UNITED
      STATES


SECURITIES
      AND EXCHANGE COMMISSION


Washington,
      D.C. 20549




FORM
          10-K/A
 (Amendment
          No. 1)
 (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, 2007




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
              Incorporation
                or Organization)
            
            (IRS
                Employer
              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
o No 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 o No
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 x No
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 o No
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, 2007 was $489,000.




The
      number of shares of the registrant's Common Stock outstanding as of March 29,
      2008 was 11,991,686.




DOCUMENTS
      INCORPORATED BY REFERENCE




None









**EXPLANATORY
          STATEMENT**
 
 
 This
          Amendment No. 1 on Form 10-K/A ("Amendment No. 1") amends the Annual Report
          for
          Mendocino Brewing Company, Inc. filed on Form 10-K for the year ended December
          31, 2007, as initially filed with the Securities & Exchange Commission (the
          "SEC") on March 31, 2008 (the "Original Report"). This Amendment No. 1
          corrects
          typographical errors in the date of the Report of Independent Registered
          Public
          Accounting Firm and the date of the signature pages of the Original Report.
          Except as described above, no other changes have been made in this Amendment
          No.
          1 that modify or update other disclosure presented in the Original
          Report.








**TABLE
      OF CONTENTS**




PageITEM
                  1.
              
              BUSINESS
              
              1ITEM
                  1A.
              
              RISK
                  FACTORS
              
              7ITEM
                  1B.
              
              UNRESOLVED
                  STAFF COMMENTS
              
              9ITEM
                  2.
              
              PROPERTIES
              
              9ITEM
                  3.
              
              LEGAL
                  PROCEEDINGS
              
              10ITEM
                  4.
              
              SUBMISSION
                  OF MATTERS TO A VOTE OF SECURITY HOLDERS
              
              10PART
                  II
              
              
              
              10ITEM
                  5.
              
              MARKET
                  FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
                  MATTERS
              
              10ITEM
                  6.
              
              SELECTED
                  FINANCIAL DATA
              
              12ITEM
                  7.
              
              MANAGEMENT'S
                  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
                  OPERATIONS
              
              12ITEM
                  7A.
              
              QUANTITATIVE
                  AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
              
              18ITEM
                  8.
              
              FINANCIAL
                  STATEMENTS AND SUPPLEMENTARY DATA
              
              18ITEM
                  9.
              
              CHANGES
                  IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
                  DISCLOSURE
              
              18ITEM
                  9A.
              
              CONTROLS
                  AND PROCEDURES
              
              18ITEM
                  9B.
              
              OTHER
                  INFORMATION
              
              21ITEM
                  10.
              
              DIRECTORS,
                  EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE OF THE COMPANY
              
              21ITEM
                  11.
              
              EXECUTIVE
                  COMPENSATION
              
              23ITEM
                  12.
              
              SECURITY
                  OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
                  STOCKHOLDER MATTERS
              
              27ITEM
                  13.
              
              CERTAIN
                  RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
                  INDEPENDENCE
              
              28ITEM
                  14.
              
              PRINCIPAL
                  ACCOUNTING FEES AND SERVICES
              
              31ITEM
                  15.
              
              EXHIBITS
                  AND FINANCIAL STATEMENT SCHEDULES
              
              31





i





**FORWARD-LOOKING
      INFORMATION**




Various
      portions of this Annual Report on Form 10-K, (the "Annual Report") including
      but
      not limited to the sections captioned "Description of Business" and
      "Management's Discussion and Analysis of Financial Condition and Results of
      Operation," contain forward-looking information. Such information involves
      risks
      and uncertainties that are based on current expectations, estimates and
      projections about the Company's business, Management's beliefs, and assumptions
      made by Management. Words such as "expects," "anticipates," "intends," "plans,"
      "believes," "seeks," "estimates," and variations of those and similar words
      are
      intended to identify such forward-looking information. Actual outcomes and
      results may differ materially from what is expressed or forecasted in such
      forward-looking information due to numerous factors, including but not limited
      to availability of financing for operations, availability of raw materials,
      successful performance of internal operations, the impact of competition,
      changes in distributor relationships or performance, and other risks discussed
      elsewhere in this Annual Report and from time to time in the Company's filings
      and reports with the Securities and Exchange Commission (the "Commission").
      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 the Company competes. 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 will celebrate 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.




1




**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.




The
      Company's New York subsidiary, Releta Brewing Company, LLC, d/b/a Ten Springs
      Brewery ("Releta"), which is located in Saratoga Springs, New York, commenced
      production in its leased facilities in February 1998. 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 the United States brewing and distribution rights for
      Kingfisher Premium Lager 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 72% of
      the
      Company's 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, which is currently estimated by Brewers Association to be in the
      range
      of 8 million barrels 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.




**EUROPEAN
      MARKET**




The
      vast
      majority of the Company's sales in the European Territory are made in the United
      Kingdom. During fiscal years 2007, 2006 and 2005 the Company's sales in the
      United Kingdom constituted approximately 91%, 92% and 94%, respectively, of
      its
      total sales in 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.




**BUSINESS
      OF THE COMPANY**




2




**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 brews five ales, one wheat beer, three lagers, one stout and a root
      beer
      on a year-round basis, and four 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.




In
      the
      European Territory, the Company currently distributes Kingfisher Premium Lager.
      Prior to April 1, 2005, the Company also distributed Sun Lik Chinese Lager
      in
      the United Kingdom.




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.




**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.




3




**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
      Carling, 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 Company promotes
      Kingfisher Premium Lager as the worldwide No. 1 selling premium Indian lager
      brand. The Company believes that the profile of this brand was raised
      significantly through the Company's promotion of Kingfisher World Curry Week
      in
      support of the charity "Action Against Hunger" that provides aid in the Indian
      sub-continent and southeast Asia.




