brand investment program that
significantly increased advertising and related costs. During
1999 and 2000, the Company primarily utilized radio, billboard
and print advertising in select markets, while also
participating, to a small degree, in co-operative advertising
where the Companys spending is matched dollar for dollar
by the local distributor. In 2001, the Company allocated a
larger share of its advertising spending to its co-operative
advertising and promotion program. The advertising investment is
expected to continue for the foreseeable future with the
objective of establishing or maintaining momentum towards
capturing a larger share of the fragmented craft beer market.
This increased spending has significantly increased the
Companys selling, general and administrative expenses in
1999, 2000 and 2001, leading to increased losses and a reduction
in 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

24



---



##### Table of Contents



deteriorate, distribution of the Companys
products would suffer significant disruption and would have a
long-term material adverse effect on the Companys sales
and results of operations. In the event that the A-B
Distribution Agreement is terminated on or before
December 31, 2004, under circumstances described in
Item 1 (see Business  Relationship with
Anheuser-Busch, Incorporated  A-B Distribution
Agreement), the terms of the Series B Preferred Stock
purchased by A-B pursuant to the A-B Investment Agreement
require the mandatory redemption of the Series B Preferred
Stock on December 31, 2004, at a redemption price equal to
$12.61 per share (approximately $16.3 million in the
aggregate), plus an amount equal to accumulated and unpaid
dividends thereon. The terms of the Series B Preferred
Stock further provide that if at the time of the mandatory
redemption the Company has insufficient legally available funds
to redeem the shares of Series B Preferred Stock as a
whole, those funds that are legally available shall be used to
redeem the maximum number of shares of Series B Preferred
Stock. At any time thereafter when additional funds of the
Company become legally available for the redemption of
Series B Preferred Stock, such funds shall be immediately
used to redeem shares of Series B Preferred Stock that have
not been previously redeemed. The Company would not be legally
able to redeem shares of Series B Preferred Stock if, after
giving effect to such redemption, the Company would not be able
to pay its debts when due in the usual course of business or the
Companys total assets would be less than the sum of its
total liabilities. Such a mandatory redemption could have a
material adverse effect on the financial position and cash flows
of the Company. While the Company believes that the benefits of
the Distribution Alliance, in particular distribution and
material cost efficiencies, offset costs associated with the
Alliance, there can be no assurance that these costs will not
have a negative impact on the Companys profit margins in
the future.


Dependence on Third-Party Distributors.The Company also relies heavily on
non-Alliance third-party distributors for the sale of its
products to retailers. The Companys most significant
non-Alliance wholesaler, K&L Distributors, Inc., that
although not part of the Alliance is a distributor in the A-B
distribution network, accounted for approximately 14% of the
Companys sales in 2001. Substantially all of the remaining
sales volume is through the Distribution Alliance to wholesalers
that are part of the A-B distribution network, most of which are
independent wholesalers. A disruption of wholesalers or
A-Bs ability to distribute products efficiently due to any
significant operational problems, such as wide-spread labor
union strikes, the loss of K&L Distributors as a customer,
or the termination of the Distribution Alliance could have a
material adverse impact on the Companys sales and results
of operations.

Customer Acceptance, Consumer Trends and
Public Attitudes.If consumers were
unwilling to accept the Companys products or if general
consumer trends caused a decrease in the demand for beer,
including craft beer, it could adversely impact the
Companys sales and results of operations. 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.While the
Companys sales volumes for 2000 and 2001 increased 7.6%
and 4.9%, respectively, as compared to the corresponding prior
years volumes, the Company did experience declining sales
volumes ranging from 2.3% to 5.7% for the years 1997 through
1999. Those declines coincided with significantly slower sales
growth of 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.

Income Tax Benefits.As of December 31, 2001, the
Company had federal income tax net operating loss carryforwards
(NOLs) of $26.5 million, substantially
all of which expire from 2012 through 2021. NOLs can
generally be carried back no more than 2 years and forward
no more than 20 years to offset regular tax liabilities in
future years. Should the Company incur significant operating
losses in the future, thus generating

25



---



##### Table of Contents



additional NOLs, the Company may be
required to establish a valuation allowance if it is more likely
than not that all, or a portion, of an NOL would either expire
before the Company is able to realize its benefit, or that
future utilization is uncertain. Such a valuation allowance
would reduce the income tax benefit recorded in the statement of
operations.


Recent Accounting Pronouncements

In August 2001, the FASB issued Statement of
Financial Accounting Standards (SFAS) No. 144,
Accounting for the Impairment or Disposal of Long-Lived
Assets, which supercedes SFAS No. 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of. SFAS No. 144 retains the
fundamental provisions of SFAS No. 121 but sets forth new
criteria for asset classification and broadens the scope of
qualifying discontinued operations. SFAS 144 is applicable
to financial statements issued for fiscal years beginning after
December 15, 2001. Adoption of SFAS 144 is not
expected to have an impact on the Companys financial
condition or results of operations.




Item 7A.     Quantitative
and Qualitative Disclosures about Market Risk

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

The Company does not have any derivative
financial instruments as of December 31, 2001.

26



---



##### Table of Contents






Item 8.     Financial
Statements and Supplementary Data

REDHOOK ALE BREWERY, INCORPORATED

INDEX TO FINANCIAL STATEMENTS

|                                                                                                 |  |      |    | 
|------------------------------------------------------------------------------------------------ |  | ---- | -- | 
|                                                                                                 |  | Page
|                                                                                                 |  |     
|Audited Financial Statements:                                                                    |  |      |    | 
|                                                                                                
|Report of Ernst & Young LLP, Independent
	Auditors                                               |  |      | 28 | 
|                                                                                                
|Balance Sheets as of December 31, 2001 and
	2000                                                 |  |      | 29 | 
|                                                                                                
|Statements of Operations for the Years Ended
	December 31, 2001, 2000 and 1999                   |  |      | 30 | 
|                                                                                                
|Statements of Common Stockholders Equity
	for the Years
	Ended December 31, 2001, 2000 and 1999 |  |      | 31 | 
|                                                                                                
|Statements of Cash Flows for the Years Ended
	December 31, 2001, 2000 and 1999                   |  |      | 32 | 
|                                                                                                
|Notes to Financial Statements                                                                    |  |      | 33 | 

27



---



##### Table of Contents



REPORT OF ERNST & YOUNG LLP, INDEPENDENT
AUDITORS

The Board of Directors

Redhook Ale Brewery, Incorporated


We have audited the accompanying balance sheets
of Redhook Ale Brewery, Incorporated as of December 31,
2001 and 2000, and the related statements of operations, common
stockholders equity, and cash flows for each of the three
years in the period ended December 31, 2001. 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, 2001 and 2000, and the results of its
operations and its cash flows for each of the three years in the
period ended December 31, 2001, in conformity with
accounting principles generally accepted in the United States.



