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                       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, 2000

    [ ]   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)

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

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

                    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:  None

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.  [ ]

State issuer's revenues for its most recent fiscal year:  $9,819,600

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 February 28,
2001 was: $2,312,667

The number of shares the issuer's Common Stock outstanding as of February 28,
2001 is: 5,580,498

                       DOCUMENT INCORPORATED BY REFERENCE

Portions of the Proxy Statement for the Registrant's 2001 Annual Meeting of
Shareholders to be filed not later than April 30, 2001 are incorporated by
reference in Part III of this Form 10-K.

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

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                                     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. (the "Company") brews Red Tail Ale, Blue
Heron Pale Ale, Black Hawk Stout, Eye of the Hawk Select Ale, Peregrine Golden
Ale, Sun Lager and two 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, the Company began operating 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 previous
annual brewing capacity. 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, LLC ("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 certain assets of
Carmel Brewing Company, Inc., a California corporation ("Carmel Brewing") such
as trademarks, trade names, and other brand related assets, 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. The transaction also involved the
acquisition by the Company of certain point of sales and brewing ingredient
inventory from Carmel Brewing and the lease from Carmel Brewing of certain
bottling line equipment and certain kegs on a short-term basis.

     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. Subsequently, the Company drew approximately $994,000 on the credit
facility. In mid 1999, the Company induced UBA to convert the $994,000 drawn on
the credit facility, together with approximately $61,000 of accrued interest,
into 938,171 shares of common stock of the Company. UBA agreed to convert all
amounts drawn through August 30, 1999 into the Company's common stock.

     In early 1999, the credit facility from UBA was terminated, and in mid
1999, UBA agreed to provide the Company with a new credit facility of up to
$800,000 to fund the operations of the Company. Then, in April 2000, UBA and the
Company agreed to increase the amount of the credit facility to $1,200,000.
Subsequently, in February 2001, the Company and UBA agreed to increase the
amount of the credit facility to $1,600,000. As of December 31, 2000, the
Company had drawn $1,193,100 on the credit facility. As of March 1, 2001, the
Company had drawn $1,510,800 on the credit facility.

     On March 29, 2000 the Company announced that it intended to enter into two
concurrent related party transactions with affiliates of UBA. Shortly
thereafter, the proposed transactions were combined into a single transaction.
Subject to shareholder approval and certain other conditions, the Company
intends to acquire UBSN Ltd. UK, which is the European distributor of the UB
Group's flagship brand,

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Kingfisher Premium Lager, by acquiring all of the shares of its parent, United
Breweries International, UK Ltd. ("UBI"). Upon the closing of the transaction,
the Company will also acquire the distribution rights to Kingfisher Premium
Lager Beer in the United States from UBI.

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
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.

     The Company first bottled its flagship brand, Red Tail Ale, in December
1983. In February 1995, the Company 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. 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 six segments:

Segment                      Representative Brands

Low-Priced                   Busch, Milwaukee's Best, Old Milwaukee
Premium                      Budweiser, Coors Genuine Draft
Premium Lite                 Miller Lite, Bud Light, Coors Light
Super-Premium                Michelob, Lowenbrau, Killians
European Import              Heineken, Guinness, Bass, Becks
Domestic Craft               Anchor Steam, Sierra Nevada Pale Ale, Red Tail Ale

     The Company competes in the domestic craft beer segment, which comprises
approximately 3% of total U.S. beer sales. Craft beers are characterized by
their full-flavor and are usually produced along traditional European brewing
styles. 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; such breweries generally have a capacity
                                  between 15,000 to 200,000 bbl per year.

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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.

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 2000. 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

     The Company brews six ales, one wheat beer, two lagers and a stout
year-round, one seasonal ale, one seasonal porter and a root beer:

     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,
        half-barrel kegs, and 5 gallon 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,
        half-barrel kegs, and 5 gallon kegs.

     o  BLACK HAWK STOUT is the fullest in flavor and body of the Company's
        brews.  It is available year-round in 12 oz. six-packs, half-barrel
        kegs, and 5 gallon 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, half-barrel kegs, and 5
        gallon kegs.

     o  PEREGRINE GOLDEN ALE is a light-bodied ale with a distinctive hop
        character.  It is brewed year-round in 12 oz. six-packs, half-barrel
        kegs, and 5 gallon kegs.

     o  YULETIDE PORTER is a deep brown Holiday brew with a traditionally rich,
        creamy flavor. It is available in November and December on draft at the
        Hopland Brewery.

     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
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     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. It is available year-round in 12 oz.
        six-packs, half-barrel kegs, and 5 gallon kegs.

     o  CARMEL PALE ALE is a full, smooth flavored ale that imparts a malty and
        spicy character to the palate. It is available year-round in 12 oz.
        six-packs, half-barrel kegs, and 5 gallon kegs.

     o  FAT BEAR STOUT is a full-bodied brew characterized by smooth roasty
        flavors and malty aromas. It is only available in the East Coast in
        12 oz. six-packs and half-barrel kegs.

     o  WHITEFACE PALE ALE is a robust and spicy American style ale crafted with
        the finest malts and perfect blend of hops. It is only available in the
        East Coast in 12 oz. six-packs and half-barrel kegs.

     o  SARATOGA CLASSIC PILSNER is a crisp, full-flavored, German-style pilsner
        with a clean hoppy finish. It is only available in the East Coast in 12
        oz. six-packs and half-barrel kegs.

     o  OLDE SARATOGA ROOT BEER is an exceptionally rich creamy premium gourmet
        root beer crafted with all natural ingredients and cane sugar. It is
        only available in the East Coast in quarter-barrel kegs.

     o  SUN LAGER is a light refreshing lager that is distinguished by its
        smooth malt flavor and distinct hop finish. It is only available in the
        East Coast in 12 oz. six-packs and half-barrel kegs.

     The Company's brands use an ale yeast strain that was first introduced at
New Albion Brewing Co. in the late 1970s. The Company 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) just before 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 beer is considered a classic style.

     The Company's distinctive brews have been very well received in the market
and within the industry. In 1999, Red Tail Ale and Eye of the Hawk Select Ale
were adjudged as exceptional and Black Hawk Stout and Frolic Ale as highly
recommended in their respective categories by the Beverage Testing Institute of
Chicago, Illinois, which conducts comprehensive testing and tasting of all
leading brands in different categories.

     In October 1997, the 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.

     Both the Ukiah and Saratoga Springs facilities presently perform some
contract brewing services for other brands.

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The Hopland Brewery Brewpub and Merchandise Store

     To date, a major marketing tool for the Company has been the Hopland
Brewery brewpub and merchandise store. 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.

     Beverages served include Red Tail Ale, Blue Heron Pale Ale, Black Hawk
Stout, Eye of the Hawk Select Ale, Peregrine Golden Ale, and a seasonal brew on
tap, along with local wines 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.

     One of the ways the Company projects its quality and corporate values to
consumers is through its Red Tail Ale, Blue Heron Pale Ale, Black Hawk Stout,
Peregrine Golden Ale 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, the Company 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 locations in Arizona, Colorado, Connecticut, Delaware,
District of Columbia, Florida, Georgia, Idaho, Indiana, Kansas, Kentucky,
Illinois, Louisiana, Maryland, Massachusetts, Minnesota, Missouri, Nevada,
Nebraska, New Jersey, New Mexico, New York, North Carolina, Ohio, Oregon,
Pennsylvania, Rhode Island, South Carolina, Tennessee, Texas, Vermont,
Washington, Wisconsin, Wyoming and Virginia. California is the Company's primary
market.

Social Responsibility

     Part of the Company'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

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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

     The Company's beers are sold through distributors to consumers in bottles
at supermarkets, warehouse stores, liquor stores, taverns and bars, restaurants,
and convenience stores. All 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 96.5% of the Company's total sales in 2000, with food and
merchandise retail and catalogue sales constituting the balance. Sales to the
top five customers totaled $ 3,907,000 and $ 4,191,700 for the years ended
December 31, 2000 and 1999, respectively representing 40% and 45% of sales. One
customer, Golden Gate Distributing had sales of 13% and 12% for the years ending
December 31, 2000 and 1999, respectively. Another customer, Del Rey Distributing
had sales of 0% and 13% for the years ending December 31, 2000 and 1999,
respectively.

Suppliers

     The Company's major suppliers are Great Western Malting Co., Yakima,
Washington, and Briess Malting, Milwaukee, Wisconsin (malt); Lupofresh Inc.
Wapato, Washington and Yakima Chief, Inc., Sunnyside, Washington (hops); Ball
Foster Glass, Muncie, Indiana and Gamer Packaging Inc. Minneapolis, Minnesota
(bottles); Gaylord Container Corporation, Antioch, California (cartons); Sierra
Pacific Packaging, Oroville, California (carriers); and Inland Printing Company
Inc., Lacrosse, Wisconsin (labels).

