SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                   FORM 10-KSB

(Mark One)
  [X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
                      For the fiscal year ended December 31, 1998

  [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
      OF 1934

     For the transition period from _________________ to ___________________
                         Commission file number: 1-13636

                         Mendocino Brewing Company, Inc.
                 (Name of small business issuer in its charter)

         California                                  68-0318293
(State or other jurisdiction of             (I.R.S. Employee Identification No.)
 incorporation or organization)

     13351 South Highway 101, Hopland, CA        95449
     (Address of principal executive offices)  (Zip code)

                    Issuer's telephone number: (707) 744-1015

Securities registered under Section 12(b) of the Act:

                               Title of each class
                    Name of each exchange on which registered
                         Common Stock, without par value
                              The Pacific Exchange

Securities registered under Section 12(g) of the Act:

                                 Not applicable
                                (Title of class)

Check  whether the issuer (1) filed all reports  required to be filed by Section
13 or 15(d) of the  Exchange  Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports),  and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]

Check if there is no disclosure of delinquent  filers in response to Item 405 of
Regulation S-B not contained in this form, and no disclosure  will be contained,
to the best of  registrant's  knowledge,  in  definitive  proxy  or  information
statements  incorporated  by  reference  in Part III of this Form  10-KSB or any
amendment to this Form 10-KSB. [X]

State issuer's revenues for its most recent fiscal year: $6,918,800

The aggregate market value of the voting stock held by  non-affiliates  computed
by reference to the last  reported  sale price of such stock as of March 9, 1999
was $1,810,490.

The number of shares the issuer's Common Stock  outstanding as of March 15, 1999
is 4,497,059.

                       DOCUMENT INCORPORATED BY REFERENCE

Portions of the Proxy  Statement  for the  Registrant's  1999 Annual  Meeting of
Shareholders  to be filed not later  than  April 30,  1999 are  incorporated  by
reference in Part III of this Form 10-K.

Transitional Small Business Disclosure Format        Yes [ ]        No [X]



<PAGE>

                                     PART I

         This Report contains  forward-looking  statements within the meaning of
Section 27A of the  Securities  Act of 1933 and  Section  21E of the  Securities
Exchange  Act of  1934.  Actual  results  could  differ  materially  from  those
projected  in the  forward-looking  statements  as a result of the risk  related
factors set forth herein.

Item 1.  Description of Business.

Overview

         Mendocino  Brewing  Company,  Inc.  brews Red Tail Ale, Blue Heron Pale
Ale, Black Hawk Stout, Peregrine Golden Ale and three seasonals for the domestic
craft beer  market.  Mendocino  Brewing is one of the first of the modern  craft
brewers, having opened the first new brewpub in California and the second in the
United States since the repeal of  Prohibition,  and has been recognized for its
innovations  in the  brewpub  concept,  its craft brew  style,  its  distinctive
labels, and its role in industry associations.

         In May 1997,  Mendocino  Brewing  placed in  operation a new brewery in
Ukiah,  California  (110 miles north of San  Francisco)  with an initial  annual
capacity  of  approximately  60,000  bbl.,  which was more  than four  times the
Company's  annual  capacity  from 1993  through the first nine months of 1995 of
13,600 bbl. The facility was designed to enable the  Company's  production to be
expanded to 200,000 bbl. per year with the addition of necessary equipment.

         The Company's  subsidiary,  Releta Brewing  Company  L.L.C.  ("Releta")
d/b/a Ten Springs  Brewery,  located in Saratoga  Springs,  New York,  commenced
production  in February  1998 with an initial  capacity of 60,000 bbl.  per year
expandable  to 150,000 bbl. per year.  In July 1998,  the Company  purchased all
brand related assets of Carmel Brewing Company,  Inc., a California  corporation
("Carmel Brewing"),  in exchange for unregistered shares of the Company's Common
Stock having an aggregate value of $100,000 based on a per share price of $3.00.
However,  on the  transaction  date,  the market  value of the 33,334  shares of
Common Stock issued to Carmel  Brewing was only $45,834.  The  transaction  also
involved the  acquisition  by the Company of certain  point of sales and brewing
ingredient  inventory  from Carmel  Brewing,  and the lease by the Company  from
Carmel  Brewing  of  certain  bottling  line  equipment  and  certain  kegs on a
short-term basis. The Carmel brands were launched from the Ukiah facility.

         During 1998, the Company's  largest  shareholder,  United  Breweries of
America,  Inc. ("UBA"),  agreed to provide the Company with a credit facility of
up to  $2,000,000.  The  advances  have a conversion  feature into  unregistered
shares of the  Company's  Common  Stock.  UBA has  advanced a total of  $994,000
(including interest) as of December 31, 1998.

         In September  1998,  the CIT  Group/Credit  Finance,  Inc.,  located in
Chicago, Illinois provided the Company with a $3,000,000 maximum line of credit.
An amount  totaling  $1,483,968  was  advanced to the Company as an initial term
loan,  which is repayable in immediately  available  funds in sixty  consecutive
monthly  installments,  each in the amount of $24,733,  commencing  on March 24,
1999.

Company Background

         Mendocino  Brewing  Company  was  originally  formed in March 1983 as a
California  limited  partnership  (the  "Partnership").  On January 1, 1994, the
business was  incorporated  by  transferring  all of the  Partnership's  assets,
including its name, to a newly formed California corporation in exchange for all

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<PAGE>

of  the  Common  and  Preferred  Stock  of  the  corporation.   The  Partnership
distributed  these shares to its partners on January 3, 1994. As used hereafter,
references  to the  "Company"  and  "Mendocino  Brewing"  include  the  business
operations of the Partnership before its incorporation.

         Mendocino  Brewing first bottled its flagship  brand,  Red Tail Ale, in
December  1983. In February  1995,  Mendocino  Brewing  completed a $3.6 million
direct public offering at $6 per share. The Company purchased nine acres of land
in Ukiah,  California  in 1995 and began  production  at the new  brewery in May
1997.  In October  1997,  the Company  raised an  additional  $4 million in cash
through a private  placement  with UBA,  which  also  contributed  Releta to the
Company  as a new  subsidiary.  The  Company's  products  are  sold in  selected
locations throughout the United States. See "Product Distribution."

Industry Overview

         The U.S. beer market may be divided into five segments:

Segment                        Representative Brands

Low-Priced                     Busch, Milwaukee's Best, Old Milwaukee
Premium                        Budweiser, Miller Lite, Bud Light, Coors Light
Super-Premium                  Michelob, Lowenbrau
European Import                Heineken, Guinness, Bass
Domestic Craft                 Samuel Adams, Pete's, Sierra Nevada, Red Tail Ale

         The  Company  competes  in  the  domestic  craft  beer  segment,  which
comprises   approximately  2%  of  total  U.S.  beer  sales.   Craft  beers  are
characterized by their  full-flavor and are usually  produced along  traditional
European  brewing styles.  While U.S. beer sales were basically flat for several
years,  domestic craft beer sales increased at a rate of  approximately  40% per
year for several years through  1996.  Segment  growth was less than 2% in 1998.
The rate at which the domestic craft beer segment  continues to grow will have a
material affect on the Company's business,  financial condition,  and results of
operations. Actual industry segment performance depends on many factors that are
outside the control of the Company.

Competition

         The craft beer category consists of:

Contract brews                            any style brew  produced by one brewer
                                          for sale  under the  label of  someone
                                          else who does  not have a  brewery  or
                                          whose brewery does not have sufficient
                                          capacity.

Regional craft brews                      "hand-crafted" brews,  primarily ales,
                                          sold  under the  label of the  brewery
                                          that produced it.

Microbrews                                "hand-crafted" brews,  primarily ales,
                                          sold  under the  label of the  brewery
                                          that  produced  it, if the capacity of
                                          the  brewery  does not  exceed  15,000
                                          bbl. per year.

                                       3
<PAGE>

Large brewer craft-style brews            a brand  brewed by a  national  brewer
                                          which may only  imitate the style of a
                                          craft beer.  These  craft-style  brews
                                          are  often  sold  under the label of a
                                          brewery  that  does  not  exist or the
                                          label of a  brewpub  with no  bottling
                                          capacity.  The term "phantom  brewery"
                                          is  sometimes  used to  describe  such
                                          brands.

Brewpub brews                             "hand-crafted" brews produced for sale
                                          and consumption at the brewery,  which
                                          is   normally    connected    with   a
                                          restaurant/saloon.  Brewpub  brews are
                                          not   normally   sold   for   off-site
                                          consumption in significant quantities.

         Mendocino  Brewing  competes  against all of the above  brewers to some
degree and also against other segments of the U.S. beer market.  Competition for
retail  shelf-space also increased in 1998.  Increased  competition could hinder
distribution of the Company's products and have a material adverse effect on the
Company's business, financial condition, and results of operations.

Products

         Mendocino  Brewing  has  historically  brewed  three  ales  and a stout
year-round, three seasonal ales, and a seasonal porter:

         o        RED TAIL ALE, a full flavored amber ale, is the flagship brand
                  of Mendocino  Brewing.  It is available  year-round  in 12 oz.
                  six-packs and half-barrel kegs.

         o        BLUE  HERON  PALE ALE is a golden  ale with a full  body and a
                  distinctive  hop character.  It is available  year-round in 12
                  oz. six-packs and half-barrel kegs.

         o        BLACK  HAWK  STOUT is the  fullest  in flavor  and body of the
                  Company's  brews.  It is also  available  year-round in 12 oz.
                  six-packs and half-barrel kegs.

         o        EYE OF THE HAWK SELECT ALE is a high gravity deep amber summer
                  ale.  It is  available  year  round  in 12 oz.  six-packs  and
                  half-barrel kegs.

         o        ULETIDE   PORTER  is  a  deep  brown   Holiday   brew  with  a
                  traditionally rich, creamy flavor. It is available in November
                  and December.

         o        PEREGRINE GOLDEN ALE is brewed year-round with a more delicate
                  flavor  and  character.  It is  available  year-round  at  the
                  Hopland  Brewery in draft form and April through October in 12
                  oz. bottles.

         o        SPRINGTIDE ALE is brewed around St.  Patrick's Day and appears
                  as a fresh, flowery, spicy golden ale. It is only available at
                  the Hopland Brewery in draft form.

         o        FROLIC SHIPWRECK ALE 1850, a Scottish-style  ale brewed around
                  July,  was  introduced  in  1994  as  a  fund-raiser  for  the
                  Mendocino  County  Museum  to  commemorate  the  wreck  of the
                  clipper  ship Frolic,  with its cargo of Scottish  ale, on the
                  Mendocino  coast in 1850.  Salvage efforts were abandoned when
                  workers,  upon sighting the previously unreported big trees of
                  Mendocino  County,  launched  the  timber  industry  which has
                  characterized  the area ever  since.  It is  available  at the
                  Hopland Brewery on draft.

                                       4
<PAGE>

         o        FAT BEAR STOUT is a full-bodied  brew  characterized by smooth
                  roasty flavors and malty aromas.

         o        WHITEFACE  PALE ALE is a robust and spicy  American  style ale
                  crafted with the finest malts and perfect blend of hops.

         o        SARATOGA   CLASSIC   PILSNER   is  a   crisp,   full-flavored,
                  German-style  pilsner with a clean hoppy finish. All three are
                  brewed  with  fresh pure  water  from the  ancient  springs of
                  Saratoga.

         o        CARMEL WHEAT BEER is a light-bodied  and  delicately  flavored
                  beer  characterized  by  its  cloudy  Hefeweizen   appearance,
                  refreshing floral aromas and subtle wheat flavor.

         o        CARMEL PALE ALE is a full,  smooth flavored ale that imparts a
                  malty and spicy character to the palate.

         Mendocino  Brewing's  brands  use an ale  yeast  strain  that was first
introduced  at New Albion  Brewing Co. in the late 1970s.  Mendocino  Brewing is
among a minority of brewers who use whole hops instead of processed  hop pellets
in their  brewing  processes.  This  technique  contributes  to the  distinctive
characteristics  of the brews. The Company adds active fermenting beer (Krausen)
after  the  beer is  bottled,  which  produces  a  pleasant  amount  of  natural
carbonation.  The thin layer of brewer's  yeast in the bottom of the bottle is a
natural characteristic of bottle conditioned ale.  Bottle-conditioned  beers are
considered as classic styles.