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

Seattle, Washington

January 25, 2002


28



---



##### Table of Contents



REDHOOK ALE BREWERY, INCORPORATED

BALANCE SHEETS

|                                                              |                                                                                                                                                          |                           |                                                                     |              |            |            |            |            |            |            | 
|------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------- | ------------------------------------------------------------------- | ------------ | ---------- | ---------- | ---------- | ---------- | ---------- | ---------- | 
|                                                              |                                                                                                                                                          | December 31,              |                                                                     | December 31,
|                                                              |                                                                                                                                                          | 2001                      |                                                                     | 2000        
|                                                              |                                                                                                                                                          |                           |                                                                     |             
|ASSETS                                                       
|Current Assets:                                               |                                                                                                                                                          |                           |                                                                     |              |            |            |            |           
|                                                              | Cash and Cash Equivalents                                                                                                                                |                           | $                                                                   | 6,363,786    |            |            | $          | 7,487,190  |           
|                                                              | Accounts Receivable                                                                                                                                      |                           |                                                                     | 1,406,329    |            |            |            | 1,075,730  |           
|                                                              | Inventories                                                                                                                                              |                           |                                                                     | 3,139,290    |            |            |            | 2,726,071  |           
|                                                              | Other                                                                                                                                                    |                           |                                                                     | 168,349      |            |            |            | 296,082    |           
|                                                              |                                                                                                                                                          |                           |                                                                     |              |            |            |            |           
|                                                              |                                                                                                                                                          | Total Current Assets      |                                                                     |              | 11,077,754 |            |            |            | 11,585,073 |           
|Fixed Assets, Net                                             |                                                                                                                                                          |                           | 70,968,503                                                          |              |            |            | 73,670,248 |           
|Other Assets                                                  |                                                                                                                                                          |                           | 108,955                                                             |              |            |            | 365,181    |           
|                                                              |                                                                                                                                                          |                           |                                                                     |              |            |            |            |           
|                                                              |                                                                                                                                                          | Total Assets              |                                                                     | $            | 82,155,212 |            |            | $          | 85,620,502 |           
|                                                              |                                                                                                                                                          |                           |                                                                     |              |            |            |            |           
|LIABILITIES, PREFERRED STOCK AND COMMON
	STOCKHOLDERS EQUITY
|Current Liabilities:                                          |                                                                                                                                                          |                           |                                                                     |              |            |            |            |           
|                                                              | Accounts Payable                                                                                                                                         |                           | $                                                                   | 1,939,565    |            |            | $          | 2,664,165  |           
|                                                              | Accrued Salaries, Wages and Payroll Taxes                                                                                                                |                           |                                                                     | 1,657,618    |            |            |            | 1,528,739  |           
|                                                              | Refundable Deposits                                                                                                                                      |                           |                                                                     | 2,000,280    |            |            |            | 1,791,267  |           
|                                                              | Other Accrued Expenses                                                                                                                                   |                           |                                                                     | 389,847      |            |            |            | 333,805    |           
|                                                              | Current Portion of Long-Term Debt                                                                                                                        |                           |                                                                     | 450,000      |            |            |            | 450,000    |           
|                                                              |                                                                                                                                                          |                           |                                                                     |              |            |            |            |           
|                                                              |                                                                                                                                                          | Total Current Liabilities |                                                                     |              | 6,437,310  |            |            |            | 6,767,976  |           
|                                                              |                                                                                                                                                          |                           |                                                                     |              |            |            |            |           
|Long-Term Debt, Net of Current Portion                        |                                                                                                                                                          |                           | 6,525,000                                                           |              |            |            | 6,975,000  |           
|                                                              |                                                                                                                                                          |                           |                                                                     |              |            |            |            |           
|Deferred Income Taxes, Net                                    |                                                                                                                                                          |                           | 575,340                                                             |              |            |            | 1,276,149  |           
|                                                              |                                                                                                                                                          |                           |                                                                     |              |            |            |            |           
|Commitments                                                   |                                                                                                                                                          |                           |                                                                     |              |            |            |            |           
|                                                             
|Convertible Redeemable Preferred Stock                        |                                                                                                                                                          |                           | 16,143,855                                                          |              |            |            | 16,099,455 |           
|                                                              |                                                                                                                                                          |                           |                                                                     |              |            |            |            |           
|Common Stockholders Equity:                                  |                                                                                                                                                          |                           |                                                                     |              |            |            |            |           
|                                                              | Common Stock, Par Value $0.005 per Share,
	Authorized, 50,000,000 Shares; Issued and Outstanding, 6,920,046
	Shares in 2001 and 7,312,786 Shares in 2000 |                           |                                                                     | 34,600       |            |            |            | 36,564     |           
|                                                              | Additional Paid-In Capital                                                                                                                               |                           |                                                                     | 55,743,429   |            |            |            | 56,407,023 |           
|                                                              | Retained Earnings (Deficit)                                                                                                                              |                           |                                                                     | (3,304,322   | )          |            |            | (1,941,665 | )         
|                                                              |                                                                                                                                                          |                           |                                                                     |              |            |            |            |           
|                                                              |                                                                                                                                                          |                           | Total Common Stockholders Equity                                   |              |            | 52,473,707 |            |            |            | 54,501,922 | 
|                                                              |                                                                                                                                                          |                           |                                                                     |              |            |            |            |           
|                                                              |                                                                                                                                                          |                           | Total Liabilities, Preferred Stock and Common
	Stockholders Equity |              | $          | 82,155,212 |            |            | $          | 85,620,502 | 
|                                                              |                                                                                                                                                          |                           |                                                                     |              |            |            |            |           

See Accompanying Notes to Financial Statements

29



---



##### Table of Contents



REDHOOK ALE BREWERY, INCORPORATED

STATEMENTS OF OPERATIONS

|                                             |  |                         |            |      |  |      |            |   |  |   |            |  
|-------------------------------------------- |  | ----------------------- | ---------- | ---- |  | ---- | ---------- | - |  | - | ---------- | -
|                                             |  |                        
|                                             |  | Year Ended December 31,
|                                             |  |                        
|                                             |  | 2001                    |            | 2000 |  | 1999
|                                             |  |                         |            |      |  |     
|Sales                                        |  | $                       | 40,116,667 |      |  | $    | 37,836,882 |   |  | $ | 35,458,710 |  
|Less Excise Taxes                            |  |                         | 3,411,922  |      |  |      | 3,425,046  |   |  |   | 3,264,311  |  
|                                             |  |                         |            |      |  |      |            |   |  |   |            |  
|Net Sales                                    |  |                         | 36,704,745 |      |  |      | 34,411,836 |   |  |   | 32,194,399 |  
|Cost of Sales                                |  |                         | 26,739,965 |      |  |      | 24,580,536 |   |  |   | 22,613,468 |  
|                                             |  |                         |            |      |  |      |            |   |  |   |            |  
|Gross Profit                                 |  |                         | 9,964,780  |      |  |      | 9,831,300  |   |  |   | 9,580,931  |  
|Selling, General and Administrative Expenses |  |                         | 11,817,041 |      |  |      | 11,747,095 |   |  |   | 11,290,271 |  
|                                             |  |                         |            |      |  |      |            |   |  |   |            |  
|Operating Income (Loss)                      |  |                         | (1,852,261 | )    |  |      | (1,915,795 | ) |  |   | (1,709,340 | )
|Interest Expense                             |  |                         | 393,853    |      |  |      | 593,628    |   |  |   | 533,360    |  
|Other Income (Expense)  Net                 |  |                         | 248,754    |      |  |      | 1,453,090  |   |  |   | (48,192    | )
|                                             |  |                         |            |      |  |      |            |   |  |   |            |  
|Income (Loss) before Income Taxes            |  |                         | (1,997,360 | )    |  |      | (1,056,333 | ) |  |   | (2,290,892 | )
|Income Tax Provision (Benefit)               |  |                         | (679,103   | )    |  |      | (328,126   | ) |  |   | (767,458   | )
|                                             |  |                         |            |      |  |      |            |   |  |   |            |  
|Net Income (Loss)                            |  | $                       | (1,318,257 | )    |  | $    | (728,207   | ) |  | $ | (1,523,434 | )
|                                             |  |                         |            |      |  |      |            |   |  |   |            |  
|Basic Earnings (Loss) per Share              |  | $                       | (0.19      | )    |  | $    | (0.10      | ) |  | $ | (0.20      | )
|                                             |  |                         |            |      |  |      |            |   |  |   |            |  
|Diluted Earnings (Loss) per Share            |  | $                       | (0.19      | )    |  | $    | (0.10      | ) |  | $ | (0.20      | )
|                                             |  |                         |            |      |  |      |            |   |  |   |            |  

See Accompanying Notes to Financial Statements

30



---



##### Table of Contents



REDHOOK ALE BREWERY, INCORPORATED

STATEMENTS OF COMMON STOCKHOLDERS
EQUITY

|                           |                            |              |           |            |   |          |        |           |   |               |            |          |   |   |            |            |   |   |            |            |  
|-------------------------- | -------------------------- | ------------ | --------- | ---------- | - | -------- | ------ | --------- | - | ------------- | ---------- | -------- | - | - | ---------- | ---------- | - | - | ---------- | ---------- | -
|                           |                            |              |           |            |   |          |        |          
|                           |                            | Common Stock |           |            |   |          |        | Total    
|                           |                            |              |           | Additional |   | Retained |        | Common   
|                           |                            |              |           | Par        |   | Paid-In  |        | Earnings  |   | Stockholders
|                           |                            | Shares       |           | Value      |   | Capital  |        | (Deficit) |   | Equity       
|                           |                            |              |           |            |   |          |        |           |   |              
|Balance, January 1, 1999   |                            |              | 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 |           
|                           | Repurchase of Common Stock |              |           | (375,000   | ) |          |        | (1,875    | ) |               |            | (582,608 | ) |   |            |           |   |   |            | (584,483   | )
|                           | Other                      |              |           |           |   |          |        |          |   |               |            |         |   |   |            | (44,400    | ) |   |            | (44,400    | )
|                           | Net Loss                   |              |           |           |   |          |        |          |   |               |            |         |   |   |            | (728,207   | ) |   |            | (728,207   | )
|                           |                            |              |           |            |   |          |        |           |   |               |            |          |   |   |            |            |   |   |            |           
|Balance, December 31, 2000 |                            |              | 7,312,786 |            |   |          | 36,564 |           |   |               | 56,407,023 |          |   |   | (1,941,665 | )          |   |   | 54,501,922 |           
|                           | Repurchase of Common Stock |              |           | (392,740   | ) |          |        | (1,964    | ) |               |            | (663,594 | ) |   |            |           |   |   |            | (665,558   | )
|                           | Other                      |              |           |           |   |          |        |          |   |               |            |         |   |   |            | (44,400    | ) |   |            | (44,400    | )
|                           | Net Loss                   |              |           |           |   |          |        |          |   |               |            |         |   |   |            | (1,318,257 | ) |   |            | (1,318,257 | )
|                           |                            |              |           |            |   |          |        |           |   |               |            |          |   |   |            |            |   |   |            |           
|Balance, December 31, 2001 |                            |              | 6,920,046 |            |   | $        | 34,600 |           |   | $             | 55,743,429 |          |   | $ | (3,304,322 | )          |   | $ | 52,473,707 |           
|                           |                            |              |           |            |   |          |        |           |   |               |            |          |   |   |            |            |   |   |            |           