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 price increases in malt and hops during 2007 and the beginning
      of
      2008 due to low availability 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 does not use any hedging
      transactions or unconditional purchase obligations to purchase its raw
      materials.




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, Inland Paper Board and Packaging, Inc., Antioch,
      California and Empire State Container, Inc., Syracuse, New York (cartons);
      Sierra Pacific Packaging, Oroville, California and Caraustar, Ashland, Ohio
      (carriers); and 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 2007 totaled $9,420,000, or
      approximately 25%, of the Company's total net sales, as compared to $8,032,600
      or 24% of total net sales for fiscal year 2006.




4




In
      the
      Company's Domestic Territory, sales to Mesa Distributing Company, Inc. totaled
      approximately 7.9% and 8.5% of the Company's domestic sales (or approximately
      3.1% and 3.3% of its total sales) for fiscal years 2007 and 2006.




Sales
      to
      the Company's principal European customer, Shepherd Neame during fiscal year
      2007 represented approximately 17.7% of the Company's European Territory sales
      (or approximately 10.7% of the Company's total sales), as compared to
      approximately 16.2% of European Territory sales (or approximately 9.9% of total
      net sales) in fiscal year 2006. No other individual customer accounted for
      more
      than 5% of the Company's total net sales during fiscal years 2007 or
      2006.




**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), SUN LAGER PREMIUM HANDCRAFTED BREW word and design mark (Reg.
      No. 2,583,446), 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).




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 expires in 2008, but will be automatically renewed unless specifically
      terminated. License fees are calculated based on sales of the product. The
      Company has not had any 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.




5




Since
      1998, UBI and UBSN have licensed to Shepherd Neame the exclusive right to brew,
      keg, bottle, can, label, and package all beers and related products sold under
      the Kingfisher trademark in the 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 - Shepherd Neame - 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.




**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 not currently required to incur sewer hook-up fees
      at
      that location. If the Company's discharge exceeds 55,000 gallons per day, which
      Management does not expect to occur until annual capacity exceeds 100,000 bbl.,
      the Company may be required to pay additional fees. The 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 trucked to a local composting facility for approximately the cost
      of
      transportation. The Company obtained a Mendocino County Air Quality Control
      Permit to operate the natural gas fired boiler in Ukiah; this permit is valid
      until August 30, 2008. Management expects this permit to be
      renewed.




6




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 Congress 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.




**EMPLOYEES**




As
      of
      December 31, 2007, MBC employed 52 full-time and 15 part-time individuals in
      the
      United States, including 11 in management and administration, 42 in brewing
      and
      production operations, 4 in retail and tavern operations and 10 in sales and
      marketing positions. In England, UBI and UBSN together employed 10 people in
      sales and marketing and 6 in managerial and administrative positions. Management
      believes that the Company's relations with its employees are generally
      good.




On
      February 28, 2003, approximately 21 employees engaged in brewing, bottling,
      warehousing, and shipping at the Ukiah brewery elected Teamsters Local No.
      896,
      International Brotherhood of Teamsters, AFL-CIO (the "Union") to represent
      them
      as a collective bargaining agent. The Company and the Union executed a
      collective bargaining agreement effective November 17, 2003. Such collective
      bargaining agreement will expire on July 31, 2008. All of such 21 employees'
      positions henceforth must be held and filled by members of the
      union.




**RESEARCH
      AND DEVELOPMENT**




The
      Company has not spent a material amount during the last two fiscal years 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.




LACK
      OF
      PROFITABLE OPERATIONS: We incurred a net loss for fiscal year 2007.
      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 cost of materials
      in
      2006 resulted in increased materials costs. 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.




7




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. We have loans, lines of credit, other credit facilities,
      and lease obligations with various creditors. Any breach of a loan by us which
      leads to our default, or to 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
      2007
      as well as in the first quarter of 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 marginally, we may not
      be in a position to pass the entire cost increase 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 28%
      of
      our sales volume in the Domestic Territory for fiscal year 2007 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
      has increased the working capital gap and diminished our ability to timely
      settle our dues. 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.




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. 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.




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. Hence any
      change in government regulation and shift in consumer preference may have an
      adverse impact on our operations.




8




**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 - Long-Term Debt"). The principal amount
      outstanding on the loan as of December 31, 2007 was $2,963,900.




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 $10,850,000. Various other assets incorporated in this
      facility are being depreciated, on a straight-line basis, at rates of between
      10
      and 20 years. Property taxes are currently assessed on the Ukiah property at
      a
      rate of 1.125%, for an annual tax of $122,100.




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 the 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 was approximately 47,200
      bbl.
      or 47% of maximum production capacity in 2007, as compared with 39,700 bbl.
      or
      44% of maximum production capacity in 2006. 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 30,200 bbl. or 34% of its maximum packaging capacity
      in 2007, as compared with 26,300 bbl. or 44% of its then maximum packaging
      capacity in 2006. 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.




**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.




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.




9




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.




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




Not
      Applicable.




**PART
      II**




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




**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.


2007
              
              High
              
              LowFirst
                  Quarter
              
              $
              0.27
              
              $
              0.21Second
                  Quarter
              
              $
              0.35
              
              $
              0.20Third
                  Quarter
              
              $
              0.22
              
              $
              0.22Fourth
                  Quarter
              
              $
              0.32
              
              $
              0.22




2006
              
              High
              
              LowFirst
                  Quarter
              
              $
              0.22
              
              $
              0.10Second
                  Quarter
              
              $
              0.30
              
              $
              0.13Third
                  Quarter
              
              $
              0.34
              
              $
              0.15Fourth
                  Quarter
              
              $
              0.25
              
              $
              0.17




The
      Company had approximately 2,288 holders of its common stock of record as of
      March 14, 2008. The Company has never paid a cash dividend on its Common Stock
      and Management does not expect the Company to pay cash dividends in the
      foreseeable future. The Company's credit agreements provide that the Company
      may
      not declare or pay any dividend or other distribution on its Common Stock (other
      than a stock dividend), or purchase or redeem any Common Stock, without the
      lender's prior written consent. Management anticipates that similar restrictions
      will remain in effect for as long as the Company has significant bank
      financing.




