UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549


FORM
10-K


(Mark
One)


xANNUAL REPORT PURSUANT
TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


FOR THE
FISCAL YEAR ENDED DECEMBER 31, 2008


or


oTRANSITION 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
      EmployerIncorporation
      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 if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes oNo x





Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes oNo x





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 xNo o





Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulations 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 o





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting
company.




Large
      accelerated Filer o
            Accelerated
      Filer o
            Non-accelerated
      Filer o
            Smaller
      reporting company x





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes oNo x





The
aggregate market value of the voting and non-voting common equity 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, 2008 was $755,744.





The
number of shares of the registrant's Common Stock outstanding as of March 29,
2009 was 12,274,762.





DOCUMENTS
INCORPORATED BY REFERENCE





None








TABLE
OF CONTENTS




PageNo.PART
      IItem
      1
                Business
                
                1Item
      1 A
                Risk
      Factors
                
                9Item
      1 B
                Unresolved
      Staff Comments
                
                12Item
      2
                Properties
                
                12Item
      3
                Legal
      Proceedings
                
                13Item
      4
                Submission
      of Matters to a Vote of Security Holders
                
                14PART
      IIItem
      5
                Market
      for the Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities
                
                14Item
      6
                Selected
      Financial Data
                
                15Item
      7
                Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                
                16Item
      7 A
                Quantitative
      and Qualitative Disclosures about Market Risk
                
                25Item
      8
                Financial
      Statements and Supplementary Data
                
                25Item
      9
                Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure
                
                25Item
      9 A
                Controls
      and Procedures
                
                25Item
      9 B
                Other
      Information
                
                26PART
      IIIItem
      10
                Directors,
      Executive Officers and Corporate Governance
                
                26Item
      11
                Executive
      Compensation
                
                29Item
      12
                Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
                
                32Item
      13
                Certain
      Relationships and Related Transactions, and Director
      Independence
                
                33Item
      14
                Principal
      Accountant Fees and Services
                
                36PART
      IVItem
      15
                Exhibits
      and Financial Statement Schedules
                
                37SIGNATURES
                
                
                42





FORWARD-LOOKING
INFORMATION





This
annual report on Form 10-K includes forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended, which we refer to in
this annual report as the Exchange Act. Forward-looking statements are not
statements of historical fact but rather reflect our current expectations,
estimates and predictions about future results and events. These statements may
use words such as "anticipate," "believe," "estimate," "expect," "intend,"
"predict," "project" and similar expressions as they relate to us or our
management. Unless the context otherwise requires, references in this annual
report to “we,” “us,” “our,” or the “Company” refer to Mendocino, Inc. When we
make forward-looking statements, we are basing them on our management's beliefs
and assumptions, using information currently available to us. These
forward-looking statements are subject to risks, uncertainties and assumptions,
including but not limited to, risks, uncertainties and assumptions discussed in
this annual report. Factors that can cause or contribute to these differences
include those described under the headings "Risk Factors" and "Management
Discussion and Analysis and Plan of Operation." If one or more of these or other
risks or uncertainties materialize, or if our underlying assumptions prove to be
incorrect, actual results may vary materially from what we projected. All
subsequent written and oral forward-looking statements attributable to us or
individuals acting on our behalf are expressly qualified in their entirety by
this paragraph. You should specifically consider the factors identified in this
annual report, which would cause actual results to differ before making an
investment decision. We are under no duty to update any of the forward-looking
statements after the date of this annual report or to conform these statements
to actual results.





In
addition, such statements could be affected by general industry and market
conditions and growth rates, and by general economic and political conditions in
the markets in which we compete. Readers are cautioned not to place undue
reliance on these forward-looking statements.





PART
I





ITEM
1.BUSINESS





OVERVIEW





Mendocino
Brewing Company, Inc., (the “Company”) a California corporation, was founded in
1983. It was one of the first modern craft brewers, having opened the first new
brewpub in California and the second in the United States following the repeal
of Prohibition. The Company has been recognized for its innovations in the
brewpub concept, its craft brew style and its distinctive labels. In 2008, the
Company celebrated its 25th anniversary. In this Annual Report, the term "the
Company" and its variants and the terms "we," "us," and "our" and their variants
are generally used to refer to Mendocino Brewing Company, Inc. together with its
subsidiaries, while the term "MBC" is used to refer to Mendocino Brewing
Company, Inc. as an individual entity.





The
Company operates in two geographic markets, domestic (the United States)
(referred to in this Annual Report as the "Domestic Territory") and Europe
(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
(collectively, referred to in this Annual Report as the "European
Territory").





The
Company's domestic operations consist primarily of brewing and marketing
proprietary craft beers, including Red Tail Ale, Blue Heron Pale Ale, Black Hawk
Stout, Eye of the Hawk Select Ale, White Hawk Original IPA, and Red Tail 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. Domestically,
the Company distributes its products in 41 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
wholly-owned subsidiary UBSN, Ltd. ("UBSN"), consist primarily of the marketing
and distribution of Kingfisher Premium Lager in the European Territory through
Indian restaurants, chain retail grocers, liquor stores, and other retail
outlets (such as convenience stores). The Company holds an exclusive 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.





All of
the Company's beers sold in the European Territory are brewed in England under
contract by Shepherd Neame, Ltd. ("Shepherd Neame"), a prominent English brewer.
Although UBSN is the sole distributor of Kingfisher Premium Lager in the United
Kingdom, Ireland, continental Europe, and Canada, it does not physically
distribute its products to its ultimate trade customers, relying instead on
specialty restaurant trade distributors in the United Kingdom and Shepherd
Neame, acting as UBSN's agent, on a commission basis, for distribution to the
supermarket and liquor and convenience store trade.




COMPANY
BACKGROUND





MBC first
bottled its flagship brand, Red Tail Ale, in December 1983, and conducted 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 packaging capacity of 100,000 brewers' barrels ("bbl.") in one shift, was
designed to enable the Company's production capacity to be expanded to 200,000
bbl. per year with the inclusion of additional equipment.


1





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 facility in February 1998. This facility, which has a
current annual packaging capacity of 90,000 bbl. in one shift, was designed to
enable the Company's production to be expanded to 200,000 bbl. per year with the
inclusion of additional equipment.





In July
1998, the Company purchased certain assets from Carmel Brewing Company, Inc., a
California corporation ("Carmel Brewing"), including trademarks, trade names,
and other brand related assets as well as certain points of sale and brewing
ingredients inventory.





On August
13, 2001, the Company acquired UBI together with UBI's wholly-owned subsidiary
UBSN, from Inversiones Mirabel, S. A., a Panamanian corporation ("Inversiones"),
in exchange for MBC stock then valued at approximately $5,500,000 (the "UBI
Acquisition"). UBI and UBSN primarily market, sell, and distribute Kingfisher
Premium Lager in the Company's European Territory. Kingfisher Premium Lager,
which is the flagship brand of UB Limited, an India-based brewing and
distribution company, is a recognized international brand, with widespread
distribution outside the Company's geographic markets.





The
Company also acquired exclusive brewing and distribution rights for Kingfisher
Premium Lager in the United States as a result of the UBI Acquisition. The
Company brews Kingfisher Premium Lager in its Saratoga Springs, New York and
Ukiah, California facilities. The Company has engaged Shepherd Neame to brew
Kingfisher Premium Lager for distribution in the European
Territory.





During
the last quarter of fiscal year 2005, United Breweries of America, BVI, a
British Virgin Islands corporation ("UBA-BVI"), an indirect beneficial owner of
a majority of the Company's outstanding shares, merged into United Breweries
Holdings, Ltd., an Indian Corporation ("UBHL"). As a result of the merger of
UBA-BVI into UBHL, UBHL acquired indirect control over approximately 78% of the
Company's then outstanding shares. Dr. Mallya is the Chairman of the board of
directors of UBHL.





INDUSTRY
OVERVIEW





DOMESTIC
MARKET





The U.S.
domestic beer market falls into a number of market categories, some of which
include low-priced, premium, super premium, lite, import, and specialty/craft
beers. In the Domestic Territory, the Company competes in the specialty/craft
category, the size of which is currently estimated by the Brewers Association to
be approximately 8 million barrels produced  per year. Craft beers are
typically all malt, characterized by their full flavor, and are usually produced
using methods similar to those of traditional European brews. The domestic beer
market is dominated by large domestic and international brewers, and the craft
brewing segment is growing, but is relatively small.





EUROPEAN
MARKET





The vast
majority of the Company's sales in the European Territory are made in the United
Kingdom. During fiscal years 2008 and 2007 the Company's sales in the United
Kingdom constituted approximately 89% and 91% and, respectively, of its total
sales in the European Territory. Sales in the European Territory primarily
consist of sales of Kingfisher Lager. The Company has production and
distribution rights for Kingfisher Lager in the UK and the European
Territory.





Within
the European Territory, the Company primarily distributes its products through
Indian restaurants using specialist restaurant trade distributors. In addition,
the Company distributes its products through other licensed premises and through
other retail outlets such as supermarkets, liquor stores, and licensed shops and
convenience stores.


2


BUSINESS
OF THE COMPANY





The
Company is a pioneering brewer in the specialty craft brewing segment in the US.
The Company produces high quality ales and lagers in Company owned breweries in
the US. The Company through its subsidiary in the UK has production and
distribution rights to Kingfisher Premium Lager (Kingfisher) in the European
Territory.





THE
HOPLAND TAVERN ALE HOUSE AND MERCHANDISE STORE





The
historic Hopland tavern ale house and merchandise store serves to market the
Company's products in the Domestic Territory. 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 following the repeal of Prohibition.





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.





PRODUCTS





The
Company produces a variety of flavorful craft beers by using high quality
ingredients (e.g., hops) in its brewing process. The Company brews six ales, one
wheat beer, three lagers, one stout and a root beer on a year-round basis, and
five seasonal ales, for distribution in the Domestic Territory. All of these
products are brewed at the Company's production facilities in Ukiah, California,
and Saratoga Springs, New York. The Company believes the locations of the
breweries are well positioned to serve the large markets of California, New York
and the New England states.





In the
European Territory, the Company currently distributes Kingfisher Premium
Lager.  Kingfisher is the leading Indian beer by sales volume in India
and abroad.





The
Company's principal products are as follows.





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.





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.





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.





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.





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.





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





RED TAIL LAGER is a
traditional lager, with a smooth light feel and a crisp sweet finish. It is
currently available year-round only in northern California in 12-oz. six packs
and half-barrel kegs.


3




DISTRIBUTION
METHODS





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





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 and its tasting room attached to the Saratoga Springs
brewery in New York.





In the
European Territory, the Company's products are distributed primarily through
Indian restaurants by specialist restaurant trade distributors. Such points of
sale represent approximately 95% of the Company's total sales volume in the
European Territory, with the remaining 5% of sales volume attributed to a
combination of sales in other ethnic restaurants (primarily Chinese) and to
sales by supermarkets, liquor stores, and licensed shops and convenience stores.
The majority of the Company's restaurant sales are through its on-tap draft
installations. UBI also exports Kingfisher Premium Lager to 16 European markets
outside of the United Kingdom and to Canada, and its sales growth in those
markets typically correlates with the establishment and proliferation of Indian
restaurants in such locations.





COMPETITION





In the
Domestic Territory, 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 United
States beer market, including major national brands like Budweiser and Miller
and imported beers such as Heineken and Becks.





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





The
larger domestic and international brewers have introduced more fuller-flavored
beers, and these are meant to compete with the Company’s craft beer offerings.
The participation by larger domestic and international brewers increases
competition and price sensitivity within the craft beer segment.





The
Company faces tough competition in the Domestic Territory as well as in the
European Territory. The Company competes with other beer and beverage companies
not only for consumer acceptance and loyalty but also for shelf and tap space in
retail establishments. The Company must also vie for marketing focus by the
Company's distributors and their customers, all of which also distribute and
sell other beer and alcoholic beverage products. Many of these competitors have
substantially greater financial and marketing resources and distribution
networks than the Company. Moreover, the introduction of new products by
competitors that compete directly with the Company's products, or that diminish
the importance of the Company's products to retailers or distributors may have a
material adverse effect on the Company's results of operations, cash flows and
financial position.





SOURCES
AND AVAILABILITY OF RAW MATERIALS




Production
of the Company's beverages requires quantities of various agricultural products,
including barley, hops, malt, and malted wheat for beer. The Company fulfills
its commodities requirements through purchases from various sources, some
through contractual arrangements and others on the open market. In the European
Territory, these purchases are made directly by or for Shepherd Neame, which
brews the Company's products on a contract basis. The Company experienced
substantial increases in the price of hops during 2008 due to low supply and
high demand. The commodity markets have experienced, and the Company believes
that the commodity markets will continue to experience, price, availability and
demand 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 has entered into long term contractual obligations to purchase
hops.


4





The
Company's major suppliers in the United States are Great Western Malting Co.,
Yakima, Washington, and Canada Malting company, Montreal, Canada (malt); Hop
Union LLC, Yakima, Washington and S S Steiner, Inc., New York, New York (hops);
Gamer Packaging Inc., Minneapolis, Minnesota (bottles and crown corks); Alliance
Packaging, Seattle, Washington, and Empire State Container, Inc., Syracuse, New
York (cartons); Sierra Pacific Packaging, Oroville, California and Caraustar,
Ashland, Ohio (carriers); and DWS Printing Associates, Bay Shore, NY
(labels).





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





DEPENDENCE
ON MAJOR CUSTOMERS





Sales to
the Company's top five customers in fiscal year 2008 totaled $10,508,300, or
approximately 28%, of the Company's total sales, as compared to $9,420,000 or
25% of total net sales for fiscal year 2007.




In the
Company's Domestic Territory, sales to Mesa Distributing Company, Inc. totaled
approximately 8.6% and 7.9% of the Company's domestic sales (or approximately
3.6% and 3.1% of its total sales) for fiscal years 2008 and 2007.





During
fiscal year 2008, sales to the Company's principal European customer, Shepherd
Neame, represented approximately 22.2% of the Company's European Territory sales
(or approximately 12.9% of the Company's total sales), as compared to
approximately 17.7% of European Territory sales (or approximately 10.7% of total
sales) in fiscal year 2007. No other individual customer accounted for more than
5% of the Company's total sales during fiscal years 2008 or 2007.





Seasonality





The
Company’s product sales are seasonal, with the first and fourth quarters
historically being the slowest and the rest of the year typically having
stronger sales. The sales volume can be affected by weather. Accordingly, the
Company’s results for any individual quarter may not be indicative of the
results that may be achieved for the full fiscal year.





Sales and
Marketing





The
Company markets its products through various advertising programs with its
distributors and wholesalers. The sales and marketing staff  offer
support to the wholesalers and retailers by educating them about the Company’s
products. The Company’s products are promoted at local art music or food
festivals, and restaurants and pubs. The Company has a tasting room in at its
Saratoga Springs brewery and a brewpub in Hopland California.  The
Company also utilizes signs, tap handles, coasters, logo glassware and posters
to promote its products in bars, pubs and restaurants.





At times
the Company has introduced various discounting programs, primarily ‘post-offs’
that are often done in conjunction with distributors and retailers.
Additionally, the Company does advertise its products in print media and
billboards.





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 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), YULETIDE PORTER word mark (Reg. No. 1,666,891), BREWSLETTER word
mark (Reg. No. 1,768,639), PEREGRINE GOLDEN ALE word mark (Reg. No. 2,475,522),
HOPLAND BREWERY word mark (Reg. No. 2,509,464), BLACK EYE ALE word mark (Reg.
No. 2,667,078), WHITE HAWK ORIGINAL IPA word and design mark (Reg. No.
2,956,999), RAPTOR RED LAGER word and design mark (Reg. No. 3,113,619), and
BLACK HAWK STOUT word mark (Reg. No. 3,205,652).


5





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 registration for the BLUE HERON word
mark (Cancelled Reg. No. 1,820,076) was cancelled as a result of an alleged
technical deficiency in registration compliance filings. The Company continues
to use the BLUE HERON word mark and claims common law trademark rights in and to
that mark. The Company presently has a pending application 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 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 expired in 2008, but has been automatically renewed. License fees are
calculated based on sales of the product. The Company has not had any sales of
this brand since 2001.





LICENSE
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 United Kingdom, Ireland, continental Europe, and Canada through a licensing
agreement with UB Limited. Under its terms, this licensing agreement is
currently scheduled to remain in effect until October 2013.





In July
2001, MBC entered into the 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
2013.





Since
1998, UBI and UBSN have licensed to Shepherd Neame Limited (Shepard 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,
Ireland, and continental Europe. 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. (For additional information see "Item 13. — Certain
Relationships and Related Transactions and Director Independence - Shepherd
Neame, Ltd. - Brewing Agreement".) Under its terms this agreement is currently
scheduled to remain in effect until October 2013.





In April
2004, the Company entered into a licensing agreement with Frank's Famous Foods
("FFF") and granted a non-exclusive license to FFF for the trademark and trade
name Red Tail Ale to be used in the manufacture and sale of barbecue sauces and
marinades. FFF pays to the Company licensing fees ranging from $1.50 to $3.00
per case sold. Under its terms this licensing agreement is scheduled to
terminate April 2, 2009. FFF and the Company are in discussions to extend the
term of the agreement.


6





GOVERNMENTAL
REGULATION





The
Company's Domestic Territory operations are subject to licensing by local, state
and federal governments, as well as to regulation by a variety of state and
local 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 Treasury Department, Alcohol and Tobacco Tax and
Trade Bureau (the "TTB") (formerly the Bureau of Alcohol, Tobacco, and Firearms)
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. The TTB must also approve all product labels, which must
include an alcohol use warning. These agencies require that individuals owning
equity securities totaling in the aggregate 10% or more of the Company's
outstanding securities be investigated as to their suitability of character. 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, the federal excise 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. for brewers producing
less than 2,000,000 barrels per year. The California excise tax rate is $6.20
per bbl. The State of New York presently imposes on brewers an excise tax of
$3.88 per bbl. for production in excess of 100,000 bbl. per year.





The
Company's operations in the European Territory are subject to regulation by
United Kingdom and European laws, as well as by the laws of various individual
countries in which UBI distributes its products. Due to the contract brewing
arrangement in the European Territory, Shepherd Neame is subject to various laws
of the European countries regarding production, bottling, packaging, and
labeling in lieu of the Company. Trade with Canada is subject to, and in
compliance with, regulation by the provincial Liquor Boards.





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, 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 environmental compliance at its Hopland
site.





Ukiah. The Company
has built its own wastewater treatment plant for the Ukiah facility. As a
result, the Company is currently required to pay lower 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 wastewater treatment
facility construction costs totaled approximately $900,000, and the approximate
operating costs of the plant are between $6,000 and $10,000 per month. The
operating costs of the facility may increase with increased production. The
Company has contracted to have the liquid sediment that remains from the treated
wastewater transported to a local composting facility at a cost of between
$4,500 and $5,500 per month. 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, 2009. Management expects this permit to be
renewed.


7


Saratoga Springs. 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 materials consist of spent grain,
cardboard, glass, and liquid waste. The Company has instituted a recycling
program for cardboard, office paper and glass at a minimal cost to the Company.
Spent grain is sold to local cattle dairy farms. The Company pays approximately
$2,500 per month in 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 Domestic Territory,
including California and New York, have adopted certain restrictive packaging
laws and regulations for beverages that require deposits on packages. Such laws
have not had a significant effect on the Company's sales. The adoption of
similar legislation by the federal government or a substantial number of states
or additional local jurisdictions might require the Company to incur significant
capital expenditures for compliance.





In
general, European packaging regulations are covered by specifications provided
by the European Union; the Company believes it is in compliance with such
specifications.





The
Company has not received any notice from any governmental agency relating to the
violation by the Company of any applicable environmental law.





Dram Shop
Laws





The
serving of alcoholic beverages to a person known to be intoxicated may, under
certain circumstances, result in the server being held liable to third parties
for injuries caused by the intoxicated customer. The Company’s brewpub and
tasting room have limited  hours and have informed employees of this
issue. Large uninsured damage awards against the Company could adversely affect
the Company’s financial condition.





EMPLOYEES





As of
December 31, 2008, MBC employed 62 full-time and 4 part-time individuals in the
United States, including 13 in management and administration, 40 in brewing and
production operations, 4 in retail and tavern operations and 9 in sales and
marketing positions. In England, UBI and UBSN together employed 11 people in
sales and marketing and 7 in managerial and administrative positions. Management
believes that the Company's relations with its employees are generally
good.





Approximately
21 employees engaged in brewing, bottling, warehousing, and shipping at the
Ukiah brewery elected Teamsters Local No. 896, International Brotherhood of
Teamsters, AFL-CIO (the "Union") to represent them as a collective bargaining
agent. The Company and the Union renewed the collective bargaining agreement
effective August 1, 2008. This collective bargaining agreement will expire on
July 31, 2013. Under the collective bargaining agreement, the  21
employee positions must be held by and any openings filled by members of the
union.





RESEARCH
AND DEVELOPMENT





During
the last two fiscal years, the Company has not spent a material amount on
research and development activities nor on customer-sponsored research
activities relating to the development of new products, services or techniques
or the improvement of existing products, services or techniques.





ITEM
1A.RISK
FACTORS





In
addition to the other information in this Annual Report on Form 10-K, described
below are risks and uncertainties that we believe are most likely to be material
to our business and results of operations. Our business operations and results
may also be adversely affected by additional risks and uncertainties not
presently known, or which we currently deem immaterial, or which are applicable
in general to the industries in which we compete or to the economy. If any of
the following risks or uncertainties actually occurs, our business, financial
condition, results of operations or cash flows would likely
suffer.


8





LACK OF
PROFITABLE OPERATIONS: We incurred a net loss for fiscal year 2008.
Historically, the Domestic Territory has operated at a net loss. Since the year
2005, the European Territory has also been operating at a loss. We believe such
losses are attributable to low sales volumes and low production capacity
utilization rates at our domestic brewing facilities and higher operating
expenses in the European Territory. Our business is also subject to certain
fixed and semi-variable operating costs, and when combined with the impact of
the correlation between current levels of production and maximum production
capacity, our gross margins may be sensitive to small increases or decreases in
sales volume in the Domestic Territory. In addition, higher costs of materials
in 2008 resulted in increased costs of goods sold. We may not be able to offset
such increased expenses with comparable price increases in our products, which
could also impact our gross margins. We may not be successful in our efforts to
increase sales volume and utilization rates. Moreover, it is uncertain when, if
at all, our operations will become profitable once again. Future operating
losses may have a material adverse effect on our cash flows and financial
position.





LIQUIDITY:
Low utilization of the production capacity at our Ukiah and Saratoga Springs
facilities and losses from our European operations continued to place demands on
our working capital during 2008. We have loans, lines of credit, other credit
facilities, and lease obligations with various creditors. Any breach of a loan
provision resulting in a default, the inability of any lender to continue
offering credit facilities to us, or an attempt by one of our creditors to
exercise its rights to certain of our tangible or intangible assets which have
been used as collateral or which have been pledged as security for our
obligations, could potentially make it difficult, at least in the short term,
for us to continue our operations.





