BUSINESS LOAN AGREEMENT
<TABLE>
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<CAPTION>
Principal   Loan Date     Maturity      Loan No.   Call    Collateral   Account   Officer   Initials
<S>         <C>           <C>           <C>
$600,000.00 12-01-1997    05-31-1998    203-00549
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<FN>
References  in the shaded area are for  Lender's use only and do not limit the applicability of this
document to any particular loan or item.
</FN>
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</TABLE>

Borrower: MENDOCINO BREWING COMPANY, INC.               Lender: WESTAMERICA BANK
P.O. BOX 400                                                  SONOMA CREDIT ADM.
HOPLAND, CA 95449                                            31 D ST. 2ND. FLOOR
                                                            SANTA ROSA, CA 95404

================================================================================

THIS  BUSINESS  LOAN  AGREEMENT   between   MENDOCINO   BREWING  COMPANY,   INC.
("Borrowers")  and  WESTAMERICA  BANK  ("Lender")  is made and  executed  on the
following terms and  conditions.  Borrower has received prior  commercial  loans
from  Lender or has applied to Lender for a  commercial  loan or loans and other
financial accommodations,  including those which may be described on any exhibit
or  schedule   attached  to  this  Agreement.   All  such  loans  and  financial
accommodations, together with all future loans and financial accommodations from
Lender to Borrower, are referred to in this Agreement individually as the "Loan"
and  collectively as the "Loans."  Borrower  understands and agrees that: (a) in
granting,  renewing,  or extending any Loan,  Lender is relying upon  Borrower's
representations, warranties, and agreements, as set forth in this Agreement; (b)
the granting, renewing, or extending of any Loan by Lender at all times shall be
subject to Lender's sole judgment and  discretion;  and (c) all such Loans shall
be and shall  remain  subject  to the  following  terms and  conditions  of this
Agreement.

TERM.  This  Agreement  shall be  effective  as of December  1, 1997,  and shall
continue  thereafter  until all  Indebtedness  of  Borrower  to Lender  has been
performed in full and the parties terminate this Agreement in writing.

CONDITIONS  PRECEDENT TO EACH ADVANCE.  Lender's  obligation to make the initial
Loan Advance and each  subsequent  Loan Advance  under this  Agreement  shall be
subject to the fulfillment to Lender's satisfaction of all of the conditions set
forth in this Agreement and in the Related Documents.

      Loan Documents.  Borrower shall provide to Lender in form  satisfactory to
      Lender the following  documents for the Loan:  (a) the Note;  (b) Security
      Agreements  granting to Lender security  interests in the Collateral;  (c)
      Financing Statements perfecting Lender's Security Interests;  (d) evidence
      of insurance as required below; and (e) any other documents required under
      this Agreement or by Lender or its counsel.

      Borrower's  Authorization.  Borrower  shall  have  provided  in  form  and
      substance  satisfactory to Lender  properly  certified  resolutions,  duly
      authorizing the execution and delivery of this Agreement, the Note and the
      Related Documents,  and such other  authorizations and other documents and
      instruments  as Lender  or its  counsel,  in their  sole  discretion,  may
      require.

      Payment of Fees and Expenses. Borrower shall have paid to Lender all fees,
      charges, and other expenses which are then due and payable as specified in
      this Agreement or any Related Document.

      Representations  and Warranties.  The  representations  and warranties set
      forth in this Agreement, in the Related Documents,  and in any document or
      certiticate delivered to Lender under this Agreement are true and correct.

      No Event of  Default.  There  shall not exist at the time of any advance a
      condition which would constitute an Event of Default under this Agreement.

REPRESENTATIONS  AND WARRANTIES.  Borrower represents and warrants to Lender, as
of the  date of this  Agreement,  as of the  date of each  disbursement  of Loan
proceeds, as of the date of any renewal,  extension or modification of any Loan,
and  at  all  times  any  indebtedness  exists:

      Organization.  Borrower is a corporation which is duly organized,  validly
      existing,  and in good standing  under the laws of the State of California
      and is  validly  existing  and in good  standing  in all  states  in which
      Borrower is doing  business.  Borrower has the full power and authority to
      own its properties and to transact the businesses in which it is presently
      engaged or presently  proposes to engage.  Borrower also is duly qualified
      as a foreign  corporation  and is in good  standing in all states in which
      the  failure to so qualify  would  have a material  adverse  effect on its
      businesses or financial condition.