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 see "Item 7.
      Management's Discussion and Analysis of Financial Condition and Results of
      Operations-Other Loans and Credit Facilities- Restricted Net
      Assets."




10




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.




**SECURITIES
      AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS**




As
      of
      December 31, 2007, 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 increased quite
      significantly the number of shares otherwise issuable to these directors —the Board
      of
      Directors adopted a Directors' Stock Grant Plan under which non-employee
      directors would receive, as compensation for Board and Committee meetings
      attended, shares of the Company's Common Stock valued at the higher of the
      book
      or market value calculated as of the last day of each year in respect of which
      such compensation was due. On May 14, 2007, the Board of Directors of the
      Company approved the issuance of an aggregate of 363,512 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 held during 2006.




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, 2007, the outstanding
      principal and interest on the UBA Notes totaled approximately $2,916,297, and
      the UBA Notes were convertible into 1,944,198 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.




11




**ITEM
      6.**  **SELECTED
      FINANCIAL DATA.**




Not
      required for smaller reporting companies.




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




**OVERVIEW**




The
      Company’s operations resulted in operating income of $611,000. After providing
      for interest, other income and taxes, the net loss was for fiscal year 2007
      was
      $384,000.




In
      the
      Domestic Territory, brewing operations sales (based on volume) were 77,349
      bbl.
      during fiscal year 2007, as compared to 65,969 bbl. and 59,046 bbl. in fiscal
      years 2006 and 2005, respectively. Sales from the Ukiah facility totaled 47,164
      bbl., 39,693 bbl. and 41,620 bbl., for the fiscal years 2007, 2006 and 2005,
      respectively. Sales from the Saratoga Springs facility totaled 30,185 bbl.,
      26,276 bbl., and 17,426 bbl. for the fiscal years 2007, 2006 and 2005,
      respectively. We bottled 2,950 bbl., 3,577 bbl., and 2,919 bbl. in fiscal years
      2007, 2006 and 2005, respectively, of cider products for California Cider
      Company.




We
      sold
      67,488 bbl. of beer in our European Territory during fiscal year 2007 as
      compared to 67,797 bbl. and 67,633 bbl. during fiscal years 2006 and 2005,
      respectively. Sales in the United Kingdom accounted for 61,202 bbl., 60,187
      bbl.
      and 61,077 bbl. during 2007, 2006 and 2005, respectively. Sales in continental
      Europe and Canada totaled 6,286 bbl., 7,610 bbl. and 6,556 bbl. during fiscal
      years 2007, 2006 and 2005, respectively. Although the sales of certain brands
      have fluctuated over the past few years, overall sales levels have remained
      consistent.




**RESULTS
      OF OPERATIONS**




**FISCAL
      YEAR 2007 COMPARED TO FISCAL YEAR 2006**




**NET
      SALES**




As
      used
      herein, the term "net sales" refers to gross sales less excise taxes. Overall
      net sales for fiscal year 2007 were $36,817,700, an increase of $4,542,300
      or
      14%, as compared to $32,275,400 in fiscal year 2006 mainly due to higher sales
      volume in the Domestic Territory.




DOMESTIC
      OPERATIONS: Net sales in the Domestic Territory totaled $13,943,700 in fiscal
      year 2007, compared to $12,149,400 for fiscal year 2006, representing an
      increase of $1,794,300 or 15%. Sales of beer for fiscal year 2007 increased
      by
      11,380 barrels, to 77,349 barrels an increase of 17% as compared to 65,969
      barrels in fiscal year 2006. The increase was due to increases in the sale
      of
      contract brands by approximately 10,100 bbl., and Company brands by 1,300 bbl.
      During fiscal year 2007, we bottled approximately 3,000 bbl. of cider products
      for California Cider Company on a contract basis compared to 3,600 bbl. in
      fiscal year 2006. 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 $22,874,000
      (£11,425,600) in fiscal year 2007, compared to $20,126,000 (£10,917,900) during
      fiscal year 2006. The increase was due to reduction in sales discount offered
      in
      the year 2007 and price increase during the beginning of the year 2007. Net
      sales presented in U.S. dollars resulted in an increase of 14%, as compared
      to
      fiscal year 2006, and by 5% compared to fiscal year 2006 when presented in
      pounds sterling due to devaluation of US dollar. We sold 67,488 bbl. of beer
      in
      our European Territory during fiscal year 2007 as compared to 67,797 bbl. in
      fiscal year 2006.




**COST
      OF GOODS SOLD:**




Overall
      cost of goods sold during fiscal year 2007 was $26,342,800, as compared to
      $23,063,300 during fiscal year 2006, an increase of $3,279,500, or 14%. As
      a
      percentage of net sales, costs of goods sold was 72% in fiscal years 2007,
      and
      2006. 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.




12




Our
      utilization of our production capacity has a direct impact on cost. Generally,
      when facilities are operating at higher a percentage of production capacity,
      cost is favorably affected because fixed and semi-variable operating costs,
      such
      as depreciation and production salaries, are spread over a larger volume base.
      In 2007 our volume level increased by 17% in comparison to 2006. This positive
      impact could be reduced if volume decrease in the future. In addition to
      capacity utilization, other factors that could affect cost of sales include
      unanticipated increases in shipping costs, the availability and prices of raw
      materials and packaging materials, and continued contract brewing contracts.
      The
      Company expects cost of goods to increase in the future due to increase in
      cost
      of raw materials.