         Mendocino  Brewing's  distinctive brews have been very well received in
the market and within the industry.  In October 1997,  Mendocino Brewing Company
was awarded three medals at the World Beer Championships, one of the largest and
most  comprehensive  beer competitions in the world. The Company received a Gold
Medal for Red Tail Ale, a Silver  Medal for Eye of the Hawk  Select  Ale,  and a
Bronze Medal for Black Hawk Stout.  Blue Heron Pale Ale was awarded a Gold Medal
with a Special Award of Excellence from the Underground Wine Journal in February
1997 in a  competition  among 183 ales from  across the United  States and won a
bronze medal at the 1991 Great  American Beer  Festival.  Eye of the Hawk Select
Ale won a gold medal at the 1991 Great  American Beer  Festival  after winning a
silver in 1990, and also won a bronze in 1992. In 1998 the Company received four
more medals at world beer championships.

         The Saratoga Springs facility  presently performs some contract brewing
services for other brands including Brooklyn beers.

The Hopland Brewery Brewpub and Merchandise Store

         To date,  Mendocino  Brewing's  major  marketing  tools  have  been the
Hopland Brewery brewpub and merchandise store, its Brewsletter  newsletter,  and
its distinctive labels. Located on a major tourist route in Hopland, California,
100 miles  north of San  Francisco,  the Hopland  Brewery  opened in 1983 as the
first new brewpub in  California  and the second in the United  States since the
repeal of Prohibition.

         The brewpub is housed in a 100 year-old  brick  building  that was once
known as the Hop Vine  Saloon.  The inside  walls are trimmed  with the original
turn-of-the-century  ornamental stamped tin. Works of local artists are featured
on a rotating basis. The bar is  hand-crafted,  early California style blond oak
and brass that  complements the tradition of the tavern and the Company's brews.
An outdoor Beer Garden includes a shaded grape arbor, flowers, trellised hops in
the summer, picnic tables, and a sandbox for children.

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<PAGE>

         Beverages  served include Red Tail Ale, Blue Heron Pale Ale, Black Hawk
Stout, Peregrine Golden Ale, and a seasonal brew on tap, along with local wines,
Hopland  Seltzer Water,  and soft drinks.  The brewpub also features hand pumped
cask  conditioned  ales.  The  menu  features  home-style   cooking,   sausages,
hamburgers,  Red Tail chili, fresh salads, snacks, vegetarian entrees, and daily
specials.  The brewpub  operates days and evenings,  with live music for special
events,  such as the  Company's  annual  Anniversary  Party  in  August  and its
Oktoberfest  in October.  The Company brews special  occasion draft beers at the
Hopland  Brewery,  and  uses or  plans  to use the  facility  for  research  and
development, test-marketing, and as a brewing education and training site.

         The adjacent Merchandise Store sells off-sale packages of the Company's
brews  (including  gift  packs)  and  merchandise  such as  hand-screened  label
T-shirts,  posters,  engraved  glasses and mugs, logo caps, books about brewing,
gift packs, and other brewery-related gifts.

         The Brewsletter  newsletter is published  quarterly and is available on
the Company's web site at  www.mendobrew.com.  The Brewsletter contains articles
about the Company, the beer industry,  and beer brewing and a calendar of events
for  the  Hopland  Brewery.  The  Brewsletter  is  circulated  to the  Company's
shareholders  and  persons  who have  signed the guest  registry  at the Hopland
Brewery.

         One of the ways  Mendocino  Brewing  projects its quality and corporate
values to consumers is through its Red Tail Ale, Blue Heron Pale Ale, Black Hawk
Stout,   and  Eye  of  the  Hawk  Select  Ale  labels.   The  Company  has  used
nationally-known wildlife artists including Randy Johnson and Lee Jayred for its
label designs.  In 1990,  Mendocino  Brewing  received the Paperboard  Packaging
Council's  Silver Award for  Excellence in Packaging and Award for Excellence in
Graphic  Design  and a  Northern  California  Addy  Award  for its Red  Tail Ale
packaging.  In 1996, the Company received a Northern California Addy Award and a
silver medal in the International Brand Packaging Award competition sponsored by
Graphic Design: USA magazine for its Blue Heron Pale Ale packaging. In 1997, the
Company's  Eye of the Hawk  Select  Ale  label  won  First  Place at the  Second
International Label competition in the Beer Label category.

Regional Distribution

         The Company's  products are  distributed  widely in  California  and in
limited  quantities  at  selected  accounts in  Arizona,  Colorado,  District of
Columbia,  Florida,  Georgia,  Idaho,  Kansas,  Illinois,  Louisiana,  Maryland,
Massachusetts,  Missouri,  Minnesota,  Nevada, New Jersey, Nebraska, New Mexico,
New  York,  North  Carolina,  Oregon,   Pennsylvania,   South  Carolina,  Texas,
Washington,  Wisconsin, Wyoming and Virginia. The Company plans to add Michigan,
New Hampshire,  Tennessee,  and Vermont, in the near future. Northern California
is the Company's primary market and Southern California  currently is the second
market.

Social Responsibility

         Part of  Mendocino  Brewing's  mission is to be viewed as a  community,
regional,  and national asset and as a positive example of how a business should
be operated.  Management  attempts to instill these values in Company  personnel
and  operations and to communicate to customers the commitment of the Company to
act  responsibly.  The Company  encourages  employees and  distributors to share
ownership  and  mission  with  Management  as well as a sense  of  pride  in the
Company's products.

Product Distribution

         Mendocino Brewing's beers are sold through distributors to consumers in
bottles at  supermarkets,  warehouse  stores,  liquor stores,  taverns and bars,
restaurants, and convenience stores. All

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<PAGE>

brands are also  available in draft.  The  Company's  products are  delivered to
retail  outlets by  independent  distributors  whose  principal  business is the
distribution  of beer  and in some  cases  other  alcoholic  beverages,  and who
typically also distribute one or more national beer brands.  Mendocino  Brewing,
together  with its  distributors,  markets its  products  to retail  outlets and
relies on its  distributors  to provide regular  deliveries,  to maintain retail
shelf  space,  and to oversee  timely  rotation of  inventory.  The Company also
offers its products  directly to consumers  at the Hopland  Brewery  brewpub and
merchandise store. Beer sales (wholesale and retail combined) constituted 90% of
the  Company's  total  sales  in 1998,  with  food and  merchandise  retail  and
catalogue  sales  constituting  the  balance.  Sales to the top  five  customers
totaled  $3,029,000  and  $2,192,000  for the years ended  December 31, 1998 and
1997, respectively representing 44% and 45% of sales.

Suppliers

         The Company's major  suppliers are Great Western  Malting Co.,  Yakima,
Washington, and Briess Malting, Milwaukee,  Wisconsin (malt); John I. Haas, Co.,
New York, New York (hops); Ball Foster Glass, Muncie, Indiana (bottles); Gaylord
Container Corporation,  Antioch, California (cartons); Sierra Pacific Packaging,
Oroville,  California  (carriers);  and Inline Labeling Inc., North  Charleston,
South Carolina (labels).

Employees

         As of December  31,  1998,  the Company  employed 54  full-time  and 23
part-time  individuals  including 15 in  management  and  administration,  35 in
brewing  operations,  17 in retail and  brewpub  operations  and 11 in sales and
marketing  positions.  Management believes that the Company's relations with its
employees are excellent.  The Company does not have any labor contracts with any
of its  employees.  The  Company  has agreed with the City of Ukiah that for two
years from the opening of the Ukiah brewery that it will give  preference in its
hiring to residents of Mendocino County.

Trademarks

         The  Company  has  federal  trademark  registrations  of the  MENDOCINO
BREWING COMPANY word mark (Reg. No. 1,785,745), RED TAIL ALE word mark (Reg. No.
2,032,382), RED TAIL DESIGN (Reg. No. 2,011,817), BLUE HERON word mark (Reg. No.
1,820,076), BLUE HERON PALE ALE DESIGN (Reg. No. 2,011,816),  PEREGRINE PALE ALE
word mark (Reg. No.  1,667,796),  EYE OF THE HAWK SELECT ALE word mark (Reg. No.
1,673,594),  EYE OF THE HAWK SELECT ALE DESIGN (Reg. No. 2,011,818),  EYE OF THE
HAWK SPECIAL EDITION ANNIVERSARY ALE AND DESIGN (Reg. No. 2,011,815), BLACK HAWK
STOUT  word mark (Reg.  No.  1,791,807),  YULETIDE  PORTER  word mark (Reg.  No.
1,666,891), BREWSLETTER word mark (Reg. No. 1,768,639), and RAZOR EDGE (Reg. No.
1,708,518).  The Company has also applied for intent to use registrations of the
trademarks  NORTH  COUNTRY  ALES,  WHITE  FACE,  WHITEFACE,  FAT BEAR,  NORTHERN
EXPOSURE, TEN SPRINGS, and SARATOGA CLASSIC PILSNER.

         The Company has also  acquired the  trademark,  whether  registered  or
unregistered  of CARMEL  BREWING  COMPANY  and any other  variation  of the name
Carmel Brewing Company used by Carmel Brewing.

         The  registration  of the word  mark  BLUE  HERON is a  concurrent  use
registration  which gives the Company the  exclusive  right to use the word mark
BLUE HERON  throughout  the United States with the  exception of Oregon,  Idaho,
Washington, and Montana. BridgePort Brewing Company, the other concurrent owner,
has the exclusive right to use the word mark BLUE HERON in those states.

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         The  Company's  use of the word mark BLACK HAWK STOUT is, by  agreement
with Hiram Walker & Sons, Inc.,  subject to the restriction that it be used only
in conjunction with the words "Mendocino Brewing Company".

         The Company  also  acquired  use of the word mark RAZOR EDGE  through a
License  Agreement with Beverage Mates, Ltd. This Agreement gives the Company an
exclusive  license  for  ten  years  to use  the  mark in  connection  with  the
manufacture,  production,  labeling and  packaging of Beverage  Mates'  products
throughout the United States with the exception of Florida,  North Carolina, and
South Carolina,  until certain agreements  pertaining to these states permit the
Company to sell in such states.

Government Regulation

         Mendocino  Brewing  is  licensed  to  manufacture  and sell beer by the
Departments of Alcoholic  Beverage Control in California and New York. A federal
permit from the Bureau of Alcohol,  Tobacco,  and Firearms  ("BATF")  allows the
Company to  manufacture  fermented  malt  beverages.  To keep these licenses and
permits in force the Company must pay annual fees and submit  timely  production
reports and excise tax returns.  Prompt notice of any changes in the operations,
ownership,  or company structure must also be made to these regulatory agencies.
BATF must also  approve all product  labels,  which must  include an alcohol use
warning.  These agencies  require that individuals  owning equity  securities in
aggregate of 10% or more in the Company be investigated as to their suitability.

         Taxation  of  alcohol  has  increased  significantly  in recent  years.
Currently, the Federal tax rate is $7.00 per bbl. for up to 60,000 bbl. per year
and $18.00 per bbl.  for over 60,000 bbl. The  California  tax rate is $6.20 per
bbl. The State of New York presently  imposes an excise tax of $4.96 per bbl. on
brewers for over 100,000 bbls. per year.

         The Hopland  Brewery's  brewpub is  regulated by the  Mendocino  County
Health Department, which requires an annual permit and conducts spot inspections
to monitor compliance with applicable health codes.

         The  Company's   production   operations  must  also  comply  with  the
Occupational  Safety and  Health  Administration's  workplace  safety and worker
health  regulations and applicable  state laws thereunder.  Management  believes
that the Company  presently is in compliance  with the  aforementioned  laws and
regulations and has implemented its own voluntary safety program.

Environmental Regulation

         The  Company  is  subject  to  various   federal,   state,   and  local
environmental  laws which regulate the use, storage,  handling,  and disposal of
various substances.

         The Company's waste products consist of water, spent grains,  hops, and
glass and  cardboard.  The Company has  instituted  a recycling  program for its
office paper, newspapers, magazines, glass, and cardboard at minimal cost to the
Company. The Company pays approximately $1,000 per month in sewage fees relating
to waste water from its Hopland  facility.  The Company  sells or gives away its
spent grain to local cattle ranchers.  The Company has not purchased any special
equipment  and does not  incur  any  identifiable  fees in  connection  with its
environmental compliance at its Hopland site. The Company earned the distinction
of being a 1998 Waste Reduction  Awards Program (WRAP) winner which is sponsored
by  the  California   Environmental   Protection  Agency  and  Integrated  Waste
Management Board.

         The Company has built its own wastewater  treatment plant for the Ukiah
facility.  As a  consequence,  the  Company  will not be required to incur sewer
hook-up fees at that location. If the Company's discharge exceeds 55,000 gallons
per day, which Management does not expect to occur until

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<PAGE>

annual  capacity  exceeds  100,000  bbl.,  the  Company  will be required to pay
additional  fees. The estimated cost of the  wastewater  treatment  facility was
$900,000,  and the estimated  cost of operating the plant is between  $6,000 and
$10,000 per month. The cost may increase with increased production.  The Company
is exploring various methods of recycling  treated  wastewater and could realize
some  revenue  from  doing so. The  Company  has  contracted  to have the liquid
sediment that remains from the treated  wastewater trucked to a local composting
facility for  essentially  the cost of  transportation.  A Mendocino  County Air
Quality  Control Permit will be required to operate the natural gas fired boiler
in Ukiah.

