##### 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,
    2003
|or                                             
|                                               
|o                                               |  | TRANSITION REPORT PURSUANT TO SECTION 13
    OR 15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934
|                                               
|For the transition period
    from           to

Commission file number 0-26542

Redhook Ale Brewery, Incorporated


(Exact name of registrant as specified in its
charter)


|                                                                                                         |  |                                            
|-------------------------------------------------------------------------------------------------------- |  | -------------------------------------------
|Washington                                                                                               |  | 91-1141254                                 
|(State of incorporation)                                                                                 |  | (I.R.S. Employer Identification
    Number)
|14300 NE 145th Street, Suite 210
    Woodinville, Washington(Address of principal executive
    offices) |  | 98072-6950(Zip Code)                       

(425) 483-3232

(Registrants telephone number, including
area code)


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

None


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

Common Stock, Par Value $0.005 Per
Share


Rights to Purchase Common Stock

(Title of Class)


Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the
past
90 days.     Yes þ          No o

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

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

The aggregate market value of the Common Stock
held by non-affiliates of the Registrant (based on the closing
price of such stock, as reported by The Nasdaq National Market,
on June 30, 2003) was $9,188,907.(1)

The number of shares of the registrants
Common Stock outstanding as of March 12, 2004 was 6,226,306.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrants Proxy Statement
relating to the registrants 2004 Annual Meeting of
Stockholders to be held on May 18, 2004, 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.



---






---










REDHOOK ALE
BREWERY, INCORPORATED

FORM 10-K

TABLE OF CONTENTS

|              |  |                                                                                                         |  |      |    | 
|------------- |  | ------------------------------------------------------------------------------------------------------- |  | ---- | -- | 
|              |  |                                                                                                         |  | Page
|              |  |                                                                                                         |  |     
|PART I.      
|ITEM 1.       |  | Business                                                                                                |  |      | 1  | 
|ITEM 2.       |  | Properties                                                                                              |  |      | 16 | 
|ITEM 3.       |  | Legal Proceedings                                                                                       |  |      | 16 | 
|ITEM 4.       |  | Submission of Matters to a
    Vote of Security Holders                                                 |  |      | 16 | 
|ITEM 4A.      |  | Executive Officers of the
    Company                                                                   |  |      | 17 | 
|PART II.     
|ITEM 5.       |  | Market for Registrants
    Common Equity and Related Stockholder Matters                               |  |      | 19 | 
|ITEM 6.       |  | Selected Financial Data                                                                                 |  |      | 20 | 
|ITEM 7.       |  | Managements Discussion
    and Analysis of Financial Condition and Results of Operations               |  |      | 21 | 
|ITEM 7A.      |  | Quantitative and Qualitative
    Disclosures about Market Risk                                          |  |      | 32 | 
|ITEM 8.       |  | Financial Statements and
    Supplementary Data                                                         |  |      | 33 | 
|ITEM 9.       |  | Changes in and Disagreements
    With Accountants on Accounting and Financial Disclosures               |  |      | 53 | 
|ITEM 9A.      |  | Controls and Procedures                                                                                 |  |      | 53 | 
|PART III.    
|ITEM 10.      |  | Directors and Executive
    Officers of the Registrant                                                  |  |      | 53 | 
|ITEM 11.      |  | Executive Compensation                                                                                  |  |      | 53 | 
|ITEM 12.      |  | Security Ownership of
    Certain Beneficial Owners and Management and Related
    Stockholders Matters |  |      | 53 | 
|ITEM 13.      |  | Certain Relationships and
    Related Transactions                                                      |  |      | 53 | 
|ITEM 14.      |  | Principal Accounting Fees
    and Services                                                              |  |      | 53 | 
|PART IV.     
|ITEM 15.      |  | Exhibits, Financial
    Statement Schedules and Reports on Form 8-K                                     |  |      | 54 | 
|EXHIBIT 10.34
|EXHIBIT 10.35
|EXHIBIT 23.1 
|EXHIBIT 31.1 
|EXHIBIT 31.2 
|EXHIBIT 32.1 
|EXHIBIT 32.2 



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 (the Washington Brewery) and
the other in Portsmouth, New Hampshire (the New Hampshire
Brewery). By operating its own small-batch breweries, the
Company believes it is better able to control the quantities,
types and flavors of beer produced, while optimizing the quality
and consistency of its products. Management believes that the
Companys significant production capacity is of high
quality and that Redhook is the only domestic craft brewer that
owns and operates substantial production facilities in both a
western region and eastern region of the United States.

The Company currently produces nine styles of
beer, marketed under distinct brand names. The Companys
flagship brand is Redhook E.S.B. and its other principal
products include Redhook India Pale Ale, Redhook Blonde Ale,
Blackhook Porter, Chinook Copper Ale, and its seasonal
offerings Winterhook, Redhook Sunrye Aleand Redhook
Nut Brown Ale.In 2003, the Company began producing and
selling Widmer Hefeweizenin the Eastern United States
under a licensing agreement with Widmer Brothers Brewing
Company. 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 distribution alliance
with Anheuser-Busch, Incorporated (A-B) (the
Distribution Alliance or the Alliance)
in 48 states as of December 31, 2003.

Industry Background

The Company is one of the leading brewers in the
relatively small craft brewing segment of the U.S. brewing
industry. Craft beers are distinguishable from other
domestically produced beers by their fuller flavor and adherence
to traditional European brewing styles. According to industry
sources, the share of the domestic beer sales market held by the
craft beer segment has remained stable over recent years. Craft
beer shipments in 2002 and 2001 were approximately 3% of total
beer shipped in the United States. During these years,
approximately 6.43 million barrels and 6.21 million
barrels were shipped in the U.S. by the craft beer segment,
while total beer sold in the U.S., including imported beer, was
approximately 203.5 million and 200.9 million barrels.
Although industry information for 2003 has not yet been
finalized, the craft beer segments market share is still
anticipated to remain at approximately 3% despite industry
analysts estimates that 2003 total beer sales in the
U.S. declined slightly while 2003 sales by the craft beer
segment increased slightly. The number of craft brewers in the
U.S. has grown dramatically, from 627 at the end of 1994,
peaking at nearly 1,500 in 2000, and down to approximately 1,326
in 2003.

In the early 1900s, the U.S. brewing
industry was comprised of nearly 2,000 breweries, most of which
were small operations that produced distinctive beers for local
markets. Fewer than 1,000 of these breweries reopened following
Prohibition. During the ensuing decades, the beer industry
concentrated its resources primarily on marketing pale lagers
and pilsners for various reasons, including the desire to appeal
to the broadest possible segment of the population; to benefit
from economies of scale through large-scale production
techniques; to prolong shelf life through use of pasteurization
processes; and to take advantage of mass media advertising
reaching consumers nationwide. At the same time the beer
industry was narrowing its product offerings to compete more
effectively, there was also extensive consolidation occurring in
the industry. According to industry sources, the three largest
domestic brewers accounted for approximately 80% of total beer
shipped in the United States, including imports, in 2003.

Annual per capita domestic beer consumption
declined from the highs experienced in the early 1980s, a result
of an elevated concern over health and safety issues, changing
tastes, and affluence and consumption attitudes of a maturing
generation of beer drinkers born after World War II. A
growing number of consumers

1



---



##### Table of Contents



began to migrate away from the major domestic
products toward a broader taste and variety in their malt
beverages, mirroring similar trends in other beverage and
cuisine categories. Foreign brewers initially benefited from
these evolving consumption patterns. Some of the principal
European, Canadian and Mexican imported beers offered a
fuller-flavored alternative to the national brands produced in
the United States, despite also being produced by large brewers.


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

The growth that occurred in the last half of the
1980s and early 1990s in the craft beer segment has
been slowed by the success of the larger specialty beer category
in which the craft beer segment competes as well as by the
growth of the wine and spirits markets. Specialty beverages
include imported beers which have enjoyed resurgence in demand
since the mid-1990s, fuller-flavored products produced by
national domestic brewers, and the newest category of flavored
alcohol beverages. Certain national domestic brewers have also
sought to appeal to this growing demand for craft beers by
producing their own fuller-flavored products. In 2001 and 2002,
the specialty segment saw the introduction of flavored alcohol
beverages, the consumers of which, industry sources generally
believe, correlate closely with the consumers of the import and
craft beer products. While sales of flavored alcohol beverages
were initially very strong, these growth rates slowed in 2003.
The wine and spirits market has experienced a surge in the past
several years, attributable to competitive pricing, increased
merchandising, and increased consumer interest in spirits.

Business Strategy

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

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

Control of Production in Company-Owned
Breweries.The Company builds, owns
and operates its own brewing facilities to optimize the quality
and consistency of its products and to achieve the greatest
control over its production costs. Management believes that its
ability to engage in ongoing product innovation and to control
product quality are critical competitive advantages.

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.

2



---



##### Table of Contents



Strategic Distribution Alliance with Industry
Leader.In October 1994, the Company
entered into a 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 domestic network consists of nearly
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 products while utilizing A-Bs
distribution network.

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

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

On February 3, 2004, the Company announced
that it had reached an agreement in principle with Widmer
Brothers Brewing Company (Widmer), headquartered in
Portland, Oregon, to form a joint sales and marketing
organization to serve both companies operations in the
Western United States. Finalization of the organization of this
joint venture will require the approval of the Boards of
Directors of both companies and various regulatory agencies. The
Company expects that the joint venture will become fully
operational in the second quarter of 2004. For additional
information about the joint venture with Widmer, see
Managements Discussion and Analysis of Financial
Condition and Results of Operations  Certain
Considerations: Issues and Uncertainties  Joint
Organization with Widmer Brothers Brewing Company.

Products

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

3



---



##### Table of Contents



The Company presently produces nine principal
brands, including one brand produced in conjunction with a
licensing agreement, 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 53% of the Companys sales in
2003, 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.

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

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

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

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

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

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

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

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

4



---



##### Table of Contents



experimental brew is sufficiently positive, then
its taste and formula are refined, as necessary, and a new
Redhook brand may be created. Redhook India Pale Ale, Redhook
Nut Brown Ale, and Redhook Blonde Aleare examples of
products that were developed in this manner.


Brewing Operations

The Brewing Process.Beer is made primarily from four natural ingredients: malted
grain, hops, yeast and water. The grain most commonly used in
brewing is barley, owing to its distinctive germination
characteristics that make it easy to ferment. The Company uses
the finest barley malt, 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 and concentrated. Hops are added
during the boil to impart bitterness, balance and aroma. The
specific mixture of hops and the brewing time and temperature
further affect the flavor of the beer. After the boil, the wort
is strained and cooled before it is moved to a fermentation
cellar, where specially cultured yeast is added to induce
fermentation. During fermentation, the worts sugars are
metabolized by the yeast, 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.

5



---



##### Table of Contents



[REDHOOK ALE BREW PROCESS GRAPHIC]

Brewing Equipment.The Company uses only technologically advanced and highly
automated small-batch brewing equipment. The Washington 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 New Hampshire Brewery
employs a 100-barrel mash tun; lauter tun; wort receiver; wort
kettle; whirlpool kettle; three 70,000-pound and two
35,000-pound grain silos; nine 100-barrel, two 200 barrel
and eighteen 400-barrel fermenters; two 200-barrel and four
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, which can extend product shelf life by
eliminating unwanted yeast.

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

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

Ingredients and Raw
Materials.The Company currently
purchases a significant portion of its malted barley from a
single supplier and its premium-quality select hops, grown in
the Pacific Northwest, from competitive sources. The Company
periodically purchases small lots of European hops, which it
uses to achieve a special hop character in certain of its beers.
In order to ensure the supply of the hop varieties used in its
products, the Company enters into supply contracts for its hop
requirements. Redhook believes that comparable quality malted
barley and hops are available from alternate sources at
competitive prices, although there can be no assurance that
pricing would be consistent with the Companys current
arrangements. The Company currently cultivates its own
Saccharomyces cerevisiae yeast supply and maintains a
separate, secure

6



---



##### Table of Contents



supply in-house. The Company has access to
multiple competitive sources for packing materials, such as
bottles, labels, six-pack carriers, crowns and shipping cases.


Product Distribution

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

In October 1994, the Company entered into the
Distribution Alliance with A-B pursuant to which Redhook began
distributing its products, for any new markets entered,
exclusively through A-Bs wholesale distribution network.
If the A-B distributor in the market does not agree to carry the
Companys products, the Company may select a non-A-B
distributor for that territory. The exclusivity provisions of
the A-B Distribution Agreement do not apply to territories where
distribution arrangements with non-Alliance distributors existed
prior to formation of the Distribution Alliance until such
arrangements expire. During 1996, Redhook changed distribution
of its products in substantially all of the significant markets
previously served by non-A-B wholesalers to distribution through
the Alliance.

Prior to establishing the Alliance with A-B, the
Company distributed its products regionally through
distributors, many of which were part of the A-B distribution
network, in eight western states: Washington, California
(northern), Oregon, Idaho, Montana, Wyoming, Colorado and
Alaska. The Companys most significant non-Alliance
wholesaler is K&L Distributors, Inc., which although
not part of the Alliance is a distributor in the A-B
distribution network and responsible for distribution of the
Companys products in most of King County, Washington,
including Seattle. K&L Distributors, Inc. accounted for
approximately 13%, 13% and 14% of total sales in 2003, 2002 and
2001, respectively. As of December 31, 2003, 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
50% of total beer shipped by volume in the U.S., including
imports, distributes its products throughout the United States
through a network of nearly 600 wholesale distributors, most of
whom are geographically contiguous and independently owned and
operated. The Company believes that the typical A-B distributor
is financially stable and has both a long-standing presence and
a substantial market share of beer sales in its territory.

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

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

7



---



##### Table of Contents



enables the Company to reduce the gaps and
overlaps in distribution coverage often experienced by the
Companys competitors.


The Companys products were distributed in
48 states at the end of 2003. In 2003, the Company shipped
its products to 527 Alliance distribution points, accounting for
approximately 72% 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 23% of the Companys sales
volume in 2003.

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

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

Sales and Marketing

During 2003, the Company promoted its products
through a co-operative advertising and promotion program with
its wholesalers; media advertising in select markets; training
and education of wholesalers and retailers; promotions at local
festivals, venues, and pubs; utilization of its two breweries;
and price discounting.

The Company has participated in advertising
programs to varying degrees over the past five years. Prior to
1999, the Company engaged in very limited advertising to market
its products. In order to increase brand awareness and capture a
larger share of the fragmented craft beer market, the Company
determined that a significant increase in spending on
advertising and promotion was necessary. During 1999 and 2000,
the Company primarily utilized radio, billboard and print
advertising in key markets, while also participating to a small
degree in a co-operative program with its distributors. In 2001,
the Company allocated a larger share of its advertising spending
to this co-operative program whereby the Companys spending
is matched dollar for dollar by the distributor. In 2002 and
2003, the Company continued its co-operative advertising and
promotion program while reducing even further those advertising
expenditures where the Company funded the entire program. The
Company believes that the financial commitment as well as the
distributors knowledge of the local market result in an
advertising and promotion program that is targeted in a manner
that will best promote Redhook. Expenditures for the co-op
program and media advertising program totaled $1.6 million
and $1.9 million in 2003 and 2002, respectively. This
advertising spending has significantly increased the
Companys selling, general and administrative expense since
1998, leading to increased losses and a reduction in
stockholders equity. The Company expects to continue to
participate in the co-op advertising and promotion program and
limited media advertising in select markets in 2004. 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

8



---



##### Table of Contents



distributors interest in promoting
increased sales of these products. This is accomplished
primarily through personal contact with each distributor,
including on-site sales training, educational tours of the
Companys breweries, and promotional activities and
expenditures shared with the distributors. The Companys
sales representatives also provide other forms of support to
wholesale distributors, such as direct contact with restaurant
and grocery chain buyers, direct involvement in the design of
grocery store displays, stacking and merchandising of beer
inventory and supply of point-of-sale materials.


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

The Companys breweries also play a
significant role in increasing consumer awareness of the
Companys products and enhancing Redhooks image as a
craft brewer. Many visitors take tours at the Companys
breweries. Both of the Companys breweries have a retail
pub on-site where the Companys products are served. In
addition, the breweries have meeting rooms that the public can
rent for business meetings, parties and holiday events, and that
the Company uses to entertain and educate distributors,
retailers and the media about the Companys products. See
Item 2. Properties. The Company also sells
various items of apparel and memorabilia bearing the
Companys trademarks at its pubs, which creates further
awareness of the Companys beers and reinforces the
Companys quality image.

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

On February 3, 2004, the Company announced
that it had reached an agreement in principle with Widmer
Brothers Brewing Company (Widmer), headquartered in
Portland, Oregon, to form a joint sales and marketing
organization to serve both companies operations in the
Western United States. Finalization of the organization of this
joint venture will require the approval of the Boards of
Directors of both companies and various regulatory agencies. The
Company expects that the joint venture will become fully
operational in the second quarter of 2004. For additional
information about the joint venture with Widmer, see
Managements Discussion and Analysis of Financial
Condition and Results of Operations  Certain
Considerations: Issues and Uncertainties  Joint
Organization with Widmer Brothers Brewing Company.

Seasonality

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

Competition

The Company competes in the highly competitive
craft brewing market as well as in the much larger specialty
beer market, which encompasses producers of import beers, major
national brewers that have introduced fuller-flavored products,
and large spirit companies and national brewers that produce
flavored alcohol beverages. Beyond the beer market, craft
brewers have also faced competition from producers of wines and
spirits. See Industry Background.

9



---



##### Table of Contents



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

The craft beer segment is highly competitive due
to the proliferation of small craft brewers, including contract
brewers, and the large number of products offered by such
brewers. Craft brewers have also encountered more competition as
their peers expand distribution. Just as Redhook expanded
distribution of its products to markets outside of its home in
the Pacific Northwest, so have other craft brewers expanded
distribution of their products to other regions of the country,
leading to an increase in the number of craft brewers in any
given market. Redhook has encountered strong competition from
microbreweries, from other regional specialty brewers such as
Sierra Nevada Brewing Company and New Belgium Brewing Company,
as well as from contract brewers such as Boston Beer Company.
Because the number of participants and number of different
products offered in this segment have increased significantly in
the past ten years, the competition for bottled product
placements and especially for draft beer placements has
intensified. Although certain of these competitors distribute
their products nationally and may have greater financial and
other resources than the Company, management believes that the
Company possesses certain competitive advantages, including its
technologically advanced, Company-owned production facilities
and distribution through the Alliance.

A significant portion of the Companys sales
continues to be in the Pacific Northwest region, which the
Company believes is one of the most competitive craft beer
markets in the United States, both in terms of number of market
participants and consumer awareness. Since 1997, the Company has
experienced a decline in sales volume in Washington State, the
Companys largest market, of approximately 6%. As this
market matures, the Company expects to face increased
competition, both from increased product introductions and
aggressive price promotions.

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

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

In 2001 and 2002, several major distilled spirits
producers and national brewers introduced flavored alcohol
beverages, also referred to as malternative beverages. These
products, such as Smirnoff Ice, SKYY Blue, Bacardi Silver and
Mikes Hard Lemonade, initially demonstrated strong sales
and appeared to draw a portion of overlapping consumers away
from imports and craft beers. While industry specialists
estimate that 2003 sales of some of these products have leveled
off or even declined slightly, flavored alcohol beverages, in
general, continue to be supported by significant advertising
spending. The producers of many of these products have
significantly greater financial resources than the Company. The
success of the flavored alcohol beverages will likely subject
the Company to increased competition.

Competition for consumers of craft beers has also
come from wine and spirits. Some of the growth in the past five
years in the wine and spirits market, industry sources believe,
has been drawn away from the beer market. This growth appears to
be attributable to competitive pricing, increased merchandising,
and increased consumer interest in spirits.