Employees

     As of December 31, 2000, the Company employed 64 full-time and 21 part-time
individuals including 11 in management and administration, 39 in brewing and
production operations, 21 in retail and brewpub operations and 14 in sales and
marketing positions. Management believes that the Company's relations with its
employees are excellent. The Company does not have any union labor contracts
with any of its employees.

Trademarks

     The Company has federal trademark registrations on the principal register
of the United States Patent and Trademark Office for the RED TAIL ALE word mark
(Reg. No. 2,032,382), RED TAIL DESIGN mark (Reg. No. 2,011,817), BLUE HERON word
mark (Reg. No. 1,820,076), BLUE HERON PALE ALE DESIGN mark (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 mark (Reg. No.
2,011,818), EYE OF THE HAWK SPECIAL EDITION ANNIVERSARY ALE DESIGN mark (Reg.
No. 2,011,815), YULETIDE PORTER word mark (Reg. No. 1,666,891), BREWSLETTER word
mark (Reg. No. 1,768,639), and FROLIC SHIPWRECK ALE 1850 AND DESIGN composite
mark (Reg. No. 2,080,761).

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     The registration for the BLUE HERON word mark is a concurrent use
registration which gives the Company the exclusive right to use the BLUE HERON
word mark 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 BLUE HERON word mark in those states.

     The Company's use of the BLACK HAWK STOUT word mark is, by agreement with
Hiram Walker & Sons, Inc., subject to the restriction that it be used solely to
identify and distinguish malt beverage products namely, beer, ale and stout, and
only in conjunction with the words "Mendocino Brewing Company".

     The Company's United States federal trademark registrations for the
MENDOCINO BREWING COMPANY word mark (Cancelled Reg. No. 1,785,745) and BLACK
HAWK STOUT word mark (Cancelled Reg. No. 1,791,807) were cancelled as a result
of technical deficiencies in registration compliance filings. The Company
continues to use the MENDOCINO BREWING COMPANY and BLACK HAWK STOUT word marks
and claims common law trademark rights in and to such marks. The Company
presently has pending applications on file with the United States Patent and
Trademark Office for the re-registration of MENDOCINO BREWING COMPANY and BLACK
HAWK STOUT word marks.

     The Company claims common law trademark rights in and to the HOPLAND
BREWERY word mark and the PEREGRINE GOLDEN ALE word mark and presently has
pending use-based applications on file with the United States Patent and
Trademark Office for the registration of such marks. The Company also has
pending intent-to-use applications on file with the United States Patent and
Trademark Office for registration of its SUN LAGER AND DESIGN composite mark and
BLACK EYE ALE word mark.

     The Company has acquired the trademark of CARMEL BREWING COMPANY and any
other variation of the name Carmel Brewing Company used by Carmel Brewing and
claims common law trademark rights in and to all such marks. The Company has
also acquired use of the RAZOR EDGE word mark through a License Agreement with
Beverage Mates, Ltd. However, the Company is currently not using the RAZOR EDGE
mark, and it is unclear whether it will use the mark in the future.

     Releta has federal trademark registrations on the principal register of the
United States Patent and Trademark Office for the FAT BEAR word mark (Reg. No.
2,267,709), TEN SPRINGS word mark (Reg. No. 2,243,852), and WHITEFACE word mark
(Reg. No. 2,322,226). Releta has a federal trademark registration on the
supplemental register of the United States Patent and Trademark Office for the
SARATOGA CLASSIC PILSNER word mark (Reg. No. 2,396,601). Releta also has a
pending intent-to-use application on file with the United States Patent and
Trademark Office for registration of the NORTH COUNTRY ALES word mark.

Government Regulation

     The Company 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.

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     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 $4.19 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 $550 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 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 $870 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.

                                       9
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Research and Development

     Research and development activity in 2000 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, 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.

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 over the period from March 2001 through August 2003. The Company leases
certain brewing equipment from FINOVA Capital Corporation pursuant to a lease
which expires November 11, 2003. The Company also leases equipment under various
small leases.

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 2000.

                                       10
<PAGE>

                                     PART II

Item 5.  Market for Common Equity and Related Stockholder Matters.

     The Company'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:

<TABLE>
<CAPTION>
                                     2000                                                1999
             ---------------------------------------------------------------------------------------------------------
                  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        $1.38        $1.44        $1.38        $1.13        $1.50        $2.00        $2.13        $1.25

     Low         $0.63        $0.63        $0.63        $0.63        $0.56        $1.06        $0.88        $0.63
</TABLE>


     The Company had approximately 2,397 shareholders of record as of December
31, 2000. Management intends to retain the Company'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. Only a
complete corporate dissolution can cause the liquidation preference to be paid.
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.

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.

Forward-Looking Information

     The Management's Discussion and Analysis of Financial Condition and Results
of Operations and other sections of this Form 10-KSB contain forward-looking
information. The forward-looking information involves risks and uncertainties
that are based on current expectations, estimates and projections about the
Company's business, Management's beliefs, and assumptions made by Management.
Words such as "expects," "anticipates," "intends," "plans," "believes," "seeks,"
"estimates," and variations of such words and similar expressions are intended
to identify such forward-looking information. Therefore, actual outcomes and
results may differ materially from what is expressed or forecasted in such
forward-looking information due to numerous factors, including, but not limited
to, availability of financing for operations, successful performance of internal
operations, impact of competition, changes in distributor relationships or
performance and other risks detailed below as well as those discussed elsewhere
in this Form 10-KSB and from time to time in the Company's Securities and
Exchange Commission filings and reports. In addition, such statements could be
affected by general industry and market conditions and growth rates, and general
domestic economic conditions. Readers are cautioned not to place undue reliance
on these forward-looking statements, which are valid as of the date of this
filing.

                                       11
<PAGE>

Overview

     The year 2000 was highlighted by the launch in the third quarter of Sun
Lager, a premium handcrafted brew from the Saratoga Springs brewery and the
announcement of the proposed acquisition of UBI and UBSN Ltd. as discussed more
fully below.

     In addition, the Company entered into an agreement with Wolaver's
Enterprises, LLC, a Florida limited liability company, during the last quarter
of 2000 to provide brewing, on a contract basis, of their line of organic beers.

     All the new products mentioned below which were introduced in 1999 have
been well received in the market. In Ukiah, Carmel Pale Ale and Peregrine Golden
Ale products were launched during the second quarter of 1999. New packaging for
Carmel Wheat, Red Tail 12 pack and Eye of the Hawk Millennium Edition was
introduced. In Saratoga Springs, a new non-alcoholic brew of Olde Saratoga
Classic Root Beer was launched during the third quarter of 1999.

     The Company has also introduced new equipment in the recent past. Bottling
line equipment such as a carrier erector and bulk glass handling equipment were
installed during 1999 in Ukiah and Saratoga facilities, respectively, which has
brought about reductions in manpower. At the Ukiah facility, two additional 240
bbl fermentation tanks were installed during 1999 to satisfy the Company's
demand for greater production and flexibility.

     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 "1998 Facility"). By mid 1999, the Company had
borrowed $994,000 drawn on the credit facility and slightly more than $61,000 of
interest had accrued thereon. Subsequently, UBA agreed to convert all of the
outstanding convertible notes (together with all accrued but unpaid interest)
into common stock after the Board of Directors of the Company offered UBA an
inducement to convert. As a result of the conversion, UBA became the majority
owner of Company.

     In mid-1999, the 1998 Facility was terminated, and a new credit facility
(the "1999 Facility") in the maximum amount of $800,000 was offered to the
Company on substantially the same terms as the 1998 Facility. On August 31,
1999, the Company and UBA entered into a Master Line of Credit Agreement setting
forth the terms of the 1999 Facility. Pursuant to the terms of the Master Line
of Credit Agreement, advances on the credit facility bear interest at the prime
rate of the Bank of America in San Francisco plus 1.5%, up to a maximum of 10%,
and is due and payable quarterly. The principal amount of each advance, together
with any accrued but unpaid interest on such advance, is due 18 months after the
date of such advance. UBA, at its option, can convert the principal and any
accrued but unpaid interest into unregistered shares of the Company's common
stock at a rate of one share of common stock for each $1.50 of principal and
unpaid interest. The terms of the 1999 Facility were amended during 2000 to
increase the maximum amount available to the Company to $1,200,000.

     As of December 31, 2000, the Company has made 11 draws on the credit
facility. As of December 31, 2000, the aggregate amount drawn on the line of
credit, together with interest accrued thereon, is equal to $1,295,600, which
corresponds to the right to acquire up to 863,733 shares of common stock of the
Company. The terms of the 1999 Facility were amended again in early 2001 to
increase the maximum amount available to the Company to $1,600,000. The Company
made an additional draw on the credit facility in 2001, bringing the outstanding
principal and interest accrued thereon to $1,635,800 as of March 1, 2001, which
corresponds to UBA's right to acquire up to 1,090,503 shares of the Company's
common stock.