         The Saratoga Springs facility is subject to various state,  federal and
local  environmental  laws which  regulate use,  storage and disposal of various
materials. The Company's solid waste products consist of spent grain, cardboard,
glass and liquid waste.  As for solid waste,  the Company has instituted at this
facility a recycling program for cardboard, office papers and glass at a minimal
cost to the Company.  The Company sells spent grain to local cattle dairy farms.
The Company pays  approximately  $650.00 per month towards sewer fees for liquid
waste.  The sewer  discharge  from the  brewery is  monitored  and is within the
standards  set by Saratoga  County  Sewer  Department.  The Company  follows and
operates  under rules and  regulations of New York  Department of  Environmental
Conservation for Air Pollution Control.

         The Company has not  received any notice from any  governmental  agency
that it is a potentially responsible person under any environmental law.

Research and Development

         Research and development activity in 1998 was minimal.

Qualified Small Business Issuer

         Federal and  California  tax laws  provide a 50%  exclusion of any gain
from the sale of "qualified small business stock." For shares to qualify for the
exclusion, several tests must be met. For instance, the shares must be purchased
directly from the Company,  not in any later trading market, and the shares must
be held for at least five years.

         A  "qualified  small  business"  must not have more than $50 million in
assets,  at  least  80% of  which  are used in a  qualified  trade  or  business
throughout the holding period.  A "qualified trade or business" does not include
"operating a hotel,  motel,  restaurant,  or similar  business." It is uncertain
whether  the  Company's  operation  of the  Hopland  Brewery  brewpub  currently
prevents it from meeting the definition of "qualified  small  business",  as the
brewing  equipment in Hopland was used in both  wholesale and retail  operations
and no  applicable  regulations  have been  published  to assist in making  such
determination.  Management believes, after consulting with its accountants, that
completing  the new  brewery in Ukiah and  acquiring  the  brewery  in  Saratoga
Springs  has  reduced the assets of the  Company  used in the  operation  of the
brewpub to well  below  20%,  but  Management  does not  intend to  request  any
opinions or rulings on this issue at the present time.

         The  Company  intends  to submit  reports  if and to the extent any are
required  under  federal  law to  make  the 50%  exclusion  from  capital  gains
available, and submitted such a report in California for 1995, the first year in
which  California  required  such a report.  Given  the  absence  of  applicable
regulations, there is no assurance that California taxing authorities will agree
with the  information  contained  in the report.  There are  limitations  on the
persons who may use any exclusion.  Prospective  investors  should consult their
own tax advisors concerning the possible applicability of these exclusions.

                                       9
<PAGE>

Item 2.  Description of Property.

         The Company owns nine acres of land in Ukiah,  California  on which its
Ukiah  brewery is operated.  The Company  currently  leases a 15,500 square foot
building in Hopland on which the Hopland  Brewery is located.  The lease expires
in August 2004. The Company leases 3.66 acres in Saratoga Springs,  New York, on
which  Ten  Springs  Brewery  operates  under a  lease  expiring  October  2002.
Additionally,  the Company leases certain equipment and vehicles under operating
leases which expire  through  March 2000.  The Company  leases  certain  brewing
equipment from FINOVA Capital Corporation which expires November 11, 2003.

Item 3.  Legal Proceedings.

         The Company is engaged in ordinary and routine litigation incidental to
its business.  Management  does not anticipate  that any amounts which it may be
required to pay by reason  thereof will have a material  effect on the Company's
financial position.

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

         No matters  were  submitted  to a vote of security  holders  during the
fourth quarter of fiscal 1998.

                                     PART II

Item 5.  Market for Common Equity and Related Stockholder Matters.
<TABLE>
         Mendocino  Brewing's  Common  Stock is listed on the Pacific  Exchange,
Inc. (symbol MBR). The high and low closing sales prices for the Common Stock on
the Pacific Exchange are set forth below for the quarters indicated:
<CAPTION>

                                     1998                                                1997
             --------------------------------------------------- -----------------------------------------------------
                  1st          2nd          3rd          4th          1st          2nd          3rd          4th
                Quarter      Quarter      Quarter      Quarter      Quarter      Quarter      Quarter      Quarter
<S>              <C>          <C>          <C>          <C>          <C>          <C>          <C>          <C>  
     High        $3.31        $2.75        $1.68        $1.18        $8.00        $7.25        $5.50        $4.37

     Low         $2.00        $1.18        $1.06        $.56         $6.00        $4.50        $3.62        $3.12
</TABLE>

         There were  approximately  2,479 shareholders of record as of March 15,
1999.  Management intends to retain Mendocino  Brewing's earnings for use in the
business  and  does  not  expect  the  Company  to  pay  cash  dividends  in the
foreseeable  future.  The Company's credit  agreements  provide that the Company
shall not declare or pay any dividend or other  distribution on its Common Stock
(other than a stock  dividend) or purchase or redeem any Common  Stock,  without
the  lender's  prior  written   consent.   Management   anticipates   that  such
restrictions  will remain in effect for as long as the  Company has  significant
bank  financing,  including  the  long-term  debt on the Ukiah real estate.  The
holders of the Company's 227,600  outstanding shares of Series A Preferred Stock
are entitled to aggregate cash dividends and  liquidation  proceeds of $1.00 per
share  before any dividend  may be paid with  respect to the Common  Stock.  The
Series A Preferred  Shares are canceled after they have received their $1.00 per
share  aggregate  dividend.  Management  does not have any present  intention to
declare or pay a dividend on the Series A Preferred Stock.

                                       10
<PAGE>

Item 6.  Management's Discussion and Analysis.

         The following  discussion  and analysis  should be read in  conjunction
with  the  Financial  Statements  and the  Notes  thereto  and  other  financial
information  included  elsewhere in this Report.  The  discussion of results and
trends does not necessarily imply that these results and trends will continue.

Overview

         In July 1998, the Company  purchased all brand related assets of Carmel
Brewing in exchange for unregistered shares of the Company's Common Stock having
an aggregate value of $100,000 based on a per share price of $3.00.  However, on
the  transaction  date,  the market  value of the 33,334  shares of Common Stock
issued to Carmel Brewing was only $45,834.  The Carmel brands were  successfully
launched from the Ukiah facility.

         Pursuant to the October 1997 Investment  Agreement  between the Company
and UBA, UBA agreed to provide,  or arrange for the provision of funding for the
working  capital  requirements  of Releta.  UBA has fulfilled this commitment by
making  available  to the  Company a credit  facility  of up to  $2,000,000  for
working capital purposes. The advances bear interest at a rate of 1.5% per annum
above  the  prime  rate  offered  by the  Bank  of  America  in  San  Francisco,
California.  Each advance on the credit  facility is evidenced by a  convertible
note in the amount of the advance. As of December 31, 1998, the Company has made
11 draws on the credit  facility.  As of December 31, 1998, the aggregate amount
drawn on the line of credit, together with interest accrued thereon, is equal to
$994,000,  which corresponds to the right of UBA to acquire up to 662,683 shares
of Common Stock of the Company at a conversion price of $1.50 per share.

         The CIT  Group/Credit  Finance,  Inc.,  has provided the Company with a
$3,000,000  maximum line of credit with an advance rate of 80% of the  qualified
accounts  receivable  and 60% of the inventory at an interest rate of prime rate
of Chase  Manhattan  Bank in New  York  plus  2.25%  payable  monthly,  maturing
September  23,  2000.  The line of credit is  secured by all  accounts,  general
intangibles,  inventory,  and  equipment of the Company  except for the specific
equipment  and  fixtures  of the  Company  subject  to a lien in favor of Finova
Capital Corporation, as well as by a second deed of trust on the property of the
Company in Mendocino  County,  California.  An amount  totaling  $1,483,968  was
advanced  to the  Company  as an  initial  term  loan,  which  is  repayable  in
immediately available funds in sixty consecutive monthly  installments,  each in
the amount of $24,773,  commencing on March 24, 1999.  The initial term loan was
used to repay all amounts outstanding on the loan from WestAmerica Bank totaling
$600,000.

         In November  1998,  the Company signed an agreement with Beverage Mates
Ltd.  for  licensing  their  brand  Razor Edge for a period of ten years with an
option  to  acquire  the  brand  rights  at the end of  three  years  at a price
determined by a formula based on earnings of the brand.

         Net sales  for 1998  increased  by 42.3%  over  1997 due  primarily  to
increased marketing efforts.  Production and sales in 1998 (measured in barrels,
brewed and  shipped  out of Ukiah and  Saratoga  Springs  facilities,  including
brands being brewed under contract) increased by 82.5% and 81.5%,  respectively,
when  compared  to 1997.  Production  in 1998  increased  to 37,514  barrels  as
compared to 20,557 barrels in 1997. Sales in 1998 increased to 35,882 barrels as
compared to 19,773  barrels in 1997.  The Company ended the year with a net loss
of $1,562,300.  Increased  fixed costs  associated  with the  breweries,  higher
selling,  general and  administrative  expenses and increased interest expenses,
contributed to the net loss of $1,562,300 for the year ended December 31, 1998.

                                       11
<PAGE>

Results of Operations
<TABLE>
         The following  tables set forth, as a percentage of net sales,  certain
items included in Mendocino  Brewing's  Statements of Operations.  See Financial
Statements and Notes thereto.
<CAPTION>

                                                               ---------------------------------------------
                                                                          Year Ended December 31
                                                               ---------------------------------------------
                                                                       1998                   1997
<S>                                                                    <C>                   <C>
                  Statements of Operations Data:                          %                     %
     Sales                                                              105.95                105.53
     Less Excise taxes                                                    5.95                  5.53
                                                                        -------               -------
     Net Sales                                                          100.00                100.00
     Costs of Goods Sold                                                 75.16                 72.16
                                                                        -------               -------
     Gross Profit                                                        24.84                 27.84
     Operating Expenses                                                  56.59                 56.26
     Loss from Operations                                               (31.75)               (28.42)
     Other Income/(expense)                                              (9.61)               (11.85)
     Loss before income taxes                                           (41.36)               (40.27)
     Benefit from income taxes                                          (17.44)               (15.44)
                                                                        -------               -------
     Net Loss                                                           (23.92)               (24.83)
                                                                        =======               =======

                                                               ---------------------------------------------
                                                                          Year Ended December 31
                                                               ---------------------------------------------
                                                                          1998                   1997
     Balance Sheet Data:                                                 $                      $
     Cash and Cash Equivalents                                             42,000               706,300
     Working Capital                                                     (630,700)             (357,400)
     Property and Equipment                                            15,259,800            15,642,500
     Deposits and Other Assets                                             34,600                42,000
     Total Assets                                                      18,923,200            18,026,400
     Long-term Debt                                                     4,753,200             2,663,300
     Obligation Under Capital Lease                                     1,525,800             1,578,900
     Total Liabilities                                                  8,781,400             6,368,100
     Accumulated Deficit                                               (2,498,800)             (936,500)
     Shareholder's equity                                              10,141,800            11,658,300
</TABLE>

Net Sales

         Net  sales  for 1998  increased  by 42.3%  from  $4,590,000  in 1997 to
$6,529,700 in 1998.  The sales volume  increased to 35,882  barrels  during 1998
from 19,773  barrels in 1997  representing  an  increase of 81.5%.  Of the total
sales of  barrels in 1998,  the sales out of the Ukiah  facility  accounted  for
28,340  barrels and the shipments  from the Releta  facility was 7,542  barrels.
Management  attributes the growth in sales to new marketing strategies including
new point of sale  materials  and  increased  sales  personnel.  The increase in
overall net sales was achieved solely by higher wholesale  shipments during 1998
when compared to 1997. In view of  Management's  focus on wholesale  beer sales,
retail sales for

                                       12
<PAGE>

the year 1998  decreased by $302,200 while the wholesale beer sales for the year
1998 increased by $2,377,100.

Cost of Goods Sold

         Cost of goods sold as a percentage of net sales increased by 3% in 1998
to 75.16% when  compared to that of 72.16% in 1997.  During  1998,  depreciation
increased by $382,900,  rentals increased by $100,000,  property taxes increased
by $140,000  and  utilities  increased by $133,750.  Management  attributes  the
increase  to  higher  fixed  costs  and to  under  utilization  of  the  brewing
facilities in Ukiah, California and Saratoga Springs, New York.

