The Company reported gross sales and a net income of $66.7 million and $664,000, respectively, for the six months ended June 30, 2009, compared with gross sales and a net loss of $22.4 million and $1.9 million, respectively, for the corresponding period in 2008. The Company generated basic and fully-diluted earnings per share of $0.04 on 17.0 million shares for the first six months of 2009 compared with a loss per share of $0.23 on 8.4 million shares for the corresponding period of 2008. The Company generated operating profit of $1.9 million during the six months ended June 30, 2009 compared with an operating loss of $3.0 million during the six months ended June 30, 2008, primarily due to an improved margin for the 2009 period and a reduction in merger-related expenses, partially offset by increased selling, general and administrative expenses and the elimination of contribution from the Company's sales and marketing joint venture. The Company's sales volume (shipments) totaled 296,200 barrels in the first six months of 2009 as compared with 144,600 barrels in the first six months of 2008.
The comparability of the Company's results for the three and six months ended June 30, 2009 relative to the results for the same periods in 2008 is significantly impacted by the Merger.
Since July 1, 2008, the Company has produced its specialty bottled and draft Redhook-branded and Widmer-branded products in its four Company-owned breweries, one in the Seattle suburb of Woodinville, Washington ("Washington Brewery"), another in Portsmouth, New Hampshire ("New Hampshire Brewery"), and two in Portland, Oregon. The two breweries in Portland, Oregon are the Company's largest production facility ("Oregon Brewery") and its smallest, a manual brewpub-style brewery at the Rose Quarter ("Rose Quarter Brewery"). The Company sells these products in addition to the Kona-branded products primarily to Anheuser-Busch, Incorporated ("A-B") and its network of wholesalers pursuant to the July 1, 2004 Master Distributor Agreement (the "A-B Distribution Agreement"), as amended. These products are available in 48 states.
In addition to the sale of Redhook-branded and Widmer-branded beer, the Company also earns revenue in connection with two operating agreements with Kona
- an alternating proprietorship agreement and a distribution agreement. Pursuant to the alternating proprietorship agreement, Kona produces a portion of its malt beverages at the Oregon Brewery. The Company sells raw materials to Kona prior to production beginning and receives from Kona a facility leasing fee based on the barrels brewed and packaged at the Oregon Brewery. These sales and fees are reflected as revenue in the Company's statements of operations. Under the distribution agreement, the Company distributes Kona-branded product, whether brewed at Kona's facility or the Oregon Brewery, and then markets, sells and distributes the Kona-branded products pursuant to the A-B Distribution Agreement. The Company also derives other revenues from sources including the sale of retail beer, food, apparel and other retail items in its three brewery pubs. The Company added the third pub, located in Portland, Oregon and in the proximity of the Oregon Brewery, in the Merger. In conjunction with the Merger, the Company acquired from Widmer a 20% equity ownership in Kona and a 42% equity ownership in FSB. Both investments are accounted for under the equity method, as outlined by Accounting Principles Board Opinion No. 18, The Equity Method of Accounting for Investments in Common Stock ("APB 18"). Through June 30, 2008, the Company produced its specialty bottled and draft Redhook-branded products at the Washington Brewery and the New Hampshire Brewery. The Company distributed these products in the Midwest and Eastern United States pursuant to the A-B Distribution Agreement and in the Western United States through Craft Brands Alliance LLC ("Craft Brands"). In addition to the sale of Redhook-branded beer, the Company also brewed, marketed and sold Widmer Hefeweizen in the Midwest and Eastern United States in conjunction with a 2003 licensing agreement with Widmer and brewed Widmer-branded products for Widmer in connection with contract brewing arrangements. Craft Brands was a joint venture sales and marketing entity formed by the Company and Widmer in July 2004. The Company and Widmer manufactured and sold their products to Craft Brands at a price substantially below wholesale pricing levels; Craft Brands, in turn, advertised, marketed, sold and distributed the products to wholesale outlets in the Western United States through a distribution agreement between Craft Brands and A-B. (Due to state liquor regulations, the Company sold its product in Washington state directly to third-party beer distributors and

