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, 1997

    [  ]    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

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

<CAPTION>
<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)

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 Stock Exchange
</TABLE>

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

                                 Not applicable
                                (Title of class)

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

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

     State issuer's revenues for its most recent fiscal year:  $4,843,900

     The  aggregate  market  value of the voting  stock  held by  non-affiliates
computed by reference to the last  reported sale price of such stock as of March
18, 1998 was $6,124,113.

     The number of shares the issuer's common stock  outstanding as of March 24,
1998 is 4,463,385.

                       DOCUMENT INCORPORATED BY REFERENCE

     Portions of the Proxy Statement for the Registrant's 1998 Annual Meeting of
Shareholders  to be filed not later  than  April 30,  1998 are  incorporated  by
reference in Part III of this Form 10-K.

     Transitional Small Business Disclosure Format  Yes     No  X
                                                        ---    ---


<PAGE>


                                     PART I

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

Item 1.  Business.

Overview

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

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

         In October 1997, Mendocino Brewing entered into an Investment Agreement
with United Breweries of America,  Inc.  ("UBA").  UBA is affiliated with The UB
Group,  which  is a  global  producer  of  beer  and  spirits.  Pursuant  to the
Investment  Agreement,  UBA provided the Company with an  additional  $4 million
cash  equity and  transferred  to the  Company its  subsidiary,  Releta  Brewing
Company LLC, which owns a brewery in Saratoga Springs, New York. The Company has
named the Saratoga  Springs  brewery "Ten Springs  Brewery." Ten Springs Brewery
commenced production in February 1998 and has an initial capacity of 60,000 bbl.
per year expandable to 150,000 bbl. per year.

         In December  1997, the Savings Bank of Mendocino  County  converted its
$2.7 million  construction  loan to a long term loan. This conversion,  combined
with the cash equity  contributed by UBA, reduced the Company's  working capital
deficit from $3,616,800 at September 30, 1997 to $357,400 at December 31, 1997.

         The  transaction  with UBA has resulted in  substantial  changes in the
management  of the  Company.  Vijay  Mallya,  the world wide  chairman of The UB
Group,  has joined the Company in the  capacity as Chief  Executive  Officer and
Chairman  of the  Board;  Yashpal  Singh,  who has many years of  experience  in
operating breweries the size of the Company's two new breweries,  has joined the
Company as Chief Operating Officer;  and financial personnel  experienced in the
budgeting, cash management,  and reporting techniques and requirements of The UB
Group have been added. Michael Laybourn remains the President of the Company and
Donald Barkley remains the Company's Master Brewer.

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.

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


<PAGE>

Industry Overview

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

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

         The  Company  competes  in  the  domestic  craft  beer  segment,  which
comprises   approximately  2%  of  total  U.S.  beer  sales.   Craft  beers  are
characterized by their  full-flavor and are usually  produced along  traditional
European  brewing styles.  While U.S. beer sales were basically flat for several
years,  domestic craft beer sales increased at a rate of  approximately  40% per
year for  several  years  through  1996.  Segment  growth  was about 5% in 1997.
Management  expects  industry  performance for 1998 to be no better than that of
1997. The rate at which the domestic  craft beer segment  continues to grow will
have a material  affect on the  Company's  business,  financial  condition,  and
results of  operations.  Actual  industry  segment  performance  depends on many
factors that are outside the control of the Company.

Competition

         The craft beer category consists of:

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

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

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

     *   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 1997.  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.



                                       -2-

<PAGE>


Products

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

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

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

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

     *   EYE OF THE HAWK SELECT ALE is a high  gravity deep amber summer ale. It
         is available during summer months in 22 oz bottles.

     *   YULETIDE PORTER is a deep brown Holiday brew with a traditionally rich,
         creamy  flavor.  It is  available  in  November  and  December in 22 oz
         bottles.

     *   PEREGRINE PALE ALE is brewed year-round with a more delicate flavor and
         character. It is available  year-round at the Hopland  Brewery in draft
         form.

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

     *   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 and nearby retail outlets in 22 oz bottles.

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

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

         Ten Springs Brewery  presently  performs some contract brewing services
for other brands. At present, the income from such services is not material.

The Hopland Brewery Brewpub and Merchandise Store

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

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


                                       -3-
<PAGE>

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

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

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

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

Regional Distribution

         The Company's  products are  distributed  widely in  California  and in
limited  quantities  at  selected  accounts in  Arizona,  Colorado,  District of
Columbia, Georgia, Idaho, Illinois, Louisiana, Maryland, Massachusetts,  Nevada,
New Jersey,  Nebraska,  New Mexico,  New York,  North  Carolina,  Oregon,  South
Carolina,  Texas,  Washington,  Wisconsin, and Wyoming. The Company plans to add
Minnesota, Pennsylvania, and Virginia in the near future. Northern California is
the Company's  most important  market at this time,  and Management  anticipates
that it will remain so for the foreseeable future.

Social Responsibility

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

Product Distribution

         Mendocino Brewing's beers are sold through distributors to consumers in
bottles at  supermarkets,  warehouse  stores,  liquor stores,  taverns and bars,
restaurants,  and  convenience  stores.  Red Tail Ale,  Blue Heron Pale Ale, and
Black  Hawk  Stout 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 88% of
the  Company's  total  sales  in 1997,  with  food and  merchandise  retail  and
catalogue  sales  constituting  the  balance.  Sales to the top  five  customers
totaled  $2,192,000  and  $1,788,900  for the years ended  December 31, 1997 and
1996, respectively representing 55% and 58% of brewing operation sales.

Suppliers

         The Company's major  suppliers are Great Western  Malting Co.,  Yakima,
Washington (malt);  John I. Haas,

                                      -4-

<PAGE>

Co.,  New  York,  New  York  (hops);  and  California  Glass  Company,  Oakland,
California and Vitro Packaging, Inc., Dallas, Texas (bottles).

Employees

         As of December  31,  1997,  the Company  employed 50  full-time  and 39
part-time  individuals  including 14 in  management  and  administration,  31 in
brewing operations, and 44 in retail and brewpub operations. Management believes
that the Company's relations with its employees are excellent.  None of its work
force is  unionized.  The Company has agreed with the City of Ukiah that for two
years from the opening of the Ukiah brewery that it will give  preference in its
hiring to residents of Mendocino County.

Trademarks

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

         The  registration  of the word  mark  BLUE  HERON is a  concurrent  use
registration  which gives the Company the  exclusive  right to use the word mark
BLUE HERON  throughout  the United States with the  exception of Oregon,  Idaho,
Washington, and Montana. BridgePort Brewing Company, the other concurrent owner,
has the  exclusive  right to use the word mark BLUE HERON in those  states.  The
BridgePort Pale Ale label used outside of Oregon, Idaho, Washington, and Montana
depicts a blue  heron  wading in a marsh  although  the words  BLUE HERON do not
appear.

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

         Before it was  acquired  by UBA and  contributed  to the  Company,  the
Saratoga  Springs  brewery  brewed and  bottled  ales sold  under the  following
trademarks:  NORTH COUNTRY ALES, WHITE FACE,  WHITEFACE,  FAT BEAR, and NORTHERN
EXPOSURE.  Intent to use  applications  have been filed with the U.S. Patent and
Trademark  Office for those marks following their  abandonment by their previous
owner.

         Mendocino Brewing does not consider its recipes, techniques, processes,
yeast strain, or equipment to be proprietary or necessary to protect.