10



---



##### Table of Contents



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,
Alcohol and Tobacco Tax and Trade Bureau (the TTB),
formerly the Bureau of Alcohol Tobacco and Firearms; the United
States Department of Agriculture; the United States Food and
Drug Administration; state alcohol regulatory agencies in the
states in which the Company sells its products; and state and
local health, sanitation, safety, fire and environmental
agencies. In addition, the beer industry is subject to
substantial federal and state excise taxes, although the Company
benefits from favorable treatment granted to brewers producing
less than 2 million barrels per year.

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



| |                                               
| | ----------------------------------------------
| | Alcoholic Beverage Regulation and
    Taxation

Both of the Companys breweries and pubs are
subject to licensing and regulation by a number of governmental
authorities. The Company operates its breweries under federal
licensing requirements imposed by the TTB. The TTB 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 TTB at any time.

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

The U.S. federal government currently
imposes an excise tax of $18 per barrel on beer sold for
consumption in the United States. However, any brewer with
annual production under 2 million barrels instead pays
federal excise tax in the amount of $7 per barrel on sales
of the first 60,000 barrels. While the Company is not aware
of any plans by the federal government to reduce or eliminate
this benefit to small brewers, any such reduction in a material
amount could have an adverse effect on the Company. In addition,
the Company would lose the benefit of this rate structure if it
exceeded the 2 million barrel production threshold.
Individual states also impose excise taxes on alcoholic
beverages in varying amounts, which have also been subject to
change. It is possible that excise taxes will be increased in
the future by both the federal government and several states. In
addition, increased excise taxes on alcoholic beverages have in
the past been considered in connection with various governmental
budget-balancing or funding proposals. Any such increases in
excise taxes, if enacted, could adversely affect the Company.



| |                                               
| | ----------------------------------------------
| | 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

11



---



##### Table of Contents



such regulation or requirement, if such a
violation were to occur, or if environmental regulations were to
become more stringent in the future, the Company could be
adversely affected.




| |               
| | --------------
| | Dram Shop Laws

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

Relationship with
Anheuser-Busch, Incorporated

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



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

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



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

12



---



##### Table of Contents



In the event that the A-B Distribution Agreement
is terminated on or before December 31, 2004, under the
circumstances described in (i), (iii) or (iv) above,
or by A-B under the circumstances described in (ii) above,
the terms of the Series B Preferred Stock held by A-B
pursuant to the A-B Investment Agreement (see A-B Investment
Agreementbelow) require the mandatory redemption of the
Series B Preferred Stock on December 31, 2004, at a
redemption price equal to $12.61 per share (approximately
$16.3 million in the aggregate), plus an amount equal to
accumulated and unpaid dividends thereon, if any. The terms of
the Series B Preferred Stock further provide that, if at
the time of the mandatory redemption the Company has
insufficient legally available funds to redeem all shares of
Series B Preferred Stock, then all funds that are legally
available must be used to redeem Series B Preferred Stock.
At any time thereafter when additional funds of the Company
become legally available, such funds must be immediately used to
redeem shares of Series B Preferred Stock. The Company
would not be legally able to redeem shares of Series B
Preferred Stock if, after giving effect to such redemption, the
Company would not be able to pay its debts when due in the usual
course of business or the Companys total assets would be
less than the sum of its total liabilities. Notice of intention
to terminate the Distribution Agreement must be made by the
party electing to do so no less than six months prior to the
termination date. To date, neither party has given notice of its
intention to terminate the A-B Distribution Agreement.

The termination of the A-B Distribution Agreement
for any reason or the failure by the Company to perform any of
its material obligations under the A-B Investment Agreement
would also constitute an event of default under the
Companys bank credit agreement. Upon default, the bank may
declare the entire outstanding term loan balance immediately due
and payable. If the loan balance became due and payable, such
payment would have seniority over the redemption of the
Series B Preferred Stock. If this were to occur, it would
be unlikely that the Company could satisfy its obligations under
the term loan. In all events, unless additional capital were
raised, the Company would not have sufficient liquidity to
satisfy both its obligation under the term loan and its
obligation to redeem the Series B Preferred Stock. The
Company could seek to refinance its term loan with one or more
banks or obtain additional equity capital, however, there can be
no assurance the Company would be able to access additional
capital to meet its needs or that such additional capital would
be at commercially reasonable terms.

If the A-B Distribution Agreement were terminated
early as described above, it would be extremely difficult for
the Company to rebuild its distribution network without a severe
negative impact on the Companys sales and results of
operations. The mandatory redemption would also have a material
adverse effect on the financial position and cash flows of the
Company. It is likely that the Company would need to raise funds
to fund the development of the new distribution network where
possible and continue operations as it uses legally available
funds to pay for the redemption of the Series B Preferred
Stock. There cannot be any guarantee that the Company would be
able to successfully rebuild all, or part, of its distribution
network or that any additional financing would be available when
needed, either from the current or a replacement bank or from
the capital markets, or that any such financing would be on
commercially reasonable terms. If the Distribution Agreement
were terminated, the Companys ability to remain a going
concern would be uncertain.



| |                         
| | ------------------------
| | A-B Investment Agreement

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

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

A-B Purchase and Transfer
Restrictions.The A-B Investment
Agreement provides that, to the extent A-Bs ownership
exceeds 30% of the outstanding shares of Common Stock,
calculated on a Fully Diluted Basis, as a result of a rights
offering, A-B will, in certain circumstances, take steps to
divest itself of such

13



---



##### Table of Contents



shares no later than the later of (i) one
year from the date of such purchase or acquisition and
(ii) the earliest period in which such shares may be sold
pursuant to Rule 144 under the Securities Act of 1933, as
amended.


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

A-B Board
Representation.Under the A-B
Investment Agreement, A-B has the right to designate a number of
nominees based on its percentage ownership, but not less than
two, so long as A-B holds at least 20% of the Common Stock on a
Fully Diluted Basis (which number will be rounded up to the next
highest whole number if not a whole number). A-Bs
percentage ownership on a Fully Diluted Basis, as
defined in the A-B Investment Agreement is calculated based on
the assumption that all outstanding shares of Series B
Preferred Stock and other convertible securities are converted
into Common Stock, that all outstanding warrants and stock
options (other than stock options granted to officers, directors
and employees under the Companys option plans) have been
exercised in full, and that all holdings of A-B and its
affiliated companies are aggregated. Currently, there are no
outstanding options or warrants that would be included in the
calculation of outstanding shares on a Fully Diluted Basis. As
of March 12, 2004, A-B owned 29.8% of the Companys
Common Stock on a Fully Diluted Basis, and therefore was
entitled under the terms of the A-B Investment Agreement to
designate 2 directors to the Companys Board of Directors.
The Company is obligated to use reasonable efforts to cause the
election of the nominees designated by A-B. If the designees are
not elected, the Company is obligated to take certain remedial
measures, and A-B is entitled to elect the same number of
directors by class voting under the terms of the Series B
Preferred Stock. A-B also has a contractual right to have one of
its Board designees sit on each committee of the Companys
Board of Directors.

Covenants Binding the
Company.The Company has agreed,
pursuant to the A-B Investment Agreement, that it will not,
without A-Bs consent, (i) enter into any acquisition
or investment transaction involving an aggregate purchase price
exceeding 50% of the book value of the Companys assets
prior to such transaction; (ii) enter into any transaction
involving the transfer of specified trademarks or trade names or
the sale of assets representing more than 50% of the book value
of the Companys assets prior to such transaction;
(iii) issue or sell to any person (including A-B), or amend
its capital structure to authorize the issuance of, equity
securities except within certain permitted categories, including
pursuant to (a) the conversion of the Series B
Preferred Stock, (b) a stock split or the exercise of any
outstanding option, (c) other issuances not exceeding in
the aggregate 20% of the shares of Common Stock and
Series B Preferred Stock (as if converted) outstanding at
the beginning of each two-year period commencing on
January 1, 1995 and on January 1 of every second year
thereafter, and (d) issuances under certain antitakeover
plans; (iv) authorize or issue any shares of capital stock
ranking equal or prior to the Series B Preferred Stock as
to dividend or liquidation rights, or entitled to more than one
vote per share or to class voting on any matter (except as
required by Washington corporation law) or to ordinary voting
power in the election of directors (other than Common Stock), or
authorize or issue any new class or series of common shares;
(v) issue or sell any equity securities to persons having
revenues of $100 million or more (subject to adjustment) from
the production or distribution of alcoholic beverages in North
and South America; (vi) afford to any other person or group
the right to designate a number of the Companys directors
equal to or greater than the largest number A-B is contractually
entitled to designate; (vii) issue or sell any equity
securities that would have the effect of reducing the aggregate
percentage ownership of A-B (and its subsidiaries and nominees)
to under 20% of the outstanding Common Stock of the Company
without providing A-B with 10 days written notice;
(viii) enter into any transaction with any affiliate of the
Company except under certain circumstances; (ix) engage in
any material respect in any business other than producing and
distributing beverages; (x) enter into a merger,
consolidation or share exchange with another corporation, except
for transactions meeting multiple criteria

14



---



##### Table of Contents



(including, among others, survival of the Company
and no change in control); or (xi) amend its Articles or
Bylaws in certain respects.


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

Trademarks

The Company has obtained U.S. trademark
registrations for the marks and corresponding logo designs for
Ballard Bitter, Blackhook, Redhook, Redhook ESB, Wheathook,
Winterhook, Sunrye, 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, 2003, the Company had 206
employees, including 60 in production, 83 in the pubs, 49 in
sales and marketing, and 14 in administration. Of these, 49 in
the pubs, 5 in sales and marketing and 1 in production were
part-time employees. The Company believes its relations with its
employees to be good.

15



---



##### Table of Contents








|        |           
|------- | ----------
|Item 2. | Properties

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

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

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






|        |                  
|------- | -----------------
|Item 3. | Legal Proceedings

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






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

None.

16



---



##### Table of Contents








|         |                                      
|-------- | -------------------------------------
|Item 4A. | Executive Officers of the
    Company

Paul S. Shipman (51)  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 (44)  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.

Gerard C. Prial (49)  Vice
President, East Coast Operations

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

Allen L. Triplett (45)  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 its Secretary and Treasurer and formerly as its
Technical Director in the Northwest district. He is also a
member of the American Society of Brewing Chemists and a current
and founding board member of National Ambassadors at the
University of Wyoming. He received his Bachelors degree in
Petroleum Engineering from the University of Wyoming in 1985.

Pamela J. Hinckley (50)  Former
Vice President, Marketing

Ms. Hinckley served as Vice President,
Marketing from August 2000 to March 2004, 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. Ms. Hinckley left
the Company in March 2004.

17



---



##### Table of Contents



Gregory J. Marquina (49)  Former
Vice President, Sales

Mr. Marquina served as Vice President, Sales
from August 2000 to March 2004. 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 for Southern 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. Mr. Marquina left the Company
in March 2004.

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

18



---



##### Table of Contents






PART II.






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

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

|     |                |      |   |       |  |  |   |       | 
|---- | -------------- | ---- | - | ----- |  |  | - | ----- | 
|     |                | High |   | Low  
|     |                |      |   |      
|2003 |                |      |   |       |  |  |   |      
|     | First quarter  |      | $ | 3.410 |  |  | $ | 2.300 | 
|     | Second quarter |      | $ | 2.600 |  |  | $ | 1.900 | 
|     | Third quarter  |      | $ | 2.860 |  |  | $ | 1.900 | 
|     | Fourth quarter |      | $ | 2.400 |  |  | $ | 2.020 | 
|2002 |                |      |   |       |  |  |   |      
|     | First quarter  |      | $ | 3.350 |  |  | $ | 1.670 | 
|     | Second quarter |      | $ | 2.780 |  |  | $ | 2.000 | 
|     | Third quarter  |      | $ | 2.250 |  |  | $ | 1.700 | 
|     | Fourth quarter |      | $ | 2.550 |  |  | $ | 1.790 | 

As of March 12, 2004, there were 842 Common
Stockholders of record, although the Company believes that the
number of beneficial owners of its Common Stock is substantially
greater.

The Company has not paid any dividends since
1994. The Company anticipates that for the foreseeable future,
all earnings, if any, will be retained for the operation and
expansion of its business and the potential redemption of the
Series B Preferred Stock, and that it will not pay cash
dividends. The payment of dividends, if any, in the future will
be at the discretion of the Board of Directors and will depend
upon, among other things, future earnings, capital requirements,
restrictions in future financing agreements, the general
financial condition of the Company and general business
conditions. Payment of dividends is also restricted by terms of
the Series B Preferred Stock. See Note 6 of the Notes
to Financial Statements  Convertible Redeemable
Preferred Stock.

Securities Authorized for Issuance Under
Equity Compensation Plans

The following is a summary as of
December 31, 2003 of all equity compensation plans of the
Company that provide for the issuance of equity securities as
compensation. See Note 7 of the Notes to Financial
Statements  Common Stockholders 
Equity for additional discussion.

|                                                               |       |                      |           |                   |  |                             |      |      |  |  |        |        | 
|-------------------------------------------------------------- | ----- | -------------------- | --------- | ----------------- |  | --------------------------- | ---- | ---- |  |  | ------ | ------ | 
|                                                               |       |                      |           |                   |  | Number of Securities       
|                                                               |       | Number of Securities |           | Weighted Average  |  | Remaining Available for    
|                                                               |       | to be Issued Upon    |           | Exercise Price of |  | Future Issuance under      
|                                                               |       | Exercise of          |           | Outstanding       |  | Equity Compensation        
|                                                               |       | Outstanding Options, |           | Options, Warrants |  | Plans (excluding securities
|                                                               |       | Warrants and Rights  |           | and Rights        |  | reflected in column (a))   
|Plan Category                                                  |       | (a)                  |           | (b)               |  | (c)                        
|                                                               |       |                      |           |                   |  |                            
|Equity compensation plans approved by security
    holders     |       |                      | 1,372,322 |                   |  | $                           | 3.61 |      |  |  | 62,269 |       
|Equity compensation plans not approved by
    security holders |       |                      |          |                   |  |                             |     |      |  |  |       |       
|                                                               |       |                      |           |                   |  |                             |      |      |  |  |        |       
|                                                               | Total |                      |           | 1,372,322         |  |                             | $    | 3.61 |  |  |        | 62,269 | 
|                                                               |       |                      |           |                   |  |                             |      |      |  |  |        |       

19



---



##### 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, 2003, 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,                            
|                                             |  |                                                    
|                                             |  | 2003                                                |         | 2002 |  | 2001 |         | 2000 |  | 1999
|                                             |  |                                                     |         |      |  |      |         |      |  |     
|                                             |  |                                                    
|                                             |  | (In thousands, except per share and operating data)
|Statement of Operations Data:                |  |                                                     |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|Sales                                        |  | $                                                   | 42,213  |      |  | $    | 40,913  |      |  | $    | 40,117  |   |  | $ | 37,837  |   |  | $ | 35,459  |  
|Less Excise Taxes                            |  |                                                     | 3,498   |      |  |      | 3,465   |      |  |      | 3,412   |   |  |   | 3,425   |   |  |   | 3,265   |  
|                                             |  |                                                     |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|Net Sales                                    |  |                                                     | 38,715  |      |  |      | 37,448  |      |  |      | 36,705  |   |  |   | 34,412  |   |  |   | 32,194  |  
|Cost of Sales                                |  |                                                     | 28,702  |      |  |      | 27,597  |      |  |      | 26,740  |   |  |   | 24,581  |   |  |   | 22,613  |  
|                                             |  |                                                     |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|Gross Profit                                 |  |                                                     | 10,013  |      |  |      | 9,851   |      |  |      | 9,965   |   |  |   | 9,831   |   |  |   | 9,581   |  
|Selling, General and Administrative Expenses |  |                                                     | 11,689  |      |  |      | 10,910  |      |  |      | 11,817  |   |  |   | 11,747  |   |  |   | 11,290  |  
|                                             |  |                                                     |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|Operating Income (Loss)                      |  |                                                     | (1,676  | )    |  |      | (1,059  | )    |  |      | (1,852  | ) |  |   | (1,916  | ) |  |   | (1,709  | )
|Interest Expense                             |  |                                                     | 192     |      |  |      | 230     |      |  |      | 394     |   |  |   | 593     |   |  |   | 533     |  
|Other Income (Expense)  Net(1)              |  |                                                     | 59      |      |  |      | 30      |      |  |      | 249     |   |  |   | 1,453   |   |  |   | (49     | )
|                                             |  |                                                     |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|Income (Loss) before Income Taxes            |  |                                                     | (1,809  | )    |  |      | (1,259  | )    |  |      | (1,997  | ) |  |   | (1,056  | ) |  |   | (2,291  | )
|Income Tax Provision (Benefit)               |  |                                                     | 30      |      |  |      | (126    | )    |  |      | (679    | ) |  |   | (328    | ) |  |   | (768    | )
|                                             |  |                                                     |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|Net Income (Loss)                            |  | $                                                   | (1,839  | )    |  | $    | (1,133  | )    |  | $    | (1,318  | ) |  | $ | (728    | ) |  | $ | (1,523  | )
|                                             |  |                                                     |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|                                            
|Basic Earnings (Loss) per Share              |  | $                                                   | (0.30   | )    |  | $    | (0.18   | )    |  | $    | (0.19   | ) |  | $ | (0.10   | ) |  | $ | (0.20   | )
|Diluted Earnings (Loss) per Share            |  | $                                                   | (0.30   | )    |  | $    | (0.18   | )    |  | $    | (0.19   | ) |  | $ | (0.10   | ) |  | $ | (0.20   | )
|                                            
|Operating Data (in barrels):                 |  |                                                     |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|Beer Shipped                                 |  |                                                     | 228,800 |      |  |      | 225,900 |      |  |      | 223,100 |   |  |   | 212,600 |   |  |   | 197,600 |  
|Production Capacity, End of Period(2)        |  |                                                     | 375,000 |      |  |      | 360,000 |      |  |      | 350,000 |   |  |   | 350,000 |   |  |   | 350,000 |  

|                                       |  |              |        |      |  |      |        |      |  |      |        |  |  |   |        |  |  |   |        | 
|-------------------------------------- |  | ------------ | ------ | ---- |  | ---- | ------ | ---- |  | ---- | ------ |  |  | - | ------ |  |  | - | ------ | 
|                                       |  |             
|                                       |  | December 31,
|                                       |  |             
|                                       |  | 2003         |        | 2002 |  | 2001 |        | 2000 |  | 1999
|                                       |  |              |        |      |  |      |        |      |  |     
|Balance Sheet Data (in thousands):     |  |              |        |      |  |      |        |      |  |      |        |  |  |   |        |  |  |   |        | 
|Cash and Cash Equivalents              |  | $            | 6,123  |      |  | $    | 7,007  |      |  | $    | 6,364  |  |  | $ | 7,487  |  |  | $ | 5,463  | 
|Working Capital                        |  |              | 4,511  |      |  |      | 4,346  |      |  |      | 4,640  |  |  |   | 4,817  |  |  |   | 2,635  | 
|Total Assets                           |  |              | 77,131 |      |  |      | 79,982 |      |  |      | 82,155 |  |  |   | 85,621 |  |  |   | 87,707 | 
|Long-term Debt, Net of Current Portion |  |              | 5,625  |      |  |      | 6,075  |      |  |      | 6,525  |  |  |   | 6,975  |  |  |   | 7,425  | 
|Convertible Redeemable Preferred Stock |  |              | 16,233 |      |  |      | 16,188 |      |  |      | 16,144 |  |  |   | 16,099 |  |  |   | 16,055 | 
|Common Stockholders Equity            |  |              | 47,916 |      |  |      | 50,027 |      |  |      | 52,474 |  |  |   | 54,502 |  |  |   | 55,859 | 



---



|    |                                                                                                                                                                                                                                                                                                                                                               
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | 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
    brewery operations in the Fremont neighborhood of Seattle.
|   
|(2) | Based on the Companys estimate of current
    production capacity of equipment, assuming ideal brewing
    conditions, installed as of the end of such period. Amounts do
    not reflect maximum designed production capacity. See
    Managements Discussion and Analysis of Financial
    Condition and Results of Operations.                         