DOMESTIC
      OPERATIONS: Cost of goods sold as a percentage of net sales in the Domestic
      Territory during fiscal year 2007 was 73%, as compared to 71% during the fiscal
      year 2006. The increase was due mainly to increased costs of raw materials,
      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 later part of the year 2007,
      prices of malts and hops increased significantly. 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
      purchaser, we do so, but in uncertain markets, we absorb a portion of the
      costs.




EUROPEAN
      TERRITORY: As a percentage of net sales, cost of goods sold in the United
      Kingdom during fiscal year 2007 was 71%, as compared to 72% during fiscal year
      2006 (in each case as calculated in U.S. dollars, after taking into account
      the
      effects of exchange rate fluctuations), mainly due to higher sales realization.




**GROSS
      PROFIT**




As
      a
      result of increased costs of goods sold, gross profit for fiscal year 2007
      (expressed in U.S. dollars) was approximately $10,474,900, an increase of
      $1,262,800, or 14%, as compared to gross profit of $9,212,100 in fiscal year
      2006. As a percentage of net sales, our overall gross profit during fiscal
      years
      2007 and 2006 remained at 29%.




**OPERATING
      EXPENSES**




Operating
      expenses for fiscal year 2007 totaled $9,863,900, an increase of $206,500,
      or
      2%, as compared to $9,657,400 for fiscal year 2006. Operating expenses consist
      of marketing and distribution expenses, general and administrative expenses,
      and
      retail operating expenses. As a percentage of net sales, such expenses decreased
      to 27% in fiscal year 2007, as compared to 30% in fiscal year 2006.




MARKETING
      AND DISTRIBUTION EXPENSES: Our marketing and distribution expenses consist
      of
      salaries and commissions, advertising costs, product and sales promotion costs,
      travel expenses, and related costs. For fiscal year 2007, such expenses equaled
      $5,561,600, an increase of $550,100 or 11%, as compared to $5,011,500 in fiscal
      year 2006. As a percentage of net sales, our marketing and distribution expenses
      decreased to 15% in fiscal year 2007, as compared to 16% in fiscal year
      2006.




DOMESTIC
      OPERATIONS: Marketing and distribution expenses for the Domestic Territory
      in
      fiscal year 2007 equaled $1,178,400, an increase of $60,500, or 5%, as compared
      to $1,117,900 in marketing and distribution expenses incurred during fiscal
      year
      2006. Marketing and distribution expenses equaled 8% of Domestic Territory
      net
      sales during fiscal year 2007, as compared to 9.2% during fiscal year 2006.
      The
      increase was mainly attributed to increase in manpower and associated increases
      in salary and travel costs.




EUROPEAN
      TERRITORY: Marketing and distribution expenses in the European Territory during
      fiscal year 2007 equaled $4,383,200, an increase of $489,600, or 13%, as
      compared to $3,893,600 during fiscal year 2006 mainly due to increase in
      advertising and promotional expenses. As a percentage of net sales in the United
      Kingdom, such expenses were 19% during 2007 and 2006 (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
      $4,192,100 for fiscal year 2007, representing a decrease of $356,600, or 8%,
      as
      compared to $4,548,700 for fiscal year 2006. General and administrative expenses
      equaled 11% and 14% respectively of net sales for fiscal years 2007 and 2006
      respectively.




DOMESTIC
      OPERATIONS. General and administrative expenses for our Domestic Territory
      equaled $1,743,100 for fiscal year 2007, representing an increase of $81,900,
      or
      5%, as compared to $1,661,200 for fiscal year 2006. The increase was primarily
      due increases in salaries.




EUROPEAN
      TERRITORY. General and administrative expenses for our European Territory
      equaled $2,449,000 in fiscal year 2007, representing a decrease of $438,500,
      or
      15%, as compared to $2,887,500 for fiscal year 2006. The decrease was mainly
      due
      to decrease in the provision against bad debts due to a more conservative credit
      control.




13




RETAIL
      OPERATING EXPENSES: Retail operating expenses for fiscal year 2007 totaled
      $110,200, representing an increase of $13,000, or 13%, from $97,200 in fiscal
      year 2006. As a percentage of net sales, retail operating expenses were
      negligible for both fiscal year 2007 and 2006.




**OTHER
      EXPENSES**




Other
      expenses including interest expenses totaled $988,000 in fiscal year 2007,
      representing an increase of $5,200, or 1%, as compared to $982,800 in fiscal
      year 2006. Interest expense was $1,049,600 in 2007 as compared to $1,077,700
      in
      2006, a reduction of $28,100 or 3% in 2007.




**INCOME
      TAXES**




We
      incurred an income tax expense of $7,000 for fiscal year 2007, as compared
      to
      expense of $2,500 for fiscal year 2006 related to 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 $4,545,600 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 2007 was $384,000, a decrease of $1,046,600 as compared
      to
      a net loss of $1,430,600 for fiscal year 2006. After taking into account a
      positive foreign currency translation adjustment of $32,900 for fiscal year
      2007
      (negative adjustment of $6,000 for fiscal year 2006), our comprehensive fiscal
      year 2007 net loss was $351,100, as compared to a net loss of $1,436,600 in
      fiscal year 2006.




**RETAIL
      SEGMENT**




We
      operate brew pubs at Hopland and Saratoga Springs. Although sales revenues
      at
      the brew pubs, are not significant, $307,400 in 2007 and $221,300 in 2006,
      we
      view the pubs as a marketing opportunity for our products. The pubs serve our
      brews on tap and also sell logo merchandise. The Company also sells various
      items of apparel and memorabilia bearing the Company’s trademarks at its pubs,
      which creates further awareness of the Company’s beers and reinforces the
      Company’s quality image.