Gross Profit

         Gross profit increased by 26.9% during 1998 to $1,621,700 in comparison
to $1,277,900 in 1997. However, in view of higher cost of sales explained above,
the gross  profit as a  percentage  of net sales  decreased by 3% during 1998 to
24.84% in 1998 from 27.84% in 1997.

Operating Expenses

         Operating expenses were $3,695,000 in 1998, representing an increase of
43% when compared to $2,582,400 in 1997.  Operating  expenses  consist of retail
operating  expenses,   marketing  and  distribution  expenses  and  general  and
administrative expenses.

         Retail  operating  expenses  for 1998 were  $481,900  when  compared to
$704,000  in 1997.  This  represented  a  decrease  of  31.5%  from  1997.  As a
percentage  of net sales,  the Retail  operating  expenses were 7.38% in 1998 as
compared to 15.3% in 1997.  The  decrease  consisted  of a reduction in labor by
$109,000,  a  reduction  in  supplies by  $30,100,  decrease  in  marketing  and
advertisement  costs by $77,000,  reduction  in  utilities  by $7,700 and net of
other expenses decreased by $1,700.

         Marketing  and   distribution   expenses   were   $1,311,700  in  1998,
representing an increase of 55% compared to $846,200 in 1997. As a percentage of
net sales,  marketing and  distribution  expenses  represented  20.1% in 1998 as
compared to 18.4% in 1997. The increase in marketing and  distribution  expenses
comprised  of an  increase in  marketing  labor  costs by  $401,600,  travel and
entertainment  costs by $38,200,  cost of point of sales  material  increased by
$87,300,  event  sponsorship  costs increased by $50,400,  and 15th  anniversary
costs  accounted for $16,200.  The above  increases  were offset by decreases in
freight costs by $71,900,  warehouse rent by $15,000,  supplies by $3,900,  auto
expenses by $9,000,  decrease of $20,000 being settlement expenses in connection
with the termination of a distributor and net of all other expenses decreased by
$8,400.

         General and Administrative expenses were $1,901,400 in 1998 as compared
to $1,032,200 in 1997  representing an increase of $869,200.  As a percentage of
net sales general and administrative expenses represented an increase of 6.6% in
1998 to  29.1%  as  compared  to 22.5% in 1997.  The  increase  of  general  and
administrative  expenses  comprised  of an increase in labor costs by  $507,650,
travel and  entertainment  costs by  $97,300,  legal and  professional  costs by
$216,900,  depreciation  by $50,950 and net of all other  expenses  decreased by
$3,600.  The increases in 1998, when compared to 1997, are  attributable to more
employees and the addition of breweries located in Ukiah and Saratoga Springs.

Other Income/(Expense)

         The other  income/(expense)  for the year 1998 was $627,800 as compared
to $544,100 in 1997.  The  increase  of $83,700  was mainly  attributable  to an
increase  in  interest  expense to the extent of

                                       13
<PAGE>

$234,400 in 1998 offset by non  recurrence  of a write-off of deferred  offering
costs to the extent of $141,000 in 1997.

Benefit From Income Taxes

         The  benefit  from  income  taxes for the year 1998 was  $1,138,800  as
compared  to  $708,900 in 1997.  The  benefit  from  income  taxes is due to the
expected  future benefit of carrying  forward of net operating  losses and other
timing differences.

         As of December 31, 1998,  the Company has  available  for  carryforward
approximately $4,700,000, $1,830,000 and $551,000 of Federal, California and New
York net operating  losses.  Approximately  $940,000 of the Federal and New York
net operating  losses will expire in 2012, the remaining  portion will expire in
2018. The California  net operating  losses expire  beginning 2001 through 2003.
The Company also has $43,500 of California  Manufactures  Investment Tax Credits
that can be carried  forward  to reduce  future  taxes and  expire in 2005.  The
benefit from these loss  carryforwards and credits has been recorded,  resulting
in a deferred tax asset. A valuation allowance is not provided since the Company
believes it is more likely  than not that the loss  carryforwards  will be fully
utilized.

         The Company  recognizes  deferred  tax  liabilities  and assets for the
expected  future  tax  consequences  of events  that have been  included  in the
financial  statements  or tax  returns,  including  the  future  benefit  of its
carryforwards.  Temporary  differences  and  carryforwards  which  give  rise to
deferred assets at December 31, 1998 are as follows:

   Benefits from net operating loss carryforwards                $1,700,800 
   Investment tax credit carryforwards                               43,500 
   Inventory                                                          6,600 
   Accruals                                                         141,800 
   Depreciation and amortization                                    (35,300)
   Other                                                           (104,900)
                                                                 -----------
   Net deferred income taxes                                      1,752,500 
   Deferred income taxes expected to be utilized in 1999            138,300 
                                                                 -----------
   Deferred income taxes                                         $1,614,200 
                                                                 -----------

Net Loss

         The net loss for the year 1998 was $1,562,300 as compared to $1,139,700
for the year 1997. As a percentage of net sales,  the net loss for the year 1998
represented 23.9% when compared to 24.8% in 1997.

Segment Information

         The Company's business presently consists of two segments. The first is
brewing  for  wholesale  to  distributors  and  other  retailers.  This  segment
accounted for 90.1% of the Company's  total gross sales during 1998.  The second
segment consists of brewing beer for sale along with food and merchandise at the
Company's brewpub and retail merchandise store located at the Hopland Brewery.
This segment accounted for 9.9% of the Company's total gross sales during 1998.

         With  expanded  wholesale  beer  production  in both Ukiah and Saratoga
Springs,  Management  expects that retail sales, as a percentage of total sales,
will decrease proportionally to the expected increase in the Company's wholesale
sales.

                                       14
<PAGE>

Seasonality

         Beer consumption nationwide has historically increased by approximately
20% during the summer months.  It is not clear to what extent  seasonality  will
affect the Company as it expands its capacity and its geographic markets.

Capital Demands

         The Releta facility  commenced brewing operations in February 1998. The
Company expects both the Ukiah and Releta facilities to operate at significantly
less than full capacity  during all or part of 1999.  Both breweries have placed
demands  upon  the  Company's  assets,  liabilities,   commitments  for  capital
expenditures, and liquidity. Failure to adequately meet those demands may have a
material  adverse affect on the Company's  business,  financial  condition,  and
results of operations.

         The Company has yet to complete  the  build-out  of its  administrative
space and the exterior  landscaping of the Ukiah facility.  The Ukiah brewery is
presently operating under a temporary  certificate of occupancy from the City of
Ukiah.  Completion  of  construction  is a condition  to the issuance of a final
certificate of occupancy.  Failure to complete  construction  and obtain a final
certificate of occupancy  could have a material  adverse effect on the Company's
business, financial condition, and results of operations.

Liquidity and Capital Resources

         Long Term Debt. Mendocino Brewing has obtained a $2.7 million long term
loan  secured  by a  first  priority  deed  of  trust  on  the  Ukiah  land  and
improvements.  The loan is payable in monthly  installments of $24,443 including
interest at the Treasury  Constant  Maturity Index plus 4.17%,  currently 4.59%,
maturing  December  2012  with a balloon  payment  in the  amount of  $1,872,300
secured by some of the assets of the Company  (other than the Releta  facility),
including,  without limitation, a first priority deed of trust on the Ukiah land
and improvements, fixtures and most of the equipment of the Company.

         Shareholder Commitment. UBA, the Company's largest shareholder,  agreed
to provide the Company with a credit facility of up to $2 million.  Each advance
will bear  interest at the prime rate plus 1.5% and is due and payable 18 months
after the date of the advance.  The advances will have a conversion feature into
unregistered shares of the Company's Common Stock. The entire principal balance,
together  with all unpaid  interest,  is  convertible  into Common  Stock of the
Company,  on or after the  maturity  date at a rate of one share of Common Stock
for each $1.50 principal and unpaid interest.  The arrangement was approved by a
committee consisting of director Michael Laybourn (the President of the Company)
and independent directors Kent Price and Sury Rao Palamond on February 19, 1998,
and the terms of the credit facility were finalized by the Board of Directors on
October 6, 1998. UBA has advanced $994,000  (including  interest) to the Company
as of December 31, 1998, evidenced by several promissory notes.

         Equipment  Lease.  FINOVA  Capital  Corporation  has leased new brewing
equipment with a total cost of approximately  $1.78 million to Mendocino Brewing
for a term of 7 years (beginning  December 1996) with monthly rental payments of
approximately  $27,100 each. At expiration of the initial term of the lease, the
Company may purchase the equipment at its then current fair market value but not
less than 25% nor more than 30% of the original cost of the equipment, or at the
Company's  option,  may extend the term of the lease for an  additional  year at
approximately  $39,000 per month with an option to purchase the equipment at the
end of the year at then current fair market value. The lease is not pre-payable.

                                       15
<PAGE>

         Credit Facility.  The CIT Group/Credit Finance,  Inc., has provided the
Company with a $3,000,000  maximum line of credit with an advance rate of 80% of
the qualified  accounts  receivable and 60% of the inventory at an interest rate
of prime rate of Chase  Manhattan  Bank of New York plus 2.25% payable  monthly,
maturing  September  23,  2000.  The line of credit is secured by all  accounts,
general  intangibles,  inventory,  and  equipment of the Company  except for the
specific  equipment  and  fixtures of the Company  subject to a lien in favor of
Finova Capital Corporation, as well as by a second deed of trust on the property
of the Company in Mendocino County,  California.  An amount totaling  $1,483,968
was  advanced  to the Company as an initial  term loan,  which is  repayable  in
immediately available funds in sixty consecutive monthly  installments,  each in
the amount of $24,733,  commencing on March 24, 1999.  The initial term loan was
used to repay all amounts outstanding on the loan from WestAmerica Bank totaling
$600,000.

         Keg  Management  Arrangement.  The  Company  has  entered  into  a  keg
management  agreement with MicroStar Keg Management LLC. Under this arrangement,
MicroStar  provides the Company with half-barrel kegs for which the Company pays
a filling fee. Distributors return the kegs to MicroStar instead of the Company.
MicroStar  then  supplies the Company with  additional  kegs.  If the  agreement
terminates,  the Company is  required to purchase a certain  number of kegs from
MicroStar. The Company would probably finance the purchase through debt or lease
financing, if available.

         Current  Ratio.  The  Company's  ratio of  current  assets  to  current
liabilities  on  December  31,  1998 was 0.75 to 1.0 and its  ratio of assets to
liabilities was 2.15 to 1.0.

         Impact of  Expansion on Cash Flow.  Mendocino  Brewing must make timely
payment of its debt and lease  commitments  to  continue  in  operation.  Unused
capacity at the Ukiah and  Saratoga  Springs  facilities  has placed  additional
demands on the  Company's  working  capital.  Beginning  approximately  with the
second  quarter  of  1997,  the  time  at  which  the  Ukiah  brewery  commenced
operations,  proceeds from operations  have not been able to provide  sufficient
working capital for day to day operations. UBA agreed to provide a loan of up to
$2 million for working capital purposes. In addition, pursuant to the Investment
Agreement dated October 24, 1997, between the Company and UBA, UBA has agreed to
provide, directly or indirectly, funding for the working capital requirements of
the Releta  facility in the amount of $1 million until October 24, 1999 or until
the brewery's operations are profitable, whichever comes first. UBA, through its
affiliated  entities,  has fulfilled  this  obligation by  facilitating  the CIT
Group/Credit Finance $3 million loan transaction.

Year 2000 Readiness

         Many  currently-installed  computer  systems and software  products are
coded to accept only two digit entries in the date code field.  Beginning in the
year 2000,  these date code  fields  will need to accept  four digit  entries in
order to distinguish  21st century dates from 20th century dates.  On January 1,
2000, many computer,  and embedded systems,  may recognize the year "00" as 1900
rather than 2000. Because many computer functions are date-sensitive, this error
may cause  systems  to  process  data  inaccurately  or shut down if they do not
recognize the date. If not  corrected,  this could result in a system failure or
miscalculations causing disruptions of operations.

         The  Company  has taken  steps to  ensure  its  operations  will not be
adversely  impacted by potential  year 2000 computer  failures.  The Company has
completed  a  review  of the  Company's  computer  software  programs,  hardware
components,  and other  systems,  and  believes  that any cost to be incurred to
ensure its systems are year 2000 compliant will not be significant.

                                       16
<PAGE>

         The Company believes that its most  significant  internal risk posed by
the year 2000 problem is the  possibility of a failure of equipment  involved in
its brewing  processes.  If the brewing  processes  equipment  were to fail, the
Company  would have to implement  manual  processes,  which may slow  production
levels that would affect the Company's  sales  volume.  The  programmable  logic
controller  connected to the brewing  equipment  and the  processes are not date
sensitive. A testing of the brewing house facility computer operations indicated
that all of the computer systems are year 2000 compliant;  however, there can be
no assurance that problems may not arise relevant to year 2000.