returned a portion of the revenue to Craft Brands based upon a contractually determined formula.) Profits and losses of Craft Brands were generally shared between the Company and Widmer based on the cash flow percentages of 42% and 58%, respectively. In connection with the Merger, Craft Brands was merged with and into the Company, effective July 1, 2008. All existing agreements between the Company and Craft Brands and between Craft Brands and Widmer terminated as a result of the merger of Craft Brands with and into the Company.
For additional information regarding A-B, Craft Brands and the A-B Distribution Agreement, see Part 1, Item 1, Business under the headings "- Product Distribution," "- Relationship with Anheuser-Busch, Incorporated" and "- Relationship with Craft Brands Alliance LLC" of the Company's 2008 Annual Report.
The Company's sales are affected by several factors, including consumer demand (itself impacted by seasonality), price discounting and competitive considerations. The Company competes in the highly competitive craft brewing market as well as in the much larger beer, wine, spirits and flavored alcohol markets, which encompass producers of import beers, major national brewers that produce fuller-flavored products, large spirit companies, and national brewers that produce flavored alcohol beverages. 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. Certain national domestic brewers have also sought to appeal to this growing demand for craft beers by producing their own fuller-flavored products. These fuller-flavored products have been most successful within the wheat beer category, including Shock Top Belgian White and Blue Moon Belgian White. These beers are generally considered to be within the same category as the Company's Hefeweizen beer, putting them in direct competition. As the national domestic brewers have substantially greater operating and financial resources, the Company may need to expend considerable incremental sales and marketing efforts merely to retain its competitive position within the craft brewing market.
The wine and spirits market has also experienced significant growth in the past five years or so, attributable to competitive pricing, increased merchandising, and increased consumer interest in wine and spirits. In recent years, the specialty segment has seen 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. Sales of these flavored alcohol beverages were initially very strong, but growth rates have slowed in recent years. While there appear to be fewer participants in the flavored alcohol category than at its peak, there is still significant volume associated with these beverages. 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 and draft product placements has intensified.
While the craft beer market has seen a significant growth in the number of competitors, the national domestic and international brewers have undergone a second round of consolidation, reducing the number of market participants at the top of the beer market. A number of factors have driven this consolidation, including the desire to capture market share and positioning as either the largest brewer or second largest brewer in any given market. The U.S. beer market, in which the Company competes, was once dominated by three companies, A-B, Miller Brewing Company and Adolph Coors Company. During the past decade, Miller Brewing Company and Adolph Coors Company were merged with international brewers, South African Brewers and Molson of Canada, respectively, to increase the global market reach of their brands. During the second quarter of 2008, the resulting companies, SABMiller and MolsonCoors, completed the terms of a joint venture to merge their U.S. operations, competing under the name MillerCoors. Likewise, A-B was acquired by Belgium-based InBev in a deal consummated in the fourth quarter of 2008. Shipments for the two entities, A-B and MillerCoors, represented nearly 80% of the total U.S. market, including imports, for 2008.
Another factor driving this is the desire on the part of these larger consolidated national brewers to control the rising cost of the majority of the inputs to the brewing process, primarily barley, wheat and hops, and packaging and shipping costs. While consolidation promises to alleviate these cost pressures for the national brewers, the Company faces these same pressures with limited resources available to achieve similar benefits.
Management monitors the annual working capacity of each brewery in connection with production and resource planning. Because an industry standard for defining brewery capacity does not exist, there are numerous variables that

can be considered in arriving at an estimate of annual working capacity. Following the Merger, management reviewed each facility, scrutinized the factors important to the Company in arriving at a practical definition of capacity, and recomputed the annual working capacity of each brewery. Among the factors that management considered in estimating annual working capacity are:
• Brewhouse capacity, fermentation capacity, and packaging capacity;

• A normal production year;

• The product mix and product cycle times; and

• Brewing losses and packaging losses.