Government Regulation

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

         Taxation  of  alcohol  has  increased  significantly  in recent  years.
Currently, the Federal tax rate is $7.00 per bbl. for up to 60,000 bbl. per year
and $18.00 per bbl.  for over 60,000 bbl. The  California  tax rate is $6.20 per
bbl.

         The 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.


                                      -5-

<PAGE>

         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 and hops,
and glass and cardboard.  The Company has instituted a recycling program for its
office paper, newspapers, magazines, glass, and cardboard at minimal cost to the
Company. The Company pays approximately $1,000 per month in sewage fees relating
to waste water from its Hopland  facility.  The Company  sells or gives away its
spent grain to local cattle ranchers.  The Company has not purchased any special
equipment  and does not  incur  any  identifiable  fees in  connection  with its
environmental compliance at its Hopland site.

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

Research and Development

         Research and development activity in 1997 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 is  presently  used in both  wholesale  and retail
operations and no applicable regulations have been published to assist in making
such determination.  Management believes, after consulting with its accountants,
that  completing  the new brewery  will reduce 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.

                                      -6-


<PAGE>

Item 2.  Description of Property.

     The Company owns nine acres of land in Ukiah, California on which its Ukiah
brewery is operated.  The Company currently leases a 15,500 square foot building
in Hopland on which the Hopland Brewery is located.  The lease expires in August
2004. The Company leases 3.66 acres on which Ten Springs Brewery  operates under
a  lease  expiring  October  2002.  Additionally,  the  Company  leases  certain
equipment and vehicles under operating leases which expire through March 1999.


Item 3.  Legal Proceedings.

     The  Company  is not  currently  involved  in any  material  litigation  or
proceeding. The Company has received a written claim by a terminated distributor
that its  termination was improper  notwithstanding  the language of the written
distribution  agreement  permitting  either party to terminate by giving 30 days
written  notice.  No legal action has been instituted with respect to this claim
as of the date of this  Report.  Management  does not believe  that there is any
merit to the claim.


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

         The  Company  held  its  annual  meeting  of   shareholders  in  Ukiah,
California, on Wednesday,  December 3, 1997. Votes were cast for the election of
directors to serve until their successors are elected at the next annual meeting
of the Company as follows

Candidate                                  Votes For              Votes Withheld
---------                                  ---------              --------------
Vijay Mallya                                1,780,923                   6,936
H. Michael Laybourn                         1,781,383                   6,476
O'Neil Nalavadi                             1,781,023                   6,836
Jerome G. Merchant                          1,779,223                   8,636
Yashpal Singh                               1,780,923                   6,936
Eric G. Bradley                             1,779,133                   8,726
Daniel R. Moldenhauer                       1,779,333                   8,526

         The shareholders also ratified the appointment of Moss Adams LLP as the
Company's  independent  auditors  for  1997 by a vote of  1,781,157  for,  1,060
against, and 5,642 abstain.

         As was disclosed in the Company's  proxy  statement for the 1997 annual
meeting,  Messrs. Bradley and Moldenhauer had already agreed to resign effective
December  31,  1997 at the time they  were  elected.  In  January  1998,  O'Neil
Nalavadi also resigned.  The Board of Directors has appointed Robert Neame, Kent
Price, and Sury Rao Palamand to fill the vacancies created by these resignations
until the next annual meeting of the shareholders of the Company.

                                      -7-
<PAGE>

                                     PART II

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

<TABLE>

         Mendocino  Brewing's  Common  Stock is listed on the  Pacific  Exchange
(symbol MBR).  The high and low closing sales prices for the Common Stock on the
Pacific Exchange are set forth below for the quarters indicated:
<CAPTION>

                             1996                                                 1997
      --------------------------------------------------   ---------------------------------------------------
      1st Quarter   2nd Quarter  3rd Quarter  4th Quarter  1st Quarter  2nd Quarter  3rd Quarter   4th Quarter
      -----------   -----------  -----------  -----------  -----------  -----------  -----------   -----------
<S>      <C>       <C>          <C>           <C>          <C>          <C>          <C>           <C>
High     $7.38     $10.82       $10.00        $8.38        $8.00        $7.25        $5.50         $4.37

Low      $5.50      $5.82        $7.38        $5.75        $6.00        $4.50        $3.62         $3.06
</TABLE>

         There were approximately  2,508 shareholders of record as of January 6,
1998.  Management intends to retain Mendocino  Brewing's earnings for use in the
business  and  does  not  expect  the  Company  to  pay  cash  dividends  in the
foreseeable  future.  The Company's credit  agreements  provide that the Company
shall not declare or pay any dividend or other  distribution on its Common Stock
(other than a stock  dividend) or purchase or redeem any Common  Stock,  without
the  lender's  prior  written   consent.   Management   anticipates   that  such
restrictions  will remain in effect for as long as the  Company has  significant
bank  financing,  including  the  long-term  debt on the Ukiah real estate.  The
holders of the Company's 227,600  outstanding shares of Series A Preferred Stock
are entitled to aggregate cash dividends and  liquidation  proceeds of $1.00 per
share  before any dividend  may be paid with  respect to the Common  Stock.  The
Series A Preferred  Shares are canceled after they have received their $1.00 per
share  aggregate  dividend.  Management  does not have any present  intention to
declare or pay a dividend on the Series A Preferred Stock.


Item 6.  Management's Discussion and Analysis.

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

Overview

         In May 1997,  Mendocino  Brewing  placed in  operation a new brewery in
Ukiah,  California  (110 miles north of San  Francisco)  with an initial  annual
capacity of  approximately  60,000 bbl.  The facility was designed to enable its
production  to be  expanded  to  200,000  bbl.  per year  with the  addition  of
necessary equipment.

         In October 1997, Mendocino Brewing entered into an Investment Agreement
with United Breweries of America,  Inc.  ("UBA").  UBA is affiliated with The UB
Group,  which  is a  global  producer  of  beer  and  spirits.  Pursuant  to the
Investment  Agreement,  UBA provided the Company with an  additional  $4 million
cash  equity and  transferred  to the  Company its  subsidiary,  Releta  Brewing
Company LLC, which owns a brewery in Saratoga Springs, New York. The Company has
named the Saratoga  Springs  brewery "Ten Springs  Brewery." Ten Springs Brewery
commenced production in February 1998 and has an initial capacity of 60,000 bbl.
per year expandable to 150,000 bbl. per year.

         In December  1997, the Savings Bank of Mendocino  County  converted its
$2.7 million  construction  loan to a long term loan. This conversion,  combined
with the cash equity  contributed by UBA, reduced the Company's  working capital
deficit from $3,616,800 at September 30, 1997 to $357,400 at December 31, 1997.

         Net sales  for 1997  increased  by 19.5%  over  1996 due  primarily  to
increased marketing efforts.  Production  (measured in barrels) increased by 54%
from 13,391 bbl. in 1996 to 20,557 bbl. in 1997. The Company ended the year with
a net loss of $1,139,700. Increased fixed costs associated with the new brewery,
higher  marketing  expenses  during  the year,  the fixed  costs of Ten  Springs
Brewery,  increased  interest expenses of $401,900,  and a one time write off of
$141,000  in  public  offering  expenses   (classified  as  "Other   Expenses"),
contributed to the net loss of $1,139,700 for the year ended December 31, 1997.