         The third  parties  whose year 2000  problems  could have the  greatest
effect on the Company are believed by the Company to be banks that  maintain the
Company's depository accounts, the company that processes the Company's payroll,
and the Company's suppliers and distributors.  The Company has not confirmed the
state of year 2000 readiness of these parties.

         The Company is in the process of  establishing a "contingency  plan" to
address potential year 2000 problems and is currently  considering the extent to
which it will develop a formal contingency plan.

Item 7.  Financial Statements.

         The information required by this item is set forth at Pages F-1 through
F-21 to this Report.

Item 8.  Changes  In  and  Disagreements  With  Accountants  on  Accounting  and
Financial Disclosure.

         None.

                                    PART III

Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
With Section 16(a) of the Exchange Act.

         The  information  required by Item 9 will be contained in the Company's
Definitive  Proxy  Statement for its 1999 Annual  Meeting of  Shareholders  (the
"1999  Proxy  Statement")  called to be held in April  1999,  which the  Company
intends to file with the  Commission  in March  1999,  and such  information  is
incorporated herein by reference.

Item 10.  Executive Compensation.

         The information required by Item 10 will be contained in the 1999 Proxy
Statement, and such information is incorporated herein by reference.

Item 11.  Security Ownership of Certain Beneficial Owners and Management.

         The information required by Item 11 will be contained in the 1999 Proxy
Statement, and such information is incorporated herein by reference.

Item 12.  Certain Relationships and Related Transactions.

         The information required by Item 12 will be contained in the 1999 Proxy
Statement, and such information is incorporated herein by reference.

                                       17
<PAGE>

Item 13.  Exhibits and Reports on Form 8-K.

Exhibit
 Number                 Description of Document
-------                 -----------------------

     3.1        (A)     Articles of Incorporation, as amended, of the Company
     3.2        (B)     Bylaws of the Company
     4.1                Articles 5 and 6 of the  Articles of  Incorporation,  as
                        amended,  of the Company  (Reference  is made to Exhibit
                        3.1).
     4.2                Article 10 of the Restated Articles of Incorporation, as
                        amended,  of the Company  (Reference  is made to Exhibit
                        3.1).
    10.1        (A)     Mendocino Brewing Company Profit Sharing Plan.
    10.2        (A)     1994  Stock  Option  Plan  (previously  filed as Exhibit
                        99.6).
    10.3        (M)     Employment Agreement with H. Michael Laybourn.
    10.4        (A)     Wholesale Distribution Agreement between the Company and
                        Bay Area Distributing.
    10.5        (A)     Wholesale Distribution Agreement between the Company and
                        Golden Gate Distributing.
    10.6        (A)     Sales  Contract  between  the  Company and John I. Haas,
                        Inc.
    10.7        (F)     Liquid  Sediment  Removal  Services  Agreement with Cold
                        Creek Compost, Inc.
    10.8        (A)     Lease Agreement between the Company and Kohn Properties.
    10.9                (C) Commercial Real Estate Purchase Contract and Receipt
                        for Deposit (previously filed as Exhibit 19.2).
    10.10       (D)     Installment Note between Ukiah Redevelopment  Agency and
                        Langley et al. (previously filed as Exhibit 19.5).
    10.11       (F)     Promissory Note for $76,230 in favor of Langley et al.
    10.12       (G)     Agreement to modify note and deed of trust dated June 6,
                        1995 with Langley, et al.
    10.13       (G)     Agreement  to  modify  note  dated  June  6,  1995  with
                        Langley, et al.
    10.14       (G)     Amendment to installment note payable to Langley, et al.
    10.15       (N)     Commercial  Lease between  Stewart's Ice Cream  Company,
                        Inc. and Releta Brewing Company LLC.
    10.16       (M)     Agreement between United Breweries of America,  Inc. and
                        Releta Brewing Company LLC regarding  payment of certain
                        liens.
    10.17       (K)+    Keg  Management  Agreement with MicroStar Keg Management
                        LLC.
    10.18       (E)     Agreement to  Implement  Condition of Approval No. 37 of
                        the  Site  Development  Permit  95-19  with  the City of
                        Ukiah, California (previously filed as Exhibit 19.6).
    10.19       (G)     Manufacturing    Business   Expansion   and   Relocation
                        Agreement with the City of Ukiah.
    10.20       (G)     Manufacturing    Business   Expansion   and   Relocation
                        Agreement with the Ukiah Redevelopment Agency.
    10.21       (O)     $2,700,000   Note  in  favor  of  the  Savings  Bank  of
                        Mendocino County.
    10.22       (O)     Hazardous Substances  Certificate and Indemnity with the
                        Savings Bank of Mendocino County.
    10.23       (J)     Equipment Lease with FINOVA Capital Corporation.
    10.24       (J)     Tri-Election   Rider  to  Equipment  Lease  with  FINOVA
                        Capital Corporation.
    10.25       (J)     Master Lease Schedule with FINOVA Capital Corporation.
    10.26       (L)     Investment  Agreement with United  Breweries of America,
                        Inc.

                                       18
<PAGE>

Exhibit
 Number                 Description of Document
-------                 -----------------------

    10.27       (L)     Shareholders'   Agreement  Among  the  Company,   United
                        Breweries of America, Inc., H. Michael Laybourn,  Norman
                        Franks, Michael Lovett, John Scahill, and Don Barkley.
    10.28       (L)     Registration Rights Agreement Among the Company,  United
                        Breweries of America, Inc., H. Michael Laybourn,  Norman
                        Franks, Michael Lovett, John Scahill, and Don Barkley.
    10.29       (Q)     Indemnification Agreement with Vijay Mallya.
    10.30       (Q)     Indemnification Agreement with Michael Laybourn.
    10.31       (Q)     Indemnification Agreement with Jerome Merchant.
    10.32       (Q)     Indemnification Agreement with Yashpal Singh.
    10.33       (Q)     Indemnification Agreement with P.A. Murali.
    10.34       (Q)     Indemnification Agreement with Robert Neame.
    10.35       (Q)     Indemnification Agreement with Sury Rao Palamand.
    10.36       (Q)     Indemnification Agreement with Kent Price.
    10.37       (R)     Loan and Security Agreement between the Company,  Releta
                        Brewing  Company LLC and The CIT  Group/Credit  Finance,
                        Inc. regarding a $3,000,000 maximum line of credit.
    10.38       (R)     Patent, Trademark and License Mortgage by the Company in
                        favor of The CIT Group/Credit Finance, Inc.
    10.39       (R)     Patent, Trademark and License Mortgage by Releta Brewing
                        Company  LLC in favor of The CIT  Group/Credit  Finance,
                        Inc.
    10.40       (S)     Promissory   Notes  in  favor  of  United  Breweries  of
                        America, Inc.
    27                  Financial Data Schedule.

----------------------------

                (A)     Incorporated    by   reference    from   the   Company's
                        Registration  Statement dated June 15, 1994, as amended,
                        previously  filed with the Commission,  Registration No.
                        33-78390-LA.
                (B)     Incorporated  by reference from the Company's  Report on
                        Form 10-KSB for the annual  period  ended  December  31,
                        1994, previously filed with the Commission.
                (C)     Incorporated  by reference from the Company's  Report on
                        Form  10-QSB for the  quarterly  period  ended March 31,
                        1995, previously filed with the Commission.
                (D)     Incorporated  by reference from the Company's  Report on
                        Form  10-QSB  for the  quarterly  period  ended June 30,
                        1995, previously filed with the Commission.
                (E)     Incorporated  by reference from the Company's  Report on
                        Form 10-QSB for the quarterly period ended September 30,
                        1995, previously filed with the Commission.
                (F)     Incorporated  by reference from the Company's  Report on
                        Form 10-KSB for the annual  period  ended  December  31,
                        1995, previously filed with the Commission.
                (G)     Incorporated  by reference from the Company's  Report on
                        Form  10-QSB  for the  quarterly  period  ended June 30,
                        1996, previously filed with the Commission.
                (J)     Incorporated    by   reference    from   the   Company's
                        Registration   Statement  dated  February  6,  1997,  as
                        amended,   previously   filed   with   the   Commission,
                        Registration No. 33-15673.
                (K)     Incorporated  by reference from the Company's  Report on
                        Form 10-KSB for the annual  period  ended  December  31,
                        1996, previously filed with the Commission.
                (L)     Incorporated  by  reference  from the Schedule 13D filed
                        with the  Commission  on  November  3,  1997,  by United
                        Breweries of America, Inc. and Vijay Mallya.
                (M)     Incorporated  by reference from the Company's  Report on
                        Form 10-QSB for the quarterly period ended September 30,
                        1997.

                                       19
<PAGE>

Exhibit
 Number                 Description of Document
-------                 -----------------------

                (N)     Incorporated  by reference from the Company's  Report on
                        Form  10-QSB/A  No.  1 for the  quarterly  period  ended
                        September 30, 1997.
                (O)     Incorporated  by reference from the Company's  Report on
                        Form 10-KSB for the annual  period  ended  December  31,
                        1997, previously filed with the Commission.
                (Q)     Incorporated  by reference from the Company's  Report on
                        Form  10-QSB  for the  quarterly  period  ended June 30,
                        1998.
                (R)     Incorporated  by reference from the Company's  Report on
                        Form 10-QSB for the quarterly period ended September 30,
                        1998.
                (S)     Incorporated  by  reference  from  Amendment  No.  4  to
                        Schedule 13D filed with the  Commission  on February 18,
                        1999.
                 +      Portions of this  Exhibit  were  omitted  pursuant to an
                        application   for  an   order   declaring   confidential
                        treatment   filed  with  the   Securities  and  Exchange
                        Commission.


No  current  reports  on Form 8-K were  filed by the  Company  during the fourth
quarter ended December 31, 1998.


                                       20
<PAGE>

                                   SIGNATURES

         Pursuant to the  requirements  of Section 13 of the  Exchange  Act, the
registrant  caused  this  report to be signed on its behalf by the  undersigned,
thereto duly authorized.

                    (Registrant) Mendocino Brewing Company, Inc.



                    By:      /s/ Vijay Mallya
                             ---------------------------------------------------
                             Vijay Mallya, Chief Executive Officer
                             Date: March 17, 1999



         Pursuant to the  requirements  of Section 13 of the Exchange  Act, this
report has been signed by the following  persons on behalf of the registrant and
in the capacities and on the dates indicated.


                    By:      /s/ Vijay Mallya                            
                             ---------------------------------------------------
                             Vijay Mallya, Chief Executive Officer and Director
                             Date: March 17, 1999


                    By:      /s/ H. Michael Laybourn                     
                             ---------------------------------------------------
                             H. Michael Laybourn, President and Director
                             Date: March 17, 1999


                    By:      Yashpal Singh
                             ---------------------------------------------------
                             Yashpal Singh, Chief Operating Officer and Director
                             Date: March 17, 1999


                    By:      /s/ Jerome G. Merchant
                             ---------------------------------------------------
                             Jerome G. Merchant, Director
                             Date: March 17, 1999


                    By:      /s/ P.A. Murali
                             ---------------------------------------------------
                             P.A. Murali, Chief Financial Officer
                             Date: March 17, 1999




                                       21
<PAGE>


--------------------------------------------------------------------------------

                        MENDOCINO BREWING COMPANY, INC.,
                                 AND SUBSIDIARY

                          INDEPENDENT AUDITOR'S REPORT
                                       AND
                        CONSOLIDATED FINANCIAL STATEMENTS

                           DECEMBER 31, 1998 AND 1997

--------------------------------------------------------------------------------

<PAGE>

--------------------------------------------------------------------------------


                                    CONTENTS


                                                                           PAGE

INDEPENDENT AUDITOR'S REPORT...............................................F - 1


CONSOLIDATED FINANCIAL STATEMENTS

     Balance sheets........................................................F - 2

     Statements of operations..............................................F - 4

     Statements of stockholders' equity....................................F - 5

     Statements of cash flows..............................................F - 6

     Notes to financial statements.........................................F - 8


--------------------------------------------------------------------------------

<PAGE>

INDEPENDENT AUDITOR'S REPORT



To the Board of Directors
Mendocino Brewing Company, Inc.


We have  audited  the  accompanying  consolidated  balance  sheets of  Mendocino
Brewing Company,  Inc., and subsidiary as of December 31, 1998 and 1997, and the
related  consolidated  statements of operations,  stockholders'  equity and cash
flows for each of the two years ended  December  31,  1998.  These  consolidated
financial  statements are the  responsibility of the Company's  management.  Our
responsibility  is  to  express  an  opinion  on  these  consolidated  financial
statements based on our audits.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable  assurance about whether the  consolidated  financial  statements are
free of material  misstatement.  An audit includes  examining,  on a test basis,
evidence  supporting the amounts and disclosures in the  consolidated  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 consolidated financial position of Mendocino Brewing
Company,  Inc., and subsidiary as of December 31, 1998 and 1997, and the results
of its  operations  and its cash flows for each of the two years ended  December
31, 1998, in conformity with generally accepted accounting principles.



