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                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K/A
                                 AMENDMENT NO. 1


(Mark One)

|X|   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
      ACT OF 1934

                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004

                                       or

| |   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
      EXCHANGE ACT OF 1934

               For the transition period from ________ to ________

                         COMMISSION FILE NUMBER 1-13636

                         MENDOCINO BREWING COMPANY, INC.
             (Exact name of Registrant as Specified in its Charter)


             CALIFORNIA                                      68-0318293
    (State or Other Jurisdiction of                        (IRS Employer
    Incorporation or Organization)                       Identification No.)


                       1601 AIRPORT ROAD, UKIAH, CA 95482
                    (Address of principal executive offices)


                                 (707) 463-6610
              (Registrant's Telephone Number, Including Area Code)

           SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
                                      NONE

           SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
                           COMMON STOCK, NO PAR VALUE

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

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

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

        The aggregate market value of the Common Stock held by non-affiliates of
the registrant (based on the average of the closing bid and asked prices for
such stock, as reported by the Nasdaq OTC Bulletin Board on June 30, 2004) was
$554,327.95.

        The number of shares of the registrant's Common Stock outstanding as of
March 30, 2005 was 11,473,914.

                       DOCUMENTS INCORPORATED BY REFERENCE
                                      None

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                         MENDOCINO BREWING COMPANY, INC.

                           ANNUAL REPORT ON FORM 10-K

                                TABLE OF CONTENTS

                                                                         PAGE
                                     PART I.

ITEM 1.      BUSINESS                                                      1
ITEM 2.      PROPERTIES                                                   10
ITEM 3.      LEGAL PROCEEDINGS                                            11
ITEM 4.      SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS          11
ITEM 4A.     EXECUTIVE OFFICERS OF THE COMPANY

                                    PART II.

ITEM 5.      MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
               STOCKHOLDER MATTERS                                        12
ITEM 6.      SELECTED FINANCIAL DATA                                      15
ITEM 7.      MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
               CONDITION AND RESULTS OF OPERATIONS                        15
ITEM 7A.     QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
               RISK                                                       27
ITEM 8.      FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                  27
ITEM 9.      CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
               ACCOUNTING AND FINANCIAL DISCLOSURES                       28
ITEM 9A.     CONTROLS AND PROCEDURES                                      28

                                    PART III.

ITEM 10.     DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT           29
ITEM 11.     EXECUTIVE COMPENSATION                                       31
ITEM 12.     SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
               MANAGEMENT AND RELATED STOCKHOLDERS MATTERS                33
ITEM 13.     CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS               35
ITEM 14.     PRINCIPAL ACCOUNTING FEES AND SERVICES                       37

                                    PART IV.

ITEM 15.     EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
               FORM 8-K                                                   38

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Explanatory Note

This Form 10-K/A amends and restates Mendocino Brewing Company, Inc.'s (the
"Company") Annual Report on Form 10-K for the year ended December 31, 2004,
filed May 13, 2005 (the "Original Annual Report"). The Company has restated its
previously issued consolidated statement of operations and comprehensive income
as of and for the year ended December 31, 2004 to reflect the correct
classification of a legal dispute settlement expense as an other (non-operating)
expense. Since the date of filing of the Original Annual Report, the Company has
determined that this item should be classified as an operating expense and has
modified its statement of operations accordingly. This reclassification does not
affect the net income for the year 2004. The Company also updated Item 9A,
Controls and Procedures to ensure that it encompasses the entire definition of
disclosure controls and procedures set forth in Exchange Act Rules 13a-15(e) and
15d-15e.

The Items of the Original Annual Report which are amended and restated are as
follows: Item 1 Financial Statements - (including the consolidated statement of
operations and comprehensive income, Notes 16 and 17), Item 7 Management's
Discussion and Analysis of Financial Condition and Results of Operations, and
Item 9A Controls and Procedures. Further, this Form 10-K/A contains new Exhibits
31.1 and 31.2 dated the date of the filing of this Form 10-K/A.

The remaining Items contained within this Form 10-K/A consist of all other Items
originally contained in the Original Annual Report. This Form 10-K/A does not
reflect events occurring after the filing of the Original Annual Report, nor
modify or update those disclosures in any way other than as required to reflect
the effects of the restatement.

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                           FORWARD-LOOKING INFORMATION

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

                                     PART I

ITEM 1.    BUSINESS

OVERVIEW

        Mendocino Brewing Company, Inc., a California corporation, was founded
in 1983. It was 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 it has been recognized for its innovations in the
brewpub concept, its craft brew style and its distinctive labels. (In this
Annual Report, the term "the Company" and its variants is generally used to
refer to Mendocino Brewing Company, Inc. and its subsidiaries, while the term
"MBC" is used to refer to Mendocino Brewing Company, Inc. as an individual
entity.)

        The Company operates in two market and geographic areas, domestic (the
United States) and European (including Austria, Belgium, Denmark, Ireland,
Italy, the Netherlands, France, Finland, Germany, Greece, Iceland,
Liechtenstein, Luxembourg, Norway, Portugal, Spain, Sweden, Switzerland, and the
United Kingdom as well as Canada (the "European Territory").

        The Company's domestic operations consist primarily of brewing and
marketing a variety of proprietary craft beers, including among others Red Tail
Ale, Blue Heron Pale Ale, Black Hawk Stout, Eye of the Hawk Select Ale, White
Hawk Original IPA, and Raptor Red Lager, and a licensed international specialty
beer, Kingfisher Premium Lager. For domestic distribution, the Company brews its
brands in its own facilities, which are located in Ukiah, California and
Saratoga Springs, New York, and these beers are distributed in 36 states and the
District of Columbia.

        The Company's European operations, which are conducted through its
wholly-owned subsidiary United Breweries International (U.K.) Limited ("UBI")
and UBI's own subsidiary UBSN, Ltd. ("UBSN"), consist primarily of the marketing
and distribution of Kingfisher Premium Lager throughout the European Territory,
and to a lesser extent the marketing and distribution of Sun Lik Chinese Lager
in the U.K., in both cases through ethnic restaurants (Indian for Kingfisher
Premium Lager and Chinese for Sun Lik), chain retail grocers, liquor stores, and
other retail outlets (such as convenience stores). The Company holds the license
to brew and distribute Kingfisher Premium Lager from United Breweries Limited
("UB Limited"), an Indian corporation. The Company's Chairman of the Board, Dr.
Vijay Mallya, is also the Chairman of the Board of UB Limited.


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        Shepherd Neame, Ltd. ("Shepherd Neame"), a prominent English brewer,
holds the license to brew and distribute Sun Lik (in the U.K. only) from an
unrelated entity, the San Miguel Corporation; and in September 2001 Shepherd
Neame granted UBSN a sublicense to distribute this beer (also in the U.K. only).
All of the Company's beers sold in the European market and Canada are brewed in
England under contract by Shepherd Neame. Although UBSN is the sole distributor
of Kingfisher Premium Lager in the U.K., Ireland, continental Europe, and
Canada, and of Sun Lik in the U.K., it does not physically distribute its
products to its ultimate trade customers, relying instead on specialist
restaurant trade distributors in the U.K. and Shepherd Neame, acting as UBSN's
agent, on a commission basis, for the supermarket and liquor and convenience
store trade.

COMPANY BACKGROUND

        MBC first bottled its flagship brand, Red Tail Ale, in December 1983,
and made its initial public offering in February 1995. The Company completed
construction of its brewery in Ukiah, California in May 1997. This facility,
which has a current annual capacity of 60,000 brewers' barrels ("bbl."), was
designed to enable the Company's production to be expanded to 200,000 bbl. per
year with the addition of necessary equipment.

        The Company's New York subsidiary, Releta Brewing Company, LLC, d/b/a
Ten Springs Brewery ("Releta"), which is located in Saratoga Springs, New York,
commenced production in its leased facilities in February 1998, with an initial
capacity of 60,000 bbl. per year expandable to 150,000 bbl. per year.

        In July 1998, the Company purchased certain of the assets of Carmel
Brewing Company, Inc., a California corporation ("Carmel Brewing"), such as
trademarks, trade names, and other brand related assets as well as certain point
of sales and brewing ingredient inventory.

        On August 13, 2001, the Company acquired United Breweries International
(U.K.) Limited ("UBI") together with UBI's own subsidiary UBSN, Ltd. ("UBSN"),
from Inversiones Mirabel, S. A., a Panamanian corporation ("Inversiones"), in
exchange for MBC stock valued at approximately $5,500,000 (the "UBI
Acquisition"). The UBI Acquisition was considered to be a related-party
transaction because at the time Inversiones was owned by a trust in which the
Company's Chairman, Dr. Mallya, may be deemed to be a beneficial owner. The
Company operates UBI and UBSN primarily in the marketing, sale, and distribution
of Kingfisher Premium Lager in the Company's European Territory, and in the
marketing and distribution of Sun Lik Chinese Lager in the U.K. Kingfisher
Premium Lager, which is the flagship brand of UB Limited, an India-based brewing
and distribution company, is a recognized international brand, with wide
distribution outside the Company's market areas.

        As a result of the UBI Acquisition, the Company now holds, in addition
to UBI and UBSN, the United States brewing and distribution rights for
Kingfisher Premium Lager. The Company brews Kingfisher Premium Lager for U.S.
distribution to the United States in both of its U.S. brewing facilities --
Saratoga Springs and Ukiah. The Company has engaged Shepherd Neame to brew
Kingfisher Premium Lager for distribution in European Territory, and Sun Lik
Chinese Lager for distribution in the U.K. only. (The Company does not brew or
distribute Sun Lik Chinese Lager outside the United Kingdom.)

INDUSTRY OVERVIEW

        DOMESTIC MARKET

        The U.S. domestic beer market falls into a number of market categories,
including among others low-priced, premium, super premium, lite, import, and
specialty/craft beers. Domestically, the Company competes in the specialty/craft
category, which is estimated to be in the range of 6 million barrels per year
and comprised approximately 3% of total U.S. beer sales in both 2004 and 2003.
Craft beers are typically

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all malt, characterized by their full flavor, and are usually produced using
methods similar to those of traditional European brews. The Company refers to
the United States as its "Domestic Territory."

        EUROPEAN TERRITORY

        The Company's European Territory includes Austria, Belgium, Denmark,
Ireland, Italy, the Netherlands, France, Finland, Germany, Greece, Iceland,
Liechtenstein, Luxembourg, Norway, Portugal, Spain, Sweden, Switzerland, and the
United Kingdom as well as Canada, although during both 2004 and 2003 Company
sales in the United Kingdom constituted approximately 91% of all the Company's
sales in the European Territory.

        The category in which the Company competes in Europe is primarily the
Indian restaurant niche, although the Company does distribute its beers through
other licensed premises and through other retail outlets such as supermarkets,
liquor stores, and licensed shops and convenience stores. In the U.K., this
market niche is estimated to be in the range of 150,000 to 175,000 bbl. per
year. Management believes that, for Europe as a whole, this market niche is
substantially larger. The Company offers two brands of beer in its European
Territory: Kingfisher Premium Lager (both within and outside the U.K.) and Sun
Lik Chinese Lager (in the U.K. only). With approximately 7,000 premises in the
U.K., the Indian restaurant niche is substantially larger than the equivalent
Chinese restaurant market, which currently includes only about 3,500 premises in
the U.K. The Company believes that the market share of Kingfisher Premium Lager
in this niche has remained stable at approximately 22% in this market niche over
the last three years.

        Both in the U.S. and in the European Territory, the rate at which the
sales in the craft and specialty categories grow will have a material affect on
the Company's business, financial condition, and results of operations. Actual
industry performance will depend on many factors that are outside the control of
the Company.

BUSINESS OF THE COMPANY

        SEGMENT INFORMATION

        Prior to 2001, the Company's business operations were exclusively
located in the United States, where it was divided into two segments,
manufacturing and distribution of beer, which accounted for the majority of the
Company's gross sales, and retail sales (primarily at the Company's Hopland,
California, tavern and merchandise store) which generally accounted for less
than 5% of annual gross sales (by revenue). With the Company's acquisition of
UBI and UBSN in August 2001, however, the Company gained a new business segment,
distribution of beer outside the United States, primarily in the U.K. and
Ireland, continental Europe, and Canada (the "European Territory"). This segment
accounted for 63% of the Company's gross sales during 2004 (as compared to 58%
in 2003), with the Company's United States operations, including manufacturing
and distribution of beer as well as retail sales accounting for the remainder.

        During both 2004 and 2003, food and merchandise retail sales
(substantially all of which took place at the Hopland tavern in Ukiah,
California) continued to decrease as a percentage of overall sales, amounting to
less than 1% in 2004 and less than 2% in 2003. With the closure of the
restaurant at Hopland, Management expects that retail sales will in the future
continue to represent an insignificant portion of overall sales. (See Note 16 to
"Notes to Financial Statements," below.)

        THE HOPLAND TAVERN ALE HOUSE AND MERCHANDISE STORE

        The historic Hopland tavern ale house and merchandise store is a
marketing tool for the Company's domestic market. Located on a 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.

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        Beverages served at the Hopland tavern include Red Tail Ale, Blue Heron
Pale Ale, Black Hawk Stout, Eye of the Hawk Select Ale, Peregrine Golden Ale,
White Hawk IPA, and a seasonal brew on tap, along with local wines and soft
drinks. The adjacent merchandise store sells the Company's brews and merchandise
such as hand-screened label T-shirts, posters, engraved glasses and mugs, logo
caps and other brewery-related gifts.

        In October 2003, the Company closed the restaurant located at the
Hopland property. Management decided to close the restaurant because the space
available for renewal at the end of the term of the current lease was limited,
and the restaurant has traditionally done less business during the winter
months. However, the Company continues to operate the tavern and merchandise
stores. There was no significant cost incurred by the Company in shutting down
the restaurant facility. Sales attributed to tavern and merchandise store were $
211,200, $423,500 and $511,400 for the years 2004, 2003 and 2002 respectively.

        PRODUCTS

        For distribution in the United States, the Company brews seven principal
ales, one wheat beer, three lagers, one stout and a root beer on a year-round
basis, and two seasonal ales, all of which are brewed at the Company's
proprietary facilities in Ukiah, California, and Saratoga Springs, New York.

        In the European Territory, the Company distributes only two beverages,
Kingfisher Premium Lager and Sun Lik Chinese Lager, both of which are brewed for
the Company by Shepherd Neame. (See below under "Licenses and Franchise
Agreements" and Item III, Section 13 - Certain Relationships and Related
Transactions - Shepherd Neame.")

        The Company's principal products are as follows.

        o       RED TAIL ALE, a full flavored amber ale, is the Company's
                flagship brand. It is available year-round in 12 oz. six-packs
                and twelve-packs, half-barrel kegs, and 5 gallon kegs.

        o       BLUE HERON PALE ALE is a golden ale with a full body and a
                distinctive hop character. It is available year-round in 12 oz.
                six-packs and twelve-packs, half-barrel kegs, and 5 gallon kegs.

        o       BLACK HAWK STOUT is a rich bodied stout with big traditional
                flavors. It is available year-round in 12 oz. six-packs,
                half-barrel kegs, and 5 gallon kegs.

        o       EYE OF THE HAWK SELECT ALE is a strong rich bodied amber ale. It
                is available year round in 12 oz. six-packs, half-barrel kegs,
                and 5 gallon kegs.

        o       WHITE HAWK ORIGINAL IPA is a heavily hopped ale with distinctive
                hop character and bold malt flavor. It is available year round
                in 12 oz. six-packs and half-barrel kegs.

        o       KINGFISHER PREMIUM LAGER is a conventionally fermented specialty
                lager with a smooth crisp taste. In the domestic market,
                Kingfisher is currently available year around in 12 oz.
                six-packs, 22 oz. bottles, and on-draft. In the European market,
                it is available year-round, in 330ml and 660ml bottles in
                multi-packs in the U.K., Ireland, and continental Europe and in
                330ml bottles in Canada, as well as in a variety of keg sizes.
                In the U.K., it is also available on draft through Indian
                restaurants.

        o       RAPTOR RED LAGER is a traditional lager, with a smooth light
                feel and a crisp dry finish. It is currently available year
                round only on the West Coast in 12-oz. six packs and half-barrel
                kegs.

        DISTRIBUTION METHODS

        In the United States, the Company's bottled products are sold through
distributors to consumers at supermarkets, warehouse stores, liquor stores,
taverns and bars, restaurants, and convenience stores.

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Most of the Company's brands are also available on 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.
Together with its distributors, the Company 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 a variety of ales and lagers directly to consumers at the
tavern and merchandise store in Hopland, California.

        In the European Territory, the Company's products are distributed
primarily through sales by Indian restaurants. Such sales represent
approximately 95% of the Company's total European sales volume, with the
remaining sales coming through other ethnic restaurants (primarily Chinese) and
in sales by supermarkets, liquor stores, and licensed shops and convenience
stores. In the U.K., Kingfisher has maintained a market share of approximately
22% of the Indian restaurant market, through sales by some 7,000 Indian
restaurants and other licensed premises. The majority of the Company's sales in
these restaurants are through its approximately 3,500 on-tap draft
installations. UBI also exports Kingfisher to 16 European markets outside of the
U.K. and to Canada, and its growth in those markets typically develops alongside
the growth of Indian restaurants in those markets.

        The Company does not physically distribute its products to its ultimate
trade customers in the European Territory, relying instead on specialist
restaurant trade distributors and Shepherd Neame, acting as UBSN's agent on a
commission basis, for the supermarket and liquor and convenience store trade.

        SEASONALITY

        DOMESTIC OPERATIONS: Sales of Company's products are somewhat seasonal,
with first and fourth quarters historically being slow. The volume of sales in
any given year and region may also be affected by local weather conditions. It
is not clear to what extent seasonality will affect the Company as it expands
its capacity and its geographic markets.

        EUROPEAN OPERATIONS: Beer consumption in the United Kingdom, Ireland,
and continental Europe has historically increased during the winter months.
Although it is not clear to what extent seasonality and the expansion of its
geographic markets will affect the Company, it is believed that the seasonality
difference between the United States and United Kingdom-European markets will
benefit the Company overall by smoothing out its income stream over the course
of the year.

        Results of any market segment or geographic area for any given quarter
may not necessarily be indicative of results that may be achieved in the same
market segment or geographic area in other quarters or full fiscal year.

        COMPETITION

        In the United States, the Company competes against a variety of brewers
in the craft beer segment, including brewpubs, microbrewers, regional craft
brewers, and craft beer products of major national breweries. Additionally, the
entire craft beer segment competes to some extent with other segments of the
U.S. beer market, including major national brands like Budweiser and Miller and
imported beers such as Heineken and Becks.

        The U.K. lager market is dominated by major international brands such as
Carling, Budweiser, Becks, and Holsten Pils, both in the restaurant and pub
segment and in sales through supermarkets and other retail outlets. The
Company's products are marketed both through Indian and other restaurants and
through major supermarket chains, smaller chains, and individual stores. In all
these sectors, the Company faces competition from other ethnic and international
brands produced by local and large international brewers.

        The Company's flagship brand in the European Territory is Kingfisher
Premium Lager, which has maintained a market share of approximately 22% of the
U.K. Indian restaurant market during each of the last three years. The Company
vigorously promotes Kingfisher as the No.1. selling premium Indian Lager

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brand in the U.K. and continental Europe. The profile of this brand has been
raised significantly through the Company's continued promotion of Kingfisher
World Curry Week in support of the charity "Action Against Hunger" that works in
the Indian sub-continent and south east Asia.

        The Company's products face tough competition both in the United States
and on its European Territory. Increased competition in either market 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.

        SOURCES AND AVAILABILITY OF RAW MATERIALS

        Production of the Company's beverages requires quantities of various
agricultural products, including barley for malt, hops, malt, and malted wheat
for beer. The Company fulfills its commodities requirements by purchases from
various sources, including both contractual arrangements and on the open market.
In its European Territory, these purchases are made directly by or for Shepherd
Neame, which brews the Company's products on a contract basis. Although the
Company believes that adequate supplies of these agricultural products are
available at the present time, it cannot predict future availability or prices
of such products and materials. The commodity markets have experienced and will
continue to experience price fluctuations. The price and supply of raw materials
will be determined by, among other factors, the level of crop production,
weather conditions, export demand, and government regulations and legislation
affecting agriculture. The Company does not use any hedges or unconditional
purchase obligations to purchase these products.

        The Company's major suppliers in the United States are Great Western
Malting Co., Yakima, Washington, and Briess Malting, Milwaukee, Wisconsin
(malt); Yakima Chief, Inc., Sunnyside, Washington and S S Steiner, Inc, New
York, New York (hops); Gamer Packaging Inc. Minneapolis, Minnesota (bottles and
crown corks); Inland Paper Board and Packaging, Inc., Antioch, California and
Empire State Container, Inc. Syracuse, New York (cartons); Sierra Pacific
Packaging, Oroville, California and Caraustar, Ashland, Ohio (carriers); and
Inland Printing Company Inc., Lacrosse, Wisconsin and DWS Printing Associates,
Bay Shore, NY(labels).

        The Company's major supplier in Europe is Shepherd Neame, which brews on
a contract basis all of the Company's products that are sold in Europe. The
Company does not directly purchase any material amounts of agricultural
commodities or other products in Europe.

        DEPENDENCE ON MAJOR CUSTOMERS

        Sales to the Company's top five customers in 2004 totaled $7,942,000, or
approximately 25%, of the Company's total sales, as compared to $7,088,800 or
25% of total sales for 2003 and $6,718,100 or 26% of total sales for 2002.

        In the Company's domestic market, sales to its principal customer, Alta
Marketing, constituted during 2004 approximately 10.2% of the Company's domestic
sales (or approximately 3.8% of its total sales), as compared to approximately
10.1% of its domestic sales (or approximately 4.2% of total sales) in 2003. In
2002, sales to the Company's largest U.S. customer (then Golden Gate
Distribution) constituted and 12.7% of domestic sales (and approximately 5.7% of
total sales).

        Sales during 2004 to the Company's principal European customer, Shepherd
Neame, represented approximately 15.3% of the Company's European Territory sales
(or approximately 9.6% of the Company's total sales) for the year, as compared
to approximately 15.5% and 14.6% of European Territory sales (or approximately
9% and 8% of total sales) in 2003 and 2002 respectively. No other individual
customer accounted for more than 5% of the Company's total sales during 2004,
2003 or 2002.

        TRADEMARKS

        The Company has U.S. federal trademark registrations on the principal
register of the United States Patent and Trademark Office for the following
marks: MENDOCINO BREWING COMPANY

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word mark (Reg. No. 2,441,141), RED TAIL ALE word mark (Reg. No. 2,032,382), RED
TAIL design mark (Reg. No. 2,011,817), BLUE HERON PALE ALE design mark (Reg. No.
2,011,816), EYE OF THE HAWK SELECT ALE word mark (Reg. No. 1,673,594), EYE OF
THE HAWK SPECIAL EDITION ANNIVERSARY ALE design mark (Reg. No. 2,011,815),
YULETIDE PORTER word mark (Reg. No. 1,666,891), BREWSLETTER word mark (Reg. No.
1,768,639), PEREGRINE GOLDEN ALE word mark (Reg. No. 2,475,222), HOPLAND BREWERY
word mark (Reg. No. 2,509,464), BLACK EYE ALE word mark (Reg. No. 2,667,078),
and SUN LAGER PREMIUM HANDCRAFTED BREW word and design mark (Reg. No.
2,583,446).