See Accompanying Notes to Financial Statements

31



---



##### Table of Contents



REDHOOK ALE BREWERY, INCORPORATED

STATEMENTS OF CASH FLOWS

|                                                                                          |                                              |                                             |            |           |          |      |            |           |          |   |            |           |          |  
|----------------------------------------------------------------------------------------- | -------------------------------------------- | ------------------------------------------- | ---------- | --------- | -------- | ---- | ---------- | --------- | -------- | - | ---------- | --------- | -------- | -
|                                                                                          |                                              |                                            
|                                                                                          |                                              | Year Ended December 31,                    
|                                                                                          |                                              |                                            
|                                                                                          |                                              | 2001                                        |            | 2000      |          | 1999
|                                                                                          |                                              |                                             |            |           |          |     
|Operating Activities                                                                      |                                              |                                             |            |           |          |      |            |           |          |   |            |          
|Net Income (Loss)                                                                         |                                              | $                                           | (1,318,257 | )         |          | $    | (728,207   | )         |          | $ | (1,523,434 | )        
|Adjustments to Reconcile Net Income (Loss) to Net
	Cash Provided by Operating Activities: |                                              |                                             |            |           |          |      |            |           |          |   |            |          
|                                                                                          | Depreciation and Amortization                |                                             |            | 3,182,661 |          |      |            | 3,240,484 |          |   |            | 3,271,381 |         
|                                                                                          | Deferred Income Taxes                        |                                             |            | (700,809  | )        |      |            | (350,918  | )        |   |            | (778,822  | )       
|                                                                                          | Loss (Gain) on Disposal of Fixed Assets      |                                             |            | 13,864    |          |      |            | (898,155  | )        |   |            | 265,415   |         
|                                                                                          | Changes in Operating Assets and Liabilities: |                                             |            |           |          |      |            |           |          |   |            |           |         
|                                                                                          |                                              | Accounts Receivable                         |            |           | (330,599 | )    |            |           | 99,123   |   |            |           | 350,855  |  
|                                                                                          |                                              | Inventories                                 |            |           | (413,219 | )    |            |           | (319,274 | ) |            |           | (139,387 | )
|                                                                                          |                                              | Income Taxes Receivable                     |            |           |         |      |            |           |         |   |            |           | 469,272  |  
|                                                                                          |                                              | Other Current Assets                        |            |           | 127,733  |      |            |           | 35,399   |   |            |           | (27,858  | )
|                                                                                          |                                              | Other Assets                                |            |           | 259,021  |      |            |           | 215,436  |   |            |           | 56,249   |  
|                                                                                          |                                              | Accounts Payable and Other Accrued Expenses |            |           | (686,843 | )    |            |           | 36,518   |   |            |           | 696,054  |  
|                                                                                          |                                              | Accrued Salaries, Wages and Payroll Taxes   |            |           | 128,879  |      |            |           | 120,187  |   |            |           | (43,384  | )
|                                                                                          |                                              | Refundable Deposits                         |            |           | 209,013  |      |            |           | 220,239  |   |            |           | 260,662  |  
|                                                                                          |                                              |                                             |            |           |          |      |            |           |          |   |            |          
|Net Cash Provided by Operating Activities                                                 |                                              |                                             | 471,444    |           |          |      | 1,670,832  |           |          |   | 2,857,003  |          
|                                                                                          |                                              |                                             |            |           |          |      |            |           |          |   |            |          
|Investing Activities                                                                      |                                              |                                             |            |           |          |      |            |           |          |   |            |          
|Expenditures for Fixed Assets                                                             |                                              |                                             | (434,415   | )         |          |      | (425,056   | )         |          |   | (1,140,603 | )        
|Proceeds from Sale of Assets and Other, Net                                               |                                              |                                             | (44,875    | )         |          |      | 1,813,118  |           |          |   | 1,084,932  |          
|                                                                                          |                                              |                                             |            |           |          |      |            |           |          |   |            |          
|Net Cash (Used in) Provided by Investing
	Activities                                      |                                              |                                             | (479,290   | )         |          |      | 1,388,062  |           |          |   | (55,671    | )        
|                                                                                          |                                              |                                             |            |           |          |      |            |           |          |   |            |          
|Financing Activities                                                                      |                                              |                                             |            |           |          |      |            |           |          |   |            |          
|Repayments on Debt                                                                        |                                              |                                             | (450,000   | )         |          |      | (450,000   | )         |          |   | (450,000   | )        
|Repurchase of Common Stock                                                                |                                              |                                             | (665,558   | )         |          |      | (584,483   | )         |          |   |           |          
|Officer Note Repayment and Other, Net                                                     |                                              |                                             |           |           |          |      |           |           |          |   | 100,999    |          
|                                                                                          |                                              |                                             |            |           |          |      |            |           |          |   |            |          
|Net Cash Used in Financing Activities                                                     |                                              |                                             | (1,115,558 | )         |          |      | (1,034,483 | )         |          |   | (349,001   | )        
|                                                                                          |                                              |                                             |            |           |          |      |            |           |          |   |            |          
|Increase (Decrease) in Cash and Cash Equivalents                                          |                                              |                                             | (1,123,404 | )         |          |      | 2,024,411  |           |          |   | 2,452,331  |          
|Cash and Cash Equivalents:                                                                |                                              |                                             |            |           |          |      |            |           |          |   |            |          
|                                                                                          | Beginning of Year                            |                                             |            | 7,487,190 |          |      |            | 5,462,779 |          |   |            | 3,010,448 |         
|                                                                                          |                                              |                                             |            |           |          |      |            |           |          |   |            |          
|                                                                                          | End of Year                                  |                                             | $          | 6,363,786 |          |      | $          | 7,487,190 |          |   | $          | 5,462,779 |         
|                                                                                          |                                              |                                             |            |           |          |      |            |           |          |   |            |          

See Accompanying Notes to Financial Statements

32



---



##### Table of Contents



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 and pub in the
Seattle suburb of Woodinville, Washington; and, a brewery and
pub in Portsmouth, New Hampshire. As of December 31, 2001, the
Companys products were distributed in 48 states.

In October 1994, the Company executed an
agreement (the Distribution Alliance or the
Alliance) with Anheuser-Busch, Incorporated
(A-B). The Alliance consists of a long-term national
distribution agreement (the A-B Distribution
Agreement) and an investment by A-B in the Company (the
A-B Investment Agreement). The Alliance gives the
Company access to A-Bs national distribution network to
distribute its products. Pursuant to the A-B Investment
Agreement, A-B invested approximately $30 million to
purchase 1,289,872 shares of the Companys convertible
redeemable Series B Preferred Stock (the
Series B Preferred Stock) and 953,470 shares of
the Companys Common Stock (Common Stock),
including 716,714 newly-issued shares concurrent with the
Companys initial public offering. As of December 31,
2001, A-B held 27.3% of the Companys outstanding shares of
Common Stock, calculated on a Fully Diluted Basis.



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

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



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

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



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

Fixed assets are stated at cost. Significant
additions and improvements are capitalized. Maintenance and
repairs are expensed as incurred. Upon disposition of fixed
assets, any gains or losses are reflected in the statement of
operations. Depreciation and amortization is computed using the
straight-line method over the following estimated useful lives:

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



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

When facts and circumstances indicate that the
carrying values of long-lived assets may be impaired, an
evaluation of recoverability is performed by comparing the
carrying value of the assets to projected future cash flows in
addition to other quantitative and qualitative analyses. Upon
indication that the carrying value of such assets may not be
recoverable, the Company recognizes an impairment loss by a
charge against current operations. Fixed assets are grouped at
the lowest level for which there are identifiable cash flows
when assessing impairment.

33



---



##### Table of Contents



REDHOOK ALE BREWERY, INCORPORATED


NOTES TO FINANCIAL STATEMENTS 
(Continued)



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

The Company recognizes revenue from product
sales, net of excise taxes and certain fees the Company must pay
in connection with sales to A-B, when the products are shipped
to customers.