                                       12
<PAGE>

     Net sales for 2000 increased by 6.0% over 1999. Sales in 2000 (measured in
barrels, brewed and shipped out of Ukiah and Saratoga Springs facilities,
including brands being brewed under contract) increased by 4.5% when compared to
1999. Sales in 2000 increased to 49,255 barrels as compared to 47,154 barrels in
1999. The Company's own brand sales were 45,520 barrels in the year 2000 as
compared to 40,460 barrels in the year 1999, registering a growth of
approximately 12.5%. The Company ended the year with a net loss of $527,200.
Increased fixed costs associated with the breweries and increased interest
expenses contributed to the net loss of $527,200 for the year ended December 31,
2000.

     On March 29, 2000 the Company announced that it intended to enter into two
concurrent related party transactions with affiliates of UBA. Shortly
thereafter, the transactions were combined into a single transaction. In the
transaction, the Company intends to acquire UBSN Ltd. UK, which is the European
distributor of the UB Group's flagship brand, Kingfisher Premium Lager, by
acquiring all of the shares of its parent corporation, UBI. Through the
transaction, the Company will also acquire the distribution rights to Kingfisher
Premium Lager Beer in the United States from UBI.

     Due to unexpected delays caused by, among other things, the difficulty of
conforming the financial statements of UBSN Ltd. UK and UBI, which were
originally prepared in accordance with UK Generally Accepted Accounting
Principles ("GAAP"), to US GAAP, consummation of the transaction has been
considerably delayed. However, the Company expects to be able to present the
transaction to its shareholders at its 2001 Annual Shareholders Meeting, to be
held in Spring of 2001, and upon approval of the transaction by the
shareholders, to consummate the transaction shortly thereafter.

Results of Operations

     The following tables set forth, as a percentage of net sales, certain items
included in the Company's Statements of Operations. See Financial Statements and
Notes thereto.

<TABLE>
<CAPTION>
                                                               ---------------------------------------------
                                                                          Year Ended December 31
                                                               ---------------------------------------------
                                                                        2000                   1999
         Statements of Operations Data:                                   %                      %
     -------------------------------------                            --------               --------
     <S>                                                              <C>                    <C>

     Sales                                                              106.09                 106.22
     Less Excise taxes                                                    6.09                   6.22
                                                                      --------               --------
     Net Sales                                                          100.00                 100.00
     Costs of Sales                                                      62.91                  66.31
                                                                       -------                -------
     Gross Profit                                                        37.09                  33.69
                                                                       -------                -------
     Retail Operating Expenses                                            4.47                   4.80
     Marketing Expense                                                   17.59                  19.44
     General and Administrative Expenses                                 15.57                  18.99
                                                                         -----                  -----
     Total Operating Expenses                                            37.63                  43.23
                                                                         -----                  -----
     Loss from Operations                                                (0.54)                 (9.54)
     Other Expense                                                        0.98                  (4.13)
     Interest Expense                                                    (9.69)                 (9.73)
                                                                       --------               --------
     Loss before income taxes                                            (9.25)                (23.40)
     Benefit from income taxes                                           (3.56)                 (8.39)
                                                                         ------                 ------
     Net Loss                                                            (5.69%)               (15.02%)
                                                                         =======               ========
</TABLE>

                                       13
<PAGE>


<TABLE>
<CAPTION>
                                                               ---------------------------------------------
                                                                          Year Ended December 31
                                                               ---------------------------------------------
                                                                        2000                   1999
     Balance Sheet Data:                                                  $                      $
     ------------------------------                                   --------               --------
     <S>                                                              <C>                    <C>
     Cash and Cash Equivalents                                                 $0                     $0
     Working Capital                                                     (541,900)            (1,500,400)
     Property and Equipment                                            13,997,400             14,727,200
     Deposits and Other Assets                                            353,100                 22,900
     Total Assets                                                      19,770,800             19,629,900
     Long-term Debt                                                     5,808,500              4,165,900
     Obligation Under Capital Lease                                     1,128,200              1,396,900
     Total Liabilities                                                  9,999,600              9,372,500
     Accumulated Deficit                                               (4,332,300)            (3,805,100)
     Shareholder's equity                                               9,771,200             10,257,400
</TABLE>

Net Sales

     Net sales for 2000 increased by 6.4% from $8,698,600 in 1999 to $9,255,900
in 2000. The sales volume increased from 47,154 barrels in 1999, to 49,255
barrels during 2000, representing an increase of 4.5%. Of the total sales of
barrels in 2000, the sales out of the Ukiah facility accounted for 41,678
barrels and the shipments from Saratoga Springs facility accounted for 7,577
barrels. The increase in overall net sales was achieved solely by greater
wholesale shipments during 2000 when compared to 1999. In view of management's
focus on wholesale beer sales, retail sales for the year 2000 decreased by
$34,800 while the wholesale beer sales for the year 2000 increased by $613,900.

Cost of Goods Sold

     Cost of goods sold as a percentage of net sales decreased in 2000 to 62.91%
when compared to that of 66.31% in 1999. During 2000, as a percentage of net
sales as compared to 1999, depreciation decreased from 7.96% in 1999 to 7.55% in
2000, property taxes decreased from 1.49% in 1999 to 1.43% in 2000, labor costs
decreased from 11.61% in 1999, to 10.17% in 2000, utilities decreased from 3.89%
in 1999 to 3.75% in 2000, thereby contributing to the decrease of 3.14% of the
cost of goods sold as a percentage of net sales for the year of 2000. Management
has taken steps to increase the efficiency of the brewing and bottling process
and has been able to lower labor and overhead associated with production while
the Company's fixed production costs have remained stable. These efficiencies
along with increased sales and production volumes at the Ukiah and Saratoga
facilities have decreased the per barrel production costs.

Gross Profit

     As a result of the higher net sales and production efficiencies as
explained above, gross profit increased in 2000 to $3,432,600 from $2,930,700 in
1999, representing an increase of 17.13%. As a

                                       14
<PAGE>

percentage of net sales, the gross profit during 2000 increased to 37.09% from
that of 33.69% for the corresponding period of 1999.

Operating Expenses

     Operating expenses were $3,483,400 in 2000, as compared to $3,760,800 for
1999, representing a decrease of 7.38%. Operating expenses consist of retail
operating expenses, marketing and distribution expenses, and general and
administrative expenses.

     Retail operating expenses for 2000 were $414,000 when compared to $417,500
in 1999. This represents a decrease of $3,500 or 0.81% from 1999. As a
percentage of net sales, retail operating expenses decreased to 4.47% in 2000 as
compared to 4.80% for 1999. The decrease in retail operating expenses consisted
of a decrease in other net expenses of $3,500.

     Marketing and distribution expenses were $1,627,900 for 2000, representing
a decrease of 3.74% compared to $1,691,100 in 1999. As a percentage of net
sales, marketing and distribution expenses represented 17.59% in 2000 as
compared to 19.44% in 1999. The decrease in marketing and distribution expenses
of $63,200 consisted of an increase in marketing and sales labor of $140,000;
telephone expenses decreased by $7,500; sales promotions expenses decreased by
$122,600; point of sale expenses decreased by $82,300; freight increased by
$39,000; license and taxes decreased by $9,400; travel and entertainment and
auto decreased by $15,800; and there was a decrease in other net expenses of
$4,600.

     General and administrative expenses were $1,441,500 in 2000, as compared to
$1,652,200 in 1999, representing a decrease of $210,700. As a percentage of net
sales, the general and administrative expenses represented a decrease of 12.75%
in 2000 to 15.57% as compared to 18.9% in 1999. The decrease of general and
administrative expenses consisted of a decrease in professional and legal fees
of $53,300, travel and entertainment decreased by $21,000, labor (including
compensation of the board of directors) decreased by $179,600, insurance
increased by $26,400, bad debt allowance increased by $15,000; and all other
expenses increased by $2,000. The large decrease in labor is the result of the
Company's President retiring at the end of 1999. The Executive Vice President
and Chief Operating Officer was appointed President.

Other Income

     The other income for the year 2000 was $805,800 as compared to $1,205,700
in 1999. The decrease of $399,900 is primarily related to a decrease of $263,900
in induced conversion expense for convertible debt and a decrease of $95,500 in
expenses related to potential acquisitions that were not consummated in the
prior years. Upon the acquisition of UBI, the Company will expense approximately
$340,000 of acquisition costs that have been capitalized in other assets as of
December 31, 2000.

Benefit From Income Taxes

     The benefit from income taxes for the year 2000 was $329,400 as compared to
$729,500 in 1999. The benefit from income taxes is due to the expected future
benefit of carrying forward net operating losses and other timing differences.