                                                    /s/ Moss Adams LLP



Santa Rosa, California
January 29, 1999



                                                                      Page F - 1
<PAGE>

                                 MENDOCINO BREWING COMPANY, INC., AND SUBSIDIARY
                                                     CONSOLIDATED BALANCE SHEETS
                                                      December 31, 1998 and 1997

--------------------------------------------------------------------------------


                                     ASSETS

                                                       1998             1997
                                                 -------------    -------------
CURRENT ASSETS
     Cash                                        $     42,000     $    706,300
     Accounts receivable                              679,900          329,700
     Inventories                                      978,000          544,100
     Prepaid expenses                                  33,500           42,600
     Refundable income taxes                                -          106,300
     Deferred income taxes                            138,300           39,500
                                                 -------------    -------------

         Total current assets                       1,871,700        1,768,500
                                                 -------------    -------------

PROPERTY AND EQUIPMENT                             15,259,800       15,642,500
                                                 -------------    -------------

OTHER ASSETS
     Deferred income taxes                          1,614,200          573,400
     Deposits and other assets                         34,600           42,000
     Intangibles, net of amortization                 142,900                -
                                                 -------------    -------------

                                                    1,791,700          615,400
                                                 -------------    -------------

         Total assets                            $ 18,923,200     $ 18,026,400
                                                 =============    =============



The accompanying notes are an integral part of these financial statements.
--------------------------------------------------------------------------------
                                                                      Page F - 2
<PAGE>


                                 MENDOCINO BREWING COMPANY, INC., AND SUBSIDIARY
                                         CONSOLIDATED BALANCE SHEETS (Continued)
                                                      December 31, 1998 and 1997

--------------------------------------------------------------------------------

<TABLE>
                                LIABILITIES AND STOCKHOLDERS' EQUITY
<CAPTION>
                                                                          1998             1997
                                                                     -------------    -------------
<S>                                                                  <C>              <C>
CURRENT LIABILITIES
     Line of credit                                                  $          -     $    600,000
     Accounts payable                                                     806,700          728,300
     Accounts payable-related party                                             -           80,200
     Accrued wages and related expense                                    210,800          169,700
     Accrued liabilities                                                   91,000          248,800
     Current maturities of long-term debt                                 322,000          130,400
     Current maturities of obligations under capital lease                221,300          168,500
     Current maturities of notes payable to related party                 850,600                -
                                                                     -------------    -------------

             Total current liabilities                                  2,502,400        2,125,900

LONG-TERM DEBT, less current maturities                                 3,871,800        2,663,300

LINE OF CREDIT                                                            738,000                -

OBLIGATIONS UNDER CAPITAL LEASE, less
     current maturities                                                 1,525,800        1,578,900

NOTES PAYABLE TO RELATED PARTY, less
     current maturities                                                   143,400                -
                                                                     -------------    -------------

             Total liabilities                                          8,781,400        6,368,100
                                                                     -------------    -------------

STOCKHOLDERS' EQUITY
     Preferred stock, Series A, no par value, with aggregate
         liquidation preference of $227,600; 227,600 shares
         authorized, issued and outstanding                               227,600          227,600
     Common stock, no par value; 20,000,000 shares authorized,
         4,497,059 and 4,463,385 shares issued and outstanding
         at December 31, 1998 and 1997, respectively                   12,413,000       12,367,200
     Accumulated deficit                                               (2,498,800)        (936,500)
                                                                     -------------    -------------

             Total stockholders' equity                                10,141,800       11,658,300
                                                                     -------------    -------------

             Total liabilities and stockholders' equity              $ 18,923,200     $ 18,026,400
                                                                     =============    =============


<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
--------------------------------------------------------------------------------
                                                                      Page F - 3
<PAGE>


                                 MENDOCINO BREWING COMPANY, INC., AND SUBSIDIARY
                                           CONSOLIDATED STATEMENTS OF OPERATIONS
                                          Years Ended December 31, 1998 and 1997
--------------------------------------------------------------------------------


                                                      1998             1997
                                                  -------------    -------------

SALES                                             $  6,918,800     $  4,843,900

LESS EXCISE TAXES                                      389,100          253,900
                                                  -------------    -------------

NET SALES                                            6,529,700        4,590,000

COST OF GOODS SOLD                                   4,908,000        3,312,100
                                                  -------------    -------------

GROSS PROFIT                                         1,621,700        1,277,900
                                                  -------------    -------------

OPERATING EXPENSES
     Retail operating                                  481,900          704,000
     Marketing                                       1,311,700          846,200
     General and administrative                      1,901,400        1,032,200
                                                  -------------    -------------

                                                     3,695,000        2,582,400
                                                  -------------    -------------

LOSS FROM OPERATIONS                                (2,073,300)      (1,304,500)
                                                  -------------    -------------

OTHER INCOME (EXPENSE)
     Interest income                                     1,900            7,300
     Other income (expense)                              2,900         (149,500)
     Gain on sale of equipment                           3,700                -
     Interest expense                                 (636,300)        (401,900)
                                                  -------------    -------------

                                                      (627,800)        (544,100)
                                                  -------------    -------------

LOSS BEFORE INCOME TAXES                            (2,701,100)      (1,848,600)

BENEFIT FROM  INCOME TAXES                          (1,138,800)        (708,900)
                                                  -------------    -------------

NET LOSS                                          $ (1,562,300)    $ (1,139,700)
                                                  =============    =============

BASIC LOSS PER COMMON SHARE                       $      (0.35)    $      (0.40)
                                                  =============    =============

WEIGHTED AVERAGE COMMON SHARES
     OUTSTANDING                                     4,480,222        2,870,478
                                                  =============    =============




The accompanying notes are an integral part of these financial statements.
--------------------------------------------------------------------------------
                                                                      Page F - 4
<PAGE>

                                 MENDOCINO BREWING COMPANY, INC., AND SUBSIDIARY
                                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                                          Years Ended December 31, 1998 and 1997
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                              Series A                                          
                                          Preferred Stock                 Common Stock               Retained
                                      -------------------------  -------------------------------     Earnings          Total
                                        Shares       Amount         Shares          Amount          (Deficit)          Equity
                                      -----------  ------------  -------------  ----------------  ---------------  ---------------
<S>                                      <C>          <C>           <C>             <C>              <C>              <C>        
Balance, December 31, 1996               227,600      $227,600      2,322,222       $ 3,869,600      $   203,200      $ 4,300,400

Issuance of common stock, net of
     $164,700 issuance costs                   -             -         19,516                 -                -                -

Stock issued for services at $6.18
     per share                                 -             -          2,000            12,200                -           12,200

Issuance of common stock, net of
     $514,600 issuance costs                   -             -        943,176         3,485,400                -        3,485,400

Stock issued for 100% ownership
     in Releta Brewing Co.                     -             -      1,176,471         5,000,000                -        5,000,000

Net loss                                       -             -              -                 -       (1,139,700)      (1,139,700)
                                      -----------  ------------  -------------  ----------------  ---------------  ---------------

Balance, December 31, 1997               227,600       227,600      4,463,385        12,367,200         (936,500)      11,658,300

Stock issued for asset acquisition             -             -         33,674            45,800                -           45,800

Net loss                                       -             -              -                 -       (1,562,300)      (1,562,300)
                                      -----------  ------------  -------------  ----------------  ---------------  ---------------

                                         227,600      $227,600      4,497,059       $12,413,000      $(2,498,800)     $10,141,800
                                      ===========  ============  =============  ================  ===============  ===============


<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
--------------------------------------------------------------------------------
                                                                      Page F - 5

<PAGE>


                                 MENDOCINO BREWING COMPANY, INC., AND SUBSIDIARY
                                           CONSOLIDATED STATEMENTS OF CASH FLOWS
                                          Years Ended December 31, 1998 and 1997

--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                      1998             1997
                                                                  -------------    -------------
<S>                                                               <C>              <C>
CASH FLOWS FROM OPERATING ACTIVITIES
     Net loss                                                     $ (1,562,300)    $ (1,139,700)
     Adjustments to reconcile net loss to net
         cash used by operating activities:
             Depreciation and amortization                             779,400          359,300
             Gain on sale of assets                                     (3,700)               -
             Deferred income taxes                                  (1,139,600)        (603,400)
             Stock issued for services                                       -           12,200
         Changes in:
             Accounts receivable                                      (350,200)         130,800
             Inventories                                              (433,900)         (78,400)
             Prepaid expenses                                            9,100           16,000
             Deposits and other assets                                 (33,100)               -
             Refundable income taxes                                   106,300          (34,400)
             Accounts payable - trade and related party                 78,400          240,900
             Accrued wages and related expense                          41,100           51,500
             Accrued liabilities                                      (157,800)         232,200
                                                                  -------------    -------------

                 Net cash used by operating activities              (2,666,300)        (813,000)
                                                                  -------------    -------------

CASH FLOWS FROM INVESTING ACTIVITIES
     Purchases of property, equipment and leasehold
         improvements                                                 (185,900)      (1,922,800)
     Increase in intangibles                                           (63,100)         (27,900)
     Proceeds from sale of fixed assets                                 24,000                -
                                                                  -------------    -------------

                 Net cash used by investing activities                (225,000)      (1,950,700)
                                                                  -------------    -------------


<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
--------------------------------------------------------------------------------
                                                                      Page F - 6
<PAGE>


                                 MENDOCINO BREWING COMPANY, INC., AND SUBSIDIARY
                               CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
                                          Years Ended December 31, 1998 and 1997

--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                       1998            1997
                                                                    -----------    ------------
<S>                                                                 <C>            <C>
CASH FLOWS FROM FINANCING ACTIVITIES
     Net borrowings on line of credit                                  138,000               -
     Borrowings on long-term debt                                    1,433,600       1,097,200
     Principal payments on long-term debt                             (153,400)     (1,068,900)
     Payments on obligations under capital lease                      (185,200)       (143,900)
     Proceeds from notes payable to related party                      994,000               -
     Reduction in accrued construction costs                                 -        (744,000)
     Reimbursement from obligations under capital lease                      -         147,400
     Proceeds from sale of common stock                                      -       4,164,700
     Deferred stock offering costs                                           -        (477,300)
                                                                    -----------    ------------

            Net cash provided by financing activities                2,227,000       2,975,200
                                                                    -----------    ------------

INCREASE (DECREASE) IN CASH                                           (664,300)        211,500

CASH, beginning of year                                                706,300         494,800
                                                                    -----------    ------------

CASH, end of year                                                   $   42,000     $   706,300
                                                                    ===========    ============



<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
--------------------------------------------------------------------------------
                                                                      Page F - 7
<PAGE>

                                 MENDOCINO BREWING COMPANY, INC., AND SUBSIDIARY
                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

--------------------------------------------------------------------------------


NOTE  1 - DESCRIPTION OF OPERATIONS AND SUMMARY OF SIGNIFICANT
          ACCOUNTING POLICIES

Description of operations - Mendocino Brewing Company and its subsidiary operate
two  breweries,  which are in the business of producing  beer and malt beverages
for the specialty "craft" segment of the beer market, as well as own and operate
a brew pub and gift store.  The  breweries are in two  locations,  one in Ukiah,
California  and the other in Saratoga  Springs,  New York. The brew pub and gift
store are located in Hopland,  California.  The majority of sales for  Mendocino
Brewing Company are in California.  The company began operations at the Saratoga
Springs,  New York facility in December 1997. The company brews several  brands,
of which Red Tail Ale is the Flagship brand. In addition,  the Company  performs
contract brewing for several other brands.

Principles of consolidation - The consolidated  financial statements present the
accounts of Mendocino  Brewing Company,  Inc., and its wholly-owned  subsidiary,
Releta Brewing Company LLC., which operates in Saratoga  Springs,  New York. All
material inter-company balances and transactions have been eliminated.

Inventories - Inventories are stated at the lower-of-average cost or market.

Property  and  equipment  -  Property  and  equipment  are  stated  at cost  and
depreciated or amortized using  straight-line  and accelerated  methods over the
assets' estimated useful lives. Capitalized interest was $0 and $263,400 in 1998
and 1997, respectively.  Costs of maintenance and repairs are charged to expense
as incurred;  significant  renewals and betterments are  capitalized.  Estimated
useful lives are as follows:

       Building                                                 40 years
       Machinery and equipment                            5 -   40 years
       Furniture and fixtures                             5 -   10 years
       Leasehold improvements                             7 -   20 years

Intangibles  - Intangibles  consist of prepaid  interest on the financing of the
Ukiah brewery and placement  fees  associated  with debt.  Amounts are amortized
using the straight line method over the lives of the debt.