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

The Company 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,
2001, 2000, and 1999, advertising expenses totaled $1,333,000,
$2,460,000, and $2,753,000 respectively.



| |                    
| | -------------------
| | 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 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, 2001, 2000 and 1999, because their effect is
antidilutive. The calculation uses the treasury stock method and
the as if converted method in determining the resulting
incremental average equivalent shares outstanding as applicable.



| |                 
| | ----------------
| | Use of Estimates

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



| |                                    
| | -----------------------------------
| | Fair Value of Financial Instruments

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



| |                                     
| | ------------------------------------
| | Recently Issued Accounting Standards

In August 2001, the Financial Accounting
Standards Board (FASB) issued Statement of Financial
Accounting Standard (SFAS) No. 144,
Accounting for the Impairment or Disposal of Long-Lived
Assets, which supercedes SFAS No. 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of. SFAS No. 144 retains the
fundamental provisions of SFAS No. 121 but sets forth

34



---



##### Table of Contents



REDHOOK ALE BREWERY, INCORPORATED


NOTES TO FINANCIAL STATEMENTS 
(Continued)

new criteria for asset classification and
broadens the scope of qualifying discontinued operations. SFAS
144 is applicable to financial statements issued for fiscal
years beginning after December 15, 2001. Adoption of SFAS
144 is not expected to have an impact on the Companys
financial condition or results of operations.

2.     Inventories

Inventories consist of the following:

|                        |  |              |           |      |  |   |           | 
|----------------------- |  | ------------ | --------- | ---- |  | - | --------- | 
|                        |  |             
|                        |  | December 31,
|                        |  |             
|                        |  | 2001         |           | 2000
|                        |  |              |           |     
|Finished goods          |  | $            | 1,262,737 |      |  | $ | 935,229   | 
|Raw materials           |  |              | 960,817   |      |  |   | 1,126,772 | 
|Promotional merchandise |  |              | 630,554   |      |  |   | 444,584   | 
|Packaging materials     |  |              | 285,182   |      |  |   | 219,486   | 
|                        |  |              |           |      |  |   |           | 
|                        |  | $            | 3,139,290 |      |  | $ | 2,726,071 | 
|                        |  |              |           |      |  |   |           | 

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

3.     Fixed
Assets

Fixed assets consist of the following:

|                                               |  |              |            |      |  |   |            | 
|---------------------------------------------- |  | ------------ | ---------- | ---- |  | - | ---------- | 
|                                               |  |             
|                                               |  | December 31,
|                                               |  |             
|                                               |  | 2001         |            | 2000
|                                               |  |              |            |     
|Land and improvements                          |  | $            | 4,599,282  |      |  | $ | 4,564,080  | 
|Buildings                                      |  |              | 35,674,357 |      |  |   | 35,603,761 | 
|Brewery equipment                              |  |              | 44,911,502 |      |  |   | 44,639,779 | 
|Furniture, fixtures and other equipment        |  |              | 3,640,925  |      |  |   | 3,606,512  | 
|Leasehold improvements                         |  |              | 176,651    |      |  |   | 176,651    | 
|Vehicles                                       |  |              | 81,730     |      |  |   | 81,730     | 
|                                               |  |              |            |      |  |   |            | 
|                                               |  |              | 89,084,447 |      |  |   | 88,672,513 | 
|Less accumulated depreciation and amortization |  |              | 18,115,944 |      |  |   | 15,002,265 | 
|                                               |  |              |            |      |  |   |            | 
|                                               |  | $            | 70,968,503 |      |  | $ | 73,670,248 | 
|                                               |  |              |            |      |  |   |            | 

4.     Fremont
Brewery

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

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

35



---



##### Table of Contents



REDHOOK ALE BREWERY, INCORPORATED


NOTES TO FINANCIAL STATEMENTS 
(Continued)

5.     Debt

Long-term debt consists of the following:

|                                                                                                                                |  |              |           |      |  |   |           |  
|------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | --------- | ---- |  | - | --------- | -
|                                                                                                                                |  |             
|                                                                                                                                |  | December 31,
|                                                                                                                                |  |             
|                                                                                                                                |  | 2001         |           | 2000
|                                                                                                                                |  |              |           |     
|Term Loan, payable to bank monthly at $37,500,
	plus accrued interest, interest at 3.1% at December 31,
	2001, due June 5, 2007 |  | $            | 6,975,000 |      |  | $ | 7,425,000 |  
|Current portion                                                                                                                 |  |              | (450,000  | )    |  |   | (450,000  | )
|                                                                                                                                |  |              |           |      |  |   |           |  
|                                                                                                                                |  | $            | 6,525,000 |      |  | $ | 6,975,000 |  
|                                                                                                                                |  |              |           |      |  |   |           |  

Annual principal payments required on debt:

|     |  |   |           | 
|---- |  | - | --------- | 
|2002 |  | $ | 450,000   | 
|2003 |  |   | 450,000   | 
|2004 |  |   | 450,000   | 
|2005 |  |   | 450,000   | 
|2006 |  |   | 450,000   | 
|2007 |  |   | 4,725,000 | 
|     |  |   |           | 
|     |  | $ | 6,975,000 | 
|     |  |   |           | 

The Company has a credit agreement with a bank
under which a term loan (the Term Loan) and a
$10 million revolving credit facility (the Revolving
Facility) are provided. The Term Loan, which originated in
June 1997 upon the conversion of a $9 million secured
credit facility, has a five-year term with a 20-year
amortization schedule. On June 19, 2001, the credit
agreement was amended to extend the maturity date on the Term
Loan to June 5, 2007. As of December 31, 2001, there
was $6.975 million outstanding on the Term Loan, and the
Companys one-month LIBOR-based borrowing rate was
approximately 3.13%. The Companys Revolving Facility
expires on July 1, 2002 and had no borrowings outstanding
as of December 31, 2001. The Term Loan and the Revolving
Facility are secured by substantially all of the Companys
assets. Through June 5, 2002, interest on the Term Loan
will accrue at a variable rate based on the London Inter Bank
Offered Rate (LIBOR), plus 1.25% to 2.00%, depending
on the Companys debt-to-tangible net worth ratio.
Effective June 5, 2002, interest on the Term Loan will
accrue at LIBOR plus 1.75% to 2.25%, depending on the
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 has the option to fix the applicable interest rate
for up to twelve months by selecting LIBOR for one- to
twelve-month periods as a base. The termination of the A-B
Distribution Agreement for any reason or the failure by the
Company to perform any of its material obligations under the A-B
Investment Agreement would constitute an event of default under
the credit agreement and the bank may declare the entire
outstanding loan balance immediately due and payable.

In mid-November 2001, the bank notified the
Company that, as of September 30, 2001, the Company was not
in compliance with the Fixed Charge Coverage Ratio covenant as
the ratio had been re-defined in the June 2001 amendment to the
credit agreement. In December 2001, the credit agreement was
amended to address the following: to waive the
September 30, 2001 covenant violation; to temporarily
modify the time periods used to calculate the Fixed Charge
Coverage Ratio; to modify the minimum Fixed Charge Coverage
Ratio the Company must maintain; and to redefine Fixed Charge
Coverage Ratio to comply with the banks revised internal
guidelines. The Company was in compliance with all covenants for
the quarter ended December 31, 2001.

36



---



##### Table of Contents



REDHOOK ALE BREWERY, INCORPORATED


NOTES TO FINANCIAL STATEMENTS 
(Continued)

The Company made interest payments totaling
$425,000, $594,000 and $530,000 for the years ended
December 31, 2001, 2000 and 1999, respectively.

6.     Convertible
Redeemable Preferred Stock

Convertible redeemable preferred stock
outstanding is as follows:

|                                                                                                                   |  |              |            |      |  |   |            | 
|------------------------------------------------------------------------------------------------------------------ |  | ------------ | ---------- | ---- |  | - | ---------- | 
|                                                                                                                   |  |             
|                                                                                                                   |  | December 31,
|                                                                                                                   |  |             
|                                                                                                                   |  | 2001         |            | 2000
|                                                                                                                   |  |              |            |     
|Series B, par value $0.005 per share, issued
	and outstanding 1,289,872 shares; net of unamortized offering
	costs |  | $            | 16,143,855 |      |  | $ | 16,099,455 | 
|                                                                                                                   |  |              |            |      |  |   |            | 

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

During 1994, the Board of Directors designated
1,289,872 preferred shares as Series B Preferred Stock. In
November 1994, the Company sold all shares of Series B
Preferred Stock to A-B for approximately $16.3 million, or
$12.61 per share. Prior to November 1999, A-Bs ownership
percentage of the Company was limited to 25% of the outstanding
shares of Common Stock, calculated on a Fully Diluted Basis (the
A-B Standstill). The ownership percentage
limitation increased to 30% of the outstanding shares of Common
Stock, calculated on a Fully Diluted Basis, for the period
November 1999 through November 15, 2001. Pursuant to the
terms of the A-B Investment Agreement, the A-B Standstill
automatically terminated on November 16, 2001. The A-B
Investment Agreement provides that, to the extent A-Bs
ownership exceeds 30% of the outstanding shares of Common Stock,
calculated on a Fully Diluted Basis, as a result of a rights
offering, A-B will, in certain circumstances, take steps to
divest itself of such shares no later than the later of
(i) one year from the date of such purchase or acquisition
and (ii) the earliest period in which such shares may be
sold pursuant to Rule 144 under the Securities Act of 1933,
as amended. The 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 declare dividends on, or
purchase, any of its capital stock without prior approval from
the Series B Stockholders. The holders of Series B
Preferred Stock and converted Series A Preferred Stock also
are entitled to certain contractual registration rights.