      Authorization.  The execution, delivery, and performance of this Agreement
      by  Borrower,  to the extent to be  executed,  delivered  or  performed by
      Borrower,  have been duly authorized by all necessary  action by Borrower;
      do not require the  consent or  approval of any other  person,  regulatory
      authority or  governmental  body;  and do not conflict  with,  result in a
      violation  of, or  constitute  a default  under (a) any  provision  of its
      articles of incorporation or organization,  or bylaws, or any agreement or
      other  instrument  binding  upon  Borrower  or (b) any  law,  governmental
      regulation, court decree, or order applicable to Borrower.

      Financial  Information.  Each financial  statement of Borrower supplied to
      Lender truly and completely disclosed Borrower's financial condition as of
      the date of the statement,  and there has been no material  adverse change
      in  Borrower's  financial  condition  subsequent  to the  date of the most
      recent financial  statement  supplied to Lender.  Borrower has no material
      contingent obligations except as disclosed in such financial statements.

      Legal Effect. This Agreement constitutes,  and any instrument or agreement
      required   hereunder  to  be  given  by  Borrower  when   delivered   will
      constitute,  legal, valid and binding obligations of Borrower enforceable
      against Borrower in accordance with their respective terms.

      Properties.  Except as  contemplated  by this  Agreement or as  previously
      disclosed in Borrower's  financial  statements or in writing to Lender and
      as accepted  by Lender,  and except for  property  tax liens for taxes not
      presently  due and  payable,  Borrower  owns and has good  title to all of
      Borrower's  properties free and clear of all liens and security interests,
      and has not  executed  any  security  documents  or  financing  statements
      relating to such  properties.  All of Borrower's properties  are titled in
      Borrower's  legal name,  and Borrower  has not used,  or filed a financing
      statement under, any other name for at least the last five (5) years.

      Hazardous  Substances.  Except  as  disclosed  to Lender  in  writing,  no
      property  of  Borrower  ever  has  been,  or ever  will be so long as this
      Agreement  remains  in  effect,  used  for  the  generation,  manufacture,
      storage,  treatment,  disposal,  release  or  threatened  release  of  any
      hazardous  waste or substance,  as those terms are defined in the "CERCLA"
      "SARA," applicable state or Federal laws, or regulations  adopted pursuant
      to any of the foregoing.  The  representations  and  warranties  contained
      herein  are  based  on  Borrower's  due  diligence  in  investigating  the
      properties for hazardous waste and hazardous  substances.  Borrower hereby
      (a) releases and waives any future claims  against Lender for Indemnity or
      contribution  in the event  Borrower  becomes  liable for cleanup or other
      costs under any such laws,  and (b) agrees to indemnify  and hold harmless
      Lender  against any and all claims and losses  resulting  from a breach of
      this  provision of this  Agreement.  This  obligation  to indemnify  shall
      survive  the  payment of the  Indebtedness  and the  satisfaction  of this
      Agreement.

      Commercial Purposes.  Borrower intends to use the Loan proceeds solely for
      business or commercial related purposes.


<PAGE>


12-01-1997                    BUSINESS LOAN AGREEMENT                     Page 2
Loan No 203-00549                 (Continued)
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AFFIRMATIVE  COVENANTS.  Borrower  covenants and agrees with Lender that,  while
this Agreement is in effect, Borrower will:

      Litigation.  Promptly inform Lender in writing of (a) all material adverse
      changes in Borrower's  financial  condition,  and (b) all existing and all
      threatened litigation, claims, investigations,  administrative proceedings
      or similar actions  affecting  Borrower or any guarantor of the Loan which
      could  materially  affect  the  financial  condition  of  Borrower  or the
      financial condition of any guarantor of the Loan.