        The Company uses the BLUE HERON word mark under a concurrent use
agreement with Bridgeport Brewing Company which gives the Company the exclusive
right to use the BLUE HERON word mark throughout the United States with the
exception of Oregon, Idaho, Washington, and Montana. Bridgeport Brewing Company,
the other concurrent use party, has the exclusive right to use the BLUE HERON
word mark in those states.

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

        The Company's United States federal trademark registrations for the BLUE
HERON word mark (Cancelled Reg. No. 1,820,076) and BLACK HAWK STOUT word mark
(Cancelled Reg. No. 1,791,807) were cancelled as a result of alleged technical
deficiencies in registration compliance filings. The Company continues to use
the BLUE HERON and BLACK HAWK STOUT word marks and claims common law trademark
rights in and to such marks. The Company presently has pending applications on
file with the United States Patent and Trademark Office for the re-registration
of the BLUE HERON word mark.

        The Company claims common law trademark rights in and to the WHITE HAWK
ORIGINAL IPA word mark and WHITE HAWK ORIGINAL IPA word and design mark. The
Company has applied to register the WHITE HAWK ORIGINAL IPA word and design mark
with the United States Patent and Trademark Office (Ser. No. 78/304,844) and the
application is currently pending. Similarly, the Company claims common law
trademark rights in and to the RAPTOR RED LAGER word mark and RAPTOR RED LAGER
word and design mark. The Company has applied to register the RAPTOR RED LAGER
word and design mark with the United States Patent and Trademark Office (Ser.
No. 78/304,831) and the application is currently pending. Additionally, the
Company claims common law trademark rights in and to the TALON BARLEY WINE ALE
word mark and TALON BARLEY WINE ALE word and design mark and intends to register
the marks with the United States Patent and Trademark Office.

        The Company has acquired the trademark CARMEL BREWING COMPANY and any
other variation of the same as used by Carmel Brewing Company and claims common
law trademark rights in and to all such marks. The Company has also acquired the
rights to use the RAZOR EDGE word mark through a License Agreement with Beverage
Mates, Ltd. However, the Company is currently not using the RAZOR EDGE mark, and
it is unclear whether it will use the mark in the future. The RAZOR EDGE License
Agreement expires in 2008, but will be automatically renewed unless specifically
terminated. License fees are calculated based on sales of the product. The
Company has not had any material sales of this brand since 2001.

        Releta has federal trademark registrations on the principal register of
the United States Patent and Trademark Office for the FAT BEAR word mark (Reg.
No.2,267,709), TEN SPRINGS word mark (Reg. No. 2,243,852), and WHITEFACE word
mark (Reg. No. 2,322,226). Releta has a federal trademark registration on the
supplemental register of the United States Patent and Trademark Office for the
SARATOGA CLASSIC PILSNER word mark (Reg. No. 2,396,601).

                                       7
<PAGE>

        LICENSE AND FRANCHISE AGREEMENTS

        In August 2001, the Company acquired UBI and its wholly-owned subsidiary
UBSN, which hold the exclusive brewing and distribution rights for Kingfisher
Premium Lager in the U.K., Ireland, continental Europe, and Canada through a
Licensing Agreement with United Breweries Limited ("UB Limited"); and to Sun Lik
Chinese Lager in the U.K. as a sub-licensee of Shepherd Neame, which holds a
license to this trademark through a Licensing Agreement with San Miguel
Corporation. (See Part III, Item 13 -- "Certain Relationships and Related
Transactions," below.)

        In July 2001 MBC entered into a Kingfisher Trademark and Trade Name
License Agreement with Kingfisher America, Inc., pursuant to which MBC obtained
a royalty-free, exclusive license to use the Kingfisher trademark and trade name
in connection with the brewing and distribution of beer in the United States.
Under its terms, this agreement is currently scheduled to remain in effect until
October of 2013.

        Since 1998, UBI and UBSN have licensed to Shepherd Neame the exclusive
right to brew, keg, bottle, can, label, and package all beers and related
products sold under the Kingfisher trademark in the .K., Ireland, and
continental Europe. (See Part III, Item 13 -- "Certain Relationships and Related
Transactions - Shepherd Neame - Brewing Agreement," below.)

        In April 2004, the Company entered into a licensing agreement with
Frank's Famous Foods ("FFF") and granted non exclusive license to FFF the
trademark and trade name Red Tail Ale in the manufacture and sale of barbecue
sauces ("Sauce"). FFF would pay a royalty varying between $1.50 to $3.00 per
case of Sauce sold.

        GOVERNMENTAL REGULATION

        The Company's United States operations are subject to licensing by both
state and Federal governments, as well as to regulation by a variety of state
and local governments and agencies. The Company is licensed to manufacture and
sell beer by the Departments of Alcoholic Beverage Control in California and New
York. A federal permit from the United States 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. The Company's production operations must also comply with
the Occupational Safety and Health Administration's workplace safety and worker
health regulations and comparable state laws. Management believes that the
Company is presently in compliance with the aforementioned laws and regulations.
In addition, the Company has implemented its own voluntary safety program. The
Hopland tavern is regulated by the Mendocino County Health Department, which
requires an annual permit and conducts spot inspections to monitor compliance
with applicable health codes.

        In the United States, taxation of alcohol has increased significantly in
recent years. Currently, the Federal tax rate is $7.00 per bbl. for up to 60,000
bbl. per year and $18.00 per bbl. for over 60,000 bbl. The California tax rate
is $6.20 per bbl. The State of New York presently imposes an excise tax of $3.88
per bbl. on brewers for over 100,000 bbl. per year.

        The Company's European operations are subject to regulation by U.K. and
European laws, as well as by the laws of various individual countries in which
UBI distributes its products. Because Shepherd Neame is contracted to perform
the brewing operations for the European market, Shepard Neame is subject to the
various laws of the European countries regarding production, bottling,
packaging, and labeling in lieu of the Company. The Company does not anticipate
any significant increase in its applicable taxes in its European markets during
2004.

                                       8
<PAGE>

        COMPLIANCE WITH ENVIRONMENTAL LAWS

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

        The Company's waste products consist of water, spent grains, hops, and
glass and cardboard. The Company has instituted a recycling program for its
office paper, newspapers, magazines, glass, and cardboard at minimal cost to the
Company. The Company 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 is not currently 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 may be required to pay additional fees. The estimated
cost of the wastewater treatment facility was $900,000, and the estimated cost
of operating the plant is between $6,000 and $10,000 per month. The cost may
increase with increased production. The Company has contracted to have the
liquid sediment that remains from the treated wastewater trucked to a local
composting facility for essentially the cost of transportation. The Company
obtained a Mendocino County Air Quality Control Permit to operate the natural
gas fired boiler in Ukiah; this permit is valid until August 30, 2005.
Management expects this permit to be renewed.

        The Saratoga Springs facility is subject to various federal, state, and
local environmental laws which regulate use, storage and disposal of various
materials. The Company's solid waste products consist of spent grain, cardboard,
glass, and liquid waste. As for solid waste, the Company has instituted at this
facility a recycling program for cardboard, office papers and glass at a minimal
cost to the Company. The Company sells spent grain to local cattle dairy farms.
The Company pays approximately $1,600 per month towards sewer fees for liquid
waste. The sewer discharge from the brewery is monitored and is within the
standards set by the Saratoga County Sewer Department. The Company follows and
operates under the rules and regulations of the New York Department of
Environmental Conservation for Air Pollution Control.

        Various states in which the Company sells its products in the U.S.,
including California and New York, have adopted certain restrictive packaging
laws and regulations for beverages that require deposits on packages. The
Company continues to do business in these states, and such laws have not had a
significant effect on the Company's sales. The adoption of similar legislation
by Congress or a substantial number of states or additional local jurisdictions
might require the Company to incur significant capital expenditures to comply.

        In Europe, various countries require information to be displayed on
packaging in the national language. In general, European packaging regulations
are covered by specifications provided by the European Union, with which the
Company believes itself to be in compliance. Trade with Canada is subject to,
and in compliance with, the regulation of the provincial Liquor Boards.

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

        EMPLOYEES

        As of December 31, 2004, MBC employed 56 full-time and 11 part-time
individuals in the United States, including 11 in management and administration,
42 in brewing and production operations, 2 in retail and tavern operations and
12 in sales and marketing positions. In England, UBI and UBSN together employed
twelve people in sales and marketing and five in managerial and administrative
positions. Management believes that the Company's relations with its employees
are generally good.

        On February 28, 2003, approximately 21 employees engaged in brewing,
bottling, warehousing, and shipping at the Ukiah brewery elected Teamsters Local
No. 896, International Brotherhood of

                                       9
<PAGE>

Teamsters, AFL-CIO ("Union") to represent them as a collective bargaining agent.
The Company and the Union executed a collective bargaining agreement effective
November 17, 2003 through July 31, 2008. All of such 21 employees' positions
henceforth must be held and filled by members of the union.

ITEM 2.    PROPERTIES.

        In the United States, the Company owns nine acres of land in Ukiah,
California on which its Ukiah brewery is operated. This facility is adequate for
Company's current capacity and also has space for future expansion. Savings Bank
of Mendocino County currently holds a first deed of trust on this property in
connection with a loan advanced to the Company. (See PART II, Item 7,
Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") - Liquidity and Capital Resources - Long-Term Debt," below.)
The principal amount outstanding on the loan as of December 31, 2004 was
$2,299,400. CIT Group holds a second deed of trust on this property, securing a
working capital facility granted to the Company. The amount owed to CIT Group by
the Company under this credit facility was $1,563,300 as of December 31, 2004.
(See MD&A -" Liquidity and Capital Resources -- Other Loans and Credit
Facilities - CIT Group/Credit Finance Line of Credit," below). The Company owes
approximately $720,100 to the County in overdue property taxes and accrued
interest (See MD&A -" Liquidity and Capital Resources -- Other Loans and Credit
Facilities - Overdue Property Taxes," below).

        The Company has estimated the life of the building at 40 years and
depreciates the cost of the building on a straight-line method over its
anticipated life. The Company does not depreciate the cost of the land. The
Company's tax basis on the Ukiah facility is $10,206,300. Various other assets
incorporated in this facility are being depreciated, on a straight-line basis,
at between 10 and 20 years. Property taxes are currently assessed on the Ukiah
property at a rate of 1.1%, for an annual tax of $112,300.

        The Company leases a 2,275 square foot building in Hopland on which the
Hopland tavern ale house and merchandise store are located. The lease on this
property expires in August 2010.

        The Company also leases 3.66 acres in Saratoga Springs, New York, on
which Ten Springs Brewery operates under a lease. In November 2004, the lessor
leased additional space for the use by the brewery as a warehouse and extended
the term of the lease until November 2019. The Company has the option to renew
the lease for two successive terms of five years if it is not in default at the
time each option to extend the lease is exercised.

        The Company's Ukiah and Releta facilities have both been operating at
significantly less than full capacity. The brewery in Ukiah, California has a
current annual bottling capacity of approximately 90,000 brewers' barrels
("bbl.") on a single shift basis, whereas the annual sales from this facility
were approximately 43,400 bbl., or 48% of maximum production capacity, in 2004,
as compared with 47,300, or 53%, in 2003, and 47,400, or 53%, in 2002. The
brewery at Saratoga Springs, New York has a n annual bottling capacity of
approximately 60,000 bbl. per year a on single shift basis, although its annual
sales from this facility were approximately 16,300 bbl., or 27% of its maximum
capacity, in 2004, as compared with 13,600, or 23%, in 2003, and 11,200, or 19%,
in 2002.. Despite their under-utilization, both of these breweries incur costs
for maintenance, property taxes, and other costs which are more consistent with
their maximum capacities than they are with the current utilization levels of
these facilities. This places demands on the Company's capital, liquidity, and
management resources. places demands upon the Company's resources. Failure to
adequately meet those demands may have a material adverse affect on the
Company's business, financial condition, and results of operations..

        The Company leases certain equipment and vehicles under capital and
operating leases which expire at varying times from September 2005 to April
2008. Additionally, the Company leases equipment under various smaller leases.
As these leases expire, it is anticipated that the equipment will be acquired
pursuant to the terms of the leases and the vehicles will be surrendered.

                                       10
<PAGE>

        In the U.K., UBSN's lease for office premises located at Faversham,
Kent, in England expired in November 2004 but has been extended on quarterly
basis. UBSN is currently negotiating a new lease. The Company does not own or
lease any other material properties in Europe.

        The Company considers its land, buildings, improvements, and equipment
to be well maintained and in good condition, and adequate to meet the operating
demands placed upon them. In the opinion of Management, all of these properties
are adequately covered by insurance.

ITEM 3.    LEGAL PROCEEDINGS.

        Effective March 28, 2003, the Company terminated a written distribution
agreement with the House of Daniels, Inc., dba Golden Gate Distributing Company
("GGDC"). On April 1, 2003, GGDC filed an action in Marin County Superior Court,
naming the Company and Mr. Mark Anderson (who is employed by the Company as a
sales manager) as defendants, and seeking actual and punitive damages in an
amount not stated in the complaint (the "Action"). GGDC's Action asserted claims
for breach of contract, breach of the covenant of good faith and fair dealing,
unfair business practices, and negligent and intentional interference with
economic relationships, all arising out of the allegedly wrongful termination of
the GGDC distribution agreement.

        On January 21, 2004, GGDC filed an amended complaint, naming as
additional defendants Dr. Vijay Mallya, the Company's Chairman; United Breweries
of America, Inc., one of its principal shareholders("UBA"); and the distribution
companies now servicing the territory formerly handled by GGDC("Subsequent
Distributors").

        Effective on or about November 1, 2004, the Company entered into a
Settlement Agreement and Release (the "Settlement Agreement") with respect to
the Action. The Settlement Agreement releases the claims asserted in, arising
out of, or related to the Action by GGDC against the Company and the other
defendants, and by the Company against GGDC. Under the terms of the Settlement
Agreement, the Company is required to pay GGDC a total of $900,000 in settlement
of all claims asserted by GGDC in the Action (the "Settlement Amount"). Payment
is to be made in three installments: $400,000 by January 31, 2005; $300,000 by
June 30, 2005; and the remaining $200,000 by December 31, 2005. UBA has
guaranteed the payment, in full, of each of the installment payments included in
the Settlement Amount. The Company made the first payment of $400,000 on March
4, 2005 along with applicable interest as per the terms of settlement.

        The Settlement Agreement entered into with GGDC released the claims
asserted in, arising out of, or related to the Action by GGDC against the
Company and the other defendants, and by the Company against GGDC; it does not,
however, release, or even cover, the cross-claims asserted against the Company
by the Subsequent Distributors.

        The Company entered into another Settlement Agreement and Release,
effective as of December 9, 2004, with the Subsequent Distributors (the
"Distributors' Settlement Agreement"), under the terms of which the cross-claims
asserted against the Company by the Subsequent Distributors was also released.
Under the terms of the Distributors' Settlement Agreement, the Company agreed to
pay the Subsequent Distributors a total of $34,250 in settlement of all claims.
As of the date of this report, $31,486, has already been deducted from invoices
otherwise payable to the Company. The remaining $2,764 is expected to be
deducted, in one remaining installment on April 29, 2005, from then-outstanding
invoices, at which time the entire settlement amount will have been paid in
full.

ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

        During 2004, two of MBC's former directors, Mr. Neame and Mr. Townshend,
resigned from the Board. Thereafter, the Board of Directors acted to reduce the
size of the Board from eight to seven members. All six of the remaining Board
members agreed to stand for re-election, and Scott Heldfond, a San
Francisco-based businessman, was nominated to fill the remaining place on the
Board. MBC held its 2004 Annual Meeting of Shareholders on January 14, 2005. At
that meeting, MBC's shareholders voted

                                       11
<PAGE>

to elect all seven of the Board's nominees for Director. The votes cast for each
of the nominees were as follows. There were no broker non-votes; ballots for a
total of 1,191,193 shares were not cast with respect to any candidate.

               Director's Name              Votes for        Withheld
              ---------------------------------------------------------

               Vijay Mallya                10,006,069         69,612
               H. Michael Laybourn         10,041,264         34,417
               Jerome G. Merchant          10,019,169         56,512
               Sury Rao Palamand           10,006,069         69,612
               Kent D. Price               10,007,869         67,812
               Yashpal Singh               10,005,669         70,012
               Scott R. Heldfond           10,008,569         67,112

        The Company's shareholders also voted to ratify the selection of Moss
Adams, LLP as independent certified accountants to audit the Company's financial
statements for the fiscal year ending December 31, 2004. The votes were cast as
follows: for, 10,019,583; against, 33,815; abstain, 22,283. There were no broker
non-votes; ballots for a total of 1,191,193 shares were not cast with respect to
the selection of Moss Adams, LLP.

                                     PART II

ITEM 5.    MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
           MATTERS.

MARKET INFORMATION

        Since May of 2002, the Company's Common Stock has been quoted on the
Nasdaq OTC Bulletin Board, under the symbol "MENB". The table below sets forth,
for the fiscal quarters indicated, the reported high and low bid prices for the
Company's Common Stock, as reported on the OTC Bulletin Board. The information
listed below reflects inter-dealer bids, without retail mark-up, mark-down, or
commission, and may not represent actual transactions.

                                             High         Low
                                             ----         ---

              2004
              ----
                First Quarter                $0.20        $0.20
                Second Quarter               $0.21        $0.20
                Third Quarter                $0.21        $0.20
                Fourth Quarter               $0.25        $0.11

              2003
              ----
                First Quarter                $0.27        $0.16
                Second Quarter               $0.22        $0.16
                Third Quarter                $0.35        $0.16
                Fourth Quarter               $0.20        $0.18

        The Company had approximately 2,334 holders of its common stock of
record as of March 31, 2005. The Company has never paid a cash dividend on its
Common Stock and Management does not expect the Company to pay cash dividends in
the foreseeable future. The Company's credit agreements provide that the Company
may 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 similar
restrictions will remain in effect for as long as the Company has significant
bank financing.

                                       12
<PAGE>

        The holders of the Company's 227,600 outstanding shares of Series A
Preferred Stock (which is not listed for trading on any market or to the
Company's knowledge quoted on any bulletin board or other public quotation
system) 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 must be canceled after the holders of these
shares 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.

SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS

        As of December 31, 2004, the Company had authorized and issued equity
compensation in the following amounts.

<TABLE>
<CAPTION>
                                                                                        Number of securities
                                                 Number of                               remaining available
                                             securities to be                            for future issuance
                                                issued upon                                 under equity
                                                exercise of        Weighted-average         compensation
                                                outstanding       exercise price of        plans(excluding
                                             options warrants    outstanding options,   securities reflected
                                                and rights       warrants and rights       in column (a))
            Plan Category                           (a)                  (b)                     (c)
<S>                                               <C>                  <C>                    <C>
Equity compensation plans approved by             340,385              $0.73                       --
   security holders

Equity compensation plans not                           *                  *                  343,960
   approved by security holders
       Total                                      340,385              $0.73                  343,960
</TABLE>
        ----------------
        * See " Recent Sales of Unregistered Securities; Use of Proceeds from
          Registered Securities," below for a description of the Company's
          Director's Compensation Plan.

RECENT SALES OF UNREGISTERED SECURITIES

        The Company's policy with respect to compensation of outside Directors
of MBC for their services as Directors is as follows: each outside Director
receives $3,000 per Board meeting attended and $1,000 per committee meeting
attended.

        Prior to 2003, the Company had a policy of granting shares of Common
Stock in lieu of cash to non-employee directors at their option, as compensation
for their attendance at meetings of the Board of Directors and of Committees of
the Board on which they serve, based on a standard schedule of $3,000 per Board
meeting attended and $1,000 per committee meeting attended. However, because the
market value of the Company's Common Stock fell below fifty cents per share
during the latter half of 2002, and has since remained consistently below $1.00
per share (at times falling below twenty cents per share) - which would have
increased quite significantly the number of shares otherwise issuable to these
Directors -- the Board of Directors adopted a Directors' Stock Grant Plan under
which non-employee Directors would receive, as compensation for Board and
Committee meetings attended, shares of the Company's Common Stock valued at the
higher of the book or market value as on the last day of each year in respect of
compensation due for the years 2002, 2003, and 2004.

                                       13
<PAGE>

        Effective as of January 31, 2005, therefore, stock grants based on the
book value of the Company's Common Stock were approved under the Directors'
Stock Grant Plan in respect of compensation due to Directors Michael Laybourn,
Sury Rao Palamand, and Kent Price for their service on the Board and various
Board Committees during 2002 and 2003, in each case assuming a fair market value
of $0.56 per share for shares so granted with respect to 2002 and $0.58 per
share for shares so granted with respect to 2003. Mr. Laybourn received stock
grants totaling 15,978 shares for his services in 2002 and 15,585 for such
services in 2003; Mr. Palamand received grants totaling 21,303 shares for 2002
and 22,513 shares for 2003; and Mr. Price received grants totaling 24,853 shares
for 2002 and 24,245 shares for 2003. Management believes that the issuance of
such shares was exempt from registration pursuant to Section 4(2) of the Act
because of the limited number of recipients and the fact that each of the
recipients has significant business experience, financial sophistication, and
intimate knowledge of and familiarity with the business of the Company.
Compensation due for the year 2004 is expected to be issued later this year in
the form of shares at book value as of December 31, 2004.

        The Company's policy for compensation of its non-employee Directors has
in the past included the annual issuance of options, pursuant to the Company's
1994 Stock Option Plan (the "Plan"), to purchase a number of shares of the
Company's Common Stock having a fair market value of $25,000. The Plan expired
in 2004, however, and to date no new option or similar plan has been adopted by
the Board. The Board may adopt new plans and guidelines for adoption later in
the year.

        Pursuant to a Master Line of Credit Agreement between the Company and
United Breweries of America, Inc. (discussed in Part II, Item 7, below, under
the heading "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources - Master Line of Credit
Agreement"), the Company issued thirteen (13) promissory notes to United
Breweries of America, Inc. ("UBA") between September, 1999, and July, 2001 (the
"UBA Notes"). (A fourteenth note, on the same terms as the others but in the
amount of $400,000 (the "New Note"), was issued to UBA on March 2, 2005.) The
outstanding principal amount of the UBA Notes and the New Note, and the unpaid
interest thereon may be converted, at UBA's discretion, into shares of the
Company's unregistered Common Stock at a conversion rate of $1.50 per share. As
of December 31, 2004, the outstanding principal and interest on the UBA Notes
totaled approximately $2,010,050, and the UBA Notes were convertible into
1,340,034 shares of the Company's Common Stock. (The New Note could currently be
converted into an additional 266,667 shares.) If the UBA Notes and the New Note
were deemed to be securities, the Company's Management believes that the
issuance of all such notes was exempt from registration pursuant to Section 4(2)
of the Act because UBA, the sole offeree and recipient thereof, has significant
business experience, financial sophistication, and knowledge of and familiarity
with the business of the Company. Management believes that if these notes were
eventually to be converted into shares of the Company's Common Stock, the
issuance of such shares would also be exempt from registration pursuant to
Section 4(2) of the Act.