Holders of Series B Preferred Stock
generally are entitled to receive dividends at a rate equal to
any dividends declared on common stock, when and if dividends
are declared by the Companys Board of Directors. In
addition, under certain circumstances relating to the
termination of the Distribution Alliance by A-B, the
Series B Preferred Stock would accumulate preferential
dividends from the date of such termination until stock
redemption at a fixed annual rate based on the ten-year U.S.
Treasury rate, plus 2.75%.

Holders of Series B Preferred Stock also
have mandatory redemption rights and liquidation preferences
equal to $12.61 per share (approximately $16.3 million in
the aggregate), plus any accumulated and unpaid dividends. The
Company is required to redeem all shares of outstanding
Series B Preferred Stock on December 31, 2004, or on
December 31, 2014, under certain conditions relating to a
termination of the Distribution Alliance by A-B.

37



---



##### Table of Contents



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 periodically through the
redemption date of December 31, 2004 by a charge of $44,000
per year to retained earnings.

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 accrued interest at 5.9% per
year.



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

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



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

In May 2000, the Board of Directors authorized
the repurchase of up to 500,000 shares of the
Companys outstanding shares of common stock. Two further
resolutions were passed by the Board of Directors in January and
November 2001, each authorizing the repurchase of an additional
250,000 shares of its outstanding shares of common stock,
bringing the total authorization to 1.0 million shares. As
of December 31, 2001, 768,000 shares of common stock had
been purchased in the open market for $1,250,000.



| |                   
| | ------------------
| | 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).
The plans, amended in May 1996, provide for 1,270,000 and
170,000 shares of common stock for options, respectively.
Employee options generally vest over a five-year period while
director options become exercisable six months after the grant
date. Vested options are generally exercisable for ten years
from the date of grant.

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 were exercisable for ten years from the date of grant.
As of December 31, 2001, no options remained outstanding
under this plan.

38



---



##### Table of Contents



REDHOOK ALE BREWERY, INCORPORATED


NOTES TO FINANCIAL STATEMENTS 
(Continued)

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

|                             |           |           |           |          |   |             |       |          |  |  |         |  |  |   |       |  | 
|---------------------------- | --------- | --------- | --------- | -------- | - | ----------- | ----- | -------- |  |  | ------- |  |  | - | ----- |  | 
|                             |           | Shares of |           |          |   |             |       |         
|                             |           | Common    |           | Weighted |   | Options     |       | Weighted
|                             |           | Stock     |           | Average  |   | Exercisable |       | Average 
|                             |           | Under the |           | Exercise |   | at          |       | Exercise
|                             |           | Plans     |           | Price    |   | End of Year |       | Price   
|                             |           |           |           |          |   |             |       |         
|Balance at January 1, 1999   |           |           | 1,016,652 |          |   | $           | 10.96 |          |  |  | 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 |          |   |             | 9.36  |          |  |  | 631,272 |  |  |   | 11.84 | 
|                             | Granted   |           |           | 95,000   |   |             |       | 1.55     |  |  |         |  |  |   |       |  | 
|                             | Exercised |           |           |         |   |             |       |         |  |  |         |  |  |   |       |  | 
|                             | Canceled  |           |           | (610,780 | ) |             |       | 11.47    |  |  |         |  |  |   |       |  | 
|                             |           |           |           |          |   |             |       |          |  |  |         |  |  |   |       | 
|Balance at December 31, 2000 |           |           | 746,752   |          |   |             | 6.64  |          |  |  | 395,702 |  |  |   | 8.75  | 
|                             | Granted   |           |           | 590,600  |   |             |       | 1.86     |  |  |         |  |  |   |       |  | 
|                             | Exercised |           |           |         |   |             |       |         |  |  |         |  |  |   |       |  | 
|                             | Canceled  |           |           | (129,260 | ) |             |       | 7.00     |  |  |         |  |  |   |       |  | 
|                             |           |           |           |          |   |             |       |          |  |  |         |  |  |   |       | 
|Balance at December 31, 2001 |           |           | 1,208,092 |          |   | $           | 4.27  |          |  |  | 439,622 |  |  | $ | 7.57  | 
|                             |           |           |           |          |   |             |       |          |  |  |         |  |  |   |       | 

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

The following table summarizes information for
options currently outstanding and exercisable at
December 31, 2001:

|                         |                |                     |           |                     |  |          |      |             |  |          |       |      |  |  |         |         |  |   |       |      | 
|------------------------ | -------------- | ------------------- | --------- | ------------------- |  | -------- | ---- | ----------- |  | -------- | ----- | ---- |  |  | ------- | ------- |  | - | ----- | ---- | 
|                         |                |                     |           |                    
|                         |                | Options Outstanding |           | Options Exercisable
|                         |                |                     |           |                    
|                         |                |                     |           | Weighted            |  |          |      |            
|                         |                |                     |           | Average             |  | Weighted |      |             |  | Weighted
|                         |                |                     |           | Remaining           |  | Average  |      |             |  | Average 
|                         |                | Number              |           | Contractual         |  | Exercise |      | Number      |  | Exercise
|Range of Exercise Prices |                | Outstanding         |           | Life (Yrs)          |  | Price    |      | Exercisable |  | Price   
|                         |                |                     |           |                     |  |          |      |             |  |         
|$ 1.49 to $ 1.82         |                |                     | 107,000   |                     |  |          | 8.64 |             |  | $        | 1.58  |      |  |  | 53,250  |         |  | $ | 1.59  |     
|                         | 1.87 to   1.87 |                     |           | 561,650             |  |          |      | 9.59        |  |          |       | 1.87 |  |  |         | 0       |  |   |       | 0.00 | 
|                         | 3.33 to   3.33 |                     |           | 49,500              |  |          |      | 0.82        |  |          |       | 3.33 |  |  |         | 49,500  |  |   |       | 3.33 | 
|                         | 3.97 to   3.97 |                     |           | 232,700             |  |          |      | 7.38        |  |          |       | 3.97 |  |  |         | 110,180 |  |   |       | 3.97 | 
|                         | 5.73 to  12.61 |                     |           | 212,842             |  |          |      | 5.03        |  |          |       | 8.41 |  |  |         | 182,292 |  |   |       | 8.68 | 
|17.00 to  25.50          |                |                     | 44,400    |                     |  |          | 4.30 |             |  |          | 23.82 |      |  |  | 44,400  |         |  |   | 23.82 |     
|                         |                |                     |           |                     |  |          |      |             |  |          |       |      |  |  |         |         |  |   |       |     
|$ 1.49 to $25.50         |                |                     | 1,208,092 |                     |  |          | 7.72 |             |  | $        | 4.27  |      |  |  | 439,622 |         |  | $ | 7.57  |     
|                         |                |                     |           |                     |  |          |      |             |  |          |       |      |  |  |         |         |  |   |       |     

Under the terms of the Companys incentive
stock option plans, employees and directors may be granted
options to purchase the Companys common stock at the
market price on the date the option is granted. At
December 31, 2001, 2000 and 1999, a total of 104,261,
565,601 and 67,821 options, respectively, were available for
future grants under the plans.