COMPETITION:
We face intense competition in both our Domestic Territory as well as in our
European Territory from both competitors in the beer market as well as from
producers of wine and spirits. Certain of our competitors have substantially
greater financial and marketing resources and more extensive distribution
networks than we do. In addition, the introduction of new products by existing
competitors or new entrants into the market may impact our market share.
Moreover, consumer preference and consumer trends may result in a decrease in
demand for our products which could also have an impact on our results of
operations.





RAW
MATERIALS: We are dependant on a limited number of suppliers, and in some
instances on a sole supplier, for the majority of the raw materials and
packaging materials used in our operations. As a result, an interruption in the
supply chain may have an adverse effect on our operations if we were unable to
find an alternative supplier at a comparable price. Our cost of materials,
particularly that of malt and hops increased significantly during the year 2008
due to limited supply and higher demand. (See Part 1, Item 1, “Sources And
Availability of Raw Materials"). While we have increased our selling prices of
our products, we may not be in a position to pass the entire cost increase of
materials to our customers which may have an adverse effect on our
operations.





DEPENDENCY
ON CONTRACT BREWING ARRANGEMENTS: We have entered into short term non-binding
arrangements with several brewers to brew and package their brands at our
brewing facilities, predominantly at our Releta facility. Approximately 20% of
our sales volume in the Domestic Territory for fiscal year 2008 includes sales
made under such contract brewing arrangements. There is no certainty that such
existing arrangements will be extended in the future or that we will be able to
enter into new arrangements. Any significant variation in these arrangements
could have a material adverse effect on the Company's results of operations,
cash flows and financial position.





ARRANGEMENT
WITH SHEPHERD NEAME: UBI and UBSN entered into a brewing agreement that grants
Shepherd Neame the exclusive right to brew and package all beers sold under the
Kingfisher trademark in the United Kingdom, and to distribute such products
elsewhere in the European Territory. Continued losses in the European Territory
have increased our working capital deficit and increased our payment time for
our accounts payable. Any interruption of the brewing, packaging or distribution
of our products by Shepherd Neame for any reason is likely to have a material
adverse effect on our results of operations, cash flows and financial
position.





GROSS
MARGINS: Our gross margins may fluctuate while our expenses remain constant.  We anticipate
that our future gross margins will fluctuate and may even decline as a result of
many factors, including shipments to Craft Brands at a fixed price substantially
below wholesale pricing levels, disproportionate depreciation and other fixed
and semi variable operating costs, and the level of production at our breweries
in relation to current production capacity. Our high level of fixed and semi
variable operating costs causes gross margin to be especially sensitive to
relatively small increases or decreases in sales volume. In addition, other
factors beyond our control that could affect cost of sales include changes in
freight charges, the availability and prices of raw materials and packaging
materials, the mix between draft and bottled product sales, the sales mix of
various bottled product packages, and federal or state excise
taxes.


9





MATERIAL
CONTRACT FOR THE SUPPLY OF KEGS: We have entered into an exclusive Keg
Management Agreement with MicroStar Keg Management LLC ("MicroStar") which
expires in September 2009. We anticipate entering into negotiations with
MicroStar for a contract extenstion. Under the terms of the agreement with
MicroStar, we receive our entire supply of kegs exclusively from MicroStar.
Moreover, pursuant to the terms of the agreement, if the agreement is
terminated, we are 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. If we are required in the future to purchase
such kegs we may need to incur additional debt financing to fund such purchases.
An interruption in the supply of kegs by MicroStar to us or in case of
termination of the agreement, our failure to obtain the necessary funding to
facilitate such purchases, could have a material adverse effect on our business,
results of operations, cash flow or financial position.





ECONOMIC CONDITIONS: There is an
increasing concern over current economic conditions in our Domestic as well as
European Territories and its impact on consumer spending. This may adversely
affect the sale of our products. Our business is seasonal in nature, and we are
likely to experience fluctuations in our results of operations and financial
condition.  
Sales in the first and fourth quarters historically are the slowest and the rest
of the year generates stronger sales. In addition, our sales volume may also be
affected by weather conditions. Therefore, our results for any quarter may not
be indicative of the results that may be achieved for the full fiscal year. If
an adverse event such as a regional economic downturn or poor weather conditions
should occur during the second and third quarters, the adverse impact to our
revenues would likely be greater as a result of our seasonal
business.





ECONOMIC DOWNTURN:In recent months,
economic conditions have deteriorated significantly in the US, UK and other
countries, and may remain depressed for the foreseeable future. These conditions
make it difficult for us to accurately forecast and plan future business
activities, and could cause us to slow down or reduce spending on our research
and development activities. Furthermore, during challenging economic times, we
may face issues gaining timely access to financings or capital infusion, which
could result in an impairment of our ability to continue our business
activities. We cannot predict the timing, strength or duration of any economic
slowdown or subsequent economic recovery, worldwide, in the United States, or in
our industry. These and other economic factors could have a material adverse
effect on our financial condition and operating results.




CHANGE IN
PUBLIC ATTITUDE AND DRINKING PREFERENCES: There is an increasing public concern
over alcohol-related social problems, including drunk driving, underage drinking
and health consequences from the misuse of alcohol, including alcoholism. This
may adversely affect consumption of alcoholic beverages. Consumers drinking
preferences may also change due to availability of a variety of products in the
craft brew segment. We believe that any changes in governmental regulation
and/or shift in consumer preference may have an adverse impact on our
operations.





ADVERTISING
AND MARKETING EFFORTS: The sales and marketing programs used by us to generate
demand for our products may be unsuccessful.  In the future
this could lead to lowering prices that we charge for our products from our
historical levels, depending on competitive factors in our various markets. To
increase demand for our products, we have participated in price promotions with
our wholesalers and retail customers in most of our markets. The number of
markets in which we participate in price promotions and the frequency of such
promotions may change depending upon market conditions. There can be no
assurance however that our price promotions will be successful in increasing
demand for our products.





INSURANCE:
Wemay experience
material losses in excess of insurance coverage.  We believe that we
have a reasonable amount of insurance coverage for a business of our size and
type. There are, however, certain types of catastrophic losses that are not
generally insured against because it is not economically feasible to do so.
Should an uninsured loss or a loss in excess of  the insured limit
occur, such loss could have an adverse effect on our results of operations and
financial condition.





10




LITIGATION:
In the future we may be subject to litigation thatcould have a material
adverse effect on our financial condition and operations.  At any
given time, we are subject to claims and actions incidental to the operation of
our business. The outcome of these proceedings cannot be predicted. If a
plaintiff were successful in a claim against our Company, we could be faced with
the payment of a material sum of money. If this were to occur, it could have an
adverse effect on our financial condition.





COMMON
STOCK PRICE: Our common stock price could be subject to significant fluctuations
and/or may decline.  The market price of our common stock could be
subject to significant fluctuations. Among the factors that could affect our
stock price are:





•
            the
      entry into, or termination of, key
agreements;





•
            the
      introduction of new products by us or our
  competitors;





•
            future
      sales of our common stock;





•
            variations
      in our operating results;





•
            changes
      in the market values of public companies that operate in our business
      segment;





•
            general
      market conditions; and





•
            domestic
      and international economic factors unrelated to our specific
      performance.





In 2008,
the stock markets in general have recently experienced increased volatility that
has sometimes been unrelated to the operating performance of a particular
company. These broad market fluctuations may cause the trading price of our
common stock to decline.





DIVIDENDS:
We have never paid cash dividends on our capital stock and do not anticipate
paying cash dividends in the foreseeable future. Instead, we will likely retain
future earnings for reinvestment in our business.





SECTION 404(b) of the SARBANES-OXLEY
ACT OF 2002:We will
be subject to reporting on internal controls in accordance with Section
404(b) of The Sarbanes-Oxley Act for auditors attestation for fiscal years
ending on or after December 15, 2009. The Company is currently unable to predict
the cost or difficulties required to complete such certifications. We may need
to hire and/or engage additional personnel and incur incremental costs in order
to complete the work required by Section 404. We have in the past discovered,
and may in the future discover, areas of our internal controls that need
improvement. We may not be able to remediate these problems on a timely basis.
Additionally, upon completion of a Section 404 plan, we may not be able to
conclude in the future that our internal controls are effective, or in the event
that we conclude that our internal controls are effective, our independent
accountants may disagree with our assessment and may issue a report that is
qualified. Any failure to implement required new or improved controls, or
difficulties encountered in their implementation, could harm our operating
results or cause us to fail to meet our reporting obligations.





ITEM
1B.UNRESOLVED STAFF
COMMENTS





Not
applicable.





ITEM
2.PROPERTIES.





BREWING
FACILITIES


The
Company owns nine acres of land in Ukiah, California on which its Ukiah brewery
is located. Management believes that this facility is adequate for the Company's
current capacity and also provides space for future expansion. Grand Pacific
Financing Corporation currently holds a first deed of trust on this property in
connection with a loan advanced to the Company. (See "Item 7. — Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources "). The principal amount outstanding on the loan
as of December 31, 2008 was $2,917,600.


11





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 $10,750,000. Various other leasehold assets incorporated in
this facility are being depreciated, on a straight-line basis, at rates of
between 10 and 40 years. Property taxes are currently assessed on the Ukiah
property at a rate of 1.125%, for an annual tax of $121,000.





The
Company also leases 3.66 acres in Saratoga Springs, New York, on which the Ten
Springs Brewery facilities are located. In November 2004, the Company leased
additional warehouse space and extended the term of this lease until November
2019.





The
Company's Ukiah and Releta facilities have both been operating at low production
capacity utilization rates. The brewery in Ukiah, California has a current
annual packaging capacity of approximately 100,000 bbl. on a single shift basis,
whereas the annual sales volume from this facility in 2008 was approximately
46,600 bbl. or 47% of maximum production capacity, as compared with 47,200 bbl.
in 2007. The brewery at Saratoga Springs, New York currently has an annual
packaging capacity of approximately 90,000 bbl. per year a on single shift
basis, although its annual sales volume from this facility was approximately
26,800 bbl. or 30% of its maximum packaging capacity in 2008, as compared with
30,200 bbl. or 34% of its then maximum packaging capacity in 2007. Despite their
low packaging capacity utilization rates, both of these brewing facilities incur
costs for maintenance, property taxes, and other costs on a level consistent
with their maximum production capacity rather than with their current
utilization levels. The inability of the Company to align costs and utilization
rates affects the Company's capital, liquidity, and resources of management.
Failure to adequately align such costs and utilization rates may have a material
adverse effect on the Company's business, financial condition, and results of
operations.





TAVERN





The
Company has leased 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.





OFFICE
SPACE





UBSN has
leased a 1,365 square foot office located at Faversham, Kent, in England for a
period of 10 years which lease expires in July 2015. The Company does not own or
lease any other material properties in Europe.





MACHINERY
AND EQUIPMENT





The
Company leases certain equipment and vehicles under capital and operating leases
which expire at varying times through September 2012. Additionally, the Company
leases equipment and vehicles under various other leases. As these leases
expire, it is anticipated that, in accordance with the Company's current
practices, the equipment will be acquired pursuant to the terms of the leases
and the vehicles will be surrendered.




The
Company considers its land, buildings, improvements, and equipment to be well
maintained, 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.





None.





12


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





Not Applicable.





PART
II





ITEM
5. MARKET FOR REGISTRANT'S COMMON EQUITY  RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES





MARKET
INFORMATION





Since May
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.





2008
                    High
                    
                    LowFirst
      Quarter
                    
                    $
                    0.42
                    
                    
                    $
                    0.30Second
      Quarter
                    
                    $
                    0.38
                    
                    
                    $
                    0.33Third
      Quarter
                    
                    $
                    0.38
                    
                    
                    $
                    0.35Fourth
      Quarter
                    
                    $
                    0.35
                    
                    
                    $
                    0.162007
                    High
                    
                    LowFirst
      Quarter
                    
                    $
                    0.27
                    
                    
                    $
                    0.21Second
      Quarter
                    
                    $
                    0.35
                    
                    
                    $
                    0.20Third
      Quarter
                    
                    $
                    0.22
                    
                    
                    $
                    0.22Fourth
      Quarter
                    
                    $
                    0.32
                    
                    
                    $
                    0.22





The
Company had approximately 2,273 holders of its common stock of record as of
March 20, 2009. 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 debt
financing.





The
holders of the Company's 227,600 outstanding shares of Series A Preferred Stock
(which are 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. For additional information on dividend
restrictions see "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations-Other Loans and Credit Facilities-
Restricted Net Assets."





Dividends





Historically,
we have not paid any dividends. We anticipate that for the foreseeable future,
all earnings, if any, will be retained for the operation and expansion of our
business and that we will not pay cash dividends. The payment of dividends, if
any, in the future will be at the discretion of the board of directors and will
depend upon, among other things, future earnings, capital requirements,
restrictions in future financing agreements, the general financial condition of
the Company and general business conditions.


13





SECURITIES
AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS





As of
December 31, 2008, the Company did not have any securities authorized for
issuance under any equity compensation plan approved by the
shareholders.





The
Company's policy with respect to the 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 served, 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 $0.50 per share during the latter
half of 2003, and has since remained consistently below $1.00 per share (at
times falling below twenty cents per share),  which would have
significantly increased the number of shares otherwise issuable to these
directors, the Board of Directors adopted a Directors' Compensation Plan under
which non-employee directors would receive, as compensation for attendance at
Board and Committee meetings shares of the Company's Common Stock valued at the
higher of the book or market value calculated as of the last day of each year in
respect of which such compensation was due. On January 26, 2009, the Board of
Directors of the Company increased the number of shares available for issuance
under the Directors' Compensation Plan and  approved the issuance of
an aggregate of 283,076 shares of the Company's unregistered Common Stock to
certain of the Company's independent non-employee directors in recognition of
services provided to the Board by such directors and as compensation, pursuant
to the terms of the Company's Directors' Compensation Plan, for their attendance
at Board and Committee meetings.  As of December 31, 2008, 64,856
shares of Common Stock remained available for issuance under the Directors'
Compensation Plan.





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 compensation in the
future.





RECENT
SALES OF UNREGISTERED SECURITIES





The
Company issued thirteen (13) promissory notes pursuant to a Master Line of
Credit Agreement between the Company and United Breweries of America, Inc.
("UBA") and one note on substantially similar terms to UBA between September
1999, and March 2005 (the "UBA Notes"). The outstanding principal amount of the
UBA 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, 2008, the outstanding
principal and interest on the UBA Notes totaled approximately $3,042,800, and
the UBA Notes were convertible into approximately 2,028,500 shares of the
Company's Common Stock. If the UBA Notes were deemed to be securities, the
Company's Management believes that the issuance of all such notes is exempt from
registration pursuant to Section 4(2) of the Securities Act of 1983, as amended
(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.





ITEM
6.           SELECTED FINANCIAL
DATA.




Not
required for smaller reporting companies.


14





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





The
following discussion of our financial condition and results of operations should
be read in conjunction with our financial statements and related notes, and the
other financial information included in Form 10-K. With respect to this
discussion, the terms “MBC” “Company,” “we,” “us,” and “our” refer to the
consolidated operations of Mendocino Brewing Company, Inc. This discussion and
analysis may contain forward-looking statements as a result of many factors,
including but not limited to those set forth under “Risk Factors” and elsewhere
in this Form 10-K.





OVERVIEW





Since our
formation in 1983, we have been brewing and selling our craft beers in the
United States.  Following our merger with UBI, we have been producing
and distributing Kingfisher Premium Lager in the United States and Europe
(primarily the UK).





Our  operations
resulted in income from operations of  $400,600. After providing for
interest, other income and taxes, our net loss for fiscal year 2008 was
$294,500.





In the
Domestic Territory, our brewing operations sales (based on volume) were 73,400
bbl. during fiscal year 2008, as compared to 77,300 bbl. and 66,000 bbl. in
fiscal years 2007 and 2006, respectively. Sales from the Ukiah facility totaled
46,600 bbl., 47,200 bbl. and 39,700 bbl., for the fiscal years 2008, 2007 and
2006, respectively. Sales from the Saratoga Springs facility totaled 26,800
bbl., 30,100 bbl., and 26,300 bbl. for the fiscal years 2008, 2007 and 2006,
respectively. We bottled 5,300 bbl., 5,600 bbl., and 3,600 bbl. in fiscal years
2008, 2007 and 2006, respectively, of cider products at our brewing facilities
under contract brewing agreements.





We sold
67,500 bbl. of beer in our European Territory during both fiscal year 2008 and
2007 as compared to 67,800 bbl. during fiscal years 2006. Sales in the United
Kingdom accounted for 59,800 bbl., 61,200 bbl. and 60,200 bbl. during 2008, 2007
and 2006, respectively. Sales in continental Europe and Canada totaled 7,700
bbl., 6,300 bbl. and 7,600 bbl. during fiscal years 2008, 2007 and 2006,
respectively. Although the sales of certain brands have fluctuated over the past
few years, overall product sales levels have remained consistent.




RESULTS
OF OPERATIONS





FISCAL
YEAR 2008 COMPARED TO FISCAL YEAR 2007





Year Ended
December 31, 2008 Compared to Year Ended December 31,
2007





The
following table sets forth, for the periods indicated, a comparison of certain
items from the Company’s Consolidated Statements of
Operations:





2008
                            
                            
                            2007
                            
                            
                            Increase/
                              (Decrease)
                            
                            
                            %
      ChangeGross
      sales
                            
                            $
                            37,640,500
                            
                            
                            $
                            37,774,500
                            
                            
                            $
                            (134,000
                            )
                            
                            
                            -0.4
                            %Excise
      taxes
                            
                            
                            905,500
                            
                            
                            
                            956,800
                            
                            
                            
                            (51,300
                            )
                            
                            
                            -5.4
                            %Net
      sales
                            
                            
                            36,735,000
                            
                            
                            
                            36,817,700
                            
                            
                            
                            (82,700
                            )
                            
                            
                            -0.2
                            %Cost
      of goods sold
                            
                            
                            27,323,100
                            
                            
                            
                            26,342,800
                            
                            
                            
                            980,300
                            
                            
                            
                            3.7
                            %Gross
      profit
                            
                            
                            9,411,900
                            
                            
                            
                            10,474,900
                            
                            
                            
                            (1,063,000
                            )
                            
                            
                            -10.1
                            %Operating
      expenses
                            
                            
                            9,011,300
                            
                            
                            
                            9,863,900
                            
                            
                            
                            (852,600
                            )
                            
                            
                            -8.6
                            %Income  from
      operations
                            
                            
                            400,600
                            
                            
                            
                            611,000
                            
                            
                            
                            (210,400
                            )
                            
                            
                            -34.4
                            %Interest
      expense
                            
                            
                            (781,500
                            )
                            
                            
                            (1,049,600
                            )
                            
                            
                            268,100
                            
                            
                            
                            -25.5
                            %Other
      income (expense)
                            
                            
                            90,900
                            
                            
                            
                            61,600
                            
                            
                            
                            16,900
                            
                            
                            
                            27.4
                            %(Loss)
      before income taxes
                            
                            
                            (290,000
                            )
                            
                            
                            (377,000
                            )
                            
                            
                            87,000
                            
                            
                            
                            -23.1
                            %Provision  for  income
      taxes
                            
                            
                            4,500
                            
                            
                            
                            7,000
                            
                            
                            
                            (2,500
                            )
                            
                            
                            -35.7
                            %Net  (loss)
                            
                            $
                            (294,500
                            )
                            
                            $
                            (384,000
                            )
                            
                            $
                            89,500
                            
                            
                            
                            -23.3
                            %




15




NET
SALES





As used
herein, the term "net sales" refers to gross sales less excise taxes. Overall
net sales for fiscal year 2008 were $36,735,000, a decrease of $82,700 as
compared to $36,817,700 in fiscal year 2007 mainly due to lower sales volume in
the Domestic Territory and the effects of exchange rate
fluctuations.





DOMESTIC
OPERATIONS: Net sales in the Domestic Territory totaled $14,784,000 in fiscal
year 2008, compared to $13,943,700 for fiscal year 2007, representing an
increase of $840,300 or 6%. Sales of beer for fiscal year 2008 decreased by
4,000 barrels, to 73,400 barrels a decrease of 5% as compared to 77,400 barrels
in fiscal year 2007. The decrease in sales was due to a reduction in the volume
of contract brewing which was offset by an increase in sales of Company brands
by 3,000 bbl. During fiscal year 2008, we bottled approximately 5,300 bbl. of
cider products on a contract basis compared to 3,000 bbl. in fiscal year 2007.
We anticipate continuing to solicit opportunities to enter into non-binding
contract brewing arrangements to address the low production capacity utilization
rates in our Ukiah and Releta brewing facilities and anticipate that such
contract brewing arrangements will continue to impact our net sales in the
Domestic Territory.





EUROPEAN
TERRITORY: Net sales in the Company's European Territory totaled $21,951,000
(£11,836,600) in fiscal year 2008, compared to $22,874,000 (£11,425,600) during
fiscal year 2007.  Net sales for fiscal year 2008  presented
in U.S. dollars resulted in a decrease of $923,000 or 4% due to devaluation of
the pound sterling as compared to fiscal year 2007, and an increase of 4%
compared to fiscal year 2007 when presented in pounds sterling. We sold 67,500
bbl. of beer in the European Territory during both fiscal years 2008 and
2007.





COST
OF GOODS SOLD:





Overall
cost of goods sold during fiscal year 2008 totaled $27,323,100, as compared to
$26,342,800 during fiscal year 2007, an increase of $980,300, or 4%. As a
percentage of net sales, costs of goods sold was 74% in fiscal year 2008
compared to 72% in fiscal year 2007. Such 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.





Our
utilization of production capacity at our brewing facilities has a direct impact
on our costs of goods sold. Generally, when facilities are operating at higher
production capacity percentages, cost is favorably affected because fixed and
semi-variable operating costs, such as depreciation and production costs, are
spread over a larger volume base. In 2008 our production volume decreased and
our costs of materials increased significantly. In addition to capacity
utilization, other factors that could affect cost of sales include unanticipated
increases in material and shipping costs, the availability and prices of raw
materials and packaging materials, and continued contract brewing contracts. The
Company expects cost of goods to remain high in the immediate future due to
higher cost of raw materials.





DOMESTIC
OPERATIONS: Cost of goods sold as a percentage of net sales in the Domestic
Territory during fiscal year 2008 increased to 77%, as compared to 73% during
fiscal year 2007. The increase was due mainly to higher costs of malt and hops,
packaging materials and utilities due to increases in energy costs. We rely
heavily on natural gas to operate brewing operations, and electricity to operate
our bottling and refrigeration units. During the year 2008, prices of malts and
hops increased significantly compared to the previous year. Any significant
increase in cost of materials and availability constraints could significantly
impact our future operations. When the market allows us to pass on price
increases to the customer, we do so, but in uncertain markets, we absorb a
portion of the costs.