      Financial  Records.  Maintain  its books and  records in  accordance  with
      accounting principles acceptable to Lender, applied on a consistent basis,
      and permit Lender to examine and audit Borrower's books and records at all
      reasonable times.

      Financial Statements. Furnish Lender with, as soon as available, but in no
      event  later  than one  hundred  twenty  (120)  days after the end of each
      fiscal year,  Borrower's  balance sheet and income  statement for the year
      ended,  audited by a certified public  accountant  satisfactory to Lender,
      and, as soon as available, but in no event later than forty five (45) days
      after the end of each fiscal quarter,  Borrower's balance sheet and profit
      and loss statement for the period ended, prepared and certified as correct
      to the best knowledge and belief by Borrower's chief financial  officer or
      other  officer or person  acceptable  to  Lender.  All  financial  reports
      required  to be  provided  under  this  Agreement  shall  be  prepared  in
      accordance with accounting principles  acceptable to Lender,  applied on a
      consistent basis, and certified by Borrower as being true and correct.

      Additional   Information.   Furnish  such   additional   information   and
      statements,  lists of assets and  liabilities,  agings of receivables  and
      payables, inventory schedules,  budgets, forecasts, tax returns, and other
      reports  with  respect to  Borrower's  financial  condition  and  business
      operations as Lender may request from time to time.

      Loan  Proceeds.  Use all Loan proceeds  solely for the following  specific
      purposes: SUPPORT BUSINESS OPERATIONS.

      Performance. Perform and comply with all terms, conditions, and provisions
      set  forth in this  Agreement  and in the  Related  Documents  in a timely
      manner, and promptly notify Lender if Borrower learns of the occurrence of
      any event which  constitutes  an Event of Default under this  Agreement or
      under any of the Related Documents.

      Operations. Maintain executive and management personnel with substantially
      the same  qualifications  and  experience  as the  present  executive  and
      management  personnel;  provide  written notice to Lender of any change in
      executive  and  management  personnel;  conduct its business  affairs in a
      reasonable  and  prudent  manner  and in  compliance  with all  applicable
      federal,  state and  municipal  laws,  ordinances,  rules and  regulations
      respecting its properties,  charters, businesses and operations, including
      without  limitation,  compliance with the Americans With  Disabilities Act
      and with all minimum funding standards and other requirements of ERISA and
      other laws applicable to Borrower's employee benefit plans.

      Inspection. Permit employees or agents of Lender at any reasonable time to
      inspect any and all Collateral for the Loan or Loans and Borrower's  other
      properties and to examine or audit Borrower's books, accounts, and records
      and to make  copies and  memoranda  of  Borrower's  books,  accounts,  and
      records.  If Borrower now or at any time  hereafter  maintains any records
      (including  without  limitation  computer  generated  records and computer
      software programs for the generation of such records) in the possession of
      a third party,  Borrower,  upon request of Lender, shall notify such party
      to permit Lender free access to such records at all  reasonable  times and
      to  provide  Lender  with  copies of any  records it may  request,  all at
      Borrower's expense.

RECOVERY OF  ADDITIONAL  COSTS.  If the imposition  of or any change in any law,
rule,  regulation or guideline,  or the  interpretation  or  application  of any
thereof by any court or administrative or governmental  authority (including any
request or policy not  having  the force of law)  shall  impose,  modify or make
applicable  any taxes (except U.S.  federal,  state or local income or franchise
taxes imposed on Lender), reserve requirements, capital adequacy requirements or
other  obligations  which would (a) increase the cost to Lender for extending or
maintaining the credit  facilities to which this Agreement  relates,  (b) reduce
the amounts payable to Lender under this Agreement or any related documents,  or
(c) reduce the rate of return on Lender's  capital as a consequence  of Lender's
obligations  with  respect to the  credit  facilities  to which  this  Agreement
relates,  then  Borrower  agrees to pay Lender such  additional  amounts as will
compensate  Lender therefor,  within five (5) days after Lender's written demand
for such payment,  which demand shall be  accompanied  by an explanation of such
imposition or charge and a calculation  in reasonable  detail of the  additional
amounts  payable  by  Borrower,  which  explanation  and  calculation  shall be
conclusive in the absence of manifest error.