During  1998 the  Company  purchased  the  brand  rights,  trademark  and  other
intangible  assets of Carmel Brewing Co. for 33,674 shares of common stock.  The
assets are being amortized over 40 years.



--------------------------------------------------------------------------------
                                                                      Page F - 8
<PAGE>

                                 MENDOCINO BREWING COMPANY, INC., AND SUBSIDIARY
                          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

--------------------------------------------------------------------------------


NOTE  1 - DESCRIPTION OF OPERATIONS AND SUMMARY OF SIGNIFICANT
          ACCOUNTING POLICIES (Continued)

Concentration of credit risks - Financial  instruments that potentially  subject
the Company to credit risk consist  principally  of trade  receivables  and cash
deposits in excess of FDIC limits.  The Company's  cash deposits are placed with
major financial  institutions.  Wholesale distributors account for substantially
all accounts  receivable;  therefore,  this concentration risk is limited due to
the number of distributors  and state laws  regulating the financial  affairs of
distributors of alcoholic beverages.

Income  taxes - The  provision  for income  taxes is based on  pre-tax  earnings
reported in the financial  statements,  adjusted for requirements of current tax
law, plus the change in deferred taxes.  Deferred tax assets and liabilities are
recognized  using  enacted  tax  rates  and  reflect  the  expected  future  tax
consequences of temporary differences between the recorded amounts of assets and
liabilities  for financial  reporting  purposes and tax basis of such assets and
liabilities and future benefits from net operating loss  carryforwards and other
expenses previously recorded for financial reporting purposes.

Basic  loss per share - Basic  loss per share was  computed  using the  weighted
average number of common shares outstanding. Diluted loss per share was computed
using the weighted average number of common shares outstanding. Debt convertible
into  662,682  shares  of common  stock at $1.50 per  share,  and  12,500  stock
options, at a weighted average price per share of $8.80, have been excluded from
the weighted average shares  outstanding  since the effect of these  potentially
dilutive securities would be antidilutive.

Use of estimates - The  preparation of financial  statements in conformity  with
generally accepted accounting principles requires the Company make estimates and
assumptions affecting the reported amounts of assets, liabilities,  revenues and
expenses,  and  disclosure of  contingent  assets and  liabilities.  The amounts
estimated could differ from actual results antidilutive.

Advertising - Advertising costs are expensed as incurred.  Advertising  expenses
for the years ended  December 31, 1998 and 1997,  were  $214,700  and  $153,900,
respectively.



--------------------------------------------------------------------------------
                                                                      Page F - 9
<PAGE>

                                 MENDOCINO BREWING COMPANY, INC., AND SUBSIDIARY
                          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

--------------------------------------------------------------------------------



NOTE  1 - DESCRIPTION OF OPERATIONS AND SUMMARY OF SIGNIFICANT
          ACCOUNTING POLICIES (Continued)

Fair value of financial instruments - The following methods and assumptions were
used by the  Company in  estimating  its fair value  disclosures  for  financial
instruments:

Long-term debt: Based on the borrowing rates currently  available to the Company
for loans with similar terms and average maturities, the fair value of long-term
debt approximates cost.

New  accounting  pronouncements  -  The  Financial  Accounting  Standards  Board
("FASB") has issued SFAS No. 133  "Accounting  for  Derivative  Instruments  and
Hedging  Activities." It requires companies to record derivatives on the balance
sheet as assets or liabilities,  measured at fair market value.  Gains or losses
resulting  from  changes in the value of those  derivatives  are  accounted  for
depending  on the use of the  derivative  and  whether  it  qualifies  for hedge
accounting.  The  key  criterion  for  hedge  accounting  is  that  the  hedging
relationship  must be highly  effective in achieving the  offsetting  changes in
fair value or cash flows.  SFAS No. 133 is effective for all fiscal  quarters of
fiscal  years  beginning  after  June 15,  1999.  Management  believes  that the
adoption  of  SFAS  No.  133  will  have no  material  effect  on its  financial
statements.


NOTE  2 - INVENTORIES

                                                           1998          1997
                                                        ----------    ----------

Raw materials                                           $ 276,800     $ 165,000
Work-in-process                                           210,500       101,700
Finished goods                                            438,900       210,800
Merchandise                                                51,800        66,600
                                                        ----------    ----------

                                                        $ 978,000     $ 544,100
                                                        ==========    ==========



--------------------------------------------------------------------------------
                                                                     Page F - 10
<PAGE>

                                 MENDOCINO BREWING COMPANY, INC., AND SUBSIDIARY
                          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

--------------------------------------------------------------------------------


<TABLE>
NOTE  3 - PROPERTY AND EQUIPMENT
<CAPTION>
                                                            1998             1997
                                                       -------------    -------------
<S>                                                    <C>              <C>         
Buildings                                              $  7,711,100     $  7,711,100
Machinery and equipment                                   5,263,700        5,055,000
Equipment under capital lease                             2,117,400        1,912,300
Land                                                        813,000          810,900
Leasehold improvements                                      777,600          771,800
Equipment in progress                                      123,500          177,700
Vehicles                                                     69,300           15,300
Furniture and fixtures                                       37,900           70,400
                                                       -------------    -------------

                                                         16,913,500       16,524,500
Less accumulated depreciation and amortization            1,653,700          882,000
                                                       -------------    -------------

                                                       $ 15,259,800     $ 15,642,500
                                                       =============    =============

</TABLE>


NOTE  4 - LINE OF CREDIT

The Company has available a $3,000,000 line of credit with interest at the prime
rate plus 2.25%.  Approximately  $1,484,000  was  advanced to the Company in the
form of a term loan (see Note 5). The bank's commitment under the line of credit
matures September 2000. The agreement is secured by substantially all the assets
of the Releta Brewing Company, LLC, a second position on the assets of Mendocino
Brewing Co., accounts receivable,  inventory and certain securities pledged by a
stockholder.





--------------------------------------------------------------------------------
                                                                     Page F - 11
<PAGE>



                                 MENDOCINO BREWING COMPANY, INC., AND SUBSIDIARY
                          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

--------------------------------------------------------------------------------

<TABLE>
NOTE  5 - LONG-TERM DEBT
<CAPTION>
                                                                                   1998            1997
                                                                                ------------    ------------
<S>                                                                             <C>             <C>
Note payable to bank, in monthly installments of $24,400,
     including interest at the Treasury Constant Maturity Index
     plus 4.17%, currently 4.59%, maturing December 2012, with
     a balloon payment, secured by substantially all the assets of
     the Mendocino Brewing Company                                              $ 2,679,900     $ 2,700,000

Note payable to financial institution, in monthly installments
     of $24,700 plus interest at the prime rate plus 2.25%,
     currently 10%, maturing March 2004, secured by
     substantially all the assets of the Releta Brewing Company
     a second position on the assets of Mendocino Brewing
     Company, and certain securities pledged by a stockholder                     1,484,000               -

Note payable, in monthly installments of $1,200, including
     interest at 5.65%, maturing March 2001, secured by
     vehicle                                                                         29,900               -

Note payable to an individual, paid in full                                               -          93,700
                                                                                ------------    ------------

                                                                                  4,193,800       2,793,700
Less current maturities                                                             322,000         130,400
                                                                                ------------    ------------

                                                                                $ 3,871,800     $ 2,663,300
                                                                                ============    ============

Maturities of long-term debt for succeeding years are as follows:

                                    Year Ending December 31,
                                    ------------------------
                                              1999                              $   322,000
                                              2000                                  377,900
                                              2001                                  373,900
                                              2002                                  377,100
                                              2003                                  384,400
                                           Thereafter                             2,358,500
                                                                                ------------
                                                                                
                                                                                $ 4,193,800
                                                                                ============

</TABLE>


--------------------------------------------------------------------------------
                                                                     Page F - 12
<PAGE>


                                 MENDOCINO BREWING COMPANY, INC., AND SUBSIDIARY
                          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

--------------------------------------------------------------------------------


NOTE  6 - OBLIGATIONS UNDER CAPITAL LEASE

The Company  leases  brewing and office  equipment  under various  capital lease
agreements with various financial institutions.
<TABLE>
Future  minimum  lease  payments  under these capital  lease  agreements  are as
follows:
<CAPTION>
                                    Year Ending December 31,
                                    ------------------------
<S>                                           <C>                               <C>             <C>
                                              1999                              $   382,500
                                              2000                                  382,500
                                              2001                                  374,600
                                              2002                                  365,400
                                              2003                                  797,100
                                           Thereafter                                     -
                                                                                ------------

                                                                                  2,302,100
Less amounts representing interest                                                  555,000
                                                                                ------------

Present value of minimum lease payments                                           1,747,100
Less current maturities                                                             221,300
                                                                                ------------

                                                                                $ 1,525,800
                                                                                ============


NOTE  7 - NOTES PAYABLE TO RELATED PARTY

                                                                                   1998            1997
                                                                                ------------    ------------

Notes payable consists of convertible notes to United Breweries of
     America, a related party, with interest at the prime rate
     plus 1.5%, maturing 18 months after the advances,
     unsecured, subordinated to bank debt; notes mature
     through June 2000; notes are convertible to common
     stock at $1.50 per share upon maturity                                     $   994,000     $       -

Less current maturities                                                             850,600             -
                                                                                ------------    ------------

                                                                                $   143,400     $       -
                                                                                ============    ============

</TABLE>



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                                                                     Page F - 13
<PAGE>

                                 MENDOCINO BREWING COMPANY, INC., AND SUBSIDIARY
                          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

--------------------------------------------------------------------------------


NOTE  8 - PROFIT-SHARING PLAN

The  Company  has a  profit-sharing  retirement  plan  under  which  it may make
employer contributions at the discretion of the Board of Directors,  although no
such  contributions are required.  Employer  contributions vest over a period of
six years. The plan covers substantially all full-time employees meeting certain
minimum age and service  requirements.  There were no contributions made for the
years ended December 31, 1998 and 1997.


NOTE  9 - COMMITMENTS AND RELATED PARTY TRANSACTIONS

The Company  leases its  Hopland,  California  facility  under a  noncancellable
operating lease expiring August 2004. The monthly lease payment is $2,100, to be
adjusted  annually by increases in the Consumer  Price Index,  as defined in the
lease  agreement.  The  Company  leases  the land on which the New York  brewery
operates under a noncancellable operating lease expiring October 2002. The lease
contains options,  which management intends to exercise, to extend the lease for
three additional 5 year periods and contains an option to purchase the property.
The monthly  lease  payment is $8,800,  to be adjusted  annually by increases in
Consumer  Price  Index,  as defined in the lease  agreement.  Additionally,  the
Company leases certain  equipment and vehicles  under  noncancellable  operating
leases  which  expire  through  March 1999.  Total rent expense was $201,300 and
$142,100 for the years ended  December 31, 1998 and 1997,  respectively.  Future
minimum lease payments are as follows:


              Year Ending December 31,
              ------------------------
                        1999                             $ 151,500
                        2000                               144,800
                        2001                               134,100
                        2002                               112,700
                        2003                                28,100
                     Thereafter                             17,100
                                                         ----------

                                                         $ 588,300
                                                         ==========



--------------------------------------------------------------------------------
                                                                     Page F - 14
<PAGE>

                                 MENDOCINO BREWING COMPANY, INC., AND SUBSIDIARY
                          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

--------------------------------------------------------------------------------


NOTE  9 - COMMITMENTS AND RELATED PARTY TRANSACTIONS (Continued)

Keg  management  agreement - In January  1997,  the Company  entered  into a keg
management  agreement with MicroStar Keg Management LLC. Under this arrangement,
MicroStar  provides  half-barrel  kegs for which the Company  pays a service fee
between $5 and $15,  depending on volume.  The  agreement is effective  April 1,
1997,  for a five year  period.  Mendocino  Brewing  Company  has the  option to
terminate  the  agreement  with 30 days notice.  If  terminated,  the Company is
required to purchase three times the average monthly keg usage for the preceding
six-month  period from Micro Star at purchase prices ranging from $54 to $84 per
keg. Rental expense  associated with this agreement was $124,800 and $63,500 for
the years ended December 31, 1998 and 1997, respectively.

The Company  reimburses certain expenses to United Breweries of America (UBA), a
related party,  owning  approximately  47% of the common stock,  for consulting,
salaries,  corporate financing and marketing activities.  Total expenses for UBA
in 1998 and 1997 were $77,800 and $80,200.  Interest expense associated with the
UBA notes was $64,900 for the year ended December 31, 1998.