16





EUROPEAN
TERRITORY: As a percentage of net sales, cost of goods sold in the United
Kingdom during fiscal year 2008 was 73%, as compared to 71% during fiscal year
2007 (in each case as calculated in U.S. dollars, after taking into account the
effects of exchange rate fluctuations), mainly due to product mix and lower
sales realization.





GROSS
PROFIT





As a
result of increased costs of goods sold, gross profit for fiscal year 2008
(expressed in U.S. dollars) was $9,411,900, a decrease of $1,063,000, or 10%, as
compared to gross profit of $10,474,900 in fiscal year 2007. As a percentage of
net sales, our overall gross profit during fiscal years 2008 was 26% compared to
28% in the year 2007.





OPERATING
EXPENSES





Operating
expenses for fiscal year 2008 totaled $9,011,300, a decrease of $852,600, or 9%,
as compared to $9,863,900 for fiscal year 2007. Operating expenses consist of
marketing and distribution expenses, general and administrative expenses. As a
percentage of net sales, such expenses decreased to 25% in fiscal year 2008, as
compared to 27% in fiscal year 2007.





MARKETING
AND DISTRIBUTION EXPENSES: Our marketing and distribution expenses consist of
salaries and commissions, advertising costs, product and sales promotion costs,
travel expenses, and retail operating expenses. For fiscal year 2008, such
expenses equaled $5,117,700, a decrease of $554,100 or 10%, as compared to
$5,671,800 in fiscal year 2007. As a percentage of net sales, our marketing and
distribution expenses decreased to 14% in fiscal year 2008, as compared to 15%
in fiscal year 2007.





DOMESTIC
OPERATIONS: Marketing and distribution expenses for the Domestic Territory in
fiscal year 2008 equaled $1,319,700, an increase of $31,100, or 2%, as compared
to $1,288,600 in marketing and distribution expenses incurred during fiscal year
2007. Marketing and distribution expenses equaled 9% of Domestic Territory net
sales during fiscal years 2008 and 2007.





EUROPEAN
TERRITORY: Marketing and distribution expenses in the European Territory during
fiscal year 2008 equaled $3,798,000, a decrease of $585,200, or 13%, as compared
to $4,383,200 during fiscal year 2007 mainly due to decrease in advertising
expenses, sales commission and expenses associated with the sales force. As a
percentage of net sales in the United Kingdom, such expenses were 17% during
2008 compared to 19% in the year 2007 (in each case as calculated in U.S.
dollars, after taking into account the effects of exchange rate
calculations).





GENERAL
AND ADMINISTRATIVE EXPENSES: Our general and administrative expenses totaled
$3,893,600 for fiscal year 2008, representing a decrease of $298,500, or 7%, as
compared to $4,192,100 for fiscal year 2007. General and administrative expenses
equaled 11% of net sales for fiscal years 2008 and 2007.





DOMESTIC
OPERATIONS. General and administrative expenses for our Domestic Territory
equaled $1,848,400 for fiscal year 2008, representing an increase of $105,300,
or 6%, as compared to $1,743,100 for fiscal year 2007. The increase was
primarily due to increases in loan fees, bank charges and legal
expenses.





EUROPEAN
TERRITORY. General and administrative expenses for our European Territory
equaled $2,045,200 in fiscal year 2008, representing a decrease of $403,800, or
16%, as compared to $2,449,000 for fiscal year 2007. The decrease was mainly due
to decreases in the provision against bad debts due to the implementation of
more conservative credit approval procedures.





OTHER
EXPENSES





Other
income and expenses (including interest expenses) totaled $690,600 in fiscal
year 2008, representing a decrease of $297,400, or 30%, as compared to $988,000
in fiscal year 2007. Interest expense was $781,500 in 2008 as compared to
$1,049,600 in 2007, a reduction of $268,100 or 26% in 2007.


17





INCOME
TAXES





We
incurred an income tax expense of $4,500 for fiscal year 2008, as compared to
$7,000 for fiscal year 2007 relating to our U.S. operations.





As a
result of the accumulated losses in our U.S. operations we have determined that
the deferred tax assets associated with our net operating loss carryforwards and
investment tax credits may expire prior to utilization. We recorded a valuation
allowance of $3,863,900 for deferred tax assets. We also have $68,433 of
California Manufacturers' Investment Tax Credits that can be carried forward to
reduce future taxes. These credits begin expiring in 2011.





NET
LOSS





Our net
loss for fiscal year 2008 was $294,500, a decrease of $89,500 as compared to a
net loss of $384,000 for fiscal year 2007. After taking into account a positive
foreign currency translation adjustment of $410,600 for fiscal year 2008 ( as
compared to a positive adjustment of $32,900 for fiscal year 2007), our
comprehensive net income for fiscal year 2008 was $116,100, as compared to a net
loss of $351,100 in fiscal year 2007.





RETAIL
OPERATIONS





We
operate brew pubs at Hopland and Saratoga Springs. Although sales revenues at
the brew pubs, are not significant ($308,600 in 2008 and $307,400 in 2007) we
view the pubs as a marketing opportunity for our products. The pubs serve our
brews on tap and also sell logo merchandise. We also sell various items of
apparel and memorabilia bearing the Company’s trademarks at the pubs, which
creates further awareness of our beers and reinforces our branding.





CASH
FLOWS





Historically,
we have funded our operations primarily with proceeds from issuances of
preferred stock, common stock, debt financing, lease financing, and cash flows
from operations.





Net cash
provided by operations was $564,400 and $1,292,400 for 2008 and 2007,
respectively. During the year ended December 31, 2008, net cash provided by
operating activities was primarily attributable to non cash expenses of
$1,286,900, increase in payable and accrued liabilities of $1,053,800 and a
decrease of $349,200 in prepaid expenses. This was offset in part by net loss of
$294,500 and an increase in receivables and inventory of $1,781,400. Non-cash
expenses include depreciation, stock-based compensation and interest accrued on
related party notes.





Net cash
used in investing activities was $764,700 and $694,600, respectively, for 2008
and, 2007. Such funds were used primarily for purchases of equipment, furniture
and leasehold improvements.





Net cash
provided (used) by financing activities was $139,100 and
$(656,600),  respectively, for 2008 and 2007. Net cash from financing
activities is comprised of the net proceeds from debt financings. The proceeds
from these debt financings have been used to fund our purchases of fixed assets
and for our working capital.





We
believe that with these recent financing agreements, coupled with
anticipated increases in 2009 sales and continued efforts on managing
costs, we will have enough cash to fund our operations through early 2010.
However, there can be no assurance that we will be able to increase sales to
provide cash for operating activities. Our future working capital requirements
will depend on many factors, including the rates of our revenue growth, our
introduction of new products and our expansion of sales and marketing
activities. To the extent our cash and cash equivalents and cash flow from
operating activities are insufficient to fund our future activities, we may need
to raise additional funds through bank credit arrangements or public or private
equity or debt financings. We also may need to raise additional funds in the
event we determine in the future to effect one or more acquisitions of
businesses or products. If additional funding is required, we may not be able to
obtain bank credit arrangements or to effect an equity or debt financing on
terms acceptable to us or at all.


18





LIQUIDITY
AND CAPITAL RESOURCES





The
Company had $273,700 and $339,700 of cash and cash equivalents at
December 31, 2008 and 2007, respectively. At December 31, 2008, the
Company had working capital deficit of $2,477,600. The Company’s long-term debt
as a percentage of total capitalization (long-term debt and common stockholders’
equity) was 69% at December 31, 2008 compared to 70% at December 31,
2007.





Low
production capacity utilization rates at our Ukiah and Saratoga Springs
facilities and losses from operations in our European Territory continue to
place demands on our working capital. Beginning approximately in the second
quarter of 1997, the time at which the Ukiah brewery commenced operations,
proceeds from our operations have not been able to provide sufficient working
capital. As a result, we have 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 our operations, we will have to make timely payments
of our debt and lease commitments as they become due. Any breach of a loan or
lease covenant which actually leads to default, or to an attempt by a creditor
to exercise its rights against our tangible or intangible assets, could
potentially make it difficult, at least in the short term, for us to continue
our operations. As it has done in certain instances in the past, UBA has agreed
to provide a guarantee covering the operations of UBSN for 2009.





MASTER
LINE OF CREDIT. On August 31, 1999, MBC and UBA, one of our 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 us with a line of credit in the
principal amount of up to $1,600,000. We have executed an Extension of Term of
Notes under Master Line of Credit Agreement (the "Extension Agreement") with
UBA. The Extension Agreement confirms UBA's and our extension of the terms of
the UBA Notes for a period ending on June 30, 2009. On December 28, 2001, we
entered into a Confirmation of Waiver with UBA 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.





As of the
date of this filing, UBA has made thirteen (13) separate advances to us under
the Credit Agreement and one additional advance on substantially the same terms
as those under the Credit Agreement, pursuant to a series of individual
eighteen-month promissory notes issued by us to UBA (the "UBA Notes"). The
aggregate outstanding principal amount of the UBA Notes as of December 31, 2008
was $1,915,400, and the accrued but unpaid interest thereon was equal to
approximately $1,127,400, for a total amount due of $3,042,800.





The
outstanding principal amount of the UBA Notes and the unpaid interest thereon
may be converted, at UBA's discretion, into shares of our unregistered Common
Stock at a conversion rate of $1.50 per share. As of December 31, 2008, the
outstanding principal and interest on the UBA Notes was convertible into
2,028,527 shares of our Common Stock.





The UBA
Notes require us to make quarterly interest payments to UBA on the first day of
April, July, October, and January. To date, UBA has permitted us to capitalize
all accrued interest; therefore, we have borrowed the maximum amount available
under the facility. Upon maturity of any UBA Note, unless UBA has given us 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 our Common Stock. If UBA does
not elect to so convert any UBA 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
us. During the extended term of any note, UBA has the right to require us to
repay the outstanding principal balance, along with the accrued and unpaid
interest thereon, to UBA within sixty (60) days.





These UBA
Notes are subordinated to credit facilities extended to us by Grand Pacific
Financing Corporation (“Grand Pacific”) and Marquette Business Credit Inc.
("MBCI") under subordination agreements executed by UBA. As per the terms of the
subordination agreements, UBA is precluded from demanding repayment of the UBA
Notes due unless the Grand Pacific and MBCI facilities are settled in full.
Hence, we do not expect to make payments on any of these UBA Notes within the
next year.


19


(For
additional information on the Credit Agreement see "Item 13. Certain
Relationships and Related Transactions -Master Line of Credit
Agreement".)





GRAND
PACIFIC FINANCING CORPORATION LOAN : On July 3, 2006, MBC obtained a $3.0
million loan from Grand Pacific, secured by a first priority deed of trust on
the Ukiah land, fixtures attached to the land, and improvements. The loan is
payable in monthly installments calculated on a 25 year amortization basis including interest at
the rate of 1.75% over the prime rate published by The Wall Street Journal,
maturing June 28, 2011 with a balloon payment. The amount of the balloon payment
will vary depending on the change in interest rates over the term of the loan.
Grand Pacific also collects approximately $10,554  per month towards
property taxes payable on the Ukiah property and pays such taxes when they
become due.





MARQUETTE
BUSINESS CREDIT INC. FACILITY: On November 21, 2006, “MBCI” extended a total
facility of $4,925,000 for a period up to June 27, 2011 consisting of a
$2,750,000 revolving facility, a $1,525,000 term loan and a $650,000 capital
expenditure loan. The rate of interest on the term loan and capital expenditure
loan is the one-month LIBOR rate published in the Wall Street Journal plus a
margin of 5.25% and on the revolving facility is one-month LIBOR rate published
in the Wall Street Journal plus a margin of 4.25%. The facility is subject to
certain financial covenants including prescribed minimum fixed charges coverage,
maintaining prescribed minimum tangible net worth and minimum earning before
interest, depreciation and taxes. The facility also has a prepayment penalty if
settled prior to the maturity date. The facility is secured by substantially all
of our assets located in the United States excluding real property and fixtures
located at our property in Ukiah, California.





OTHER
LOANS AND CREDIT FACILITIES





ROYAL
BANK OF SCOTLAND FACILITY: Royal Bank of Scotland Commercial Services Limited
(“RBS”) provided UBSN with a £1,750,000 (US $2,558,300) maximum revolving line
of credit with an advance rate based on 80% of UBSN's qualified accounts
receivable. This facility has a minimum maturity of twelve months, but will be
automatically extended unless terminated by either party upon six months'
written notice.





SHEPHERD
NEAME LOAN: Shepherd Neame has a contract with UBSN to brew Kingfisher Premium
Lager for the Company's European Territory. As consideration for extending the
brewing contract, Shepherd Neame advanced a loan of £600,000 to UBSN, repayable
in annual installments of £60,000 per year, commencing in June 2003. The loan
carries a fixed interest rate of 5% per year. (For more information about this
loan see "Item 13. - Certain Relationships and Related Transactions — Loan
Agreement Between UBSN and Shepherd Neame".)





WEIGHTED
AVERAGE INTEREST: The weighted average interest rates paid on our debts incurred
in connection with the Domestic Territory was 7.24% for fiscal year 2008
compared to 10.01%  fiscal year 2007. For loans primarily associated
with our European territory, the weighted average interest rates paid were 6.13%
in 2008 versus 6.92% in 2007.





KEG
MANAGEMENT ARRANGEMENT: We entered into a keg management agreement (the "Keg
Agreement") with MicroStar Keg Management LLC ("Microstar") for a five year term
on September 1, 2004. Under this arrangement, MicroStar provides us with
half-barrel kegs for which we pay a filling and use fee. Distributors return the
kegs to MicroStar instead of to us. MicroStar then supplies us with additional
kegs. Under the terms of the Keg Agreement, if, on any given month, the
agreement is not extended and terminates, we would be required to purchase a
certain number of kegs from MicroStar. We anticipate financing the purchase of
such kegs through debt or lease financing, if available. However, there can be
no assurance that we will be able to finance the purchase of such kegs. Failure
to purchase the necessary kegs from MicroStar upon the termination of the Keg
Agreement is likely to have a material adverse effect on both our business (if
we are unable to find a comparable supplier) as well as on our working capital
(if we are required to purchase the kegs upon early termination and are unable
to obtain adequate financing).





CURRENT
RATIO: Our ratio of current assets to current liabilities on December 31, 2008
was 0.79 to 1.0 and our ratio of total assets to total liabilities was 1.18 to
1.0. On December 31, 2007 our ratio of current assets to current liabilities was
0.77 to 1.0 and our ratio of total assets to total liabilities was 1.16 to
1.0.


20





RESTRICTED
NET ASSETS. Our wholly-owned subsidiary, UBI, had retained losses of
approximately £395,500 as of December 31, 2008. Under UBSN's line of credit
agreement with Royal Bank of Scotland, distributions and other payments from our
subsidiaries to us are not permitted if the retained earnings drop below
approximately £1,000,000.





RELATED
PARTY TRANSACTIONS: Over the last several years, MBC and its subsidiaries have
entered into or amended several agreements with affiliated and related entities.
Among such agreements 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 these agreements please see "Item 13. — Certain
Relationships and Related Transactions".)





OFF-BALANCE
SHEET TRANSACTIONS. We are not involved in any off-balance sheet arrangements
that have or are reasonably likely to have a material current or future impact
on our financial condition, changes in financial condition, revenues or
expenses, results of operations, liquidity, capital expenditures or capital
resources.


CONTRACTUAL
OBLIGATIONS





The
following chart sets forth our contractual obligations as of December 31,
2008.





Contractual
      Obligations
                
                Payments
      due by periodTotal
                
                
                Less
      than
                  1
      year
                
                
                1
      -3 years
                
                
                3
      -5 years
                
                
                More
      than
                  5
      yearsSecured
      line of credit
                
                $
                3,601,700
                
                
                $
                3,601,700Long
      Term Debt Obligations
                
                
                4,136,400
                
                
                
                316,400
                
                
                $
                3,820,000
                
                
                
                -
                
                
                
                -Capital
      Lease Obligations
                
                
                345,200
                
                
                
                137,300
                
                
                
                207,900
                
                
                
                -
                
                
                
                -Operating
      Lease Obligations
                
                
                836,700
                
                
                
                240,700
                
                
                
                397,600
                
                
                $
                170,600
                
                
                $
                27,800Purchase
      Obligations
                
                
                4,470,700
                
                
                
                3,024,600
                
                
                
                1,112,500
                
                
                
                235,100
                
                
                
                98,500Other
      Long Term Liabilities
                
                
                3,393,700
                
                
                
                87,700
                
                
                
                3,218,300
                
                
                
                87,700
                
                
                
                -Total
                
                $
                16,784,400
                
                
                $
                7,408,400
                
                
                $
                8,756,300
                
                
                $
                493,400
                
                
                $
                126,300





CRITICAL
ACCOUNTING POLICIES





Our
discussion and analysis of our financial condition and results of operations are
based on our financial statements, which have been prepared in accordance with
U.S. generally accepted accounting principles. The preparation of these
financial statements requires us to make estimates and judgments that affect the
reported amounts of assets, liabilities and expenses and related disclosure of
contingent assets and liabilities. We review our estimates on an ongoing basis.
We base our estimates on historical experience and on various other assumptions
that we believe to be reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying values of assets and
liabilities. Actual results may differ from these estimates under different
assumptions or conditions. While our significant accounting policies are
described in more detail in Note 1 to our financial statements, we believe the
following accounting policies to be critical to the judgments and estimates used
in the preparation of our financial statements:





Revenue Recognition. We
recognize revenue from two types of customers, end users and distributors.
Revenue is recognized in accordance with Staff Accounting Bulletin 104, “Revenue
Recognition in Financial Statements” when all of the following criteria are met:
persuasive evidence of an arrangement exists, shipment of the product has
occurred and title of products transferred at the point of shipment, payment of
the product is reasonably assured and no substantive obligations to the customer
remain. Revenue is presented net of discounts, allowances, and returns.
Customers are not generally entitled to any rights of product return. Payment
terms are either open trade credit or cash. We have distributors in the US, UK
and Europe and we record as revenue the wholesale price we charge our
distributors. Although title and risk of loss on all shipments may not transfer
until delivery of our products to the distributor, we recognize revenue upon
shipment rather than when title passes because the time between shipment and
delivery is short and product damage claims and returns are immaterial. We
recognize revenue on retail sales at the time of sale. We recognize revenue from
events at the time of the event.


21





Allowance for Doubtful Accounts.We use the allowance method to account for uncollectible accounts
receivable. Our estimate is based on historical collection experience and a
review of the current status of accounts receivable. We review our accounts
receivable balances by customer for accounts greater than 90 days old and make a
determination regarding the collectability of the accounts based on specific
circumstances and the payment history that exists with such customers. We also
take into account our prior experience, the customer’s ability to pay and an
assessment of the current economic conditions in determining the net realizable
value of our receivables. We also review our allowances for doubtful accounts
in  the aggregate for adequacy following this assessment. Accordingly,
we believe that our allowances for doubtful accounts fairly represent the
underlying collectability risks associated with our accounts
receivable.





Inventories. Inventory
consists of raw materials, work in progress, and finished goods. Inventory is
stated at the lower of cost or market using the average-cost method. Cost
includes the acquisition cost of raw materials and components, direct labor, and
manufacturing overhead. We periodically review our inventory for excess or
quality issues. Should we conclude that we have inventory for which we cannot
recover our costs as a result of such review, we would record a charge to cost
of goods sold. We record write downs for excess and obsolete inventory equal to
the difference between the cost of inventory and the estimated fair value based
on assumptions about future product life-cycles, product demand and market
conditions.  If actual product life cycles, product demand and market
conditions are less favorable than those projected by management, additional
inventory write-downs may be required.




Long-Lived
Assets.  The Company evaluates potential impairment of
long-lived assets in accordance with SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. SFAS No. 144 establishes
procedures for review of recoverability and measurement of impairment, if
necessary, of long-lived assets, goodwill and certain identifiable intangibles.
When facts and circumstances indicate that the carrying values of long-lived
assets may be impaired, an evaluation of recoverability is performed by
comparing the carrying value of the assets to projected future undiscounted cash
flows in addition to other quantitative and qualitative analyses. Upon
indication that the carrying value of such assets may not be recoverable, we
will recognize an impairment loss by a charge against current
operations.




Income Taxes.Income taxes are accounted
for under the asset and liability method. Deferred income tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement bases and the respective tax bases
of the assets and liabilities and operating loss and tax credit carry forwards.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date. Valuation allowances are established
when necessary to reduce deferred tax assets to the amount expected to be
realized, and have been provided for all periods presented.





RECENT
ACCOUNTING PRONOUNCEMENTS





In June
2007, the FASB ratified Emerging Issues Task Force (EITF) Issue No. 06-11,
"Accounting for Income Tax
Benefits of Dividends on Share-Based Payment Awards." EITF Issue No 06-11
requires that tax benefits generated by dividends paid during the vesting period
on certain equity-classified share-based compensation awards be treated as
additional paid-in capital and included in a pool of excess tax benefits
available to absorb tax deficiencies from share-based payment awards. EITF Issue
No. 06-11 is effective beginning with the 2008 fiscal year. The adoption of
EITF Issue No. 06-11 did not have any impact on our financial position, results
of operations or cash flows.





Effective
January 1, 2008, we adopted SFAS No. 159, “The Fair Value Option for Financial
Assets and Financial Liabilities – including an amendment of FASB Statement No.
115”.  SFAS No. 159 allows an entity the irrevocable option to
elect fair value for the initial and subsequent measurement of certain financial
assets and liabilities under an instrument-by-instrument
election.  Subsequent measurements for the financial assets and
liabilities an entity elects to fair value will be recognized in the results of
operations.  SFAS No. 159 also establishes additional disclosure
requirements.  We did not elect the fair value option under SFAS No.
159 for any of our financial assets or liabilities upon adoption.  The
adoption of SFAS No. 159 did not have a material impact on our results of
operations or financial position.


22




In
September 2006, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 157, “Fair Value Measurements (SFAS
No. 157)”. SFAS No. 157 establishes a framework for measuring fair
value, clarifies the definition of fair value and requires additional
disclosures about fair-value measurements. In general, SFAS No. 157 applies
to fair value measurements that are already required or permitted by other
accounting standards and is expected to increase the consistency of those
measurements. SFAS No. 157, as issued, is effective for fiscal years
beginning after November 15, 2007. In February 2008, the FASB issued FASB
Staff Position (FSP) SFAS No. 157-2, Effective Date of FASB Statement No.
157 (FSP SFAS No. 157-2) which deferred the effective date of SFAS No.
157 for one year for certain nonfinancial assets and nonfinancial liabilities.
Accordingly, we adopted the required provisions of SFAS No. 157 at the beginning
of fiscal year 2008 and the remaining provisions will be adopted by us at the
beginning of fiscal year 2009. The 2008 fiscal year adoption did not result in a
material impact to our financial statements. In October 2008, the FASB issued
FSP 157-3, “Determining the
Fair Value of a Financial Asset when the Market of that Asset is not
Active”, or FSP 157-3. FSP 157-3 clarifies the application of SFAS 157 in
a market that is not active and provides an example to illustrate key
considerations in determining the fair value of a financial asset when the
market for that financial asset is not active. We are currently evaluating the
impact of adopting the remaining parts of SFAS No. 157 and FSP 157-3 in fiscal
year 2009.