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

39



---



##### Table of Contents



REDHOOK ALE BREWERY, INCORPORATED


NOTES TO FINANCIAL STATEMENTS 
(Continued)



| |                                 
| | --------------------------------
| | Pro Forma Fair Value Disclosures

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, 2001, 2000 and 1999 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.

|                                                       |  |                         |            |      |  |      |          |   |  |   |            |  
|------------------------------------------------------ |  | ----------------------- | ---------- | ---- |  | ---- | -------- | - |  | - | ---------- | -
|                                                       |  |                        
|                                                       |  | Year Ended December 31,
|                                                       |  |                        
|                                                       |  | 2001                    |            | 2000 |  | 1999
|                                                       |  |                         |            |      |  |     
|Reported net income (loss)                             |  | $                       | (1,318,257 | )    |  | $    | (728,207 | ) |  | $ | (1,523,434 | )
|Pro forma net income (loss)                            |  |                         | (1,473,018 | )    |  |      | (963,456 | ) |  |   | (2,083,754 | )
|Reported basic and diluted earnings
	(loss) per share  |  | $                       | (0.19      | )    |  | $    | (0.10    | ) |  | $ | (0.20      | )
|Pro forma basic and diluted earnings
	(loss) per share |  | $                       | (0.21      | )    |  | $    | (0.13    | ) |  | $ | (0.27      | )

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:

|                                      |  |      |        |      |  |      |        |   |  |  |        |  
|------------------------------------- |  | ---- | ------ | ---- |  | ---- | ------ | - |  |  | ------ | -
|                                      |  | 2001 |        | 2000 |  | 1999
|                                      |  |      |        |      |  |     
|Expected life of option               |  |      | 5 yrs. |      |  |      | 5 yrs. |   |  |  | 5 yrs. |  
|Risk-free interest rate               |  |      | 4.63   | %    |  |      | 6.75   | % |  |  | 5.25   | %
|Volatility of the Companys stock     |  |      | 54.4   | %    |  |      | 82.3   | % |  |  | 50.0   | %
|Dividend yield on the Companys stock |  |      | 0.0    | %    |  |      | 0.0    | % |  |  | 0.0    | %

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

|                                                  |  |      |         |      |  |      |         |  |  |   |         | 
|------------------------------------------------- |  | ---- | ------- | ---- |  | ---- | ------- |  |  | - | ------- | 
|                                                  |  | 2001 |         | 2000 |  | 1999
|                                                  |  |      |         |      |  |     
|Total number of options granted                   |  |      | 590,600 |      |  |      | 95,000  |  |  |   | 293,950 | 
|Estimated fair value of each option granted       |  | $    | 0.90    |      |  | $    | 1.06    |  |  | $ | 1.69    | 
|Total estimated fair value of all options granted |  | $    | 530,921 |      |  | $    | 100,700 |  |  | $ | 496,776 | 

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 of options
currently outstanding for the weighted average exercise price
for options granted during 2001, 2000 and 1999.

40



---



##### Table of Contents



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 A-B for up to 30% of the Companys common
stock. The Rights, which are not currently exercisable, expire
on September 22, 2005, but may be redeemed at any time by
the Company for $0.001 per Right.

8.     Earnings
(Loss) Per Share

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

|                                                          |              |                                |                                             |      |            |       |   |   |           |       |   |   |            |       |  
|--------------------------------------------------------- | ------------ | ------------------------------ | ------------------------------------------- | ---- | ---------- | ----- | - | - | --------- | ----- | - | - | ---------- | ----- | -
|                                                          |              |                               
|                                                          |              | Year Ended December 31,       
|                                                          |              |                               
|                                                          |              | 2001                           |                                             | 2000 |            | 1999 
|                                                          |              |                                |                                             |      |            |      
|Basic and diluted earnings (loss) per share
	computation: |              |                                |                                             |      |            |       |   |   |           |       |   |  
|                                                          | Numerator:   |                                |                                             |      |            |       |   |   |           |       |   |   |           
|                                                          |              | Net income (loss)              |                                             | $    | (1,318,257 | )     |   | $ | (728,207  | )     |   | $ | (1,523,434 | )    
|                                                          |              |                                |                                             |      |            |       |   |   |           |       |   |  
|                                                          | Denominator: |                                |                                             |      |            |       |   |   |           |       |   |   |           
|                                                          |              | Weighted-average common shares |                                             |      | 7,070,801  |       |   |   | 7,632,628 |       |   |   | 7,687,687  |      
|                                                          |              |                                |                                             |      |            |       |   |   |           |       |   |  
|                                                          |              |                                | Basic and diluted earnings (loss) per share |      | $          | (0.19 | ) |   | $         | (0.10 | ) |   | $          | (0.20 | )
|                                                          |              |                                |                                             |      |            |       |   |   |           |       |   |  

41



---



##### Table of Contents



REDHOOK ALE BREWERY, INCORPORATED


NOTES TO FINANCIAL STATEMENTS 
(Continued)

9.     Income
Taxes

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

|         |  |                         |          |      |  |      |          |   |  |   |          |  
|-------- |  | ----------------------- | -------- | ---- |  | ---- | -------- | - |  | - | -------- | -
|         |  |                        
|         |  | Year Ended December 31,
|         |  |                        
|         |  | 2001                    |          | 2000 |  | 1999
|         |  |                         |          |      |  |     
|Current  |  | $                       | 21,706   |      |  | $    | 22,792   |   |  | $ | 11,364   |  
|Deferred |  |                         | (700,809 | )    |  |      | (350,918 | ) |  |   | (778,822 | )
|         |  |                         |          |      |  |      |          |   |  |   |          |  
|         |  | $                       | (679,103 | )    |  | $    | (328,126 | ) |  | $ | (767,458 | )
|         |  |                         |          |      |  |      |          |   |  |   |          |  

The Companys effective income tax rate was
34.0%, 31.1% and 33.5% for the years ended December 31,
2001, 2000 and 1999, respectively. In 2000, 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.

Current tax expense is attributable to state tax
liabilities. 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:

|                           |                                  |              |            |            |  |   |            |            | 
|-------------------------- | -------------------------------- | ------------ | ---------- | ---------- |  | - | ---------- | ---------- | 
|                           |                                  |             
|                           |                                  | December 31,
|                           |                                  |             
|                           |                                  | 2001         |            | 2000      
|                           |                                  |              |            |           
|Deferred tax liabilities:  |                                  |              |            |            |  |   |            |           
|                           | Tax-over-book depreciation       |              | $          | 10,832,992 |  |   | $          | 10,192,182 | 
|                           | Other                            |              |            | 138,837    |  |   |            | 272,650    | 
|                           |                                  |              |            |            |  |   |            |           
|                           |                                  |              | 10,971,829 |            |  |   | 10,464,832 |           
|Deferred tax assets:       |                                  |              |            |            |  |   |            |           
|                           | NOL and AMT credit carryforwards |              |            | 10,160,532 |  |   |            | 9,162,201  | 
|                           | Other                            |              |            | 235,957    |  |   |            | 26,482     | 
|                           |                                  |              |            |            |  |   |            |           
|                           |                                  |              | 10,396,489 |            |  |   | 9,188,683  |           
|                           |                                  |              |            |            |  |   |            |           
|Net deferred tax liability |                                  | $            | 575,340    |            |  | $ | 1,276,149  |           
|                           |                                  |              |            |            |  |   |            |           

As of December 31, 2001, the Company had
federal operating loss carryforwards of $26.5 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 2021, are the primary components of the
Companys deferred tax asset presented above.

42



---



##### Table of Contents



REDHOOK ALE BREWERY, INCORPORATED


NOTES TO FINANCIAL STATEMENTS 
(Continued)

10.     Commitments

The Company has an operating lease for its
Fremont Brewery facility, occupied by the Trolleyman Pub and the
corporate offices. The lease expires in October 2002 and may be
extended at the Companys option for an additional
five-year term.

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 lease also provides the Company
with the first right of refusal to purchase the premises should
the lessor receive an offer to sell the property to a third
party. The monthly rent commenced upon the completion of the
facility, and can escalate up to 5% at the end of every
five-year period.

Rent expense for the years ended
December 31, 2001, 2000 and 1999 totaled $567,000, $553,000
and $536,000, respectively.

Minimum aggregate future lease payments under
noncancelable operating leases as of December 31, 2001 are
as follows:

|           |  |   |            | 
|---------- |  | - | ---------- | 
|2002       |  | $ | 493,629    | 
|2003       |  |   | 267,449    | 
|2004       |  |   | 266,529    | 
|2005       |  |   | 260,230    | 
|2006       |  |   | 252,652    | 
|Thereafter |  |   | 10,095,807 | 
|           |  |   |            | 
|           |  | $ | 11,636,296 | 
|           |  |   |            | 

The Company periodically enters into commitments
to purchase natural gas and certain raw materials in the normal
course of business. Furthermore, the Company has entered into
purchase commitments to ensure it has the necessary supply of
hops to meet future production requirements. Hop commitments are
for crop years through 2004. 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 $203,000, $186,000
and $178,000 in 2001, 2000 and 1999, respectively.

43



---



##### Table of Contents



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 14%, 16% and
17% of total sales in 2001, 2000 and 1999, respectively. The
sales to A-B through the Distribution Alliance represented 62%,
60% and 58% of total sales, or $24,990,000, $22,582,000 and
$20,712,000 (net of certain fees the Company must pay to A-B in
connection with sales to A-B), in 2001, 2000 and 1999,
respectively. Additional fees incurred by the Company for
A-B administrative and handling charges totaled $238,000,
$216,000 and $188,000 in 2001, 2000 and 1999, respectively. The
Company purchased certain materials through A-B totaling
$4,527,000, $3,989,000 and $3,999,000 in 2001, 2000, and 1999,
respectively. Net amount due from A-B was $199,000 as of
December 31, 2001 and net amount due to A-B was $120,000 as
of December 31, 2000.