20



---



##### Table of Contents








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

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

Overview

Since its formation, the Company has focused its
business activities on the brewing, marketing and selling of
craft beers in the United States. For the year ended
December 31, 2003, the Company had gross sales of
$42,213,000, an increase of 3.2% over gross sales of $40,913,000
for the year ended December 31, 2002. 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 two brewery pubs.

The Companys sales volume
(shipments) increased 1.3% to 228,800 barrels in 2003
as compared to 225,900 barrels in 2002. Sales in the craft
beer industry generally reflect a degree of seasonality, with
the first and fourth quarters historically being the slowest and
the rest of the year typically demonstrating stronger sales. The
Company has historically operated with little or no backlog, and
its ability to predict sales for future periods is limited.

The Companys sales are affected by several
factors, including consumer demand, price discounting and
competitive considerations. The Company competes in the highly
competitive craft brewing market as well as in the much larger
specialty beer market, which encompasses producers of import
beers, major national brewers that have introduced
fuller-flavored products, and large spirit companies and
national brewers that produce flavored alcohol beverages. Beyond
the beer market, craft brewers have also faced competition from
producers of wines and spirits. The craft beer segment is highly
competitive due to the proliferation of small craft brewers,
including contract brewers, and the large number of products
offered by such brewers. Imported products from foreign brewers
have enjoyed resurgence in demand since the mid-1990s.
Certain national domestic brewers have also sought to appeal to
this growing demand for craft beers by producing their own
fuller-flavored products. In 2001 and 2002, the specialty
segment saw the introduction of flavored alcohol beverages, the
consumers of which, industry sources generally believe,
correlate closely with the consumers of the import and craft
beer products. While sales of flavored alcohol beverages were
initially very strong, these growth rates slowed in 2003. The
wine and spirits market has experienced a surge in the past
several years, attributable to competitive pricing, increased
merchandising, and increased consumer interest in spirits.
Because the number of participants and number of different
products offered in this segment have increased significantly in
the past ten years, the competition for bottled product
placements and especially for draft beer placements has
intensified.

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

21



---



##### Table of Contents



The Company is required to pay federal excise
taxes on sales of its beer. The excise tax burden on beer sales
increases from $7 to $18 per barrel on annual sales over
60,000 barrels and thus, if sales volume increases, federal
excise taxes would increase as a percentage of sales. Most
states also collect an excise tax on the sale of beer.

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

During the peak sales volume periods of 2002,
production capacity at the New Hampshire Brewery was nearly
fully utilized. In order to accommodate volume growth in the
markets served by the New Hampshire Brewery, including
anticipated growth resulting from sales of Widmer Hefeweizen,
the Company expanded fermentation capacity during the first half
of 2003. This expansion brought the production capacity from
approximately 110,000 barrels per year at the end of
December 2002 to the current capacity of approximately
125,000 barrels per year. Production capacity at the New
Hampshire Brewery can be added in phases until the facility
reaches its maximum designed production capacity of
approximately 250,000 barrels per year, under ideal brewing
conditions. Such an increase would require additional capital
expenditures, primarily for fermentation equipment, and
production personnel. The decision to add capacity is affected
by the availability of capital, construction constraints and
anticipated sales in new and existing markets

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

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

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

22



---



##### Table of Contents



Results of Operations

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

|                                             |  |                         |       |      |  |      |       |    |  |  |       |   
|-------------------------------------------- |  | ----------------------- | ----- | ---- |  | ---- | ----- | -- |  |  | ----- | --
|                                             |  |                        
|                                             |  | Year Ended December 31,
|                                             |  |                        
|                                             |  | 2003                    |       | 2002 |  | 2001
|                                             |  |                         |       |      |  |     
|Sales                                        |  |                         | 109.0 | %    |  |      | 109.3 | %  |  |  | 109.3 | % 
|Less Excise Taxes                            |  |                         | 9.0   |      |  |      | 9.3   |    |  |  | 9.3   |   
|                                             |  |                         |       |      |  |      |       |    |  |  |       |   
|Net Sales                                    |  |                         | 100.0 |      |  |      | 100.0 |    |  |  | 100.0 |   
|Cost of Sales                                |  |                         | 74.1  |      |  |      | 73.7  |    |  |  | 72.9  |   
|                                             |  |                         |       |      |  |      |       |    |  |  |       |   
|Gross Profit                                 |  |                         | 25.9  |      |  |      | 26.3  |    |  |  | 27.1  |   
|Selling, General and Administrative Expenses |  |                         | 30.2  |      |  |      | 29.1  |    |  |  | 32.2  |   
|                                             |  |                         |       |      |  |      |       |    |  |  |       |   
|Operating Income (Loss)                      |  |                         | (4.3  | )    |  |      | (2.8  | )  |  |  | (5.1  | ) 
|Interest Expense                             |  |                         | 0.5   |      |  |      | 0.6   |    |  |  | 1.1   |   
|Other Income (Expense)  Net                 |  |                         | 0.2   |      |  |      | 0.1   |    |  |  | 0.7   |   
|                                             |  |                         |       |      |  |      |       |    |  |  |       |   
|Income (Loss) before Income Taxes            |  |                         | (4.6  | )    |  |      | (3.3  | )  |  |  | (5.5  | ) 
|Income Tax Provision (Benefit)               |  |                         | 0.1   |      |  |      | (0.3  | )  |  |  | (1.9  | ) 
|                                             |  |                         |       |      |  |      |       |    |  |  |       |   
|Net Income (Loss)                            |  |                         | (4.7  | )%   |  |      | (3.0  | )% |  |  | (3.6  | )%
|                                             |  |                         |       |      |  |      |       |    |  |  |       |   



| |                                                                          
| | -------------------------------------------------------------------------
| | Year Ended December 31, 2003 Compared
    to Year Ended December 31, 2002

The following table sets, for the periods
indicated, a comparison of certain items from the Companys
Statements of Operations:

|                                             |  |                               |         |           |  |            |         |        |  |   |       |   |  |  |       |   
|-------------------------------------------- |  | ----------------------------- | ------- | --------- |  | ---------- | ------- | ------ |  | - | ----- | - |  |  | ----- | --
|                                             |  |                               |         |           |  |           
|                                             |  | Year Ended                    |         |           |  |           
|                                             |  | December 31,                  |         |           |  |           
|                                             |  |                               |         | Increase/ |  | %         
|                                             |  | 2003                          |         | 2002      |  | (Decrease) |         | Change
|                                             |  |                               |         |           |  |            |         |       
|                                             |  |                               |         |          
|                                             |  | (In thousands except barrels) |         |          
|Sales                                        |  | $                             | 42,213  |           |  | $          | 40,913  |        |  | $ | 1,300 |   |  |  | 3.2   | % 
|Less Excise Taxes                            |  |                               | 3,498   |           |  |            | 3,465   |        |  |   | 33    |   |  |  | 1.0   |   
|                                             |  |                               |         |           |  |            |         |        |  |   |       |   |  |  |       |   
|Net Sales                                    |  |                               | 38,715  |           |  |            | 37,448  |        |  |   | 1,267 |   |  |  | 3.4   |   
|Cost of Sales                                |  |                               | 28,702  |           |  |            | 27,597  |        |  |   | 1,104 |   |  |  | 4.0   |   
|                                             |  |                               |         |           |  |            |         |        |  |   |       |   |  |  |       |   
|Gross Profit                                 |  |                               | 10,013  |           |  |            | 9,851   |        |  |   | 163   |   |  |  | 1.7   |   
|Selling, General and Administrative Expenses |  |                               | 11,689  |           |  |            | 10,910  |        |  |   | 780   |   |  |  | 7.1   |   
|                                             |  |                               |         |           |  |            |         |        |  |   |       |   |  |  |       |   
|Operating Income (Loss)                      |  |                               | (1,676  | )         |  |            | (1,059  | )      |  |   | (617  | ) |  |  | (58.3 | ) 
|Interest Expense                             |  |                               | 192     |           |  |            | 230     |        |  |   | (38   | ) |  |  | (16.8 | ) 
|Other Income (Expense)  Net                 |  |                               | 59      |           |  |            | 30      |        |  |   | 29    |   |  |  | 95.8  |   
|                                             |  |                               |         |           |  |            |         |        |  |   |       |   |  |  |       |   
|Income (Loss) before Income Taxes            |  |                               | (1,809  | )         |  |            | (1,259  | )      |  |   | (550  | ) |  |  | (43.7 | ) 
|Income Tax Provision (Benefit)               |  |                               | 30      |           |  |            | (126    | )      |  |   | 155   |   |  |  | 123.7 |   
|                                             |  |                               |         |           |  |            |         |        |  |   |       |   |  |  |       |   
|Net Income (Loss)                            |  | $                             | (1,839  | )         |  | $          | (1,133  | )      |  | $ | (705  | ) |  |  | (62.2 | )%
|                                             |  |                               |         |           |  |            |         |        |  |   |       |   |  |  |       |   
|Beer Shipped (in barrels)                    |  |                               | 228,800 |           |  |            | 225,900 |        |  |   | 2,900 |   |  |  | 1.3   | % 
|                                             |  |                               |         |           |  |            |         |        |  |   |       |   |  |  |       |   

Sales.Total sales
increased 3.2% in 2003 as compared to 2002, attributable to a
1.3% increase in barrels sold, some strength in pricing and a
2.8% increase in other sales. Total sales volume in 2003
increased to 228,800 barrels from 225,900 barrels in
2002, the result of a 2.3% increase in shipments of packaged
products offset by 0.5% decrease in shipments of the
Companys draft products. The mix of package sales to draft
sales generally affects overall revenue per barrel, with package
product generating a higher revenue per barrel but

23



---



##### Table of Contents



also an increased cost of sales per barrel. The
sales mix continued to migrate towards an increasing proportion
of package sales in 2003, with 64.9% of 2003 total volume being
package shipments versus 64.3% in 2002. Contrary to the trend
during the past several years, sales volume for the 12-pack
package, which is more costly to produce, decreased to 33.6% of
package sales from 34.1% in 2002. West Coast sales decreased
5.0% in 2003 as compared to 2002, largely due to a significant
decline in sales in California and, to a smaller degree, to a
2.4% decline in shipments in Washington State, the
Companys largest market. Sales other than wholesale beer
sales, primarily retail pub revenues, totaled $4,581,000 in 2003
compared to $4,455,000 in 2002. This increase was due to
increasing sales in the Companys pubs located in its two
breweries, partially offset by the September 2002 closure of the
Companys Trolleyman Pub, located in the Companys
former Fremont Brewery. At December 31, 2003 and 2002, the
Companys products were distributed in 48 states.


Excise Taxes.Excise
taxes increased to $3,498,000 in 2003 from $3,465,000 in 2002,
but decreased as a percentage of net sales to 9.0% from 9.3% in
2002. The comparability of excise taxes as a percentage of net
sales is impacted by many factors, including average revenue per
barrel, the proportion of pub sales to total sales, and the
estimated annual average federal and state excise tax rates.

Cost of Sales.Cost
of sales increased 4.0%, or $1,104,000, in 2003 and also
increased as a percentage of net sales and on a per barrel
basis. The per barrel increase of $3.27 was attributable to an
increase in the cost of raw materials (malted barley in
particular following a poor 2002 worldwide harvest), packaging
and brewing supplies, as well as higher freight costs driven by
fuel surcharges. Some of the Companys indirect costs also
increased in 2003 following the expansion of its New Hampshire
Brewery. The utilization rate, based upon the breweries
combined current production capacity, was 61.6% and 63.4% for
the years ended December 31, 2003 and 2002, respectively.
The Company anticipates that, although it will experience modest
cost increases in some raw materials and packaging in 2004, it
will realize improved pricing for one of its most significant
raw materials, malted barley.

Selling, General and Administrative
Expenses.Selling, general and
administrative expenses increased $780,000 in 2003 in addition
to increasing as a percentage of net sales and on a per barrel
basis. Significant components of the sales and marketing effort
continue to be expenditures for the Companys promotion
programs as well as salaries and related expenses for the
national sales force. Increases in both promotional expenses and
sales salaries in 2003 were a reaction to perceived shortfalls
in promoting the Redhook brand in certain markets. These
increases in expenses included an increase in sales headcount
and materials related to sales. Redhook continues to focus on
effective sales and marketing programs, supported by the effort
and commitment of its wholesalers.

Interest Expense.Interest expense decreased in 2003, compared to 2002, reflecting
the effect of lower outstanding debt and lower average interest
rates.

Other Income (Expense) 
Net.Other income
(expense)  net increased to income of $59,000 in 2003
from income of $30,000 in 2002. Interest income declined $68,000
in 2003 as a result of a lower average balance of
interest-bearing deposits and lower average interest rates. The
2002 period included a $97,000 loss on the disposal of assets,
most of which were disposed of in conjunction with the September
2002 consolidation of the Companys corporate offices into
the Washington Brewery.

Income Taxes.The
Companys effective income tax rate was a 1.6% expense in
2003 compared to a 10.0% benefit in 2002. Both years
income taxes reflect a deferred income tax benefit offset by the
recording of a valuation allowance. In 2003, the Company
increased the valuation allowance to fully cover net tax
operating loss carryforwards (NOLs) that were
generated by the years deferred income tax benefit. In
2002, the NOLs generated by the years deferred income tax
benefit were partially reduced by the creation of a valuation
allowance. The valuation allowance covers a portion of the
Companys deferred tax assets, specifically certain federal
and state NOLs that may expire before the Company is able to
utilize the tax benefit. Realization of the benefit is dependent
on the Companys ability to generate future
U.S. taxable income. To the extent that the Company
continues to be unable to generate adequate taxable income in
future periods, the Company will not be able to recognize
additional tax benefits and may be required to record a greater
valuation allowance covering potentially expiring NOLs.

24



---



##### Table of Contents





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

The following table sets, for the periods
indicated, a comparison of certain items from the Companys
Statements of Operations:

|                                             |  |                               |         |           |  |            |         |        |  |   |       |   |  |  |       |  
|-------------------------------------------- |  | ----------------------------- | ------- | --------- |  | ---------- | ------- | ------ |  | - | ----- | - |  |  | ----- | -
|                                             |  |                               |         |           |  |           
|                                             |  | Year Ended                    |         |           |  |           
|                                             |  | December 31,                  |         |           |  |           
|                                             |  |                               |         | Increase/ |  | %         
|                                             |  | 2002                          |         | 2001      |  | (Decrease) |         | Change
|                                             |  |                               |         |           |  |            |         |       
|                                             |  |                               |         |          
|                                             |  | (In thousands except barrels) |         |          
|Sales                                        |  | $                             | 40,913  |           |  | $          | 40,117  |        |  | $ | 796   |   |  |  | 2.0   | %
|Less Excise Taxes                            |  |                               | 3,465   |           |  |            | 3,412   |        |  |   | 53    |   |  |  | 1.5   |  
|                                             |  |                               |         |           |  |            |         |        |  |   |       |   |  |  |       |  
|Net Sales                                    |  |                               | 37,448  |           |  |            | 36,705  |        |  |   | 743   |   |  |  | 2.0   |  
|Cost of Sales                                |  |                               | 27,597  |           |  |            | 26,740  |        |  |   | 857   |   |  |  | 3.2   |  
|                                             |  |                               |         |           |  |            |         |        |  |   |       |   |  |  |       |  
|Gross Profit                                 |  |                               | 9,851   |           |  |            | 9,965   |        |  |   | (114  | ) |  |  | (1.1  | )
|Selling, General and Administrative Expenses |  |                               | 10,910  |           |  |            | 11,817  |        |  |   | (907  | ) |  |  | (7.7  | )
|                                             |  |                               |         |           |  |            |         |        |  |   |       |   |  |  |       |  
|Operating Income (Loss)                      |  |                               | (1,059  | )         |  |            | (1,852  | )      |  |   | 793   |   |  |  | 42.8  |  
|Interest Expense                             |  |                               | 230     |           |  |            | 394     |        |  |   | (164  | ) |  |  | (41.6 | )
|Other Income (Expense)  Net                 |  |                               | 30      |           |  |            | 249     |        |  |   | (219  | ) |  |  | (87.9 | )
|                                             |  |                               |         |           |  |            |         |        |  |   |       |   |  |  |       |  
|Income (Loss) before Income Taxes            |  |                               | (1,259  | )         |  |            | (1,997  | )      |  |   | 738   |   |  |  | 37.0  |  
|Income Tax Provision (Benefit)               |  |                               | (126    | )         |  |            | (679    | )      |  |   | 553   |   |  |  | 81.5  |  
|                                             |  |                               |         |           |  |            |         |        |  |   |       |   |  |  |       |  
|Net Income (Loss)                            |  | $                             | (1,133  | )         |  | $          | (1,318  | )      |  | $ | 185   |   |  |  | 14.0  | %
|                                             |  |                               |         |           |  |            |         |        |  |   |       |   |  |  |       |  
|Beer Shipped (in barrels)                    |  |                               | 225,900 |           |  |            | 223,100 |        |  |   | 2,800 |   |  |  | 1.3   | %
|                                             |  |                               |         |           |  |            |         |        |  |   |       |   |  |  |       |  

Sales.Total sales
increased 2.0% to $40,913,000 in 2002, compared to $40,117,000
in 2001, attributable to a 1.3% increase in barrels sold and a
3.8% increase in other sales. Total sales volume in 2002
increased to 225,900 barrels from 223,100 barrels in
2001. A 3.8% decline in shipments in Washington State, the
Companys largest market, was the major factor leading to
the nearly flat sales volume for the West Coast. The mix of
package sales to draft sales generally affects overall revenue
per barrel, with package product generating a higher revenue per
barrel but also an increased cost of sales per barrel. The sales
mix continued to migrate towards an increasing proportion of
package sales in 2002, with 64.3% of 2002 total volume being
package shipments versus 63.2% in 2001. Within package sales,
the 12-pack package also increased to 34.1% of package sales
from 29.4% in 2001. Sales other than wholesale beer sales,
primarily retail pub revenues, totaled $4,455,000 in 2002,
compared to $4,291,000 in 2001. At December 31, 2002 and
2001, the Companys products were distributed in
48 states.

Excise Taxes.Excise
taxes increased to $3,465,000, or 9.3% of net sales in 2002,
compared to $3,412,000, or 9.3% of net sales in 2001. The
comparability of excise taxes as a percentage of net sales is
impacted by many factors, including average revenue per barrel,
the proportion of pub sales to total sales, and the estimated
annual average federal and state excise tax rates.

Cost of Sales.Cost
of sales increased 3.2% to $27,597,000 in 2002, compared to
$26,740,000 in 2001, due to higher sales volume, increased raw
material and packaging costs, and a shift in product mix towards
an increasing proportion of package sales, including 12-packs.
Cost of sales, as a percentage of net sales, increased to 73.7%
in 2002, compared to 72.9% in 2001. The utilization rate, based
upon the breweries combined current production capacity,
was 63.4% and 63.8% for the years ended December 31, 2002
and 2001, respectively.

Selling, General and Administrative
Expenses.Selling, general and
administrative expenses decreased to $10,909,000 in 2002,
compared to $11,817,000 in 2001 due to a reduction in
advertising and promotion expenses as well as sales salaries and
incentives during 2002. The Company significantly reduced its
use of media advertising, particularly print, radio and
billboard, during 2002 and moderately reduced spending on its
co-operative advertising and promotion program where desired
results were not being achieved. Expenditures

25



---



##### Table of Contents



for the co-op program and media advertising
program totaled $1.9 million and $2.6 million in 2002
and 2001, respectively. As a percentage of net sales, selling,
general and administrative expenses were 29.1% and 32.2% for
years ended December 31, 2002 and 2001, respectively.