In
December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations (SFAS
No. 141(R))”. SFAS No. 141(R) amends SFAS No. 141, “Business Combinations”,and
provides revised guidance for recognizing and measuring identifiable assets and
goodwill acquired, liabilities assumed and any noncontrolling interest in the
acquiree. Some of the revised guidance of SFAS No. 141(R) includes initial
capitalization of acquired in-process research and development (IPR&D),
expensing transaction costs, expensing acquired restructuring costs and
recording contingent consideration payments at fair value with subsequent
adjustments recorded to net earnings. It also provides disclosure requirements
to enable users of the financial statements to evaluate the nature and financial
statement effects of the business combination. SFAS No. 141(R) is effective for
fiscal years beginning on or after December 15, 2008 and will be applied
prospectively to business combinations that are consummated after adoption of
SFAS No. 141(R). We are currently evaluating the effects, if any, that SFAS No.
141(R) may have on our financial statements.





In
December 2007, the FASB issued FAS No. 160, “Accounting for Noncontrolling
Interests.” FAS No. 160 clarifies the classification of noncontrolling
interests in consolidated statements of financial position and the accounting
for and reporting of transactions between the reporting entity and holders of
such noncontrolling interests. Under the standard, noncontrolling interests are
considered equity and should be reported as an element of consolidated equity,
and net income will encompass the total income of all consolidated subsidiaries
and there will be separate disclosure on the face of the income statement of the
attribution of that income between the controlling and noncontrolling interests.
FAS No. 160 is effective prospectively for fiscal years beginning after December
15, 2008. The adoption of FAS No. 160 did not have a significant impact on our
results of operations, financial condition or liquidity.





In March
2008, the FASB issued FAS No. 161, “Disclosures about Derivative
Instruments and Hedging Activities,” an amendment of FASB Statement No.
133 “Accounting for Derivative
Instruments and Hedging Activities”. FAS No. 161 requires entities to
provide greater transparency about how and why an entity uses derivative
instruments, how derivative instruments and related hedged items are accounted
for under FAS No. 133, and how derivative instruments and related hedged items
affect an entity’s financial position, results of operations, and cash flows.
The statement is effective for financial statements issued for fiscal years and
interim periods beginning after November 15, 2008, and is not expected to have a
significant impact on our results of operations, financial condition or
liquidity.





In May
2008, the FASB issued Financial Accounting Standard (“FAS”) No. 162, “The Hierarchy of Generally Accepted
Accounting Principles.” The statement is intended to improve financial
reporting by identifying a consistent hierarchy for selecting accounting
principles to be used in preparing financial statements that are prepared in
conformance with generally accepted accounting principles. Unlike Statement on
Auditing Standards (“SAS”) No. 69, “The Meaning of Present in Conformity
With GAAP,” FAS No. 162 is directed to the entity rather than the
auditor. The statement is effective 60 days following the SEC’s approval of the
Public Company Accounting Oversight Board (“PCAOB”) amendments to AU Section
411, “The Meaning of Present
Fairly in Conformity with GAAP,” and is not expected to have any impact
on our results of operations, financial condition or liquidity.


23


In May
2008, the FASB issued FSP Accounting Principles Board (APB) Opinion No. 14-1,
Accounting for Convertible
Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial
Cash Settlement) (FSP APB No. 14-1). The FSP requires the proceeds from
the issuance of such convertible debt instruments to be allocated between a
liability and an equity component in a manner that reflects the entity’s
nonconvertible debt borrowing rate when interest expense is recognized in
subsequent periods. The resulting debt discount is amortized over the period the
convertible debt is expected to be outstanding as additional non-cash interest
expense. FSP APB No. 14-1 is effective in fiscal years beginning after December
15, 2008 and requires retrospective application to all prior periods presented.
We believe that the adoption of FSP APB No. 14-1 will not have a significant
impact on our results of operations, financial condition or
liquidity.





In June
2008, the Financial Accounting Standards Board (“FASB”) issued FASB Staff
Position (“FSP”) Emerging Issues Task Force (EITF) No. 03-6-1, “Determining Whether Instruments
Granted in Share-Based Payment Transactions Are Participating
Securities.” Under the FSP, unvested share-based payment awards that
contain rights to receive nonforfeitable dividends (whether paid or unpaid) are
participating securities, and should be included in the two-class method of
computing earnings per share. The FSP is effective for fiscal years beginning
after December 15, 2008, and interim periods within those years, and is not
expected to have a significant impact on our results of operations, financial
condition or liquidity.





ITEM
7A.        QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET RISK





Not
required for smaller reporting companies.





ITEM
8.           FINANCIAL STATEMENTS
AND SUPPLEMENTARY DATA.





The
information required by this item is set forth at Pages F-1 through F-26 to this
Annual Report.





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





None.





ITEM
9A.CONTROLS AND
PROCEDURES.





EVALUATION
OF DISCLOSURE CONTROLS AND PROCEDURES





Our management team, under the
supervision and with the participation of our principal executive officer and
our principal financial officer, evaluated the effectiveness of the design and
operation of our disclosure controls and procedures as such term is defined
under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934,
as amended (Exchange Act), as of the last day of the fiscal period covered by
this report, December 31, 2008. The term disclosure controls and procedures
means our controls and other procedures that are designed to ensure that
information required to be disclosed by us in the reports that we file or submit
under the Exchange Act is recorded, processed, summarized and reported, within
the time periods specified in the SEC’s rules and forms. Disclosure controls and
procedures include, without limitation, controls and procedures designed to
ensure that information required to be disclosed by us in the reports that we
file or submit under the Exchange Act is accumulated and communicated to
management, including our principal executive and principal financial officer,
or persons performing similar functions, as appropriate to allow timely
decisions regarding required disclosure. Based on this evaluation, our principal
executive officer and our principal financial officer concluded that, our
disclosure controls and procedures were effective as of December 31,
2008.





CHANGES
IN INTERNAL CONTROL OVER FINANCIAL REPORTING





There
were no changes in our internal control over financial reporting that occurred
in the last fiscal quarter ended December 31, 2008 that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.


24





Report of Management on Internal
Control over Financial Reporting





Management
is responsible for establishing and maintaining adequate internal control over
financial reporting. Internal control over financial reporting is defined in
Rule 13a-15(f) and Rule 15d-15(f) under the Exchange Act as a process
designed by, or under the supervision of, the issuer’s principal executive and
principal financial officers, or persons performing similar functions, and
effected by the issuer’s board of directors, management and other personnel, to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with GAAP and includes those policies and procedures that:





•
            pertain
      to the maintenance of records that, in reasonable detail, accurately and
      fairly reflect the transactions and dispositions of the assets of the
      issuer;





•
            provide
      reasonable assurance that transactions are recorded as necessary to permit
      the preparation of financial statements in accordance with GAAP, and that
      receipts and expenditures of the issuer are being made only in accordance
      with authorizations of management and directors of the
      issuer; and





•
            provide
      reasonable assurance regarding the prevention or timely detection of
      unauthorized acquisition, use or disposition of the issuer’s assets that
      could have a material effect on the financial
  statements.





Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions or that the degree of compliance
with existing policies or procedures may deteriorate.





In
accordance with the internal control reporting requirements of the SEC,
management completed an assessment of the adequacy of our internal control over
financial reporting as of December 31, 2008. In making this assessment,
management used the criteria set forth in Internal Control — Integrated
Frameworkby the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) and the SEC’s guide entitled
“Sarbanes-Oxley Section 404: A Guide for Small Business. As a result of
this assessment and based on the criteria in the COSO framework and SEC
guidance, management has concluded that, as of December 31, 2008, our
internal control over financial reporting was effective.





Our
independent registered public accounting firm has not issued an audit report on
the effectiveness of our internal control over financial
reporting.





ITEM
9B. OTHER
INFORMATION.





None.





PART
III





ITEM
10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE





The
following table sets forth the names, ages as of February 28, 2009, and certain
information regarding each of the Company's current directors and executive
officers:





Name
              
              Age
              
              Position(s)
              
              Director
      Since**Scott
      R. Heldfond *+
              
              64
              
              Director
              
              2005Michael
      Laybourn+
              
              70
              
              Director
              
              1993Vijay
      Mallya, Ph.D.
              
              53
              
              Director
      and Chairman of the Board
              
              1997Jerome
      G. Merchant*+
              
              47
              
              Director
              
              1997Mahadevan
      Narayanan
              
              51
              
              Chief
      Financial Officer and Secretary
              
              N/ASury
      Rao Palamand, Ph.D.
              
              77
              
              Director
              
              1998Kent
      D. Price*+
              
              65
              
              Director
              
              1998Yashpal
      Singh
              
              63
              
              Director,
      President and Chief Executive Officer
              
              1997




25




**
            All directors are elected by the
      Shareholders at the Annual Meeting to serve until the following Annual
      Meeting. Currently, there are no arrangements or understandings between
      any of the directors and any other person pursuant to which any director
      was or is to be selected as a director. The Company has entered into an
      employment agreement with the Company's Chief Executive Officer pursuant
      to which his term of employment has been extended until March 31, 2011.
      The Company's Chief Financial Officer and Chairman do not have any set
      date for the expiration of their respective terms of
      office.





*
            Member of the Audit/Finance
      Committee.





+
            Member of the Compensation
      Committee.





Mr. Scott
Heldfond joined the Board in January 2005. He is a Director of NASDAQ Insurance
Group, LLC, a national insurance brokerage and consulting firm owned by the
NASDAQ Stock Market. Mr. Heldfond has also served as the Managing Partner of
eSEED Capital, LLC, a technology-focused merchant banking firm since 1999. He
also served as President and Chief Executive Officer of Frank Crystal & Co.
of California, a New York-based insurance brokerage firm from 1995 to 1999,
Chairman of Hales Capital LLC, an investment banking firm from 1994 to February
1997 and President of AON Real Estate & Investments. Mr. Heldfond also
served as a Director of HomeGain, Inc (recently sold to Classified Ventures), a
private venture backed company and UBICS, a NASDAQ traded firm that provides
information technology staffing and solutions for domestic and international
businesses. Mr. Heldfond has also served as a Director of Galoob Toys, which was
the third largest toy manufacture before its sale to Hasbro. Mr. Heldfond holds
an undergraduate degree from the University of California, Berkeley and a J.D.
from the University of San Francisco Law School. He is a Commissioner and the
President of the Health Services Commission of the City and County of San
Francisco, in addition he serves 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 is the Honorary Consul General to the U.S. for the
Republic of Rwanda.





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 until January 2005. Dr. Mallya is Chairman of UBICS, Inc.,
United Breweries Limited, UB Engineering Limited, Mangalore Chemicals and
Fertilizers Ltd., Herbertsons Limited, McDowell & Co. Ltd., and other
affiliated companies (collectively the "UB Group"). 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. dollars $1 billion. He also sits
on the 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 holds a
Bachelor of Commerce degree from the University of Calcutta in India and an
honorary Doctorate in Business Administration from California Southern
University, Santa Ana.


26


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  served
as the Strategic Planning Consultant to the Chairman's Office of the Company
from July 1996 until January 2007. Mr. Merchant is currently a Managing Director
with RSM EquiCo Capital Markets, LLC a mid market investment bank. He has over
20 years experience in investment banking and capital raising. Previously, he
held executive positions at Citigroup and MetLife Investors. Mr. Merchant has
advised the investment division and clients of Citibank, Smith Barney, Bank of
America, Wells Fargo and U.S. Bank amongst others. In executive and strategic
planning capacities, he has advised public and private companies and
institutional and high-net worth investors. Between April 1993 and December
2003, Mr. Merchant served in various senior capacities for Cal Fed Investments,
a wholly owned subsidiary of Cal Fed Bank. Previously, Mr. Merchant directed the
West Coast capital raising for a private equity group making equity oriented
management buyouts and strategic acquisitions. He received his B.S. degree in
Managerial Economics-Finance from the University of California, at
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 17 years in various financial and accounting
capacities. Mahadevan Narayanan 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 became a director of the Company in January 1998. Dr. Palamand is a
director and partner of Summit Products, Inc, a beverage development and
consulting company serving the food and beverage industry. He is also a director
and partner in the Historic Lemp Brewery involved in the development of
microbreweries and brewpubs in addition to his real estate activities in the
restoration of historic buildings. Dr. Palamand has over 40 years of experience
in the brewing industry and has published numerous scientific and technical
papers on beer and other fermented beverages in various Technical Journals in
the USA and abroad. He is an associate member of the Institute of Brewing,
London and is a member of several brewing organizations in the United States. In
addition, Dr. Palamand possesses technical and technological expertise in wine
making as well as in the development of soft drinks. Prior to joining the
Company as a director, Dr. Palamand served as Director of Beer and New Beverage
Development at Anheuser-Busch Companies, Inc. Dr. Palamand holds a Bachelor of
Science degree from the University of Mysore, India, a Master of Science degree
in Applied Chemistry from the University of Bombay, India and a Masters degree
in Food Microbiology and a Ph.D. degree in Food and Flavor technology from the
Ohio State University, Columbus, Ohio. Dr. Palamand is listed in the MARQUIS WHO
is WHO in America and in the WHO is WHO in the Midwest.





Kent D.
Price became a director in January 1998. Kent Price is a founder and President
of Parker Price Venture Capital. Mr. Price was a Rhodes Scholar at Oxford
University, attended the University of Montana, UCLA and Harvard Business
School. Mr. Price is a member of the board of directors of the University of
Montana and a member of the Investment Committee. Mr. Price has extensive
operational experience, including his role as CEO of The Chloride Group, a
global battery company, CEO of the Bank of San Francisco, General Manager of
Banking, Finance and Securities Group at IBM, Chief Financial Office at the Bank
of New England, Executive Vice President of the Bank of America and a senior
officer at Citibank. He has lived and worked in England, Germany, Ireland,
Nigeria, Ivory Coast, Taiwan, Hong Kong, Japan, Singapore as well as the United
States. He has served on boards in the UK, India, South Africa, Hong Kong,
Taiwan, China and the United States. Mr. Price served as a Captain in the United
States Air Force.





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. 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 the operations of 12 breweries, instituting new projects,
and technical and operational evaluations 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.





FAMILY
RELATIONSHIPS





There are
no family relationships between any of the directors and executive
officers.





INVOLVEMENT
IN CERTAIN LEGAL PROCEEDINGS


None.


27





SECTION
16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE





Based
solely on its review of the Forms 3, 4 and 5 furnished to the Company during and
with respect to the year 2008, the Company is not aware of any untimely filing
by a Director, officer, or greater than 10% beneficial owner of the reports
required by Section 16(a) of the Exchange Act during the Company's most recent
fiscal year.





AUDIT
COMMITTEE





The
Company has a separately-designated standing Audit/ Finance Committee
established in accordance with Section 3(a)(58)(A) of the Exchange Act. Jerome
G. Merchant, Scott R Heldfond and Kent D. Price serve as the committee members
of the Audit/Finance Committee.





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 Securities Exchange Act of 1934, as amended, and pursuant to the rules and
regulations promulgated by 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 website at www.mendobrew.com. The Company
intends to disclose future amendments to certain provisions of its Code of
Ethics, or waivers of such provisions granted to executive officers and
directors on its website within four (4) business days following the date of
such amendment or waiver. 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.





DIRECTORS'
NOMINATIONS





There
have been no material changes to the procedures by which shareholders may
recommend nominees to the Company's board of directors.





ITEM
11.EXECUTIVE
COMPENSATION





SUMMARY
COMPENSATION TABLE





The
following table sets forth the annual compensation of the principal executive
officer and the only additional employee (the chief financial officer) whose
total compensation exceeded $100,000 during the fiscal year ended December 31,
2008.





None of
these executive officers were issued any equity shares or stock options as
compensation to date.




28





Name
      and Principal
                                                                  Position
                                                                
                                                                Year
                                                                
                                                                Salary
                                                                  ($)
                                                                
                                                                
                                                                Bonus
                                                                  ($)
                                                                
                                                                
                                                                Stock
                                                                  Awards
                                                                  ($)
                                                                
                                                                
                                                                Option
                                                                  Awards
                                                                  ($)
                                                                
                                                                
                                                                Non
      Equity
                                                                  Incentive
      Plan
                                                                  Compensation
                                                                  ($)
                                                                
                                                                
                                                                Nonqualified
                                                                  Deferred
                                                                  Compensation
                                                                  Earnings
      ($)
                                                                
                                                                
                                                                All
      Other
                                                                  Compensation
                                                                  ($)*
                                                                
                                                                
                                                                Total
                                                                  ($)(a)
                                                                
                                                                (b)
                                                                
                                                                (c)
                                                                
                                                                
                                                                (d)
                                                                
                                                                
                                                                (e)
                                                                
                                                                
                                                                (f)
                                                                
                                                                
                                                                (g)
                                                                
                                                                
                                                                (h)
                                                                
                                                                
                                                                (i)
                                                                
                                                                
                                                                (j)Yashpal
      Singh President and Chief Executive Officer
                                                                
                                                                2008
                                                                
                                                                
                                                                235,000
                                                                
                                                                
                                                                
                                                                19,000
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                19,899
                                                                
                                                                
                                                                
                                                                273,8992007
                                                                
                                                                
                                                                189,000
                                                                
                                                                
                                                                
                                                                40,825
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                32,976
                                                                
                                                                
                                                                
                                                                262,801Mahadevan
      Narayanan Chief Financial Officer and Corporate Secretary
                                                                
                                                                2008
                                                                
                                                                
                                                                140,000
                                                                
                                                                
                                                                
                                                                11,500
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                25,074
                                                                
                                                                
                                                                
                                                                176,5742007
                                                                
                                                                
                                                                114,000
                                                                
                                                                
                                                                
                                                                21,481
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                135,481




*
            Other
      compensation includes use of company vehicle, health care reimbursement
      for the executive and his immediate family and vacation
      reimbursement.





Compensation
Narrative





The
Compensation Committee of the Board of Directors (the "Committee") determines
and administers the compensation for MBC's executive officers. The Committee
reviews and determines all components of the executive officers' compensation,
including making individual compensation decisions and reviewing and revising
compensation guidelines as appropriate. The Committee also consults with the
Chief Executive Officer regarding revisions to the compensation of the Chief
Financial Officer and other non-executive employees, as
appropriate.





The
Company has entered into an Employment Agreement with its Chief Executive
Officer that sets forth the term of his employment and provides for certain
benefits. The Company does not currently have an employment agreement in place
with its Chief Financial Officer, but may enter into an employment agreement
with such executive officer in the future. The Company does not have any
severance payment arrangements other than with the Chief Executive Officer. The
Company has agreed to reimburse travel expenses for the Chief Executive Officer
and his family to return to their home country upon the termination of the Chief
Executive Officer's employment with the Company. In addition, if the Chief
Executive Officer is terminated prior to the expiration of a twelve-month notice
period, he is entitled to be paid an amount equal to his remaining unpaid
compensation for the remainder of the twelve-month period. The Company does not
have any payment arrangements that would be triggered by a "change in control"
of the Company. The Company also does not maintain any retirement plan programs
or provide the executive officers with any benefits following their retirement
or termination from the Company.





Total
compensation consists of base salary, annual cash bonus payments, health
benefits for the executive officers and their immediate dependent family
members, key person life insurance, use of company vehicles and vacation
reimbursements.





Elements
of Compensation





Base
Salary





The
Committee establishes executive officers' base salaries on an annual basis.
Historically approximately 25% of the cash compensation paid to the Chief
Executive Officer and Chief Financial Officer, respectively, was paid in the
form of a bonus rather than as salary due to the lack of sufficient available
working capital during certain periods. Beginning January 1, 2008 the base
salary was raised and the bonus potential was reduced to 10%.  Given
the Company's stock performance and financial situation, there is currently no
salary component directly tied to the Company's stock price nor to its financial
performance.


29


Annual
Cash Bonus


As
discussed above, the compensation packages for the Chief Executive Officer and
the Chief Financial Officer provide for payment of annual cash bonuses. Given
the working capital constraints of the Company in the past, the Committee
historically determined that a percentage of the cash compensation of the
executive officers would be in the form of annual cash bonuses that could be
disbursed following the completion of the applicable fiscal year.





Perquisites
and Personal Benefits





In
addition to salary and annual bonuses, the total compensation of the Company's
Chief Executive Officer and the Chief Financial Officer include perquisites and
personal benefits. The types of perquisites and personal benefits awarded to the
officers were determined when each such officer commenced employment with the
Company and are substantially of the same nature as the perquisites provided to
such executive officer by previous employers. The perquisites available to the
executive officers consist of: use of company vehicles, health care
reimbursement for the executive officer and his immediate family, reimbursement
of certain specified vacation expenses and life insurance.





Equity
Plans





The
Company does not currently maintain any equity compensation plans for or provide
any form of equity compensation to its executive officers.





Retirement
Plans





The
Company does not currently maintain any retirement plans, nor does it provide
any post-retirement benefits to any of its employees (including its executive
officers).





DIRECTORS'
COMPENSATION FOR THE YEAR 2008





Dr. Vijay
Mallya, Chairman of the Board, is paid $120,000 per year by MBC for services
rendered as Chairman, and £89,600 per year (approximately $166,200 in U.S.
dollars at the average exchange rate for the year 2008) by UBI for promoting the
Company’s products in the European Territory outside the United
Kingdom.





Directors
who are not in receipt of fixed remuneration from the Company receive fees for
their services as a director consisting of payments in the amount of $3,000 per
Board meeting and $1,000 per committee meeting attended by such director. The
following table provides details of directors' compensation for the year
2008.





Name
                  
                  Fees
                    earned
                    or
      Paid
                    in
      Cash
                    ($)
                  
                  Stock
                    Awards
                    ($)
                  
                  Option
                    Awards
                    ($)
                  
                  Non
      Equity
                    Incentive
      Plan
                    Compensation
                    ($)
                  
                  Nonqualified
                    Deferred
                    Compensation
                    Earnings
                    ($)
                  
                  All
      Other
                    Compensation
                    ($)
                  
                  Total
                    ($)(a)
                  
                  (b)
                  
                  (c)
                  
                  (d)
                  
                  (e)
                  
                  (f)
                  
                  (g)
                  
                  (h)Dr.Vijay
      Mallya
                  
                  286,200Kent
      Price
                  
                  
                  -
                  
                  14,000
                  *
                  -
                  
                  
                  -
                  
                  -
                  
                  
                  -
                  
                  14,000Sury
      Rao Palamand
                  
                  
                  -
                  
                  9,000
                  **
                  -
                  
                  
                  -
                  
                  -
                  
                  
                  -
                  
                  9,000Jerome
      Merchant
                  
                  
                  -
                  
                  13,000
                  +
                  -
                  
                  
                  -
                  
                  -
                  
                  
                  -
                  
                  13,000Scott
      Heldfond
                  
                  
                  -
                  
                  15,000
                  #
                  -
                  
                  
                  -
                  
                  -
                  
                  
                  -
                  
                  15,000Michael
      Laybourne
                  
                  
                  -
                  
                  10,000
                  ##
                  -
                  
                  
                  -
                  
                  -
                  
                  
                  -
                  
                  10,000




*
            Fee for attending three board
      meetings and five committee meetings calculated at $3,000 per board
      meeting and $1,000 per committee meeting, to be compensated in the form of
      Company’s common stock calculated at $0.40 per share being the average
      value of the stock during the year
2008.