     As of December 31, 2000, the Company has available for carryforward
Federal, California and New York net operating losses. The losses will expire as
follows:

                                       15
<PAGE>

<TABLE>
<CAPTION>
                                                                 Net Operating Loss
                                --------------------------------------------------------------------------------------
      Date of Expiration                  Federal                    California                    New York
      ------------------                  -------                    ----------                    --------
      <S>                               <C>                          <C>                          <C>
             2001                       $    -                       $  87,500                    $    -
             2002                            -                         761,200                         -
             2003                            -                         961,200                         -
             2004                            -                         694,700                         -
             2010                            -                         276,400                         -
             2012                        1,802,300                        -                         251,500
             2018                        2,758,800                        -                         385,000
             2019                        2,153,100                        -                         290,300
             2020                          991,500                        -                         137,900
                                        ----------                   ----------                   ----------
                                        $7,705,700                   $2,781,000                   $1,064,700
                                        ==========                   ==========                   ==========
</TABLE>

     The Company also has $35,000 of California Manufactures Investment Tax
Credits that can be carried forward to offset future taxes until they begin to
expire in 2007. The benefit from these loss carryforwards and credits has been
reported as a deferred tax asset.

     Management believes that the Company will utilize the deferred tax assets
in the ordinary course of business prior to any of the losses or credit reaching
their expiration dates based on the following factors:

     o  Changes implemented by the Company have resulted in the loss before
        income taxes being reduced by 25% from 1998 to 1999, from $2,701,100 to
        $2,035,800, and 58% from 1999 to 2000, from $2,035,800 to $856,600.

     o  The Company projects income before taxes of more than $600,000 in 2002,
        and currently projects that it will realize income before taxes in later
        years as well.

     o  For California income tax purposes, significant book to tax temporary
        differences will result in additional taxable income of $300,000 per
        year for the next four years.

     o  To increase production, the Company has negotiated with a related party
        to acquire the exclusive brewing and distribution rights to Kingfisher
        Lager in the United States. The Company projects the production and
        sales of Kingfisher Lager may be in excess of 10,000 barrels per year.
        The Company anticipates acquiring the rights and beginning production of
        Kingfisher Lager on or before June 1, 2001. With this addition , along
        with other changes being made, the brewing operation is expected to
        achieve profitable operations in 2002.

     o  The Company has entered into an agreement to acquire UBI, a United
        Kingdom company, that owns a distributorship of Kingfisher Lager in the
        United Kingdom and Europe. UBI had profitable operations in 2000 and
        1999 and also generated positive cash flows for the years then ended.
        The Company anticipates that after the acquisition, it will use the
        excess cash flow from the operations of UBI to reduce the Company's
        outstanding debt and reduce interest expense.

                                       16
<PAGE>

     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 tax assets
and liabilities on December 31, 2000 are as follows:

     Accounts receivables allowance                               $     6,400
     Benefits from net operating loss carryforwards                 2,961,500
     Inventory                                                          6,000
     Accruals                                                          38,700
     Depreciation and amortization                                   (111,200)
     Other                                                            (85,300)


Net Loss

     The net loss for the year 2000 was $527,200 as compared to $1,306,300 for
the year 1999. As a percentage of net sales, the net loss for the year 2000
represented 5.70%, as compared to 15.0% in 1999.

Segment Information

     Mendocino Brewing's business presently consists of two segments. The first
is brewing for wholesale to distributors and other retailers. This segment
accounted for 94% of the Company's total gross sales during 2000. 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 6% of the Company's total gross sales during 2000.

     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.

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 2001. 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 Ukiah brewery is presently operating under a temporary certificate of
occupancy from the City of Ukiah. The Company has yet to complete the build-out
of its administrative space and the

                                       17
<PAGE>

exterior landscaping of the Ukiah facility. In the interim, the Company
approached the authorities with plans to construct offices in a different part
of the building at a much lessor cost to the Company. Those plans were approved
by the city and accordingly the offices were completed at the end of 1999 at a
cost of approximately $23,000. Management believes that if the offices had been
built according to the original plan, it would have cost the Company
approximately $300,000. Management believes that it is not necessary at this
point in time to build the offices according to original plans and has therefore
decided to shelve the plan indefinitely.

     With regard to the exterior landscaping of the Ukiah facility, the Company
has been using its own in-house resources to complete the bulk of the work, and
has employed outside firms from time to time for limited purposes. The work was
completed at a cost of approximately $23,000. The work related to Ukiah Brewery
building pending completion and the estimated cost thereof are as follows:

     1.  Covering the parking lot with asphalt, approximately $30,000

     2.  Building concrete sidewalk to one of the entrances of the brewery
         building, approximately $10,000

     3.  If required, creating additional office/record room space for future
         development, approximately $60,000

     It is estimated that the above construction cost would be approximately
$100,000, which includes the cost of modifying the original plan submitted to
the City of Ukiah. The Company's gross profit has improved considerably (from
25% in 1998 to 32% in 1999 to 35% in 2000) and the operating results have shown
significant improvement compared to earlier years. The Company's working capital
requirements have been met from time to time by its largest shareholder, UBA.
Management believes that the Company may not experience working capital problems
it has experienced in the past. In addition, the impending merger of the Company
will, if consummated, add positive cash flow and financial strength to the
Company. The management is planning to approach the City authorities for their
approval of modifications to the original plan and complete the pending jobs
during the year 2001 and obtain the final certificate of occupancy from the City
authorities by the end of the year 2001.

     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, because of, among
other reasons, increased administrative burdens and costs.

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 5.83%,
maturing December 2012 with a balloon payment in the amount of $1,872,300. This
loan is 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. During 1998, UBA, the Company's largest
shareholder, agreed to provide the Company with a credit facility of up to $2
million (the "1998 Facility"). In mid-1999, the 1998 Facility was terminated,
and a new credit facility (the "1999 Facility") in the maximum amount of
$800,000 was offered to the Company on substantially the same terms as the 1998
Facility pursuant to a

                                       18
<PAGE>

Master Line of Credit Agreement. On April 28, 2000, the 1999 Facility was
increased to $1,200,000. Pursuant to the terms of the Master Line of Credit
Agreement, advances on the credit facility bear interest at the prime rate of
the Bank of America in San Francisco plus 1.5%, up to a maximum of 10%, and is
due and payable quarterly. The principal amount of each advance, together with
any accrued but unpaid interest on such advance, is due 18 months after the date
of such advance. Each advance made on the line of credit will be evidenced by a
convertible note. Each convertible note includes a conversion feature whereby
UBA could, at its option, convert the principal and any accrued but unpaid
interest into unregistered shares of the Company's common stock on or after the
maturity date, at a rate of one share of common stock for each $1.50 of
principal and unpaid interest. The arrangement was approved by the independent
directors (Robert Neame, Kent Price and Sury Rao Palamand) on August 30, 1999.

     The terms of the 1999 Facility were amended during 2000 to increase the
maximum amount available to the Company to $1,200,000. As of December 31, 2000
the aggregate amount drawn, together with interest accrued, equaled $1,295,600
which corresponds to the right of UBA to acquire up to 863,733 shares of Common
Stock of the Company at a conversion price of $1.50 per share. The terms of the
1999 Facility were amended again in early 2001 to increase the maximum amount
available to the Company to $1,600,000. The Company made an additional draw on
the credit facility in 2001, bringing the outstanding principal and interest
accrued thereon to $1,635,800 as of March 1, 2001, which corresponds to UBA's
right to acquire up to 1,090,503 shares of the Company's common stock.

     Conversion of Certain Promissory Notes. On August 30, 1999, UBA agreed to
convert all of the outstanding convertible notes (together with all accrued but
unpaid interest) issued to UBA under the 1998 Facility. By their terms the
convertible notes were convertible at $1.50 per share. However, the Board of
Directors of the Company offered to induce UBA to convert the notes into common
stock at a price of $1.125, which was the then-current price of the Company's
common stock as traded on the Pacific Exchange. The total amount converted was
approximately $1,055,442, which is equal to 938,171 shares of common stock. As a
result of the conversion, UBA became the majority owner of Company, holding
55.8% of the issued and outstanding shares of common stock. Further, as a result
of the conversion, the Company recognized an expense of $263,900 for the induced
conversion. The induced conversion was approved by the independent directors
(Robert Neame, Kent Price and Sury Rao Palamand) on August 30, 1999.

     Equipment Lease. FINOVA Capital Corporation 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.

     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 the prime rate of Chase Manhattan Bank of New York plus 2.25% payable
monthly, maturing September 23, 2002. 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 leased from FINOVA
Capital Corporation, as well as by a second deed of trust on the Company's Ukiah
land improvements. $1,484,000 of the line of credit was advanced to the Company
as an initial term loan, which is repayable in sixty consecutive monthly
installments of principal, each in the amount of $24,700. The Company commenced
repayment of the term loan in March 1999 and approximately $964,600 of the term
loan was outstanding as of December 31, 2000. On

                                       19
<PAGE>

November 20, 2000, the CIT Group had agreed to increase the borrowing limit by
$100,000, subject to the condition that the increased limit has to be paid back
in monthly installments of $11,111 during the period from April 1, 2001 through
December 1, 2001. Based on the Company's current level of accounts receivable
and inventory, the Company has drawn the maximum amount permitted under the line
of credit. As of December 31, 2000, the total amount outstanding on the line of
credit was approximately $2,246,197

     Interest. The weighted average interest rates paid on the Company's debts
(including the long term capital lease of equipment by FINOVA Capital
Corporation Inc.) was 10.82% for the year 2000 and 10.17% for the year 1999.