ISSUER PURCHASE OF EQUITY SECURITIES

        None.


                                       14
<PAGE>

ITEM 6     SELECTED FINANCIAL DATA.

        In August of 2001, the Company acquired all the outstanding stock of
United Breweries International (U.K.) Limited ("UBI"), which had as a
wholly-owned subsidiary UBSN, Ltd. ("UBSN"), in exchange for 5,000,000 shares of
MBC's Common Stock. Since it was considered a related party transaction, this
acquisition was required to be reported on an "as-if pooled" basis. The
Company's consolidated financial statements have been presented as if the
acquisition of UBI had occurred on January 1, 2000.

<TABLE>
<CAPTION>
         STATEMENT OF OPERATIONS DATA

    ----------------------------- -------------------------------------------------------------------------------
                                                                 YEARS ENDED
    ----------------------------- -------------------------------------------------------------------------------
                                        2004            2003            2002            2001           2000
    ----------------------------- --------------- --------------- --------------- --------------- ---------------
<S>                                <C>             <C>             <C>             <C>             <C>
    Sales                          $  32,157,900   $  28,864,300   $  26,085,100   $  24,638,600   $  22,432,900
    ----------------------------- --------------- --------------- --------------- --------------- ---------------
    Less Excise Taxes                    652,400         673,900         651,600         666,000         563,700
    ----------------------------- --------------- --------------- --------------- --------------- ---------------
    Net Sales                         31,505,500      28,190,300      25,433,500      23,602,300      21,869,200
    ----------------------------- --------------- --------------- --------------- --------------- ---------------
    Cost of goods sold                21,045,500      19,145,500      16,892,800      15,907,500      14,043,300
    ----------------------------- --------------- --------------- --------------- --------------- ---------------
    Gross Profit                      10,460,000       9,044,800       8,540,700       8,065,000       7,825,900
    ----------------------------- --------------- --------------- --------------- --------------- ---------------
    Operating Expenses                10,006,200       8,067,300       7,312,000       7,822,200       7,162,900
    ----------------------------- --------------- --------------- --------------- --------------- ---------------
    Depreciation & Amortization        1,031,300       1,127,100       1,049,000       1,083,300       1,169,600
    ----------------------------- --------------- --------------- --------------- --------------- ---------------
    Net income (Loss)                   (468,900)         46,900      (1,729,800)     (2,843,600)       (115,200)
    ----------------------------- --------------- --------------- --------------- --------------- ---------------
    Net income (Loss) per
    common share                           (0.04)           0.00           (0.15)          (0.26)          (0.01)
    ----------------------------- --------------- --------------- --------------- --------------- ---------------
    Common shares outstanding         11,266,874      11,266,874      11,266,874      11,083,228      11,080,498
    ----------------------------- --------------- --------------- --------------- --------------- ---------------

         BALANCE SHEET DATA

    ----------------------------- -------------------------------------------------------------------------------
                                                                 DECEMBER 31,
    ----------------------------- -------------------------------------------------------------------------------
                                        2004            2003            2002            2001           2000
    ----------------------------- --------------- --------------- --------------- --------------- ---------------
    Cash and Cash equivalent       $     526,600         554,300         146,800          89,800         208,300
    ----------------------------- --------------- --------------- --------------- --------------- ---------------
    Working capital                   (2,215,100)     (1,795,600)      (2,673,00)     (2,470,500)     (1,738,300)
    ----------------------------- --------------- --------------- --------------- --------------- ---------------
    Property and equipment            13,533,900      13,874,800      14,159,400      14,640,600      14,862,300
    ----------------------------- --------------- --------------- --------------- --------------- ---------------
    Deposit and other assets             205,100         188,600          73,600          87,500          87,400
    ----------------------------- --------------- --------------- --------------- --------------- ---------------
    Total assets                      24,363,100      23,471,700      22,289,600      23,947,400      24,883,000
    ----------------------------- --------------- --------------- --------------- --------------- ---------------
    Long term debt                     3,384,800       3,730,300       3,290,200       3,775,100       4,165,900
    ----------------------------- --------------- --------------- --------------- --------------- ---------------
    Capital lease                         62,600         204,100         193,900         925,000       1,396,900
    ----------------------------- --------------- --------------- --------------- --------------- ---------------
    Total liabilities                 18,209,100      16,965,100      15,943,200      16,085,800      14,488,900
    ----------------------------- --------------- --------------- --------------- --------------- ---------------
    Accumulated deficit               (8,916,500)     (8,447,600)     (8,494,500)     (6,764,700)     (3,859,000)
    ----------------------------- --------------- --------------- --------------- --------------- ---------------
    Shareholders equity                6,154,000       6,506,600       6,346,400       7,861,600      10,394,100
    ----------------------------- --------------- --------------- --------------- --------------- ---------------
</TABLE>

ITEM 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
           RESULTS OF OPERATIONS.

        The following discussion and analysis should be read in conjunction with
the Financial Statements and the Notes thereto and other financial information
included elsewhere in this Report. The

                                       15
<PAGE>

discussion of results and trends does not necessarily imply that these results
and trends will continue. With respect to certain forward-looking statements
contained in the following discussion, please refer to the paragraph captioned
"Forward Looking Statements" set forth immediately prior to Part I of this
Annual Report, above.

CRITICAL ACCOUNTING POLICIES

        In the ordinary course of business, the Company has made a number of
estimates and assumptions relating to the reporting of results of operations and
financial condition in the preparation of its financial statements in conformity
with accounting principles generally accepted in the United States of America.

        Actual results could differ significantly from those estimates under
different assumptions and conditions. The Company believes that the following
discussion addresses the Company's most critical accounting policies, which are
those that are most important to the portrayal of the Company's financial
condition and results. The Company constantly re-evaluates these significant
factors and makes adjustments where facts and circumstances dictate.
Historically, actual results have not significantly deviated from those
determined using the necessary estimates inherent in the preparation of
financial statements. Estimates and assumptions include, but are not limited to,
customer receivables, inventories, assets held for sale, fixed asset lives,
contingencies and litigation. The Company has also chosen certain accounting
policies when options were available, including:

        o       The first-in, first-out (FIFO) method to value a majority of our
                inventories;

        o       The intrinsic value method, or APB Opinion No. 25, to account
                for our common stock incentive awards;

        o       A full valuation allowance of deferred tax assets for net
                operating loss carryforwards that are expected to expire prior
                to utilization;

        o       The carrying value of certain plant and equipment in not
                impaired under FASB 144 based on expected future cash flows from
                operations;

        These accounting policies are applied consistently for all years
presented. Our operating results would be affected if other alternatives were
used. Information about the impact on our operating results is included in the
footnotes to our consolidated financial statements.

OVERVIEW

        The Company reported a net loss for the year 2004, primarily as a result
of increased legal expenses and one-time settlement expenses relating to a legal
dispute. (See Part I, Item 3 - "Legal Proceedings," above.) The Company's losses
were partially offset by increased sales in the European Territory and a
favorable exchange rate.

        The Company's United States brewing operations sales were 59,616 bbl
during 2004., as compared to 60,871 bbl. and 58,616 bbl. sold in 2003 and 2002
respectively. Sales out of the Ukiah facility amounted to 43,358 bbl., 47,315
bbl. and 47,440 bbl. respectively for the years 2004, 2003 and 2002. Sales out
of the Saratoga Springs facility amounted to 16,258 bbl., 13,556 bbl., and
11,176 bbl. for the years 2004, 2003 and 2002 respectively. During the year
2004, the Company bottled 1,157 bbl (none in 2003 and 2002) of cider products
for California Cider Company.

        The Company sold 67,493 bbl. in its European Territory during 2004 as
compared to 64,115 bbl. and 57,072 bbl. sold during 2003 and 2002 respectively.
Sales to the United Kingdom customers were 61,564 bbl., 58,501 bbl. and 51,426
bbl. during 2004, 2003 and 2002 respectively. Sales to continental Europe and
Canada customers were 5,929 bbl., 5,614 bbl. and 5,646 bbl. during 2004, 2003
and 2002 respectively.

                                       16
<PAGE>

        The Company introduced a few new products during 2004. During the first
quarter, the Company launched Talon Barley Wine Ale in 22 oz. bottles on the
West Coast, followed by a second launch in the East Coast during the fourth
quarter. UBSN also launched Kingfisher natural spring water in the Indian
restaurant trade in February. In July, the Company entered into a bottling
contract with California Cider Company to bottle their cider products. During
the fourth quarter, the Company launched Winter Ale Special Edition in 12 oz.
six packs on the East Coast.


RESULTS OF OPERATIONS

                         YEAR 2004 COMPARED TO YEAR 2003

        NET SALES

        As used herein, the term "net sales" refers to gross sales less excise
taxes. Overall net sales for 2004 were $31,505,500, an increase of $3,315,200,
or 11.76%, as compared to $28,190,300 in 2003. Sales volume and price increases
in the European Territory contributed to the increase in sales.

        DOMESTIC OPERATIONS: Net U.S. sales were $11,245,600 in 2004, compared
to $11,341,500 for 2003, representing a decrease of 0.8%. Sales volume of beer
for the year decreased by 1,255 barrels, to 59,616 barrels a decrease of 2.1% as
compared to 60,871 barrels in 2003. The decrease was mainly due to reduction in
contract brands which decreased by 1,532 bbl, decreases in the sale of the
Company's brands (other than Kingfisher) by 654 bbl, offset partially by
increase in sale of Kingfisher Premium Lager by 931 bbl. During 2004, the
Company bottled 1,157 bbl of cider products for California Cider Company on a
contract basis. The decrease in overall net sales during 2004 was mainly due to
decrease of $214,000 in retail sales at the Hopland tavern ale house and
merchandise store, a decrease of 50.3% when compared to retail sales of $425,300
during 2003, due to closure of the restaurant located at the Hopland in the year
2003. Net sales associated with wholesale shipment of beer and bottling cider
increased by $118,000 during the year 2004, an increase of 1.08% compared to
2003.

        EUROPEAN TERRITORY: Net sales in the Company's European Territory were
$20,259,900 ((pound)11,052,900) in 2004, compared to $16,848,800 ((pound)
10,310,700) during 2003. The increase is attributed to increase in sales volume
and increase in sales prices effected in April 2004 in the United Kingdom.
Because of exchange rate fluctuations, when the net sales results are compared
in dollars they amount to an increase of 20.3%, as compared to 2003, while when
measured in Pounds Sterling, the increase is only 7.2%. The Company sold 67,493
bbl. in its European Territory during 2004, an increase of 3,378 bbl. or 5.3%,
as compared to 64,115 bbl. sold during 2003.

COST OF GOODS SOLD:

        Overall cost of goods sold during 2004 was $21,045,500, as compared to
$19,145,500 during 2003, an increase of $1,900,000, or 9.9%. As a percentage of
net sales, costs of goods sold was 66.8% in 2004, as compared to 67.9% during
2003. (The foregoing amounts are calculated in U.S. dollars, and do not take
into account the effect of exchange rate fluctuations on the actual costs of
goods sold in the Company's European Territory.)

        DOMESTIC OPERATIONS: Cost of goods sold as a percentage of net sales in
the United States during 2004 was 66.4%, as compared to 70.3% during the year
2003, representing a decrease of 3.9%. The decrease was due mainly to decrease
in depreciation and retail operation costs because of the closure of the
restaurant in Hopland. The Company relies heavily on natural gas to operate its
brewing operations, and electricity to operate its bottling and refrigeration
units. Any significant increase in the use or charges of these utilities could
significantly impact operations.

        EUROPEAN TERRITORY: As a percentage of net sales, cost of goods sold in
the United Kingdom during 2004 was 67.5%, as compared to 66.8% during 2003 (in
each case as calculated in U.S. dollars,

                                       17
<PAGE>

after taking into account the effects of exchange rate fluctuations). The
increase was mainly due to exchange rate fluctuations and price increase by
Shepherd Neame.

GROSS PROFIT

        As a result of the higher sales volumes, price increases, and exchange
rate fluctuations described above, gross profit for 2004 (expressed in dollars)
grew to approximately $10,460,000, an increase of approximately $1,415,200, or
15.6%, as compared to gross profit of $9,044,800 achieved in 2003. As a
percentage of net sales, the Company's overall gross profit during the year 2004
increased to 33.2%, as compared to 32.1% for 2003, largely as a result of
increases in sales volume and sales revenue.

OPERATING EXPENSES

        Operating expenses for the year 2004 were $10,006,200, an increase of
$1,938,900, or 24%, as compared to $8,067,300 for 2003. Operating expenses
consist of marketing and distribution expenses, general and administrative
expenses, and retail operating expenses.

        MARKETING AND DISTRIBUTION EXPENSES: The Company's marketing and
distribution expenses consist of salesmen's salaries and commissions,
advertising costs, product and sales promotion costs, travel expenses, and
related costs. For 2004, such expenses were $5,841,200, an increase of
$1,417,300, or 32%, as compared to $4,423,900 in 2003. As a percentage of net
sales, the Company's marketing and distribution expenses increased to 18.5% in
2004, as compared to 15.7% in 2003.

        DOMESTIC OPERATIONS: Domestic marketing and distribution expenses in
2004 were $1,561,900, an increase of $222,200, or 16.6%, as compared to the
$1,339,700 incurred during 2003. These expenses were equal to 13.9% of U.S. net
sales during the year 2004, as compared to 11.8% during 2003. This increase is
primarily due to salary increases effected during the beginning of the year 2004
and increase in the Company's U.S. sales staff during the last quarter of the
year 2003, which resulted in increased compensation, travel, entertainment and
sampling expenses during the year 2004.

        EUROPEAN TERRITORY: Marketing and distribution expenses in the European
Territory during 2004 were $4,279,300, an increase of $1,195,100, or 38.8%, as
compared to $3,084,200 during 2003. As a percentage of net sales in the United
Kingdom, such expenses increased to 21.1% during 2004, as compared to 18.3%
during 2003 (in each case as calculated in U.S. dollars, after taking into
account the effects of the exchange rate calculation). The increase was due
primarily to increased advertising and promotional activities, including
marketing and sales promotion expenses; higher personnel costs; personnel costs
and sales commissions due to increased sales in supermarkets and convenient
stores; startup costs associated with launch of Kingfisher Natural Spring Water;
freight costs due to higher sales and distribution; and increases in the costs
of repair and replacement of beer dispensing equipment installed in bars by the
Company. These increases were partially offset by decreases in freight costs due
to a reduction in export sales, and other miscellaneous distribution expenses.

        GENERAL AND ADMINISTRATIVE EXPENSES: The Company's general and
administrative expenses were $3,774,900 for 2004, representing an increase of
$454,900, or 13.7%, over $3,320,000 for 2003. These expenses were equal to 12%
of net sales for 2004, as compared to 11.8% of net sales for 2003.

        DOMESTIC OPERATIONS. Domestic general and administrative expenses were
$1,955,200 for 2004, representing an increase of $121,600, or 6.6%, over
$1,833,600 for 2003. The increase was primarily due to $88,600 in increased
legal expenses caused by a legal dispute with a distributor and $65,200 in loan
and lease fee related to Company's refinancing efforts. This increase was partly
offset by

                                       18
<PAGE>

decreases primarily in director's remuneration, bad debt, rent, certain one time
professional fees incurred in the year 2003 and bank charges.

        EUROPEAN TERRITORY. General and administrative expenses related to the
European Territory were $1,819,700 for 2004, representing an increase of
$333,300, or 22.4%, as compared to $1,486,400 for 2003. These increases were led
by higher remuneration costs, and increased depreciation expenses.

        RETAIL OPERATING EXPENSES: Retail operating expenses for 2004 were
$139,500, representing a decrease of $183,900, or 56.7%, from $323,400 in 2003.
As a percentage of net sales, retail operating expenses decreased to 0.4% as
compared to 1.1% for the year 2003. The decrease in retail operating expenses
consisted mainly of decreases in labor expenses as a result of reduced hours of
operation of the tavern and closure of the restaurant.

        LEGAL DISPUTE SETTLEMENT: The Company settled a legal dispute with a
former distributor in the year 2004. The amount of the settlement represents a
one-time expense. (Please refer to Part I, Item 3, Legal Proceedings above for
details).

OTHER EXPENSES

        Other expenses totaled $800,900 in 2004, representing an increase of
$135,000, or 20.3%, when compared to $665,900 in 2003. The primary cause of the
increase was that in 2003 the Company received a one-time payment of $122,000 as
a result of the early termination of a brewing contract by Wolavers Enterprises,
LLC. The Company received no such benefit in 2004 to offset its other expenses.

INCOME TAXES

        The Company's provision for income taxes was $121,800 for 2004, a drop
of $142,900, or 54%, as compared to $264,700 for 2003. The provision for taxes
includes $118,000 related to the estimated amount of taxes that will be imposed
by taxing authorities in the United Kingdom.

        As of December 31, 2004, the Company had approximately $10,928,400,
$3,522,400 and $1,767,300 of Federal, California, and New York net operating
losses, respectively, available to carry forward. Of the Federal and New York
net operating losses, approximately $1,963,100 will expire in 2013, and the
remainder will expire through 2024. The State of California has suspended the
ability to use net operating loss carryforwards until 2005. The Company
anticipates that any taxable income in California during this period will be
offset by investment tax credits. The California net operating losses begin to
expire in 2005 and will continue to expire through 2012. The Company also has
$141,400 of California Manufacturers' Investment Tax Credits that can be carried
forward to offset future taxes until they begin to expire in 2007. The Company
has recorded a valuation allowance of $3,375,000 on deferred tax assets for net
operating loss carryforwards that may expire prior to utilization. Management
believes that the Company could still utilize the deferred tax assets in the
ordinary course of business, but due to the significant time period that may
elapse before utilization, Management has decided that a valuation allowance was
necessary. The Company is implementing various strategies to achieve profits
sufficient to utilize these assets.

NET INCOME

        The Company's net loss for 2004 was $468,900, a decrease of $515,800 as
compared to a net income of $46,900 for the year 2003. After providing for a
foreign currency translation adjustment of $116,300 for 2003 ($113,300 for
2003), the Company's comprehensive 2004 loss was $352,600, as compared to an
income of $160,200 in 2003.

                                       19
<PAGE>

                         YEAR 2003 COMPARED TO YEAR 2002

NET SALES

        Overall net sales for 2003 were $28,190,300, an increase of $2,756,800,
or 10.8%, as compared to $25,433,500 in 2002. Sales volume and (in the European
Territory) price increases contributed to the increase in sales.

        DOMESTIC OPERATIONS: Net U.S. sales were $11,341,500 in 2003, compared
to $11,017,900 for 2002, representing an increase of 2.9%. Sales volume for the
year increased by 2,255 barrels, to 60,871 barrels an increase of 3.84% as
compared to 58,616 barrels in 2002 The growth reflects increases in the sale of
the Company's brands (other than Kingfisher) by 1,307 bbl., contract brands by
857 bbl, and by 91 bbl. of Kingfisher Premium Lager. The increase in overall net
sales during 2003 was achieved mainly by higher wholesale shipments, which
represented an increase of $409,700 over the wholesale shipments during 2002.
Retail sales for the year decreased by $86,100, to $425,300, a decrease of
16.84% when compared to retail sales of $511,400 during 2002.

        EUROPEAN TERRITORY: Net sales in the Company's European Territory were
$16,848,800 ((pound)10,310,700) in 2003, compared to $14,415,600
((pound)9,594,400) during 2002. Because of exchange rate fluctuations, when the
net sales results are compared in dollars they amount to an increase of 16.88%,
as compared to 2002, while when measured in Pounds Sterling, the increase is
only 7.47%. During 2003, the Company sold 61,040 barrels in its European
Territory, an increase of 3,968 barrels, or 6.9%, as compared to 57,072 barrels
during 2002. The Company increased its selling prices in all its European
Territory markets by approximately 2.5% in March 2003, and about 1.7% of the
increase in net sales is attributable to those price hikes.

COST OF GOODS SOLD:

        Overall cost of goods sold during 2003 was $19,145,500, as compared to
$16,892,800 during 2002, an increase of $2,252,700, or 13.34%. As a percentage
of net sales, costs of goods sold was 67.9% in 2003, as compared to 66.4% during
2002. (The foregoing amounts are calculated in U.S. dollars, and do not take
into account the effect of exchange rate fluctuations on the actual costs of
goods sold in the Company's European Territory.)

        DOMESTIC OPERATIONS: Cost of goods sold as a percentage of net sales in
the United States during 2003 was 70.3%, as compared to 67.1% during the year
2002, representing an increase of 3.2%. During 2003, there were increases in the
price of packaging material (mainly bottles), rent, and insurance costs. The
Company relies heavily on natural gas to operate its brewing operations, and
electricity to operate its bottling and refrigeration units. Any significant
increase in the use or charges of these utilities could significantly impact
operations.

        EUROPEAN TERRITORY: Cost of goods sold in 2003 was $11,249,900
((pound)6,884,500), as compared to similar costs of $9,470,700
((pound)6,303,300) in 2002. As a percentage of net sales, cost of goods sold in
the United Kingdom during 2003 was 66.8%, as compared to 65.9% during 2002 (in
each case as calculated in U.S. dollars, after taking into account the effects
of exchange rate fluctuations). The increase was mainly due to exchange rate
fluctuations and price increase by Shepherd Neame.

GROSS PROFIT

        As a result of the higher sales volumes, price increases, and exchange
rate fluctuations described above, gross profit for 2003 (expressed in dollars)
grew to approximately $9,044,800, an increase of approximately $504,100, or
5.9%, as compared to gross profit of $8,540,700 achieved in 2002. As a

                                       20
<PAGE>

percentage of net sales, however, the Company's overall gross profit during the
year 2003 decreased to 32.1%, as compared to 33.6% for 2002, largely as a result
of increases in costs of goods sold and excise taxes.

OPERATING EXPENSES

        Operating expenses for the year 2003 were $8,067,300, an increase of
$755,300, or 10.3%, as compared to $7,312,000 for 2002. Operating expenses
consist of marketing and distribution expenses, general and administrative
expenses, and retail operating expenses.

        MARKETING AND DISTRIBUTION EXPENSES: The Company's marketing and
distribution expenses were $4,423,900, an increase of $179,500, or 4.2%, as
compared to $4,244,400 in 2002. As a percentage of net sales, the Company's
marketing and distribution expenses decreased to 15.7% in 2003, as compared to
16.7% in 2002.

        DOMESTIC OPERATIONS: Domestic marketing and distribution expenses in
2003 were $1,339,700, a decrease of $42,600, or 3.09%, as compared to the
$1,382,300 incurred during 2002. These expenses were equal to only 11.8% of U.S.
net sales during the year 2003, as compared to 12.6% during 2002. This decrease
is primarily due to a reduction in the Company's U.S. sales staff, which
resulted in lower compensation, travel, entertainment and sampling expenses.
Partially offsetting these reductions were increases in the Company's sales
promotion expenses, including media advertising costs and point of sales
materials.