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

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

Income Taxes.The
Companys effective income tax rate was a 10.0% benefit in
2002, compared to a 34.0% benefit in 2001. During 2002, the
Company established a $271,000 valuation allowance reducing the
income tax benefit. The valuation allowance covers a portion of
the Companys deferred tax assets, specifically certain
state net operating tax loss carryforwards, that may expire
before the Company is able to utilize the tax benefit.

Liquidity and Capital Resources

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

The Company had $6,123,000 and $7,007,000 of cash
and cash equivalents at December 31, 2003 and 2002,
respectively. At December 31, 2003, the Company had working
capital of $4,511,000. The Companys long-term debt as a
percentage of total capitalization (long-term debt, preferred
stock and Common Stockholders equity) was 8.7% and 9.0% as
of December 31, 2003 and 2002, respectively. Cash provided
by operating activities totaled $786,000 and $3,098,000 for 2003
and 2002, respectively. Cash provided by operations in 2003 was
lower than in 2002 as a result of an increase in raw materials,
beer and promotional inventories to levels necessary to meet the
demands of the coming months, as well as the timing of payment
of certain current liabilities. During 2003, the Company
repurchased 101,400 shares of its Common Stock totaling
$231,000 and had capital expenditures totaling $992,000 related
primarily to the expansion of fermentation cellars in the New
Hampshire Brewery to accommodate the anticipated increase in
East Coast volume. Capital expenditures for 2004 are expected to
total approximately $600,000.

The Company has a credit agreement with a bank
under which a term loan (the Term Loan) and a
$2 million revolving credit facility (the Revolving
Facility) are provided. The Term Loan, which originated in
June 1997 upon the conversion of a $9 million secured
credit facility, had a five-year term with a 20-year
amortization schedule. In June 2001, the credit agreement was
amended to extend the maturity date on the Term Loan to
June 5, 2007. In June 2002, the credit agreement was
amended to extend the commitment period for the Revolving
Facility to July 1, 2004. In October 2003, the credit
agreement was amended to reduce the $10 million revolving
credit facility to a $2 million revolving credit facility.
The Term Loan and the Revolving Facility are secured by
substantially all of the Companys assets. Through
June 4, 2002, interest on the Term Loan accrued at a
variable rate based on the London Inter Bank Offered Rate
(LIBOR) plus 1.25%. Since June 5, 2002,
interest on the Term Loan accrued at LIBOR plus 1.75%. The
interest rate on the Revolving Facility is the applicable LIBOR
plus 1.00% to 2.00%, depending on the Companys funded debt
ratio. The Company has the option to fix the applicable interest
rate for up to twelve months by selecting LIBOR for one- to
twelve-month periods as a base. As of December 31, 2003,
there was $6.075 million outstanding on the Term Loan, and
the Companys one-month LIBOR-based borrowing rate was
2.9%. As of December 31, 2003, there were no borrowings
outstanding on the Revolving Facility. The termination of the
A-B Distribution Agreement for any reason or the failure by the
Company to perform any of its material

26



---



##### Table of Contents



obligations under the A-B Investment Agreement
would constitute an event of default under the credit agreement
and the bank may declare the entire outstanding loan balance
immediately due and payable. See  Certain
Considerations: Issues and Uncertainties below. If this
were to occur, it would be unlikely that the Company could
satisfy its obligations under the Term Loan. In all events,
unless additional capital was raised, the Company would not have
sufficient liquidity to satisfy both its obligation under the
Term Loan and its obligation to redeem the Series B
Preferred Stock under the A-B Investment Agreement. The Company
could seek to refinance its Term Loan with one or more banks or
obtain additional equity capital; however, there can be no
assurance the Company would be able to access additional capital
to meet its needs or that such additional capital would be at
commercially reasonable terms.


The terms of the credit agreement require the
Company to meet certain financial covenants. In December 2001,
March 2003 and February 2004, the credit agreement was amended
to modify several financial covenants. These revisions have
reduced the likelihood that a violation of the covenants by the
Company will occur; however, if the Company were to report a
significant net loss for one or more quarters within a time
period covered by the financial covenants, one or more of the
covenants would be negatively impacted and could cause a
violation. Failure to meet the covenants required by the credit
agreement is an event of default and, at its option, the Bank
could deny a request for a waiver and declare the entire
outstanding loan balance immediately due and payable. In such a
case, the Company would seek to refinance the loan with one or
more banks, potentially at less desirable terms. However, there
can be no guarantee that additional financing would be available
at commercially reasonable terms, if at all. The Company was in
compliance with all covenants for the year ended
December 31, 2003.

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

The Company has certain commitments,
contingencies and uncertainties relating to its normal
operations. As of December 31, 2003, 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, |        |      |  |     
|                                          |  |                         |        |      |  |     
|                                          |  | 2004                    |        | 2005 |  | 2006 |     | 2007 |  | 2008 |     | Thereafter |  | Total
|                                          |  |                         |        |      |  |      |     |      |  |      |     |            |  |      
|                                          |  |                        
|                                          |  | (In thousands)         
|Long-term Debt(1)                         |  | $                       | 450    |      |  | $    | 450 |      |  | $    | 450 |            |  | $     | 4,725 |  |  | $ |    |  |  | $ |       |  |  | $ | 6,075  | 
|Convertible Redeemable Preferred Stock(2) |  |                         | 16,300 |      |  |      |    |      |  |      |    |            |  |       |      |  |  |   |    |  |  |   |       |  |  |   | 16,300 | 
|Operating Leases(3)                       |  |                         | 267    |      |  |      | 269 |      |  |      | 265 |            |  |       | 263   |  |  |   | 263 |  |  |   | 12,363 |  |  |   | 13,690 | 
|Hop Purchase Commitments(4)               |  |                         | 106    |      |  |      | 126 |      |  |      | 46  |            |  |       | 51    |  |  |   | 36  |  |  |   | 366    |  |  |   | 731    | 
|Other Operating Purchase Obligations(5)   |  |                         | 2,560  |      |  |      | 101 |      |  |      | 86  |            |  |       | 70    |  |  |   | 70  |  |  |   | 6      |  |  |   | 2,893  | 
|                                          |  |                         |        |      |  |      |     |      |  |      |     |            |  |       |       |  |  |   |     |  |  |   |        |  |  |   |        | 
|                                          |  | $                       | 19,683 |      |  | $    | 946 |      |  | $    | 847 |            |  | $     | 5,109 |  |  | $ | 369 |  |  | $ | 12,735 |  |  | $ | 39,689 | 
|                                          |  |                         |        |      |  |      |     |      |  |      |     |            |  |       |       |  |  |   |     |  |  |   |        |  |  |   |        | 



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Represents annual principal payments required on
    the Companys Term Loan. Interest on the Term Loan accrues
    at LIBOR plus 1.75%. 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-                                                                                                                                                                                                                                                                                                                                                          

27



---



##### Table of Contents



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    | Busch, Incorporated  A-B
    Distribution Agreement), the terms of the Series B
    Preferred Stock require the mandatory redemption of the
    Series B Preferred Stock on December 31, 2004, at a
    redemption price equal to $12.61 per share (approximately
    $16.3 million in the aggregate), plus an amount equal to
    accumulated and unpaid dividends thereon. If the A-B
    Distribution Agreement were terminated early as described above,
    distribution of the Companys products would suffer
    significant disruption and would have a long-term material
    adverse effect on the Companys sales and results of
    operations as well as on its financial position and cash flows
    from operations.                                                                
|   
|(3) | Represents minimum aggregate future lease
    payments under noncancelable operating leases.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   
|(4) | Represents purchase commitments to ensure that
    the Company has the necessary supply of specialty hops to meet
    future production requirements. Contracts generally provide for
    payment upon delivery of the product with the balance due on any
    unshipped product during the year following the harvest year.
    The Company believes that, based upon its relationships with its
    hop suppliers, the risk of non-delivery is low and that if
    non-delivery of its required supply of hops were to occur, the
    Company would be able to purchase hops to support its operations
    from other competitive sources. Hop commitments in excess of
    future requirements, if any, will not materially affect the
    Companys financial condition or results of operations.
|   
|(5) | Represents legally-binding production and
    operating purchase commitments, most significant of which are
    commitments to purchase malted grain and other production
    supplies.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

Certain Considerations: Issues and
Uncertainties

The Company does not provide forecasts of future
financial performance or sales volumes, although this Annual
Report contains certain other types of forward-looking
statements that involve risks and uncertainties. The Company
may, in discussions of its future plans, objectives and expected
performance in periodic reports filed by the Company with the
Securities and Exchange Commission (or documents incorporated by
reference therein) and in written and oral presentations made by
the Company, include forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as
amended, or Section 21E of the Securities Exchange Act of
1934, as amended. Such forward-looking statements are based on
assumptions that the Company believes are reasonable, but are by
their nature inherently uncertain. In all cases, there can be no
assurance that such assumptions will prove correct or that
projected events will occur. Actual results could differ
materially from those projected depending on a variety of
factors, including, but not limited to, the successful execution
of market development and other plans, and the availability of
financing and the issues discussed below. While Company
management is optimistic about the Companys long-term
prospects, the following issues and uncertainties, among others,
should be considered in evaluating its business prospects and
any forward-looking statements.

Relationship with
Anheuser-Busch, Incorporated.Most of the Companys future sales are expected to be
through the Distribution Alliance with A-B. See
Part 1, Item 1 
Business  Product Distribution, and Relationship With
Anheuser-Busch, Incorporated for a further
description of the Companys relationship with A-B. If the
Distribution Alliance were to be terminated, or if the
relationship between A-B and the Company were to deteriorate,
distribution of the Companys products would suffer
significant disruption and such event would have a long-term
severe negative impact on the Companys sales and results
of operations, as it would be extremely difficult for the
Company to rebuild its own distribution network. Further, in the
event that the A-B Distribution Agreement is terminated on or
before December 31, 2004, under circumstances described in
Item 1 (see Business  Relationship with
Anheuser-Busch, Incorporated  A-B Distribution
Agreement), the terms of the Series B Preferred Stock held
by A-B pursuant to the A-B Investment Agreement require the
Company to redeem the Series B Preferred Stock on
December 31, 2004, at a redemption price equal to
$12.61 per share (approximately $16.3 million in the
aggregate), plus an amount equal to accumulated and unpaid
dividends thereon, if any. The terms of the Series B
Preferred Stock further provide that, if at the time of the
mandatory redemption the Company has insufficient legally
available funds to redeem all shares of Series B Preferred
Stock, then all funds that are legally available must be used to
redeem Series B Preferred Stock. At any time thereafter
when additional funds of the Company become legally available,
such funds must be immediately used to redeem additional shares
of Series B Preferred

28



---



##### Table of Contents



Stock. The Company would not be legally able to
redeem shares of Series B Preferred Stock if, after giving
effect to such redemption, the Company would not be able to pay
its debts when due in the usual course of business or the
Companys total assets would be less than the sum of its
total liabilities. Such a mandatory redemption could have a
material adverse effect on the financial position and cash flows
of the Company. While the Company believes that the benefits of
the Distribution Alliance, in particular distribution and
material cost efficiencies, offset costs associated with the
Alliance, there can be no assurance that these costs will not
have a negative impact on the Companys profit margins in
the future. Notice of intention to terminate the Distribution
Agreement must be made by the party electing to do so no less
than six months prior to the termination date. To date, neither
Redhook nor A-B has given notice of its intention to terminate
the Distribution Agreement. Failure to come to an agreement with
A-B or the termination of the Distribution Agreement would have
a material adverse effect on the Companys ability to
continue as a going concern.


Effect of Competition on Future
Sales.The Company competes in the
highly competitive craft brewing market as well as in the much
larger specialty beer market, which encompasses producers of
import beers, major national brewers that have introduced
fuller-flavored products, and large spirit companies and
national brewers that produce flavored alcohol beverages. Beyond
the beer market, craft brewers have also faced competition from
producers of wines and spirits. Primarily as a result of
increased competition, the Company experienced declining sales
volumes ranging from 2.3% to 5.7% for the years 1997 through
1999. And while the Companys sales volumes since 1999 have
increased when compared to the corresponding prior years
volumes, competition within the segment has, at times,
negatively impacted pricing of the Companys products. A
further increase in competition could cause the Companys
future sales and results of operations to be adversely affected.
The Company has historically operated with little or no backlog
and, therefore, its ability to predict sales for future periods
is limited.

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

Variability of Gross Margin and Cost of
Sales.The Company anticipates that
its future gross margins will fluctuate and may decline as a
result of many factors, including disproportionate depreciation
and other fixed and semivariable operating costs, depending on
the level of production at the Companys breweries in
relation to current production capacity. The Companys high
level of fixed and semivariable operating costs causes gross
margin to be very sensitive to relatively small increases or
decreases in sales volume. In addition, other factors that could
affect cost of sales include changes in freight charges, the
availability and prices of raw materials and packaging
materials, the mix between draft and bottled product sales, the
sales mix of various bottled product packages, and federal or
state excise taxes. Also, as sales volume through the
Distribution Alliance increases, the related fees would increase.

Advertising and Promotional
Costs.The Company has participated in
advertising programs to varying degrees over the past five
years. Prior to 1999, the Company engaged in very limited
advertising to market its products. In order to increase brand
awareness and capture a larger share of the fragmented craft
beer market, the Company determined that a significant increase
in spending on advertising and promotion was necessary. During
1999 and 2000, the Company primarily utilized radio, billboard
and print advertising in key markets, while also participating
to a small degree in a co-operative program with its
distributors. In 2001, the Company allocated a larger share of
its advertising spending to this co-operative program whereby
the Companys spending is matched dollar for dollar by the
distributor. In 2002 and 2003, the Company continued its
co-operative advertising and promotion program while reducing
even further those advertising expenditures where the Company
funded the entire program. The Company believes that the
financial commitment as well as the distributors knowledge
of the local market result in an advertising and promotion
program that is targeted in a manner that will best promote
Redhook. Expenditures for the co-op program and media
advertising program totaled $1.6 million, $1.9 million
and $2.6 million in 2003, 2002 and 2001, respectively. This
increased advertising spending has significantly increased the
Companys selling, general and administrative expense since
1998, leading to increased losses and a reduction in
stockholders equity. The Company

29



---



##### Table of Contents



expects to continue to participate in the co-op
advertising and promotion program and limited media advertising
in select Eastern United States markets throughout 2004. Market
and competitive considerations could require an increase in
other promotional costs associated with developing existing and
new markets.


Joint Organization with Widmer Brothers
Brewing Company.On February 3,
2004, the Company announced that it had reached an agreement in
principle with Widmer Brothers Brewing Company to form a joint
sales and marketing organization that will serve both
companies operations in the Western United States. The
joint organization was formed in March 2004 as a limited
liability company and is seeking required regulatory approvals.
During this preliminary stage, the Company and Widmer have
agreed to share certain start-up expenses of the joint
organization, including staff salaries, severance expenses,
legal fees, regulatory license fees and overhead costs. The
Company expects that its share of these start-up expenses will
total approximately $900,000 during the first and second quarter
of 2004.

The Company believes that the combined sales and
marketing organization will create synergies and capitalize on
both companies sales and marketing experience and
complementary product portfolios. The Company anticipates that
the joint organization will positively impact revenues and
decrease the Companys selling, general and administrative
expenses. However, negotiations between the Company and Widmer
are not complete, and there can be no assurance that
(i) the necessary regulatory approvals will be obtained,
(ii) the parties will agree upon the final structure of the
joint venture or (iii) the Company will see any anticipated
benefits from the joint venture. Until the joint organization is
fully deployed, the Company expects to continue to participate
in the co-op advertising and promotion program and limited media
advertising in the markets impacted by the organization.

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

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

Effect of Sales Trends on Brewery Efficiency
and Operations.The Companys
breweries have been operating at production levels substantially
below their current and maximum designed capacities. Operating
breweries at low capacity utilization rates negatively impacts
gross margins and operating cash flows generated by the
production facilities. In 1998, after performing an analysis of
the Companys current and future production capacity
requirements, production at the Fremont Brewery was permanently
curtailed and the assets were written down to an estimate of
their net realizable value. The Company will continue to
evaluate whether it expects to recover the costs of its two
remaining production facilities over the course of their useful
lives. If facts and circumstances indicate that the carrying
value of these long-lived assets may be impaired, an evaluation
of recoverability will be performed in accordance with FASB
Statement No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, by comparing the carrying
value of the assets to projected future undiscounted cash flows
in addition to other quantitative and qualitative analyses. If
management

30



---



##### Table of Contents



believes that the carrying value of such assets
may not be recoverable, the Company will recognize an impairment
loss by a charge against current operations.


Income Tax Benefits.As of December 31, 2003, the Company had approximately
$11.8 million of deferred tax assets, comprised principally
of federal net operating loss carryforwards that expire from
2012 through 2023 and state NOLs that expire through 2018.
Federal NOLs, generally permitted to be carried forward no more
than 20 years, and state NOLs, generally permitted to be
carried forward five to 15 years, can be used to offset
regular tax liabilities in future years. The recognition of
these assets is dependent upon estimates of future taxable
income resulting from future reversals of existing taxable
temporary differences, which have been recorded as deferred tax
liabilities and exceed the deferred tax assets. As of
December 31, 2003, the Company also had a valuation
allowance of $738,000, reflected as a reduction of the
Companys deferred tax assets on its balance sheet. The
Company established the valuation allowance in 2002 and
increased the balance in 2003. The valuation allowance covers a
portion of the Companys deferred tax assets, specifically
certain federal and state NOL carryforwards, that may expire
before the Company is able to utilize the tax benefit.
Realization of the benefit is dependent on the Companys
ability to generate future U.S. taxable income. To the
extent that the Company is unable to generate adequate taxable
income in the future, the Company may not be able to recognize
additional tax benefits and may be required to record a greater
valuation allowance covering expiring NOLs.

Critical Accounting Policies and
Estimates

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

Income Taxes.The
Company records federal and state income taxes in accordance
with Financial Accounting Standards Board (FASB)
Statement of Financial Accounting Standard (SFAS)
No. 109, Accounting for Income Taxes. Deferred
income taxes or tax benefits reflect the tax effect of temporary
differences between the amounts of assets and liabilities for
financial reporting purposes and amounts as measured for tax
purposes. The Company will establish a valuation allowance if it
is more likely than not that these items will either expire
before the Company is able to realize their benefits, or that
future deductibility is uncertain. The valuation allowance is
reviewed and adjusted on a quarterly basis based on
managements assessment of the realizability of the
deferred tax assets. As of December 31, 2003, the Company
had approximately $11.8 million of deferred tax assets,
comprised principally of federal net operating loss
carryforwards (NOLs) that expire from 2012 through
2023 and state NOLs that expire through 2018. The recognition of
these assets is dependent upon estimates of future taxable
income resulting from future reversals of existing taxable
temporary differences, which have been recorded as deferred tax
liabilities and exceed the deferred tax assets. As of
December 31, 2003, the Company also had a valuation
allowance of $738,000, reflected as a reduction of the
Companys deferred tax assets on its balance sheet. The
Company established the valuation allowance in 2002 and
increased the balance in 2003. The valuation allowance covers a
portion of the Companys deferred tax assets, specifically
certain federal and state NOLs that may expire before the
Company is able to utilize the tax benefit. Realization of the
benefit is dependent on the Companys ability to generate
future U.S. taxable income. To the extent that the Company
continues to be unable to generate adequate taxable income in
future periods, the Company will not be able to recognize
additional tax benefits and may be required to record a greater
valuation allowance covering potentially expiring NOLs.