     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
and use 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. However, there can be no assurances that the Company
will be able to finance the purchase of kegs and the failure to purchase the
necessary kegs from MicroStar is likely to have a material adverse effect on the
Company.

     Current Ratio. The Company's ratio of current assets to current liabilities
on December 31, 2000 was 0.82 to 1.0 and its ratio of total assets to total
liabilities was 1.97 to 1.0. On December 31, 1999, the Company's ratio of
current assets to current liabilities was 0.61 to 1.0 and its ratio of total
assets to total liabilities was 2.09 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. To fund its operating
deficits, the Company has relied upon lines of credit and other credit
facilities. However, there can be no assurances that the Company will have
access to any such sources of funds in the future, and the inability to secure
sufficient funds will have a materially adverse effect on the Company.

     Acquisition of UBSN

     On November 3, 2000, the company entered into a Share Purchase Agreement
with Inversiones Mirabel, S.A. and Golden Eagle Trust, both of which are
entities related to the Company's Chairman of the Board and Chief Executive
Officer, Dr. Vijay Mallya, and its principal shareholder, United Breweries of
America, Inc. Under the terms of the Share Purchase Agreement, the Company will
acquire all of the issued and outstanding shares of UBI which is the parent
company of UBSN Ltd. In the transaction, the Company has offered to issue
approximately 5,500,000 shares of the Company's common stock in exchange for the
shares of UBI. Upon the closing of the transaction, UBI will become a
wholly-owned subsidiary of the Company. The closing of the transaction is
expected to occur in May 2001, or as soon

                                       20
<PAGE>

thereafter as the various conditions to closing have been satisfied or waived.
UBI has obtained the distribution rights to the "Kingfisher" brand of beer in
the United States. Under the terms of the distribution agreement, the Company
will also have an option to brew "Kingfisher" brand beer in the United States,
for distribution primarily in the United States, on terms and conditions
mutually agreeable with American United Breweries of America, Inc ("AUBI").

     The closing of the transaction, the obligation of the Company to proceed
with the acquisition of the shares of UBI, and the precise number of shares of
common stock to be issued are subject to the satisfaction or waiver of certain
conditions including the approval of the transaction by the shareholders of the
Company and the receipt by the Company of a "fairness opinion", in a form
satisfactory to the Board of Directors of the Company, regarding the transaction
from Sage Capital LLC.

     The closing of the acquisition was originally scheduled to occur in late
June, 2000. However, conforming all of the foreign entities' financial
statements consistent with United States accounting standards and as required by
the U.S. Securities and Exchange Commission, and conducting all of the required
audits, has taken longer than expected.

     The transaction described above is a related party transaction because the
corporation that owns all of the shares of UBI is held by Golden Eagle Trust,
which is controlled by fiduciaries who may exercise discretion in favor of Dr.
Vijay Mallya, who is the Chairman and Chief Executive Officer of the Company.
Dr. Mallya is also a member of the board of directors of UBSN Ltd. Golden Eagle
Trust also owns a controlling interest in the Company's largest shareholder,
UBA.

     Additional information about this transaction will be contained in the 2001
Proxy Statement, and such information is incorporated herein by reference.

Item 7.  Financial Statements.

     The information required by this item is set forth at Pages F-1 through
F-17 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.


     Based solely on its review of the Forms 4 and 5 furnished to the Company
during and with respect to the year 2000, one Annual Statement of Changes in
Beneficial Ownership on Form 5 was not filed on a timely basis. The Form 5 filed
jointly by Dr. Vijay Mallya and United Breweries of America, Inc. was filed with
the Commission one day after the filing deadline, because Dr. Mallya was
travelling overseas and could not be reached until his return.

     Additional information required by Item 9 will be contained in the
Company's Definitive Proxy Statement for its 2001 Annual Meeting of Shareholders
(the "2001 Proxy Statement") which the Company expects to be held in late spring
2001, which the Company intends to file with the Commission no later than April
30, 2001, and such information is incorporated herein by reference.

                                       21
<PAGE>

Item 10.  Executive Compensation.

     The information required by Item 10 will be contained in the 2001 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 2001 Proxy
Statement, and such information is incorporated herein by reference.

Item 12.  Certain Relationships and Related Transactions.

     Please refer to the description of the Company's proposed acquisition of
UBSN Ltd. under "Acquisition of UBSN" in Item 6 of this Annual Report on Form
10-KSB.

     Additional information required by Item 12 will be contained in the 2001
Proxy Statement, and such information is incorporated herein by reference.

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).

10.4        (A)     Wholesale Distribution Agreement between the Company and Bay
                    Area Distributing.

10.5        (A)     Wholesale Distribution Agreement between the Company and
                    Golden Gate Distributing.

10.7        (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).

10.15       (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.


                                       22
<PAGE>

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

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.

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.

10.41       (U)     Employment Agreement with Yashpal Singh.

10.42       (U)     Employment Agreement with P.A. Murali.

10.43       (V)     Master Loan Agreement between the Company and the United
                    Breweries of America Inc., dated August 31, 1999.

10.44       (V)     Convertible Note in favor of the United Breweries of America
                    Inc. dated Sept. 7, 1999.

10.45       (W)     Convertible Note in favor of the United Breweries of America
                    Inc. dated October 21, 1999.

10.46       (W)     Convertible Note in favor of the United Breweries of America
                    Inc. dated November 12, 1999.

10.47       (W)     Convertible Note in favor of the United Breweries of America
                    Inc. dated December 17, 1999.

10.48       (W)     Convertible Note in favor of the United Breweries of America
                    Inc. dated December 31, 1999.

10.49       (W)     Convertible Note in favor of the United Breweries of America
                    Inc. dated February 16, 2000.

10.50       (W)     Convertible Note in favor of the United Breweries of America
                    Inc. dated February 17, 2000.

10.51       (W)     Convertible Note in favor of the United Breweries of America
                    Inc. dated April 28, 2000.

10.52       (W)     First Amendment to Master Loan Agreement between the Company
                    and United Breweries of America, Inc., dated April 28, 2000.

10.53       (X)     Convertible Note in favor of the United Breweries of
                    America, Inc. dated September 11, 2000.

10.54       (X)     Convertible Note in favor of the United Breweries of
                    America, Inc. dated September 30, 2000.

10.55       (X)     Convertible Note in favor of the United Breweries of
                    America, Inc. dated December 31, 2000.

---------
            (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.

                                       23
<PAGE>

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

            (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.

            (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.

            (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.

            (T)     Incorporated by reference from the Company's Report on Form
                    10-KSB for the annual period ended December 31, 1998,
                    previously filed with the Commission.

            (U)     Incorporated by reference from the Company's Report on Form
                    10-QSB for the quarterly period ended June 30, 1999.

            (V)     Incorporated by reference from the Amendment No. 5 to
                    Schedule 13D filed with the Commission on September 15,
                    1999, by United Breweries of America, Inc. and Vijay Mallya.

            (W)     Incorporated by reference from the Amendment No. 6 to
                    Schedule 13D filed with the Commission on May 12, 2000 by
                    United Breweries of America, Inc. and Vijay Mallya.

            (X)     Incorporated by reference from the Amendment No. 7 to
                    Schedule 13D filed with the Commission on February 22,
                    2001 by United Breweries of America, Inc. and Vijay Mallya.

             +      Portions of this Exhibit were omitted pursuant to an
                    application for an order declaring confidential treatment
                    filed with the Securities and Exchange Commission.


     On November 28, 2000, the Registrant filed a report on Form 8-K to announce
under Item 5 of Form 8-K, the filing of the Company's definitive proxy statement
in connection with its Annual Meeting of Shareholders which was scheduled to
take place on January 24, 2001. The Annual Meeting of Shareholders was
subsequently postponed. No financial statements were filed.

     The Registrant then filed an amended report on Form 8-K/A on December 26,
2000 to revise and restate the text of the report filed on November 28, 2000
under Item 5 of Form 8-K/A, and to include under Item

                                       24
<PAGE>

7 of Form 8-K/A, financial statements of UBSN Ltd. and UBI, and pro forma
financial statements of the Registrant and UBI. The financial statements filed
were as follows:

     1. United Breweries International (UK) Limited Directors' Report and
     Financial Statements for the Year Ended December 31, 1998

     2. United Breweries International (UK) Limited Directors' Report and
     Financial Statements for the Year Ended December 31, 1999

     3. United Breweries International (UK) Limited Unaudited Balance Sheet,
     Income Statement, and Statement of Cash Flows for the Nine Months Ended
     September 30, 2000

     4. United Breweries International (UK) Limited Unaudited Income Statement
     and Statement of Cash Flows for the Nine Months Ended September 30, 1999.