Because the conditions under which each brewery operates differ (such as age of equipment, local environment, product mix), the impact that these factors have on the estimate of capacity also vary by brewery. For example, while the New Hampshire Brewery and the Oregon Brewery are constrained by the volume of beer that each can ferment (each brewery can brew more beer than it can ferment), the Washington Brewery is constrained by the size of its brewhouse (the brewery has adequate capacity to ferment all product that it brews).
Management did not consider the impact that seasonality clearly has on the capacity calculation. Rather, management assumed that each brewery produces beer at 100% of working capacity throughout a 50 week year. But because seasonality is a notable factor affecting the Company's sales, the Company expects that the breweries' capacity will be more efficiently utilized during periods when the Company's sales are strongest and there likely will be periods when the breweries' capacity utilization will be lower.
Management estimates the annual working capacity for its breweries as follows:

                                               Annual Working
                                                Capacity at
                                               June 30, 2009
                                                (In barrels)

                      Oregon Brewery (1)             377,000
                      Washington Brewery             230,000
                      New Hampshire Brewery          190,000

                                                     797,000

Note 1 -
Excludes the
annual
working
capacity for
the Rose
Quarter
Brewery,
which is
less than
1,000
barrels.

The Company's capacity utilization has a significant impact on gross profit. Generally, when facilities are operating at their working capacities, profitability is favorably affected because fixed and semi-variable operating costs, such as depreciation and production salaries, are spread over a larger sales base. While current period production levels have increased, in part, due to the seasonal fluctuations in demand, the Company still has a significant amount of unused working capacity. As a result, gross margins have been negatively impacted. If the Company is unable to achieve significant sales growth on a sustained basis, the resulting excess capacity and unabsorbed overhead of the Company will have an adverse effect on the Company's gross margins, operating cash flows and overall financial performance.
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 A-B Distribution Agreement. Prior to July 1, 2008, sales to Craft Brands at a price substantially below wholesale pricing levels and sales of contract beer at a pre-determined contract price also affected cost of sales, gross margins and the comparability of fiscal periods.

Brand Trends
Redhook Beers. The Redhook brand has lagged the trend in the growth of the craft segment for the last several years, due in part to the life cycle of the brand family's former flagship, ESB, which had matured in key markets even while the overall segment continued to grow. To offset this factor, the Company engaged in systematic initiatives, including rebranding Redhook IPA into Long Hammer IPA and relaunching this brand with new packaging and a concentrated focus as the new Redhook flagship in January 2007. Leveraging off of the growth of the IPA category, this rebranding effort resulted in an increase in shipments of Long Hammer IPA from 2007 to 2008 by approximately 15%. As part of these initiatives, the Company reexamined its pricing strategy and increased the brand family to price points comparable to the market leaders in the last couple of years.
The Company will continue to look for niche areas of category growth for Redhook on which to capitalize. For example, during the first quarter of 2009 the Company launched Slim Chance Light Ale to fulfill consumer demand for full-flavored, low-calorie craft beer. In order to reconnect the Redhook brand with the craft community, a high-end line of Redhook beers was launched in late 2008. Each beer in this line is marketed toward the beer connoisseur, premium-priced, and only available for a limited time.
Widmer Brothers' Beers. The Widmer Brothers' brand has experienced significant growth in recent years, led by the popular consumer response to the Hefeweizen category within the craft beer segment and the role that Widmer Hefeweizen has enjoyed as a leader in this category. This category continues to experience positive trends nationally, but has more recently seen a significant increase in competitive products from other craft brewers as well as offerings from large domestic brewers such as A-B's Shock Top Belgian White and MillerCoors' Blue Moon Belgian White attempting to participate in the same category. Widmer Hefeweizen has also been particularly impacted by the downturn in the restaurant industry as a result of the U.S. economic recession worsening during the fourth quarter of 2008 and continuing into the first six months of 2009. This brand is significantly more dependent on on-premise sales than the Company's other brands.
As a result of the Merger, the Company now has the ability to sell and market other Widmer-branded products in the Midwest and Eastern United States. This will round out the Widmer-brand offering in these regions, giving the consumers in these areas a true Widmer brand family to enjoy, including Drop Top Amber Ale and Drifter Pale Ale, which was launched in the first quarter of 2009. In an effort to keep Widmer Hefeweizen top of mind with consumers and to shift the emphasis of this brand from the on-premise market, during the second quarter of 2009, the Company began offering Widmer Hefeweizen in the Western U.S. markets in a 5-liter steel mini keg. The Company believes this allows consumers the opportunity to enjoy the draft experience of this brand at home.
Except for Widmer-branded products brewed and shipped under the contract brewing arrangements and Widmer Hefeweizen shipped under the licensing agreement, sales and shipments for Widmer-branded product were not reflected in the Company's statements of operations prior to the Merger.
Kona Brewing Beers. Prior to its association with the Company, the Kona Brewing brand had experienced strong growth as a result of forming relationships with Widmer and Craft Brands beginning in 2004. Kona-branded product is relatively new outside of Hawaii and has been recently introduced into a number of new markets in the continental United States. Kona-branded products have experienced the rapid growth of a new brand that benefits from growing distribution and new trial from consumers. The brand family has a clear identity, the Company markets it as "Liquid Aloha", which is easily grasped by consumers, and the beer is of high quality, making it easy to sell to wholesalers, retailers and consumers.
Despite lapping strong launch volumes in the Kona brand's biggest mainland market, California, the brand continues to see double-digit growth in this market, suggesting that consumers have formed a strong bond with the brand, purchasing it repeatedly. The Company identifies Longboard Island Lager as the brand family's flagship, creating a direct connection to Hawaii with consumers. The Company believes that the Kona brand's growth potential is significant not only from organic growth within its current markets but also from geographic expansion.