**
            Fee
      for attending three board meetings calculated at $3,000 per board meeting
      to be compensated in the form of Company’s common stock calculated at
      $0.40 per share being the average value of the stock during the year
      2008.




30




+
            Fee
      for attending three board meetings and four committee meetings calculated
      at $3,000 per board meeting and $1,000 per committee meeting, to be
      compensated in the form of Company’s common stock calculated at $0.40 per
      share being the average value of the stock during the year
      2008.





#
            Fee for attending three board
      meetings and six committee meetings calculated at $3,000 per board meeting
      and $1,000 per committee meeting, to be compensated in the form of
      Company’s common stock calculated at $0.40 per share being the average
      value of the stock during the year
2008.




##
            Fee for attending three board
      meetings and one committee meeting calculated at $3,000 per board meeting
      and $1,000 per committee meeting, to be compensated in the form of
      Company’s common stock calculated at $0.40 per share being the average
      value of the stock during the year
2008.




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 December 31, 2008, 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 otherwise 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.





Name
      and Address
                    
                    Shares
                      Beneficially
                      Owned (1)
                    
                    
                    Approximate
                      PercentageCOMMON
      STOCKUnited
      Breweries of America, Inc.
                      1050,
      Bridge way,
                      Sausalito,
      CA 94965
                    
                    
                    3,087,818
                    (2)
                    
                    
                    25.7
                    %Inversiones
      Mirabel S.A.
                      Hong
      Kong Bank Building
                      6th
      Floor, Samuel Lewis Avenue
                      P O
      Box 6-4298, El Dorado
                      Panama
      City, Panama
                    
                    
                    5,500,000
                    (2)
                    
                    
                    45.9
                    %United
      Breweries (Holdings) Limited.
                      100/1,
      Richmond Road,
                      Bangalore
      - 560 025, India
                    
                    
                    8,587,818
                    (3)
                    
                    
                    71.6
                    %H.
      Michael Laybourn +
                    
                    
                    416,948
                    
                    
                    
                    3.5
                    %Vijay
      Mallya
                    
                    
                    8,587,818
                    (4)
                    
                    
                    71.6
                    %Kent
      D Price
                      c/o
      Parker Price Venture Capital, Inc.
                      101,
      California Street
                      Suite
      2830
                      San
      Francisco, CA 94111
                    
                    
                    274,907
                    
                    
                    
                    2.3
                    %Sury
      Rao Palamand, Ph.D. +
                    
                    
                    240,065
                    
                    
                    
                    2.0
                    %Jerome
      G. Merchant+
                    
                    
                    155,665
                    
                    
                    
                    1.3
                    %Yashpal
      Singh+
                    
                    
                    —
                    
                    
                    
                    —Scott
      R. Heldfond +
                    
                    
                    93,505
                    
                    
                    
                    *N.
      Mahadevan
                    
                    
                    —
                    
                    
                    
                    —All
      Directors and executive officers as a group (8 persons)
                    
                    
                    9,768,908
                    (5)
                    
                    
                    81.5
                    %SERIES
      A PREFERRED STOCKH.
      Michael Laybourn +
                    
                    
                    6,100
                    
                    
                    
                    2.7
                    %All
      Directors and executive officers as a group (8 persons)
                    
                    
                    6,100
                    
                    
                    
                    2.7
                    %




31




*Amount
represents less than 1% of the outstanding securities of the class.


+1601 Airport Road, Ukiah, CA
95402





(1)
Applicable percentages of ownership are based on 11,991,686 shares of Common
Stock outstanding.





(2) Does
not include 2,028,527 shares issuable to UBA upon conversion of certain
convertible notes issued by MBC to UBA under a Master Line of Credit Agreement
(For additional information, see "Item 13. Certain Relationships and Related
Transactions"). UBHL is the ultimate beneficiary of substantially all of the
shares owned by both UBA and Inversiones.





(3)
Includes all shares held by the Company's two largest shareholders, UBA and
Inversiones. UBHL is the beneficial owner of UBA and Inversiones because they
are both controlled by Rigby International Corp., a company registered in the
British Virgin Island with its primary offices at Vanterpool Plaza, 2nd Floor,
Wickhams Cay I, Road Town, Tortola, British Virgin Island 2 and its mailing
address c/o CAS SA, 12-14 Avenue, Riverdil, CH-1260, Lyon, Switzerland, which in
turn is a wholly-owned subsidiary of UBHL. Such amount does not include
2,028,527 shares issuable to UBA upon conversion of certain convertible notes
issued by MBC to UBA under a Master Line of Credit Agreement.





(4)
Includes all shares indirectly held by UBHL. Does not include 2,028,527 shares
issuable to UBA upon conversion of certain convertible notes issued by MBC to
UBA described in footnotes (2) and (3) above. Dr. Mallya disclaims beneficial
ownership of the reported securities except to the extent of his pecuniary
interest therein.





(5) Does
not include shares which may be obtained upon the conversion of the Notes
described in footnotes (2) and (3), above.





CHANGES
IN CONTROL





There are
no arrangements currently known to the Company which may result in a change in
control of the Company at a future date.





DIRECTORS'
EQUITY COMPENSATION PLAN





As of
December 31, 2008, an aggregate of 435,155 shares of the Company's unregistered
Common Stock had been issued to directors under the Directors' Compensation Plan
and an additional 64,856 remained available for issuance under the Directors'
Compensation Plan.  Each Director is entitled to receive only that
number of shares that is equal to such Director's amount of cash compensation
that he otherwise would have received for attending Board and Board committee
meetings. A Board meeting is valued at $3,000 per meeting and a Board committee
meeting is valued at $1,000 per meeting. The Common Stock is to be valued at the
quarterly average of fair market values over the relevant calendar year,
provided that the price per share will never be lower than the fair market value
on the date of the shares.





ITEM
13. CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE.





During
fiscal years 2008 and 2007, the Company was a participant in the following
transactions in which (i) the amount involved exceeded the lesser of (A)
$120,000, or (B) one percent of the Company's total assets at year end for the
last two completed fiscal years and (ii) a related person had or will have a
direct or indirect material interest:


32





Master
Line of Credit Agreement





On
August 31, 1999, the Company and United Breweries of America, Inc. ("UBA")
entered into a Master Line of Credit Agreement, which was subsequently amended
on April 28, 2000, and February 12, 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.





UBA has
made thirteen (13) separate advances to the Company under the Credit Agreement,
and one separate advance with a principal amount of $400,000 on terms
substantially similar to those of the Credit Agreement, each pursuant to an
eighteen-month promissory note, (collectively, the "UBA Notes"). Interest
accrued on the UBA Notes at an interest rate equal to the lesser of (i) one and
one-half percent (1.5%) per annum above the prime rate offered from time to time
by the Bank of America in San Francisco, California, or (ii) ten percent (10%).
The maturity dates of the UBA Notes have been extended until June 30,
2009.





As of
February 28, 2009, the aggregate outstanding principal amount of the UBA Notes
is $1,915,400, and the accrued but unpaid interest thereon is equal to
approximately $1,142,100. The entire amount of the outstanding principal and
accrual but unpaid interest is convertible into shares of common stock of the
Company at a conversion price of $1.50 per share. As of February 28, 2009, UBA
beneficially owns approximately 25.2% of the Company's outstanding Common Stock
(excluding any shares issuable upon the conversion of the UBA Notes) and the
Company's Chairman, Dr. Vijay Mallya, is also the Chairman of the board of UBA.
During both the years 2008 and 2007, the largest aggregate amount of principal
outstanding was $1,915,400. No principal or
interest was paid during either 2008 or 2007, respectively.





In July
2001, the Company entered into a Kingfisher Trademark and Trade Name License
Agreement with Kingfisher America, Inc., a Delaware corporation affiliated with
UB Limited, pursuant to which the Company 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 remains in effect. 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,
is a party to a Brewing Agreement and a Loan Agreement with Shepherd Neame.
Shepherd Neame and the Company may be deemed to be related parties, because Mr.
R.H.B. Neame (Shepherd Neame's Chairman of the Board) was also a director of the
Company until 2004, 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) and was also a director of the Company until 2004.





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 (together, the "Brewing Agreement").





The
Brewing Agreement, which was entered into (and amended) in conjunction with the
Loan Agreement described below, grants 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 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) 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. For 2008, the
purchases from Shepherd Neame by UBSN equaled approximately $16,032,400 at the
average exchange rate in effect during 2008. For 2007, the purchases from
Shepherd Neame by UBSN equaled approximately $16,235,100at the average exchange
rate in effect during 2007.


33





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 £600,000 (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 £60,000 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 are terminated (except in accordance with their terms or in
connection with the parties' entry into an equivalent Brewing Agreement). The
aggregate amount of principal paid during each of 2008 and 2007 was £60,000 or
$111,300and
$120,100 at the average exchange rate during 2008 and 2007,
respectively.





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 a Brewing
License Agreement described below. The Distribution Agreement, which also
requires UBSN to pay UBI a royalty fee of 50 British pence (approximately $0.93
at the average exchange rates in effect during fiscal year 2008) for every 100
liters (26 gallons) of beer brewed for sale in the European Territory, will
expire in October 2013. The royalty due to UBI for the year 2008 was
approximately $73,500 and for the year 2007 was approximately
$79,200.





Market
Development Agreement





Effective
October 26, 2001, the Company and UBSN entered into a Market Development,
General and Administrative Services Agreement (the "Market Development
Agreement"), under the terms of which UBSN engaged the Company 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 the Company's
service fees amounting in the aggregate to $1,500,000 over the period from 2001
through 2003. Such payments have been made in full and no additional payments
are anticipated to be made in the future. The Company and UBSN agreed to extend
the agreement for an additional five (5) year period.





Brewing
License Agreement





Concurrently
with the Market Development Agreement described above, the Company entered into
a Brewing License Agreement with UBSN, under the terms of which UBSN granted to
the Company 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 the Company
under this agreement. The Company and UBSN agreed to extend the agreement for a
further period of five years. The royalty due to UBSN pursuant to the Brewing
License Agreement for the year 2008 was approximately $115,400 and for the year
2007 was approximately $101,700.


34





DIRECTOR
INDEPENDENCE





The Board
of Directors of the Company has determined that the following directors qualify
as "independent" in accordance with the published listing requirements of
NASDAQ: Mr. Heldfond, Mr. Layborn, Mr. Palamand, Mr. Merchant and Mr. Price. Mr.
Singh is not "independent" because he is an employee of the Company. Dr. Mallya
is not independent since he has received payments in excess of $60,000 from the
Company during the last three (3) fiscal years.





The
NASDAQ rules have both objective tests and a subjective test for determining who
is an "independent director". The objective tests provide that a director is not
considered independent if he (i) is an employee of the Company (or has been in
the past three (3) years; (ii) has accepted (or a family member has accepted)
compensation from the Company in excess of $100,000 during any twelve (12)
consecutive months within the preceding three (3) year period (subject to
certain exceptions); (iii) has a family member that was employed as an executive
officer of the Company during the past three (3) years; (iv) is (or a family
member is) a controlling shareholder or an executive officer of an organization
to which the Company made or received payments that exceed the greater of (a)
five percent (5%) of the recipient's consolidated gross revenues for that year
or (b) $200,000 for the current year or the preceding three (3) years. The
subjective test is based on the standard that an independent director must be a
person who lacks a relationship that, in the opinion of the Board, would
interfere with the exercise of independent judgment in carrying out the
responsibilities of a director.





COMPANY
RELATIONSHIPS





UBA and
Inversiones own 25.2% and 44.8% of the outstanding shares of the Company's
common stock respectively as of February 28, 2009.  UBA has also advanced
to the Company a principal amount of $1,915,400 under separate convertible
notes. As of December 31, 2008 the principal amount outstanding on the notes
together with the accrued interest is convertible into 2,028,527 shares of
common stock. Because UBHL is the ultimate parent of both UBA and Inversiones,
UBHL is the ultimate beneficiary of 70.0% of the shares of common stock of the
Company. Refer to "Item 12 - Security ownership of certain beneficial
owners and management and related stockholder matters" above.  As
of December 31, 2007, the principal amount outstanding on the UBA Notes together
with the accrued interest was convertible into 1,944,198 shares of common
stock.  UBHL was the ultimate beneficiary of 71.6% of
the  shares of common stock of the Company.





ITEM
14.PRINCIPAL ACCOUNTING
FEES AND SERVICES.





The
Company has appointed PMB Helin Donovan, L.L.P. ("PMB"), formerly Pohl,
McNabola, Berg & Company, LLP, as its independent auditors to perform the
audit of the Company's financial statements for the year 2008.





AUDIT
FEES. The aggregate fees billed by PMB during the year 2008 for the audit of the
Company's annual consolidated financial statements was $100,100 ; fees of an
additional $44,900 were billed to the Company during 2008 in connection with
PMB’s review of interim financial statements in connection with the Company's
Quarterly Reports on Form 10-Q for that year. Such fees represented
approximately 90% of the total fees for services billed to the Company by PMB
during 2008.





The
aggregate fees billed by PMB during the year 2007 for the audit of the Company's
annual consolidated financial statements was $90,000; fees of an additional
$39,000 were billed to the Company during 2007 in connection with PMB’s review
of interim financial statements in connection with the Company's Quarterly
Reports on Form 10-Q for this year. Such fees represented approximately 90% of
the total fees for services rendered to the Company by PMB during
2007.





AUDIT
RELATED FEES. PMB did not bill any amount in fees for assurance or related
services to the Company in 2008 or 2007.





TAX FEES.
The aggregate fees billed during 2008 for tax products and services related to
the preparation of the Company's tax returned provided by PMB, other than those
described in the foregoing paragraphs, was $16,000. Such fees represented
approximately 10% of the total fees for services rendered to the Company by PMB
during 2008.





The
aggregate fees billed during 2007 for tax products and services related to the
preparation of the Company's tax returned provided by PMB, other than those
described in the foregoing paragraphs, was $15,000. Such fees represented
approximately 10% of the total fees for services rendered to the Company by PMB
during 2007.





35





ALL OTHER
FEES. During the years 2008 and 2007, PMB did not bill the Company for any
amount other than those mentioned above.





All audit
and other services performed by PMB on behalf of the Company are approved in
advance by the Company's audit committee.





The
Company is not aware that any significant amount of the work done during the
course of the audits of the Company's 2008 and 2007 Financial Statements was
performed by persons other than full-time, permanent, employees of
PMB.





ITEM
15.EXHIBITS AND
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
PMB Helin Donovan., LLP, Independent Registered Auditors





Consolidated
Balance Sheets as of December 31, 2008 and 2007





Consolidated
Statements of Operations and Comprehensive Income for the Years Ended December
31, 2008 and 2007





Consolidated
Statements of Stockholders' Equity for the Years Ended December 31, 2008 and
2007





Consolidated
Statements of Cash Flow for the Years Ended December 31, 2008 and
2007





Notes to
Financial Statements




(2)
                FINANCIAL STATEMENT
      SCHEDULES. The 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 Document3.1
                          
                          (T)
                          
                          Articles
      of Incorporation of the Company, as amended.3.2
                          
                          (T)
                          
                          Bylaws
      of the Company, as amended.10.1
                          
                          
                          
                          [Intentionally
      omitted]10.2
                          
                          
                          
                          [Intentionally
      omitted]10.3
                          
                          (A)
                          
                          Wholesale
      Distribution Agreement between the Company and Bay Area
      Distributing.10.4
                          
                          
                          
                          [Intentionally
      omitted]10.5
                          
                          (B)
                          
                          Liquid
      Sediment Removal Services Agreement with Cold Creek Compost,
      Inc.10.6
                          
                          
                          
                          [Intentionally
      omitted]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
                          
                          
                          
                          [Intentionally
      omitted]




36




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
      Exhibit19.6).10.12
                
                
                
                [Intentionally
      omitted]10.13
                
                
                
                [Intentionally
      omitted]10.14
                
                
                
                [Intentionally
      omitted]10.15
                
                (I)
                
                Hazardous
      Substances Certificate and Indemnity with the Savings Bank of Mendocino
      County.10.16
                
                
                
                [Intentionally
      omitted]10.17
                
                
                
                [Intentionally
      omitted]10.18
                
                
                
                [Intentionally
      omitted]10.19
                
                (K)
                
                Investment
      Agreement with United Breweries of America, Inc.10.20
                
                
                
                [Intentionally
      omitted]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.10.30
                
                
                
                [Intentionally
      omitted]10.31
                
                
                
                [Intentionally
      omitted]10.32
                
                
                
                [Intentionally
      omitted]10.33
                
                
                
                [Intentionally
      omitted]10.35
                
                (O)
                
                Master
      Line of Credit Agreement between the Company and United Breweries of
      America Inc. dated August 31, 1999.10.36
                
                (O)
                
                Convertible
      Note in favor of United Breweries of America Inc. dated Sept. 7,
      1999.10.37
                
                (P)
                
                Convertible
      Note in favor of United Breweries of America Inc. dated October 21,
      1999.10.38
                
                (P)
                
                Convertible
      Note in favor of United Breweries of America Inc. dated November 12,
      1999.10.39
                
                (P)
                
                Convertible
      Note in favor of United Breweries of America Inc. dated December 17,
      1999.10.40
                
                (P)
                
                Convertible
      Note in favor of United Breweries of America Inc. dated December 31,
      1999.10.41
                
                (P)
                
                Convertible
      Note in favor of United Breweries of America Inc. dated February 16,
      2000.10.42
                
                (P)
                
                Convertible
      Note in favor of United Breweries of America Inc. dated February 17,
      2000.10.43
                
                (P)
                
                Convertible
      Note in favor of United Breweries of America Inc. dated April 28,
      2000.10.44
                
                (P)
                
                First
      Amendment to Master Line of Credit Agreement between the Company and
      United Breweries of America, Inc., dated April 28, 2000.10.45
                
                (Q)
                
                Convertible
      Note in favor of United Breweries of America Inc. dated September 11,
      2000.10.46
                
                (Q)
                
                Convertible
      Note in favor of United Breweries of America Inc. dated September 30,
      2000.


37


10.47
                
                (Q)
                
                Convertible
      Note in favor of United Breweries of America Inc. dated December 31,
      2000.10.48
                
                (Q)
                
                Convertible
      Note in favor of United Breweries of America Inc. dated February 12,
      2001.10.49
                
                (R)
                
                Convertible
      Note in favor of United Breweries of America Inc. dated July 1,
      2001.10.50
                
                (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 31, 2003.10.64
                
                
                
                [Intentionally
      omitted]10.65
                
                
                
                [Intentionally
      omitted]10.66
                
                (W)
                
                Third
      Amendment to Extension of Term of Notes under Master Line of Credit
      Agreement, dated August 14, 2003.10.67
                
                
                
                [Intentionally
      omitted]10.69
                
                
                
                [Intentionally
      omitted]10.70
                
                (Z)
                
                Second
      Agreement dated October 9, 1998 between UBSN, Ltd. and Shepherd Neame,
      Ltd.10.71
                
                
                
                [Intentionally
      omitted]10.72
                
                
                
                [Intentionally
      omitted]10.73
                
                
                
                [Intentionally
      omitted]10.74
                
                (BB)
                
                Convertible
      Promissory Note of Mendocino Brewing Company, Inc. in favor of United
      Breweries of America, Inc., dated March 2, 2005.10.75
                
                
                
                [Intentionally
      omitted]




38




10.76
            
            (DD)
            
            Invoice
      Discounting Agreement between The Royal Bank of Scotland Commercial
      Services Limited and UBSN Limited, dated April 26,
2005.10.77
            
            
            
            [Intentionally
      omitted]10.78
            
            
            
            [Intentionally
      omitted]10.79
            
            (EE)
            
            Loan
      Agreement by and between Mendocino Brewing Company, Inc. and Grand Pacific
      Financing Corporation dated June 28, 2006.10.80
            
            (EE)
            
            Promissory
      Note of Mendocino Brewing Company, Inc. in favor of Grand Pacific
      Financing Corporation, dated June 28, 2006.10.81
            
            
            
            [Intentionally
      omitted]10.82
            
            (FF)
            
            Loan
      and Security Agreement by and among Marquette Business Credit Inc. and
      Mendocino Brewing Company, Inc. and Releta Brewing Company, LLC, dated
      November 16, 2006.10.83
            
            (FF)
            
            Revolving
      Note of Mendocino Brewing Company, Inc. and Releta Brewing Company, LLC in
      favor of Marquette Business Credit Inc., dated November 16,
      2006.10.84
            
            (FF)
            
            Term
      Note of Mendocino Brewing Company, Inc. and Releta Brewing Company, LLC in
      favor of Marquette Business Credit Inc., dated November 16,
      2006.10.85
            
            (FF)
            
            CAPEX
      Note of Mendocino Brewing Company, Inc. and Releta Brewing Company, LLC in
      favor of Marquette Business Credit Inc., dated November 16,
      2006.10.86
            
            (FF)
            
            Fifth
      Amendment to Extension of Term of Notes Under Master Line of Credit
      Agreement, effective August 31, 2005.10.87
            
            (FF)
            
            Sixth
      Amendment to Extension of Term of Notes under Master Line of Credit
      Agreement, effective December 31, 2006.10.88
            
            (FF)
            
            Second
      Amendment to Convertible Promissory Note, effective December 31,
      2006.10.89
            
            (GG)
            
            Seventh
      Amendment to Extension of Term of Notes under Master Line of Credit
      Agreement effective June 30, 2007.10.90
            
            (GG)
            
            Third
      Amendment to Convertible Promissory Note, effective June 30,
      2007.10.91
            
            *
            
            Employment
      Agreement of Yashpal Singh (Management Contract).10.92
            
            (HH)
            
            Eighth
      Amendment to Extension of Term of Notes under Master Line of Credit
      Agreement, effective June 30, 2008.10.93
            
            (HH)
            
            Fourth
      Amendment to Convertible Promissory Note, effective June 30,
      2008.10.94
            
            *
            
            Directors'
      Compensation Plan, as amended, (Management Contract)14.1
            
            (V)
            
            Code
      of Ethics31.1
            
            *
            
            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. 135032.2
            
            *
            
            Certification
      of Chief Financial Officer Pursuant to U.S.C.
  1350.




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.





(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.