        EUROPEAN TERRITORY: Marketing and distribution expenses in the European
Territory during 2003 were $3,084,200, an increase of $222,100, or 7.76%, as
compared to $2,862,100 during 2002. As a percentage of net sales in the United
Kingdom, such expenses decreased to 18.31% during 2003, as compared to 19.85%
during 2002 (in each case as calculated in U.S. dollars, after taking into
account the effects of the exchange rate calculation). The increase was due
primarily to increased promotional activities, including marketing and sales
promotion expenses, which increased by $190,000, to $932,000 in 2003 as compared
to $742,000 in 2002; higher personnel costs; personnel costs and sales
commissions due to increased sales in supermarkets and convenient stores;
increased distribution and promotional expenses relating to Sun Lik beer; and
increases in the costs of repair and replacement of beer dispensing equipment
installed in bars by the Company. These increases were partially offset by
decreases in freight costs due to a reduction in export sales, and other
miscellaneous distribution expenses.

        GENERAL AND ADMINISTRATIVE EXPENSES: The Company's general and
administrative expenses were $3,320,000 for 2003, representing an increase of
$587,700, or 21.5%, over $2,732,300 for 2002. These expenses were equal to 11.8%
of net sales for 2003, as compared to 10.7% of net sales for 2002.

        DOMESTIC OPERATIONS. Domestic general and administrative expenses were
$1,833,600 for 2003, representing an increase of $189,400, or 11.5%, over
$1,644,200 for 2002. The increase was primarily due to $289,800 in increased
legal and professional expenses caused by negotiation of a collective bargaining
agreement at the Company's Ukiah, California, facility, and a legal dispute with
a distributor. This increase was partly offset by decreases in bad debt, rent,
certain lease fees and bank charges, investor related expenses, and travel
expenses.

        EUROPEAN TERRITORY. General and administrative expenses related to the
European Territory were $1,486,400 for 2003, representing an increase of
$418,300, or 39.2%, as compared to $1,068,100 for 2002. These increases were led
by $181,200 in higher personnel costs and $110,000 in increased depreciation
expenses.

                                       21
<PAGE>

        RETAIL OPERATING EXPENSES: Retail operating expenses for 2003 were
$323,400, representing a decrease of $11,900, or 3.5%, from $335,300 in 2002. As
a percentage of net sales, retail operating expenses decreased to 1.1% as
compared to 1.3% for the year 2002. The decrease in retail operating expenses
consisted mainly of decreases in labor expenses as a result of reduced hours of
operation of the tavern and closure of the associated restaurant.

OTHER EXPENSES

        Other expenses totaled $665,900 in 2003, representing a decrease of
$69,500, or 9.5%, when compared to $735,400 in 2002. The decrease was primarily
a result of lower interest expenses and miscellaneous income.

INCOME TAXES

        The Company's provision for income taxes was $264,700 for 2003, a drop
of $1,958,400, or 88.1%, as compared to $2,223,100 for 2002. The provision for
taxes includes $263,400 related to the estimated amount of taxes that will be
imposed by taxing authorities in the United Kingdom.

NET INCOME

        The Company's net income for 2003 was $46,900, an improvement of
$1,775,700 as compared to a net loss of $1,729,800 for the year 2002. After
providing for a foreign currency translation adjustment of $113,300 for 2003
($42,500 for 2002), the Company's comprehensive 2003 income was $160,200, as
compared to a loss of $1,687,300 in 2002.

                                       22
<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

        Unused capacity at the Ukiah and Saratoga Springs facilities (see part
I, Item 2, Properties," above) has continued to place demands on the Company's
working capital. Beginning approximately in 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. The Company has entered
into a substantial number of loans, lines of credit, other credit facilities,
and lease agreements over the last several years. In order to continue its
operations, the Company will have to make timely payments of its debt and lease
commitments as they fall due. Any breach of a loan or lease which actually leads
to default, or to an attempt by a creditor to exercise its rights in the
Company's tangible or intangible assets, could potentially make it difficult, at
least in the short term, for the Company to continue its operations.

        The Company does not currently have sufficient funds available to repay
certain loans as they become due. So far, the lenders have extended their loans
to facilitate refinancing. Subsequent to year-end, the Company successfully
extended a debt and secured commitment from the lender for extension of the loan
until May 2006 (see "OTHER LOANS AND CREDIT FACILITIES - Savings Bank of
Mendocino Temporary Loan," below). It also obtained a new $2,000,000 secured
revolving credit Facility and a loan of $31,240 (See "BFI LOAN AND LINE OF
CREDIT," below.) The proceeds from this new loan and line of credit were used to
pay off the outstanding loan from CIT Group on May 6, 2005.

        Additionally, one of the Company's majority stock holders has guaranteed
to provide financial support to avoid possible default action by Savings Bank of
Mendocino County.

BFI LOAN AND LINE OF CREDIT

        On May 5, 2005, the Company entered into a receivables and
inventory-based line of credit transaction with BFI Business Finance ("BFI"),
pursuant to which BFI has provided the Company with a $2,000,000 maximum
revolving line of credit with an advance rate based on 80% of MBC's qualified
accounts receivable, 70% of Releta's qualified accounts receivable, and 50% of
the eligible inventory carried by both MBC and Releta (the "BFI Line of
Credit").

        The BFI Line of Credit has an initial term of twelve months, but it can
be automatically extended, at the Company's option, for an unlimited number of
additional twelve-month periods. However, BFI also retains the right to
terminate the BFI Line of Credit at any time, upon 30 days' notice. The minimum
monthly interest payment under the BFI Line of Credit is approximately $6,000,
and there is no prepayment fee if the BFI Line of Credit remains outstanding for
a minimum of six (6) months. The BFI Facility carries an interest rate equal to
the greater of 9.5%, or the prime rate announced in the Western edition of the
Wall Street Journal plus 3.75 %, payable monthly. The facility is also subject
to a monthly administrative fee of 0.40%.

        At the same time, BFI also advanced the Company $31,240 under a
promissory note (the "BFI Note" and, together with the BFI Line of Credit, the
"BFI Facility"). The BFI Note is interest-only until September of 2005;
principal under the BFI Note is payable in four equal monthly installments
commencing in September 2005.

        On May 6, 2005, the Company used the entire immediately available amount
drawable under the BFI Facility to pay off the balance remaining outstanding
under the CIT Group Line of Credit discussed below (see "OTHER LOANS AND CREDIT
FACILITIES -- CIT GROUP/CREDIT FINANCE LINE OF CREDIT").

        MASTER LINE OF CREDIT. On August 31, 1999, MBC and United Breweries of
America, Inc. ("UBA"), one of the Company's principal shareholders, entered into
a Master Line of Credit Agreement, which was subsequently amended in April 2000
and February 2001 (the "Credit Agreement"). The terms of the Credit Agreement
provide the Company with a line of credit in the principal amount of up to
$1,600,000. The Company and UBA executed an Extension of Term of Notes

                                       23
<PAGE>

under Master Line of Credit Agreement in February 2002, which was later amended
in August 2002, and again in March, August 2003 and August 2004 (the "Extension
Agreement"). The Extension Agreement confirms the Company's and UBA's extension
of the terms of the UBA Notes for a period ending on August 14, 2005. Because
these notes are subordinated to the BFI Facility and the SMBC Temporary Loan
(discussed below), the Company does not expect to make payments on the notes
within the next year. The Company also expects the maturity dates of the UBA
Notes to be extended again, although it has received no written assurance that
this will be the case.

        The outstanding principal amount of the notes and the unpaid interest
thereon may be converted, at UBA's discretion, into shares of the Company's
unregistered Common Stock at a conversion rate of $1.50 per share. As of
December 31, 2004, the outstanding principal and interest on the notes was
convertible into 1,340,034 shares of the Company's Common Stock. On December 28,
2001, the Company and UBA entered into a Confirmation of Waiver which confirms
that as of August 13, 2001, UBA waived its rights with regard to all conversion
rate protection as set forth in the UBA Notes.

        UBA has made thirteen (13) separate advances to the Company under the
Credit Agreement, pursuant to a series of individual eighteen (18) month
promissory notes issued by the Company to UBA (the "UBA Notes"). The aggregate
outstanding principal amount of the UBA Notes as of February 28, 2005 was
$1,515,371, and the accrued but unpaid interest thereon was equal to
approximately $511,494. These amounts reflect an increase of approximately
$105,300 in the interest currently due on the UBA Notes, as compared to December
31, 2003.

        The UBA Notes and the New Note (which is on essentially the same terms
as are the UBA Notes) require the Company to make quarterly interest payments to
UBA on the first day of April, July, October, and January. To date, UBA has
permitted the Company to capitalize all accrued interest; therefore, the Company
has borrowed the maximum amount available under the facility. Upon maturity of
any UBA Note or New Note , unless UBA has given the Company prior instructions
to commence repayment of the outstanding principal balance, the outstanding
principal and accrued but unpaid interest on such Note may be converted, at the
option of UBA, into shares of the Company's common stock. If UBA does not elect
to so convert any UBA Note or New Note upon maturity, it has the option to
extend the term of such notes for any period of time mutually agreed upon by UBA
and the Company. During the extended term of any note, UBA has the right to
require the Company to repay the outstanding principal balance, along with the
accrued and unpaid interest thereon, to UBA within sixty (60) days.

        (For further information about the Credit Agreement please refer to
"PART III, Item 13 - Certain Relationships and Related Transactions -Master Line
of Credit Agreement," below.)

        LONG TERM DEBT: MBC has obtained a $2.7 million loan from Savings Bank
of Mendocino County ("SBMC"), secured by a first priority deed of trust on the
Ukiah land, fixtures, and improvements. The loan is payable in partially
amortizing monthly installments of $24,443 including interest at the rate of
7.24%, maturing December 2012 with a balloon payment in the amount of $932,600.
The interest rate is adjusted on every five year anniversary of the agreement to
the Treasury Constant Maturity Rate plus 4.17%. The amount of the balloon
payment will vary depending on the change in interest rates over the years. In
addition to the Ukiah land and facility, this loan is secured by some of the
other assets of the Company (other than the Releta facility), including, without
limitation, most of the Company's equipment. The amount outstanding as of
December 31, 2004 on this facility was $2,299,400.

        EQUIPMENT LEASE: From 1996 until 2003, Finova Capital Corporation
("Finova") leased new brewing equipment with an original total cost of
approximately $1.78 million to MBC, with monthly rental payments of
approximately $27,100 each. During 2003, the Company exercised its option to
purchase the equipment at a cost of approximately $576,200.

OTHER LOANS AND CREDIT FACILITIES.

        CIT GROUP/CREDIT FINANCE LINE OF CREDIT: The CIT Group/Credit Finance,
Inc. provided MBC a $3,000,000 maximum line of credit secured by all accounts,
general intangibles, inventory, and equipment of MBC except for the specific
equipment and fixtures of the Company leased from Finova Capital Corporation, as
well as by a second deed of trust on the Company's Ukiah land improvements.
$1,484,000 of the line of credit was advanced to MBC as an initial term loan,
which was repayable in sixty consecutive monthly installments of principal, each
in the amount of $24,700. As of December 31, 2004, the total amount outstanding
on the line of credit was approximately $1,563,300. The Company used the
proceeds from the BFI Facility to pay off the entire amount outstanding on May
6, 2005.

                                       24
<PAGE>

        SAVINGS BANK OF MENDOCINO TEMPORARY LOAN: On December 31, 2003, Savings
Bank of Mendocino County ("SBMC") extended a temporary loan in the principal
amount of $576,200 to MBC in order to finance a buy-out of equipment leased
through Finova Capital Corporation. The lender has committed to extend the loan
until May 2006. The rate of interest on the loan is prime plus 3%.

        NEDBANK BANK LIMITED OPTION FACILITY: Nedbank Limited (formerly Necor
Bank Limited), a South African registered company, has provided UBSN with a
multi-currency option facility of 1,250,000 Pounds Sterling. This overdraft
facility is secured by all of the assets of UBSN. The amount outstanding on this
line of credit as of December 31, 2004 was approximately $1,729,500.

        SHEPHERD NEAME LOAN: Shepherd Neame has a contract with UBSN to brew
Kingfisher Premium Lager for the Company's European and Canadian markets. As
consideration for extending the brewing contract, Shepherd Neame advanced a loan
of (pound)600,000 (Pounds Sterling) to UBSN, repayable in annual installments of
(pound)60,000 (Pounds Sterling) per year, commencing in June 2003. The loan
carries a fixed interest rate of 5% per year. (For more information about this
loan please see "PART III -- Certain Relationships and Related Transactions --
Loan Agreement Between UBSN and Shepherd Neame," below.)

        WEIGHTED AVERAGE INTEREST: The weighted average interest rates paid on
the Company's U.S. debts was 7.85% for the year 2004 compared to 7.38% and 8.19%
(including the long term capital lease of equipment by Finova Capital
Corporation Inc.) for the year 2003 and 2002 respectively. For loans primarily
associated with Company's European territory, the weighted average rate paid was
5.9% ,6.42% and 6.94% in 2004, 2003 and 2002 respectively.

        KEG MANAGEMENT ARRANGEMENT: The Company entered into a five-year keg
management agreement with MicroStar Keg Management LLC as of September 1, 2004.
Under this arrangement, MicroStar provides the Company with half-barrel kegs for
which the Company pays a filling and use fee. Distributors return the kegs to
MicroStar instead of the Company. MicroStar then supplies the Company with
additional kegs. If, on any given month, the agreement is not extended and
terminates, the Company is required to purchase a certain number of kegs from
MicroStar. The Company

                                       25
<PAGE>

would probably finance the purchase through debt or lease financing, if
available. However, there can be no assurance that the Company will be able to
finance the purchase of kegs. Failure to purchase the necessary kegs from
MicroStar on termination of contract is likely to have a material adverse effect
on the Company.

        CURRENT RATIO: The Company's ratio of current assets to current
liabilities on December 31, 2004 was 0.83 to 1.0 and its ratio of total assets
to total liabilities was 1.3 to 1.0. On December 31, 2003, the Company's ratio
of current assets to current liabilities was 0.84 to 1.0 and its ratio of total
assets to total liabilities was 1.4 to 1.0. On December 31, 2002, the Company's
ratio of current assets to current liabilities was 0.64 to 1.0 and its ratio of
total assets to total liabilities was 1.4 to 1.0.

        OVERDUE PROPERTY TAXES: As of June 30, 2003, the delinquent property
taxes due on the Company's Ukiah property, including penalties and interest,
totaled $710,600, representing overdue taxes for the period from April 1999 to
June 2003. On July 31, 2003, the Company entered into a payment plan to settle
these issues, pursuant to which it made an initial payment to the County of
$143,000. In April 2005, the Company made payment of the 2005 installment, plus
interest, for a total payment of $324,600. The remaining balance of the overdue
taxes will be paid in three annual installments, due on or before April 10,
2006, 2007, and 2008, each representing 20% or more of the original overdue
balance, along with accrued interest calculated at 18% per year. Because of the
large amount of taxes owed, and the County's ability to sell the Ukiah property
to satisfy a delinquency, failure to settle these tax issues (including payments
due under the payment plan) could have, or have had, a serious adverse effect on
the Company's business and financial condition.

        RESTRICTED NET ASSETS. The Company's wholly-owned subsidiary, UBI, has
undistributed earnings of approximately $2,587,000. Under UBI's line of credit
agreement, distributions and other payments to the Company from its subsidiary
are limited to approximately $200,000 per year.

        RELATED PARTY TRANSACTIONS: In the last several years, MBC and its
subsidiaries have entered into or amended several agreements with affiliated and
related entities. Among these have been a Brewing Agreement and a Loan Agreement
between UBSN and Shepherd Neame; a Market Development Agreement, a Distribution
Agreement, and a Brewing License Agreement between MBC and UBSN; a Distribution
Agreement between UBI and UBSN; a Trademark Licensing Agreement between MBC and
Kingfisher of America, Inc.; and a License Agreement between UBI and UB Limited.
(For more information on all of these agreements please see "PART III - Item 13
-- Certain Relationships and Related Transactions," below.)

CONTRACTUAL OBLIGATIONS

        The following chart sets forth the Company's contractual obligations as
of December 31, 2004.

<TABLE>
<CAPTION>
---------------------------------------- ----------------------------------------------------------------------------
        Contractual Obligations                                    Payments due by period
                                         ----------------------------------------------------------------------------
                                              Total        Less than 1     1-3 years      3-5 years     More than 5
                                                               year                                        years
---------------------------------------- ----------------- ------------- -------------- -------------- --------------
<S>                                           <C>               <C>            <C>            <C>          <C>
Long Term Debt Obligations                    $ 3,785,100       400,300        809,300        711,100      1,864,400
---------------------------------------- ----------------- ------------- -------------- -------------- --------------
Capital Lease Obligations                     $   209,100       146,500         62,600              -              -
---------------------------------------- ----------------- ------------- -------------- -------------- --------------
Operating Lease Obligations                   $   863,800       181,200        341,100        331,600          9,900
---------------------------------------- ----------------- ------------- -------------- -------------- --------------
Purchase Obligations                                    -             -              -              -              -
---------------------------------------- ----------------- ------------- -------------- -------------- --------------
Other Long Term Liabilities                   $ 2,010,100             -              -              -      2,010,100
---------------------------------------- ----------------- ------------- -------------- -------------- --------------
Total                                         $ 6,868,100       728,000      1,213,000      1,042,700      3,884,400
---------------------------------------- ----------------- ------------- -------------- -------------- --------------
</TABLE>

                                       26
<PAGE>

ITEM 7A.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

        As of December 31, 2004, the Company did not hold derivative
instruments, or engage in hedging activities, of any material value or in any
material amount, whether for trading or for hedging purposes. The Company's
direct exposure to risks arises out of changes in interest rates, foreign
currency exchange rate fluctuations and commodity prices.

INTEREST RATE RISK

        The Company had total debt as of December 31, 2004 of $9,158,900, of
which $5,384,500 was subject to variable rates of interest (either prime or
LIBOR plus 1.5% or prime plus 3% or prime plus 4.25%). Its long-term debt
(including current portion) as of December 31, 2004 totaled $5,300,500 of
which$3,774,400 had fixed rates of interest and the balance of $1,526,100 were
subject to variable rates. Short term debts amounted to $3,858,400, all of which
were subject to variable rates. At current borrowing levels, an increase in
prime and LIBOR rates of 1% would result in an annual increase of $53,800 in
interest expense on the Company's variable rate loans.

FOREIGN CURRENCY RATE FLUCTUATIONS

        The Company's primary operating subsidiary, UBSN, operates in its
European Territory, and primarily in the United Kingdom, where both its income
and its expenses are denominated in British Pounds. The ultimate value to the
Company of its sales in the European Territory may be either magnified or
diminished depending on the trading value of the British Pound as against the
U.S. Dollar, the Company's principal reporting currency. The net effect of that
part of the Company's consolidated cash flows and earnings which is derived from
UBSN is therefore subject to fluctuations due to changes in the value of the
British Pound as compared with the U.S. Dollar.

        UBSN and its immediate corporate parent, UBI, contributed approximately
63% of the Company's total sales and 69.7% of its net operating income in 2004,
as compared to approximately 58.4% and 100%, respectively, in 2003 and
approximately 55.3% and 80.1%, respectively, in 2002. See Part II, Item 7 --
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Results of Operations," above, for a more direct discussion of
these effects. The Company does not attempt to hedge against currency
fluctuations.

        The Company utilizes the rates published by the Board of Governors of
the Federal Reserve System to convert European operational results and cash flow
into U.S. Dollars. On that basis, the average annual rates of exchange for
converting Pounds Sterling into Dollars during the years 2004, 2003, and 2002
were $1.833, $1.634 and $1.502 respectively, representing an increase in the
value of the British Pound (as compared to the Dollar) of 12.18% for 2004 as
compared to 2003 and 8.79% for 2003 as compared to 2002.

        Similarly, the exchange rates used to convert the value of the assets
and liabilities of UBI and UBSN from Pound Sterling to U.S. Dollars as at
December 31, 2004, 2003, and 2002 were $1.916, $1.784, and $1.61 respectively.
These year-end valuations represent an increase in the value of the British
Pound, as against the U.S. Dollar, of 7.4% as of December 31, 2003 as compared
to December 31, 2003, and of 10.8% as of December 31, 2003 as compared to
December 31, 2002.

ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

        With the exception of the chart set forth below, the information
required by this item is set forth at Pages F-1 through F-17 to this Annual
Report.

        The following chart sets forth, on a quarterly basis, certain financial
information about the Company's results of operations for the 2004 and 2003
fiscal years.

                                       27
<PAGE>

<TABLE>
<CAPTION>
------------------- ----------------------------------------------------- ----------------------------------------------------
                                           2004                                                   2003
------------------- ----------------------------------------------------- ----------------------------------------------------
                        Q1          Q2             Q3            Q4            Q1           Q2          Q3            Q4
------------------- ------------ ------------ ------------- ------------- ------------- ------------ ------------ ------------
<S>                  <C>          <C>           <C>           <C>           <C>          <C>          <C>          <C>
Net Sales            $6,803,200   $8,187,100    $7,978,300    $8,536,900    $5,870,100   $7,112,900   $7,628,300   $7,579,000
------------------- ------------ ------------ ------------- ------------- ------------- ------------ ------------ ------------
Gross profit          2,168,400    2,814,600     2,769,500     2,707,500     1,875,500    2,296,000    2,526,700    2,346,600
------------------- ------------ ------------ ------------- ------------- ------------- ------------ ------------ ------------
Net income (loss)      (374,400)     166,400       (34,000)     (226,900)     (289,400)     161,900      435,400    (261,000)
------------------- ------------ ------------ ------------- ------------- ------------- ------------ ------------ ------------
Basic
Earnings
(Loss) per share          $(.03)        $.01         $(.00)        $(.02)        $(.03)        $.01         $.04       $(.02)
------------------- ------------ ------------ ------------- ------------- ------------- ------------ ------------ ------------
</TABLE>

ITEM 9.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
           FINANCIAL DISCLOSURE.

        None.

ITEM 9A.   CONTROLS AND PROCEDURES.

        The Company's management, including the Chief Executive Officer ("CEO")
and Chief Financial Officer ("CFO") has evaluated the effectiveness of the
design, maintenance, and operation of the Company's "disclosure controls and
procedures" as of December 31, 2004, the end of the period covered by this
report. Disclosure controls and procedures are controls and other procedures
that are designed to ensure that information required to be disclosed by the
Company in its reports under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), is recorded, processed, summarized, and reported within
the time periods specified in the Commission's rules and forms. Disclosure
controls and procedures are also designed to ensure that information that the
Company is required to disclose in its reports under the Exchange Act is
accumulated and communicated to the Company's management, including its CEO and
CFO, as appropriate to allow timely decisions regarding the required disclosure.

        Certain aspects of the Company's internal control over financial
reporting are included in the Company's disclosure controls and procedures, and
are therefore included in management's evaluation. Management evaluates internal
control over financial reporting on a quarterly basis to determine whether any
changes have occurred. Internal control over financial reporting is also
evaluated on an annual basis in connection with the preparation of the Company's
Form 10-K.