     5. Mendocino Brewing Company, Inc. and United Breweries International (UK)
     Limited Consolidated Pro Forma Balance Sheet as at September 30, 2000

     6. Mendocino Brewing Company, Inc. and United Breweries International (UK)
     Limited Consolidated Pro Forma Income Statement for the Nine Months Ended
     September 30, 2000

     7. Mendocino Brewing Company, Inc. and United Breweries International (UK)
     Limited Consolidated Pro Forma Income Statement for the Year Ended December
     31, 1999.



                                       25


<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 19, 2001



     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 19, 2001



                                 By: /s/ Yashpal Singh
                                     -------------------------------------------
                                     Yashpal Singh, President and Director
                                     Date: March 19, 2001


                                 By: /s/ Jerome G. Merchant
                                     -------------------------------------------
                                     Jerome G. Merchant, Director
                                     Date: March 19, 2001


                                 By: /s/ N. Mahadevan
                                     -------------------------------------------
                                     N. Mahadeyan, Secretary and Chief
                                     Financial Officer
                                     Date: March 19, 2001


<PAGE>
--------------------------------------------------------------------------------


                         MENDOCINO BREWING COMPANY, INC.

                          INDEPENDENT AUDITOR'S REPORT
                                       AND
                        CONSOLIDATED FINANCIAL STATEMENTS

                           DECEMBER 31, 2000 AND 1999

<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 - 7



<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., as of December 31, 2000 and 1999, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the two years ended December 31, 2000 and 1999. 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., as of December 31, 2000 and 1999, and the results of its
operations and its cash flows for the years then ended, in conformity with
generally accepted accounting principles.


                                       /s/ Moss Adams LLP



Santa Rosa, California
February 2, 2001

                                                                             F-1
<PAGE>

                                                 MENDOCINO BREWING COMPANY, INC.
                                                     CONSOLIDATED BALANCE SHEETS
                                                      December 31, 2000 and 1999

--------------------------------------------------------------------------------
                                                          2000           1999
                                                      -----------    -----------

CURRENT ASSETS
   Accounts receivable, net of allowance
      for doubtful accounts of $15,000 and $0         $ 1,173,000    $ 1,040,300
   Inventories                                          1,203,300      1,168,700
   Prepaid expenses                                       116,600         57,200
   Deferred income taxes                                   48,100         43,100
                                                      -----------    -----------

        Total current assets                            2,541,000      2,309,300
                                                      -----------    -----------

PROPERTY AND EQUIPMENT                                 13,997,400     14,727,200
                                                      -----------    -----------
OTHER ASSETS
   Deferred income taxes                                2,768,000      2,440,300
   Deposits and other assets                              410,500         92,100
   Intangibles, net of amortization                        53,900         61,000
                                                      -----------    -----------

                                                        3,232,400      2,593,400
                                                      -----------    -----------
        Total assets                                  $19,770,800    $19,629,900
                                                      ===========    ===========







See accompanying notes.
--------------------------------------------------------------------------------
                                                                             F-2
<PAGE>

                                                 MENDOCINO BREWING COMPANY, INC.
                                         CONSOLIDATED BALANCE SHEETS (Continued)
                                                      December 31, 2000 and 1999

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

                      LIABILITIES AND STOCKHOLDERS' EQUITY

                                                         2000           1999
                                                      -----------   -----------
CURRENT LIABILITIES
Disbursements in excess of deposits                   $     1,700   $     9,600
Line of credit                                                  -     1,159,800
Accounts payable                                        1,942,200     1,708,700
Accrued wages and related expense                         164,600       204,600
Accrued liabilities                                       193,500       130,300
Income taxes payable                                        1,000             -
Current maturities of long-term debt                      457,600       321,000
Current maturities of capital lease obligations           302,300       275,700
                                                      -----------   -----------

          Total current liabilities                     3,062,900     3,809,700

LINE OF CREDIT                                          1,281,600             -

LONG-TERM DEBT, less current maturities                 3,231,300     3,589,600

CAPITAL LEASE OBLIGATIONS, less current maturities      1,128,200     1,396,900

NOTES TO RELATED PARTY                                  1,295,600       576,300
                                                      -----------   -----------

          Total liabilities                             9,999,600     9,372,500
                                                      -----------   -----------

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, 5,580,498 and
       5,530,177 shares issued and outstanding
       at December 31, 2000 and 1999                   13,875,900    13,834,900
    Accumulated deficit                                (4,332,300)   (3,805,100)
                                                      -----------   -----------

          Total stockholders' equity                    9,771,200    10,257,400
                                                      -----------   -----------

Total liabilities and stockholders' equity            $19,770,800   $19,629,900
                                                      ===========   ===========

See accompanying notes.
--------------------------------------------------------------------------------
                                                                             F-3
<PAGE>

                                                 MENDOCINO BREWING COMPANY, INC.
                                           CONSOLIDATED STATEMENTS OF OPERATIONS
                                          Years Ended December 31, 2000 and 1999

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

                                                        2000         1999
                                                     ----------   -----------

SALES                                                $9,819,600   $ 9,240,000

LESS EXCISE TAXES                                       563,700       541,400
                                                     ----------   -----------

NET SALES                                             9,255,900     8,698,600

COST OF GOODS SOLD                                    5,823,300     5,767,900
                                                     ----------   -----------

GROSS PROFIT                                          3,432,600     2,930,700
                                                     ----------   -----------

OPERATING EXPENSES
    Retail operating                                    414,000       417,500
    Marketing                                         1,627,900     1,691,100
    General and administrative                        1,441,500     1,652,200
                                                     ----------   -----------
                                                      3,483,400     3,760,800
                                                     ----------   -----------
LOSS FROM OPERATIONS                                    (50,800)     (830,100)

OTHER INCOME (EXPENSE)
    Induced conversion                                        -      (263,900)
    Interest income                                       1,100           500
    Miscellaneous income (expense)                       61,100       (95,500)
    Gain on sale of equipment                            28,900             -
    Interest expense                                   (896,900)     (846,800)
                                                     ----------   -----------
                                                       (805,800)   (1,205,700)
                                                     ----------   -----------
LOSS BEFORE INCOME TAXES                               (856,600)   (2,035,800)

BENEFIT FROM INCOME TAXES                              (329,400)     (729,500)
                                                     ----------   -----------

NET LOSS                                             $ (527,200)  $(1,306,300)
                                                     ==========   ===========
LOSS PER COMMON SHARE                                $    (0.10)  $     (0.27)
                                                     ==========   ===========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING            5,538,514     4,838,151
                                                     ==========   ===========

See accompanying notes.
--------------------------------------------------------------------------------
                                                                        Page F-4

<PAGE>

                                                 MENDOCINO BREWING COMPANY, INC.
                                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                                          Years Ended December 31, 2000 and 1999

--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                Series A
                                             Preferred Stock         Common Stock
                                           -------------------  ----------------------   Accumulated          Total
                                            Shares     Amount    Shares      Amount        Deficit           Equity
                                           -------   ---------  ---------  -----------  -------------     ------------
<S>                                        <C>       <C>        <C>        <C>          <C>               <C>

Balance, December 31, 1998                 227,600   $ 227,600  4,497,059  $12,413,000  $ (2,498,800)     $ 10,141,800
Related-party debt converted to
   common stock at $1.125 per share              -           -    938,171    1,319,300             -         1,319,300
Stock issued for compensation to
   board members                                 -           -     94,947      102,600             -           102,600
Net loss                                         -           -          -            -    (1,306,300)       (1,306,300)
                                           -------   ---------  ---------  -----------  ------------      ------------

Balance, December 31, 1999                 227,600     227,600  5,530,177   13,834,900    (3,805,100)       10,257,400

Stock issued for compensation
   to board members                              -           -     50,321       41,000             -            41,000
Net loss                                         -           -          -            -      (527,200)         (527,200)
                                           -------   ---------  ---------  -----------  ------------      ------------

Balance, December 31, 2000                 227,600   $ 227,600  5,580,498  $13,875,900  $ (4,332,300)     $  9,771,200
                                           =======   =========  =========  ===========  ============      ============
</TABLE>

See accompanying notes.
--------------------------------------------------------------------------------
                                                                        Page F-5
<PAGE>

                                                 MENDOCINO BREWING COMPANY, INC.
                                           CONSOLIDATED STATEMENTS OF CASH FLOWS
                                          Years Ended December 31, 2000 and 1999
--------------------------------------------------------------------------------