                                      -8-
<PAGE>

<TABLE>
Results of Operations

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

                                                                             Year Ended December 31,
                                                              ---------------------------------------------
                                                                  1997                               1996
                                                              ------------------                 -----------
<S>                                                              <C>                                <C>
Statements of Operations Data:
     Sales...........................................            105.53%                            104.30%
     Less excise taxes...............................              5.53                               4.30
                                                                 ------                             ------
     Net Sales.......................................            100.00                             100.00
     Cost of goods sold..............................             72.16                              49.74
                                                                 ------                             ------
     Gross profit....................................             27.84                              50.26
     Operating expenses..............................             56.26                              54.75
                                                                 ------                             ------
     Loss from operations............................            (28.42)                             (4.49)
     Other expense...................................            (11.85)                             (0.77)
                                                                 ------                             ------
     Loss before income taxes........................            (40.27)                             (5.26)
     Benefit from income taxes.......................            (15.44)                             (2.04)
                                                                 ------                             ------
     Net loss........................................            (24.83)%                            (3.22)%
                                                                 ======                             ======
</TABLE>

<TABLE>
<CAPTION>
                                                                                 At December 31,
                                                              -----------------------------------------------
                                                                     1997                              1996
                                                              ------------------                    ----------
<S>                                                            <C>                                <C>
Balance Sheet Data:
     Cash and cash equivalents.......................          $    706,300                       $    494,800
     Working capital.................................              (357,400)                        (3,616,800)
     Property and equipment..........................            15,642,500                          9,270,300
     Deposits and other assets.......................                42,000                            304,100
     Total assets....................................            18,026,400                         11,144,600
     Long-term debt..................................             2,663,300                              --
     Obligation under capital lease..................             1,578,900                          1,863,000
     Total liabilities...............................             6,368,100                          6,844,200
     Retained earnings (deficit).....................              (936,500)                           203,200
     Stockholder's equity............................            11,658,300                          4,300,400

</TABLE>


         Net Sales.  Net sales for 1997  increased by 19.5% from  $3,839,700  in
1996 to $4,590,000  in 1997.  Management  attributes  the growth in sales to the
implementation  of  new  marketing  strategies,  including  new  point  of  sale
materials and the  commencement of operations at the new brewery in Ukiah in May
1997.  Wholesale beer shipments  (measured in barrels)  increased by 54% in 1997
when compared to 1996.  Increases  attributable  to  additional  unit sales were
offset in part by a wholesale  price  reduction  implemented in September  1996.
Management attributes  approximately 60% of sales increase to increased sales to
existing  distributors  and  geographic  expansion  begun  in late  1996 and the
remaining  40% to sales of  draft  beer  from  the new  brewery  in Ukiah  which
commenced  operations  in May 1997.  Retail  sales at the  Hopland  brewpub  and
merchandise store increased 5.4% during 1997. Management attributes the increase
to merchandise  sales resulting from tourist traffic  generated by the Company's
marketing efforts.

         Cost of goods  sold.  Cost of goods sold as a  percentage  of net sales
increased by 22.4  percentage  points in 1997 to 72.2% when compared to 49.7% in
1996.  Managment  attributes the increase to a combination of a wholesale  price
reduction  resulting in decreased  sales  dollars,  higher fixed and  production
costs due to the  underutilization  of the new brewing facility in Ukiah and the
Ten Springs  Brewery in Saratoga  Springs,  New York and certain  start-up costs
associated with the new brewery. The Company did not realize any material amount
of revenue from Ten Springs  Brewery  during 1997, as the brewery did not become
operational until February 1998.

         Gross profit. Gross profit decreased by 33.8% during 1997 to $1,277,900
in comparison to $1,930,000 in 1996. As a percentage of net sales,  gross profit
decreased 22.4 percentage  points to 27.8% in 1997 as compared to 50.2% in 1996.
The decrease in gross profit as a percentage of net sales is attributable to the
increase in cost of goods sold and a wholesale  price  reduction  implemented in
late 1996.

                                      -9-

<PAGE>

         Operating  expenses.   Operating  expenses  were  $2,582,400  in  1997,
representing an increase of 22.8% when compared to $2,102,400 in 1996. Operating
expenses  consist  of retail  operating  expenses,  marketing  and  distribution
expenses and general and Administrative expenses.

         Retail  operating  expenses  were $704,000  representing  a decrease of
$34,200 or 4.6% over 1996. The decrease  consisted of a reduction in labor costs
of $10,400,  a reduction  in repairs and  maintenance  expense of $9,400,  and a
decrease in net other expenses of $14,400.

         Marketing and distribution expenses were $846,200 in 1997, representing
an increase of 24% compared to $682,300 in 1996.  As a percentage  of net sales,
marketing and  distribution  expenses  represented  18.4% in 1997 as compared to
17.8% in 1996.  Point of sale,  promotional/advertising,  packaging,  and  label
development costs increased by $111,300.  Marketing and sales labor increased by
$85,300.  Travel and  lodging  incurred in  supporting  new  geographic  markets
increased  by $40,000.  Distribution  expenses  decreased  by $44,800  primarily
because of reduced  warehouse  rental expense.  Other net expenses  decreased by
$27,900.

         General  and   Administrative   expenses   were   $1,032,200   in  1997
representing an increase of $350,300 over the expenses incurred in 1996. General
and administrative  expenses increased by 51.4% over 1996 and as a percentage of
net sales represented 22.5% in 1997 as against 17.8% in 1996.  Professional fees
increased  by  $81,700.  Taxes  and  insurance  costs  associated  with  the new
breweries  in Ukiah and  Saratoga  Springs  increased  by  $124,900.  Travel and
lodging expenses increased by $57,700.  Labor costs increased by $27,200.  Costs
associated  with being a public  company  increased by $17,700.  Net other costs
increased by $41,100.

         Net  interest  expense.  Net  interest  expense in 1997 was $401,900 as
against  interest income of $11,600 in 1996. The total interest expense incurred
during  1997  was  $665,300  out of which  capitalized  interest  accounted  for
$263,400 in 1997 as against $214,900 in 1996.

         Other expense.  Other expense,  not including net interest expense,  in
1997 was  $149,500  as  against  $41,200 in 1996  representing  an  increase  of
$108,300.

         In February  1997 the Company  commenced  a direct  public  offering of
600,000  shares of common stock at an offering  price of $8.50.  In August 1997,
the offering was  terminated  after having sold 19,516 shares for $164,700.  All
sales occurred before June 30, 1997. The Company  incurred  $305,300 of offering
costs related to the offering.  Of that amount,  $164,700 was offset against the
stock sale  proceeds in  stockholders'  equity and the  balance of $141,000  was
expensed.

         Other net expenses increased by $5,600. These expenses were offset by a
non recurring  write off in 1996 of $38,300 in costs  associated with a proposed
alliance.

         Net loss.  Increased overhead as the Company commenced operation at the
new brewery in Ukiah,  fixed  expenses  associated  with the brewery in Saratoga
Springs,  increased  marketing  expenses,  the charge for interest expense after
commencement  of operations  at the new brewery in Ukiah,  and the net effect of
certain one time occurrences, offset by a tax benefit of $708,900, resulted in a
net loss in 1997 of $1,139,700 as against the net loss of $123,800 in 1996.

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 80% of the Company's  1997 gross annual sales.  The second segment
consists  of  brewing  beer for sale  along  with  food and  merchandise  at the
Company's  brewpub  and retail  merchandise  store,  the Hopland  Brewery.  This
segment  accounted for 20% of the Company's 1997 gross annual sales.  See "Notes
to Financial Statements, Note 13 - Segment Information."

         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.

                                      -10-
<PAGE>

Capital Demands.