**FISCAL
      YEAR 2006 COMPARED TO FISCAL YEAR 2005**




**NET
      SALES**




As
      used
      herein, the term "net sales" refers to gross sales less excise taxes. Overall
      net sales for fiscal year 2006 were $32,275,400, an increase of $983,600 or
      3%,
      as compared to $31,291,800 in fiscal year 2005 mainly due to higher sales volume
      in the Domestic Territory.




DOMESTIC
      OPERATIONS: Net sales in the Domestic Territory totaled $12,149,400 in fiscal
      year 2006, compared to $11,125,500 for fiscal year 2005, representing an
      increase of $1,023,900 or 9%. Sales of beer for fiscal year 2006 increased
      by
      6,923 barrels, to 65,969 barrels an increase of 12% as compared to 59,046
      barrels in fiscal year 2005. The increase was due to increases in the sale
      of
      contract brands by 5,632 bbl., Company brands by 405 bbl. and Kingfisher Premium
      Lager by 886 bbl. During fiscal year 2006, we bottled 3,577 bbl. of cider
      products for California Cider Company on a contract basis compared to 2,919
      bbl.
      in fiscal year 2005. 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 $20,126,000
      (£10,917,900) in fiscal year 2006, compared to $20,166,300 (£11,078,000) during
      fiscal year 2005. The decrease is attributed to exchange rate fluctuations.
      Net
      sales presented in U.S. dollars remained flat compared to fiscal year 2005,
      alternatively, when presented in pounds sterling, net sales decreased by 1%
      compared to fiscal year 2005. We sold 67,797 bbl. of beer in our European
      Territory during fiscal year 2006 as compared to 67,633 bbl. in fiscal year
      2005.




14




**COST
      OF GOODS SOLD:**




Overall
      cost of goods sold during fiscal year 2006 was $23,063,300, as compared to
      $21,754,200 during fiscal year 2005, an increase of $1,309,100, or 6%. As a
      percentage of net sales, costs of goods sold was 72% in fiscal year 2006, as
      compared to 70% during fiscal year 2005. 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.




DOMESTIC
      OPERATIONS: Cost of goods sold as a percentage of net sales in the Domestic
      Territory during fiscal year 2006 was 71%, as compared to 70% during the fiscal
      year 2005. The increase was due mainly to increased costs of raw materials
      and
      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. Any significant increase in our usage
      of
      natural gas or electricity or increases in price rates for these utilities
      could
      significantly impact our future operations.




EUROPEAN
      TERRITORY: As a percentage of net sales, cost of goods sold in the United
      Kingdom during fiscal year 2006 was 73%, as compared to 70% during fiscal year
      2005 (in each case as calculated in U.S. dollars, after taking into account
      the
      effects of exchange rate fluctuations). The percentage increase was mainly
      due
      to increased costs and fees we owed Shepherd Neame pursuant to the standard
      annual cost adjustment provisions under our production and distribution
      agreements with them and product mix. Such increases were not fully offset
      by
      comparable price increases in our products. When the market allows us to pass
      on
      price increases to the purchaser, we do so, but in uncertain markets, we absorb
      a portion of the costs.




**GROSS
      PROFIT**




As
      a
      result of increased costs of goods sold, gross profit for fiscal year 2006
      (expressed in U.S. dollars) was approximately $9,212,100, a decrease of
      $325,500, or 3.4%, as compared to gross profit of $9,537,600 in fiscal year
      2005. As a percentage of net sales, our overall gross profit during fiscal
      year
      2006 decreased to 29%, as compared to 31% for fiscal year 2005.




**OPERATING
      EXPENSES**




Operating
      expenses for fiscal year 2006 totaled $9,657,400, a decrease of $396,600, or
      4%,
      as compared to $10,054,000 for fiscal year 2005. Operating expenses consist
      of
      marketing and distribution expenses, general and administrative expenses, and
      retail operating expenses. As a percentage of net sales, such expenses decreased
      to 30% in fiscal year 2006, as compared to 32% in fiscal year 2005.




MARKETING
      AND DISTRIBUTION EXPENSES: Our marketing and distribution expenses consist
      of
      salaries and commissions, advertising costs, product and sales promotion costs,
      travel expenses, and related costs. For fiscal year 2006, such expenses equaled
      $5,011,500, a decrease of $1,204,700 or 19.38%, as compared to $6,216,200 in
      fiscal year 2005. As a percentage of net sales, our marketing and distribution
      expenses decreased to 16% in fiscal year 2006, as compared to 20% in fiscal
      year
      2005.




DOMESTIC
      OPERATIONS: Marketing and distribution expenses for the Domestic Territory
      in
      fiscal year 2006 equaled $1,117,900, a decrease of $249,500, or 18%, as compared
      to $1,367,400 in marketing and distribution expenses incurred during fiscal
      year
      2005. Marketing and distribution expenses equaled 9% of Domestic Territory
      net
      sales during fiscal year 2006, as compared to 12% during fiscal year 2005.
      The
      decrease was mainly attributed to reduced salary and travel costs resulting
      from
      a reduction in headcount.




EUROPEAN
      TERRITORY: Marketing and distribution expenses in the European Territory during
      fiscal year 2006 equaled $3,893,600, a decrease of $955,200, or 20%, as compared
      to $4,848,800 during fiscal year 2005. As a percentage of net sales in the
      United Kingdom, such expenses increased to 19% during 2006, as compared to
      34%
      during 2005 (in each case as calculated in U.S. dollars, after taking into
      account the effects of exchange rate calculations). We ran a special advertising
      campaign in London in June and July of 2005 which was not repeated in the year
      2006, resulting in a significant reduction in marketing costs. The decrease
      was
      also due to a decrease in headcount in the United Kingdom and associated reduced
      salary and travel costs and reduction in freight expenses due to lower sales
      volumes in the United Kingdom.