Long-Lived Assets.The Company evaluates potential impairment of long-lived assets
in accordance with SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets.
SFAS No. 144 establishes procedures for review of
recoverability and measurement of impairment, if necessary, of
long-lived assets, goodwill and certain identifiable
intangibles. When facts and circumstances indicate that the
carrying values of long-lived assets may be impaired, an
evaluation of recoverability is performed by comparing the
carrying value of the assets to projected future undiscounted
cash flows in addition to other quantitative and

31



---



##### Table of Contents



qualitative analyses. Upon indication that the
carrying value of such assets may not be recoverable, the
Company recognizes an impairment loss by a charge against
current operations. Fixed assets are grouped at the lowest level
for which there are identifiable cash flows when assessing
impairment. During 2003, 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.


Recent Accounting Pronouncements

In May 2003, the FASB issued Statement of
Financial Accounting Standards No. 150, Accounting for
Certain Financial Instruments with Characteristics of both
Liabilities and Equity (SFAS No. 150).
This statement requires that certain financial instruments be
accounted for as liabilities. The financial instruments affected
include mandatorily redeemable stock, certain financial
instruments that require or may require the issuer to buy back
some of its shares in exchange for cash or other assets, and
certain obligations that can be settled with shares of stock.
SFAS No. 150 is effective for all financial
instruments entered into or modified after May 31, 2003,
and must be applied to the Companys existing financial
instruments effective June 30, 2003, the beginning of the
first fiscal period after June 15, 2003. The adoption of
SFAS No. 150 did not have an impact on the
Companys financial statements or disclosures.






|         |                                                               
|-------- | --------------------------------------------------------------
|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 did not have any derivative financial
instruments as of December 31, 2003.

32



---



##### 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                                              |  |      | 34 | 
|                                                                                                  
|Balance Sheets as of December 31, 2003 and
    2002                                                |  |      | 35 | 
|                                                                                                  
|Statements of Operations for the Years Ended
    December 31, 2003, 2002 and 2001                  |  |      | 36 | 
|                                                                                                  
|Statements of Common Stockholders Equity
    for the Years Ended December 31, 2003, 2002 and 2001 |  |      | 37 | 
|                                                                                                  
|Statements of Cash Flows for the Years Ended
    December 31, 2003, 2002 and 2001                  |  |      | 38 | 
|                                                                                                  
|Notes to Financial Statements                                                                      |  |      | 39 | 

33



---



##### 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, 2003 and 2002, and the related statements of
operations, common stockholders equity, and cash flows for
each of the three years in the period ended December 31,
2003. 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, 2003 and 2002, and the results of its
operations and its cash flows for each of the three years in the
period ended December 31, 2003, in conformity with
accounting principles generally accepted in the United States.

As discussed in Note 1 to the financial
statements, the Companys distribution agreement with
Anheuser-Busch is subject to early termination in 2004. The
termination of the distribution agreement would cause an event
of default under the Companys bank credit agreement and
would require the Company to redeem the Series B Preferred
Stock on December 31, 2004. These matters raise substantial
doubt about the Companys ability to continue as a going
concern. Managements plans as to these matters are also
described in Note 1. The 2003 financial statements do not
include any adjustments that might result from the outcome of
this uncertainty.



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

Seattle, Washington

January 23, 2004


34



---



##### Table of Contents



REDHOOK ALE
BREWERY, INCORPORATED

BALANCE SHEETS

|                                                                 |                                                                                                                                                                |                                   |                                                                        |              |            |            |            |            |            |            | 
|---------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------- | ---------------------------------------------------------------------- | ------------ | ---------- | ---------- | ---------- | ---------- | ---------- | ---------- | 
|                                                                 |                                                                                                                                                                | December 31,                      |                                                                        | December 31,
|                                                                 |                                                                                                                                                                | 2003                              |                                                                        | 2002        
|                                                                 |                                                                                                                                                                |                                   |                                                                        |             
|ASSETS                                                          
|                                                                
|Current Assets:                                                  |                                                                                                                                                                |                                   |                                                                        |              |            |            |            |           
|                                                                 | Cash and Cash Equivalents                                                                                                                                      |                                   | $                                                                      | 6,123,349    |            |            | $          | 7,007,351  |           
|                                                                 | Accounts Receivable                                                                                                                                            |                                   |                                                                        | 1,686,735    |            |            |            | 1,490,517  |           
|                                                                 | Inventories                                                                                                                                                    |                                   |                                                                        | 3,342,006    |            |            |            | 2,832,427  |           
|                                                                 | Other                                                                                                                                                          |                                   |                                                                        | 247,038      |            |            |            | 238,268    |           
|                                                                 |                                                                                                                                                                |                                   |                                                                        |              |            |            |            |           
|                                                                 |                                                                                                                                                                | Total Current Assets              |                                                                        |              | 11,399,128 |            |            |            | 11,568,563 |           
|Fixed Assets, Net                                                |                                                                                                                                                                |                                   | 65,699,658                                                             |              |            |            | 68,360,716 |           
|Other Assets                                                     |                                                                                                                                                                |                                   | 32,256                                                                 |              |            |            | 52,592     |           
|                                                                 |                                                                                                                                                                |                                   |                                                                        |              |            |            |            |           
|                                                                 |                                                                                                                                                                |                                   | Total Assets                                                           |              | $          | 77,131,042 |            |            | $          | 79,981,871 | 
|                                                                 |                                                                                                                                                                |                                   |                                                                        |              |            |            |            |           
|LIABILITIES, PREFERRED STOCK AND COMMON
    STOCKHOLDERS EQUITY
|Current Liabilities:                                             |                                                                                                                                                                |                                   |                                                                        |              |            |            |            |           
|                                                                 | Accounts Payable                                                                                                                                               |                                   | $                                                                      | 1,983,377    |            |            | $          | 2,270,450  |           
|                                                                 | Accrued Salaries, Wages and Payroll Taxes                                                                                                                      |                                   |                                                                        | 1,561,526    |            |            |            | 1,635,463  |           
|                                                                 | Refundable Deposits                                                                                                                                            |                                   |                                                                        | 2,272,328    |            |            |            | 2,546,628  |           
|                                                                 | Other Accrued Expenses                                                                                                                                         |                                   |                                                                        | 621,185      |            |            |            | 320,470    |           
|                                                                 | Current Portion of Long-Term Debt                                                                                                                              |                                   |                                                                        | 450,000      |            |            |            | 450,000    |           
|                                                                 |                                                                                                                                                                |                                   |                                                                        |              |            |            |            |           
|                                                                 |                                                                                                                                                                | Total Current Liabilities         |                                                                        |              | 6,888,416  |            |            |            | 7,223,011  |           
|                                                                 |                                                                                                                                                                |                                   |                                                                        |              |            |            |            |           
|Long-Term Debt, Net of Current Portion                           |                                                                                                                                                                |                                   | 5,625,000                                                              |              |            |            | 6,075,000  |           
|                                                                 |                                                                                                                                                                |                                   |                                                                        |              |            |            |            |           
|Deferred Income Taxes, Net                                       |                                                                                                                                                                |                                   | 468,798                                                                |              |            |            | 468,798    |           
|                                                                 |                                                                                                                                                                |                                   |                                                                        |              |            |            |            |           
|Commitments                                                      |                                                                                                                                                                |                                   |                                                                        |              |            |            |            |           
|                                                                
|Convertible Redeemable Preferred Stock                           |                                                                                                                                                                |                                   | 16,232,655                                                             |              |            |            | 16,188,255 |           
|                                                                 |                                                                                                                                                                |                                   |                                                                        |              |            |            |            |           
|Common Stockholders Equity:                                     |                                                                                                                                                                |                                   |                                                                        |              |            |            |            |           
|                                                                 | Common Stock, Par Value $0.005 per Share,
    Authorized, 50,000,000 Shares; Issued and Outstanding,
    6,226,306 Shares in 2003 and 6,326,146 Shares in 2002 |                                   |                                                                        | 31,132       |            |            |            | 31,631     |           
|                                                                 | Additional Paid-In Capital                                                                                                                                     |                                   |                                                                        | 54,250,059   |            |            |            | 54,477,181 |           
|                                                                 | Retained Earnings (Deficit)                                                                                                                                    |                                   |                                                                        | (6,365,018   | )          |            |            | (4,482,005 | )         
|                                                                 |                                                                                                                                                                |                                   |                                                                        |              |            |            |            |           
|                                                                 |                                                                                                                                                                | Total Common Stockholders Equity |                                                                        |              | 47,916,173 |            |            |            | 50,026,807 |           
|                                                                 |                                                                                                                                                                |                                   |                                                                        |              |            |            |            |           
|                                                                 |                                                                                                                                                                |                                   | Total Liabilities, Preferred Stock and Common
    Stockholders Equity |              | $          | 77,131,042 |            |            | $          | 79,981,871 | 
|                                                                 |                                                                                                                                                                |                                   |                                                                        |              |            |            |            |           

See Accompanying Notes to Financial Statements

35



---



##### Table of Contents



REDHOOK ALE
BREWERY, INCORPORATED

STATEMENTS OF OPERATIONS

|                                             |  |                         |            |      |  |      |            |   |  |   |            |  
|-------------------------------------------- |  | ----------------------- | ---------- | ---- |  | ---- | ---------- | - |  | - | ---------- | -
|                                             |  |                        
|                                             |  | Year Ended December 31,
|                                             |  |                        
|                                             |  | 2003                    |            | 2002 |  | 2001
|                                             |  |                         |            |      |  |     
|Sales                                        |  | $                       | 42,212,771 |      |  | $    | 40,912,532 |   |  | $ | 40,116,667 |  
|Less Excise Taxes                            |  |                         | 3,497,714  |      |  |      | 3,464,762  |   |  |   | 3,411,922  |  
|                                             |  |                         |            |      |  |      |            |   |  |   |            |  
|Net Sales                                    |  |                         | 38,715,057 |      |  |      | 37,447,770 |   |  |   | 36,704,745 |  
|Cost of Sales                                |  |                         | 28,701,946 |      |  |      | 27,597,345 |   |  |   | 26,739,965 |  
|                                             |  |                         |            |      |  |      |            |   |  |   |            |  
|Gross Profit                                 |  |                         | 10,013,111 |      |  |      | 9,850,425  |   |  |   | 9,964,780  |  
|Selling, General and Administrative Expenses |  |                         | 11,689,410 |      |  |      | 10,909,476 |   |  |   | 11,817,041 |  
|                                             |  |                         |            |      |  |      |            |   |  |   |            |  
|Operating Income (Loss)                      |  |                         | (1,676,299 | )    |  |      | (1,059,051 | ) |  |   | (1,852,261 | )
|Interest Expense                             |  |                         | 191,404    |      |  |      | 229,916    |   |  |   | 393,853    |  
|Other Income (Expense)  Net                 |  |                         | 58,891     |      |  |      | 30,074     |   |  |   | 248,754    |  
|                                             |  |                         |            |      |  |      |            |   |  |   |            |  
|Income (Loss) before Income Taxes            |  |                         | (1,808,812 | )    |  |      | (1,258,893 | ) |  |   | (1,997,360 | )
|Income Tax Provision (Benefit)               |  |                         | 29,801     |      |  |      | (125,610   | ) |  |   | (679,103   | )
|                                             |  |                         |            |      |  |      |            |   |  |   |            |  
|Net Income (Loss)                            |  | $                       | (1,838,613 | )    |  | $    | (1,133,283 | ) |  | $ | (1,318,257 | )
|                                             |  |                         |            |      |  |      |            |   |  |   |            |  
|Basic Earnings (Loss) per Share              |  | $                       | (0.30      | )    |  | $    | (0.18      | ) |  | $ | (0.19      | )
|                                             |  |                         |            |      |  |      |            |   |  |   |            |  
|Diluted Earnings (Loss) per Share            |  | $                       | (0.30      | )    |  | $    | (0.18      | ) |  | $ | (0.19      | )
|                                             |  |                         |            |      |  |      |            |   |  |   |            |  

See Accompanying Notes to Financial Statements

36



---



##### 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, 2001   |                            |              | 7,312,786 |            |   | $        | 36,564 |           |   | $             | 56,407,023 |            |   | $ | (1,941,665 | )          |   | $ | 54,501,922 |           
|                           | Repurchase of Common Stock |              |           | (392,740   | ) |          |        | (1,964    | ) |               |            | (663,594   | ) |   |            |           |   |   |            | (665,558   | )
|                           | Other                      |              |           |           |   |          |        |          |   |               |            |           |   |   |            | (44,400    | ) |   |            | (44,400    | )
|                           | Net Loss                   |              |           |           |   |          |        |          |   |               |            |           |   |   |            | (1,318,257 | ) |   |            | (1,318,257 | )
|                           |                            |              |           |            |   |          |        |           |   |               |            |            |   |   |            |            |   |   |            |           
|Balance, December 31, 2001 |                            |              | 6,920,046 |            |   |          | 34,600 |           |   |               | 55,743,429 |            |   |   | (3,304,322 | )          |   |   | 52,473,707 |           
|                           | Repurchase of Common Stock |              |           | (593,900   | ) |          |        | (2,969    | ) |               |            | (1,266,248 | ) |   |            |           |   |   |            | (1,269,217 | )
|                           | Other, Net                 |              |           |           |   |          |        |          |   |               |            |           |   |   |            | (44,400    | ) |   |            | (44,400    | )
|                           | Net Loss                   |              |           |           |   |          |        |          |   |               |            |           |   |   |            | (1,133,283 | ) |   |            | (1,133,283 | )
|                           |                            |              |           |            |   |          |        |           |   |               |            |            |   |   |            |            |   |   |            |           
|Balance, December 31, 2002 |                            |              | 6,326,146 |            |   |          | 31,631 |           |   |               | 54,477,181 |            |   |   | (4,482,005 | )          |   |   | 50,026,807 |           
|                           | Repurchase of Common Stock |              |           | (101,440   | ) |          |        | (507      | ) |               |            | (230,160   | ) |   |            |           |   |   |            | (230,667   | )
|                           | Other, Net                 |              |           | 1,600      |   |          |        | 8         |   |               |            | 3,038      |   |   |            | (44,400    | ) |   |            | (41,354    | )
|                           | Net Loss                   |              |           |           |   |          |        |          |   |               |            |           |   |   |            | (1,838,613 | ) |   |            | (1,838,613 | )
|                           |                            |              |           |            |   |          |        |           |   |               |            |            |   |   |            |            |   |   |            |           
|Balance, December 31, 2003 |                            |              | 6,226,306 |            |   | $        | 31,132 |           |   | $             | 54,250,059 |            |   | $ | (6,365,018 | )          |   | $ | 47,916,173 |           
|                           |                            |              |           |            |   |          |        |           |   |               |            |            |   |   |            |            |   |   |            |           

See Accompanying Notes to Financial Statements

37



---



##### Table of Contents



REDHOOK ALE
BREWERY, INCORPORATED

STATEMENTS OF CASH FLOWS

|                                                                                             |                                                                        |                                             |            |           |          |      |            |           |         |   |            |           |          |  
|-------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------- | ------------------------------------------- | ---------- | --------- | -------- | ---- | ---------- | --------- | ------- | - | ---------- | --------- | -------- | -
|                                                                                             |                                                                        |                                            
|                                                                                             |                                                                        | Year Ended December 31,                    
|                                                                                             |                                                                        |                                            
|                                                                                             |                                                                        | 2003                                        |            | 2002      |          | 2001
|                                                                                             |                                                                        |                                             |            |           |          |     
|Operating Activities                                                                         |                                                                        |                                             |            |           |          |      |            |           |         |   |            |          
|Net Income (Loss)                                                                            |                                                                        | $                                           | (1,838,613 | )         |          | $    | (1,133,283 | )         |         | $ | (1,318,257 | )        
|Adjustments to Reconcile Net Income (Loss) to Net
    Cash Provided by Operating Activities: |                                                                        |                                             |            |           |          |      |            |           |         |   |            |          
|                                                                                             | Depreciation and Amortization                                          |                                             |            | 3,024,536 |          |      |            | 3,092,441 |         |   |            | 3,182,661 |         
|                                                                                             | Deferred Income Taxes                                                  |                                             |            |          |          |      |            | (106,542  | )       |   |            | (700,809  | )       
|                                                                                             | Loss on Disposal of Fixed Assets                                       |                                             |            |          |          |      |            | 97,122    |         |   |            | 13,864    |         
|                                                                                             | Changes in Operating Assets and Liabilities:                           |                                             |            |           |          |      |            |           |         |   |            |           |         
|                                                                                             |                                                                        | Accounts Receivable                         |            |           | (196,218 | )    |            |           | (84,188 | ) |            |           | (330,599 | )
|                                                                                             |                                                                        | Inventories                                 |            |           | (509,579 | )    |            |           | 306,863 |   |            |           | (413,219 | )
|                                                                                             |                                                                        | Other Current Assets                        |            |           | (8,770   | )    |            |           | (69,919 | ) |            |           | 127,733  |  
|                                                                                             |                                                                        | Other Assets                                |            |           | (4,400   | )    |            |           | 53,765  |   |            |           | 259,021  |  
|                                                                                             |                                                                        | Accounts Payable and Other Accrued Expenses |            |           | 63,477   |      |            |           | 417,658 |   |            |           | (686,843 | )
|                                                                                             |                                                                        | Accrued Salaries, Wages and Payroll Taxes   |            |           | (73,937  | )    |            |           | (22,155 | ) |            |           | 128,879  |  
|                                                                                             |                                                                        | Refundable Deposits                         |            |           | 329,525  |      |            |           | 546,348 |   |            |           | 209,013  |  
|                                                                                             |                                                                        |                                             |            |           |          |      |            |           |         |   |            |          
|Net Cash Provided by Operating Activities                                                    |                                                                        |                                             | 786,021    |           |          |      | 3,098,110  |           |         |   | 471,444    |          
|                                                                                             |                                                                        |                                             |            |           |          |      |            |           |         |   |            |          
|Investing Activities                                                                         |                                                                        |                                             |            |           |          |      |            |           |         |   |            |          
|Expenditures for Fixed Assets                                                                |                                                                        |                                             | (991,985   | )         |          |      | (705,416   | )         |         |   | (434,415   | )        
|Other, Net                                                                                   |                                                                        |                                             | (417       | )         |          |      | (29,912    | )         |         |   | (44,875    | )        
|                                                                                             |                                                                        |                                             |            |           |          |      |            |           |         |   |            |          
|Net Cash Used in Investing Activities                                                        |                                                                        |                                             | (992,402   | )         |          |      | (735,328   | )         |         |   | (479,290   | )        
|                                                                                             |                                                                        |                                             |            |           |          |      |            |           |         |   |            |          
|Financing Activities                                                                         |                                                                        |                                             |            |           |          |      |            |           |         |   |            |          
|Principal Payments on Debt                                                                   |                                                                        |                                             | (450,000   | )         |          |      | (450,000   | )         |         |   | (450,000   | )        
|Repurchase of Common Stock                                                                   |                                                                        |                                             | (230,667   | )         |          |      | (1,269,217 | )         |         |   | (665,558   | )        
|Issuance of Common Stock                                                                     |                                                                        |                                             | 3,046      |           |          |      |           |           |         |   |           |          
|                                                                                             |                                                                        |                                             |            |           |          |      |            |           |         |   |            |          
|Net Cash Used in Financing Activities                                                        |                                                                        |                                             | (677,621   | )         |          |      | (1,719,217 | )         |         |   | (1,115,558 | )        
|                                                                                             |                                                                        |                                             |            |           |          |      |            |           |         |   |            |          
|Increase (Decrease) in Cash and Cash Equivalents                                             |                                                                        |                                             | (884,002   | )         |          |      | 643,565    |           |         |   | (1,123,404 | )        
|Cash and Cash Equivalents:                                                                   |                                                                        |                                             |            |           |          |      |            |           |         |   |            |          
|                                                                                             | Beginning of Year                                                      |                                             |            | 7,007,351 |          |      |            | 6,363,786 |         |   |            | 7,487,190 |         
|                                                                                             |                                                                        |                                             |            |           |          |      |            |           |         |   |            |          
|                                                                                             | End of Year                                                            |                                             | $          | 6,123,349 |          |      | $          | 7,007,351 |         |   | $          | 6,363,786 |         
|                                                                                             |                                                                        |                                             |            |           |          |      |            |           |         |   |            |          
|                                                                                            
|Supplemental Disclosures of Cash Flow
    Information:                                       |                                                                        |                                             |            |           |          |      |            |           |         |   |            |          
|                                                                                             | Disposal of Fixed Assets in Exchange
    for Related Deposit Liability |                                             | $          | 603,825   |          |      | $          |          |         |   | $          |          |         
|                                                                                             |                                                                        |                                             |            |           |          |      |            |           |         |   |            |          

See Accompanying Notes to Financial Statements

38



---



##### Table of Contents



REDHOOK ALE
BREWERY, INCORPORATED

NOTES TO FINANCIAL STATEMENTS



|   |                     
|-- | --------------------
|1. | Nature of Operations

Redhook Ale Brewery, Incorporated (the
Company) was formed in 1981 to brew and sell craft
beer. The Company produces its specialty bottled and draft
products in its two technologically advanced, Company-owned
breweries. The Washington Brewery, located in the Seattle suburb
of Woodinville, Washington, began limited operations in late
1994 after completion of the initial phase of construction.
Additional phases of construction on the Washington Brewery were
completed in 1996 and 1997. The Companys New Hampshire
Brewery, located in Portsmouth, New Hampshire, began brewing
operations in late 1996 after construction was completed. The
fermentation capacity at the New Hampshire Brewery was expanded
during the first half of 2003. Each brewery also operates a pub
on the premises, promoting the Companys products, offering
dining and entertainment facilities, and selling retail
merchandise. Prior to 1999, the Company also operated a third
brewery, located in the Fremont neighborhood of Seattle,
Washington. In 1998, brewing operations at the Fremont brewery
location were curtailed, but the Company continued to operate
its Trolleyman Pub at the Fremont location as well as house the
Companys corporate offices. In September 2002, the Company
closed the Trolleyman Pub and moved its corporate offices to the
Washington Brewery location.