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




39




(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.


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


(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 13D
      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)
            Amendment No. 10 to Schedule 13D
      filed August 18, 2003 by United Breweries of America, Inc. and Dr.
      Vijay Mallya.


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


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


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


(DD)
            The Company's Quarterly Report on
      Form 10-Q for the period ended June 30,
  2005.


(EE)
            The Company's Quarterly Report on
      Form 10-Q for the period ended June 30,
  2006.


(FF)
            The Company's Annual Report on
      Form 10-K for the fiscal year ended December 31,
    2006.


(GG)
            The Company's Quarterly Report on
      Form 10-Q for the period ended June 30,
  2007.


(HH)
            The
      Company's Quarterly Report on Form 10-Q for the period ended September 30,
      2008.




(b)
              Exhibits
      AttachedThe
      following Exhibits are attached to this Annual Report on Form
      10-K:
 10.91
                Employment
      Agreement of Yashpal Singh (Management
Contract)
 10.94
              Directors'
      Compensation Plan (as amended)
 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.


40


Signatures





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




(Registrant)
      MENDOCINO BREWING COMPANY, INC.By:
              /s/
      Yashpal SinghYashpal
      Singh
                Its
      President and Chief Executive OfficerDate:
      March 30, 2009





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
capacity and on the dates indicated.




(Registrant)
      MENDOCINO BREWING COMPANY, INC.By:Dr.
      Vijay Mallya
                  Director
      and Chairman of the BoardDate:
      March 30, 2009




By:
                /s/
      Yashpal SinghYashpal
      Singh
                  Its
      President, Director and Chief Executive OfficerDate:
      March 30, 2009




By:
                /s/
      Scott R. HeldfondScott
      R. Heldfond, DirectorDate:
      March 30, 2009




By:
                /s/
      Jerome G. MerchantJerome
      G. Merchant, DirectorDate:
      March 30, 2009




41




By:
                  /s/
      N. MahadevanN.
      Mahadevan
                    Its
      Secretary and Chief Financial OfficerDate:
      March 30, 2009By:
                  /s/
      H. Michael LaybournH.
      Michael Laybourn, DirectorDate:
      March 30,
2009




By:
                /s/
      Kent PriceKent
      Price, DirectorDate:
      March 30, 2009




By:
                /s/
      Sury Rao PalamandSury
      Rao Palamand, DirectorDate:
      March 30, 2009


42




Mendocino
Brewing Company, Inc.





Consolidated
Financial Statements


For
the Years Ended


December
31, 2008 and 2007





Mendocino
Brewing Company, Inc.





Consolidated
Financial Statements


For
the Years Ended


December
31, 2008 and 2007





C
O N T E N T S








Report
      of Independent Registered Public Accounting Firm
                    
                    
                    F-1Consolidated
      Balance Sheets
                    
                    
                    F-2Consolidated
      Statements of Operations and Comprehensive Income (Loss)
                    
                    
                    F-3Consolidated
      Statements of Stockholders' Equity
                    
                    
                    F-4Consolidated
      Statements of Cash Flows
                    
                    
                    F-5Notes
      to Consolidated Financial Statements
                    
                    
                    F-6
      – F-26








Report
of Independent Registered Public Accounting Firm





To the
Board of Directors and Stockholders


Mendocino
Brewing Company, Inc.


Ukiah,
California





We have
audited the accompanying consolidated balance sheets of Mendocino Brewing
Company, Inc. (“MBC”) as of December 31, 2008 and 2007, and the related
consolidated statements of operations and comprehensive income (loss),
stockholders’ equity and cash flows for the years ended December 31, 2008 and
2007.  These consolidated financial statements are the responsibility
of the Company’s management.  Our responsibility is to express an
opinion on these consolidated financial statements based on our
audits.





We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statement is free of material misstatement.  The Company
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audit includes consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting.  Accordingly, we express no such opinion.  An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statement.  An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation.  We believe that our audits provide a reasonable basis
for our opinion.





In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of MBC as of
December 31, 2008 and 2007 and the consolidated results of their operations and
their consolidated cash flows for the years ended December 31, 2008 and 2007, in
conformity with accounting principles generally accepted in the United States of
America.





/s/ PMB
Helin Donovan, LLP





PMB
Helin Donovan, LLP


San
Francisco, California


March 30,
2009


F-1


Mendocino
Brewing Company, Inc.


Consolidated
Balance Sheets


As
of December 31, 2008 and 2007





2008
                            
                            
                            2007ASSETSCurrent
      AssetsCash
                            
                            $
                            273,700
                            
                            
                            $
                            339,700Accounts
      receivable, net of allowance fordoubtful accounts of $65,700 and
      $52,600, respectively
                            
                            
                            6,966,900
                            
                            
                            
                            7,411,400Inventories
                            
                            
                            1,865,200
                            
                            
                            
                            1,461,200Prepaid
      expenses
                            
                            
                            201,700
                            
                            
                            
                            585,800Total
      Current Assets
                            
                            
                            9,307,500
                            
                            
                            
                            9,798,100Property
      and Equipment(net
      of accumulated depreciation)
                            
                            
                            12,806,100
                            
                            
                            
                            13,218,300Other
      AssetsDeposits
      and other assets
                            
                            
                            326,100
                            
                            
                            
                            313,600Intangibles,
      (net of amortization)
                            
                            
                            47,600
                            
                            
                            
                            47,600Total
      Other Assets
                            
                            
                            373,700
                            
                            
                            
                            361,200Total
      Assets
                            
                            $
                            22,487,300
                            
                            
                            $
                            23,377,600LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      LiabilitiesSecured
      lines of credit
                            
                            $
                            3,601,700
                            
                            
                            $
                            3,801,400Accounts
      payable
                            
                            
                            6,152,900
                            
                            
                            
                            7,167,800Accrued
      liabilities
                            
                            
                            1,513,000
                            
                            
                            
                            1,309,100Current
      maturities of notes to related parties
                            
                            
                            87,700
                            
                            
                            
                            119,100Current
      maturities of obligation under long-term debt
                            
                            
                            316,400
                            
                            
                            
                            254,400Current
      maturities of obligation under capital lease
                            
                            
                            113,400
                            
                            
                            
                            69,500Total
      Current Liabilities
                            
                            
                            11,785,100
                            
                            
                            
                            12,721,300Long-Term
      LiabilitiesNotes
      to related parties including accruedinterest
      of $1,127,400 and $1,000,900, respectively
                            
                            
                            3,306,000
                            
                            
                            
                            3,392,500Long
      term debt, less current maturities
                            
                            
                            3,820,000
                            
                            
                            
                            3,972,600Obligations
      under capital leases, less current maturities
                            
                            
                            218,700
                            
                            
                            
                            49,800Total
      Long-Term Liabilities
                            
                            
                            7,344,700
                            
                            
                            
                            7,414,900Total
      Liabilities
                            
                            
                            19,129,800
                            
                            
                            
                            20,136,200Stockholders'
      EquityPreferred
      stock, Series A, no par value, with liquidation preference of $1 per
      share; 10,000,000 shares authorized, 227,600 shares issued and
      outstanding
                            
                            
                            227,600
                            
                            
                            
                            227,600Common
      stock, no par value 30,000,000 shares authorized,
      11,991,686  shares issued and outstanding
                            
                            
                            14,902,300
                            
                            
                            
                            14,902,300Accumulated
      comprehensive income
                            
                            
                            567,900
                            
                            
                            
                            157,300Accumulated
      deficit
                            
                            
                            (12,340,300
                            )
                            
                            
                            (12,045,800
                            )Total
      Stockholders' Equity
                            
                            
                            3,357,500
                            
                            
                            
                            3,241,400Total
      Liabilities and Stockholders' Equity
                            
                            $
                            22,487,300
                            
                            
                            $
                            23,377,600





The
accompanying notes are an integral part of these financial
statements.




F-2


Mendocino
Brewing Company, Inc.


Consolidated
Statements of Operations and Comprehensive Income (Loss)


For
the Years Ending December 31, 2008 and 2007





2008
                          
                          
                          2007Sales
                          
                          $
                          37,640,500
                          
                          
                          $
                          37,774,500Less
      excise tax
                          
                          
                          905,500
                          
                          
                          
                          956,800Net
      Sales
                          
                          
                          36,735,000
                          
                          
                          
                          36,817,700Cost
      of Goods Sold
                          
                          
                          27,323,100
                          
                          
                          
                          26,342,800Gross
      Profit
                          
                          
                          9,411,900
                          
                          
                          
                          10,474,900Operating
      ExpensesMarketing
                          
                          
                          5,117,700
                          
                          
                          
                          5,671,800General
      and administrative (1)
                          
                          
                          3,893,600
                          
                          
                          
                          4,192,100Total
      Operating Expenses
                          
                          
                          9,011,300
                          
                          
                          
                          9,863,900Income
      from Operations
                          
                          
                          400,600
                          
                          
                          
                          611,000Other
      Income (Expense)Miscellaneous
      income
                          
                          
                          85,300
                          
                          
                          
                          68,400Profit
      (loss) on sale of equipment, net
                          
                          
                          5,600
                          
                          
                          
                          (6,800
                          )Interest
      expense
                          
                          
                          (781,500
                          )
                          
                          
                          (1,049,600
                          )Total
      Other Income (Expense)
                          
                          
                          (690,600
                          )
                          
                          
                          (988,000
                          )Loss
      before Income Taxes
                          
                          
                          (290,000
                          )
                          
                          
                          (377,000
                          )Provision
      for (Benefit from) Income Taxes
                          
                          
                          4,500
                          
                          
                          
                          7,000Net
      Loss
                          
                          
                          (294,500
                          )
                          
                          
                          (384,000
                          )Other
      Comprehensive Income (Loss)Foreign
      currency translation adjustment
                          
                          
                          410,600
                          
                          
                          
                          32,900Comprehensive
      Income (Loss)
                          
                          $
                          116,100
                          
                          
                          $
                          (351,100
                          )Net
      Income (Loss) per common share (basic and diluted)
                          
                          $
                          (0.02
                          )
                          
                          $
                          (0.03
                          )Weighted
      average common shares outstanding (basic and diluted)
                          
                          
                          11,991,686
                          
                          
                          
                          11,855,369





(1)
            Includes
      $61,000 and$103,000,  of stock based compensation, for 2008 and
      2007, respectively.





The
accompanying notes are an integral part of these financial
statements.


F-3


Mendocino
Brewing Company, Inc.


Consolidated
Statements of Stockholders’ Equity


For
the Years Ending December 31, 2008 and 2007





Series A
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  Other
                    AccumulatedPreferred
                  
                  
                  
                  
                  
                  Common
                  
                  
                  
                  
                  
                  Comprehensive
                  
                  
                  Accumulated
                  
                  
                  TotalShares
                  
                  
                  Amount
                  
                  
                  Shares
                  
                  
                  Amount
                  
                  
                  Income/(Loss)
                  
                  
                  Deficit
                  
                  
                  EquityBalance
      December 31, 2006
                  
                  
                  227,600
                  
                  
                  $
                  227,600
                  
                  
                  
                  11,628,174
                  
                  
                  $
                  14,815,300
                  
                  
                  $
                  124,400
                  
                  
                  $
                  (11,661,800
                  )
                  
                  $
                  3,505,500Stock
      issued for compensation
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  363,512
                  
                  
                  
                  87,000
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  87,000Net
      loss
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (384,000
                  )
                  
                  
                  (384,000
                  )Currency
      translation adjustment
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  32,900
                  
                  
                  
                  -
                  
                  
                  
                  32,900Balance
      December 31, 2007
                  
                  
                  227,600
                  
                  
                  $
                  227,600
                  
                  
                  
                  11,991,686
                  
                  
                  $
                  14,902,300
                  
                  
                  $
                  157,300
                  
                  
                  $
                  (12,045,800
                  )
                  
                  $
                  3,241,400Net
      loss
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (294,500
                  )
                  
                  
                  (294,500
                  )Currency
      translation adjustment
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  410,600
                  
                  
                  
                  -
                  
                  
                  
                  410,600Balance
      December 31, 2008
                  
                  
                  227,600
                  
                  
                  $
                  227,600
                  
                  
                  
                  11,991,686
                  
                  
                  $
                  14,902,300
                  
                  
                  $
                  567,900
                  
                  
                  $
                  (12,340,300
                  )
                  
                  $
                  3,357,500





The
accompanying notes are an integral part of these financial
statements.


F-4


Mendocino
Brewing Company, Inc.


Consolidated
Statements of Cash Flows


For
the Years Ending December 31, 2008 and 2007





2008
                  
                  
                  2007CASH
      FLOWS FROM OPERATING ACTIVITIESNet
      (loss)
                  
                  $
                  (294,500
                  )
                  
                  $
                  (384,000
                  )Adjustments
      to reconcile net income(loss)
      to net cash from operating activities:Depreciation
      and amortization
                  
                  
                  1,077,000
                  
                  
                  
                  1,097,800Provision
      for doubtful accounts
                  
                  
                  28,000
                  
                  
                  
                  (8,300
                  )Loss
      (gain) on sale of assets
                  
                  
                  (5,600
                  )
                  
                  
                  6,800Interest
      accrued on related party notes
                  
                  
                  126,500
                  
                  
                  
                  182,900Non-cash
      compensation
                  
                  
                  61,000
                  
                  
                  
                  103,000Changes
      in operating assets and liabilities:(Increase)
      decrease in accounts receivable
                  
                  
                  (1,377,400
                  )
                  
                  
                  463,300(Increase)
      decrease in inventories
                  
                  
                  (404,000
                  )
                  
                  
                  (131,700
                  )(Increase)
      decrease in prepaid expenses
                  
                  
                  349,200
                  
                  
                  
                  92,400(Increase)
      decrease in deposits and other assets
                  
                  
                  (49,600
                  )
                  
                  
                  (25,700
                  )Increase
      (decrease) in accounts payable
                  
                  
                  667,800
                  
                  
                  
                  (73,400
                  )Increase
      (decrease) in accrued liabilities
                  
                  
                  386,000
                  
                  
                  
                  (30,700
                  )Net
      cash provided by  operating activities
                  
                  
                  564,400
                  
                  
                  
                  1,292,400CASH
      FLOWS FROM INVESTING ACTIVITIESPurchases
      of property, equipment and leasehold improvements
                  
                  
                  (770,300
                  )
                  
                  
                  (730,400
                  )Proceeds
      from sale of fixed assets
                  
                  
                  5,600
                  
                  
                  
                  35,800Net
      cash used in investing activities:
                  
                  
                  (764,700
                  )
                  
                  
                  (694,600
                  )CASH
      FLOWS FROM FINANCING ACTIVITIESNet
      borrowing (repayment) on line of credit
                  
                  
                  457,100
                  
                  
                  
                  (167,600
                  )Borrowings
      on long term debt
                  
                  
                  168,500
                  
                  
                  
                  -Repayment
      on long-term debt
                  
                  
                  (259,100
                  )
                  
                  
                  (236,200
                  )Repayment
      on related party debt
                  
                  
                  (111,300
                  )
                  
                  
                  (120,100
                  )Proceeds
      from notes payable
                  
                  
                  -
                  
                  
                  
                  -Repayment
      of notes payable
                  
                  
                  -
                  
                  
                  
                  -Payments
      on obligations under long term leases
                  
                  
                  (116,100
                  )
                  
                  
                  (132,700
                  )Net
      cash provided by (used in) financing activities:
                  
                  
                  139,100
                  
                  
                  
                  (656,600
                  )EFFECT
      OF EXCHANGE RATE CHANGES ON CASH
                  
                  
                  (4,800
                  )
                  
                  
                  52,600Net
      Change in Cash
                  
                  
                  (66,000
                  )
                  
                  
                  (6,200
                  )Cash
      at beginning of period
                  
                  
                  339,700
                  
                  
                  
                  345,900Cash
      at end of period
                  
                  $
                  273,700
                  
                  
                  $
                  339,700SUPPLEMENTAL
      CASH FLOW INFORMATIONCash
      paid during the period for:Interest
                  
                  $
                  655,000
                  
                  
                  $
                  866,700Income
      taxes
                  
                  $
                  4,500
                  
                  
                  $
                  7,000Non-cash
      investing and financing activities:Common
      stock issued for prior year compensation
                  
                  $
                  -
                  
                  
                  $
                  32,000Seller
      financed equipment
                  
                  $
                  369,400
                  
                  
                  $
                  112,200





The
accompanying notes are an integral part of these financial
statements.




F-5


Mendocino
Brewing Company, Inc.


Notes
to Consolidated Financial Statements


December
31, 2008





1.
            Description of
      Operations and Summary of Significant Accounting
      Policies





Description of
Operations





Mendocino
Brewing Company, Inc., ("the Company" or "MBC"), was formed in 1983 in
California, has operating subsidiaries, Releta Brewing Company, ("Releta"), and
United Breweries International, Limited (UK), ("UBIUK").  In the
United States, MBC and its subsidiary, Releta, 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 US 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, and
MBC holds the license to distribute Kingfisher Lager in the US. Generally,
product shipments are made directly from the breweries to the wholesalers or
distributors in accordance with state and local laws.





The
Company's UK subsidiary, 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 intracompany and inter-company balances,
profits and transactions have been eliminated.





Basis of Presentation and
Organization





The
financial statements for the fiscal years ended December 31, 2008 and 2007, have
been prepared in accordance with accounting principles generally accepted in the
United States.  The financial statements and notes are representations
of the management and the Board of Directors, who are responsible for their
integrity and objectivity.





Cash and Cash Equivalents,
Short- and Long-Term Investments





For
purposes of cash flows, the Company considers all highly liquid investments
purchased with a maturity of three months or less to be cash equivalents, those
with original maturities not greater than three months and current maturities
less than twelve months from the balance sheet date are considered short-term
investments, and those with maturities greater than twelve months from the
balance sheet date are considered long-term investments.





Concentration





Financial
instruments that potentially subject the Company to significant concentration of
credit risk consist primarily of cash and cash equivalents, and accounts
receivable.  Substantially all of the Company's cash and cash
equivalents are deposited with commercial banks, that have minimal credit risk,
in the US and the UK.


Accounts
receivable are generally unsecured and customers are subject to an initial
credit review and ongoing monitoring 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 $168,300 in cash deposits
and $5,107,200 of accounts receivable due from customers located in the United
Kingdom as of December 31, 2008.


F-6


Mendocino
Brewing Company, Inc.


Notes
to Consolidated Financial Statements


December
31, 2008




The
Company could experience labor disputes, work stoppages or other disruptions in
production that could adversely affect us. As of December 31, 2008, unions
represented approximately 32% of our US workforce. On that date, the Company had
approximately 20 employees at its CA facility who were working under a
collective bargaining agreement. The agreement covering the CA facility expires
on July 31, 2013.





Foreign
Operations




Approximately
31% of the Company’s assets are located in the United
Kingdom.  Although this country is considered economically stable and
the Company has experienced no notable burden from foreign exchange
transactions, export duties, or government regulations, it is always possible
that unanticipated events in foreign countries could disrupt the Company’s
operations.





Trade Accounts Receivable
and Allowance for Doubtful Accounts





Trade
accounts receivable are stated at the invoiced amount and are the amount the
Company expects to collect. Sales are
made to approved customers on an open account basis, subject to established
credit limits, and generally no collateral is required. The allowance for
doubtful accounts is the Company’s best estimate of the amount of probable
credit losses in the Company’s existing accounts receivable; however, changes in
circumstances relating to accounts receivable may result in a requirement for
additional allowances in the future.





Allowance
for Doubtful Accounts





The
Company maintains allowances for doubtful accounts for estimated losses
resulting from the inability of its customers to make required
payments.  Management considers the following factors when determining
the collectibility of specific customer accounts: customer credit-worthiness,
past transaction history with the customer, current economic and industry trends
and changes in customer payment terms.  Past due balances over 90 days
and other higher risk amounts are reviewed individually for
collectibility.  If the financial condition of the Company's customers
were to deteriorate, adversely affecting their ability to make payments,
additional allowances would be required.  Based on management's
assessment, the Company provides for estimated uncollectible amounts through a
charge to earnings and a credit to a valuation allowance.  Balances
that remain outstanding after the Company has used reasonable collection efforts
are written off through a charge to the valuation allowance and a credit to
accounts receivable. As of December 31, 2008, the Company maintained a reserve
of $65,700 of potentially doubtful accounts receivable.  Bad debt
expenses totaled $61,000 and $393,200 for the years ended December 31, 2008 and
2007 respectively.





Inventories





Inventories
are stated at the lower of average cost or market (net realizable
value).


F-7


Mendocino
Brewing Company, Inc.


Notes
to Consolidated Financial Statements


December
31, 2008




Prepaid Expenses and Other
Assets




Prepaid
expenses and other assets generally consist of deposits, other receivables and
prepayments for future services. Prepayments are expensed when the services are
received.





Property and
Equipment





Property
and equipment are stated at cost and depreciated or amortized using
straight-line method 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.  The Company uses
other depreciation methods (generally, accelerated depreciation methods) for tax
purposes where appropriate.  Costs of maintenance and repairs are
charged to expense as incurred; significant renewals and improvements are
capitalized.  When property and equipment are retired, sold, or
otherwise disposed of, the asset’s carrying amount and related accumulated
depreciation are removed from the accounts and any gain or loss is included in
operations.





Assets
Held under Capital Leases





Assets
held under capital leases are recorded at the lower of the net present value of
the minimum lease payments or the fair value of the leased asset at the
inception of the lease.  Amortization expense is computed using the
straight-line method over the shorter of the estimated useful lives of the
assets or the period of the related lease.





Estimated
useful lives of property and equipment are as follows:





Building
                  40
      yearsMachinery
      and equipment
                  3 -
      40 yearsEquipment
      under capital lease
                  3 -
      20 yearsLeasehold
      improvements
                  5 -
      10 yearsVehicles
                  3 -
      5 yearsFurniture
      and fixtures
                  5 -
      10 years




Impairment
of Long-Lived Assets





The
Company assesses the impairment of its long-lived assets periodically in
accordance with the provisions of Statement of Financial Accounting Standards
("SFAS") 144, "Accounting for the Impairment and Disposal of Long-Lived
Assets".  The Company reviews the carrying value of property and
equipment for impairment whenever events and circumstances indicate that the
carrying value of an asset may not be recoverable from the estimated future cash
flows expected to result from its use and eventual disposition.  In
cases where undiscounted expected future cash flows are less than the carrying
value, an impairment loss is recognized equal to an amount by which the carrying
value exceeds the fair value of assets.  The factors considered by
management in performing this assessment include current operating results,
trends, and prospects, as well as the effects of obsolescence, demand,
competition, and other economic factors.  Long-lived assets that
management commits to sell or abandon are reported at the lower of carrying
amount or fair value less cost to sell.


F-8


Mendocino
Brewing Company, Inc.