15




GENERAL
      AND ADMINISTRATIVE EXPENSES: Our general and administrative expenses totaled
      $4,548,700 for fiscal year 2006, representing an increase of $813,300, or 22%,
      as compared to $3,735,400 for fiscal year 2005. General and administrative
      expenses equaled 14% and 12% respectively of net sales for fiscal years 2006
      and
      2005 respectively.




DOMESTIC
      OPERATIONS. General and administrative expenses for our Domestic Territory
      equaled $1,661,200 for fiscal year 2006, representing a decrease of $149,400,
      or
      8%, as compared to $1,810,600 for fiscal year 2005. The decrease was primarily
      due to a portion of common corporate overheads being transferred to UBSN and
      a
      reduction in legal expenses partly offset by increases in salaries and loan
      fees.




EUROPEAN
      TERRITORY. General and administrative expenses for our European Territory
      equaled $2,887,500 in fiscal year 2006, representing an increase of $962,700,
      or
      50%, as compared to $1,924,800 for fiscal year 2005. The increase was mainly
      due
      to an increase in the provision against bad debts on account of a customer
      having filed for liquidation of their operations, an increase in legal fees
      and
      common corporate overheads being transferred from MBC.




RETAIL
      OPERATING EXPENSES: Retail operating expenses for fiscal year 2006 totaled
      $97,200, representing a decrease of $5,200, or 5%, from $102,400 in fiscal
      year
      2005.




**OTHER
      EXPENSES**




Other
      expenses totaled $982,800 in fiscal year 2006, representing an increase of
      $58,900, or 6%, as compared to $923,900 in fiscal year 2005. The increase in
      other expenses was mainly due to higher interest expenses associated with the
      increased amount of borrowings as well as due to increases in the prime lending
      rates in the United States.




**INCOME
      TAXES**




We
      incurred an income tax expense of $2,500 for fiscal year 2006, as compared
      to an
      income tax benefit of $125,600 for fiscal year 2005. The income tax benefit
      for
      fiscal year 2005 related to the estimated refunds due to us, relating to excess
      payments by us of taxes for operations in the United Kingdom.




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 $4,100,500 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 2006 was $1,430,600, an increase of $115,900, or 9%, as
      compared to a net loss of $1,314,700 for fiscal year 2005. After taking into
      account a foreign currency translation adjustment of $6,000 for fiscal year
      2006
      ($63,900 for fiscal year 2005), our comprehensive fiscal year 2006 net loss
      was
      $1,436,600, as compared to a net loss of $1,378,600 in fiscal year
      2005.




**RETAIL
      SEGMENT**




We
      operate brew pubs at Hopland and Saratoga Springs. Although sales revenues
      at
      the brew pubs, are not significant, $221,300 in 2006 and $203,100 in 2005,
      we
      view the pubs as a marketing opportunity for our products. The pubs serve our
      brews on tap and also sell logo merchandise.




**CASH
      FLOWS**




Net
      cash
      provided (used) by operations was $1,292,400, $390,700, and $(309,600),
      respectively, for 2007, 2006 and 2005. During the year ended December 31, 2007,
      net cash provided by operating activities was primarily attributable to non
      cash
      expenses of $1,383,700 and decrease in receivables of $463,300. This was offset
      in part by net loss of $384,000, an increase in inventory of $131,700 and a
      net
      decrease of $99,100 in accounts payable and accrued liabilities. Non-cash
      expenses include depreciation, stock-based compensation and interest accrued
      on
      related party notes.




16




Net
      cash
      used in investing activities was $694,600, $946,800, and $523,900, respectively,
      for 2007, 2006 and 2005. Such funds were used primarily for purchases of
      equipment, furniture and leasehold improvements.




Net
      cash
      provided (used) by financing activities was $(656,600), $548,800, and $587,200,
      respectively, for 2007, 2006 and 2005. Net cash from financing activities is
      comprised of the net proceeds from debt financing. Such funds have been used
      to
      fund our purchases of equipment and other fixed assets, and our general and
      administrative costs in 2007 and 2006.




**LIQUIDITY
      AND CAPITAL RESOURCES**




Low
      production capacity utilization rates at our Ukiah and Saratoga Springs
      facilities and losses from European operations 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 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 directly guaranty the
      operations of UBSN for the upcoming calendar year. Without such guaranty, the
      Company's cash flow concerns would be more troubling.




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, 2008. 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,
      2007
      was $1,915,400, and the accrued but unpaid interest thereon was equal to
      approximately $1,000,900, for a total amount due of $2,916,300.




The
      outstanding principal amount of the 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, 2007, the outstanding
      principal and interest on the UBA Notes was convertible into 1,944,198 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 MBCI under subordination agreements
      executed by UBA. As per the terms of the subordination agreements, UBA is
      precluded from demanding repayment of the 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.




17




(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 25 years 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 on a monthly basis an amount
      of
      approximately $10,554 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, Marquette Business Credit
      Inc. (“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 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 10.01%% for fiscal year 2007
      compared to 11.16% and 9.13% for fiscal years 2006 and 2005, respectively.
      For
      loans primarily associated with our European territory, the weighted average
      interest rates paid were 6.92%, 6.15% and 6.15% in fiscal years 2007, 2006
      and
      2005, respectively.




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, 2007
      was 0.77 to 1.0 and our ratio of total assets to total liabilities was 1.16
      to
      1.0. On December 31, 2006 our ratio of current assets to current liabilities
      was
      0.79 to 1.0 and our ratio of total assets to total liabilities was 1.17 to
      1.0.
      On December 31, 2005, our ratio of current assets to current liabilities was
      0.75 to 1.0 and our ratio of total assets to total liabilities was 1.33 to
      1.0.