Since 1997, the Companys products have been
distributed in the United States in 48 states. The
Companys sales consist predominantly of sales of beer to
third-party distributors and Anheuser-Busch, Incorporated
(A-B) through the Companys distribution
alliance (the Distribution Alliance or the
Alliance) with A-B. The Alliance, executed in
October 1994, consists of a national distribution agreement (the
A-B Distribution Agreement) and an investment by A-B
in the Company (the A-B Investment Agreement). The
Alliance gives the Company access to A-Bs national
distribution network to distribute its products. Pursuant to the
A-B Investment Agreement, A-B invested approximately
$30 million to purchase 1,289,872 shares of the
Companys convertible redeemable Series B Preferred
Stock (the Series B Preferred Stock) and
953,470 shares of the Companys Common Stock
(Common Stock), including 716,714 shares issued
concurrent with the Companys initial public offering. As
of December 31, 2003, A-B held 29.8% of the Companys
outstanding shares of Common Stock, calculated on a Fully
Diluted Basis.

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



| |          
| | ---------
| | Liquidity

The A-B Distribution Agreement has a stated term
of 20 years, but is subject to one-time early termination
by either party without cause on December 31, 2004. The A-B
Distribution Agreement is also terminable at any time by either
party for cause. In the event that the A-B Distribution
Agreement is terminated on or before December 31, 2004, the
terms of the Series B Preferred Stock held by A-B require
the mandatory redemption of the Series B Preferred Stock on
December 31, 2004, at a redemption price equal to
$12.61 per share (approximately $16.3 million in the
aggregate), plus an amount equal to accumulated and unpaid
dividends thereon, if any. The terms of the Series B
Preferred Stock further provide that, if at the time of the
mandatory redemption the Company has insufficient legally
available funds to redeem all shares of Series B Preferred
Stock, then all funds that are legally available must be used to
redeem Series B Preferred Stock. At any time thereafter
when additional funds of the Company become legally available,
such funds must be immediately used to redeem additional shares
of Series B Preferred Stock.

The termination of the A-B Distribution Agreement
for any reason or the failure by the Company to perform any of
its material obligations under the A-B Investment Agreement
would also constitute an event of default under the
Companys bank credit agreement. Upon default, the bank may
declare the entire outstanding term loan balance immediately due
and payable. If the loan balance became due and payable, such
payment would have seniority over the redemption of the
Series B Preferred Stock. If this were to occur, it would
be unlikely that the Company could satisfy its obligations under
the term loan. In all events, unless

39



---



##### Table of Contents



REDHOOK ALE BREWERY, INCORPORATED


NOTES TO FINANCIAL STATEMENTS 
(Continued)

additional capital were raised, the Company would
not have sufficient liquidity to satisfy both its obligation
under the term loan and its obligation to redeem the
Series B Preferred Stock. The Company could seek to
refinance its term loan with one or more banks or obtain
additional equity capital, however, there can be no assurance
the Company would be able to access additional capital to meet
its needs or that such additional capital would be at
commercially reasonable terms. These matters raise substantial
doubt about the Companys ability to continue as a going
concern. The 2003 financial statements do not include any
adjustments that might result from the outcome of this
uncertainty.

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

Management of the Company and A-B are having
ongoing discussions. To date, neither the Company nor
Anheuser-Busch has given notice of its intention to terminate
the A-B Distribution Agreement.



|   |                                
|-- | -------------------------------
|2. | Significant Accounting Policies



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

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



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

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



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

Fixed assets are carried at cost less accumulated
depreciation and accumulated amortization. The costs of repairs
and maintenance are expensed when incurred, while expenditures
for improvements that extend the useful life of an asset are
capitalized. When assets are retired or sold, the asset cost and
related accumulated depreciation or accumulated amortization are
eliminated with any remaining gain or loss reflected in the
statement of operations. Depreciation and amortization of fixed
assets is provided on the straight-line method over the
following estimated useful lives:

|                                        |  |  |               | 
|--------------------------------------- |  |  | ------------- | 
|Buildings                               |  |  | 31 - 40 years | 
|Brewery equipment                       |  |  | 10 - 25 years | 
|Furniture, fixtures and other equipment |  |  | 2 - 10 years  | 
|Vehicles                                |  |  | 5 years       | 



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

The Company evaluates potential impairment of
long-lived assets in accordance with Financial Accounting
Standards Board (FASB) Statement of Financial
Accounting Standard (SFAS) No. 144,
Accounting for the Impairment or Disposal of Long-Lived
Assets. SFAS No. 144 establishes procedures for
review of recoverability and measurement of impairment, if
necessary, of long-lived assets, goodwill and certain

40



---



##### Table of Contents



REDHOOK ALE BREWERY, INCORPORATED


NOTES TO FINANCIAL STATEMENTS 
(Continued)

identifiable intangibles. When facts and
circumstances indicate that the carrying values of long-lived
assets may be impaired, an evaluation of recoverability is
performed by comparing the carrying value of the assets to
projected future undiscounted cash flows in addition to other
quantitative and qualitative analyses. Upon indication that the
carrying value of such assets may not be recoverable, the
Company recognizes an impairment loss by a charge against
current operations. Fixed assets are grouped at the lowest level
for which there are identifiable cash flows when assessing
impairment. During 2003, the Company performed an analysis of
its brewery assets to determine if an impairment might exist.
The Companys estimate of future undiscounted cash flows
indicated that such carrying values were expected to be
recovered.



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

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



| |                            
| | ---------------------------
| | Shipping and Handling Costs

Costs incurred for the shipping of finished goods
are included in cost of sales in the accompanying statement of
operations.



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

The Company records federal and state income
taxes in accordance with SFAS No. 109, Accounting
for Income Taxes, whereby deferred taxes are provided for
the temporary differences between the financial reporting basis
and the tax basis of the Companys assets and liabilities.
These deferred tax assets and liabilities are measured under the
provisions of the currently enacted tax laws. The Company will
establish a valuation allowance if it is more likely than not
that these items will either expire before the Company is able
to realize their benefits, or that future deductibility is
uncertain.



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

Advertising costs, comprised of radio, print and
outdoor advertising, sponsorships and printed product
information, as well as costs to produce these media, are
expensed as incurred. For the years ended December 31,
2003, 2002, and 2001, advertising expenses totaled $1,706,000,
$1,655,000, and $2,224,000 respectively.



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

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



| |                         
| | ------------------------
| | Stock-Based Compensation

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

41



---



##### Table of Contents



REDHOOK ALE BREWERY, INCORPORATED


NOTES TO FINANCIAL STATEMENTS 
(Continued)

The following table illustrates the effect on net
income (loss) and earnings (loss) per share for the years ended
December 31, 2003, 2002 and 2001 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:

|                                                                                                                                             |                       |                         |            |       |   |      |            |       |   |   |            |       |  
|-------------------------------------------------------------------------------------------------------------------------------------------- | --------------------- | ----------------------- | ---------- | ----- | - | ---- | ---------- | ----- | - | - | ---------- | ----- | -
|                                                                                                                                             |                       |                        
|                                                                                                                                             |                       | Year Ended December 31,
|                                                                                                                                             |                       |                        
|                                                                                                                                             |                       | 2003                    |            | 2002  |   | 2001
|                                                                                                                                             |                       |                         |            |       |   |     
|Net income (loss), as reported                                                                                                               |                       | $                       | (1,838,613 | )     |   | $    | (1,133,283 | )     |   | $ | (1,318,257 | )    
|Add: Stock-based employee compensation expense as
    reported under APB 25                                                                  |                       |                         |           |       |   |      |           |       |   |   |           |      
|Less: Stock-based employee compensation expense
    determined under fair value based method for all options, net of
    related tax effects |                       |                         | (260,220   | )     |   |      | (219,518   | )     |   |   | (154,761   | )    
|                                                                                                                                             |                       |                         |            |       |   |      |            |       |   |   |            |      
|Pro forma net income (loss)                                                                                                                  |                       | $                       | (2,098,833 | )     |   | $    | (1,352,801 | )     |   | $ | (1,473,018 | )    
|                                                                                                                                             |                       |                         |            |       |   |      |            |       |   |   |            |      
|Earnings (loss) per share:                                                                                                                   |                       |                         |            |       |   |      |            |       |   |   |            |      
|                                                                                                                                             | Basic  as reported   |                         | $          | (0.30 | ) |      | $          | (0.18 | ) |   | $          | (0.19 | )
|                                                                                                                                             | Basic  pro forma     |                         | $          | (0.34 | ) |      | $          | (0.21 | ) |   | $          | (0.21 | )
|                                                                                                                                             | Diluted  as reported |                         | $          | (0.30 | ) |      | $          | (0.18 | ) |   | $          | (0.19 | )
|                                                                                                                                             | Diluted  pro forma   |                         | $          | (0.34 | ) |      | $          | (0.21 | ) |   | $          | (0.21 | )

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:

|                                      |  |      |       |      |  |      |        |   |  |  |        |  
|------------------------------------- |  | ---- | ----- | ---- |  | ---- | ------ | - |  |  | ------ | -
|                                      |  | 2003 |       | 2002 |  | 2001
|                                      |  |      |       |      |  |     
|Expected life of option               |  |      | 5 yrs |      |  |      | 5 yrs. |   |  |  | 5 yrs. |  
|Risk-free interest rate               |  |      | 2.63  | %    |  |      | 3.25   | % |  |  | 4.63   | %
|Volatility of the Companys stock     |  |      | 52.5  | %    |  |      | 63.3   | % |  |  | 54.4   | %
|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:

|                                                  |  |      |        |      |  |      |         |  |  |   |         | 
|------------------------------------------------- |  | ---- | ------ | ---- |  | ---- | ------- |  |  | - | ------- | 
|                                                  |  | 2003 |        | 2002 |  | 2001
|                                                  |  |      |        |      |  |     
|Total number of options granted                   |  |      | 12,000 |      |  |      | 296,800 |  |  |   | 590,600 | 
|Estimated fair value of each option granted       |  | $    | 0.97   |      |  | $    | 1.04    |  |  | $ | 0.90    | 
|Total estimated fair value of all options granted |  | $    | 12,000 |      |  | $    | 309,000 |  |  | $ | 532,000 | 

In accordance with SFAS 148, the weighted
average estimated fair value of stock options granted is
required to be based on a theoretical statistical model using
the preceding Black-Scholes assumptions. In actuality, because
Company stock options do not trade on a secondary exchange,
employees can receive no value nor derive any benefit from
holding stock options under these plans without an increase,
above the grant price, in the market price of the Companys
stock. Such an increase in stock price would benefit all
stockholders commensurately. Refer to the table of options
currently outstanding in Note 7 for the weighted average
exercise price for options granted during 2003, 2002 and 2001.

42



---



##### Table of Contents



REDHOOK ALE BREWERY, INCORPORATED


NOTES TO FINANCIAL STATEMENTS 
(Continued)



| |                          
| | -------------------------
| | Earnings (Loss) per Share

The Company follows SFAS No. 128,
Earnings per Share. Basic loss per share is calculated
using the weighted average number of shares of Common Stock
outstanding. The calculation of adjusted weighted average shares
outstanding for purposes of computing diluted earnings per share
includes the dilutive effect of all outstanding convertible
redeemable preferred stock and outstanding stock options for the
periods when the Company reports net income. The convertible
preferred stock and outstanding stock options have been excluded
from the calculation of diluted loss per share for the years
ended December 31, 2003, 2002 and 2001 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 May 2003, the FASB issued Statement of
Financial Accounting Standards No. 150, Accounting for
Certain Financial Instruments with Characteristics of both
Liabilities and Equity. This statement requires that certain
financial instruments be accounted for as liabilities. The
financial instruments affected include mandatorily redeemable
stock, certain financial instruments that require or may require
the issuer to buy back some of its shares in exchange for cash
or other assets, and certain obligations that can be settled
with shares of stock. SFAS No. 150 is effective for
all financial instruments entered into or modified after
May 31, 2003, and must be applied to the Companys
existing financial instruments effective June 30, 2003, the
beginning of the first fiscal period after June 15, 2003.
The adoption of SFAS No. 150 did not have an impact on
the Companys financial statements or disclosures.

43



---



##### Table of Contents



REDHOOK ALE BREWERY, INCORPORATED


NOTES TO FINANCIAL STATEMENTS 
(Continued)



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

Inventories consist of the following:

|                        |  |              |           |      |  |   |           | 
|----------------------- |  | ------------ | --------- | ---- |  | - | --------- | 
|                        |  |             
|                        |  | December 31,
|                        |  |             
|                        |  | 2003         |           | 2002
|                        |  |              |           |     
|Raw materials           |  | $            | 1,184,733 |      |  | $ | 1,060,760 | 
|Work in process         |  |              | 900,388   |      |  |   | 797,712   | 
|Finished goods          |  |              | 408,561   |      |  |   | 341,963   | 
|Promotional merchandise |  |              | 631,147   |      |  |   | 413,676   | 
|Packaging materials     |  |              | 217,177   |      |  |   | 218,316   | 
|                        |  |              |           |      |  |   |           | 
|                        |  | $            | 3,342,006 |      |  | $ | 2,832,427 | 
|                        |  |              |           |      |  |   |           | 

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



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

Fixed assets consist of the following:

|                                               |  |              |            |      |  |   |            | 
|---------------------------------------------- |  | ------------ | ---------- | ---- |  | - | ---------- | 
|                                               |  |             
|                                               |  | December 31,
|                                               |  |             
|                                               |  | 2003         |            | 2002
|                                               |  |              |            |     
|Brewery equipment                              |  | $            | 45,941,954 |      |  | $ | 45,244,253 | 
|Buildings                                      |  |              | 35,753,363 |      |  |   | 35,717,678 | 
|Land and improvements                          |  |              | 4,601,427  |      |  |   | 4,599,282  | 
|Furniture, fixtures and other equipment        |  |              | 2,055,809  |      |  |   | 3,605,166  | 
|Vehicles                                       |  |              | 81,730     |      |  |   | 81,730     | 
|Construction in progress                       |  |              | 37,567     |      |  |   | 51,881     | 
|                                               |  |              |            |      |  |   |            | 
|                                               |  |              | 88,471,850 |      |  |   | 89,299,990 | 
|Less accumulated depreciation and amortization |  |              | 22,772,192 |      |  |   | 20,939,274 | 
|                                               |  |              |            |      |  |   |            | 
|                                               |  | $            | 65,699,658 |      |  | $ | 68,360,716 | 
|                                               |  |              |            |      |  |   |            | 



|   |     
|-- | ----
|5. | Debt

Long-term debt consists of the following:

|                                                                                                                                     |  |              |           |      |  |   |           |  
|------------------------------------------------------------------------------------------------------------------------------------ |  | ------------ | --------- | ---- |  | - | --------- | -
|                                                                                                                                     |  |             
|                                                                                                                                     |  | December 31,
|                                                                                                                                     |  |             
|                                                                                                                                     |  | 2003         |           | 2002
|                                                                                                                                     |  |              |           |     
|Term Loan, payable to bank monthly at $37,500
    plus accrued interest; interest at 2.9% at December 31,
    2003; due June 5, 2007 |  | $            | 6,075,000 |      |  | $ | 6,525,000 |  
|Current portion                                                                                                                      |  |              | (450,000  | )    |  |   | (450,000  | )
|                                                                                                                                     |  |              |           |      |  |   |           |  
|                                                                                                                                     |  | $            | 5,625,000 |      |  | $ | 6,075,000 |  
|                                                                                                                                     |  |              |           |      |  |   |           |  

Annual principal payments required on debt:

|     |  |   |           | 
|---- |  | - | --------- | 
|2004 |  | $ | 450,000   | 
|2005 |  |   | 450,000   | 
|2006 |  |   | 450,000   | 
|2007 |  |   | 4,725,000 | 
|     |  |   |           | 
|     |  | $ | 6,075,000 | 
|     |  |   |           | 

44



---



##### Table of Contents



REDHOOK ALE BREWERY, INCORPORATED


NOTES TO FINANCIAL STATEMENTS 
(Continued)

The Company has a credit agreement with a bank
under which a term loan (the Term Loan) and a
$2 million revolving credit facility (the Revolving
Facility) are provided. The Term Loan, which originated in
June 1997 upon the conversion of a $9 million secured
credit facility, had a five-year term with a 20-year
amortization schedule. In June 2001, the credit agreement was
amended to extend the maturity date on the Term Loan to
June 5, 2007. In June 2002, the credit agreement was
amended to extend the commitment period for the Revolving
Facility to July 1, 2004. In October 2003, the credit
agreement was amended to reduce the $10 million revolving
credit facility to a $2 million revolving credit facility.
The Term Loan and the Revolving Facility are secured by
substantially all of the Companys assets. Through
June 4, 2002, interest on the Term Loan accrued at a
variable rate based on the London Inter Bank Offered Rate
(LIBOR) plus 1.25%. Since June 5, 2002,
interest on the Term Loan accrued at LIBOR plus 1.75%. The
interest rate on the Revolving Facility is the applicable LIBOR
plus 1.00% to 2.00%, depending on the Companys funded debt
ratio. The Company has the option to fix the applicable interest
rate for up to twelve months by selecting LIBOR for one- to
twelve- month periods as a base. As of December 31, 2003,
there were no borrowings outstanding on the Revolving Facility.
The Company was in compliance with all covenants mandated by the
credit agreement for all quarters and the year ended
December 31, 2003. The termination of the A-B Distribution
Agreement for any reason or the failure by the Company to
perform any of its material obligations under the A-B Investment
Agreement would constitute an event of default under the credit
agreement and the bank may declare the entire outstanding loan
balance immediately due and payable.

The Company made interest payments totaling
$194,000, $233,000 and $425,000 for the years ended
December 31, 2003, 2002 and 2001, respectively.