         Ten Springs Brewery did not commence brewing  operations until February
1998 and will not realize any material amount of revenues for several weeks. The
Company  expects  both the Ukiah  brewery and Ten Springs  Brewery to operate at
significantly less than full capacity during all or part of 1998.

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

         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.


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  of  $1,872,300  secured  by
substantially all the assets of the Company, other than Ten Springs Brewery.

         Shareholder Commitment.  United Breweries of America, Inc. ("UBA"), the
Company's  largest  shareholder,  has agreed in principle to provide the Company
with a credit  facility of up to $2 million,  to be funded in installments of up
to $300,000 each. The advances are secured by Ten Springs Brewery.  The advances
bear  interest  at prime plus 1.5% and are due and  payable 18 months  after the
date of the  advance.  It is  anticipated  the  advances  will have a conversion
feature into  unregistered  shares of the  Company's   common  stock.  The final
structure of the conversion  feature is currently being reviewed pending what is
most financially  beneficial for the Company.  The arrangement was approved by a
committee consisting of director Michael Laybourn (the President of the Company)
and independent directors Kent Price and Sury Rao Palamond on February 19, 1998.
Although formal  documentation  of the arrangement is pending,  UBA had advanced
the first installment of $300,000 to the Company as of March 25, 1998.

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

         Seller Financing of Ukiah Real Estate. The seller of the Ukiah land has
a note,  secured by a third priority deed of trust on the land, with a remaining
principal balance as of December 31, 1997 of approximately  $93,000 at 9% annual
interest  payable at maturity in December 1998 per a verbal  agreement  with the
spokesman for the lending group.

         Revolving Credit Facility.  WestAmerica Bank of Santa Rosa,  California
has provided a $600,000 maximum revolving line of credit with an advance rate of
80% of the qualified accounts receivable and 25% of the inventory at an interest
rate of the bank's index rate plus 1.5% payable monthly,  maturing May 31, 1998.
To the extent that the loan is not extended or  refinanced,  the Company will be
required to repay the loan. Failure to find a lender to refinance the loan could
have a  material adverse effect on the Company's business,  financial condition,
and results of operations.

         Keg  Management  Arrangement.  The  Company  has  entered  into  a  keg
management  agreement with MicroStar Keg Management LLC. Under this arrangement,
MicroStar  provides the Company with half-barrel kegs for which the Company pays
a filling fee. Distributors return the kegs to MicroStar instead of the Company.
MicroStar  then  supplies the Company with  additional  kegs.  If the  agreement
terminates,  the Company is  required to

                                      -11-
<PAGE>

purchase a certain  number of kegs from  MicroStar.  The Company would  probably
finance the purchase through debt or lease financing, if available.

         The  Company's  ratio of  current  assets  to  current  liabilities  on
December  31,  1997 was 0.83 to 1.0 and its ratio of assets to  liabilities  was
2.83 to 1.0.

Impact of Expansion on Cash Flow.

         Mendocino  Brewing  must  make  timely  payment  of its debt and  lease
commitment to continue in operation.  Increased  capacity has placed  additional
demands on the Company's working capital to pay the cost of additional sales and
marketing activities and staff,  production personnel,  and administrative staff
and to fund  increased  purchases of supplies.  The Company has been required to
incur some or all of these costs  before the Company  can realize  revenue  from
increased  sales.  Working  capital  for  day to  day  business  operations  had
historically been provided primarily through operations. 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.  The investment  agreement with UBA
provided  approximately $700,000 in working capital. In addition, UBA has agreed
to provide funding for the working capital  requirements of the Saratoga Springs
brewery in an amount not to exceed $1 million  until  October  24, 1999 or until
the brewery's operations are profitable, whichever comes first.


Item 7.  Financial Statements.

         The information required by this item is set forth at Pages F-1 through
F-18 to this Report.


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

         None.


                                    PART III

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

         The information required by this item is incorporated by reference from
the Company's  definitive proxy statement to be filed pursuant to Regulation 14A
no later than April 30, 1998.


Item 10.  Executive Compensation.

         The information required by this item is incorporated by reference from
the Company's  definitive proxy statement to be filed pursuant to Regulation 14A
no later than April 30, 1998.


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


         The information required by this item is incorporated by reference from
the Company's  definitive proxy statement to be filed pursuant to Regulation 14A
no later than April 30, 1998.

                                      -12-
<PAGE>

Item 12.  Certain Relationships and Related Transactions.


         The information required by this item is incorporated by reference from
the Company's  definitive proxy statement to be filed pursuant to Regulation 14A
no later than April 30, 1998.

<TABLE>

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

<CAPTION>

Exhibit
Number               Description of Document
-------              -------------------------------
<S>            <C>
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 3.2.)

10.1           (A)   Mendocino Brewing Company Profit Sharing Plan.

10.2           (A)   1994 Stock Option Plan (previously filed as Exhibit 99.6).

10.3           (M)   Employment Agreement with H. Michael Laybourn.

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

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

10.6           (A)   Sales Contract between the Company and John I. Hass, Inc.

10.7           (F)   Liquid Sediment Removal Services Agreement with Cold Creek Compost, Inc.

10.8           (A)   Lease Agreement between the Company and Kohn Properties.

10.9           (C)   Commercial  Real  Estate  Purchase  Contract  and Receipt  for  Deposit  (previously  filed as
                     Exhibit 19.2).

10.10          (D)   Installment Note between Ukiah  Redevelopment  Agency and Langley et al.  (previously filed as
                     Exhibit 19.5).

10.11          (F)   Promissory Note for $76,230 in favor of Langley et al.

10.12          (G)   Agreement to modify note and deed of trust dated June 6, 1995 with Langley, et al.

10.13          (G)   Agreement to modify note dated June 6, 1995 with  Langley, et al.

10.14          (G)   Amendment to installment note payable to Langley, et al.

10.15          (N)   Commercial Lease Between Stewart's Ice Cream Company, Inc. and Releta Brewing Company LLC.

10.16          (M)   Agreement  between United Breweries of America,  Inc. and Releta Brewing Company LLC regarding
                     payment of certain liens.

10.17          (K)+  Keg Management Agreement with MicroStar Keg Management LLC.

10.18          (E)   Agreement to  Implement  Condition  of Approval  No. 37 of the Site  Development  Permit 95-19
                     with the City of Ukiah, California (previously filed as Exhibit 19.6).

10.19          (G)   Manufacturing Business Expansion and Relocation Agreement with the City of Ukiah.

10.20          (G)   Manufacturing  Business  Expansion  and  Relocation  Agreement  with the  Ukiah  Redevelopment
                     Agency.

                                                          -13-

<PAGE>




Exhibit
Number               Description of Document
-------              -------------------------------
10.21                $2,700,000 Note in favor of the Savings Bank of Mendocino County.

10.22                Hazardous Substances Certificate and Indemnity with the Savings Bank of Mendocino County.

10.23                Business Loan Agreement with WestAmerica Bank.

10.24                $600,000 Note in favor of the WestAmerica Bank.

10.25          (J)   Equipment Lease with FINOVA Capital Corporation.

10.26          (J)   Tri-Election Rider to Equipment Lease with FINOVA Capital Corporation.

10.27          (J)   Master Lease Schedule with FINOVA Capital Corporation.

10.28          (L)   Investment Agreement with United Breweries of America, Inc.