RESTRICTED
      NET ASSETS. Our wholly-owned subsidiary, UBI, had retained losses of
      approximately £312,800 as of December 31, 2007. 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.




18


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 a party to nor do we engage in any off-balance
      sheet transactions.




**CONTRACTUAL
      OBLIGATIONS**




The
      following chart sets forth our contractual obligations as of December 31,
      2007.


Contractual
                  Obligations
              
              Payments
                  due by periodTotal
              
              Less
                  than 1 year
              
              1
                  -3 years
              
              3
                  -5 years
              
              More
                  than 5 yearsSecured
                  line of credit
              
              $
              3,801,400
              
              $
              3,801,400Long
                  Term Debt Obligations
              
              
              4,227,000
              
              
              254,400
              
              $
              519,400
              
              $
              3,453,200
              
              $
              -Capital
                  Lease Obligations
              
              
              119,300
              
              
              69,500
              
              
              49,800
              
              
              -
              
              
              -Operating
                  Lease Obligations
              
              
              1,100,500
              
              
              267,700
              
              
              440,500
              
              
              342,300
              
              
              50,000Purchase
                  Obligations
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -Other
                  Long Term Liabilities
              
              
              3,511,500
              
              
              119,100
              
              
              238,200
              
              
              3,154,300
              
              
              -Total
              
              $
              12,759,800
              
              $
              4,512,100
              
              $
              1,247,900
              
              $
              6,949,800
              
              $
              50,000




**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-29 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**




We
      evaluated the effectiveness of the design and operation of our disclosure
      controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the
      Exchange Act, as of December 31, 2007. Our principal executive and
      financial officers supervised and participated in the evaluation. Based on
      the
      evaluation, our principal executive and financial officers each concluded that
      our disclosure controls and procedures were effective in providing reasonable
      assurance that information required to be disclosed by us in the reports we
      file
      or submit under the Exchange Act is recorded, processed, summarized and reported
      within the time periods specified in the SEC’s forms and rules as of
      December 31, 2007. However, the company has also identified areas requiring further  improvement
      as identified below.




**INTERNAL
      CONTROL OVER FINANCIAL REPORTING**




Our
      management is responsible for establishing and maintaining adequate internal
      control over financial reporting, as defined in Rules 13a-15(f) and
      15d-15(f) of the Exchange Act. Internal control over financial reporting is
      designed to provide reasonable assurance regarding the reliability of financial
      reporting and the preparation of financial statements for external purposes
      in
      accordance with GAAP. Our internal control over financial reporting includes
      those policies and procedures that:





i.  pertain
      to the maintenance of records that, in reasonable detail, accurately and fairly
      reflect the transactions and dispositions of our assets;




19





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





iii.  provide
      reasonable assurance regarding prevention or timely detection of unauthorized
      acquisition, use or disposition of our assets that could have a material effect
      on our financial statements.




**MANAGEMENT’S
      ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING**




Our
      management concluded that we maintain appropriate internal control over
      financial reporting at December 31, 2007. In arriving at that conclusion,
      we considered the criteria established in *Internal
      Control—Integrated Framework* issued
      by
      the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”)
      and we performed a complete assessment as outlined in *Commission
      Guidance Regarding Management’s Report on Internal Control Over Financial
      Reporting Under Section 13(a) or 15(d) of the Exchange Act* .




In
      performing our assessment, we identified the risks that most likely affect
      reliable financial reporting and are most likely to have a material impact
      on
      the company’s financial statements, documented each business process within the
      risk area, determined the control points related to the business process and
      tested the design and effectiveness of each control .
      In
      addition to process (transactional) level controls, we evaluated entity level
      controls to determine if compensating controls mitigated any process level
      risks. Entity level controls include a broad range of non-transactional
      activities including account reconciliations, management review of results,
      the
      company’s Code of Conduct and Audit Committee review of practices and
      results.




SEC
      Release 33-8809 defines “material weakness” as a deficiency, or a combination of
      deficiencies in internal control over financial reporting such that there is
      a
      reasonable possibility that a material misstatement of the registrant’s
      financial statement will not be prevented or detected on a timely basis. SEC
      release 33829 defines “significant deficiency” as a deficiency, or combination
      of deficiencies in internal control over financial reporting that is less severe
      than a material weakness, yet important enough to merit attention by those
      responsible for oversight of the registrant’s financial reporting.




In
      summary, as a result of our first assessment of internal control over financial
      reporting, we identified a number of significant deficiencies in medium to
      low
      risk processes within high risk areas of financial statement control. Despite
      the existence of these significant deficiencies, we believe that our
      consolidated financial statements contained in this Form 10-K filed with the
      SEC
      fairly present our financial position, results of operations and cash flows
      for
      the fiscal year ending December 31, 2007 in all material respects. In
      conjunction with this conclusion, our independent registered public accounting firm is not required to attest this year.




As
      of
      December 31, 2007, the following significant deficiencies in our internal
      control over financial reporting were identified:





1.  We
      did
      not formally document certain of the reviews conducted by the financial
      department in the processing and preparation of the company financial
      statements. These processes include journal entries, account reconciliations,
      consolidations, equity reconciliations, disclosure checklists and tax return
      preparation. The company plans to remediate these issues by formalizing it’s
      documentation of financial reviews.




20





2.  The
      company did not conduct sufficient testing in 2007 to satisfy Sox requirements
      as a non- accelerated filer. The company plans to remediate this issue during
      2008.




3.  Human
      Resource documents including job descriptions, employee handbooks, and reviews
      were not current. The company plans to remediate this issue during 2008.





4.  The
      Whistleblower contact has not been established. The Whistleblower contact will
      be established in 2008, and the contact will be independent of
      management.