Sales and shipments for Kona-branded product were not reflected in the Company's statements of operations prior to the Merger.
See Part 1, Item 1A, "Risk Factors" of the Company's 2008 Annual Report for additional matters which could materially affect the Company's business, financial condition or future results.
Results of Operations
The following table sets forth, for the periods indicated, certain items from the Company's Statements of Operations expressed as a percentage of net sales:

                                                     Three Months              Six Months
                                                    Ended June 30,           Ended June 30,
                                                  2009         2008        2009         2008
Sales                                             106.6 %     111.3 %      106.9 %     111.4 %
Less excise taxes                                   6.6        11.3          6.9        11.4

Net sales                                         100.0       100.0        100.0       100.0
Cost of sales                                      74.4        93.0         76.9        94.4

Gross profit                                       25.6         7.0         23.1         5.6
Selling, general and administrative expenses       18.2        22.7         19.7        21.6
Merger-related expenses                             0.3        10.1          0.4         5.8
Income from equity investment in Craft Brands         -         5.9            -         6.9

Operating income (loss)                             7.1       (19.9 )        3.0       (14.9 )
Income from equity investments in Kona & FSB        0.3           -          0.2           -
Interest expense                                   (1.6 )         -         (1.8 )         -
Interest and other income, net                      0.2         0.1          0.3         0.3

Income (loss) before income taxes                   6.0       (19.8 )        1.7       (14.6 )
Income tax provision (benefit)                      1.1        (7.0 )        0.6        (5.0 )

Net income (loss)                                   4.9 %     (12.8 )%       1.1 %      (9.6 )%

Non-GAAP Financial Measures
The Company's loan agreement, as modified, subjects the Company to a financial covenant based on earnings before interest, taxes, depreciation and amortization ("EBITDA"). See "Liquidity and Capital Resources." EBITDA is defined per the modified loan agreement and requires additional adjustments, among other items, to (a) exclude merger-related expenses, (b) adjust losses
(gains) on sale or disposal of assets, and (c) exclude certain other non-cash income and expense items. For the quarter ended June 30, 2009, the financial covenants, including required EBITDA, were measured on a one quarter basis; however, beginning with the third quarter of 2009, the financial covenants under the Company's loan agreement will be measured on a trailing four-quarter basis. EBITDA as defined under the modified loan agreement was $4.7 million for the quarter ended June 30, 2009. The following table reconciles net income to EBITDA per the modified loan agreement for the quarter ended June 30, 2009:

                                                                                 For the Quarter
                                                                                      Ended
                                                                                  June 30, 2009
                                                                                 (In thousands)

Net income                                                                      $           1,739
Interest expense                                                                              571
Income tax provision                                                                          366
Depreciation expense                                                                        1,593
Amortization expense                                                                          288
Merger-related expenses                                                                       113
Loss on sale or disposal of property, equipment and leasehold improvements                     10
Stock compensation                                                                             36

EBITDA per the modified loan agreement                                          $           4,716

Three months ended June 30, 2009 compared with three months ended June 30, . . .