10.29          (L)   Shareholders'  Agreement  Among the  Company,  United  Breweries  of  America,  Inc.,  Michael
                     Laybourn, Norman Franks, Michael Lovett, John Scahill, and Don Barkley

10.30          (L)   Registration  Rights Agreement Among the Company,  United Breweries of America,  Inc., Michael
                     Laybourn, Norman Franks, Michael Lovett, John Scahill, and Don Barkley

27             Financial Data Schedule
<FN>
--------------------------------
               (A)   Incorporated  by reference from the Company's  Registration
                     Statement dated June 15, 1994, as amended, previously filed
                     with the Commission, Registration No. 33-78390-LA.

               (B)   Incorporated  by referenced  from the  Company's  Report on
                     Form 10-KSB for the annual  period ended  December 31, 1994
                     previously filed with the Commission.

               (C)   Incorporated  by referenced  from the  Company's  Report on
                     Form 10-QSB for the  quarterly  period ended March 31, 1995
                     previously filed with the Commission.

               (D)   Incorporated  by referenced  from the  Company's  Report on
                     Form 10-QSB for the  quarterly  period  ended June 30, 1995
                     previously filed with the Commission.

               (E)   Incorporated  by referenced  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 referenced  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 referenced  from the  Company's  Report on
                     Form 10-QSB for the  quarterly  period  ended June 30, 1996
                     previously filed with the Commission.

               (H)   Incorporated  by referenced  from the  Company's  Report on
                     Form 10-QSB/A No. 1 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. 333-15673.

               (K)   Incorporated  by referenced  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.

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

</FN>
</TABLE>
                                      -14-

<PAGE>


The Registrant filed a report on Form 8-K on November 5, 1997 (amended  November
18, 1997) relating to the Investment  Agreement with UBA and the  acquisition of
Ten Springs  Brewery.  The Report  contained  a  description  of the  Investment
Agreement  with UBA  responsive  to Item 1 of Form 8-K  (Changes  of  Control of
Registrant)  and a description of the  acquisition of Ten Springs Brewery by way
of  acquisition  of the  outstanding  interests in Releta  Brewing  Company LLC,
responsive to Item 2 of form 8-K  (Acquisition  or  Disposition  of Assets).  No
financial statements were filed.


                                      -15-

<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 __,  1998

     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 __,  1998


                         By:     /s/ H. Michael Laybourn
                             ---------------------------------------------------
                             H. Michael Laybourn, President and Director
                         Date: March __,  1998


                         By:     /s/ Yashpal Singh
                             ---------------------------------------------------
                             Yashpal Singh, Chief Operating Officer and Director
                         Date: March __,  1998


                         By:     /s/ Jerome G. Merchant
                             ---------------------------------------------------
                             Jerome G. Merchant, Chief Financial Officer and
                                 Director
                         Date: March __,  1998


                         By:     /s/ P.A. Murali
                             ---------------------------------------------------
                             P.A. Murali, Controller
                         Date: March __,  1998


                                      -16-
<PAGE>


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






                        MENDOCINO BREWING COMPANY, INC.,
                                 AND SUBSIDIARY

                          INDEPENDENT AUDITOR'S REPORT
                                       AND
                        CONSOLIDATED FINANCIAL STATEMENTS

                           DECEMBER 31, 1997 AND 1996






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

<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., and subsidiary as of December 31, 1997 and 1996, and the
related  consolidated  statements of operations,  stockholders'  equity and cash
flows for each of the two years ended  December  31,  1997.  These  consolidated
financial  statements are the  responsibility of the Company's  management.  Our
responsibility  is  to  express  an  opinion  on  these  consolidated  financial
statements based on our audits.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable  assurance about whether the  consolidated  financial  statements are
free of material  misstatement.  An audit includes  examining,  on a test basis,
evidence  supporting the amounts and disclosures in the  consolidated  financial
statements.  An audit also includes assessing the accounting principles used and
significant  estimates  made by  management,  as well as evaluating  the overall
financial  statement  presentation.   We  believe  that  our  audits  provide  a
reasonable basis for our opinion.

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects,  the consolidated financial position of Mendocino Brewing
Company,  Inc., and subsidiary as of December 31, 1997 and 1996, and the results
of its  operations  and its cash flows for each of the two years ended  December
31, 1997, in conformity with generally accepted accounting principles.


/s/ Moss Adams LLP

Santa Rosa, California
March 4, 1998

                                                                      Page F - 1
<PAGE>

                                 MENDOCINO BREWING COMPANY, INC., AND SUBSIDIARY
                                                     CONSOLIDATED BALANCE SHEETS
                                                      December 31, 1997 and 1996

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



                                     ASSETS

                                                           1997         1996
                                                       -----------   -----------
CURRENT ASSETS
     Cash                                              $   706,300   $   494,800
     Accounts receivable                                   329,700       317,400
     Inventories                                           544,100       380,500
     Prepaid expenses                                       42,600        58,600
     Refundable income taxes                               106,300        71,900
     Deferred income taxes                                  39,500        23,100
                                                       -----------   -----------

         Total current assets                            1,768,500     1,346,300
                                                       -----------   -----------

PROPERTY AND EQUIPMENT                                  15,642,500     9,270,300
                                                       -----------   -----------

OTHER ASSETS
     Deferred income taxes                                 573,400         4,500
     Deposits and other assets                              42,000       304,100
     Deferred stock offering costs                            --         202,000
     Label development costs, net of amortization             --          17,400
                                                       -----------   -----------

                                                           615,400       528,000
                                                       -----------   -----------

         Total assets                                  $18,026,400   $11,144,600
                                                       ===========   ===========


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

<PAGE>

                                 MENDOCINO BREWING COMPANY, INC., AND SUBSIDIARY
                                         CONSOLIDATED BALANCE SHEETS (Continued)
                                                      December 31, 1997 and 1996

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

<TABLE>
                      LIABILITIES AND STOCKHOLDERS' EQUITY
<CAPTION>
                                                                     1997            1996
                                                                 ------------    ------------
<S>                                                              <C>             <C>
CURRENT LIABILITIES
     Line of credit                                              $    600,000    $    600,000
     Accounts payable                                                 728,300         567,600
     Accounts payable-related party                                    80,200            --
     Accrued wages and related expense                                169,700         118,200
     Accrued construction costs                                           500         744,500
     Accrued liabilities                                              248,300          16,100
     Current maturities of long-term debt                             130,400       2,765,400
     Current maturities of obligation under capital lease             168,500         151,300
                                                                 ------------    ------------

             Total current liabilities                              2,125,900       4,963,100

LONG-TERM DEBT, less current maturities                             2,663,300            --

OBLIGATION UNDER CAPITAL LEASE, less
     current maturities                                             1,578,900       1,863,000

DEFERRED INCOME TAXES                                                    --            18,100
                                                                 ------------    ------------

             Total liabilities                                      6,368,100       6,844,200
                                                                 ------------    ------------

STOCKHOLDERS' EQUITY
     Preferred stock, Series A, no par value, with aggregate
         liquidation preference of $227,600; 227,600 shares
         authorized, issued and outstanding                           227,600         227,600
     Common stock, no par value; 20,000,000 shares authorized,
         4,463,385 and 2,322,222 shares issued and outstanding
         at December 31, 1997 and 1996, respectively               12,367,200       3,869,600
     Retained earnings (deficit)                                     (936,500)        203,200
                                                                 ------------    ------------

             Total stockholders' equity                            11,658,300       4,300,400
                                                                 ------------    ------------

             Total liabilities and stockholders' equity          $ 18,026,400    $ 11,144,600
                                                                 ============    ============
<FN>