13.     Quarterly
Financial Data (Unaudited)

|                                             |  |                                          |       |                    |  |         |        |         |  |         |        |          |  |         |       |         |  |   |        |   |  |   |        |   |  |   |        |   |  |   |       |  
|-------------------------------------------- |  | ---------------------------------------- | ----- | ------------------ |  | ------- | ------ | ------- |  | ------- | ------ | -------- |  | ------- | ----- | ------- |  | - | ------ | - |  | - | ------ | - |  | - | ------ | - |  | - | ----- | -
|                                             |  |                                          |       |                   
|                                             |  | 2001 Quarter Ended                       |       | 2000 Quarter Ended
|                                             |  |                                          |       |                   
|                                             |  | Dec. 31                                  |       | Sept. 30           |  | June 30 |        | Mar. 31 |  | Dec. 31 |        | Sept. 30 |  | June 30 |       | Mar. 31
|                                             |  |                                          |       |                    |  |         |        |         |  |         |        |          |  |         |       |        
|                                             |  |                                         
|                                             |  | (In thousands, except per share amounts)
|Sales                                        |  | $                                        | 9,944 |                    |  | $       | 10,518 |         |  | $       | 10,757 |          |  | $       | 8,899 |         |  | $ | 8,960  |   |  | $ | 10,313 |   |  | $ | 10,408 |   |  | $ | 8,156 |  
|Less Excise Taxes                            |  |                                          | 831   |                    |  |         | 886    |         |  |         | 941    |          |  |         | 756   |         |  |   | 754    |   |  |   | 922    |   |  |   | 984    |   |  |   | 764   |  
|                                             |  |                                          |       |                    |  |         |        |         |  |         |        |          |  |         |       |         |  |   |        |   |  |   |        |   |  |   |        |   |  |   |       |  
|Net Sales                                    |  |                                          | 9,113 |                    |  |         | 9,632  |         |  |         | 9,816  |          |  |         | 8,143 |         |  |   | 8,206  |   |  |   | 9,391  |   |  |   | 9,424  |   |  |   | 7,392 |  
|Cost of Sales                                |  |                                          | 6,557 |                    |  |         | 6,952  |         |  |         | 7,012  |          |  |         | 6,219 |         |  |   | 6,259  |   |  |   | 6,388  |   |  |   | 6,506  |   |  |   | 5,428 |  
|                                             |  |                                          |       |                    |  |         |        |         |  |         |        |          |  |         |       |         |  |   |        |   |  |   |        |   |  |   |        |   |  |   |       |  
|Gross Profit                                 |  |                                          | 2,556 |                    |  |         | 2,680  |         |  |         | 2,804  |          |  |         | 1,924 |         |  |   | 1,947  |   |  |   | 3,003  |   |  |   | 2,918  |   |  |   | 1,964 |  
|Selling, General and Administrative Expenses |  |                                          | 2,577 |                    |  |         | 3,286  |         |  |         | 3,276  |          |  |         | 2,677 |         |  |   | 3,238  |   |  |   | 3,160  |   |  |   | 2,707  |   |  |   | 2,642 |  
|                                             |  |                                          |       |                    |  |         |        |         |  |         |        |          |  |         |       |         |  |   |        |   |  |   |        |   |  |   |        |   |  |   |       |  
|Operating Income (Loss)                      |  |                                          | (21   | )                  |  |         | (606   | )       |  |         | (472   | )        |  |         | (753  | )       |  |   | (1,291 | ) |  |   | (157   | ) |  |   | 211    |   |  |   | (678  | )
|Interest Expense                             |  |                                          | (66   | )                  |  |         | (92    | )       |  |         | (106   | )        |  |         | (130  | )       |  |   | (152   | ) |  |   | (153   | ) |  |   | (148   | ) |  |   | (140  | )
|Other Income (Expense)  Net(1)              |  |                                          | 29    |                    |  |         | 61     |         |  |         | 67     |          |  |         | 92    |         |  |   | 162    |   |  |   | 1,143  |   |  |   | 85     |   |  |   | 63    |  
|                                             |  |                                          |       |                    |  |         |        |         |  |         |        |          |  |         |       |         |  |   |        |   |  |   |        |   |  |   |        |   |  |   |       |  
|Income (Loss) before Taxes                   |  |                                          | (58   | )                  |  |         | (637   | )       |  |         | (511   | )        |  |         | (791  | )       |  |   | (1,281 | ) |  |   | 833    |   |  |   | 148    |   |  |   | (755  | )
|Income Tax Provision (Benefit)               |  |                                          | (20   | )                  |  |         | (223   | )       |  |         | (171   | )        |  |         | (265  | )       |  |   | (439   | ) |  |   | 306    |   |  |   | 59     |   |  |   | (253  | )
|                                             |  |                                          |       |                    |  |         |        |         |  |         |        |          |  |         |       |         |  |   |        |   |  |   |        |   |  |   |        |   |  |   |       |  
|Net Income (Loss)                            |  | $                                        | (38   | )                  |  | $       | (414   | )       |  | $       | (340   | )        |  | $       | (526  | )       |  | $ | (842   | ) |  | $ | 527    |   |  | $ | 89     |   |  | $ | (502  | )
|                                             |  |                                          |       |                    |  |         |        |         |  |         |        |          |  |         |       |         |  |   |        |   |  |   |        |   |  |   |        |   |  |   |       |  
|                                            
|Basic Earnings (Loss) per Share              |  | $                                        | (0.01 | )                  |  | $       | (0.06  | )       |  | $       | (0.05  | )        |  | $       | (0.07 | )       |  | $ | (0.11  | ) |  | $ | 0.07   |   |  | $ | 0.01   |   |  | $ | (0.07 | )
|                                             |  |                                          |       |                    |  |         |        |         |  |         |        |          |  |         |       |         |  |   |        |   |  |   |        |   |  |   |        |   |  |   |       |  
|                                            
|Diluted Earnings (Loss) per Share            |  | $                                        | (0.01 | )                  |  | $       | (0.06  | )       |  | $       | (0.05  | )        |  | $       | (0.07 | )       |  | $ | (0.11  | ) |  | $ | 0.06   |   |  | $ | 0.01   |   |  | $ | (0.07 | )
|                                             |  |                                          |       |                    |  |         |        |         |  |         |        |          |  |         |       |         |  |   |        |   |  |   |        |   |  |   |        |   |  |   |       |  
|                                            
|Barrels Shipped                              |  |                                          | 55.5  |                    |  |         | 57.9   |         |  |         | 60.1   |          |  |         | 49.6  |         |  |   | 50.5   |   |  |   | 56.9   |   |  |   | 58.7   |   |  |   | 46.4  |  



---



|    |                                                                                                                                                                          
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | In July 2000, the Company sold a warehousing
	facility and real estate parcel for approximately
	$1.7 million in cash and recorded a gain of approximately
	$1.0 million.

44



---



##### Table of Contents








|        |                                                                                        
|------- | ---------------------------------------------------------------------------------------
|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 2002
Annual Meeting of Stockholders (the 2002 Proxy
Statement) under the captions Board of
Directors, Executive Compensation and
Section 16(a) Beneficial Ownership Reporting
Compliance.




Item 11.Executive
Compensation

Information regarding executive compensation is
incorporated by reference from the 2002 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 2002 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 2002
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.     Audited
	Financial Statements and Financial Statement Schedules

|                                                                                                 |  |      |    | 
|------------------------------------------------------------------------------------------------ |  | ---- | -- | 
|                                                                                                 |  | Page
|                                                                                                 |  |     
|Report of Ernst & Young LLP, Independent
	Auditors                                               |  |      | 28 | 
|Balance Sheets as of December 31, 2001 and
	2000                                                 |  |      | 29 | 
|Statements of Operations for the Years Ended
	December 31, 2001, 2000 and 1999                   |  |      | 30 | 
|Statements of Common Stockholders Equity
	for the Years Ended
	December 31, 2001, 2000 and 1999 |  |      | 31 | 
|Statements of Cash Flows for the Years Ended
	December 31, 2001, 2000 and 1999                   |  |      | 32 | 
|Notes to Financial Statements                                                                    |  |      | 33 | 



| |                                                                                                                                                                            
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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.