        Management's review of the disclosure controls and procedures includes a
review of their objectives, design, implementation, and results. Based on this
evaluation, the CEO and CFO believe that, as of the end of the period covered by
this report, subject to the limitations set forth below, the Company's
disclosure controls and procedures were effective in providing reasonable
assurance that the information required to be disclosed in the Company's reports
under the Exchange Act is recorded, processed, summarized, and reported within
the time specified by the Commission, and that material information pertaining
to the Company is timely communicated to the Company's management (including the
CEO and CFO). Management is not aware of any changes in the Company's internal
or other controls over financial reporting identified in connection with that
evaluation that occurred during the most recent fiscal quarter that have
materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.

        LIMITATIONS ON CONTROLS

        Disclosure controls and procedures, no matter how well designed and
implemented, can provide only reasonable assurance of achieving the Company's
disclosure objectives. The likelihood of achieving such objectives is affected
by limitations inherent in such controls and procedures, including the fact that
human judgment in decision making can be faulty and that breakdowns in internal
controls can occur because of human failures such as simple errors or mistakes
or intentional circumvention of the established process.

        Please refer to the certifications of the Company's Chief Executive
Officer and Chief Financial Officer (which are attached to this report as
Exhibits 31.1 and 31.2) for additional information regarding the Company's
controls and procedures.

ITEM 9B.   OTHER INFORMATION.

        None.


                                       28
<PAGE>

                                    PART III

ITEM 10.   DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY

        The following table sets forth the names, ages as of February 28, 2005 ,
and certain information regarding each of the Company's current Directors and
executive officers:

<TABLE>
<CAPTION>
<S>                                                                           <C>
                                                                                                 Director
               Name              Age                           Position(s)                         Since
               ----              ---                           -----------                         -----
Scott R. Heldfond                 60       Director                                                2005

Michael Laybourn                  66       Director                                                1993

Vijay Mallya, Ph.D.               50       Director and Chairman of the Board                      1997

Jerome G. Merchant*+              43       Director                                                1997

Mahadevan Narayanan               47       Chief Financial Officer and Secretary

Sury Rao Palamand, Ph.D.*+        73       Director                                                1998

Kent D. Price*+                   61       Director                                                1998

Yashpal Singh                     59       Director, President, and Chief Executive Officer        1997

*    Member of the Audit/Finance Committee.
+    Member of the Compensation Committee.
</TABLE>

        R H B (Bobby) Neame and David Townshend resigned from MBC's Board of
Directors in November 2004. Scott R. Heldfond was elected a s a director at the
Annual Meeting of Shareholders held on January 14, 2005.

        Scott R. Heldfond became a director in January 2005. Since 1999, Mr.
Heldfond has been a Managing Partner of eSEED Capital, LLC, a technology-focused
merchant bank, and the Executive Director of Nasdaq Insurance, LLC, a national
insurance brokerage and consulting firm. From 1995 to 1999, he was the President
and Chief Executive Officer of Frank Crystal & Co., a New York-based insurance
company. Mr. Heldfond also currently serves as a Director of HomeGain, Inc., a
private venture backed company, and UBICS, a NASDAQ traded firm that provides
information technology staffing and solutions for domestic and international
businesses. He is a Commissioner, and the President, of the Health Services
Commission of the City and County of San Francisco, in addition to serving as an
advisor to or on the Board of Directors of a number of local, statewide, and
national charitable and community service organizations. Mr. Heldfond received
his undergraduate degree from the University of California, Berkeley, and a J.D.
from the University of San Francisco Law School.

        H. Michael Laybourn, co-founder of the Company, served as the Company's
President from its inception in 1982 through December, 1999, and as its Chief
Executive Officer from inception through October 1997. Mr. Laybourn was elected
a Director in November 1993 when the Company began the process of converting
from a limited partnership to a corporation and served as Chairman of the Board
from June 1994 through October 1997. Mr. Laybourn is a former Vice President of
the California Small Brewers Association and a former Chairman of the Board of
Directors of the Brewers Association of America. Mr. Laybourn holds a Bachelor
of Fine Arts degree from Arizona State University.

        Vijay Mallya, Ph.D., became Chairman of the Board in October 1997 and
was its Chief Executive Officer till January 2005. Dr. Mallya is Chairman of
UBICS, Inc., United Breweries Limited, UB Engineering Limited, Mangalore
Chemicals and Fertilizers Ltd., Herbertsons Limited, McDowell & Co.

                                       29
<PAGE>

Ltd., and other affiliated companies (collectively the "UB Group"). (See
"Security Ownership of Certain Beneficial Owners and Management," below.) United
Breweries Limited and McDowell & Co., Ltd. are two of Asia's leading beer and
spirits companies. The UB Group has annual sales in excess of (U.S.) $1 Billion.
He also sits on boards of several foreign companies and organizations including
companies comprising the UB Group, The Institute of Economic Studies (India),
and the Federation of the Indian Chamber of Commerce and Industries. Dr. Mallya
was recently elected to serve as a member of the Upper House of the Indian
Parliament. Dr. Mallya holds a Bachelor of Commerce degree from the University
of Calcutta in India and an honorary Doctorate in Business Administration from
the University of California, Irvine.

        Jerome G. Merchant became a Director in October 1997 and was Chief
Financial Officer of the Company from November 1997 to October, 1998. Mr.
Merchant currently serves as the Strategic Planning Consultant to the Chairman's
Office of the Company and has served in such capacity since July 1996. Between
April 1993 and December 2003, Mr. Merchant served in various capacities for Cal
Fed Investments, a wholly owned subsidiary of Cal Fed Bank. His responsibilities
included due diligence review and monitoring of investment products for Cal Fed
Investments. As a result of the acquisition of Cal Fed Bank by Citigroup, since
January 2003 Mr. Merchant has been serving as a Vice President and Regional
Sales Director for Citigroup. Mr. Merchant received his Bachelor of Science
degree in Managerial Economics-Finance from the University of California, Davis.

        Mahadevan Narayanan joined the company in early 2001 as Secretary,
Corporate Controller and Chief Financial Officer. Before joining the Company, he
served the United Breweries Group in India for the prior 17 years in various
financial and accounting capacities. Mr. Mahadevan was most recently employed as
Senior Manager of Accounting Services of Herbertsons Ltd. for the past six
years. He holds a Bachelor of Science degree in Mathematics from Madurai Kamaraj
University in India and is an associate member of the Institute of Chartered
Accountants of India.

        Sury Rao Palamand, Ph.D., became a Director in January 1998. Dr.
Palamand is the president of Summit Products, Inc., a beverage development firm
serving the beverage industry; Chairman of the Southend Management, LLC which
owns and operates a chain of restaurant breweries in the States of North
Carolina, South Carolina, and Florida; and President of the Historic Lemp
Brewery, LLC, which develops micro breweries and restaurants. From 1966 to 1989,
Dr. Palamand served as Director, Beer and New Beverage Development for
Anheuser-Busch Companies, Inc. Dr. Palamand holds a Master of Science in
Chemistry from the University of Bombay, India and a Master of Science and
Doctorate in Food and Flavor Technology from the Ohio State University, Columbus
Ohio, U.S.A.

        Kent D. Price became a Director in January 1998. He is currently the
President and CEO of Robert Kent and Company, an investment and consulting
company. Additionally, he is currently the Chairman of Fluid, Inc., President of
Parker Price Venture Capital, and a Director of Capital Markets Company. From
August 1994 until July 1998, he was employed by IBM Banking, Finance and
Securities Industries as General Manager of Securities and Capital Markets. From
1993 through August 1994, he served as Chairman and Chief Executive Officer of
the Bank of San Francisco. He currently serves as a Director of The San
Francisco Company, which is the holding company for the Bank of San Francisco.
He also sits on the board of the American Bridge Company. Mr. Price received a
Bachelor of Arts in history and politics and a Master of Arts in Slavic studies
from the University of Montana and attended Oxford University as a Rhodes
Scholar.

        Yashpal Singh, President of the Company since January 2000, became a
Director in October 1997 and has served as its Executive Vice President and
Chief operating Officer since May 1998. Mr. Singh became the Chief Executive
Officer in January 2005. From May 1997 to March 1998, Mr. Singh served as
Executive Vice-President- Operations for UBA, an affiliate of the Company (see
"Security Ownership of Certain Beneficial Owners and Management," below). In
that capacity, he was responsible for UBA's United States brewing operations.
Between 1992 and 1997, Mr. Singh also served as Senior Vice President-Operations
for United Breweries Ltd., an Indian Corporation, where he was responsible for

                                       30
<PAGE>

the operations of 12 breweries, instituting new projects, and technical and
operational evaluation of potential acquisition opportunities worldwide. Mr.
Singh has over 38 years of experience in the brewing industry. Mr. Singh holds a
Bachelors degree in Science from Punjab University in India, and has graduate
training in the fields of Brewing, Malting, and Mineral Water Technology. Mr.
Singh is an associate member of the Institute of Brewing, London; a member of
the Master Brewers Association of America; and was a former executive member of
the Managing Committee of the All India Brewer's Association.

COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT

        Based solely on its review of the Forms 4 and 5 furnished to the Company
during and with respect to the year 2004, the Company is not aware of any person
that was a Director, officer, or greater than 10% beneficial owner of the
Company that failed to file on a timely basis reports required by Section 16(a)
of the Exchange Act during the most recent fiscal year.

        Three of the Company's Directors, Michael Laybourn, Sury Rao Palamand
and Kent Price each failed to file on a timely basis a report required by
Section 16(a) of the Exchange Act with respect to the issuance of shares of
Company stock issued to them in January 2005 as compensation for their
attendance at Board and Committee meetings held during 2002 and 2003. In
addition, the Company has recently become aware that the same three Directors
failed to file any report required under Section 16(a) of the Exchange Act with
respect to issuance of shares of Company stock, and / or stock options, issued
to them in January 2002, although the ownership of such shares and options were
in each case reflected in the Company's Annual Reports on Form 10 KSB for 2003
and in Proxy Statements for the 2003 and 2004 Annual Meetings of Shareholders.
Mr. Laybourn, Mr. Palamand and Mr. Price have since disclosed the required
information through the filing of Form 4, "Statement of Changes in Beneficial
Ownership".

AUDIT COMMITTEE FINANCIAL EXPERT

        The Company's Board of Directors believes that at least one member of
the Company's Audit Committee - Mr. Kent D. Price - is both an independent
Director and qualifies as an "audit committee financial expert" as that term is
defined in the regulations of the Securities and Exchange Commission.

CODE OF ETHICS

        The Company has adopted a Code of Ethics that applies to its Chief
Executive Officer, Chief Financial Officer, and principal accounting officer.
The Code of Ethics is posted on the Company's Internet website at
www.mendobrew.com. Any person desiring a free copy of the Code of Ethics should
send a written request to the Company's Secretary, N. Mahadevan at the Company's
principal executive offices located at 1601 Airport Road, Ukiah, CA 95482.

ITEM 11.   EXECUTIVE COMPENSATION.

        The following table sets forth the annual compensation, including
salary, bonuses, and certain other compensation, paid by the Company to its
Chief Executive Officer and most highly-compensated executive officers and
employees during each of the fiscal years ended December 31, 2004, 2003 and
2002. None of the Company's other executive officers received total compensation
in excess of $100,000 in any of those years.

        Dr. Vijay Mallya resigned as the Chief Executive Officer with effect
from January 14, 2005. Mr. Yashpal Singh was appointed as President and Chief
Executive Officer from that date.

                                       31
<PAGE>
<TABLE>
<CAPTION>
<S>                                                                           <C>

                                                    SUMMARY COMPENSATION TABLE


                       Annual Compensation                                             Long Term Compensation
                       -------------------                                             ----------------------
                                                                                 Awards                       Payouts
                                                                                 ------                       -------
       (a)              (b)          (c)            (d)           (e)           (f)             (g)            (h)          (i)
                                                                 Other      Restricted      Securities
                                                                Annual         Stock        Underlying       LTIP       All Other
Name and Principal                                              Compen-       Award(s)        Options/      Payouts      Compen-
     Position          Year       Salary ($)     Bonus ($)     Sation($)         ($)          Sars (#)         ($)       Sation($)
     --------          ----      ----------     ---------     ---------         ---          --------         ---       ---------

Vijay Mallya
Chairman of the        2004       248,310*
Board and Chief
Executive Officer
                       2003       158,129*
                       2002      $120,000

Yashpal Singh          2004       120,000         43,300       14,914**
President              2003       118,875         41,887       13,538**
                       2002       115,500         37,035       11,539**

Mark Anderson
Sales Manager          2004        83,160         27,589       10,108
                       2003        79,200         27,091        7,847
                       2002        79,200         27,606        6,421

     *    Includes (pound)70,000 (approximately $128,310 in U.S. Dollars at
          average exchange rate for the year 2004) paid to Dr. Mallya by UBI
          during the year 2004, as compensation for promoting the Company's
          products in the European Territory outside the U.K.

     **   The value of the executive's medical benefits makes up approximately
          80% of each of these amounts.
</TABLE>

COMPENSATION OF DIRECTORS

        In the past, the Company has compensated each non-employee Director for
his attendance at the meetings of the Board of Directors and for his attendance
at meetings of committees of the Board of Directors, annually granting each
non-employee Director both (a) that number of shares of the Company's common
stock which had a fair market value of $3,000 for each board meeting, and $1,000
for each committee meeting he attended during the prior year and (b) options to
purchase that number of shares of the Company's common stock which had a fair
market value of $25,000. In the last two years, however, noting the drop in the
trading or quoted price for the Company's stock to less than $1.00 per share,
the Board of Directors agreed to receive Company's shares in lieu of
compensation valued at book cost as of the end of each year or a value of $1.00
per share whichever is higher and has suspended the Company's stock option. The
Compensation Committee is currently considering a proposal to significantly
modify the previous stock option plan, and it is expected that one or more new
plans and guidelines may be adopted later in the year.

                                       32
<PAGE>

ITEM 12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
           RELATED STOCKHOLDER MATTERS.

        The following table sets forth certain information known to the Company
regarding the beneficial ownership of the Company's Common Stock and Series A
Preferred Stock as of February 28, 2005, for (a) each shareholder known by the
Company to own beneficially 5% or more of the outstanding shares of its Common
Stock or Series A Preferred Stock; (b) each Director; and (c) all Directors and
executive officers of the Company as a group. Except as noted, the Company
believes that the beneficial owners of the Common Stock and Series A Preferred
Stock listed below, based on information furnished by such owners, have sole
investment and voting power with respect to such shares, subject to community
property laws where applicable.

                                             Shares Beneficially  Approximate
            Name and Address                       Owned(1)       Percentage
            ----------------                       --------       ----------

COMMON STOCK

United Breweries of America, Inc.+                3,087,818(2)         26.9%

Inversiones Mirabel S.A.                          5,500,000(2)         47.9%
     Hong Kong Bank Building
     6th Floor, Samuel Lewis Avenue
     P O Box 6-4298, El Dorado
     Panama City, Panama

Vijay Mallya, Ph.D.+                              8,587,818(3)         74.8%

H. Michael Laybourn +                               354,254(4)          3.3%

Kent D Price                                        180,097(4)          1.8%
     c/o Robert Kent and Company
     Wood Island #308
     60 E. Sir Francis Drake Blvd.
     Larkspur, CA 94939

Sury Rao Palamand, Ph.D.                            147,500(4)          1.5%
     50 Crestwood Executive Center,
     Suite 207
     St. Louis, MO 63126

Jerome G. Merchant+                                 195,964(4)          1.5%

Yashpal Singh++                                          --              --

Scott R. Heldfond                                        --              --
     2039, Broderick St.
     San Francisco, CA 94115

All Directors and executive officers 3
     as a group (7 persons)                       9,523,444(5)           82%


                                       33
<PAGE>

SERIES A PREFERRED STOCK
H. Michael Laybourn +                                 6,100             2.7%

All Directors and executive officers
     as a group (7 persons)                           6,100             2.7%

------------------
+    2400, Bridgeway, Suite 290, Sausalito, CA 94965
++   1601 Airport Road, Ukiah, CA 95402

(1)     Applicable percentages of ownership are based on 11,473,914 shares of
        Common Stock outstanding. Shares of Common Stock subject to a contract
        of purchase or options currently exercisable or exercisable within 60
        days after the date of this Statement are deemed outstanding for
        computing the percentage ownership of the person obligated to purchase
        the shares or holding the options, but are not deemed outstanding for
        computing the percentage of any other person.

(2)     Does not include 1,351,243 shares issuable to UBA upon conversion of
        certain convertible notes issued by MBC to UBA to terminate an existing
        Master Line of Credit Agreement and convert certain outstanding Notes
        into shares of Common Stock (see "PART III - Item 13, Certain
        Relationships and Related Transactions," below). Also does not include
        266,667 shares issuable upon conversion of a convertible note issued to
        UBA on March 2, 2005, convertible after a period of 18 months.
        Substantially all of the shares of both UBA and Inversiones are held by
        United Breweries of America, BVI ("UBA-BVI"). See below under
        "Announcement of Interest by United Breweries (Holdings) Limited" for
        information about a potential transaction involving UBA-BVI.

(3)     Includes all shares held by the Company's two largest shareholders,
        United Breweries of America, Inc. ("UBA") and Inversiones Mirabel. S.A.,
        a Panamanian corporation "Inversiones"). Dr. Mallya may be deemed to be
        a beneficial owner of UBA and Inversiones because they are both
        controlled by Golden Eagle Trust, an Isle of Mann trust which in turn is
        controlled by persons who may exercise discretion in Dr. Mallya's favor
        among others. Does not include 1,351,243 shares issuable upon conversion
        of certain convertible notes issued to UBA to terminate an existing
        Master Line of Credit Agreement and convert certain outstanding Notes
        into shares of Common Stock. (See "PART III - Item 13, Certain
        Relationships and Related Transactions," below). Also does not include
        266,667 shares issuable upon conversion of a convertible note issued to
        UBA on March 2, 2005, convertible after a period of 18 months.

(4)     Includes 68,077 shares subject to options that are exercisable or will
        be exercisable within 60 days.

(5)     Includes 272,308 shares subject to options that are exercisable or will
        be exercisable within 60 days. Does not include shares which may be
        obtained upon the conversion of those notes described in footnotes (2)
        and (3), above.

ANNOUNCEMENT OF INTEREST BY UNITED BREWERIES HOLDINGS LTD.

        On September 30, 2002, the shareholders of United Breweries Holdings,
Ltd. (formerly Kingfisher Properties & Holdings, Ltd.) ("UBHL"), a corporation
based and incorporated in India and publicly-held in that country, approved
resolutions authorizing UBHL's board of directors to consider a transaction by
which UBHL would acquire some or all of the Company's outstanding shares.

                                       34
<PAGE>

Dr. Mallya, the Company's Chairman of the Board, is also the Chairman of the
Board of UBHL.

        On March 1, 2005, UBHL formally submitted to the High Court of Karnataka
at Bangalore, India (the "High Court"), as required under Indian law, a plan of
reorganization (the "Plan") by which UBHL would, in addition to merging with a
number of its existing wholly-owned subsidiaries, acquire indirect control of
approximately 74.8% of the Company's outstanding shares. The acquisition would
take the form of a merger between UBHL and United Breweries of America, BVI, a
British Virgin Islands corporation ("UBA-BVI"), which is the corporate parent of
both Inversiones Mirabel, S.A., a Panamanian corporation which holds
approximately 47.9% of the Company's outstanding shares ("Inversiones"), and
United Breweries of America, Inc., a Delaware corporation ("UBA"), which holds
approximately 26.9% of the Company's outstanding shares. In the proposed Merger,
UBA-BVI would be merged with and into UBHL. Pursuant to an order of the High
Court, the shareholders of UBHL, held a Special Meeting on April 27, 2005. The
results of the voting at the Special Meeting are not expected to be made public
prior to a hearing before the High Court now scheduled for May 27, 2005.

        UBA also holds a number of convertible Company notes with a balance of
$2,426,865 as of March 30, 2005, all of which are convertible (some currently)
into shares of MBC's Common Stock. If all of these notes were converted into
shares of the Company's Common Stock now, UBA would hold approximately 35.9% of
the Company's Common Stock, and the combined holdings of UBA and Inversiones
would amount to approximately 78% of the Company's outstanding Common Stock.

        Consummation of the Plan, both as it affects the Company's shares and
with respect to the other entities involved, is subject to a number of
contingencies, including among others: compliance with various applicable Indian
and British Virgin Island laws and regulations; ratification by the High Court;
and approval of the Indian Foreign Investment Promotion Board and/or the Reserve
Bank of India with respect to the issuance of UBHL shares under the Plan. At
present, therefore, it is unclear when (if ever) the Plan and the Merger may be
consummated.

ITEM 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

MASTER LINE OF CREDIT AGREEMENT

        On August 31, 1999, the Company and UBA entered into a Master Line of
Credit Agreement, which as subsequently amended in April of 2000, and February
of 2001 (the "Credit Agreement"). The terms of the Credit Agreement provide the
Company with a line of credit in the principal amount of up to $1,600,000. As of
the date of this filing, UBA has made thirteen (13) separate advances to the
Company under the Credit Agreement, pursuant to a series of individual eighteen
(18) month promissory notes issued by the Company to UBA (the "UBA Notes"). As
of February 28, 2003, the aggregate outstanding principal amount of the UBA
Notes was $1,515,371, and the accrued but unpaid interest thereon was equal to
approximately $494,700. (For more information on the Master Line of Credit
Agreement, please refer to Item 7 - Management's Discussion and Analysis of
Financial Information and Results of Operations - Liquidity and Capital
Resources," above.)

LICENSE OF THE KINGFISHER TRADEMARK

        UBI licenses the trademark Kingfisher (the "Mark") from UB Limited,
pursuant to a License Agreement dated October 9, 1998 and amended pursuant to a
Supplemental Agreement dated October 22, 2001 (together, the "License
Agreement"). Under the terms of the License Agreement, UB Limited has granted
UBI and UBSN the exclusive right to use the Mark in a number of European
countries, including among others Austria, Belgium, Italy, France, Germany,
Ireland, the Netherlands, Spain, Sweden and the United Kingdom, as well as in
Canada (collectively, the "Licensed Territory"). UB Limited, which owns the
Mark, is responsible for maintaining the registration of the Mark in all
relevant market areas. The License Agreement, which will expire on October 9,
2013, also provides that neither party may transfer its rights or obligations
thereunder to any other person or entity unless the transferee enters into an
agreement to be bound by the obligations of the transferor.

                                       35
<PAGE>

        In July 2001 MBC entered into a Kingfisher Trademark and Trade Name
License Agreement with Kingfisher America, Inc., a Delaware corporation
affiliated with UB Limited, pursuant to which MBC obtained a royalty-free,
exclusive license to use the Kingfisher trademark and trade name in connection
with the brewing and distribution of beer in the United States. Under its terms,
this agreement will remain in effect for so long as the Distribution Agreement
(described below) between UBI and UBSN does. Currently, that agreement is
scheduled to expire in October 2013.

        Because the Company's Chairman of the Board, Dr. Vijay Mallya, is also
the Chairman of the Board of UB Limited, the transactions represented by these
license agreements may be deemed to be related party transactions.

SHEPHERD NEAME, LTD.