                                                         2000          1999
                                                    -------------   ------------
CASH FLOWS FROM OPERATING ACTIVITIES
   Net loss                                         $   (527,200)   $(1,306,300)
   Adjustments to reconcile net loss to net
      cash from operating activities:
         Depreciation and amortization                   808,000        794,600
         Induced conversion expense                            -        263,900
         Allowance for doubtful accounts                  15,000              -
         Gain on sale of assets                          (28,900)             -
         Deferred income taxes                          (332,700)      (730,900)
         Stock issued for services                        41,000        102,600
         Accrued interest converted to stock                   -         61,200
      Changes in:
         Accounts receivable                            (147,700)      (360,400)
         Inventories                                     (34,600)      (190,700)
         Prepaid expenses                                (59,500)       (23,700)
         Deposits and other assets                      (330,300)        11,700
         Accounts payable                                233,500        902,000
         Accrued wages and related expense               (40,000)        39,300
         Accrued liabilities                              64,200         (6,200)
                                                    -------------   ------------

              Net cash from operating activities        (339,200)      (442,900)
                                                    -------------   ------------

CASH FLOWS FROM INVESTING ACTIVITIES
   Purchases of property, equipment and
      leasehold improvements                             (36,700)       (99,800)
   Proceeds from sale of fixed assets                     54,600              -
                                                    -------------   ------------

   Net cash from investing activities                     17,900        (99,800)
                                                    -------------   ------------

CASH FLOWS FROM FINANCING ACTIVITIES
   Net borrowings on line of credit                      121,800        421,800
   Borrowings on long-term debt                          100,000              -
   Principal payments on long-term debt                 (329,700)      (283,200)
   Payments on obligations under capital lease          (282,200)      (223,800)
   Disbursements in excess of deposits                    (7,900)         9,600
   Proceeds from notes payable to related party          719,300        576,300
                                                    ------------    -----------
   Net cash from financing activities                    321,300       500,700
                                                    ------------    -----------
DECREASE IN CASH                                               -        (42,000)

CASH, beginning of year                                        -         42,000
                                                    ------------    -----------
CASH, end of year                                   $          -    $         -
                                                    ============    ===========

See accompanying notes.
--------------------------------------------------------------------------------
                                                                        Page F-6

<PAGE>

                                                 MENDOCINO BREWING COMPANY, INC.
                                      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 that 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
brewpub and gift store. The breweries are in two locations, one in Ukiah,
California, and the other in Saratoga Springs, New York. The brewpub 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. 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                    3 - 40 years
             Equipment under capital lease                   7 years
             Leasehold improvements                     7 - 20 years
             Vehicles                                        3 years
             Furniture and fixtures                     5 - 10 years

Intangibles - Intangibles consist of receipts, tradenames, trademarks and other
intangibles. Amounts are amortized using the straight-line method over twenty
years, which is the estimated useful life of the intangibles.

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.


--------------------------------------------------------------------------------
                                                                        Page F-7

<PAGE>

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

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

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

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.

Loss per common share - Loss per common share is computed using the weighted
average number of common shares outstanding. Since a loss from operations
exists, a diluted earnings per share number is not presented because the
inclusion of common stock equivalents in the computation would be antidilutive.
Common stock equivalents associated with convertible notes and stock options,
which are exercisable into 1,045,138 shares of common stock at December 31,
2000, could potentially dilute earnings per share in future years.

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.

Advertising - Advertising costs are expensed as incurred. Advertising expenses
for the years ended December 31, 2000 and 1999, were $232,400 and $243,200,
respectively.

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 has
issued Statement of Financial Accounting Standards (SFAS) No. 140 "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities". This statement replaces SFAS No. 125 of the same title, which was
effective, generally, after December 31, 1996. SFAS 140 revises the standards
for accounting and reporting of financial assets and extinguishments of
liabilities, but it carries over most of SFAS 125's provisions. SFAS 140 was
effective for fiscal years ending after December 31, 2000. Certain components of
SFAS 140, relating to the transferring and serving of financial assets and
extinguishments of liabilities, are effective after March 31, 2001. The adoption
of SFAS 140 is not expected to have a material effect on the Company's
consolidated financial statements.

--------------------------------------------------------------------------------
                                                                        Page F-8

<PAGE>

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

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

NOTE 2 - INVENTORIES

                                                        2000         1999
                                                    ----------    ----------
Raw materials                                       $  517,100    $  363,600
Work-in-process                                        133,000       210,100
Finished goods                                         526,000       562,500
Merchandise                                             27,200        32,500
                                                    ----------    ----------
                                                    $1,203,300    $1,168,700
                                                    ==========    ==========



NOTE 3 - PROPERTY AND EQUIPMENT


                                                        2000         1999
                                                    -----------   -----------
Buildings                                           $ 7,792,100   $ 7,738,700
Machinery and equipment                               5,391,700     5,381,100
Equipment under capital lease                         2,313,900     2,265,700
Land                                                    810,900       810,900
Leasehold improvements                                  792,200       792,200
Equipment in progress                                    13,400        66,900
Vehicles                                                 69,300        69,300
Furniture and fixtures                                   38,500        37,900
                                                    -----------   -----------
                                                     17,222,000    17,162,700
Less accumulated depreciation and amortization        3,224,600     2,435,500
                                                    -----------   -----------
                                                    $13,997,400   $14,727,200
                                                    ===========   ===========

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 2002. The agreement is secured by substantially all the assets
of the Releta Brewing Company, LLC, accounts receivable, inventory, certain
securities pledged by a stockholder, and a second position on the real property
of Mendocino Brewing Company.


--------------------------------------------------------------------------------
                                                                        Page F-9

<PAGE>

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

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

NOTE  5 - LONG-TERM DEBT

                                                           2000          1999
                                                       -----------   -----------

Note to a bank; payable in monthly
installments of $24,400, including
interest at the Treasury Constant
Maturity Index, plus 4.17%; maturing
December 2012, with a balloon payment;
secured by substantially all the assets
of Mendocino Brewing Company                           $ 2,624,300   $ 2,655,800

Note to a financial institution; payable
in monthly installments of $24,700, plus
interest at the prime rate plus 2.25%;
maturing March 2004; secured by
substantially all the assets of the
Releta Brewing Company, certain
securities pledged by a stockholder,
accounts receivable, inventory, and a
second position on the remaining assets
of Mendocino Brewing Company                               964,600     1,236,600

Note to a financial institution; payable
in monthly installments of $11,100
beginning April 2001, plus interest at
the prime rate plus 2.25%; maturing in
December 2001, secured by substantially
all the assets of the Releta Brewing
Company, certain securities pledged by a
stockholder, accounts receivable,
inventory, and a second position on the
remaining assets of Mendocino Brewing
Company                                                    100,000           -

Other notes                                                    -          18,200
                                                        ----------    ----------
                                                        $3,688,900    $3,910,600

Less current maturities                                    457,600       321,000
                                                        ----------    ----------
                                                        $3,231,300    $3,589,600
                                                        ==========    ==========

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

                    Year Ending December 31,
                    ------------------------
                               2001                  $  457,600
                               2002                     332,100
                               2003                     335,800
                               2004                      92,500
                               2005                      47,600
                            Thereafter                2,423,300
                                                     ----------
                                                     $3,688,900
                                                     ==========


--------------------------------------------------------------------------------
                                                                       Page F-10

<PAGE>


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

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

NOTE  6 - CAPITAL LEASE OBLIGATIONS

The Company leases brewing and office equipment under various capital lease
agreements with various financial institutions.

Future minimum lease payments under these capital lease agreements are as
follows:

                Year Ending December 31,
                ------------------------
                        2001                         $  435,100
                        2002                            416,700
                        2003                            839,100
                        2004                             29,800
                        2005                              4,800
                                                     ----------
                                                      1,725,500
Less amounts representing interest                      295,000
                                                     ----------
Present value of minimum lease payments               1,430,500
Less current maturities                                 302,300
                                                     ----------
                                                     $1,128,200
                                                     ==========

NOTE 7- NOTES PAYABLE TO RELATED PARTY

                                                        2000         1999
                                                     ----------   ----------

Notes payable consist of convertible
notes to United Breweries of America, a
related party, with interest at the
prime rate plus 1.5%, but not to exceed
10% per year; the notes mature 18 months
after the advances, and are unsecured
and subordinated to bank debt; the notes
are convertible, upon maturity, into
common stock at $1.50 per share or may
be repaid in 60 monthly installments;
the notes begin maturing in March 2001
through July 2002, and include $104,200
and $11,200 of accrued interest at
December 31, 2000 and 1999                           $1,295,600   $  576,300
                                                     ==========   ==========

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, 2000 and 1999.


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


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

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

NOTE  9 - COMMITMENTS

The Company leases its Hopland, California facility under a noncancelable
operating lease expiring August 2004. The monthly lease payment is $2,300, 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 noncancelable operating lease expiring October 2002. The lease
contains options, which management intends to exercise, to extend the lease for
three additional five-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
noncancelable operating leases that expire through August 2004. Total rent
expense was $187,800 and $192,100 for the years ended December 31, 2000 and
1999, respectively. Future minimum lease payments are as follows:

                Year Ending December 31,
                ------------------------
                          2001                         $135,900
                          2002                          114,500
                          2003                           31,200
                          2004                           20,800
                                                       --------
                                                       $302,400
                                                       ========

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 MicroStar at purchase prices ranging from $54 to $84 per
keg. Rental expense associated with this agreement was $90,100 and $101,800 for
the years ended December 31, 2000 and 1999.