NEGATIVE  COVENANTS.  Borrower  covenants and agrees with Lender that while this
Agreement is in effect, Borrower shall not, without the prior written consent of
Lender:

      Indebtedness  and Liens.  (a) Except for trade debt incurred in the normal
      course  of  business  and  indebtedness  to  Lender  contemplated  by this
      Agreement,  create,  incur or  assume  indebtedness  for  borrowed  money,
      including capital leases, (b) except as allowed as a Permitted Lien, sell,
      transfer,  mortgage,  assign, pledge, lease, grant a security interest in,
      or encumber  any of  Borrower's  assets, or (c) sell with  recourse any of
      Borrower's accounts, except to Lender.

      Continuity  of   Operations.   (a)  Engage  in  any   business  activities
      substantially different than those in which Borrower is presently engaged,
      (b) cease operations,  liquidate,  merge, transfer, acquire or consolidate
      with any other  entity,  change  ownership,  change its name,  dissolve or
      transfer or sell  Collateral out of the ordinary  course of business,  (c)
      pay any dividends on Borrower's stock (other than dividends payable in its
      stock), provided,  however that notwithstanding the foregoing, but only so
      long as no Event of Default has occurred and is continuing or would result
      from the payment of dividends, if Borrower is a "Subchapter S Corporation"
      (as defined in the Internal  Revenue Code of 1986,  as amended),  Borrower
      may pay cash dividends on its stock to is  shareholders  from time to time
      in amounts  necessary to enable the  shareholders  to pay income taxes and
      make  estimated  income tax payments to satisfy  their  liabilities  under
      federal and state law which arise solely from their status as Shareholders
      of a  "Subchapter S Corporation"  because of their  ownership of shares of
      stock of Borrower, or (d) purchase or retire any of Borrower's outstanding
      shares or alter or amend Borrower's capital structure.

      Loans,  Acquisitions and Guaranties.  (a) Loan, invest in or advance money
      or assets,  (b)  purchase,  create or acquire  any  interest  in any other
      enterprise  or entity, or (c) incur any  obligation as surety or guarantor
      other than in the ordinary course of business.

CESSATION OF  ADVANCES.  If Lender has made any  commitment  to make any Loan to
Borrower,  whether  under this  Agreement or under any other  agreement,  Lender
shall have no  obligation to make Loan advances or to disburse Loan proceeds if:
(a) Borrower or any guarantor is in default under the terms of this Agreement or
any other agreement that Borrower or any guarantor has with Lender; (b) Borrower
or any Guarantor  becomes  insolvent,  files a petition in bankruptcy or similar
proceedings,  or is adjudged a  bankrupt;  (c) there  occurs a material  adverse
change in Borrower's  financial  condition,  in the  financial  condition of any
guarantor,  or in the value of any  collateral  securing  any  Loan;  or (d) any
guarantor seeks,  claims or otherwise  attempts to limit,  modify or revoke such
guarantor's guaranty of the Loan or any other loan with Lender.

ADDITIONAL PROVISIONS:

BORROWER  SHALL  PROVIDE  TO  BANK  A  COPY  OF  BORROWER'S  AGING  OF  ACCOUNTS
RECEIVABLE,  ACCOUNTS  PAYABLE  AND  INVENTORY  REPORT  (IN FORM  AND  SUBSTANCE
SATISFACTORY TO BANK) WITHIN I5 DAYS OF THE END OF EACH MONTH.

BORROWER SHALL PROVIDE COPIES OF FEDERAL TAX RETURNS WITHIN 30 DAYS OF FlLING.

EVENTS OF DEFAULT.  Each of the following  shall  constitute an event of default
("Event of Default") under this Agreement:

      Default of Indebtedness.  Faliure of Borrower to make any payment when due
      on the Loans.