        As described more fully below, the Company's principal European
subsidiary, UBSN, Ltd. ("UBSN"), is a party to a Brewing Agreement and a Loan
Agreement with Shepherd Neame, Ltd., a major English brewer ("Shepherd Neame").
During most of 2004 (as in prior years), Shepherd Neame and the Company may be
deemed to have been related parties, because Mr. R.H.B. Neame (Shepherd Neame's
Chairman of the Board) was also a Director of MBC, and Mr. David Townshend (a
senior Shepherd Neame employee) was serving as the President of UBSN (pursuant
to an agreement between UBSN and Shepherd Neame) as well as a Director of MBC.

        BREWING AGREEMENT

        On October 9, 1998, UBI and UBSN entered into a Brewing Agreement with
Shepherd Neame, and on October 24, 2001, this agreement was amended by a
Supplemental Agreement (as so amended, the "Brewing Agreement").

        The Brewing Agreement, which was entered into (and amended) in
conjunction with the Loan Agreement described below, grants Shepherd Neame the
exclusive right to brew, keg, bottle, can, label, and package all beers and
related products sold under the Kingfisher trademark in the United Kingdom, and
with respect to the distribution of such products elsewhere in the European
Territory, UBI and UBSN further agreed that they would require any other
distributor of such products (subject to applicable laws and regulations) both
to obtain such products directly from a company related to UBI or its
subsidiaries and to refrain from seeking customers, or establishing a
distribution network for such products, in the United Kingdom. In exchange,
Shepherd Neame agreed to brew and/or supply Kingfisher Premium Lager and related
products to UBSN for destinations within (and, with the consent of Shepherd
Neame, outside) the United Kingdom. The price UBSN pays to Shepherd Neame for
brewing Kingfisher Premium Lager for distribution in the United Kingdom is set
by a formula which varies according to the applicable duty on Kingfisher Premium
Lager and other factors.

        LOAN AGREEMENT

        Concurrently with the Brewing Agreement described above, UBSN and
Shepherd Neame entered into a Loan Agreement, under which on or about October
24, 2001, Shepherd Neame advanced to UBSN (pound)600,000 (Pounds Sterling) (the
full amount available under the Loan Agreement), at a fixed interest rate of 5%,
for general corporate purposes. This loan is payable in ten annual installments
of (pound)60,000 (Pounds Sterling) each, commencing on June 30, 2003 and
continuing on each anniversary thereof until the Loan is fully repaid. Any
remaining balance of principal or interest will become due and payable (and the
loan will terminate) on June 30, 2013. It would be an event of default under the
Loan Agreement, and the lender would have the right, at will, not only to cancel
the Loan Agreement and accelerate all sums due under it, but also to terminate
the Brewing Agreement, if UBSN were to terminate or default under the Brewing
Agreement, or if either of the License Agreements that UBI and UBSN have entered
into with UB Limited (see "License of the Kingfisher Trademark, above) are
terminated (except in accordance with their terms or in connection with the
parties' entry into an equivalent Brewing Agreement).

                                       36
<PAGE>

DISTRIBUTION AGREEMENT

        UBI entered into a Distribution Agreement with its wholly-owned
subsidiary UBSN on October 9, 1998. Under this agreement, which was subsequently
amended by a Supplemental Agreement dated as of October 24, 2001 (together, the
"Distribution Agreement"), UBI granted UBSN an exclusive sublicense for the
distribution of all lager and other beer products brewed or prepared for sale in
the Company's European Territory, and a sublicense to use the Kingfisher
trademark and trade name, to manufacture, package, market, distribute, and sell
beer and other products using the Kingfisher trademark and logo, and to enter
into the Brewing Agreement described below. The Distribution Agreement, which
also requires UBSN to pay UBI a royalty fee of 50 British pence (approximately
$0.92, at the average exchange rates during 2004) for every 100 liters (26
gallons) of beer brewed for sale in the European Territory, will expire (unless
its term is extended) in October 2013.

MARKET DEVELOPMENT AGREEMENT

        Effective October 26, 2001, MBC and UBSN entered into a Market
Development, General and Administrative Services Agreement (the "Market
Development Agreement"), under the terms of which UBSN engaged MBC to perform a
variety of advertising, promotional, and other market development activities in
the United States, in connection with Kingfisher beer and related consumer
products (the "Products"), provide certain legal and business management support
services to UBSN, and provide assistance with the establishment and management
of distribution channels for the Products in the United States. In consideration
for the services received under this agreement, UBSN agreed to pay MBC service
fees amounting in the aggregate to $1,500,000 over the period from 2001 through
2003. Such payments amounted to $1,000,000 during calendar 2001, $300,000 during
2002, and $200,000 during 2003. No such payments were made during 2004, or are
anticipated to be made in the future. The Market Development Agreement will
continue in force during the term of the Distribution Agreement described above.

BREWING LICENSE AGREEMENT

        Concurrently with the Market Development Agreement described above, MBC
entered into a Brewing License Agreement with UBSN, under the terms of which
UBSN granted to MBC an exclusive license to brew and distribute Kingfisher
Premium Lager in the United States, in exchange for a royalty, payable to UBSN,
of eighty cents ($0.80) for each case of Kingfisher Premium Lager brewed by MBC
under this agreement.

ITEM 14.   PRINCIPAL ACCOUNTING FEES AND SERVICES.

        The Company has appointed Moss Adams, L.L.P. ("Moss Adams"), as its
independent auditors perform the audit of the Company's financial statements.
All audit and other services performed by Moss Adams on behalf of the Company
are approved in advance by the Audit Committee, on a case-by-case basis.

        AUDIT FEES. The aggregate fees billed by Moss Adams for the audit of the
Company's annual consolidated financial statements for the years ended December
31, 2003 and 2004 were $69,251 and $92,754, respectively; fees of an additional
$15,868 and $26,955 were billed to the Company during 2003 and 2004,
respectively, in connection with Moss Adams' review of its financial statements
in connection with the Company's Quarterly Reports on Form 10-QSB and 10-Q for
those years. Such fees represented 79% and 82%, respectively, of the total fees
for services rendered to the Company by Moss Adams during 2003 and 2004.

        AUDIT RELATED FEES. Moss Adams billed $2,146 and $2,888 in fees to the
Company in 2003 and 2004 for assurance or related services.

        TAX FEES. The aggregate fees billed during 2003 and 2004 for products
and services provided by Moss Adams, other than those described in the foregoing
paragraphs, were $18,865 and $15,837,

                                       37
<PAGE>

respectively. Such fees represented 17% and 11%, respectively of the total fees
for services rendered to the Company by Moss Adams during 2003 and 2004.

        ALL OTHER FEES. The aggregate fees billed to the Company for all other
services rendered by Moss Adams for the years ended December 31, 2003 and 2004
were $970 and $7,138, respectively. Such fees represented 9% and 5% respectively
of the total fees for services rendered to the Company by Moss Adams during 2003
and 2004. The Audit Committee has concluded that the provision of the services
described above is not incompatible with maintaining the independence of Moss
Adams as the Company's principal accountants.

        The Company is not aware that any significant amount of the work done
during the course of Moss Adams' audit of the Company's 2004 Financial
Statements was performed by persons other than Moss Adams' full-time, permanent,
employees.

ITEM 15.   EXHIBITS, FINANCIAL STATEMENT SCHEDULES.

(a)     DOCUMENTS FILED AS PART OF THIS REPORT The following documents are filed
        as part of this Report:

        (1)     Audited financial statements and financial statement schedules

                        Report of Moss Adams LLP, Independent Auditors

                        Consolidated Balance Sheets as of December 31, 2004 and
                        2003

                        Consolidated Statements of Operations and Comprehensive
                        Income for the Years Ended December 31, 2004, 2003, and
                        2002

                        Consolidated Statements of Stockholders' Equity for the
                        Years Ended December 31, 2004, 2003, and 2002

                        Consolidated Statements of Cash Flow for the Years Ended
                        December 31, 2004, 2003, and 2002

                        Notes to Financial Statements

        (2)     FINANCIAL STATEMENT SCHEDULES. Those financial statement
                schedules required to be filed by Item 8 of this Annual Report
                on Form 10-K are listed above. All other financial statement
                schedules are omitted because they were not required or the
                required information is included in the Financial Statements or
                Notes thereto.

        (3)     LIST OF EXHIBITS.

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

  3.1   (T)     Articles of Incorporation of the Company, as amended.
  3.2   (T)     Bylaws of the Company, as amended.
 10.1   (A)     Mendocino Brewing Company Profit Sharing Plan.
 10.2   (T)     Amended 1994 Stock Option Plan

                                       38
<PAGE>

        (3)     LIST OF EXHIBITS (Continued)

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

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

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

 10.5   (B)     Liquid Sediment Removal Services Agreement with Cold Creek
                Compost, Inc.

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

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

 10.8   (D)     Commercial Lease between Stewart's Ice Cream Company, Inc. and
                Releta Brewing Company LLC.

 10.9   (E)     Agreement between United Breweries of America Inc. and Releta
                Brewing Company LLC regarding payment of certain liens.

 10.10  (F)     Keg Management Agreement with MicroStar Keg Management LLC.

 10.11  (G)     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).

 10.12  (H)     Manufacturing Business Expansion and Relocation Agreement with
                the City of Ukiah.

 10.13  (H)     Manufacturing Business Expansion and Relocation Agreement with
                the Ukiah Redevelopment Agency.

 10.14  (I)     $2,700,000 Note in favor of the Savings Bank of Mendocino
                County.

 10.15  (I)     Hazardous Substances Certificate and Indemnity with the Savings
                Bank of Mendocino County.

 10.16  (J)     Equipment Lease with Finova Capital Corporation.

 10.17  (J)     Tri-Election Rider to Equipment Lease with Finova Capital
                Corporation.

 10.18  (J)     Master Lease Schedule with Finova Capital Corporation.

 10.19  (K)     Investment Agreement with United Breweries of America, Inc.

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

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

 10.22  (L)     Indemnification Agreement with Vijay Mallya.

 10.23  (L)     Indemnification Agreement with Michael Laybourn.

 10.24  (L)     Indemnification Agreement with Jerome Merchant.

 10.25  (L)     Indemnification Agreement with Yashpal Singh.

 10.27  (L)     Indemnification Agreement with Robert Neame.

 10.28  (L)     Indemnification Agreement with Sury Rao Palamand.

 10.29  (L)     Indemnification Agreement with Kent Price.

                                       39
<PAGE>

        (3)     LIST OF EXHIBITS (Continued)

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

 10.30  (M)     Loan and Security Agreement between the Company, Releta Brewing
                Company LLC and The CIT Group/Credit Finance, Inc. regarding a
                $3,000,000 maximum line of credit.

 10.31  (M)     Patent, Trademark and License Mortgage by the Company in favor
                of The CIT Group/Credit Finance, Inc.

 10.32  (M)     Patent, Trademark and License Mortgage by Releta Brewing Company
                LLC in favor of The CIT Group/Credit Finance, Inc.

 10.33  (N)     Employment Agreement with Yashpal Singh.

 10.35  (O)     Master Loan Agreement between the Company and the United
                Breweries of America Inc.

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

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

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

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

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

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

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

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

 10.44  (P)     First Amendment to Master Loan Agreement between the Company
                and United Breweries of Comerica, Inc., dated April 28, 2000

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

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

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

 10.48  (Q)     Convertible Note in favor of the United Breweries of America
                Inc. dated February 12, 2001

 10.49  (R)     Convertible Note in favor of the United Breweries of America
                Inc. dated July 1, 2001


                                       40
<PAGE>

        (3)     LIST OF EXHIBITS (Continued)

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

 10.50  (S)     Confirmation of Waiver Between Mendocino Brewing Company, Inc.
                and United Breweries of America, Inc., dated as of December 28,
                2001

 10.51  (S)     Extension of Term of Notes Under Master Line of Credit Agreement
                between Mendocino Brewing Company, Inc. and United Breweries of
                America, Inc., dated February 14, 2002

 10.52  (T)     License Agreement between United Breweries Limited and United
                Breweries International (U.K.), Limited

 10.53  (T)     Supplemental Agreement to License Agreement between United
                Breweries Limited and United Breweries International (U.K.),
                Limited

 10.54  (T)     Distribution Agreement between United Breweries International
                (U.K.), Limited. and UBSN, Ltd.

 10.55  (T)     Supplemental Agreement to Distribution Agreement between United
                Breweries International (U.K.), Limited. and UBSN, Ltd.

 10.56  (T)     Market Development, General and Administrative Services
                Agreement between Mendocino Brewing Company, Inc. and UBSN, Ltd.

 10.57  (T)     Contract to Brew and Supply Kingfisher Products among Shepherd
                Neame, Limited, United Breweries International (U.K.), Limited.
                and UBSN, Ltd.

 10.58  (T)     Supplemental Agreement to Contract to Brew and Supply Kingfisher
                Products among Shepherd Neame, Limited, United Breweries
                International (U.K.), Limited. and UBSN, Ltd.

 10.59  (T)     Loan Agreement between Shepherd Neame, Limited and UBSN, Ltd.

 10.60  (T)     Brewing License Agreement between UBSN, Ltd. and Mendocino
                Brewing Company, Inc.

 10.61  (T)     Kingfisher Trade Mark and Trade Name License Agreement between
                Kingfisher of America, Inc. and Mendocino Brewing Company, Inc.

 10.62  (U)     First Amendment to Extension of Term of Notes Under Master Line
                of Credit Agreement between Mendocino Brewing Company, Inc. and
                United Breweries of America, Inc., dated November 13, 2002.

 10.63  (U)     Second Amendment to Extension of Term of Notes Under Master Line
                of Credit Agreement between Mendocino Brewing Company, Inc. and
                United Breweries of America, Inc., dated March, 2003.

 10.64  (V)     Amendment to Loan and Security Agreement between Mendocino
                Brewing Company, Inc. and Releta Brewing Company, LLC and the
                CIT Group/Business Credit, Inc., dated January 17, 2003.

 10.65  (V)     Commitment Letter from United Breweries of America, Inc. dated
                March 31, 2004.

 10.66  (W)     Extension of Loan and Security Agreement between the Company,
                Releta Brewing Company LLC and The CIT Group/Credit Finance,
                Inc., dated July 1, 2004

 10.67  (W)     Revised Promissory Note in favor of Savings Bank of Mendocino
                County, dated as of July 20, 2004

                                       41
<PAGE>

        (3)     LIST OF EXHIBITS (Continued)

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

 10.68  (X)     Fourth Amendment to Extension of Term of Notes Under Master Line
                of Credit Agreement between Mendocino Brewing Company, Inc. and
                United Breweries of America, Inc., dated as of August 14, 2004

 10.69  (Y)     Settlement Agreement and Release between the Company and House
                of Daniels, Inc., dba Golden Gate Distributing Company, dated as
                of November 1, 2004

 10.70  (Z)     Secondment Agreement dated October 9, 1998 between UBSN, Ltd.
                and Shepherd Neame, Ltd.

 10.71  (Z)     Agreement to Extend Loan and Security Agreement between the
                Company, Releta Brewing Company LLC and The CIT Group/Credit
                Finance, Inc., dated October 31, 2004

 10.72  (Z)     Revised Promissory Note in favor of Savings Bank of Mendocino
                County, dated as of November 1 2004

 10.73  (AA)    Settlement Agreement and Release, effective as of December 9,
                2004

 10.74  (BB)    Convertible Promissory Note of Mendocino Brewing Company, Inc.
                in favor of United Breweries of America, Inc., dated March 2,
                2005

 14.1   (V)     Code of Ethics

        NOTES: Each Exhibit listed above that is annotated with one or more of
the following letters is incorporated by reference from the following sources:

(A)     The Company's Registration Statement dated June 15, 1994, as amended,
        previously filed with the Commission, Registration No. 33-78390-LA.

(B)     The Company's Annual Report on Form 10-KSB for the period ended December
        31, 1995.

(C)     The Company's Quarterly Report on Form 10-QSB for the period ended March
        31, 1995.

(D)     The Company's Quarterly Report on Form 10-QSB/A No. 1 for the period
        ended September 30, 1997.

(E)     The Company's Quarterly Report on Form 10-QSB for the quarterly period
        ended September 30, 1997.

(F)     The Company's Annual Report on Form 10-KSB for the period ended December
        31, 1996

(G)     The Company's Quarterly Report on Form 10-QSB for the period ended
        September 30, 1995

(H)     The Company's Quarterly Report on Form 10-QSB for the period ended June
        30, 1996

(I)     The Company's Annual Report on Form 10-KSB for the period ended December
        31, 1997

(J)     The Company's Registration Statement dated February 6, 1997, as amended,
        Registration No. 33-15673

(K)     Schedule 13D filed November 3, 1997, by United Breweries of America,
        Inc. and Vijay Mallya

(L)     The Company's Quarterly Report on Form 10-QSB for the period ended June
        30, 1998

(M)     The Company's Quarterly Report on Form 10-QSB for the period ended
        September 30, 1998

(N)     The Company's Quarterly Report on Form 10-QSB for the period ended June
        30, 1999

                                       42
<PAGE>

(O)     Amendment No. 5 to Schedule 13D filed September 15, 1999, by United
        Breweries of America, Inc. and Vijay Mallya.

(P)     Amendment No. 6 to Schedule l3D filed May 12, 2000, by United Breweries
        of America, Inc. and Vijay Mallya.

(Q)     Amendment No. 7 to Schedule 13D filed February 22, 2001, by United
        Breweries of America, Inc. and Vijay Mallya.

(R)     Amendment No. 8 to Schedule 13D filed August 22, 2001, by United
        Breweries of America, Inc and Vijay Mallya.

(S)     The Company's Current Report on Form 8-K filed as of February 19, 2002

(T)     The Company's Annual Report on Form 10-KSB for the period ended December
        31, 2001

(U)     Amendment No. 9 to Schedule 13D filed March 31, 2003, by United
        Breweries of America, Inc. and Vijay Mallya

(V)     The Company's Annual Report on Form 10-KSB for the year ended December
        31, 2003

(W)     The Company's Quarterly Report on Form 10-Q for the period ended June
        30, 2004

(X)     Amendment No. 11 to Schedule 13D, jointly filed by United Breweries of
        America, Inc. and Dr. Vijay Mallya on August 16, 2004

(Y)     The Company's Current Report on Form 8-K filed as of November 1, 2004

(Z)     The Company's Quarterly Report on Form 10-Q for the period ended
        September 30, 2004

(AA)    The Company's Current Report on Form 8-K filed as of November 25, 2004

(BB)    The Company's Current Report on Form 8-K filed as of March 2. 2005

(b)     EXHIBITS ATTACHED The following Exhibits are attached to this Annual
        Report on Form 10-K:

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

10.75   Loan and Security Agreement (Accounts Receivable & Inventory Line of
        Credit) dated May 5, 2005 between the Company and BFI Business Finance

31.1    Certification of Chief Executive Officer pursuant to Rule
        13a-14(a)/15d-14(a)

31.2    Certification of Chief Financial Officer pursuant to Rule
        13a-14(a)/15d-14(a)

32.1    Certification of Chief Executive Officer Pursuant to U.S.C. 1350

32.2    Certification of Chief Financial Officer Pursuant to U.S.C. 1350

(c)     EXCLUDED FINANCIAL STATEMENTS. None.


                                       43
<PAGE>

                                   SIGNATURES

        Pursuant to the requirements of Section 13 or 15(d) f the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereto duly authorized.

                                  (Registrant) MENDOCINO BREWING COMPANY, INC.

                                               By: /s/ Yashpal Singh
                                                  ------------------------------
                                                   Yashpal Singh
                                                   Its President, Director and
                                                   Chief Executive Officer

                                               Date: August 31, 2005


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

                                  (Registrant) MENDOCINO BREWING COMPANY, INC.


                                               By: /s/ Yashpal Singh
                                                  ------------------------------
                                                   Yashpal Singh
                                                   Its President, Director and
                                                   Chief Executive Officer

                                               Date: August 31, 2005



                                               By: /s/ Scott R. Heldfond
                                                  ------------------------------
                                                  Scott R. Heldfond,
                                                  Director

                                               Date: August 31, 2005



                                               By: /s/ Jerome G. Merchant
                                                  ------------------------------
                                                  Jerome G. Merchant,
                                                  Director

                                               Date: August 31, 2005



                                               By: /s/ N. Mahadevan
                                                  ------------------------------
                                                  N. Mahadevan
                                                  Its Secretary and Chief
                                                  Financial Officer

                                               Date: August 31, 2005


                                               By: /s/ H. Michael Laybourn,
                                                  ------------------------------
                                                  H. Michael Laybourn,
                                                  Director

                                               Date: August 31, 2005


                                       44
<PAGE>

                                               By: /s/ Kent Price
                                                  ------------------------------
                                                  Kent Price,
                                                  Director

                                               Date: August 31, 2005



                                               By: /s/ Sury Rao Palamand,
                                                  ------------------------------
                                                  Sury Rao Palamand,
                                                  Director

                                               Date: August 31, 2005




                                       45

<PAGE>

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




                                    CONTENTS


                                                                            PAGE

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM......................F-1


CONSOLIDATED FINANCIAL STATEMENTS

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

     Statements of operations and comprehensive income.......................F-3

     Statements of stockholders' equity......................................F-4

     Statements of cash flows................................................F-5

     Notes to financial statements...........................................F-6







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

<PAGE>

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


To the Board of Directors and Stockholders
Mendocino Brewing Company, Inc.

We have audited the accompanying consolidated balance sheets of Mendocino
Brewing Company, Inc., as of December 31, 2004 and 2003, and the related
consolidated statements of operations and comprehensive income, stockholders'
equity and cash flows for each of the three years ended December 31, 2004. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Mendocino Brewing
Company, Inc., as of December 31, 2004 and 2003, and the results of its
operations and cash flows for each of the three years ended December 31, 2004,
in conformity with accounting principles generally accepted in the United States
of America.