NOTE 10 - RELATED PARTY TRANSACTIONS

The Company reimburses certain expenses to United Breweries of America Inc.
(UBA), a related party, owning approximately 55% of the common stock, for
consulting, salaries, corporate financing and marketing activities. Total
expenses for UBA in 2000 and 1999 were $25,000 and $39,300. Interest expense
associated with the UBA notes was $93,100 and $72,600 for the years ended
December 31, 2000 and 1999.

The Company has convertible debt agreements with UBA. See Note 7 for additional
details.

The Company currently has accrued expenses to related parties of $28,800 and
$42,200 as December 31, 2000 and 1999.

The Company pays a member of the Board of Directors $2,700 per month for
consulting services. During the year the Company paid $32,400 for these
consulting services.


--------------------------------------------------------------------------------
                                                                       Page F-12

<PAGE>

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

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

NOTE 11 - MAJOR CUSTOMERS

Sales to the top five customers totaled $3,907,000 and $4,191,700 for the years
ended December 31, 2000 and 1999, representing 40% and 45% of sales. One
customer, Golden Gate Distributing, had sales of 13% and 12% for the years
ending December 31, 2000 and 1999. Another customer, Del Rey Distributing had
sales of 0% and 13% for the years ending December 31, 2000 and 1999.


NOTE 12 - STOCKHOLDERS' EQUITY

Common Stock

In August 1999, the Company offered UBA an incentive to convert their
outstanding debt of $994,000 plus accrued interest of $61,400 to shares of
common stock. Per the agreement, the notes were convertible at $1.50 per share
at UBA's sole request. On the date of the conversion, the market price was
significantly lower than the conversion price of $1.50 per share. In order to
induce UBA to convert their entire debt, which has not matured, to common stock,
the Company offered to convert the debt at the market price of the stock. As
part of this transaction the Company recorded as an expense, $263,900 for the
inducement of the conversion price at less than the $1.50 conversion price.
After this transaction, UBA holds approximately 55% of the outstanding common
stock.

Also in August 1999, the Company voted to compensate the independent outside
members of the Board of Directors. The Company issued 22,196 and 94,947 shares
to these board members for December 31, 2000 and 1999 and recognized $41,000 and
$102,600 of compensation expense for the issuance of the common stock. The
Company issued 28,126 shares subsequent to December 31, 2000 for compensation of
the board members earned in 2000. The compensation expense was accrued at
December 31, 2000.


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 its 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. Only a
complete corporate dissolution will cause a liquidation preference to be paid.


--------------------------------------------------------------------------------
                                                                       Page F-13
<PAGE>

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

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

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.

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 2000 and 1999, the Company issued
80,000 and 88,888 non-statutory stock options with a five-year term to the
independent members of the Board of Directors at the market price on the date of
the grant.

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 2000 and 1999. Had compensation cost for the
Company's options been determined based on the fair value at the grant date for
awards in 2000 and 1999 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:

                                                        2000         1999
                                                     ----------  ------------
Net loss - as reported                               $ (527,200) $ (1,306,300)
Net loss - pro forma                                   (582,600) $ (1,363,800)

Loss per share - as reported                         $    (0.10) $      (0.27)
Loss per share - pro forma                           $    (0.11) $      (0.28)

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 2000 and 1999.

                                                        2000         1999
                                                     ----------   ----------
Dividends                                                 None         None
Expected volatility                                       151%         120%
Risk free interest rate                                  7.00%        6.51%
Expected life                                          5 years      5 years

Options issued during 2000 and 1999 have an estimated weighted average fair
value of $1.15 and $1.08.

                                                Shares Under   Weighted-Average
                                                   Option       Exercise Price
                                                ------------   ----------------
Balance, December 31, 1998                         12,500         $   8.80
Granted                                            88,888             1.13
Exercised                                            -                 -
Canceled                                             -                 -
                                                ------------
Balance, December 31, 1999                        101,388             2.07
Granted                                            80,000             1.25
Exercised                                            -                 -
Canceled                                             -                 -
                                                ------------
Balance, December 31, 2000                        181,388         $   1.71
                                                ============


--------------------------------------------------------------------------------
                                                                       Page F-14

<PAGE>

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

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

NOTE 14 - INCOME TAXES

                                                      2000            1999
                                                   ----------      ----------
Provision for income taxes
    Federal                                        $     -         $     -
    State                                               3,300           1,400
                                                   ----------      ----------
                                                   $    3,300      $    1,400
    Deferred                                         (332,700)       (730,900)
                                                   ----------      ----------
                                                   $ (329,400)     $ (729,500)
                                                   ==========      ==========

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:


                                                      2000            1999
                                                   ----------      ----------
Income tax benefit at 34%                          $ (290,900)     $ (692,200)
State taxes                                             3,300           1,400
State tax benefit of net operating
  loss carryforward                                   (36,800)        (96,900)
Recognition of future tax revenues
  (deductions)                                        (5,000)          58,200
                                                   ----------      ----------
                                                   $ (329,400)     $ (729,500)
                                                   ==========      ==========


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


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


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

NOTE 14 -      INCOME TAXES (Continued)

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

                                                    2000           1999
                                                ------------   ------------
Accounts receivables allowance                  $      6,400   $         -
Inventories                                            6,000         6,900
Accruals                                              38,700        39,700
Other                                                 (3,000)       (3,500)
                                                ------------   -----------
                                                $     48,100   $    43,100
                                                ============   ===========

Depreciation and amortization                   $   (111,200)  $   (78,600)
Benefit of net operating loss carryforward         2,961,500     2,590,800
Other                                                (82,300)      (71,900)
                                                ------------   -----------
                                                $  2,768,000   $ 2,440,300
                                                ============   ===========

The Company's net operating losses that are available for carryforward will
expire as follows:

                                                Net Operating Loss
                                     ------------------------------------------
 Date of expiration                     Federal      California      New York
                                     ------------   ------------   ------------
        2001                         $       -      $    87,500    $       -
        2002                                 -          761,200            -
        2003                                 -          961,200            -
        2004                                 -          694,700            -
        2010                                 -          276,400            -
        2012                           1,802,300            -          251,500
        2018                           2,758,800            -          385,000
        2019                           2,153,100            -          290,300
        2020                             991,500            -          137,900
                                     ------------   ------------   ------------
                                     $ 7,705,700    $ 2,781,000    $ 1,064,700
                                     ============   ============   ============

The Company also has $35,000 of California Manufactures Investment Tax Credits
that can be carried forward to reduce future taxes and expire beginning in 2007.
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.


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

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

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

NOTE 15 - 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
94% of the Company's total gross sales during 2000 and 1999. 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 6% of the Company's total gross sales during 2000 and
1999. A summary of each segment is as follows:

<TABLE>
<CAPTION>
                                                     Year Ending December 31, 2000
                                     ------------------------------------------------------------
                                         Brewing        Hopland       Corporate
                                       Operations       Brewery       and other          Total
                                     --------------   -----------    -----------    -------------
<S>                                  <C>              <C>            <C>            <C>
Sales                                $    9,270,400   $   549,200    $         -    $   9,819,600
Operating loss                               (7,300)      (43,500)             -          (50,800)
Identifiable assets                      15,121,800        78,900      4,570,100       19,770,800
Depreciation and amortization               702,300         6,800         98,900          808,000
Capital expenditures                         56,740         2,560              -           59,300

<CAPTION>
                                                     Year Ending December 31, 1999
                                     ------------------------------------------------------------
                                         Brewing        Hopland       Corporate
                                       Operations       Brewery       and other          Total
                                     --------------   -----------    -----------    -------------
<S>                                  <C>              <C>            <C>            <C>
Sales                                $    8,657,000   $   583,000    $         -    $   9,240,000
Operating loss                             (796,500)      (33,600)             -         (830,100)
Identifiable assets                      15,816,900        79,000      3,734,000       19,629,900
Depreciation and amortization               710,100         6,500         78,000          794,600
Capital expenditures                        244,400           800          4,100          249,300
</TABLE>


NOTE 16 - STATEMENT OF CASH FLOWS

Supplemental cash flow information includes the following:

                                                     2000            1999
                                                 ------------    ------------
Cash paid during the year for:
   Interest                                      $    863,600    $    771,600
   Income taxes                                  $      2,300    $      1,400

Non-cash investing and financing activities:
   Seller financed equipment                     $     48,200    $    149,200
   Induced conversion                            $          -    $  1,319,300
   Stock issued for services                     $     41,000    $    102,600



--------------------------------------------------------------------------------
                                                                       Page F-17