Notes
to Consolidated Financial Statements


December
31, 2008





Intangibles





Intangibles
consist of trade names and trademarks.  Purchased trademarks are
initially measured based on their fair values.  Trademarks include
purchased trademarks, brand names, logos or other recognizable symbols
associated with the Company's products.  Trademarks are not amortized
because they have indefinite lives.  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 $47,600 as of December 31, 2008 and 2007.





Impairment
of Intangible Assets





The
Company evaluates the recoverability of identifiable intangible assets whenever
events or changes in circumstances indicate that an intangible asset's carrying
amount may not be recoverable.  Such circumstances could include, but
are not limited to: (1) a significant decrease in the market value of an asset,
(2) a significant adverse change in the extent or manner in which an asset is
used, or (3) an accumulation of costs significantly in excess of the amount
originally expected for the acquisition of an asset.  The Company
measures the carrying amount of the asset against the estimate
of  undiscounted future cash flows associated with
it.  Should the sum of the expected future net cash flows be less than
the carrying value of the asset being evaluated, an impairment loss would be
recognized.  The impairment loss would be calculated as the amount by
which the carrying value of the asset exceeds its fair value.  The
fair value is measured based on quoted market prices, if
available.  If quoted market prices are not available, the estimated
fair value is based on various valuation techniques, including the discounted
value of estimated future cash flows.  The evaluation of asset
impairment requires the Company to make assumptions about future cash flows over
the life of the asset being evaluated.  These assumptions require
significant judgment and actual results may differ from assumed and estimated
amounts.  During the years ended December 31, 2008 and 2007, the
Company recorded no impairment losses related to an intangible
asset.





Deferred Financing
Costs





Costs
relating to obtaining financing are capitalized and amortized over the term of
the related debt.  Deferred financing costs were $311,300, and the
related accumulated amortization at December 31, 2008 and 2007 was $147,900 and
$82,600, respectively.  Amortization of deferred financing costs
charged to operations was $65,300 for the year ended December 31, 2008, $49,900
for the year ended December 31, 2007 and $54,300 for the year December 31,
2006.  The Company will continue to amortize these fees until
2011.  When a loan is paid in full, any unamortized financing costs
are removed from the related accounts and charged to operations.





Income
Taxes





The
Company accounts for its income taxes using the Financial Accounting Standards
Board Statements of Financial Accounting Standards No. 109, "Accounting for
Income Taxes," which requires the establishment of a deferred tax asset or
liability for the recognition of future deductible or taxable amounts and
operating loss and tax credit carryforwards.  Deferred tax expense or
benefit is recognized as a result of timing differences between the recognition
of assets and liabilities for book and tax purposes during the
year.





Deferred
tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled.  Deferred tax assets are
recognized for deductible temporary differences and operating loss, and tax
credit carryforwards.  A valuation allowance is established to reduce
the deferred tax asset if it is "more likely than not" that the related tax
benefits will not be realized.


F-9


Mendocino
Brewing Company, Inc.


Notes
to Consolidated Financial Statements


December
31, 2008





In July 2006, the Financial Accounting
Standards Board issued FASB Interpretation No. 48, "Accounting for Uncertainty
in Income Taxes.”  The Interpretation requires that realization of an
uncertain income tax position must be estimated as "more likely than not" (i.e.,
greater than 50% likelihood of receiving a benefit) before it can be recognized
in the financial statements.  Further, the Interpretation requires the
recognition of tax benefits recorded in the financial statements to be based on
the amount most likely to be realized assuming a review by tax authorities
having all relevant information.  The Interpretation also clarifies
the financial statement classification of tax-related penalties and interest and
sets forth new disclosures regarding unrecognized tax
benefits.The Company adopted this
Interpretation on January 1, 2007. The adoption of FIN No. 48 did
not result in the recognition of any uncertain tax benefits at January 1,
2007 or December 31, 2008 and 2007.





Revenue
Recognition





The
Company recognizes revenue from the brewing and distribution operations in
accordance with Securities and Exchange Commission (SEC) Staff Accounting
Bulletin (SAB) No. 104 when the product is shipped.  The Company
recognizes revenue from product sales, net of discounts.





The
Company recognizes revenue only when all of the following criteria have been
met:





·
            Persuasive
      evidence of an arrangement exists;


·
            Delivery
      has occurred or services have been
rendered;


·
            The
      fee for the arrangement is fixed or determinable;
  and


·
            Collectibility
      is reasonably assured.





"Persuasive Evidence of an
Arrangement" –The Company documents all terms of an arrangement in a
written contract or purchase order signed by the customer prior to recognizing
revenue.





"Delivery Has Occurred or Services
Have Been Performed" – The Company delivers the products prior to
recognizing revenue or performs services as per contractual
terms.  Product is considered delivered upon delivery to a customer's
designated location and services are considered performed upon completion of the
Company's contractual obligations.





"The Fee for the Arrangement is
Fixed or Determinable" – Prior to recognizing revenue, an amount is
either fixed or determinable under the terms of the written
contract.  The price is negotiated at the outset of the arrangement
and is not subject to refund or adjustment during the initial term of the
arrangement.





"Collectibility is Reasonably
Assured" – The Company determines that collectibility is reasonably
assured prior to recognizing revenue.  Collectibility is assessed on a
customer-by-customer basis based on criteria outlined by
management.  The Company does not enter into arrangements unless
collectibility is reasonably assured at the outset.  Existing
customers are subject to ongoing credit evaluations based on payment history and
other factors.  If it is determined during the arrangement that
collectibility is not reasonably assured, revenue is recognized on a cash
basis.





The
Company has adopted Emerging Issues Task Force (EITF), Issue No. 01-09
“Accounting for Consideration Given by a Vendor to a Customer (including a
Reseller of the Vendor’s Products)”.  This EITF issue requires that
certain consideration paid to customers for services or placement fees are to be
reported as a reduction in revenue rather than as an expense.  The
Company reports these items on the income statement as a reduction in revenue
and as a corresponding reduction in marketing and selling expenses.





Revenues
from the brewpub and gift store are recognized when sales have been
completed.


F-10


Mendocino
Brewing Company, Inc.


Notes
to Consolidated Financial Statements


December
31, 2008




United
Kingdom




The
Company has agreements with Shepard Neame or SN, to produce, market and
distribute Kingfisher Lager in the United Kingdom. See Note 10 regarding
transactions with SN.  The Company invoices SN based on an agreed
transfer price per unit, which is subject to revision upon reconciliations based
on contractual formulas.





Excise
Taxes





The
federal government levies excise taxes on the sale of alcoholic beverages,
including beer. For brewers producing less than 2.0 million barrels of beer per
calendar year, the federal excise tax is $7 per barrel on the first 60,000
barrels of beer removed for consumption or sale during a calendar year, and $18
per barrel for each barrel in excess of 60,000. Individual states also impose
excise taxes on alcoholic beverages in varying amounts, which have also been
subject to change. Sales, as presented in the Company’s statements of
operations, reflect the amount invoiced to the Company’s wholesalers and other
customers. Excise taxes due to federal and state agencies are not collected from
the Company’s customers, but rather are the responsibility of the Company. Net
sales, as presented in the Company’s statements of operations, are reduced by
applicable federal and state excise taxes. In the United Kingdom, excise taxes
are paid by the manufacturer and not by the Company.





Discounts




To
further promote retail bottled product sales and in response to local
competitive conditions, the Company regularly offers “post-offs,” or price
discounts, to distributors in most of its markets. Distributors and retailers
usually participate in the cost of these price discounts.




Chargebacks
and Sales Reserves




The
Company has estimated reserves for chargebacks for goods purchased by
distributors and cash discounts for prompt payment. The Company estimates its
reserves by utilizing historical information and current contracts and estimated
customer inventory levels and data obtained from external sources. In estimating
chargeback reserves, the Company analyzes actual chargeback amounts and applies
historical chargeback rates to estimates of the quantity of units sold subject
to potential chargeback. The Company routinely assesses its experience with
distributors and adjusts the reserves accordingly. If actual government
chargebacks and other rebates are greater than the Company's estimates,
additional reserves may be required. Revisions to estimates are charged to
income in the period in which the facts that give rise to the revision become
known.





Seasonality




Sales of
the Company’s products are somewhat seasonal, with the first and fourth quarters
historically being the slowest and the rest of the year generating stronger
sales. The volume of sales may also be affected by weather conditions. Because
of the seasonality of the Company’s business, results for any one quarter are
not necessarily indicative of the results that may be achieved for the full
fiscal year.


F-11


Mendocino
Brewing Company, Inc.


Notes
to Consolidated Financial Statements


December
31, 2008





Taxes Collected From
Customers





Taxes
collected from customers and remitted to tax authorities are state and federal
excise taxes on beer shipments.  Excise taxes are shown in a separate
line item in the consolidated statement of operations as a reduction of gross
sales.  Sales taxes collected from customers are recognized as a
liability, with the liability subsequently reduced when the taxes are remitted
to the tax authority.  Total sales taxes collected from customers and
remitted to tax authorities were not material in either 2008 or
2007.





Delivery
Costs





In
accordance with EITF 00-10, "Accounting for Shipping and Handling Fees and
Costs," the Company reports pass-through freight costs on beer shipped to
independent beer wholesalers in cost of sales.  Reimbursements of
these costs by wholesalers are reported in sales.




Non-pass-through
costs incurred by the Company to deliver beer to customers are included in
marketing, distribution and administrative expenses.  These costs are
considered marketing related because in addition to product delivery, drivers
provide marketing and other customer service functions to customers including
product display, shelf space management, distribution of promotional materials,
and product rotation.  Shipping costs included in marketing expense
totaled $948,700 and $927,300, for the years ended December 31, 2008 and 2007,
respectively.





Stock-Based
Compensation





On
January 1, 2006, the Company adopted the fair value recognition provisions
of Financial Accounting Standards Board (FASB) Statement 123 (revised 2004),
Share-Based Payment,
(Statement 123(R)), using the modified prospective transition method. Had the
Company granted stock options in 2008 or 2007 or had any stock options been
outstanding in 2008 and 2007, the compensation costs for those options would
have been based on the grant-date fair value estimated in accordance with the
provisions of Statement 123(R).




Statement
123(R) requires companies to estimate the fair value of stock options on the
date of grant using an option pricing model. If the Company does grant stock
options it would use the Black-Scholes option pricing model to determine the
fair value of our options. The determination of the fair value of stock based
awards using an option pricing model is affected by a number of assumptions
including expected volatility of the common stock over the expected term, the
expected term, the risk free interest rate during the expected term and the
expected dividends to be paid. The value of the portion of the award that is
ultimately expected to vest is recognized as compensation expense over the
requisite service periods.




No
stock-based compensation expense related to employee stock options was
recognized under Statement 123(R) for 2008 and 2007. The Company did not grant
any options for the years ended December 31, 2008 and
2007.





The
Company’s determination of estimated fair value of stock options or warrants
utilizes the Black-Scholes option-pricing model.  The Black-Scholes
model is affected by the Company’s stock price as well as assumptions regarding
a number of highly complex and subjective variables.  These variables
include, but are not limited to; the Company’s expected stock price volatility
over the term of the awards, and actual and projected employee stock option
exercise behaviors.


F-12


Mendocino
Brewing Company, Inc.


Notes
to Consolidated Financial Statements


December
31, 2008





In 2008
and 2007, the Company did not grant any options or warrants, and all options
outstanding were fully vested prior to January 1, 2007 and no stock options were
outstanding as of December 31, 2008 and 2007.





Stock-based
Compensation – Non-employees





The
company accounts for equity instruments issued to non-employees in accordance
with the provisions of SFAS No 123(R) and Emerging Issues Task Force (“EITF”) No
96-18, "Accounting for Equity Instruments That Are Issued to Other Than
Employees for Acquiring, or in Conjunction with Selling Goods or
Services."





Basic and Diluted Earnings
(Loss) per Share





In
accordance with SFAS No. 128, "Earnings Per Share," the basic earnings (loss)
per share is computed by dividing the loss attributable to common stockholders
by the weighted average number of common shares outstanding during the
period.  Basic net loss per share excludes the dilutive effect of
stock options or warrants and convertible notes.  Diluted net loss per
share was the same as basic net loss per share for 2008and 2007, since the
effect of any potentially dilutive securities is excluded, as they are
anti-dilutive due to the Company's net losses.  The following table
sets forth the computation of basic and diluted net loss per common
share:





Basic and Diluted Earnings
(Loss) per Share (continued)





Year ended December 31,2008
                  
                  
                  2007Net
      income (loss) – available to common shareholders
                  
                  $
                  (294,500
                  )
                  
                  $
                  (384,000
                  )Weighted
      average common shares outstanding: Basic and diluted
                  
                  
                  11,991,686
                  
                  
                  
                  11,855,369Total
      shares outstanding at end of period
                  
                  
                  11,991,686
                  
                  
                  
                  11,991,686Net
      income (loss) per common share: Basic and diluted
                  
                  $
                  (0.02
                  )
                  
                  $
                  (0.03
                  )





The
potential shares, which are excluded from the determination of basic and diluted
net loss per share as their effect is anti-dilutive, are as
follows:





Year Ended December 31,2008
                  
                  
                  2007Convertible
      Notes
                  
                  
                  3,042,800
                  
                  
                  
                  2,916,300Potential
      equivalent shares excluded
                  
                  
                  2,028,527
                  
                  
                  
                  1,944,198





Foreign Currency
Translation





Financial
statements of foreign subsidiaries, located in the United Kingdom, where the
local currency, UK Pound Sterling, is the functional currency are translated
into U.S. dollars using period-end exchange rates for assets and liabilities and
average exchange rates during the period for revenues and
expenses.  Cumulative translation adjustments associated with net
assets or liabilities are reported in non-owner changes in equity.  Any
exchange rate gains or losses related to foreign currency transactions are
recognized in the income statement as incurred, in the same financial statement
caption as the underlying transaction, and are not material for any year
shown.


F-13


Mendocino
Brewing Company, Inc.


Notes
to Consolidated Financial Statements


December
31, 2008





Cash at
UBIUK was translated at exchange rates in effect at December 31, 2008 and 2007,
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 includes having the Company
make estimates and assumptions affecting the reported amounts of assets,
liabilities, revenues and expenses, and disclosure of contingent assets and
liabilities.  The amounts estimated could differ from actual
results.  Significant estimates include, allowance for bad debts,
depreciation and amortization periods, and 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
deferred tax assets.





Advertising





Advertising
costs are expensed as incurred and were $1,014,900 and $1,369,900 for the years
ended December 31, 2008 and 2007, respectively.





Fair Value of Financial
Instruments




Fair
Value




On
January 1, 2008, the Company adopted SFAS No. 157 Fair Value, except as it
applies to the nonfinancial assets and nonfinancial liabilities subject to FSP
157-2. Adoption of the provisions of this standard did not have a material
effect on the Company's consolidated financial position.




Financial
Instruments Measured at Fair Value.    The Company's
cash and cash equivalents and available-for-sale financial instruments are
carried at fair value and the Company makes estimates regarding valuation of
these assets measured at fair value in preparing the consolidated financial
statements.




The
carrying value of certain of the financial instruments, including accounts
receivable, other current assets, accounts payable and accrued expenses,
approximate fair value due to their short maturities.  Based on
borrowing rates currently available to the Company for loans with similar terms,
the carrying value of short and long term notes payable approximate fair
value.





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.


F-14


Mendocino
Brewing Company, Inc.


Notes
to Consolidated Financial Statements


December
31, 2008





Reportable
Segments





The
Company manages its operations through two business segments: brewing
operations, tavern and tasting room operations (domestic) and distributor
operations (international).  The international business segment sells
the Company's products outside the U.S.  The Company evaluates
performance based on net operating profit.  Where applicable, portions
of the administrative function expenses are allocated between the operating
segments.  The operating segments do not share manufacturing or
distribution facilities.  In the event any materials and/or services
are provided to one operating segment by the other, the transaction is valued
according to the Company's transfer policy, which approximates market
price.  The costs of operating the manufacturing plants are captured
discretely within each segment.  The Company's property, plant and
equipment, inventory, and accounts receivable are captured and reported
discretely within each operating segment.





Reclassifications





Certain
amounts in the prior periods presented have been reclassified to conform to the
current period financial statement presentation.  These
reclassifications have no effect on previously reported net loss.





Recent Accounting
Pronouncements





In
February 2007, the FASB issued SFAS 159, The Fair Value Option for Financial
Assets and Financial Liabilities—Including an amendment of FASB Statement
No. 115, or SFAS 159. SFAS 159 permits entities to choose
to measure many financial instruments and certain other items at fair value.
This statement provides entities the opportunity to mitigate volatility in
reported earnings caused by measuring related assets and liabilities differently
without having to apply complex hedge accounting provisions. This Statement is
effective as of the beginning of an entity's first fiscal year that begins after
November 15, 2007. Management did not elect to measure any additional
assets or liabilities at fair value that are not already measured at fair value
under existing standards. Therefore, the adoption of this standard had no impact
on the Company’s consolidated financial statements.





In
December 2007, the FASB issued Statement of Financial Accounting
Standards No. 141 (revised 2007), or SFAS No. 141(R), Business
Combinations. Under SFAS No. 141(R), an entity is required to
recognize the assets acquired, liabilities assumed, contractual contingencies,
and contingent consideration at their fair value on the acquisition date. It
further requires that acquisition-related costs be recognized separately from
the acquisition and expensed as incurred, restructuring costs generally be
expensed in periods subsequent to the acquisition date, and changes in
accounting for deferred tax asset valuation allowances and acquired income tax
uncertainties after the measurement period impact income tax expense. In
addition, acquired in-process research and development, or IPR&D is
capitalized as an intangible asset and amortized over its estimated useful
life.  The Company is required to adopt the provisions of SFAS No.
141(R) beginning with its fiscal quarter ending April 26, 2009.  SFAS
141(R) is to be applied prospectively to business combinations for which the
acquisition date is on or after January 1, 2009. Early adoption is not
permitted. Generally, the effect of SFAS 141(R) on the Company will depend on
future acquisitions.





Also in
December 2007, the FASB issued Statement of Financial Accounting Standards
No. 160, Noncontrolling Interests in Consolidated Financial Statements — an
amendment of ARB No. 51 (“SFAS 160”). SFAS 160 establishes new accounting
and reporting standards for noncontrolling interest (minority interest) in a
subsidiary, provides guidance on the accounting for and reporting of the
deconsolidation of a subsidiary, and increases transparency through expanded
disclosures. Specifically, SFAS 160 requires the recognition of minority
interest as equity in the consolidated financial statements and separate from
the parent company’s equity. It also requires consolidated net earnings in the
consolidated statement of earnings to include the amount of net earnings
attributable to minority interest. This statement will be effective for the
Company as of the beginning of fiscal year 2009. Early adoption is not
permitted. The Company is presently evaluating the impact of the adoption of
SFAS 160 and believes there will be no material impact on its consolidated
financial statements.


F-15


Mendocino
Brewing Company, Inc.


Notes
to Consolidated Financial Statements


December
31, 2008





In
February 2008, the FASB issued FSP SFAS 157-2, which delays the effective
date of SFAS 157 for non-financial assets and non-financial liabilities,
except for items that are recognized or disclosed at fair value on a recurring
basis (items that are remeasured at least annually). The FSP deferred the
effective date of SFAS 157 for non-financial assets and non-financial
liabilities until the Company's fiscal year beginning on January 1, 2009.
Management does not expect the adoption of SFAS 157 for non-financial
assets and non-financial liabilities to have a material effect on the Company's
consolidated financial statements.





In April
2008, the FASB issued FSP No. 142-3, “Determination of the Useful Life of
Intangible Assets” (“FSP 142-3”), which amends the factors an entity should
consider in developing renewal or extension assumptions used in determining the
useful life of recognized intangible assets under FASB Statement No. 142,
“Goodwill and Other Intangible Assets”. This new guidance applies prospectively
to intangible assets that are acquired individually or with a group of other
assets in business combinations and asset acquisitions. FSP 142-3 is
effective for financial statements issued for fiscal years beginning after
December 15, 2008 and will be adopted by the Company in the first quarter
of 2009 for intangible assets acquired thereafter.





In May
2008, the FASB issued Statement of Financial Accounting
Standards No. 162, or SFAS No. 162,The
Hierarchy of Generally Accepted Accounting Principles.SFAS 162 identifies the sources of accounting principles and the
framework for selecting the principles used in the preparation of financial
statements of nongovernmental entities that are presented in conformity with
GAAP. SFAS 162 will be effective 60 days after the approval of the Securities
and Exchange Commission (“SEC”) of the Public Company Accounting Oversight Board
(“PCAOB’s”) amendments to AU Section 411. The Company does not expect SFAS 162
to have an impact on its consolidated financial statements.





Other
recent accounting pronouncements issued by the FASB (including its Emerging
Issues Task Force ("EITF"), the American Institute of Certified Public
Accountants ("AICPA"), and the SEC did not or are not believed by management to
have a material impact on the Company's present or future financial
statements.





2.
            Liquidity and
      Management Plans





At
December 31, 2008, the Company had cash and cash equivalents of $273,700, a
working capital deficit of $2,477,600 and an accumulated deficit of
$12,340,300.  Additionally, the Company has a history of past losses
as infrastructure and marketing costs were incurred in advance of obtaining
customers. However the Company did have income from operations of $400,600 for
the year 2008, and cash from operations of $564,400 for the year
2008.





Management
has taken several actions to ensure that the Company will have sufficient cash
for its working capital needs through December 31, 2009, including reductions in
discretionary expenditures and securing additional contract brewing contracts.
In addition, the Company’s majority shareholder issued a letter of support to
provide financial assistance when required. The Company may also seek additional
capital infusions to support operations. Management believes that these actions
will permit the Company to meet its working capital needs through December 31,
2009.





3.
            Inventories





Inventories,
consisting of materials, materials overhead, labor, and manufacturing overhead,
are stated at the lower of average cost or market (net realizable value) and
consist of the following at December 31:


F-16


Mendocino
Brewing Company, Inc.


Notes
to Consolidated Financial Statements


December
31, 2008





2008
                  
                  
                  2007Raw
      materials
                  
                  $
                  667,700
                  
                  
                  $
                  601,000Work-in-progress
                  
                  
                  324,000
                  
                  
                  
                  177,200Finished
      goods
                  
                  
                  848,400
                  
                  
                  
                  647,200Merchandise
                  
                  
                  25,100
                  
                  
                  
                  35,800$
                  1,865,200
                  
                  
                  $
                  1,461,200





4.
            Property and
      Equipment





The
following is a summary of property and equipment, at cost less accumulated
depreciation, at December 31:


2008
                  
                  
                  2007Machinery
      and equipment
                  
                  $
                  11,902,700
                  
                  
                  $
                  13,614,800Buildings
                  
                  
                  7,222,100
                  
                  
                  
                  7,202,300Equipment
      under capital lease
                  
                  
                  233,800
                  
                  
                  
                  6,300Land
                  
                  
                  810,900
                  
                  
                  
                  810,900Leasehold
      improvements
                  
                  
                  1,452,200
                  
                  
                  
                  1,432,400Vehicles
                  
                  
                  363,000
                  
                  
                  
                  373,000Furniture
      and fixtures
                  
                  
                  401,500
                  
                  
                  
                  183,800Equipment
      in progress
                  
                  
                  68,700
                  
                  
                  
                  106,30022,454,900
                  
                  
                  
                  23,729,800Less:  Accumulated
      depreciation and amortization
                  
                  
                  (9,648,800
                  )
                  
                  
                  (10,511,500
                  )$
                  12,806,100
                  
                  
                  $
                  13,218,300





The
Company has property and equipment located in the United Kingdom with a net book
value of approximately $1,526,600 as of December 31,
2008.  Amortization of assets under capital leases is included in
depreciation and amortization expense. Depreciation and amortization expense for
the years ended December 31, 2008 and 2007 was $1,077,000 and $1,097,800,
respectively.