                               /s/ MOSS ADAMS LLP

Santa Rosa, California
February 4, 2005, except for Notes 2 and 5,
   as to which the date is May 6, 2005

                                                                        PAGE F-1
<PAGE>
<TABLE>
<CAPTION>
                                                                          MENDOCINO BREWING COMPANY, INC.
                                                                              CONSOLIDATED BALANCE SHEETS
                                                                               DECEMBER 31, 2004 AND 2003

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

                                                  ASSETS
                                                                              2004               2003
                                                                        ---------------   ---------------
<S>                                                                      <C>               <C>
CURRENT ASSETS
     Cash                                                                $     526,600     $     554,300
     Accounts receivable, net of allowance for doubtful accounts
         of $47,500 and $37,800                                              8,477,200         7,017,700
     Inventories                                                             1,185,400         1,186,100
     Prepaid expenses                                                          347,300           555,500
                                                                        ---------------   ---------------

         Total current assets                                               10,536,500         9,313,600
                                                                        ---------------   ---------------

PROPERTY AND EQUIPMENT                                                      13,533,900        13,874,800
                                                                        ---------------   ---------------

OTHER ASSETS
     Deposits and other assets                                                 205,100           188,600
     Intangibles, net of amortization                                           87,600            94,700
                                                                        ---------------   ---------------

                                                                               292,700           283,300
                                                                        ---------------   ---------------

         Total assets                                                    $  24,363,100     $  23,471,700
                                                                        ===============   ===============

                                   LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES
     Line of credit                                                      $   3,282,200     $   1,974,800
     Note payable                                                              576,200           576,200
     Accounts payable                                                        5,897,600         5,340,100
     Accrued liabilities                                                     1,402,900         1,275,100
     Legal dispute settlement                                                  911,800           655,200
     Income taxes payable                                                      134,100           465,100
     Current maturities of long-term debt                                      400,300           693,700
     Current maturities of capital lease obligations                           146,500           129,000
                                                                        ---------------   ---------------

         Total current liabilities                                          12,751,600        11,109,200

NOTES TO RELATED PARTY - SUBORDINATED                                        2,010,100         1,921,500

LONG-TERM DEBT, less current maturities                                      3,384,800         3,730,300

CAPITAL LEASE OBLIGATIONS, less current maturities                              62,600           204,100
                                                                        ---------------   ---------------

         Total liabilities                                                  18,209,100        16,965,100
                                                                        ---------------   ---------------

STOCKHOLDERS' EQUITY
     Preferred stock, Series A, no par value, with aggregate
         liquidation preference of $227,600; 10,000,000 shares
         authorized, 227,600 shares issued and outstanding                     227,600           227,600
     Common stock, no par value; 30,000,000 shares authorized,
         11,266,874 shares issued and outstanding                           14,648,600        14,648,600
     Accumulated comprehensive income                                          194,300            78,000
     Accumulated deficit                                                    (8,916,500)       (8,447,600)
                                                                        ---------------   ---------------

         Total stockholders' equity                                          6,154,000         6,506,600
                                                                        ---------------   ---------------

         Total liabilities and stockholders' equity                      $  24,363,100     $  23,471,700
                                                                        ===============   ===============

SEE ACCOMPANYING NOTES.
---------------------------------------------------------------------------------------------------------
                                                                                                 PAGE F-2
</TABLE>

<PAGE>
<TABLE>
<CAPTION>
                                                                              MENDOCINO BREWING COMPANY, INC.
                                               CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
                                                                YEARS ENDED DECEMBER 31, 2004, 2003, AND 2002

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

                                                               2004              2003              2002
                                                         ----------------  ----------------  ----------------
<S>                                                       <C>               <C>               <C>
SALES                                                    $     32,157,900  $     28,864,200  $     26,085,100

LESS EXCISE TAXES                                                 652,400           673,900           651,600
                                                         ----------------  ----------------  ----------------

NET SALES                                                      31,505,500        28,190,300        25,433,500

COST OF GOODS SOLD                                             21,045,500        19,145,500        16,892,800
                                                         ----------------  ----------------  ----------------

GROSS PROFIT                                                   10,460,000         9,044,800         8,540,700
                                                         ----------------  ----------------  ----------------

OPERATING EXPENSES
      Retail operating                                            139,500           323,400           335,300
      Marketing                                                 5,841,200         4,423,900         4,244,400
      General and administrative                                3,774,900         3,320,000         2,732,300
      Legal dispute settlement                                    250,600                 -                 -
                                                         ----------------  ----------------  ----------------
                                                               10,006,200         8,067,300         7,312,000
                                                         ----------------  ----------------  ----------------

INCOME FROM OPERATIONS                                            453,800           977,500         1,228,700
                                                         ----------------  ----------------  ----------------

OTHER INCOME (EXPENSE)
      Miscellaneous income                                         36,800           162,900           200,200
      Profit (loss) on sale of equipment                           15,600              (300)           (9,200)
      Interest expense                                           (853,300)         (828,500)         (926,400)
                                                         ----------------  ----------------  ----------------

                                                                 (800,900)         (665,900)         (735,400)
                                                         ----------------  ----------------  ----------------

INCOME (LOSS) BEFORE INCOME TAXES                                (347,100)          311,600           493,300

PROVISION FOR INCOME TAXES                                        121,800           264,700         2,223,100
                                                         ----------------  ----------------  ----------------

NET INCOME (LOSS)                                                (468,900)           46,900        (1,729,800)

OTHER COMPREHENSIVE INCOME
      Foreign currency translation adjustment                     116,300           113,300            42,500
                                                         ----------------  ----------------  ----------------

COMPREHENSIVE INCOME (LOSS)                              $       (352,600) $        160,200  $     (1,687,300)
                                                         ================  ================  ================

NET INCOME (LOSS) PER COMMON SHARE -
      Basic and diluted                                  $          (0.04) $           0.00  $          (0.15)
                                                         ================  ================  ================
WEIGHTED AVERAGE COMMON SHARES
      OUTSTANDING - basic and diluted                          11,266,874        11,266,874        11,173,686
                                                         ================  ================  ================


SEE ACCOMPANYING NOTES.
-------------------------------------------------------------------------------------------------------------
                                                                                                     PAGE F-3
</TABLE>

<PAGE>
<TABLE>
<CAPTION>
                                                                                                 MENDOCINO BREWING COMPANY, INC.
                                                                                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                                                                                   YEARS ENDED DECEMBER 31, 2004, 2003, AND 2002

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

                                         SERIES A
                                      PREFERRED STOCK           COMMON STOCK         ACCUMULATED
                                   ---------------------- ------------------------- COMPREHENSIVE     ACCUMULATED      TOTAL
                                     SHARES      AMOUNT      SHARES       AMOUNT     INCOME (LOSS)      DEFICIT        EQUITY
                                   ---------- ----------- ----------- ------------- --------------- --------------  ------------
<S>                                  <C>       <C>        <C>         <C>                <C>         <C>            <C>
Balance, December 31, 2001           227,600   $ 227,600  11,083,228  $ 14,476,500       $ (77,800)  $ (6,764,700)  $ 7,861,600

Stock issued for services                  -           -     135,665       125,100               -              -       125,100

Stock issued to Board of Directors         -           -      47,981        47,000               -              -        47,000

Currency translation adjustment            -           -           -             -          42,500              -        42,500

Net loss                                   -           -           -             -               -     (1,729,800)   (1,729,800)
                                   ---------- ----------- ----------- ------------- --------------- --------------  ------------

Balance, December 31, 2002           227,600     227,600  11,266,874    14,648,600         (35,300)    (8,494,500)    6,346,400

Currency translation adjustment            -           -           -             -         113,300              -       113,300

Net income                                 -           -           -             -               -         46,900        46,900
                                   ---------- ----------- ----------- ------------- --------------- --------------  ------------

Balance, December 31, 2003           227,600     227,600  11,266,874    14,648,600          78,000     (8,447,600)    6,506,600
                                   ---------- ----------- ----------- ------------- --------------- --------------  ------------

Currency translation adjustment            -           -           -             -         116,300              -       116,300

Net loss                                   -           -           -             -               -       (468,900)     (468,900)
                                   ---------- ----------- ----------- ------------- --------------- --------------  ------------

Balance, December 31, 2004           227,600   $ 227,600  11,266,874  $ 14,648,600       $ 194,300   $ (8,916,500)  $ 6,154,000
                                   ========== =========== =========== ============= =============== ==============  ============


SEE ACCOMPANYING NOTES.
--------------------------------------------------------------------------------------------------------------------------------
                                                                                                                        PAGE F-4
</TABLE>

<PAGE>
<TABLE>
<CAPTION>

                                                                                MENDOCINO BREWING COMPANY, INC.
                                                                          CONSOLIDATED STATEMENTS OF CASH FLOWS
                                                                  YEARS ENDED DECEMBER 31, 2004, 2003, AND 2002

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

                                                                 2004              2003               2002
                                                           ----------------   ---------------   ---------------
<S>                                                         <C>                <C>               <C>
CASH FLOWS FROM OPERATING ACTIVITIES
  Net income (loss)                                         $     (468,900)    $      46,900     $  (1,729,800)
  Adjustments to reconcile net income (loss) to net
      cash from operating activities:
         Depreciation and amortization                           1,031,300         1,127,400         1,049,000
         Allowance for doubtful accounts                             8,000          (122,700)           18,700
         Loss (profit) on sale of assets                           (15,600)              300             9,200
         Deferred income taxes                                           -                 -         1,922,600
         Stock issued for services                                       -                 -            44,000
      Changes in:
         Accounts receivable                                    (1,004,900)         (519,800)            4,800
         Inventories                                                   700           288,200          (199,700)
         Prepaid expenses                                          224,200          (124,200)          (68,100)
         Deposits and other assets                                 (27,800)           (5,800)           13,800
         Accounts payable                                          125,700           155,800           (21,000)
         Accrued liabilities                                       338,200           334,200            12,500
         Income taxes payable                                     (192,500)          (24,400)          170,200
                                                           ----------------   ---------------   ---------------

             Net cash from operating activities                     18,400         1,155,900         1,226,200
                                                           ----------------   ---------------   ---------------

CASH FLOWS FROM INVESTING ACTIVITIES
  Purchases of property and equipment                             (597,800)         (728,600)         (368,100)
  Proceeds from new distributors                                         -           655,200                 -
  Proceeds from sale of fixed assets                                24,300            15,200            23,700
                                                           ----------------   ---------------   ---------------

             Net cash from investing activities                   (573,500)          (58,200)         (344,400)
                                                           ----------------   ---------------   ---------------

CASH FLOWS FROM FINANCING ACTIVITIES
  Net repayments (borrowings) on line of credit                  1,211,500           347,600          (350,900)
  Borrowings on long-term debt                                           -           403,700                 -
  Principal payments on long-term debt                            (704,200)         (734,700)         (356,400)
  Payments on obligations under capital lease                     (124,000)         (680,900)         (359,000)
  Disbursements in excess of deposits                                    -          (134,300)          134,300
  Proceeds from notes payable to related party                      88,600            85,200            93,500
                                                           ----------------   ---------------   ---------------

             Net cash from financing activities                    471,900          (713,400)         (838,500)
                                                           ----------------   ---------------   ---------------

EFFECT OF EXCHANGE RATE CHANGES ON CASH                             55,500            23,200            13,700
                                                           ----------------   ---------------   ---------------

NET CHANGE IN CASH                                                 (27,700)          407,500            57,000

CASH, beginning of year                                            554,300           146,800            89,800
                                                           ----------------   ---------------   ---------------

CASH, end of year                                           $      526,600     $     554,300     $     146,800
                                                           ================   ===============   ===============

SUPPLEMENTAL CASH FLOW INFORMATION
  Cash paid during the year for:
      Interest                                              $      764,700     $     743,300      $     950,600
      Income taxes                                          $      314,200     $     305,600      $     147,700
  Non-cash investing and financing activities:
      Seller financed equipment                             $       15,400     $     173,900      $     117,400
      Accounts payable converted to note payable            $            -     $     752,600      $           -

SEE ACCOMPANYING NOTES.
---------------------------------------------------------------------------------------------------------------
                                                                                                       PAGE F-5
</TABLE>

<PAGE>

                                                 MENDOCINO BREWING COMPANY, INC.
                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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

DESCRIPTION OF OPERATIONS - Mendocino Brewing Company, Inc. (the Company), and
its subsidiary, Releta Brewing Company, operate two breweries that produce beer
and malt beverages for the specialty "craft" segment of the beer market. The
breweries are located in Ukiah, California and Saratoga Springs, New York. The
Company also owns and operates a brewpub and gift store located in Hopland,
California. The majority of sales for Mendocino Brewing Company are in
California. The Company brews several brands, of which Red Tail Ale is the
flagship brand. In addition, the Company performs contract brewing for several
other brands.

The Company's subsidiary, United Breweries International, Limited (UK) (UBIUK),
is a holding company for UBSN Limited. UBSN is a distributor of alcoholic
beverages, mainly Kingfisher Lager, in the United Kingdom and Europe. The
distributorship is located in Faversham, Kent in the United Kingdom.

PRINCIPLES OF CONSOLIDATION - The consolidated financial statements present the
accounts of Mendocino Brewing Company, Inc., and its wholly-owned subsidiaries,
Releta Brewing Company, LLC, and UBIUK. All material inter-company balances,
profits, 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. Leasehold improvements are amortized over the
shorter of the life of the related asset or the life of the lease. Costs of
maintenance and repairs are charged to expense as incurred; significant renewals
and betterments are capitalized. Long-lived assets are assessed for impairment
whenever events or changes in circumstances indicate the assets' carrying amount
may not be recoverable. The evaluation is based on an estimate of the future
undiscounted net cash flows of the related asset or asset grouping over the
assets' remaining life. Long-lived assets that are assessed to be impaired are
reduced to their estimated net fair value.

Estimated useful lives of property and equipment are as follows:

         Building                                          40 years
         Machinery and equipment                       3 - 40 years
         Equipment under capital lease                 3 - 20 years
         Leasehold improvements                        7 - 20 years
         Vehicles                                      2 -  5 years
         Furniture and fixtures                        5 - 10 years

INTANGIBLES - Intangibles consist of receipts, trade names, trademarks, and
other intangibles. Intangibles that are amortized have a gross carrying value of
$104,400 and accumulated amortization of $80,300 and are amortized using the
straight-line method over 20 years, which is the estimated useful life of the
intangibles. Amortization is approximately $8,600 per year. Assets determined to
have indefinite lives are no longer amortized in accordance with SFAS No. 142,
GOODWILL AND OTHER INTANGIBLES, but are tested for impairment on an annual
basis. The carrying amount of intangibles not subject to amortization is $63,500
for December 31, 2004 and 2003.

CONCENTRATION OF CREDIT RISKS - Financial instruments that potentially subject
the Company to credit risk consist principally of trade receivables, cash
deposits in excess of FDIC limits, and assets located in the United Kingdom. The
Company's cash deposits are placed with major financial institutions. At
December 31, 2004, $420,000 of the Company's cash is being restricted to use by
the bank which is holding the amount as collateral for a note payable classified
as current. Wholesale distributors account for substantially all accounts
receivable; therefore, this risk concentration is limited due to the number of
distributors and the laws regulating the financial affairs of distributors of
alcoholic beverages. The Company has approximately $240,600 in cash deposits and
$6,907,500 of accounts receivable due from customers located in the United
Kingdom.

INCOME TAXES - The provision for income taxes is based on pre-tax earnings
reported in the financial statements and 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 the tax basis of such assets
and liabilities, and the future benefits from net operating loss carryforwards.

SHIPPING COSTS - Shipping costs are included in marketing expense and totaled
$978,600, $576,500, and $600,200 for the years ended December 31, 2004, 2003,
and 2002.


--------------------------------------------------------------------------------
                                                                        PAGE F-6

<PAGE>

                                                 MENDOCINO BREWING COMPANY, INC.
                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

REVENUE RECOGNITION - The Company recognizes revenue from the brewing and
distribution operations when the product is shipped. Revenues from the brewpub
and gift store are recognized when services have been completed.

STOCK-BASED COMPENSATION - The Company accounts for stock-based employee
compensation arrangements in accordance with the provisions of Accounting
Principles Board Opinion (APB) No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES,
and complies with the disclosure provisions of Statement of Financial Accounting
Standards (SFAS) No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION. Under APB No.
25, compensation expense is the excess, if any, of the fair value of the
Company's stock at a measurement date over the amount that must be paid to
acquire the stock. SFAS No. 123 requires a fair value method to be used when
determining compensation expense for stock options and similar equity
instruments. SFAS No. 123 permits a company to continue to use APB No. 25 to
account for stock-based compensation to employees, but pro forma disclosures of
net income and earnings per share must be made as if SFAS No. 123 had been
adopted in its entirety. Stock options issued to non-employees are valued under
the provisions of SFAS No. 123.

Had compensation cost for the Company's options been determined based on the
methodology prescribed under SFAS No. 123, the Company's net loss and loss per
share would have been as follows:

<TABLE>
<CAPTION>
                                                   2004            2003             2002
                                             ---------------  ---------------  ---------------
<S>                                           <C>              <C>              <C>
Net income (loss) - as reported               $    (468,900)   $      46,900    $  (1,729,800)
Compensation expense                                      -                -           99,100
                                             ---------------  ---------------  ---------------

Net income (loss) - pro forma                 $    (468,900)   $      46,900    $  (1,828,900)
                                             ===============  ===============  ===============

Income (loss) per share - pro forma           $       (0.04)   $        0.00    $       (0.16)
</TABLE>

The fair value of each option is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions:

<TABLE>
<CAPTION>
                                                   2004            2003             2002
                                             ---------------  ---------------  ---------------
<S>                                                 <C>             <C>            <C>
Dividends                                           N/A             N/A              None
Expected volatility                                 N/A             N/A              107%
Risk free interest rate                             N/A             N/A             4.50%
Expected life                                       N/A             N/A            5 years
</TABLE>

INCOME (LOSS) PER COMMON SHARE - Income (loss) per common share is computed
using the weighted average number of common shares outstanding. A diluted
earnings per share number is not presented because the inclusion of common stock
equivalents in the computation would be antidilutive. Common stock equivalents
associated with convertible notes and stock options, which are exercisable into
1,680,419, 1,710,290, and 1,653,474 of common stock at December 31, 2004, 2003,
and 2002, could potentially dilute earnings per share in future years.

FOREIGN CURRENCY TRANSLATION - The assets and liabilities of UBIUK were
translated at the United Kingdom pound sterling - U.S. dollar exchange rates in
effect at December 31, 2004 and 2003, and the statements of operations were
translated at the average exchange rates for the years then ended. Gains and
losses resulting from the translations were deferred and recorded as a separate
component of consolidated stockholders' equity. Cash at UBIUK was translated at
exchange rates in effect at December 31, 2004 and 2003, and its cash flows were
translated at the average exchange rates for the years then ended. Changes in
cash resulting from the translations are presented as a separate item in the
statements of cash flows.

USE OF ESTIMATES - The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires the Company to 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. Significant estimates include the future utilization of deferred
tax assets. The Company has determined that deferred tax assets associated with
net operating loss carryforwards may expire prior to utilization. The Company
has placed a valuation allowance on these assets.


--------------------------------------------------------------------------------
                                                                        PAGE F-7

<PAGE>

                                                 MENDOCINO BREWING COMPANY, INC.
                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

ACCOUNTS RECEIVABLE - Accounts receivable are reported at net realizable value.
The Company has established an allowance for doubtful accounts based on factors
pertaining to the credit risk of specific customers, historical trends, and
other information. Delinquent accounts are written-off when it is determined
that the amounts are uncollectible.

ADVERTISING - Advertising costs are expensed as incurred and were $1,674,000,
$1,196,100, and $972,400 for the years ended December 31, 2004, 2003, and 2002.

FAIR VALUE OF FINANCIAL INSTRUMENTS - The following methods and assumptions were
used by the Company in estimating its fair value disclosures for financial
instruments:

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

COMPREHENSIVE INCOME (LOSS) - Comprehensive income (loss) is composed of the
Company's net income (loss) and changes in equity from non-stockholder sources.
The accumulated balances of these non-stockholder sources are reflected as a
separate item in the equity section of the balance sheet.

RECENT ACCOUNTING PRONOUNCEMENTS - In December 2004, the FASB issued SFAS No.
123 (revised 2004) (SFAS 123R), SHARE-BASED PAYMENT, which replaces SFAS No.
123, ACCOUNTING FOR STOCK-BASED COMPENSATION and supersedes APB Opinion No. 25,
ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES. SFAS 123R requires all share-based
payments to employees, including grants of employee stock options, to be
recognized in the financial statements based on their fair values, beginning
with the first interim or annual period after June 15, 2005, with early adoption
encouraged. The pro forma disclosures previously permitted under SFAS 123 will
no longer be an alternative to financial statement recognition. The Company is
currently evaluating the requirements of SFAS 123R, but it is expected that
adoption of SFAS 123R will have an immaterial impact on the Company's
consolidated results of operations.

In November 2004, the FASB issued SFAS No. 151, Inventory Costs, an amendment of
ARB No. 43, Chapter 4. This statement clarifies the accounting for abnormal
amounts of idle facility expense, freight, handling costs and wasted material.
SFAS 151 is effective for inventory costs incurred during fiscal years beginning
after June 15, 2005. The Company does not believe adoption of Statement 151 will
have a material effect on its consolidated financial position, results of
operations or cash flows.

NOTE 2 - LIQUIDITY AND MANAGEMENT PLANS

Subsequent to December 31, 2004, the Company successfully refinanced a debt that
matured in April 2005 and secured a commitment from another lender for extension
of their loan until May 2006. Additionally, one of the Company's majority
stockholders has guaranteed to provide financial support to avoid any possible
default action by Savings Bank of Mendocino County. The Company is pursuing
other refinancing opportunities to augment working capital, as well as exploring
the prospect of expatriating excess earnings from its subsidiary. (Please see
Note 5.)

On May 5, 2005, the Company entered into a receivables and inventory-based line
of credit transaction with BFI Business Finance ("BFI"), pursuant to which BFI
has provided the Company with a $2,000,000 maximum revolving line of credit with
an advance rate based on 80% of MBC's qualified accounts receivable, 70% of
Releta's qualified accounts receivable, and 50% of the eligible inventory
carried by both MBC and Releta (the "BFI Line of Credit"). At the same time, BFI
also advanced the Company $31,240 under a promissory note (the "BFI Note" and,
together with the BFI Line of Credit, the "BFI Facility"). On May 6, 2005, the
Company used the entire immediately available amount drawable under the BFI
Facility to pay off the balance remaining outstanding under the CIT Line of
Credit.

NOTE 3 - INVENTORIES

                                                      2004             2003
                                                ---------------  ---------------

     Raw materials                               $     357,500    $     459,600
     Work-in-process                                   140,100          190,400
     Finished goods                                    664,700          510,000
     Merchandise                                        23,100           26,100
                                                ---------------  ---------------

                                                 $   1,185,400    $   1,186,100
                                                ===============  ===============


--------------------------------------------------------------------------------
                                                                        PAGE F-8

<PAGE>

                                                 MENDOCINO BREWING COMPANY, INC.
                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 4 - PROPERTY AND EQUIPMENT

<TABLE>
<CAPTION>
                                                                  2004               2003
                                                            -----------------  -----------------
<S>                                                          <C>                <C>
     Machinery and equipment                                 $    10,744,400    $    10,323,800
     Buildings                                                     7,202,300          7,202,300
     Equipment under capital lease                                   772,600            573,300
     Land                                                            810,900            810,900
     Leasehold improvements                                        1,432,400          1,432,400
     Vehicles                                                        419,800            100,300
     Furniture and fixtures                                          129,000            167,800
     Equipment in progress                                            80,800            256,800
                                                            -----------------  -----------------

                                                                  21,592,200         20,867,600
     Less accumulated depreciation and amortization                8,058,300          6,992,800
                                                            -----------------  -----------------

                                                             $    13,533,900    $    13,874,800
                                                            =================  =================
</TABLE>

The Company has property and equipment located in the United Kingdom with a net
book value of approximately $1,385,800.

NOTE 5 - LINE OF CREDIT AND NOTE PAYABLE

Commencing in September 1998, The CIT Group/Credit Finance, Inc. made available
to the Company a $3,500,000 line of credit, with interest at the prime rate plus
2.25% secured by substantially all of the assets of the Releta Brewing Company,
LLC, accounts receivable, inventory, certain securities pledged by a
stockholder, and a second position on the real property of Mendocino Brewing
Company. The Company had $1,552,700 and $1,209,300 outstanding as of December
31, 2004 and 2003. The Company used the proceeds from the BFI Facility and paid
off the entire amount due on May 6, 2005. (Please see Note 2.)