<PAGE>


12-01-1997                     BUSINESS LOAN AGREEMENT                    Page 3
Loan No 203-00549                 (Continued)
================================================================================

      Other  Defaults. Failure of Borrower to comply with or to perform when due
      any other  term,  obligation,  covenant  or  condition  contained  in this
      Agreement.

      Default in Favor of Third Parties. Should Borrower default under any loan,
      extension of credit,  security agreement,  purchase or sales agreement, or
      any other  agreement,  in favor of any other  creditor  or person that may
      materially  affect any of  Borrower's  property or  Borrower's  ability to
      repay the Loans or perform Borrower's  obligations under this Agreement or
      any related document.

      False  Statements.  Any  warranty,  representation  or  statement  made or
      furnished to Lender by or on behalf of Borrower is false or  misleading in
      any material  respect at the time made or  furnished  or becomes  false or
      misleading  at  any  time  thereafter.

      Insolvency.  The  dissolution or termination of Borrower's  existence as a
      going business,  the insolvency of Borrower, the appointment of a receiver
      for any part of Borrower's  property,  any  assignment  for the benefit of
      creditors,  any  type of  creditor  workout,  or the  commencement  of any
      proceeding under any bankruptcy or insolvency laws by or against Borrower.

      Creditor  or  Forfeiture  Proceedings.   Commencement  of  foreclosure  or
      forfeiture  proceedings,   whether  by  judicial  proceeding,   self-help,
      repossession  or any  other  method,  by any  creditor  of  Borrower,  any
      creditor  of any  grantor  of  collateral  for the Loan. This  includes  a
      garnishment,  attachment,  or  levy  on or of  any of  Borrower's  deposit
      accounts with Lender.

      Events  Affecting  Guarantor.  Any of the  preceding  events  occurs  with
      respect to any Guarantor of any of the  indebtedness or any Guarantor dies
      or becomes  incompetent,  or  revokes  or  disputes  the  validity  of, or
      liability under, any Guaranty of the Indebtedness.

      Change In Ownership. Any change in  ownership of twenty-five percent (25%)
      or more of the common stock of Borrower.

      Adverse Change. A material  adverse change occurs in Borrower's  financial
      condition,  or Lender  believes the prospect of payment or  performance of
      the Indebtedness is impaired.

EFFECT OF AN EVENT OF DEFAULT. If any Event of Default shall occur, except where
otherwise provided in this Agreement or the Related  Documents,  all commitments
and  obligations  of Lender  under this  Agreement  immediately  will  terminate
(including  any  obligation  to make Loan  Advances  or  disbursements), and, at
Lender's option,  all Indebtedness  immediately will become due and payable, all
without  notice of any kind to Borrower,  except that in the case of an Event of
Default  of the  type  described  in the  "Insolvency"  subsection  above,  such
acceleration shall be automatic and not optional. In addition, Lender shall have
all the rights and  remedies  provided in the Related  Documents or available at
law, in equity, or otherwise. Except as may be prohibited by applicable law, all
of  Lender's  rights  and  remedies  shall be  cumulative  and may be  exercised
singularly  or  concurrently.  Election by Lender to pursue any remedy shall not
exclude pursuit of any other remedy,  and an election to make expenditures or to
take action to perform an  obligation  of  Borrower or of any Grantor  shall not
affect  Lender's  right to  declare a default  and to  exercise  its  rights and
remedies.


BORROWER  ACKNOWLEDGES  HAVING READ ALL THE  PROVISIONS  OF THIS  BUSINESS  LOAN
AGREEMENT,  AND  BORROWER  AGREES TO ITS TERMS.  THIS  AGREEMENT  IS DATED AS OF
DECEMBER 1, 1997.

BORROWER:

MENDOCINO BREWING COMPANY, INC.

By: /s/ H. MICHAEL LAYBOURN, PRESIDENT  By: /s/ YASHPAL SINGH
   ----------------------------------      -------------------------------------
        H. MICHAEL LAYBOURN, PRESIDENT    YASHPAL SINGH, CHIEF OPERATING OFFICER

LENDER:
WESTAMERICA BANK

By:
   ----------------------------
   Authorized Officer


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