5.
            Line of Credit and
      Note Payable





In
November 2006, Marquette Business Credit, Inc. provided a line of credit
drawable up to 85% of eligible receivable and 60% of eligible inventory for a
period up to June 2011.  The borrowings were collateralized, with
recourse, by certain eligible trade receivables up to a maximum percentage of
85% of the qualified net amounts of such receivables of each of MBC and Releta
and 60% of MBC’s and Relata’s eligible inventory located in the
US.  This facility carries interest at a rate of one-month LIBOR plus
4.25% and secured by substantially all assets, excluding the real property of
Releta and MBC.





The
Company retains the right to recall any of the collateralized receivables under
the line of credit, and the receivables are subject to
recourse.  Therefore, the transaction does not qualify as a sale under
the terms of Financial Accounting Standards Board Statement No. 140 (Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities).  Included in the Balance Sheets as receivables at
December 31, 2008, are account balances totaling $1,818,600 of uncollected
receivables collateralized to the financial institution under this facility. The
amount outstanding on this line of credit as of December 31, 2008 was
approximately $1,762,000.


F-17


Mendocino
Brewing Company, Inc.


Notes
to Consolidated Financial Statements


December
31, 2008





On April
26, 2005, Royal Bank of Scotland Commercial Services Limited ("RBS") provided an
invoice discounting facility to UBSN Limited up to a maximum amount of
£1,750,000 (US $2,558,300) based on 80% prepayment against qualified accounts
receivable related to UBSN's United Kingdom customers.  The initial
term of the facility is for a period of one year after which the facility can be
terminated by either party by providing the other party a notice of six
months.  The facility carries an interest rate of 1.38% above RBS base
rate and a service charge of 0.10% of each invoice discounted.  The
amount outstanding on this line of credit as of December 31, 2008 was
approximately $1,839,700.





6.
            Long-Term
      Debt





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


2008
                
                
                2007Notes
      to a financial institution, payable in monthly installments of $20,500,
      plus interest at one month LIBOR plus 5.25% with a balloon payment of
      $622,400 in June 2011; secured by substantially all assets of the Releta
      Brewing Company and Mendocino Brewing Company excluding the real property
      in Ukiah, CA.
                
                $
                1,237,300
                
                
                $
                1,289,000Note
      to a financial institution, payable in monthly installment of $23,200
      including interest at prime plus 1.75% with a balloon payment of
      approximately $2,732,900 in June 2011, secured by the real property in
      Ukiah, CA.
                
                
                2,899,100
                
                
                
                2,938,0004,136,400
                
                
                
                4,227,000Less
      current maturities
                
                
                316,400
                
                
                
                254,400$
                3,820,000
                
                
                $
                3,972,600





Payments
      due during Year Ending December 31,2009
                  
                  $
                  316,4002010
                  
                  
                  321,3002011
                  
                  
                  3,498,700$
                  4,136,400





7.
            Capital Lease
      Obligations





The
Company leases certain brewing equipment, vehicles and office equipment under
agreements that are classified as capital leases.  The future minimum
lease payments required under the capital leases and the present value of the
net minimum lease payments as of December 31, 2008, are as follows:





Year
      Ending December 31,2009
                  
                  $
                  137,3002010
                  
                  
                  123,4002011
                  
                  
                  84,5002012
                  
                  
                  41,500386,700Less
      amounts representing interest
                  
                  
                  (54,600
                  )Present
      value of minimum lease payments
                  
                  
                  332,100Less
      current maturities
                  
                  
                  (113,400
                  )Non-current
      leases payable
                  
                  $
                  218,700


F-18


Mendocino
Brewing Company, Inc.


Notes
to Consolidated Financial Statements


December
31, 2008





8.
            Notes to Related Party
      – Subordinated





Notes
payable to a related party consist of unsecured 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 June
2009.  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 Grand Pacific Financing
Corporation and Marquette Business Credit, Inc., both maturing in June
2011.  Therefore, the Company will not require the use of working
capital to repay any of the UBA notes until the above facilities are
repaid.  Accordingly, the entire amounts due of $3,042,800 and
$2,916,300 as of December 31, 2008 and 2007, respectively,  under the
notes is classified as a long term liability.  The notes include
$1,127,400 and $1,000,900 of accrued, respectively, interest at December 31,
2008 and 2007.





Notes
payable also includes the balance of an unsecured loan from Shepherd Neame
Limited to UBSN Limited payable in annual installments of $87,700 with interest
at 5% per year and maturing in June 2012.  The amounts outstanding,
under this loan as of December 31, 2008 and 2007 were $350,900 and $595,300,
respectively.





Payments
      due during Year Ending December 31,2009
                  
                  $
                  87,7002010
                  
                  
                  87,7002011
                  
                  
                  3,130,6002012
                  
                  
                  87,700$
                  3,393,700





9.
            Commitments and
      Contingencies





Legal





The
Company is periodically involved in legal actions and claims that arise as a
result of events that occur in the normal course of operations.  The
Company’s management assess such contingent liabilities, and such assessments
inherently involves an exercise of judgment.  In assessing loss
contingencies related to legal proceedings that are pending against the Company
or unasserted claims that may result in such proceedings, the Company’s
Management evaluates the perceived merits of any legal proceedings or unasserted
claims as well as the perceived merits of the amount of relief sought or
expected to be sought therein.





If the
assessment of a contingency indicates that it is probable that a material loss
has been incurred and the amount of the liability can be estimated, then the
estimated liability would be accrued in the Company’s financial
statements.  If the assessment indicates that a potentially material
loss contingency is not probable, but is reasonably possible, or is probable but
cannot be estimated, then the nature of the contingent liability, together with
an estimate of the range of possible loss if determinable and material, would be
disclosed.





Loss
contingencies considered remote are generally not disclosed unless they involve
guarantees, in which case the nature of the guarantee would be
disclosed.  The Company is not currently aware of any legal
proceedings or claims that the Company believes will have, individually or in
the aggregate, a material adverse effect on the Company's financial position or
results of operations


F-19


Mendocino
Brewing Company, Inc.


Notes
to Consolidated Financial Statements


December
31, 2008





Operating
Leases





The
Company leases some of its operating and office facilities for various terms
under long-term, non-cancelable operating lease agreements.  The
leases expire at various dates through 2015 and provide for renewal options
ranging from month-to-month to five years.  In the normal course of
business, it is expected that these leases will be renewed or replaced by leases
on similar properties.  The leases provide for increases in future
minimum annual rental payments based on defined increases which are generally
meant to correlate with the Consumer Price Index, subject to certain minimum
increases.  Also, the agreements generally require the Company to pay
certain costs (real estate taxes, insurance and repairs).





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
equipment.  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 leases begin expiring in 2009.  Rent expense
charged to operations was $200,600 and $220,600 for the years ended December 31,
2008 and 2007.





Future
minimum lease payments under these agreements are as follows:





Year
      Ending December 31,2009
                  
                  $
                  240,7002010
                  
                  
                  210,4002011
                  
                  
                  187,2002012
                  
                  
                  152,1002013
                  
                  
                  18,600Thereafter
                  
                  
                  27,800$
                  836,800





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
the applicable territory.  The agreement is effective for five years
ending in September 2009 and the Company anticipates entering into negotiations
to extend the agreement.  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
$46,700 and $55,500, and for the years ended December 31, 2008 and
2007.





10.
            Related-Party
      Transactions





The
Company conducts business with United Breweries of America (UBA), which owns
approximately 72% of the Company's common stock through common
ownership.  Additionally, UBSN Limited has significant transactions,
amounting to 13% of sales in the year ending December 31, 2008, with Shepherd
Neame, Ltd., which is a related party to a former Board member.  The
Company also had 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, 2008 and 2007:


F-20


Mendocino
Brewing Company, Inc.


Notes
to Consolidated Financial Statements


December
31, 2008





2008
                          
                          
                          2007TRANSACTIONSGross
      sales to Shepherd Neame Ltd.
                          
                          $
                          4,872,800
                          
                          
                          $
                          4,058,800Purchases
      from Shepherd Neame Ltd.
                          
                          
                          16,032,400
                          
                          
                          
                          16,235,100Expenses
      reimbursement to Shepherd Neame Ltd.
                          
                          
                          1,161,700
                          
                          
                          
                          1,251,200Interest
      expenses associated with UBA notes (see note 8)
                          
                          
                          126,500
                          
                          
                          
                          182,900Interest
      paid to Shepherd Neame Ltd. (see note 6)
                          
                          
                          25,000
                          
                          
                          
                          33,000ACCOUNT
      BALANCESAccounts
      payable and accrued liabilities to Shepherd Neame Ltd.
                          
                          
                          4,936,800
                          
                          
                          
                          5,776,700Accounts
      receivable and prepayments to Shepherd Neame Ltd.
                          
                          
                          1,309,000
                          
                          
                          
                          1,065,300Amounts
      payable to AUBI
                          
                          
                          5,000
                          
                          
                          
                          20,000





11.
            Major
      Customers





Sales to
the top five customers totaled $10,508,300 and $9,420,000 for the years ended
December 31, 2008 and 2007, which represents 28% and 25% of sales for the years
ended December 31, 2008 and 2007, respectively. No other customers individually
represent greater than 5% of the accounts receivable balance or
revenues.





12.
            Stockholders'
      Equity





Independent
outside members of the Board of Directors are compensated for attending Board of
Directors and committee meetings through the issuance of common
stock.  Expenses related to this compensation totaled $61,000 and
$103,000 for the years ended December 31, 2008 and 2007,
respectively.





In
January 2009, the Company issued 123,076 shares of its unregistered common stock
to independent outside directors totaling $48,000 in accrued compensation and
160,000 shares of its unregistered common stock totaling to $32,000 as
compensation.





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.





13.
            Stock
      Option Plan




The
Company had a stock option plan, the 1994 Stock Option Plan, which expired in
2004.   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 stock options
outstanding were non-statutory, and issued with a five year term and were fully
vested on date of grant.  Therefore, there was no stock compensation
expense recognized in 2007 or 2008.    The 240,835 options
expired in January 2007.


F-21


Mendocino
Brewing Company, Inc.


Notes
to Consolidated Financial Statements


December
31, 2008





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





Shares under
                    option
                  
                  
                  Weighted-average
                    exercise price
                  
                  
                  Weighted-average
                    remaining lifeBalance
      at December 31, 2006
                  
                  
                  240,385
                  
                  
                  $
                  
                  
                  
                  $
                  0.52
                  
                  
                  
                  0.1Options
      granted
                  
                  
                  -
                  
                  
                  
                  
                  
                  
                  $
                  -
                  
                  
                  
                  -Options
      expired
                  
                  
                  (240,385
                  )
                  
                  $
                  
                  
                  
                  $
                  0.52Balance
      at December 31, 2007
                  
                  
                  -
                  
                  
                  
                  
                  
                  
                  $
                  -
                  
                  
                  
                  -





All
240,385 options outstanding at December 31, 2006  were fully vested
and exercisable.





During
the years ended December 31, 2008 and 2007, the Company granted no performance
based options to employees, executives or senior management.





14.
            Income
      Taxes





The
accumulated losses during the past in the Company's 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 $3,375,300
for deferred tax assets.  The Company also has $68,433 of California
Manufacturers' Investment Tax Credits that can be carried forward to reduce
future taxes.  These credits begin expiring in 2011.





2008
                  
                  
                  2007Provision
      for income taxesUS
      Federal
                  
                  $
                  -
                  
                  
                  $
                  -US
      States
                  
                  
                  4,500
                  
                  
                  
                  7,000Current
      provision
                  
                  
                  4,500
                  
                  
                  
                  7,000Change
      in deferred income taxes
                  
                  
                  -
                  
                  
                  
                  -Total
      provision for income taxes
                  
                  $
                  4,500
                  
                  
                  $
                  7,000




F-22


Mendocino
Brewing Company, Inc.


Notes
to Consolidated Financial Statements


December
31, 2008





The
difference between the actual income tax provision and the tax provision
computed by applying the statutory US Federal and United Kingdom income tax
rates to earnings before taxes is attributable to the following:





2008
                  
                  
                  2007US
      Federal income tax expense (benefit) at 34%
                  
                  $
                  (46,500
                  )
                  
                  $
                  42,700US
      State income tax expense (benefit)
                  
                  
                  (8,200
                  )
                  
                  
                  11,100United
      Kingdom income tax expense (benefit)
                  
                  
                  (32,200
                  )
                  
                  
                  (150,800
                  )Other
      tax items
                  
                  
                  (590,300
                  )
                  
                  
                  (341,100
                  )Change
      in valuation allowance
                  
                  
                  681,700
                  
                  
                  
                  445,100Total
                  
                  $
                  4,500
                  
                  
                  $
                  7,000





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





2008
                  
                  
                  2007Benefit
      of net operating loss carryforwards
                  
                  $
                  5,032,900
                  
                  
                  $
                  5,116,500Undistributed
      earnings of UBIUK
                  
                  
                  (335,000
                  )
                  
                  
                  (454,800
                  )Investment
      in UBIUK
                  
                  
                  366,800
                  
                  
                  
                  349,000Depreciation
      and amortization
                  
                  
                  (1,239,000
                  )
                  
                  
                  (523,000
                  )Other
                  
                  
                  38,200
                  
                  
                  
                  57,900Subtotal
                  
                  
                  3,863,900
                  
                  
                  
                  4,545,600Less
      valuation allowance
                  
                  
                  (3,863,900
                  )
                  
                  
                  (4,545,600
                  )Total
                  
                  $
                  -
                  
                  
                  $
                  -Change
      in valuation allowance
                  
                  $
                  (681,700
                  )
                  
                  $
                  445,100





The
Company has net operating losses available for carry forward. The US Federal net
operating losses total approximately $12,930,700 and expire beginning 2013 and
ending in 2027. The US state operating losses total approximately $2,464,200 and
expire beginning 2012 and ending 2027. The Company’s United Kingdom operating
losses total approximately $2,326,700 and do not expire.





Tax years
that remain open for examination by the Internal Revenue Service include 2005,
2006, 2007, and 2008 (expected to be filed in 2009), and by the State of
California include 2004 through 2008.  In addition, tax years from
1997 to 2003 may be subject to examination by the Internal Revenue Service to
the extent that the Company utilizes the net operating losses from those years
in its current or future year tax returns.




F-23


Mendocino
Brewing Company, Inc.


Notes
to Consolidated Financial Statements


December
31, 2008





15.
            Segment
      Information





The
Company's business presently consists of two segments.  The first is
brewing for wholesale to distributors and direct sales (including merchandise)
at the Company's brewpub and retail merchandise store located at the Hopland
Brewery and at the Saratoga Springs brewery.  This segment accounted
for approximately 42% of the Company's gross sales during the year 2008 and 39%
during the year 2007.  The second segment consists of distribution of
alcoholic beverages to retail establishments and restaurants in the United
Kingdom and Europe.  This segment accounted for approximately 58% and
61% of the Company's gross sales during 2008 and 2007.  A summary of
each segment is as follows:





Year Ended December 31, 2008Brewing
                              Operations
                            
                            
                            Distributor
                              Operations
                            
                            
                            Corporate
                              and Other
                            
                            
                            TotalSales
                            
                            $
                            15,689,500
                            
                            
                            $
                            21,951,000
                            
                            
                            
                            
                            
                            $
                            37,640,500Operating
      income
                            
                            
                            325,200
                            
                            
                            
                            75,400
                            
                            
                            
                            
                            
                            
                            400,600Identifiable
      assets
                            
                            
                            13,144,700
                            
                            
                            
                            6,898,800
                            
                            
                            
                            2,443,800
                            
                            
                            
                            22,487,300Depreciation
      and amortization
                            
                            
                            533,900
                            
                            
                            
                            543,100
                            
                            
                            
                            
                            
                            
                            
                            1,077,000Capital
      expenditures
                            
                            
                            519,900
                            
                            
                            
                            668,400
                            
                            
                            
                            
                            
                            
                            
                            1,188,300Year Ended December 31, 2007Brewing
                              Operations
                            
                            
                            Distributor
                              Operations
                            
                            
                            Corporate
                              and Other
                            
                            
                            TotalSales
                            
                            $
                            14,900,500
                            
                            
                            $
                            22,874,000
                            
                            
                            
                            
                            
                            
                            $
                            37,774,500Operating
      income (loss)
                            
                            
                            804,300
                            
                            
                            
                            (193,300
                            )
                            
                            
                            
                            
                            
                            
                            611,000Identifiable
      assets
                            
                            
                            12,689,400
                            
                            
                            
                            8,458,800
                            
                            
                            
                            2,229,400
                            
                            
                            
                            23,377,600Depreciation
      and amortization
                            
                            
                            515,200
                            
                            
                            
                            582,600
                            
                            
                            
                            
                            
                            
                            
                            1,097,800Capital
      expenditures
                            
                            
                            166,700
                            
                            
                            
                            665,000
                            
                            
                            
                            
                            
                            
                            
                            831,700





16.
            Unrestricted Net
      Assets





The
Company's wholly-owned subsidiary, UBIUK, has retained losses of approximately
£395,500 as
of December 31, 2008.  Under UBSN's line of credit agreement with RBS,
distributions and other payments to the Company from its subsidiary are not
permitted if the retained earnings drop below £1,000,000.  Condensed
financial information of the the United States operations is as
follows:


F-24


Mendocino
Brewing Company, Inc.


Notes
to Consolidated Financial Statements


December
31, 2008





Balance
      Sheets
                
                2008
                
                
                2007AssetsCash
                
                $
                105,400
                
                
                $
                32,000Accounts
      receivable
                
                
                1,797,100
                
                
                
                1,643,400Inventories
                
                
                1,865,200
                
                
                
                1,461,200Other
      current assets
                
                
                167,600
                
                
                
                192,800Total
      current assets
                
                
                3,935,300
                
                
                
                3,329,400Investment
      in subsidiary
                
                
                1,225,000
                
                
                
                1,225,000Property
      and equipment
                
                
                11,279,500
                
                
                
                11,228,200Other
      assets
                
                
                373,700
                
                
                
                361,200Total
      assets
                
                $
                16,813,500
                
                
                $
                16,143,800LiabilitiesLine
      of credit and note payable
                
                $
                1,762,000
                
                
                $
                1,313,500Accounts
      payable
                
                
                1,324,100
                
                
                
                1,270,900Accrued
      liabilities
                
                
                802,100
                
                
                
                510,500Current
      maturities of debt and leases
                
                
                374,500
                
                
                
                261,500Total
      current liabilities
                
                
                4,262,700
                
                
                
                3,356,400Intercompany
      payable
                
                
                533,900
                
                
                
                753,900Long-term
      debt and capital leases
                
                
                3,970,700
                
                
                
                3,972,600Notes
      payable to related party
                
                
                3,042,800
                
                
                
                2,916,300Total
      liabilities
                
                
                11,810,100
                
                
                
                10,999,200Stockholders'
      equityCommon
      stock
                
                
                14,902,300
                
                
                
                14,902,300Preferred
      stock
                
                
                227,600
                
                
                
                227,600Accumulated
      deficit
                
                
                (10,126,500
                )
                
                
                (9,985,300
                )Total
      stockholders' equity
                
                
                5,003,400
                
                
                
                5,144,600Total
      Liabilities and stockholders' equity
                
                $
                16,813,500
                
                
                $
                16,143,800




F-25


Mendocino
Brewing Company, Inc.


Notes
to Consolidated Financial Statements


December
31, 2008





17.
            Unrestricted Net
      Assets (continued)





Statement
      of Operations
                  
                  2008
                  
                  
                  2007Net
      sales
                  
                  $
                  14,784,000
                  
                  
                  $
                  13,943,700Cost
      of goods sold
                  
                  
                  11,406,100
                  
                  
                  
                  10,209,400Selling,
      marketing, and retail expenses
                  
                  
                  1,319,700
                  
                  
                  
                  1,288,600General
      and administrative expenses
                  
                  
                  1,848,400
                  
                  
                  
                  1,743,100Income
      from operations
                  
                  
                  209,800
                  
                  
                  
                  702,600Other
      income and (expense)Interest
      expenses
                  
                  
                  (545,100
                  )
                  
                  
                  (760,600
                  )Other
      income
                  
                  
                  198,600
                  
                  
                  
                  183,700Provision
      for taxes
                  
                  
                  (4,500
                  )
                  
                  
                  (7,000
                  )(351,000
                  )
                  
                  
                  (583,900
                  )Net
      income (loss)
                  
                  $
                  (141,200
                  )
                  
                  $
                  118,700





Statements
      of Cash Flows
                    
                    2008
                    
                    
                    2007Cash
      flows from operating activities
                    
                    $
                    253,700
                    
                    
                    $
                    760,400Cash
      flow from investing activitiesPurchase
      of property and equipment
                    
                    
                    (286,100
                    )
                    
                    
                    (166,700
                    )Proceeds
      from sale of assets
                    
                    
                    -
                    
                    
                    
                    4,400Net
      cash from investment activities
                    
                    
                    (286,100
                    )
                    
                    
                    (162,300
                    )Cash
      flow from financing activitiesNet
      borrowing (repayment) on line of credit
                    
                    
                    448,500
                    
                    
                    
                    (50,100
                    )Borrowing
      on long-term debt
                    
                    
                    168,500
                    
                    
                    
                    -Repayment
      of long-term debt
                    
                    
                    (259,100
                    )
                    
                    
                    (236,200
                    )Proceeds
      from note payable
                    
                    
                    -
                    
                    
                    
                    -Repayment
      of notes payable
                    
                    
                    -
                    
                    
                    
                    -Payment
      on obligation under capital lease
                    
                    
                    (32,100
                    )
                    
                    
                    (9,600
                    )Net
      change in inter company payable
                    
                    
                    (220,000
                    )
                    
                    
                    (325,900
                    )Proceeds
      from related party
                    
                    
                    -
                    
                    
                    
                    -Net
      cash flow from financing activities
                    
                    
                    105,800
                    
                    
                    
                    (621,800
                    )Cash,
      beginning of year
                    
                    
                    32,000
                    
                    
                    
                    55,700Cash,
      end of year
                    
                    $
                    105,400
                    
                    
                    $
                    32,000




F-26