On December 31, 2003, Savings Bank of Mendocino County ("SBMC") extended the
Company a temporary note of $576,200 to finance the end of term buy-out of
certain equipment previously leased from Finova Capital Corporation. This note
is secured against existing collateral held by the Bank in addition to assets
that were originally under capital lease. SMBC has committed to extend this loan
until May 2006.

UBSN Limited has available a (pound)1,250,000 (approximately $2,395,000 at
December 31, 2004) line of credit with interest at the bank's base rate plus
1.5%. The bank's commitment under the line of credit is available on an on-going
basis until further notice. The agreement is secured by substantially all of the
assets of UBSN limited. The subsidiary had (pound)902,600 and (pound)429,100
($1,729,500 and $765,500) outstanding as of December 31, 2004 and 2003. The
agreement restricts dividends to approximately (pound)100,000 ($191,600 at
December 31, 2004) per year.

NOTE 6 - LONG-TERM DEBT

<TABLE>
<CAPTION>
                                                                                     2004               2003
                                                                               -----------------  -----------------
<S>                                                                             <C>                <C>
Note to a bank; payable in monthly installments of $24,400, including
interest at the Treasury Constant Maturity Index, plus 4.17% (currently
7.24%); maturing December 2012, with a balloon payment; secured by
substantially all of the assets of Mendocino Brewing Company                    $     2,299,400    $     2,421,300

Note to a financial institution; payable in weekly installments of
$10,000, plus interest at the prime rate plus 2.25%; maturing January
2005; secured by substantially all assets of the Releta Brewing
Company, certain securities pledged by a stockholder, accounts
receivable, inventory, and a second position on the remaining assets
of Mendocino Brewing Company                                                             10,700            464,700
</TABLE>

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

                                                 MENDOCINO BREWING COMPANY, INC.
                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

<TABLE>
<CAPTION>
                                                                                     2004               2003
                                                                               -----------------  -----------------
<S>                                                                             <C>                <C>
Payable to Mendocino County in four annual installments of $143,600,
plus interest at 18%, beginning April 2005; maturing April 2008                         574,500            574,500

Note payable to Sheperd Neame, Ltd., a related party; payable in
annual installments of $110,000, plus interest at 5% beginning June
2003; maturing December 2012; unsecured                                                 900,500            963,500
                                                                               -----------------  -----------------

                                                                                      3,785,100          4,424,000
Less current maturities                                                                 400,300            693,700
                                                                               -----------------  -----------------

                                                                                $     3,384,800    $     3,730,300
                                                                               =================  =================
</TABLE>

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

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

                   2005                                 $      400,300
                   2006                                        399,400
                   2007                                        409,900
                   2008                                        421,300
                   2009                                        289,800
                Thereafter                                   1,864,400
                                                       ----------------

                                                        $    3,785,100
                                                       ================

NOTE 7 - CAPITAL LEASE OBLIGATIONS

The Company leases brewing and office equipment under capital lease agreements
with various financial institutions. Future minimum lease payments under these
capital lease agreements are as follows:

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

                   2005                                 $      171,700
                   2006                                         60,300
                   2007                                         13,100
                   2008                                          3,500
                   2009                                              -
                                                       ----------------

                                                               248,600
Less amounts representing interest                              39,500
                                                       ----------------

Present value of minimum lease payments                        209,100
Less current maturities                                        146,500
                                                       ----------------

                                                        $       62,600
                                                       ================

NOTE 8 - NOTES TO RELATED PARTY - SUBORDINATED

Notes payable to a related party consist of convertible notes to United
Breweries of America (UBA), with interest at the prime rate plus 1.5%, but not
to exceed 10% per year. The notes are convertible into common stock at $1.50 per
share. The notes have been extended until August 2005. UBA may demand payment
within 60 days of the end of the extension period but is precluded from doing so
because the notes are subordinated to long-term debt agreements with Savings
Bank of Mendocino County. Because of the subordination, the Company has shown
these notes as long term. The notes include $494,700 and $406,100 of accrued
interest at December 31, 2004 and 2003. The notes are unsecured and subordinated
to bank debt. Subsequent to year end, the Company borrowed an additional
$400,000 on the same terms as the notes above.

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

                                                 MENDOCINO BREWING COMPANY, INC.
                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 9 - PROFIT-SHARING PLAN

Subsequent to December 31, 2004, the Company terminated its profit sharing plan.
Contributions to the Plan were made at the discretion of the Board of Directors,
and any contributions vested over a six year period. The plan covered
substantially all full-time employees that met certain minimum age and service
requirements. No contributions were made to the Plan for the years ended
December 31, 2004, 2003, and 2002.

NOTE 10 - COMMITMENTS AND CONTINGENCIES

OPERATING LEASES - The Company and its subsidiaries have various lease
agreements for the brewpub and gift store in Hopland, California; land at its
Saratoga Springs, New York, facility; a building in the United Kingdom; and
certain personal property. The land lease includes a renewal option for two
additional five-year periods, which the Company intends to exercise, and some
leases are adjusted annually for changes in the consumer price index. The land
lease also contains an option to purchase. The leases begin expiring in 2005.
Rent expense charged to operations was $202,700, $210,500, and $221,300 for the
years ended December 31, 2004, 2003, and 2002.

Future minimum lease payments under these agreements are as follows:

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

                   2005                                 $      181,200
                   2006                                        173,300
                   2007                                        167,800
                   2008                                        165,800
                   2009                                        165,800
                                                       ----------------

                                                        $      853,900
                                                       ================

KEG MANAGEMENT AGREEMENT - In September 2004, the Company renewed the keg
management agreement with MicroStar Keg Management LLC. Under this arrangement,
MicroStar provides all kegs for which the Company pays a service fee between $5
and $15, depending on territory. The agreement is effective for five years
ending in September 2009. If the agreement is terminated, the Company is
required to purchase three times the average monthly keg usage for the preceding
six-month period from MicroStar at purchase prices ranging from $54 to $84 per
keg. The Company expects to continue this relationship. Rental expense
associated with this agreement was $91,400, $76,200, and $84,400 for the years
ended December 31, 2004, 2003, and 2002.

NOTE 11 - RELATED-PARTY TRANSACTIONS

The Company conducts business with United Breweries of America (UBA), which owns
approximately 76% of the Company's common stock through common ownership.
Additionally, UBSN Limited has significant transactions with Sheperd Neame,
Ltd., which is related to a former Board member. The Company also has
transactions with AUBI, a company affiliated with one of the Board members. The
following table reflects balances outstanding and the value of the transactions
with these related parties for the years ended December 31, 2004, 2003, and
2002.

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

                                                 MENDOCINO BREWING COMPANY, INC.
                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

<TABLE>
<CAPTION>
                                                              2004              2003              2002
                                                         ---------------   ---------------   ---------------
<S>                                                       <C>               <C>               <C>
TRANSACTIONS
Sales to Sheperd Neame, Ltd.                              $    3,099,500    $    2,536,000    $    2,110,200
Purchases from Sheperd Neame, Ltd.                            14,541,100        11,240,000         9,470,700
Expense reimbursements to Sheperd Neame, Ltd.                  1,239,300           743,000           710,600
Interest expense associated to UBA convertible
  notes payable (see Note 8)                                      88,500            85,200            93,500
Interest paid to Sheperd Neame, Ltd. (see Note 6)                 46,300            46,600            52,300

ACCOUNT BALANCES
Accounts payable and accrued liabilities to                    4,160,300         3,510,100         3,004,200
  Sheperd Neame, Ltd.
Accounts receivable and prepayments from                         841,700           660,600           224,400
  Sheperd Neame, Ltd.
Amounts payable to AUBI                                           20,000            20,000            20,000
</TABLE>

NOTE 12 - MAJOR CUSTOMERS

Sales to the top five customers totaled $7,942,000, $7,088,800, and $6,718,100
for the years ended December 31, 2004, 2003, and 2002, which represents 25%,
25%, and 26% of sales for the years ended December 31, 2004, 2003, and 2002.

NOTE 13 - STOCKHOLDERS' EQUITY

Independent outside members of the Board of Directors are compensated for
attending Board of Directors and committee meetings. Compensation is with common
stock. Expenses related to this compensation totaled $27,000, $45,000, and
$47,000 for the years ended December 31, 2004, 2003, and 2002. Stock has been
issued for the years 2003 and 2002 subsequent to the year ended December 31,
2004.

PREFERRED STOCK - Ten million shares of preferred stock have been authorized, of
which 227,600 are designated as Series A. 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 stock or any
other series of preferred stock. When the entire Series A dividend/liquidation
proceeds have been paid, the Series A shares are automatically canceled and will
cease to be outstanding. Only a complete corporate dissolution will cause a
liquidation preference to be paid.

NOTE 14 - STOCK OPTION PLAN

Under the 1994 Stock Option Plan, which expired during 2004, the Company could
issue options to purchase up to 1,000,000 shares of common stock. The Plan
provided for both incentive stock options, as defined in Section 422 of the
Internal Revenue Code, and options that did not qualify as incentive stock
options.

The exercise price of incentive options was no less than the fair-market value
of the Company's stock at the date the option was granted, while the exercise
price of non-statutory options was no less than 85% of the fair-market value per
share on the date of grant. Options granted to a person possessing more than 10%
of the combined voting power of all classes of the Company's stock had an
exercise price of no less than 110% of the fair-market value of the Company's
stock at the date of grant. During 2002, 240,385 non-statutory stock options
with a five-year term were issued to the independent members of the Board of
Directors at the market price on the date of grant. All options were exercisable
at the date of grant. There were no options issued during 2003 or 2004. The
exercise prices range from $.52 to $1.25 per option. Options for 88,888 expired
during 2004. Outstanding options expire through January 2007, with 100,000
options expiring in 2005, and 240,385 options expiring in 2007.

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

                                                 MENDOCINO BREWING COMPANY, INC.
                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

The following table summarizes the number of options granted and exercisable and
the weighted average exercise prices:


                                                SHARES UNDER    WEIGHTED-AVERAGE
                                                   OPTION        EXERCISE PRICE
                                              ---------------  -----------------

Balance at December 31, 2001                         188,888    $           1.19
Options granted                                      240,385    $           0.52
                                              ---------------
Balance at December 31, 2002                         429,273    $           0.82
                                              ---------------
Balance at December 31, 2003                         429,273    $           0.82

Options expired                                      (88,888)   $           1.13
                                              ---------------
Balance at December 31, 2004                         340,385    $           0.73
                                              ===============

NOTE 15 - INCOME TAXES

The continuing losses in the U.S. operations has resulted in the Company
determining that the deferred tax assets associated with net operating loss
carryforwards and investment tax credits may expire prior to utilization. The
Company recorded a valuation allowance of $3,375,000 for deferred tax assets.
The Company also has $57,900 of California Manufacturers' Investment Tax Credits
that can be carried forward to reduce future taxes. These credits begin expiring
in 2008.

<TABLE>
<CAPTION>
                                                                       2004               2003               2002
                                                                 -----------------  -----------------  -----------------
<S>                                                               <C>                <C>                <C>
Provision for income taxes
     Federal                                                      $             -    $             -    $             -
     United Kingdom                                                       118,000            263,400            298,400
     States                                                                 3,800             16,300              8,900
     Benefit of state investment tax credit carryforwards                       -            (15,000)            (6,800)
                                                                 -----------------  -----------------  -----------------

                                                                          121,800            264,700            300,500
     Change in deferred income taxes                                            -                  -          1,922,600
                                                                 -----------------  -----------------  -----------------

                                                                  $       121,800    $       264,700    $     2,223,100
                                                                 =================  =================  =================
</TABLE>

The difference between the actual income tax provision and the tax provision
computed by applying the statutory federal income tax rate to earnings before
taxes is attributable to the following:

<TABLE>
<CAPTION>
                                                                       2004               2003               2002
                                                                 -----------------  -----------------  -----------------
<S>                                                               <C>                <C>                <C>
Income tax provision (benefit) at 34%                             $      (232,400)   $       105,800    $       167,700
State income tax (benefit)                                                (15,000)            12,900             20,300
United Kingdom income tax                                                 118,000            263,500            298,400
Recognition of future tax revenues or expenses                             (6,500)            26,800            (39,000)
Valuation allowance                                                       257,700           (144,300)         1,775,700
                                                                 -----------------  -----------------  -----------------

                                                                  $       121,800    $       264,700    $     2,223,100
                                                                 =================  =================  =================
</TABLE>
--------------------------------------------------------------------------------
                                                                       PAGE F-13
<PAGE>

                                                 MENDOCINO BREWING COMPANY, INC.
                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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

<TABLE>
<CAPTION>
                                                                               2004                2003
                                                                        -----------------    -----------------
<S>                                                                      <C>                  <C>
Accruals                                                                 $        83,200      $        73,000
Depreciation and amortization                                                   (490,000)            (317,500)
Benefit of net operating loss carryforward                                     4,190,000            3,758,900
Undistributed earnings of United Breweries International (UK), Ltd.             (800,300)            (800,300)
Investment in United Breweries International (UK) Ltd.                           321,600              328,400
Other                                                                             70,500               74,800
                                                                        -----------------    -----------------

                                                                               3,375,000            3,117,300
Less valuation allowance                                                      (3,375,000)          (3,117,300)
                                                                        -----------------    -----------------

                                                                         $             -      $             -
                                                                        =================    =================

Valuation allowance - beginning of year                                  $     3,117,300      $     3,261,600
Valuation allowance - end of year                                              3,375,000            3,117,300
                                                                        -----------------    -----------------

Change in valuation allowance                                            $       257,700      $      (144,300)
                                                                        =================    =================
</TABLE>

Net operating losses available for carryforward will expire as follows:

<TABLE>
<CAPTION>

                      DATE OF EXPIRATION        FEDERAL             CALIFORNIA             NEW YORK
                      ------------------   -------------------  --------------------  --------------------
<S>                          <C>            <C>                  <C>                   <C>
                             2004           $               -    $          761,300    $                -
                             2005                           -               961,200                     -
                             2006                           -               694,700                     -
                             2012           $               -    $          250,900    $                -
                             2013                   1,686,100               229,300               277,000
                             2014                           -               625,000                     -
                             2018                   2,758,800                     -               453,300
                             2019                   2,153,100                     -               341,800
                             2020                     965,600                     -               143,300
                             2021                   1,041,100                     -               171,000
                             2022                     615,800                     -               100,800
                             2023                           -                     -                     -
                             2024                   1,707,900                     -               280,100
                                           -------------------  --------------------  --------------------

                                            $      10,928,400    $        3,522,400    $        1,767,300
                                           ===================  ====================  ====================
</TABLE>

NOTE 16 - SEGMENT INFORMATION

The Company's business presently consists of three segments. The first is
brewing for wholesale to distributors and other retailers. This segment
accounted for 36%, 43%, and 46% of the Company's gross sales during 2004, 2003
and 2002. The second consists of distributing alcoholic beverages to retail
establishments and restaurants in the United Kingdom and Europe. This segment
accounted for approximately 63%, 55%, and 52% of the Company's gross sales
during 2004, 2003, and 2002. The third segment consists of beer for sale along
with food and merchandise at the Company's brewpub and retail merchandise store
located at the Hopland Brewery. This segment accounted for 2% of the Company's
gross sales during 2004, 2003, and 2002. A summary of each segment is as
follows:

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

                                                 MENDOCINO BREWING COMPANY, INC.
                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

<TABLE>
<CAPTION>

                                                                YEAR ENDED DECEMBER 31, 2004
                                  ------------------------------------------------------------------------------------------
                                       BREWING           TAVERN &         DISTRIBUTOR        CORPORATE
                                     OPERATIONS        TASTING ROOM       OPERATIONS         AND OTHER            TOTAL
                                  ----------------   ----------------  ----------------  -----------------  ----------------
<S>                                  <C>                   <C>            <C>                 <C>              <C>
Sales                                $ 11,686,800          $ 211,200      $ 20,259,900                  -      $ 32,157,900
Operating income                          (49,900)            12,800           490,900                  -           453,800
Identifiable assets                    13,166,900             99,400         8,729,400          2,367,400        24,363,100
Depreciation and amortization             535,800              5,000           459,300             31,200         1,031,300
Capital expenditures                       38,700                  -           559,100                  -           597,800

                                                                YEAR ENDED DECEMBER 31, 2003
                                  ------------------------------------------------------------------------------------------
                                       BREWING           TAVERN &         DISTRIBUTOR        CORPORATE
                                     OPERATIONS        TASTING ROOM       OPERATIONS         AND OTHER            TOTAL
                                  ----------------   ----------------  ----------------  -----------------  ----------------

Sales                                $ 11,590,100          $ 425,300      $ 16,848,800        $         -      $ 28,864,200
Operating income (Loss)                   (19,400)           (31,400)        1,028,300                  -           977,500
Identifiable assets                    13,695,200            102,400         6,676,900          1,336,700        21,811,200
Depreciation and amortization             736,500              6,000           358,800             26,100         1,127,400
Capital expenditures                      268,600                  -           459,200                  -           727,800

                                                                YEAR ENDED DECEMBER 31, 2002
                                  ------------------------------------------------------------------------------------------
                                       BREWING           TAVERN &         DISTRIBUTOR        CORPORATE
                                     OPERATIONS        TASTING ROOM       OPERATIONS         AND OTHER            TOTAL
                                  ----------------   ----------------  ----------------  -----------------  ----------------

Sales                                $ 11,158,100          $ 511,400      $ 14,415,600        $         -      $ 26,085,100
Operating income                          221,400             22,800           984,500                  -         1,228,700
Identifiable assets                    14,500,800             99,600         5,973,100          1,716,100        22,289,600
Depreciation and amortization             758,900              5,700           246,500             37,900         1,049,000
Capital expenditures                      133,900                  -           350,900              2,700           487,500
</TABLE>

NOTE 17 - UNRESTRICTED NET ASSETS

The net assets of the Company's subsidiary, UBSN, are restricted by bank
covenants that allows the payment of dividends to its parent company, Mendocino
Brewing Company, of one-third of UBSN's annual profits after taxes but limited
to no more than (pound)100,000 (approximately $191,000) per year. Condensed
financial information of the parent company, Mendocino Brewing Company, Inc., is
as follows:

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

                                                 MENDOCINO BREWING COMPANY, INC.
                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

<TABLE>
<CAPTION>

BALANCE SHEETS                                                    2004                  2003
                                                            -----------------    ------------------
<S>                                                          <C>                  <C>
Assets
       Cash                                                  $       286,000      $        301,500
       Accounts receivable                                         1,569,700             1,457,100
       Inventories                                                 1,185,400             1,186,100
       Other current assets                                          170,200               250,300
                                                            -----------------    ------------------
             Total current assets                                  3,211,300             3,195,000

Investment in subsidiary                                           1,225,000             1,225,000
Property and equipment                                            12,148,100            12,678,700
Other assets                                                         274,300               260,500
                                                            -----------------    ------------------
             Total assets                                    $    16,858,700      $     17,359,200
                                                            =================    ==================

Liabilities
       Line of credit and note payable                       $     1,552,700      $      1,785,500
       Accounts payable                                            1,757,000             1,857,000
       Intercompany payable                                        1,177,500             1,204,000
       Accrued liabilities                                           752,600             1,269,000
       Legal dispute settlement                                      911,800                     -
       Current maturities of debt and leases                         431,800               715,600
                                                            -----------------    ------------------
             Total current liabilities                             6,583,400             6,831,100

Long-term debt and capital leases                                  3,238,100             3,078,000
Notes payable to related party                                     2,010,100             1,921,500
                                                            -----------------    ------------------
             Total liabilities                                    11,831,600            11,830,600
                                                            -----------------    ------------------

Stockholders' equity
       Common stock                                               14,648,600            14,648,600
       Preferred stock                                               227,600               227,600
       Accumulated deficit                                        (9,849,100)           (9,347,600)
                                                            -----------------    ------------------
             Total stockholders' equity                            5,027,100             5,528,600
                                                            -----------------    ------------------
             Total liabilities and stockholders' equity      $    16,858,700      $     17,359,200
                                                            =================    ==================
</TABLE>

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

                                                 MENDOCINO BREWING COMPANY, INC.
                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

<TABLE>
<CAPTION>
STATEMENTS OF OPERATIONS
                                                              2004              2003              2002
                                                         ---------------   ---------------   ---------------
<S>                                                       <C>               <C>               <C>
Net sales                                                 $  11,245,600     $  11,341,500     $  11,018,000
Cost of goods sold                                            7,467,000         7,972,600         7,473,300
Selling, marketing, and retail expenses                       1,701,400         1,663,100         1,717,600
General and administrative expenses                           1,955,200         1,833,600         1,664,200
Legal dispute settlement                                        250,600                 -                 -
                                                         ---------------   ---------------   ---------------
         Income (loss) from operations                         (128,600)         (127,800)          162,900
                                                         ---------------   ---------------   ---------------

Other income and (expense)
         Interest expense                                      (725,900)         (727,800)         (816,900)
         Other income (expense)                                 356,800           487,600           365,100
         Provision for taxes                                     (3,800)           (1,300)       (1,924,700)
                                                         ---------------   ---------------   ---------------
                                                               (372,900)         (241,500)       (2,376,500)
                                                         ---------------   ---------------   ---------------
Net loss                                                  $    (501,500)    $    (369,300)    $  (2,213,600)
                                                         ===============   ===============   ===============


STATEMENTS OF CASH FLOWS
                                                              2004               2003              2002
                                                         ---------------   ---------------   ---------------

Cash flows from operating activities                      $     374,200     $    (237,500)    $     537,400
                                                         ---------------   ---------------   ---------------

Cash flow from investing activities
     Purchase of property and equipment                         (38,700)         (268,600)          (17,200)
     Proceeds from new distributors                                   -           655,200                 -
     Proceeds from sale of assets                                16,700                 -             1,500
                                                         ---------------   ---------------   ---------------

         Net cash flow from investing activities                (22,000)          386,600           (15,700)
                                                         ---------------   ---------------   ---------------

Cash flow from financing activities
     Net borrowings on line of credit                           343,400           101,800            65,900
     Borrowings (repayments) on long-term debt                 (575,900)          554,800          (348,500)
     Payment on obligation under capital lease                 (124,000)         (697,100)         (359,000)
     Net change in intercompany payable                         (99,800)          107,700                 -
     Proceeds on notes from related party                        88,600            85,200            93,500
                                                         ---------------   ---------------   ---------------

         Net cash flow from financing activities               (367,700)          152,400          (548,100)
                                                         ---------------   ---------------   ---------------

Net change in cash                                              (15,500)          301,500           (26,400)

Cash, beginning of year                                         301,500                 -            26,400
                                                         ---------------   ---------------   ---------------

Cash, end of year                                         $     286,000     $     301,500     $           -
                                                         ===============   ===============   ===============

Cash dividends received from subsidiary                   $     215,100     $     155,800     $           -
                                                         ===============   ===============   ===============

</TABLE>
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