6.     Convertible
Redeemable Preferred Stock

Convertible redeemable preferred stock
outstanding is as follows:

|                                                                                                                         |  |              |            |      |  |   |            | 
|------------------------------------------------------------------------------------------------------------------------ |  | ------------ | ---------- | ---- |  | - | ---------- | 
|                                                                                                                         |  |             
|                                                                                                                         |  | December 31,
|                                                                                                                         |  |             
|                                                                                                                         |  | 2003         |            | 2002
|                                                                                                                         |  |              |            |     
|Series B, par value $0.005 per share,
    issued and outstanding 1,289,872 shares; net of unamortized
    offering costs |  | $            | 16,232,655 |      |  | $ | 16,188,255 | 
|                                                                                                                         |  |              |            |      |  |   |            | 

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

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

The A-B Investment Agreement provides that, to
the extent A-Bs ownership exceeds 30% of the outstanding
shares of Common Stock, calculated on a Fully Diluted Basis, as
a result of a rights offering, A-B will, in certain
circumstances, take steps to divest itself of such shares no
later than the later of (i) one year from the date of such
purchase or acquisition and (ii) the earliest period in
which such shares may be sold pursuant to Rule 144 under
the Securities Act of 1933, as amended. As of December 31,
2003, A-B held 29.8% of the Companys outstanding shares of
Common Stock, calculated on a Fully Diluted Basis.

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

45



---



##### Table of Contents



REDHOOK ALE BREWERY, INCORPORATED


NOTES TO FINANCIAL STATEMENTS 
(Continued)

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

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

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

7.     Common
Stockholders Equity



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

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



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

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



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

In 2002, the Companys shareholders approved
the 2002 Stock Option Plan (the 2002 Plan). The
maximum number of shares of Common Stock for which options may
be granted during the term of the 2002 Plan is 346,000. The
Compensation Committee of the Board of Directors administers the
2002 Plan, determining to whom options are to be granted, the
number of shares of Common Stock for which the options are
exercisable, the purchase prices of such shares, and all other
terms and conditions. Options granted to employees of the
Company in 2002 under the 2002 Plan vest over a five-year
period, and options granted to the Companys Board of
Directors in 2002 and 2003 under the 2002 Plan became
exercisable six months after

46



---



##### Table of Contents



REDHOOK ALE BREWERY, INCORPORATED


NOTES TO FINANCIAL STATEMENTS 
(Continued)

the grant date. Options were granted at an
exercise price equal to fair market value of the underlying
Common Stock on the grant date and will terminate on the tenth
anniversary of the grant date.

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

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

|                             |           |           |           |          |   |             |      |          |  |  |         |  |  |   |      |  | 
|---------------------------- | --------- | --------- | --------- | -------- | - | ----------- | ---- | -------- |  |  | ------- |  |  | - | ---- |  | 
|                             |           | Shares of |           |          |   |             |      |         
|                             |           | Common    |           | Weighted |   | Options     |      | Weighted
|                             |           | Stock     |           | Average  |   | Exercisable |      | Average 
|                             |           | Under the |           | Exercise |   | at End of   |      | Exercise
|                             |           | Plans     |           | Price    |   | Year        |      | Price   
|                             |           |           |           |          |   |             |      |         
|Balance at January 1, 2001   |           |           | 746,752   |          |   | $           | 6.64 |          |  |  | 395,702 |  |  | $ | 8.75 | 
|                             | Granted   |           |           | 590,600  |   |             |      | 1.86     |  |  |         |  |  |   |      |  | 
|                             | Exercised |           |           |         |   |             |      |         |  |  |         |  |  |   |      |  | 
|                             | Canceled  |           |           | (129,260 | ) |             |      | 7.00     |  |  |         |  |  |   |      |  | 
|                             |           |           |           |          |   |             |      |          |  |  |         |  |  |   |      | 
|Balance at December 31, 2001 |           |           | 1,208,092 |          |   |             | 4.27 |          |  |  | 439,622 |  |  |   | 7.57 | 
|                             | Granted   |           |           | 296,800  |   |             |      | 2.03     |  |  |         |  |  |   |      |  | 
|                             | Exercised |           |           |         |   |             |      |         |  |  |         |  |  |   |      |  | 
|                             | Canceled  |           |           | (97,290  | ) |             |      | 5.16     |  |  |         |  |  |   |      |  | 
|                             |           |           |           |          |   |             |      |          |  |  |         |  |  |   |      | 
|Balance at December 31, 2002 |           |           | 1,407,602 |          |   |             | 3.73 |          |  |  | 555,631 |  |  |   | 6.17 | 
|                             | Granted   |           |           | 12,000   |   |             |      | 2.18     |  |  |         |  |  |   |      |  | 
|                             | Exercised |           |           | (1,600   | ) |             |      | 1.90     |  |  |         |  |  |   |      |  | 
|                             | Canceled  |           |           | (45,680  | ) |             |      | 7.03     |  |  |         |  |  |   |      |  | 
|                             |           |           |           |          |   |             |      |          |  |  |         |  |  |   |      | 
|Balance at December 31, 2003 |           |           | 1,372,322 |          |   | $           | 3.61 |          |  |  | 766,562 |  |  | $ | 4.85 | 
|                             |           |           |           |          |   |             |      |          |  |  |         |  |  |   |      | 

The following table summarizes information for
options currently outstanding and exercisable at
December 31, 2003:

|                         |  |                     |           |                     |  |          |      |             |  |          |       |  |  |  |         |  |  |   |       | 
|------------------------ |  | ------------------- | --------- | ------------------- |  | -------- | ---- | ----------- |  | -------- | ----- |  |  |  | ------- |  |  | - | ----- | 
|                         |  |                     |           |                    
|                         |  | 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   |                     |  |          | 6.64 |             |  | $        | 1.58  |  |  |  | 83,250  |  |  | $ | 1.58  | 
|1.87 to   1.87           |  |                     | 546,750   |                     |  |          | 7.59 |             |  |          | 1.87  |  |  |  | 218,820 |  |  |   | 1.87  | 
|2.02 to   2.02           |  |                     | 271,331   |                     |  |          | 8.66 |             |  |          | 2.02  |  |  |  | 56,171  |  |  |   | 2.02  | 
|2.18 to   3.97           |  |                     | 240,599   |                     |  |          | 5.71 |             |  |          | 3.82  |  |  |  | 201,679 |  |  |   | 3.79  | 
|5.73 to  22.75           |  |                     | 189,042   |                     |  |          | 3.17 |             |  |          | 9.80  |  |  |  | 189,042 |  |  |   | 9.80  | 
|25.50 to  25.50          |  |                     | 17,600    |                     |  |          | 1.91 |             |  |          | 25.50 |  |  |  | 17,600  |  |  |   | 25.50 | 
|                         |  |                     |           |                     |  |          |      |             |  |          |       |  |  |  |         |  |  |   |       | 
|$ 1.49 to $25.50         |  |                     | 1,372,322 |                     |  |          | 6.71 |             |  | $        | 3.61  |  |  |  | 766,562 |  |  | $ | 4.85  | 
|                         |  |                     |           |                     |  |          |      |             |  |          |       |  |  |  |         |  |  |   |       | 

47



---



##### Table of Contents



REDHOOK ALE BREWERY, INCORPORATED


NOTES TO FINANCIAL STATEMENTS 
(Continued)

Under the terms of the Companys incentive
stock option plans, employees and directors may be granted
options to purchase the Companys Common Stock at the
market price on the date the option is granted. At
December 31, 2003, 2002 and 2001, a total of 62,269, 64,399
and 104,261 options, respectively, were available for future
grants under the plans.

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



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

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



|   |                          
|-- | -------------------------
|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,
|                                           |                                                |                        
|                                           |                                                | 2003                    |            | 2002       |   | 2001
|                                           |                                                |                         |            |            |   |     
|Net income (loss)                          |                                                | $                       | (1,838,613 | )          |   | $    | (1,133,283 | )          |   | $ | (1,318,257 | )         
|Preferred stock accretion                  |                                                |                         | (44,400    | )          |   |      | (44,400    | )          |   |   | (44,400    | )         
|                                           |                                                |                         |            |            |   |      |            |            |   |   |            |           
|                                           | Income (loss) available to common stockholders |                         | $          | (1,883,013 | ) |      | $          | (1,177,683 | ) |   | $          | (1,362,657 | )
|                                           |                                                |                         |            |            |   |      |            |            |   |   |            |           
|Weighted-average common shares outstanding |                                                |                         | 6,243,208  |            |   |      | 6,689,189  |            |   |   | 7,070,801  |           
|                                           |                                                |                         |            |            |   |      |            |            |   |   |            |           
|                                           | Basic and diluted earnings (loss) per share    |                         | $          | (0.30      | ) |      | $          | (0.18      | ) |   | $          | (0.19      | )
|                                           |                                                |                         |            |            |   |      |            |            |   |   |            |           

The convertible redeemable preferred stock and
outstanding stock options have been excluded from the
calculation of diluted loss per share for the years ended
December 31, 2003, 2002 and 2001 because their effect is
antidilutive.

48



---



##### 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,
|         |  |                        
|         |  | 2003                    |        | 2002 |  | 2001
|         |  |                         |        |      |  |     
|Current  |  | $                       | 29,801 |      |  | $    | 30,344   |   |  | $ | 21,706   |  
|Deferred |  |                         |       |      |  |      | (155,954 | ) |  |   | (700,809 | )
|         |  |                         |        |      |  |      |          |   |  |   |          |  
|         |  | $                       | 29,801 |      |  | $    | (125,610 | ) |  | $ | (679,103 | )
|         |  |                         |        |      |  |      |          |   |  |   |          |  

The current tax expense is attributable to state
taxes.

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

|                                                             |  |                         |       |      |  |      |       |   |  |  |      |  
|------------------------------------------------------------ |  | ----------------------- | ----- | ---- |  | ---- | ----- | - |  |  | ---- | -
|                                                             |  |                        
|                                                             |  | Year Ended December 31,
|                                                             |  |                        
|                                                             |  | 2003                    |       | 2002 |  | 2001
|                                                             |  |                         |       |      |  |     
|Federal statutory rate                                       |  |                         | 34.0  | %    |  |      | 34.0  | % |  |  | 34.0 | %
|State taxes, net of federal benefit                          |  |                         | 2.7   |      |  |      | 2.6   |   |  |  | 2.5  |  
|Permanent differences, primarily meals and
    entertainment |  |                         | (3.8  | )    |  |      | (4.8  | ) |  |  | (2.8 | )
|Other items, net                                             |  |                         | 0.2   |      |  |      | (0.3  | ) |  |  | 0.3  |  
|Valuation allowance                                          |  |                         | (34.7 | )    |  |      | (21.5 | ) |  |  |     |  
|                                                             |  |                         |       |      |  |      |       |   |  |  |      |  
|                                                             |  |                         | (1.6  | )%   |  |      | 10.0  | % |  |  | 34.0 | %
|                                                             |  |                         |       |      |  |      |       |   |  |  |      |  

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

|                           |                                  |              |            |            |   |   |            |            |  
|-------------------------- | -------------------------------- | ------------ | ---------- | ---------- | - | - | ---------- | ---------- | -
|                           |                                  |             
|                           |                                  | December 31,
|                           |                                  |             
|                           |                                  | 2003         |            | 2002      
|                           |                                  |              |            |           
|Deferred tax liabilities:  |                                  |              |            |            |   |   |            |           
|                           | Tax-over-book depreciation       |              | $          | 11,373,318 |   |   | $          | 11,252,106 |  
|                           | Other                            |              |            | 119,213    |   |   |            | 119,213    |  
|                           |                                  |              |            |            |   |   |            |           
|                           |                                  |              | 11,492,531 |            |   |   | 11,371,319 |           
|Deferred tax assets:       |                                  |              |            |            |   |   |            |           
|                           | NOL and AMT credit carryforwards |              |            | 11,542,567 |   |   |            | 10,923,999 |  
|                           | Other                            |              |            | 218,849    |   |   |            | 249,461    |  
|                           | Valuation allowance              |              |            | (737,683   | ) |   |            | (270,939   | )
|                           |                                  |              |            |            |   |   |            |           
|                           |                                  |              | 11,023,733 |            |   |   | 10,902,521 |           
|                           |                                  |              |            |            |   |   |            |           
|Net deferred tax liability |                                  | $            | 468,798    |            |   | $ | 468,798    |           
|                           |                                  |              |            |            |   |   |            |           

As of December 31, 2003, the primary
components of the Companys deferred tax asset presented
above were: federal net operating tax loss (NOL)
carryforwards of $30.8 million, or $10.5 million
tax-effected; federal alternative minimum tax credit
carryforwards of $135,000; and state NOL carryforwards of
$915,000 tax-effected. The federal NOL carryforwards expire from
2012 through 2023; alternative minimum tax credit carryforwards
can be utilized to offset regular tax liabilities in future
years and have no expiration date; and state NOL carryforwards
expire through 2018. In 2002, the Company received a $49,000
refund resulting from the carryback of a federal alternative
minimum tax credit to reduce a prior years tax liability.

49



---



##### Table of Contents



REDHOOK ALE BREWERY, INCORPORATED


NOTES TO FINANCIAL STATEMENTS 
(Continued)

In accordance with SFAS No. 109, the Company
established a valuation allowance in 2002 and increased it
further in 2003. The net change in the valuation allowance
during the years ended December 31, 2003 and
December 31, 2002, was an increase of $467,000 and an
increase of $271,000, respectively. The valuation allowance
covers a portion of the Companys deferred tax assets,
specifically certain federal and state NOLs that may expire
before the Company is able to utilize the tax benefit. The
Company evaluates the potential recoverability of its deferred
tax assets on a quarterly basis and, to the extent necessary,
records a valuation allowance when circumstances indicate that
the deferred tax asset may expire before the Company is able to
utilize the tax benefit. Realization of the benefit is dependent
on the Companys ability to generate future
U.S. taxable income. To the extent that the Company
continues to be unable to generate adequate taxable income in
future periods, the Company will not be able to recognize
additional tax benefits and may be required to record a greater
valuation allowance covering potentially expiring NOLs.



|    |            
|--- | -----------
|10. | Commitments

Rent expense for the years ended
December 31, 2003, 2002 and 2001 totaled $247,000, $527,000
and $567,000, respectively.

Minimum aggregate future lease payments under
noncancelable operating leases as of December 31, 2003 are
as follows:

|           |  |   |            | 
|---------- |  | - | ---------- | 
|2004       |  | $ | 266,529    | 
|2005       |  |   | 268,581    | 
|2006       |  |   | 265,181    | 
|2007       |  |   | 263,097    | 
|2008       |  |   | 263,097    | 
|Thereafter |  |   | 12,363,180 | 
|           |  |   |            | 
|           |  | $ | 13,689,665 | 
|           |  |   |            | 

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

In May 1995, the Company entered into an
agreement to lease the land on which the New Hampshire Brewery
was subsequently constructed. The initial lease period runs
through April 2047 and may be extended at the Companys
option for two additional seven-year terms. The lease also
provides the Company with the first right of refusal to purchase
the premises should the lessor receive an offer to sell the
property to a third party. The monthly rent commenced upon the
completion of the facility, and will escalate by 5% at the end
of every five-year period beginning in 2005.

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 2007. The Company believes that hop
commitments in excess of future requirements, if any, will not
materially affect its financial condition or results of
operations.

50



---



##### Table of Contents



REDHOOK ALE BREWERY, INCORPORATED


NOTES TO FINANCIAL STATEMENTS 
(Continued)



|    |                      
|--- | ---------------------
|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. Employee contributions may not exceed a
specific dollar amount determined by law and rules of the
Internal Revenue Service. The Company matches 100% of each
dollar contributed by a participant employed by the Company on
the last day of the calendar year, with a maximum matching
contribution of 4% of a participants compensation. The
Companys contributions to the plan vest incrementally over
five years of service by the employee. The Companys
contributions to the plan totaled $231,000, $214,000 and
$203,000 in 2003, 2002 and 2001, respectively.



|    |                                                                           
|--- | --------------------------------------------------------------------------
|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. While wholesale distributors and A-B account for
substantially all accounts receivable, this concentration risk
is limited due to the number of distributors, their geographic
dispersion, and state laws regulating the financial affairs of
distributors of alcoholic beverages.

The Companys most significant non-Alliance
wholesaler, K&L Distributors, Inc., an independent A-B
distributor, accounted for approximately 13%, 13% and 14% of
total sales in 2003, 2002 and 2001, respectively. Sales to A-B
through the Distribution Alliance represented 65%, 63% and 62%
of total sales, or $27,312,000, $25,914,000 and $24,990,000 (net
of certain fees the Company must pay to A-B in connection with
sales to A-B) in 2003, 2002 and 2001, respectively. Additional
fees incurred by the Company related to A-B administrative and
handling charges totaled $300,000, $268,000 and $238,000 in
2003, 2002 and 2001, respectively. The Company purchased certain
materials through A-B totaling $6,750,000 $4,115,000 and
$4,527,000 in 2003, 2002 and 2001, respectively. The net amount
due from A-B was $150,000 as of December 31, 2003 and the
net amount due to A-B was $281,000 as of December 31, 2002.



|    |                             
|--- | ----------------------------
|13. | Subsequent Event (Unaudited)

On February 3, 2004, the Company announced
that it had reached an agreement in principle with Widmer
Brothers Brewing Company to form a joint sales and marketing
organization that will serve both companies operations and
the Western United States. The joint organization was formed in
March 2004 as a limited liability company and is seeking
required regulatory approvals. During this preliminary stage,
the Company and Widmer have agreed to share certain start-up
expenses of the joint organization, including staff salaries,
severance expenses, legal fees, regulatory license fees an
overhead costs. The Company anticipates that the joint
organization will be fully operational in the second quarter of
2004.