NOTE  10 - CONTINGENCIES

The Year 2000 Issue is the result of computer  programs  being written using two
digits  rather than four to define the  applicable  year.  Any of the  Company's
computer programs that have  date-sensitive  software may recognize a date using
"00" as the year 1900 rather than the year 2000. In addition,  certain  hardware
components  may not function  properly as the year 2000  approaches.  This could
result in a system failure or miscalculations causing disruptions of operations,
including,  among other things, a temporary  inability to process  transactions,
send invoices, or engage in similar normal business activities.

Management has completed a review of the Company's  computer software  programs,
hardware  components,  and  other  systems,  and  believes  that any costs to be
incurred to ensure its systems are Year 2000 compliant will not be significant.


NOTE  11 - MAJOR CUSTOMERS

Sales to the top five customers totaled  $3,029,000 and $2,192,000 for the years
ended  December  31,  1998 and 1997,  respectively  representing  44% and 45% of
sales.



--------------------------------------------------------------------------------
                                                                     Page F - 15
<PAGE>

                                 MENDOCINO BREWING COMPANY, INC., AND SUBSIDIARY
                          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

--------------------------------------------------------------------------------


NOTE 12 - STOCKHOLDERS' EQUITY

Common Stock

The Company began offering 600,000 shares of stock for sale in a second offering
beginning February 1997. The Company sold 19,516 shares of stock for total gross
proceeds of  $164,600.  In  connection  with this second  offering,  the Company
offset  $164,600 of issuance  costs against the proceeds from the sale of common
stock.  The second offering was terminated in August 1997. The Company wrote off
approximately  $140,500  of  additional  issuance  costs  which are  included in
miscellaneous expense on the 1997 statement of operations.

In October 1997, the Company entered into an agreement with United  Breweries of
America  (UBA) whereby UBA purchased  2,119,647  shares of stock for  $4,000,000
cash and all the outstanding  shares of Releta Brewing  Company,  LLC, valued at
$5,000,000.  In connection with this  transaction,  the Company paid $514,600 of
issuance costs associated with the shares of common stock purchased.

Preferred Stock

The Company has authorized 2,000,000 shares of preferred stock, of which 227,600
have  been  designated  as  Series  A. At the time of the  incorporation  of the
partnership,  the Company  issued  227,600  shares of  non-voting,  no-par value
Series A Preferred  Stock in exchange for  partnership  assets.  The partnership
distributed  the Series A Preferred  Stock to it's  partners on January 3, 1994.
Series A shareholders are entitled to receive cash dividends and/or  liquidation
proceeds equal in the aggregate to $1.00 per share before any cash dividends are
paid on the Common  Shares or any other  series of  Preferred  Shares.  When the
entire  Series A  dividend/liquidation  proceeds  have been  paid,  the Series A
Shares shall automatically be canceled and cease to be outstanding.


NOTE 13 - STOCK OPTION PLAN

Under the 1994 Stock Option Plan,  the Company may issue  options to purchase up
to 200,000  shares of the  Company's  Common  Stock.  The plan provides for both
incentive stock options, as defined in Section 422 of the Internal Revenue Code,
and  options  that do not qualify as  incentive  stock  options.  The Plan shall
terminate  upon the earlier of (a) the tenth  anniversary of its adoption by the
Board or (b) the date on which all shares  available for issuance under the Plan
have been issued.


--------------------------------------------------------------------------------
                                                                     Page F - 16
<PAGE>

                                 MENDOCINO BREWING COMPANY, INC., AND SUBSIDIARY
                          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

--------------------------------------------------------------------------------


NOTE  13 - STOCK OPTION PLAN (Continued)

The  exercise  price of incentive  options must be no less than the  fair-market
value of such stock at the date the option is granted,  while the exercise price
of nonstatutory  options will be no less than 85% of the  fair-market  value per
share  on the  date of  grant.  With  respect  to  options  granted  to a person
possessing  more than 10% of the  combined  voting  power of all  classes of the
Company's stock, the exercise price will be no less than 110% of the fair-market
value of such share at the grant date.  During 1997,  the Company  issued 70,000
options to five key employees under the terms of their employment contracts.  As
a part of the investment agreement with United Breweries of America,  these five
employees  signed new employment  agreements which superseded the old agreements
and canceled the options. Also, during 1997, the Company issued 12,500 option to
an officer for his personal  guarantee of debt. The personal guarantee has since
been removed.

The Company has adopted the disclosure  only provision of Statement of Financial
Accounting  Standards  No.  123  (SFAS  No.  123)  "Accounting  for  Stock-Based
Compensation."  Accordingly,  no  compensation  expense has been  recognized for
stock  options  issued  during 1997.  Had  compensation  cost for the  Company's
options been determined  based on the fair value at the grant date for awards in
1997  consistent with the provisions of SFAS No. 123, the Company's net earnings
and  earnings per share would have  reduced to the pro forma  amounts  indicated
below:

                                                      1998             1997
                                                  -------------    -------------

Net earnings - as reported                        $ (1,572,400)    $ (1,139,700)
Net earnings - pro forma                          $ (1,572,400)    $ (1,216,300)

Earnings per share - as reported                  $      (0.35)    $      (0.40)
Earnings per share - pro forma                    $      (0.35)    $      (0.42)


The  fair  value  of  each  option  is  estimated  on date of  grant  using  the
Black-Scholes   option-pricing   model  with  the   following   weighted-average
assumptions used for grants in 1997.
There were no options granted in 1998.

                                                                       1997
                                                                   -------------

Dividends                                                                  None
Expected volatility                                                        1000%
Risk free interest rate                                                    5.35%
Expected life                                                            5 years


Options  issued  during 1997 have an  estimated  weighted  average fair value of
$6.13.


--------------------------------------------------------------------------------
                                                                     Page F - 17
<PAGE>

                                 MENDOCINO BREWING COMPANY, INC., AND SUBSIDIARY
                          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

--------------------------------------------------------------------------------


NOTE 13 - STOCK OPTION PLAN (Continued)
<TABLE>
The following table summarizes common stock option activity:
<CAPTION>
                                                       Shares Under    Weighted-Average
                                                          Option        Exercise Price
                                                       -------------   ----------------
<S>                                                    <C>             <C>
Balance, December 31, 1996                                        -    $              -
Granted                                                      82,500                8.95
Exercised                                                         -
Canceled                                                    (70,000)               8.97
                                                       -------------

Balance, December 31, 1997                                   12,500    $           8.80
Granted                                                           -                   -
Exercised                                                         -
Canceled                                                          -                   -
                                                       -------------

Balance, December 31, 1998                                   12,500    $           8.80
                                                       =============



NOTE 14 - INCOME TAXES

                                                           1998             1997
                                                       -------------   ----------------
Current
     Federal                                           $         -     $              -
     State                                                      800                 800
     Benefit of net operating loss carryback                      -            (106,300)
                                                       -------------   ----------------

                                                                800           (105,500)
                                                       -------------   ----------------
Deferred
     Current                                                (98,800)           (16,400)
     Non-current                                         (1,040,800)          (587,000)
                                                       -------------   ----------------

                                                         (1,139,600)          (603,400)
                                                       -------------   ----------------

                                                       $ (1,138,800)   $      (708,900)
                                                       =============   ================

</TABLE>


--------------------------------------------------------------------------------
                                                                     Page F - 18
<PAGE>

                                 MENDOCINO BREWING COMPANY, INC., AND SUBSIDIARY
                          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

--------------------------------------------------------------------------------


NOTE 14 - INCOME TAXES (Continued)
<TABLE>
The  difference  between the actual  income tax  provision and the tax provision
computed by applying the statutory  federal  income tax rate to earnings  before
taxes is attributable to the following:
<CAPTION>
                                                                     1998           1997
                                                                 -------------    -----------
<S>                                                              <C>              <C>        
Income tax benefit at 34%                                        $   (925,200)    $ (628,500)
State taxes                                                               800            800
State tax benefit of net operating loss carry forward                (111,300)       (81,000)
Recognition of future tax (deductions)                               (103,100)          (200)
                                                                 -------------    -----------

                                                                 $ (1,138,800)    $ (708,900)
                                                                 =============    ===========


Temporary  differences and carryforwards  which give rise to deferred tax assets
and liabilities are as follows:

                                                                     1998           1997
                                                                 -------------    -----------

Inventories                                                      $      6,600     $    4,000
Accruals                                                              141,800         38,500
Other                                                                 (10,100)        (3,000)
                                                                 -------------    -----------

Current deferred tax asset                                       $    138,300     $   39,500
                                                                 =============    ===========

Depreciation and amortization                                    $    (35,300)    $  (18,600)
Investment tax credit carryforward                                     43,500         43,500
Benefit of net operating loss carryforward                          1,700,800        593,500
Other                                                                 (94,800)       (45,000)
                                                                 -------------    -----------

Non-current deferred tax asset                                   $  1,614,200     $  573,400
                                                                 =============    ===========

</TABLE>


--------------------------------------------------------------------------------
                                                                     Page F - 19
<PAGE>

                                 MENDOCINO BREWING COMPANY, INC., AND SUBSIDIARY
                          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

--------------------------------------------------------------------------------


NOTE 14 - INCOME TAXES (Continued)

At December 31, 1998, the Company has available for  carryforward  approximately
$4,700,000,  $1,830,000  and  $515,000 of federal,  California  and New York net
operating  losses.  Approximately  $940,000  of the  federal  and New  York  net
operating losses will expire in 2012, the remaining portion will expire in 2018.
The  California  net operating  losses expire  beginning  2001 through 2003. The
Company also has $43,500 of California  Manufactures Investment Tax Credits that
can be carried  forward to reduce  future taxes and expire in 2005.  The benefit
from these loss  carryforwards  and credits has been  recorded,  resulting  in a
deferred tax asset.  A valuation  allowance  is not  provided  since the Company
believes it is more likely  than not that the loss  carryforwards  will be fully
utilized.


NOTE 15 - SEGMENT INFORMATION
<TABLE>
The Company's business presently consists of two segments.  The first is brewing
for wholesale to distributors  and other retailers.  This segment  accounted for
90.1% of the  Company's  total  gross  sales  during  1998.  The second  segment
consists  of  brewing  beer for sale  along  with  food and  merchandise  at the
Company's  brewpub and retail  merchandise store located at the Hopland Brewery.
This segment  accounted for 9.9% of the Company's total gross sales during 1998.
A summary of each segment is as follows:
<CAPTION>

                                                                    Year Ending December 31, 1998
                                           ---------------------------------------------------------------------------------
                                               Brewing              Hopland             Corporate
                                              Operations            Brewery             and other               Total
                                           -----------------    -----------------    -----------------    ------------------
<S>                                           <C>                    <C>                 <C>                  <C>        
Sales                                         $ 6,233,400            $ 685,400           $        -           $ 6,918,800
Operating loss                                    (89,200)             (82,700)                   -              (171,900)
Identifiable assets                            16,056,500               67,100            2,799,600            18,923,200
Depreciation and amortization                     694,900                6,100               78,400               779,400
Capital expenditures                              296,400                    -              114,100               410,500


                                                                    Year Ending December 31, 1997
                                           ---------------------------------------------------------------------------------
                                               Brewing              Hopland             Corporate
                                              Operations            Brewery             and other               Total
                                           -----------------    -----------------    -----------------    ------------------

Sales                                         $ 3,856,300            $ 987,600           $        -           $ 4,843,900
Operating loss                                   (127,800)            (144,500)                   -              (272,300)
Identifiable assets                            16,027,200               98,700            1,900,500            18,026,400
Depreciation and amortization                     340,100                6,800               12,400               359,300
Capital expenditures                            1,891,800                    -               31,000             1,922,800


</TABLE>

--------------------------------------------------------------------------------
                                                                     Page F - 20
<PAGE>

                                 MENDOCINO BREWING COMPANY, INC., AND SUBSIDIARY
                          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

--------------------------------------------------------------------------------


NOTE 16 - STATEMENT OF CASH FLOWS

Supplemental cash flow information includes the following:

                                                          1998           1997
                                                        ---------    -----------
Cash paid during the year for:
     Interest                                           $ 623,400    $   644,400
     Income taxes                                       $   2,300    $       800

Non-cash investing and financing activities:
     Seller financed equipment                          $ 224,300    $    19,500
     Issuance of stock for goodwill                     $  45,800    $         -
     Transfer of liabilities to long-term debt          $  80,200    $         -
     Deposit offset against long-term debt              $       -    $   290,000
     Issuance of stock for stock in Releta              $       -    $ 5,000,000



--------------------------------------------------------------------------------
                                                                     Page F - 21