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

                                 MENDOCINO BREWING COMPANY, INC., AND SUBSIDIARY
                                           CONSOLIDATED STATEMENTS OF OPERATIONS
                                          Years Ended December 31, 1997 and 1996
--------------------------------------------------------------------------------

                                                        1997            1996
                                                    -----------     -----------
SALES                                               $ 4,843,900     $ 4,004,700

LESS EXCISE TAXES                                       253,900         165,000
                                                    -----------     -----------

NET SALES                                             4,590,000       3,839,700

COST OF GOODS SOLD                                    3,312,100       1,909,700
                                                    -----------     -----------

GROSS PROFIT                                          1,277,900       1,930,000
                                                    -----------     -----------

OPERATING EXPENSES
     Retail operating                                   704,000         738,200
     Marketing                                          846,200         682,300
     General and administrative                       1,032,200         681,900
                                                    -----------     -----------

                                                      2,582,400       2,102,400
                                                    -----------     -----------

LOSS FROM OPERATIONS                                 (1,304,500)       (172,400)
                                                    -----------     -----------

OTHER INCOME (EXPENSE)
     Interest income                                      7,300          11,600
     Other expense                                     (149,500)        (41,200)
     Interest expense                                  (401,900)           --
                                                    -----------     -----------

                                                       (544,100)        (29,600)
                                                    -----------     -----------

LOSS BEFORE INCOME TAXES                             (1,848,600)       (202,000)

BENEFIT FROM  INCOME TAXES                             (708,900)        (78,200)
                                                    -----------     -----------

NET LOSS                                            $(1,139,700)    $  (123,800)
                                                    ===========     ===========

LOSS PER COMMON SHARE                               $     (0.40)    $     (0.05)
                                                    ===========     ===========

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING            2,870,478       2,322,222
                                                    ===========     ===========


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



<PAGE>
<TABLE>
                                 MENDOCINO BREWING COMPANY, INC., AND SUBSIDIARY
                                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                                          Years Ended December 31, 1997 and 1996

--------------------------------------------------------------------------------
<CAPTION>
                                              Series A
                                           Preferred Stock                 Common Stock
                                     ---------------------------    --------------------------     Retained         Total
                                        Shares         Amount         Shares         Amount        Earnings         Equity
                                     ------------   ------------   ------------   ------------   ------------    ------------

<S>                                       <C>       <C>               <C>         <C>            <C>             <C>
Balance, December 31, 1995                227,600   $    227,600      2,322,222   $  3,869,600   $    327,000    $  4,424,200

Net loss                                     --             --             --             --         (123,800)       (123,800)
                                     ------------   ------------   ------------   ------------   ------------    ------------

Balance, December 31, 1996                227,600        227,600      2,322,222      3,869,600        203,200       4,300,400

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

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

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

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

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

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

<FN>

The accompanying notes are an integral part of these financial statements.
--------------------------------------------------------------------------------
                                                                      Page F - 5
</FN>
</TABLE>
<PAGE>
<TABLE>
                                 MENDOCINO BREWING COMPANY, INC., AND SUBSIDIARY
                                           CONSOLIDATED STATEMENTS OF CASH FLOWS

--------------------------------------------------------------------------------
<CAPTION>
                                                                        1997          1996
                                                                    -----------    -----------
<S>                                                                 <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES
     Net loss                                                       $(1,139,700)   $  (123,800)
     Adjustments to reconcile net loss to net
         cash provided (used) by operating activities:
             Depreciation and amortization                              359,300         51,900
             Gain on sale of assets                                        --           (3,600)
             Deferred income taxes                                     (603,400)       (14,200)
             Stock issued for services                                   12,200           --
         Changes in:
             Accounts receivable                                        130,800        141,500
             Inventories                                                (78,400)      (124,300)
             Prepaid expenses                                            16,000        (11,500)
             Refundable income taxes                                    (34,400)       (71,900)
             Accounts payable - trade and related party                 240,900        461,900
             Accrued wages and related expense                           51,500        (11,600)
             Accrued liabilities                                        232,200         (6,200)
             Accrued profit sharing                                        --          (30,000)
             Income taxes payable                                          --          (34,200)
                                                                    -----------    -----------

                 Net cash (used) provided by operating activities      (813,000)       224,000
                                                                    -----------    -----------

CASH FLOWS FROM INVESTING ACTIVITIES
     Purchases of property, equipment and leasehold
         improvements                                                (1,922,800)    (4,817,500)
     Increase in other assets                                           (27,900)      (255,600)
     Proceeds from sale of fixed assets                                    --           10,300
                                                                    -----------    -----------

                 Net cash used by investing activities               (1,950,700)    (5,062,800)
                                                                    -----------    -----------

CASH FLOWS FROM FINANCING ACTIVITIES
     Net borrowings on line of credit                                      --          600,000
     Borrowings on long-term debt                                     1,097,200      2,502,800
     Principal payments on long-term debt                            (1,068,900)      (302,800)
     Reimbursement from obligation under capital lease                  147,400      1,523,800
     Payments on obligation under capital lease                        (143,900)       (57,900)
     Reduction in accrued construction costs                           (744,000)      (437,800)
     Proceeds from sale of common stock                               4,164,700           --
     Deferred stock offering costs                                     (477,300)      (190,600)
                                                                    -----------    -----------

                 Net cash provided by financing activities            2,975,200      3,637,500
                                                                    -----------    -----------

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                        211,500     (1,201,300)

CASH AND CASH EQUIVALENTS, beginning of year                            494,800      1,696,100
                                                                    -----------    -----------

CASH AND CASH EQUIVALENTS, end of year                              $   706,300    $   494,800
                                                                    ===========    ===========

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

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

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

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

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

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

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

Property  and  equipment  -  Property  and  equipment  are  stated  at cost  and
depreciated or amortized using  straight-line  and accelerated  methods over the
assets' estimated useful lives.  Capitalized  interest was $263,400 and $214,900
in 1997 and 1996, respectively.  Costs of maintenance and repairs are charged to
expense as incurred;  significant  renewals  and  betterments  are  capitalized.
Estimated useful lives are as follows:

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



Deferred  stock  offering costs - Deferred stock offering costs consist of legal
and other costs  incurred  as part of the  Company's  public  offering of common
stock.  In 1997,  the public stock offering was terminated and $164,600 of stock
offering  costs were offset  against the same amount of proceeds  from the stock
sale. The balance of stock offering costs of $140,500 was expensed.

Deposits  and other  assets - Deposits  and other  assets  consist  primarily of
prepaid  interest on the financing of the Ukiah  brewery.  Amounts are amortized
using the straight line method over the life of the mortgage.

Concentration of credit risks - Financial  instruments that potentially  subject
the  Company  to  credit  risk  consist  principally  of trade  receivables  and
interest-bearing   deposits   in   excess   of  FDIC   limits.   The   Company's
interest-bearing   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., AND SUBSIDIARY
                          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.  Income taxes are
described further in Note 12.

Basic loss per share - In 1997,  the  Company  adopted  Statement  of  Financial
Accounting  Standards  ("SFAS") No. 128, "Earnings per Share." In February 1998,
the Securities and Exchange  Commission  ("SEC") staff released Staff Accounting
Bulleting  ("SAB")  No. 98,  "Computations  of  Earnings  per Share." SAB No. 98
revises prior SEC guidance concerning presentation of loss per share information
for companies going public,  and requires all companies to present  earnings per
share for all periods for which  income  statement  information  is presented in
accordance  with SFAS No. 128.  Basic earnings per share were computed using the
weighted average number of common shares outstanding. Diluted loss per share was
computed using the weighted average number of common shares outstanding.  Common
stock  equivalents  associated with 12,500 stock options,  at a weighted average
price per share of $8.80,  have been excluded from the weighted  average  shares
outstanding since the effect of these potentially  dilutive  securities would be
antidilutive.