51



---



##### Table of Contents



REDHOOK ALE BREWERY, INCORPORATED


NOTES TO FINANCIAL STATEMENTS 
(Continued)



|    |                                     
|--- | ------------------------------------
|14. | Quarterly Financial Data (Unaudited)

|                                             |  |                                          |        |                    |  |         |        |         |  |         |        |          |  |         |        |         |  |   |       |   |  |   |        |   |  |   |        |   |  |   |       |  
|-------------------------------------------- |  | ---------------------------------------- | ------ | ------------------ |  | ------- | ------ | ------- |  | ------- | ------ | -------- |  | ------- | ------ | ------- |  | - | ----- | - |  | - | ------ | - |  | - | ------ | - |  | - | ----- | -
|                                             |  |                                          |        |                   
|                                             |  | 2003 Quarter Ended                       |        | 2002 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                                        |  | $                                        | 10,099 |                    |  | $       | 11,110 |         |  | $       | 12,332 |          |  | $       | 8,671  |         |  | $ | 9,880 |   |  | $ | 10,691 |   |  | $ | 11,420 |   |  | $ | 8,921 |  
|Less Excise Taxes                            |  |                                          | 828    |                    |  |         | 868    |         |  |         | 1,068  |          |  |         | 733    |         |  |   | 804   |   |  |   | 897    |   |  |   | 995    |   |  |   | 769   |  
|                                             |  |                                          |        |                    |  |         |        |         |  |         |        |          |  |         |        |         |  |   |       |   |  |   |        |   |  |   |        |   |  |   |       |  
|Net Sales                                    |  |                                          | 9,271  |                    |  |         | 10,242 |         |  |         | 11,264 |          |  |         | 7,938  |         |  |   | 9,076 |   |  |   | 9,794  |   |  |   | 10,425 |   |  |   | 8,152 |  
|Cost of Sales                                |  |                                          | 7,412  |                    |  |         | 7,178  |         |  |         | 7,844  |          |  |         | 6,267  |         |  |   | 6,910 |   |  |   | 7,141  |   |  |   | 7,397  |   |  |   | 6,150 |  
|                                             |  |                                          |        |                    |  |         |        |         |  |         |        |          |  |         |        |         |  |   |       |   |  |   |        |   |  |   |        |   |  |   |       |  
|Gross Profit                                 |  |                                          | 1,859  |                    |  |         | 3,064  |         |  |         | 3,420  |          |  |         | 1,671  |         |  |   | 2,166 |   |  |   | 2,653  |   |  |   | 3,028  |   |  |   | 2,002 |  
|Selling, General and Administrative Expenses |  |                                          | 2,683  |                    |  |         | 3,236  |         |  |         | 2,937  |          |  |         | 2,833  |         |  |   | 2,133 |   |  |   | 2,987  |   |  |   | 2,982  |   |  |   | 2,807 |  
|                                             |  |                                          |        |                    |  |         |        |         |  |         |        |          |  |         |        |         |  |   |       |   |  |   |        |   |  |   |        |   |  |   |       |  
|Operating Income (Loss)                      |  |                                          | (824   | )                  |  |         | (172   | )       |  |         | 483    |          |  |         | (1,162 | )       |  |   | 33    |   |  |   | (334   | ) |  |   | 46     |   |  |   | (805  | )
|Interest Expense                             |  |                                          | (45    | )                  |  |         | (46    | )       |  |         | (50    | )        |  |         | (51    | )       |  |   | (58   | ) |  |   | (62    | ) |  |   | (56    | ) |  |   | (54   | )
|Other Income (Expense)  Net                 |  |                                          | 18     |                    |  |         | 7      |         |  |         | 15     |          |  |         | 19     |         |  |   | 22    |   |  |   | (24    | ) |  |   | 8      |   |  |   | 25    |  
|                                             |  |                                          |        |                    |  |         |        |         |  |         |        |          |  |         |        |         |  |   |       |   |  |   |        |   |  |   |        |   |  |   |       |  
|Income (Loss) before Income Taxes            |  |                                          | (851   | )                  |  |         | (211   | )       |  |         | 448    |          |  |         | (1,194 | )       |  |   | (3    | ) |  |   | (420   | ) |  |   | (2     | ) |  |   | (834  | )
|Income Tax Provision (Benefit)               |  |                                          | 30     |                    |  |         |       |         |  |         |       |          |  |         |       |         |  |   |      |   |  |   | (65    | ) |  |   |       |   |  |   | (61   | )
|                                             |  |                                          |        |                    |  |         |        |         |  |         |        |          |  |         |        |         |  |   |       |   |  |   |        |   |  |   |        |   |  |   |       |  
|Net Income (Loss)                            |  | $                                        | (881   | )                  |  | $       | (211   | )       |  | $       | 448    |          |  | $       | (1,194 | )       |  | $ | (3    | ) |  | $ | (355   | ) |  | $ | (2     | ) |  | $ | (773  | )
|                                             |  |                                          |        |                    |  |         |        |         |  |         |        |          |  |         |        |         |  |   |       |   |  |   |        |   |  |   |        |   |  |   |       |  
|Basic Earnings (Loss) per Share              |  | $                                        | (0.14  | )                  |  | $       | (0.04  | )       |  | $       | 0.07   |          |  | $       | (0.19  | )       |  | $ | 0.00  |   |  | $ | (0.05  | ) |  | $ | 0.00   |   |  | $ | (0.11 | )
|                                             |  |                                          |        |                    |  |         |        |         |  |         |        |          |  |         |        |         |  |   |       |   |  |   |        |   |  |   |        |   |  |   |       |  
|Diluted Earnings (Loss) per Share            |  | $                                        | (0.14  | )                  |  | $       | (0.04  | )       |  | $       | 0.06   |          |  | $       | (0.19  | )       |  | $ | 0.00  |   |  | $ | (0.05  | ) |  | $ | 0.00   |   |  | $ | (0.11 | )
|                                             |  |                                          |        |                    |  |         |        |         |  |         |        |          |  |         |        |         |  |   |       |   |  |   |        |   |  |   |        |   |  |   |       |  
|Barrels Shipped                              |  |                                          | 54.6   |                    |  |         | 58.7   |         |  |         | 67.9   |          |  |         | 47.7   |         |  |   | 54.3  |   |  |   | 58.4   |   |  |   | 63.1   |   |  |   | 50.1  |  

52



---



##### Table of Contents








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

None.






|         |                        
|-------- | -----------------------
|Item 9A. | Controls and Procedures

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

No changes in the Companys internal control
over financial reporting were identified in connection with the
evaluation that has materially affected, or is reasonably likely
to materially affect, the Companys internal control over
financial reporting.




PART III.






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

The response to this Item is contained in part in
the Companys definitive proxy statement for its 2004
Annual Meeting of Stockholders (the 2004 Proxy
Statement) under the captions Board of
Directors and Section 16(a) Beneficial
Ownership Reporting Compliance, and the information
contained therein is incorporated herein by reference.

Information regarding executive officers is set
forth herein in Part I, Item 4A, under the
caption Executive Officers of the Company.

The Company has adopted a Code of Ethics
applicable to all employees, including the principal executive
officer, principal financial officer, principal accounting
officer and directors. A copy of the Code of Ethics is available
on the Companys website at www.Redhook.com under
Corporate Governance. Any waivers of the code for
the Companys directors or executive officers will be
approved by the Board of Directors. The Company will disclose
any such waivers on a Form 8-K within five business days
after the waiver is approved.






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

The response to this Item is contained in the
2004 Proxy Statement under the caption Executive
Compensation, and the information contained therein is
incorporated herein by reference.






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

The response to this Item is contained in part in
the 2004 Proxy Statement under the captions Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters, and Securities
Authorized for Issuance Under Equity Compensation Plans
and the information contained therein is incorporated herein by
reference.






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

The response to this Item is contained in the
2004 Proxy Statement under the caption Certain
Transactions, and the information contained therein is
incorporated herein by reference.






|         |                                           
|-------- | ------------------------------------------
|Item 14. | Principal Accounting Fees and
    Services

The response to this Item is contained in the
2004 Proxy Statement under the caption
Proposal 2  Appointment of Independent
Auditors, and the information contained therein is
incorporated herein by reference.

53



---



##### Table of Contents






PART IV.






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



| |                                                                  
| | -----------------------------------------------------------------
| | (a) 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                                              |  |      | 34 | 
|Balance Sheets as of December 31, 2003 and
    2002                                                |  |      | 35 | 
|Statements of Operations for the Years Ended
    December 31, 2003, 2002 and 2001                  |  |      | 36 | 
|Statements of Common Stockholders Equity
    for the Years Ended December 31, 2003, 2002 and 2001 |  |      | 37 | 
|Statements of Cash Flows for the Years Ended
    December 31, 2003, 2002 and 2001                  |  |      | 38 | 
|Notes to Financial Statements                                                                      |  |      | 39 | 



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



| |                        
| | -----------------------
| | (b) Reports on Form 8-K



| |                                                                                                                                                                                                               
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | During the quarter ended December 31, 2003,
    and between such date and the filing of this Form 10-K, the
    Company furnished the following reports on Form 8-K:                                          
|
| | Current report filed February 4, 2004
    furnishing a press release announcing certain financial results
    for the quarter ended December 31, 2003.                                                        
|
| | Current report filed February 6, 2004
    furnishing a copy of the transcript of a conference call hosted
    by the Company to discuss certain financial results for the
    quarter ended December 31, 2003.



| |             
| | ------------
| | (c) Exhibits



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

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



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

|     |  |                                                                                                                                                                                                                                                     
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.1 |  | Registrants Incentive Stock Option Plan,
    dated September 12, 1990 (Incorporated by reference from
    Exhibit 10.15 to the Companys Registration Statement
    on Form S-1, No. 33-94166)                                                     
|10.2 |  | Amended and Restated Registrants Directors
    Stock Option Plan (Incorporated by reference from
    Exhibit 10.14 to the Companys Registration Statement
    on Form S-1, No. 33-94166)                                                          
|10.3 |  | Amendment dated as of February 27, 1996, to
    Amended and Restated Registrants Directors Stock Option
    Plan (Incorporated by reference from Exhibit 10.32 to the
    Companys Form 10-Q for the quarter ended
    June 30, 1996, No. 0-26542)

54



---



##### Table of Contents



|      |  |                                                                                                                                                                                                                                          
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.4  |  | 1992 Stock Incentive Plan, approved
    October 20, 1992, as amended, October 11, 1994 and
    May 25, 1995 (Incorporated by reference from
    Exhibit 10.16 to the Companys Registration Statement
    on Form S-1, No. 33-94166)     
|10.5  |  | Amendment dated as of July 25, 1996, to
    Registrants 1992 Stock Incentive Plan, as amended
    (Incorporated by reference from Exhibit 10.33 to the
    Companys Form 10-Q for the quarter ended
    June 30, 1996, No. 0-26542)    
|10.6  |  | Amendment dated as of February 27, 1996, to
    Registrants 1992 Stock Incentive Plan, as amended
    (Incorporated by reference from Exhibit 10.31 to the
    Companys Form 10-Q for the quarter ended
    June 30, 1996, No. 0-26542)
|10.7  |  | 2002 Stock Option Plan (Incorporated by reference
    from the Addendum to the Companys Proxy Statement for 2002
    Annual Meeting of Shareholders)                                                                                    
|10.8  |  | Employment Agreement between Registrant and Paul
    Shipman, dated November 1, 2000 (Incorporated by reference
    from Exhibit 10.43 to the Companys Form 10-K for
    the year ended December 31, 2000)                              
|10.9  |  | Employment Agreement between Registrant and David
    J. Mickelson, dated August 1, 2000 (Incorporated by
    reference from Exhibit 10.27 to the Companys
    Form 10-Q for the quarter ended September 30, 2000)                      
|10.10 |  | Employment Agreement between Registrant and Allen
    L Triplett, dated August 1, 2000 (Incorporated by reference
    from Exhibit 10.28 to the Companys Form 10-Q for
    the quarter ended September 30, 2000)                        
|10.11 |  | Employment Agreement between Registrant and
    Pamela J. Hinckley, dated August 1, 2000 (Incorporated by
    reference from Exhibit 10.29 to the Companys
    Form 10-Q for the quarter ended September 30, 2000)                      
|10.12 |  | Employment Agreement between Registrant and Greg
    Marquina, dated August 1, 2000 (Incorporated by reference
    from Exhibit 10.41 to the Companys Form 10-Q for
    the quarter ended September 30, 2000)                           
|10.13 |  | Employment Agreement between Registrant and
    Gerard C. Prial, dated August 1, 2000 (Incorporated by
    reference from Exhibit 10.46 to the Companys
    Form 10-K for the year ended December 31, 2001)                             



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

|      |  |                                                                                                                                                                                                                                                                                                                         
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.14 |  | Investment Agreement dated as of October 18,
    1994, between the Registrant and
    Anheuser-Busch, Incorporated (Incorporated by reference
    from Exhibit 10.4 to the Companys Registration
    Statement on Form S-1, No. 33-94166)                                                                              
|10.15 |  | Registration Rights Agreement dated as of
    October 18, 1994, between Registrant and
    Anheuser-Busch, Incorporated (Incorporated by reference
    from Exhibit 10.7 to the Companys Registration
    Statement on Form S-1, No. 33-94166)                                                                         
|10.16 |  | Master Distributor Agreement between Registrant
    and Anheuser-Busch, Incorporated, dated October 18,
    1994 (Incorporated by reference from Exhibit 10.21 to the
    Companys Registration Statement on Form S-1,
    No. 33-94166)*                                                                              
|10.17 |  | Amendment No. 1 dated as of June 26,
    1996, to Master Distribution Agreement between Registrant and
    Anheuser-Busch, Incorporated, dated October 18, 1994
    (Incorporated by reference from Exhibit 10.30 to the
    Companys Form 10-Q for the quarter ended
    June 30, 1996, No. 0-26542)                  
|10.18 |  | Letter Agreement dated as of July 31, 1995,
    between Registrant and Anheuser-Busch, Incorporated
    (Incorporated by reference from Exhibit 10.25 to the
    Companys Registration Statement on Form S-1,
    No. 33-94166)                                                                                        
|10.19 |  | Consent, Waiver and Amendment, dated
    September 19, 1997, to Master Distributor Agreement between
    Registrant and Anheuser-Busch, Incorporated, dated
    October 18, 1994 (Incorporated by reference from
    Exhibit 10.36 to the Companys Form 10-Q for the
    quarter ended September 30, 1997, No. 0-26542)
|10.20 |  | Purchasing Agreement dated as of March 27,
    1998, between Registrant and Anheuser-Busch, Incorporated
    (Incorporated by reference from Exhibit 10.37 to the
    Companys Form 10-Q for the quarter ended
    March 31, 1998)                                                                                     

55



---



##### Table of Contents



|      |  |                                                                                                                                                                                                                                                                                                                                                                                                         
|----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.21 |  | Purchasing Agreement dated as of
    November 21, 2002, between Registrant and
    Anheuser-Busch, Incorporated (Incorporated by reference
    from Exhibit 10.21 to the Companys Form 10-K for
    the year ended December 31, 2002)                                                                                                                                                                  
|10.22 |  | Multi-Tenant Lease between the Quadrant
    Corporation and Registrant, dated June 1, 1987, as amended,
    November 5, 1987, February 1, 1988, March 29,
    1988, June 27, 1988, October 27, 1988, June 18,
    1991, October 1, 1991, December 22, 1992 and
    March 31,1993 (Incorporated by reference from
    Exhibit 10.9 to the Companys Registration Statement
    on Form S-1, No. 33-94166)
|10.23 |  | Sublease between Pease Development Authority as
    Sublessor and Registrant as Sublessee, dated May 30, 1995
    (Incorporated by reference from Exhibit 10.11 to the
    Companys Registration Statement on Form S-1,
    No. 33-94166)                                                                                                                                                              
|10.24 |  | Assignment of Sublease and Assumption Agreement
    dated as of July 1, 1995, between Registrant and Redhook of
    New Hampshire, Inc. (Incorporated by reference from
    Exhibit 10.24 to the Companys Registration Statement
    on Form S-1, No. 33-94166)                                                                                                                                        
|10.25 |  | Amended and Restated Credit Agreement between
    U.S. Bank of Washington, National Association and
    Registrant, dated June 5, 1995 (Incorporated by reference
    from Exhibit 10.18 to the Companys Registration
    Statement on Form S-1, No. 33-94166)                                                                                                                                         
|10.26 |  | First Amendment dated as of July 25, 1996,
    to Amended and Restated Credit Agreement between U.S. Bank
    of Washington, National Association and Registrant, dated
    June 5, 1995 (Incorporated by reference from
    Exhibit 10.34 to the Companys Form 10-Q for the
    quarter ended September 30, 1996, No. 0-26542)                                                                        
|10.27 |  | Second Amendment to Amended and Restated Credit
    Agreement between U.S. Bank of Washington, National
    Association and Registrant, dated September 15, 1997
    (Incorporated by reference from Exhibit 10.35 to the
    Companys Form 10-Q for the quarter ended
    September 30, 1997, No. 0-26542)                                                                                            
|10.28 |  | Third Amendment to Amended and Restated Credit
    Agreement between U.S. Bank of Washington, National
    Association and Registrant, dated February 22, 1999
    (Incorporated by reference from Exhibit 10.38 to the
    Companys Form 10-Q for the quarter ended
    March 31, 1999)                                                                                                               
|10.29 |  | Fourth Amendment to Amended and Restated Credit
    Agreement between U.S. Bank National Association and
    Registrant, dated August 10, 2000 (Incorporated by
    reference from Exhibit 10.42 to the Companys
    Form 10-Q for the quarter ended September 30, 2000)                                                                                                                               
|10.30 |  | Fifth Amendment to Amended and Restated Credit
    Agreement between U.S. Bank National Association and
    Registrant, dated June 19, 2001 (Incorporated by reference
    from Exhibit 10.44 to the Companys Form 10-Q for
    the quarter ended June 30, 2001)                                                                                                                                       
|10.31 |  | Sixth Amendment to Amended and Restated Credit
    Agreement between U.S. Bank National Association and
    Registrant, dated December 31, 2001 (Incorporated by
    reference from Exhibit 10.45 to the Companys
    Form 10-K for the year ended December 31, 2001)                                                                                                                                  
|10.32 |  | Seventh Amendment to Amended and Restated Credit
    Agreement between U.S. Bank National Association and
    Registrant, dated June 21, 2002 (Incorporated by reference
    from Exhibit 10.47 to the Companys Form 10-Q for
    the quarter ended June 30, 2002)                                                                                                                                     
|10.33 |  | Eighth Amendment to Amended and Restated Credit
    Agreement between U.S. Bank National Association and
    Registrant, dated March 18, 2003 (Incorporated by reference
    from Exhibit 10.1 to the Companys Form 10-Q for
    the quarter ended March 31, 2003)                                                                                                                                     
|10.34 |  | Ninth Amendment to Amended and Restated Credit
    Agreement between U.S. Bank National Association and
    Registrant, dated as of October 31, 2003                                                                                                                                                                                                                                                    
|10.35 |  | Tenth Amendment to Amended and Restated Credit
    Agreement between U.S. Bank National Association and
    Registrant, dated as of February 9, 2004                                                                                                                                                                                                                                                    



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

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

56



---



##### Table of Contents





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

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



| |                              
| | -----------------------------
| | EXHIBIT NO. 31 Certifications

|     |  |                                                                                                                                                                                                    
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|31.1 |  | Certification of Chief Executive Officer of
    Redhook Ale Brewery, Incorporated pursuant to
    Section 302 of the Sarbanes-Oxley Act of 2002                                                    
|31.2 |  | Certification of Chief Financial Officer of
    Redhook Ale Brewery, Incorporated pursuant to
    Section 302 of the Sarbanes-Oxley Act of 2002                                                    
|32.1 |  | Certification of Chief Executive Officer of
    Redhook Ale Brewery, Incorporated pursuant to
    18 U.S.C. Section 1350, as adopted pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002 
|32.2 |  | Certification of Chief Financial Officer of
    Redhook Ale Brewery,, Incorporated pursuant to
    18 U.S.C. Section 1350, as adopted pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002



| | 
| | 
| | 



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

57



---



##### 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
Woodinville, State of Washington, on March 29, 2004.



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



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

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

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

|                                           |  |                                                                                                                     |  |                |  |     
|------------------------------------------ |  | ------------------------------------------------------------------------------------------------------------------- |  | -------------- |  | ----
|                                           |  | Signature                                                                                                           |  | Title          |  | Date
|                                           |  |                                                                                                                     |  |                |  |     
|/s/ PAUL S. SHIPMANPaul S. Shipman         |  | President, Chief Executive Officer and Chairman
    of the Board
    (Principal Executive Officer)                  |  | March 29, 2004
|                                          
|/s/ DAVID J. MICKELSONDavid J. Mickelson   |  | Executive Vice President, Chief Financial Officer
    and Chief Operating Officer
    (Principal Financial Officer) |  | March 29, 2004
|                                          
|/s/ ANNE M. MUELLERAnne M. Mueller         |  | Controller and Treasurer
    (Principal Accounting Officer)                                                         |  | March 29, 2004
|                                          
|/s/ FRANK H. CLEMENTFrank H. Clement       |  | Director                                                                                                            |  | March 29, 2004
|                                          
|/s/ JERRY D. JONESJerry D. Jones           |  | Director                                                                                                            |  | March 29, 2004
|                                          
|/s/ DAVID R. LORDDavid R. Lord             |  | Director                                                                                                            |  | March 29, 2004
|                                          
|/s/ PATRICK J. MCGAULEYPatrick J. McGauley |  | Director                                                                                                            |  | March 29, 2004
|                                          
|/s/ ANTHONY J. SHORTAnthony J. Short       |  | Director                                                                                                            |  | March 29, 2004

58