45



---



##### Table of Contents





| |    |         
| | -- | --------
| | 2. | Exhibits



| |                                                                                                       
| | ------------------------------------------------------------------------------------------------------
| | The following exhibits are filed or incorporated
	by reference pursuant to Item 601 of Regulation S-K:

|             |  |                                                                                                                                                                                                                                                                  
|------------ |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.1(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                                           
|3.2(9)       |  | Amended and Restated Bylaws of Registrant, dated
	May 22, 2001                                                                                                                                                                                                   
|10.1(1)      |  | Securities Purchase Agreement dated as of
	July 21, 1993, between the Registrant and GE Capital
	Redhook Investment Corp.                                                                                                                                        
|10.2(1)      |  | Securities Purchase Agreement dated as of
	July 21, 1993, among Registrant and certain investors                                                                                                                                                                 
|10.3(1)      |  | 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)                                                                                                                          
|10.4(1)      |  | Investment Agreement dated as of October 18,
	1994, between the Registrant and Anheuser-Busch, Incorporated                                                                                                                                                      
|10.5(1)      |  | Registration Rights Agreement dated as of
	August 9, 1993, between the Registrant and Purchasers (as
	defined therein)                                                                                                                                           
|10.6(1)      |  | Amendment No. 1 dated as of October 18,
	1994, to Registration Rights Agreement dated as of
	August 9, 1993                                                                                                                                                      
|10.7(1)      |  | Registration Rights Agreement dated as of
	October 18, 1994, between Registrant and Anheuser-Busch,
	Incorporated                                                                                                                                                
|10.8(1)      |  | Employment Agreement between Registrant and Paul
	Shipman, dated October 18, 1994                                                                                                                                                                                
|10.9(1)      |  | 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
|10.11(1)     |  | Sublease between Pease Development Authority as
	Sublessor and Registrant as Sublessee, dated May 30, 1995                                                                                                                                                       
|10.14(1)     |  | Amended and Restated Registrants Directors
	Stock Option Plan                                                                                                                                                                                                   
|10.15(1)     |  | Registrants Incentive Stock Option Plan,
	dated September 12, 1990                                                                                                                                                                                              
|10.16(1)     |  | 1992 Stock Incentive Plan, approved
	October 20, 1992, as amended, October 11, 1994 and
	May 25, 1995                                                                                                                                                            
|10.18(1)     |  | Amended and Restated Credit Agreement between
	U.S. Bank of Washington, National Association and
	Registrant, dated June 5, 1995                                                                                                                                 
|10.21(1)(10) |  | Master Distributor Agreement between Registrant
	and Anheuser-Busch, Incorporated, dated October 18, 1994                                                                                                                                                        
|10.22(1)     |  | 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)                                                                                                                             
|10.23(1)     |  | Amendment dated as of July 25, 1995, between
	the Registrant and GE Capital Redhook Investment Corp.                                                                                                                                                             
|10.24(1)     |  | Assignment of Sublease and Assumption Agreement
	dated as of July 1, 1995, between Registrant and Redhook of
	New Hampshire, Inc. (see Exhibit 10.11)                                                                                                            
|10.25(1)     |  | Letter Agreement dated as of July 31, 1995,
	between Registrant and Anheuser-Busch, Incorporated                                                                                                                                                                 
|10.27(7)     |  | Employment Agreement between Registrant and
	David J. Mickelson, dated August 1, 2000                                                                                                                                                                            
|10.28(7)     |  | Employment Agreement between Registrant and
	Allen L Triplett, dated August 1, 2000                                                                                                                                                                              
|10.29(7)     |  | Employment Agreement between Registrant and
	Pamela J. Hinckley, dated August 1, 2000                                                                                                                                                                            

46



---



##### Table of Contents



|             |  |                                                                                                                                                                                
|------------ |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.30(2)     |  | Amendment No. 1 dated as of June 26,
	1996, to Master Distribution Agreement between Registrant and
	Anheuser-Busch, Incorporated, dated October 18, 1994                      
|10.31(2)     |  | Amendment dated as of February 27, 1996, to
	Registrants 1992 Stock Incentive Plan, as amended                                                                                
|10.32(2)     |  | Amendment dated as of February 27, 1996, to
	Amended and Restated Registrants Directors Stock Option
	Plan                                                                    
|10.33(2)     |  | Amendment dated as of July 25, 1996, to
	Registrants 1992 Stock Incentive Plan, as amended                                                                                    
|10.34(3)     |  | 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
|10.35(4)     |  | Second Amendment to Amended and Restated Credit
	Agreement between U.S. Bank of Washington, National
	Association and Registrant, dated September 15, 1997                     
|10.36(4)     |  | Consent, Waiver and Amendment, dated
	September 19, 1997, to Master Distributor Agreement between
	Registrant and Anheuser-Busch, Incorporated, dated
	October 18, 1994        
|10.37(5)(10) |  | Purchasing Agreement dated as of March 27,
	1998, between and Anheuser-Busch, Incorporated                                                                                     
|10.38(6)     |  | Third Amendment to Amended and Restated Credit
	Agreement between U.S. Bank of Washington, National
	Association and Registrant, dated February 22, 1999                       
|10.39(6)     |  | Amended and Restated Rights Agreement between
	Registrant and ChaseMellon Shareholder Services, LLC, dated as
	of May 12, 1999                                                 
|10.40(6)     |  | First Amendment to Employment Agreement between
	Registrant and Paul Shipman, dated May 6, 1999                                                                                
|10.41(7)     |  | Employment Agreement between Registrant and Greg
	Marquina, dated August 1, 2000                                                                                               
|10.42(7)     |  | Fourth Amendment to Amended and Restated Credit
	Agreement between U.S. Bank National Association and
	Registrant, dated August 10, 2000                                       
|10.43(8)     |  | Employment Agreement between Registrant and Paul
	Shipman, dated November 1, 2000                                                                                              
|10.44(9)     |  | Fifth Amendment to Amended and Restated Credit
	Agreement between U.S. Bank National Association and
	Registrant, dated June 19, 2001                                          
|10.45        |  | Sixth Amendment to Amended and Restated Credit
	Agreement between U.S. Bank National Association and
	Registrant, dated December 31, 2001                                      
|10.46        |  | Employment Agreement between Registrant and
	Gerard C. Prial, dated August 1, 2000                                                                                             
|21.1(1)      |  | Subsidiaries of the Registrant                                                                                                                                                 
|23.1         |  | Consent of Ernst & Young LLP, Independent
	Auditors                                                                                                                            



| | 
| | 
| | 



| |     |                                                                                                                                    
| | --- | -----------------------------------------------------------------------------------------------------------------------------------
| | (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-Q for the quarter ended
	June 30, 1996.              
|
| | (3) | Incorporated by reference to same exhibit number
	as in the Companys Form 10-Q for the quarter ended
	September 30, 1996.         
|
| | (4) | Incorporated by reference to same exhibit number
	as in the Companys Form 10-Q for the quarter ended
	September 30, 1997.         
|
| | (5) | Incorporated by reference to same exhibit number
	as in the Companys Form 10-Q for the quarter ended
	March 31, 1998.             

47



---



##### Table of Contents





| |     |                                                                                                                           
| | --- | --------------------------------------------------------------------------------------------------------------------------
| | (6) | Incorporated by reference to same exhibit number
	as in the Companys Form 10-Q for the quarter ended
	March 31, 1999.    
|
| | (7) | Incorporated by reference to same exhibit number
	as in the Companys Form 10-Q for the quarter ended
	September 30, 2000.
|
| | (8) | Incorporated by reference to same exhibit number
	as in the Companys Form 10-K for the year ended
	December 31, 2000.    
|
| | (9) | Incorporated by reference to same exhibit number
	as in the Companys Form 10-Q for the quarter ended
	June 30, 2001.     



| |      |                                                                        
| | ---- | -----------------------------------------------------------------------
| | (10) | Confidential treatment has been granted for
	portions of this document.

48



---



##### Table of Contents






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, 2002.



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



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

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

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

|                                         |  |                                                                                                               |  |               
|---------------------------------------- |  | ------------------------------------------------------------------------------------------------------------- |  | --------------
|Signature                                |  | Title                                                                                                         |  | Date          
|                                         |  |                                                                                                               |  |               
|/s/ PAUL S. SHIPMANPaul S. Shipman       |  | President, Chief Executive Officer and Chairman
	of the Board
	(Principal Executive Officer)                  |  | March 28, 2002
|/s/ DAVID J. MICKELSONDavid J. Mickelson |  | Executive Vice President, Chief Financial Officer
	and Chief Operating Officer
	(Principal Financial Officer) |  | March 28, 2002
|/s/ ANNE M. MUELLERAnne M. Mueller       |  | Controller and Treasurer
	(Principal Accounting Officer)                                                      |  | March 28, 2002
|/s/ FRANK H. CLEMENTFrank H. Clement     |  | Director                                                                                                      |  | March 28, 2002
|/s/ JERRY D. JONESJerry D. Jones         |  | Director                                                                                                      |  | March 28, 2002
|/s/ DAVID A. PEACOCKDavid A. Peacock     |  | Director                                                                                                      |  | March 28, 2002
|/s/ ANTHONY J. SHORTAnthony J. Short     |  | Director                                                                                                      |  | March 28, 2002
|/s/ WALTER F. WALKERWalter F. Walker     |  | Director                                                                                                      |  | March 28, 2002

49