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

Advertising - Advertising costs are expensed as incurred.  Advertising  expenses
for the years ended  December  31, 1997 and 1996,  were  $153,900  and  $81,500,
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:

Cash and cash equivalents: The carrying amount reported in the balance sheet for
cash and cash equivalents approximates fair value.

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.

Accrued  construction  costs - Accrued  construction  costs  consist of expenses
incurred for the construction of the new brewery including equipment.

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

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

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

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

New  accounting  pronouncements  - In June 1997,  the FASB  issued SFAS No. 130,
"Reporting  Comprehensive  Income,"  which  establishes  standards for reporting
comprehensive income and its components (revenues,  expenses,  gains and losses)
in  financial  statements.   SFAS  No.  130  requires  classification  of  other
comprehensive  income  in  a  financial  statement,   and  the  display  of  the
accumulated  balance of other  comprehensive  income  separately  from  retained
earnings and additional  paid-in  capital.  SFAS No. 130 is effective for fiscal
years beginning after December 15, 1997. The Company believes this pronouncement
will not have a material effect on its financial statements.

In June 1997, the FASB also issued SFAS No. 131,  "Disclosures about Segments of
an Enterprise and Related Information." This pronouncement established standards
for  reporting   information  about  operating   segments  in  annual  financial
statements  and requires that  enterprises  report  selected  information  about
operating  segments in interim financial  reports to shareholders.  SFAS No. 131
also establishes  standards for related disclosures about products and services,
geographic areas and major customers. SFAS No. 131 is effective for fiscal years
beginning after December 15, 1997,  although earlier  application is encouraged.
The Company believes this  pronouncement  will not have a material effect on its
financial statements.

Reclassifications  -  Certain  reclassifications  have  been  made  to the  1996
financial statements to conform to the 1997 presentation.


NOTE  2 -     INVENTORIES

                                  1997                    1996
                           --------------------    --------------------

Raw Materials                        $ 165,000               $ 121,800
Work-in-process                        101,700                  81,700
Finished goods                         210,800                 139,800
Merchandise                             66,600                  37,200
                           --------------------    --------------------

                                     $ 544,100               $ 380,500
                           ====================    ====================

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

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

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

NOTE  3 -     PROPERTY AND EQUIPMENT

                                                          1997          1996
                                                      -----------    -----------

Buildings                                             $ 7,711,100    $      --
Machinery and equipment                                 5,070,300        557,500
Equipment under capital lease                           1,912,300           --
Land                                                      810,900        810,900
Equipment in progress                                     177,700      2,573,600
Leasehold improvements                                    771,800        129,000
Furniture and fixtures                                     70,400         19,800
Construction in progress                                     --        5,719,600
                                                      -----------    -----------

                                                       16,524,500      9,810,400
Less accumulated depreciation and amortization            882,000        540,100
                                                      -----------    -----------

                                                      $15,642,500    $ 9,270,300
                                                      ===========    ===========
NOTE  4 -     LINE OF CREDIT

The Company has  available a $600,000 line of credit with interest at the bank's
index rate plus 1.5%. The bank's commitment under the line of credit matures May
31, 1998. The agreement is secured by accounts receivable and inventory.


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

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

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

<TABLE>
NOTE  5 -     LONG-TERM DEBT
<CAPTION>
                                                                            1997         1996
                                                                         ----------   ----------
<S>                                                                      <C>          <C>
Note payable to bank, in monthly installments of $24,400, including
     interest at the Treasury Constant Maturity Index plus 4.17%,
     currently 5.83%, maturing December 2012, with a balloon
     payment of $1,872,300, secured by substantially all the assets of
     the Company                                                         $2,700,000   $     --

Note payable (construction loan) to bank, with interest at the
     banks interest rate plus 2%; matured January 1998;
     the note was converted to permanent financing                             --      2,202,800

Note payable to an individual, due December 31, 1998, including
     interest at 9%; secured by real property and subordinated to
     bank debt                                                               93,700      262,600

Note payable to contractor, paid in full November 1997                         --        300,000
                                                                         ----------   ----------

                                                                          2,793,700    2,765,400
Less current maturities                                                     130,400    2,765,400
                                                                         ----------   ----------

                                                                         $2,663,300   $     --
                                                                         ==========   ==========
</TABLE>
Maturities of long-term debt for succeeding years are as follows:

                                    Year Ending December 31,
                                    ------------------------

                                              1998               $ 130,400
                                              1999                  28,100
                                              2000                  31,100
                                              2001                  34,400
                                              2002                  38,000
                                           Thereafter            2,531,700
                                                                 ----------

                                                                $2,793,700
                                                                 =========


--------------------------------------------------------------------------------
                                                                     Page F - 11
<PAGE>
                                 MENDOCINO BREWING COMPANY, INC., AND SUBSIDIARY
                          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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


NOTE  6 -     OBLIGATION UNDER CAPITAL LEASE

During 1996, the Company entered into a capital lease agreement with a financial
institution for brewing  equipment.  The agreement is secured by the new brewery
equipment.

Future minimum lease payments for equipment  under this capital lease  agreement
are as follows:

                                    Year Ending December 31,
                                    ------------------------

                                              1998               $ 330,100
                                              1999                 330,100
                                              2000                 330,100
                                              2001                 329,800
                                              2002                 325,200
                                           Thereafter              776,100
                                                              -------------

                                                                 2,421,400
Less amounts representing interest                                 674,000
                                                              -------------

Present value of minimum lease payments                          1,747,400
Less current maturities                                            168,500
                                                              -------------

                                                               $ 1,578,900
                                                              =============

NOTE  7 -     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, 1997 and 1996.

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

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

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


NOTE  8 -     COMMITMENTS

The Company  leases its  Hopland,  California  facility  under a  noncancellable
operating lease expiring August 2004. The monthly lease payment is $2,100, to be
adjusted  annually by increases in the Consumer  Price Index,  as defined in the
lease  agreement.  The  Company  leases  the land on which the New York  brewery
operates under a noncancellable operating lease expiring October 2002. The lease
contains options,  which management intends to exercise, to extend the lease for
three additional 5 year periods and contains an option to purchase the property.
The monthly  lease  payment is $8,800,  to be adjusted  annually by increases in
Consumer  Price  Index,  as defined in the lease  agreement.  Additionally,  the
Company leases certain  equipment and vehicles  under  noncancellable  operating
leases which  expires  through  March 1999.  Total rent expense was $142,100 and
$50,700 for the years ended  December  31, 1997 and 1996,  respectively.  Future
minimum lease payments are as follows:

                                    Year Ending December 31,
                                    ------------------------

                                              1998             $ 130,200
                                              1999               126,900
                                              2000               125,800
                                              2001               125,800
                                              2002               109,100
                                           Thereafter             51,600
                                                              -----------

                                                               $ 669,400
                                                              ===========


Employment  agreements - Five key  employees  have  employment  agreements  that
provide,  in part,  severance  benefits  equal to the remaining  amount of their
annual base salary.  The aggregate annual base salary for the five key employees
is $374,400.  In January and February of 1998,  two employees  terminated  their
employment with the Company.

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 filling fee.
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 a certain number of kegs from
MicroStar.


NOTE  9 -     MAJOR CUSTOMERS

Sales to the top five customers totaled  $2,192,000 and $1,788,900 for the years
ended  December  31,  1997 and 1996,  respectively  representing  55% and 58% of
brewing operation sales.


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

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

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


NOTE 10 -     STOCKHOLDERS' EQUITY

Common Stock

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

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

Preferred Stock

The Company has authorized 2,000,000 shares of preferred stock, of which 227,600
have  been  designated  as  Series  A. At the time of the  incorporation  of the
partnership,  the Company  issued  227,600  shares of  non-voting,  no-par value
Series A Preferred  Stock in exchange for  partnership  assets.  The partnership
distributed  the Series A  Preferred  Stock to 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.


NOTE 11 -     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 then 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.  As of December 31, 1996,  no options had
been granted,  exercised,  or canceled under the Plan.  During 1997, the Company
issued 70,000 options to five key employees under the terms of their  employment
contracts.  As a part of the  investment  agreement  with  United  Breweries  of
America,  these five employees signed new employment agreements which superseded
the old  agreements  and canceled the options.  Also,  during 1997,  the Company
issued  12,500  options to an officer for his  personal  guarantee  of debt. The
personal guarantee has since been removed.

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

<PAGE>

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

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


NOTE 11 -     STOCK OPTION PLAN (Continued)

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

                                                   1997             1996
                                              --------------    -------------

Net earnings - as reported                    $ (1,139,700)      $ (123,800)
Net earnings - pro forma                      $ (1,216,300)      $ (123,800)

Earnings per share - as reported              $      (0.40)      $    (0.05)
Earnings per share - pro forma                $      (0.42)      $    (0.05)


The  fair  value  of  each  option  is  estimated  on date of  grant  using  the
Black-Scholes   option-pricing   model  with  the   following   weighted-average
assumptions used for grants in 1997. There were no options granted in 1996.

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

Dividends                                                      None
Expected volatility                                            100%
Risk free interest rate                                       5.35%
Expected life                                              5 years


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

The following table summarizes common stock option activity:

                                   Shares Under         Weighted-Average
                                      Option            Exercise Price
                                -----------------    -----------------------

Balance, December 31, 1996                     -       $           -
Granted                                   82,500                   8.95
Exercised                                      -                   -
Canceled                                 (70,000)                  8.97
                                -----------------

Balance, December 31, 1997                12,500       $           8.80
                                =================


--------------------------------------------------------------------------------
                                                                     Page F - 15

<PAGE>

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

--------------------------------------------------------------------------------
<TABLE>

NOTE 12 -     INCOME TAXES
<CAPTION>
                                                                                     1997          1996
                                                                                   ---------    ---------
<S>                                                                                <C>          <C>
Current
     Federal                                                                       $    --      $    --
     State                                                                               800          800
     Benefit of net operating loss carryback                                        (106,300)     (64,800)
                                                                                   ---------    ---------

                                                                                    (105,500)     (64,000)
                                                                                   ---------    ---------
Deferred
     Current                                                                         (16,400)      (7,600)
     Non-current                                                                    (587,000)      (6,600)
                                                                                   ---------    ---------

                                                                                    (603,400)     (14,200)
                                                                                   ---------    ---------

                                                                                   $(708,900)   $ (78,200)
                                                                                   =========    =========


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:

                                                                                     1997          1996
                                                                                   ---------    ---------

Income tax provision (benefit) at 34%                                              $(628,500)   $ (68,700)
Adjustment due to lower federal rates                                                   --          5,000
State taxes                                                                              800          800
State tax benefit of net operating loss carry forward                                (81,000)      (7,400)
Recognition of future tax (deductions)                                                  (200)      (7,900)
                                                                                   ---------    ---------

                                                                                   $(708,900)   $ (78,200)
                                                                                   =========    =========
</TABLE>

--------------------------------------------------------------------------------
                                                                     Page F - 16
<PAGE>
                                 MENDOCINO BREWING COMPANY, INC., AND SUBSIDIARY
                          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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


NOTE 12 -     INCOME TAXES (Continued)

Temporary  differences and carryforwards  which give rise to deferred tax assets
and liabilities are as follows:
                                                          1997           1996
                                                       ---------      ---------

Inventories                                            $   4,000      $   3,200
Accruals                                                  38,500         21,700
Other                                                     (3,000)        (1,800)
                                                       ---------      ---------

Current deferred tax asset                             $  39,500      $  23,100
                                                       =========      =========

Depreciation and amortization                          $ (18,600)     $  (2,900)
Investment tax credit carryforward                        43,500           --
Benefit of net operating loss carryforward               593,500          7,400
Other                                                    (45,000)          --
                                                       ---------      ---------

Non-current deferred tax asset                         $ 573,400      $   4,500
                                                       =========      =========

Depreciation and amortization                          $    --        $  25,300
Other                                                       --           (7,200)
                                                       ---------      ---------

Non-current deferred tax liability                     $    --        $  18,100
                                                       =========      =========

At December 31, 1997, the Company has available for  carryforward  approximately
$1,500,000  and $920,000 of federal and  California  net operating  losses.  The
federal net operating  losses will expire in 2012.  The California net operating
losses  expire  through  2002.  The  Company  also  has  $43,000  of  California
Manufactures Investment Tax Credits that can be carried forward to reduce future
taxes and expire in 2005. The benefit from these loss  carryforwards and credits
has been recorded,  resulting in a deferred tax asset. A valuation  allowance is
not provided since the Company believes it is more likely than not that the loss
carryforwards will be fully utilized.

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

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

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


NOTE 13 -     SEGMENT INFORMATION
<TABLE>

The  Company's   business   segments  are  brewing   operations   and  a  retail
establishment  known as the  Hopland  Brewery.  A summary of each  segment is as
follows:
<CAPTION>
                                                Year Ending December 31, 1997
                                ------------------------------------------------------------
                                  Brewing          Hopland       Corporate
                                 Operations        Brewery       and other         Total
                                -------------   -------------   ------------   -------------
<S>                             <C>             <C>             <C>            <C>
Sales                           $  3,856,300    $    987,600    $       --     $  4,843,900
Operating profit (loss)             (261,900)        (10,400)           --         (272,300)
Identifiable assets               16,027,200          98,700       1,900,500     18,026,400
Depreciation and amortization        340,100           6,800          12,400        359,300
Capital expenditures               1,891,800            --            31,000      1,922,800

                                                Year Ending December 31, 1996
                                ------------------------------------------------------------
                                  Brewing          Hopland       Corporate
                                 Operations        Brewery       and other         Total
                                -------------   -------------   ------------   -------------

Sales                           $  3,067,300    $    937,400    $       --     $  4,004,700
Operating profit (loss)              591,100         (84,600)           --          509,500
Identifiable assets                9,873,600          97,900       1,173,100     11,144,600
Depreciation and amortization         26,200           7,800          17,900         51,900
Capital expenditures               5,339,800            --            19,500      5,359,300

</TABLE>

NOTE 14 -     STATEMENT OF CASH FLOWS

Supplemental cash flow information includes the following:

                                                          1997           1996
                                                       ----------     ----------
Cash paid during the year for:
     Interest                                          $  644,400     $  180,400
     Income taxes                                      $      800     $   60,700

Non-cash investing and financing activities:
     Capital lease for equipment                       $   19,500     $  548,500
     Deposit offset against long-term debt             $  290,000     $     --
     Issuance of stock for stock in Releta             $5,000,000     $     --


--------------------------------------------------------------------------------
                                                                     Page F - 18