**CHANGES
      IN INTERNAL CONTROL OVER FINANCIAL REPORTING**




As
      this
      is our first report on internal control, none of the weaknesses identified
      above
      have been previously disclosed. As a result of implementing the assessment
      process over the internal control over financial reporting, we implemented
      various remediation measures to improve our financial reporting and disclosure
      controls.





We
      have
      enhanced our accounting procedures to review and monitor critical accounts
      and
      transactions on a timely basis. We are implementing a new ERP system to further
      improve controls.




**LIMITATIONS
      ON CONTROLS**




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




**ITEM
      9B.**  **OTHER
      INFORMATION.**




None.




**PART
      III**




**ITEM
      10.**  **DIRECTORS,
      EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE OF THE COMPANY**




The
      following table sets forth the names, ages as of February 28, 2008, and certain
      information regarding each of the Company's current directors and executive
      officers:


Name
              
              Age
              
              Position(s)
              
              Director
                  Since**Scott
                  R. Heldfond
              
              63
              
              Director
              
              2005Michael
                  Laybourn
              
              69
              
              Director
              
              1993Vijay
                  Mallya, Ph.D.
              
              52
              
              Director
                  and Chairman of the Board
              
              1997Jerome
                  G. Merchant*+
              
              46
              
              Director
              
              1997Mahadevan
                  Narayanan
              
              50
              
              Chief
                  Financial Officer and Secretary
              
              N/ASury
                  Rao Palamand, Ph.D.*+
              
              76
              
              Director
              
              1998Kent
                  D. Price*+
              
              64
              
              Director
              
              1998Yashpal
                  Singh
              
              62
              
              Director,
                  President and Chief Executive Officer
              
              1997




**
            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.




21




*
            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 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 was
      recently elected to serve as a member of the Upper House of the Indian
      Parliament. Dr. Mallya holds a Bachelor of Commerce degree from the University
      of Calcutta in India and an honorary Doctorate in Business Administration from
      California Southern University, Santa Ana.




Jerome
      G.
      Merchant became a director in October 1997 and was Chief Financial Officer
      of
      the Company from November 1997 to October 1998. Mr. Merchant currently 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.




22




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.




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 2007, the Company is aware of one 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. The untimely filing was a form 4 filed by Jerome Merchant on May 17,
      2007
      that was due on May 16, 2007.




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, Sury Rao Palamand and Kent D. Price serve as the committee members
      of the Audit/Finance Committee.




23




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,
      2007.




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


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
              
              
              2007
              
              
              189,000
              
              
              40,825
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              32,976
              
              
              262,8012006
              
              
              150,000
              
              
              46,900
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              19,006
              
              
              215,906Mahadevan
                  NarayananChief
                  Financial Officer and Corporate Secretary
              
              
              2007
              
              
              114,000
              
              
              21,481
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              135,4812006
              
              
              81,250
              
              
              23,069
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              
              
              
              104,319




*
            Other
                compensation of the Chief Executive Officer includesuse
                of company vehicle, health care reimbursement for the executive and
                his
                immediate family and vacation
                reimbursement.




24




***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 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 for the Chief Executive Officer consists of base salary, annual
      cash bonus payments, health benefits for the executive officer and their
      immediate dependent family members, key person life insurance, use of company
      vehicle and vacation reimbursement.




**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. 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.




*Annual
      Cash Bonus*




The
      compensation packages for the Chief Executive Officer and the Chief Financial
      Officer also contain a component providing 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 bonus, the total compensation of the Company's
      Chief Executive Officer includes perquisites and personal benefits. The types
      of
      perquisites and personal benefits awarded to the Chief Executive Officer 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).




25




**DIRECTORS'
      COMPENSATION**


**FOR
      THE YEAR 2007**





Dr.
      Vijay
      Mallya, Chairman of the Board, is paid $120,000 per year by MBC for services
      rendered as Chairman, and £70,000 per year (approximately $140,140 in U.S.
      dollars at average exchange rate for the year 2007) by UBI for promoting the
      Company’s products in the European territory outside the United
      Kingdom.




Until
      December 31, 2006, Jerome Merchant received $48,000 per year as a consultant
      to
      the Chairman’s office, therefore he was not paid any remuneration for attending
      meetings of the Board and Board committees. Effective January 1, 2007, Mr.
      Merchant receives remuneration applicable to independent directors for attending
      meetings of the Board and Board committees.




Directors
      who are not in receipt of fixed remuneration from the Company receive fees
      for
      their service 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 2007.


Name
              
              Fees
                  earned of Paid in Cash ($)
              
              Stock
                  Awards
                ($)
              
              Option
                  Awards
                ($)
              
              Non
                  Equity Incentive Plan Compensation ($)
              
              Change
                  in Pension Value and Nonqualified Deferred Compensation Earnings
                  ($)
              
              All
                  Other Compensation($)
              
              Total
                ($)(a)
              
              (b)
              
              (c)
              
              (d)
              
              (e)
              
              (f)
              
              (g)
              
              (h)Dr.Vijay
                  Mallya
              
              260,140Kent
                  Price
              
              
              -
              
              
              24,000
              *
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              24,000Sury
                  Rao Palamand
              
              
              -
              
              
              19,000
              **
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              19,000Jerome
                  Merchant
              
              
              -
              
              
              24,000
              *
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              24,000Scott
                  Heldfond
              
              
              -
              
              
              22,000
              #
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              22,000Michael
                  Laybourne
              
              
              -
              
              
              14,000
              ##
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              14,000




*
            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 $0.39 per
                share being the average value of the stock during the year 2007.




**
            Fee
                for attending two board meetings and two 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 $0.39 per
                share being the average value of the stock during the year 2007.




#
            Fee
                for attending three board meetings and two 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 $0.39 per
                share being the average value of the stock during the year 2007.




##
            Fee
                for attending one board meeting calculated at $3,000 per board meeting,
                to
                be compensated in the form of Company’s common stock calculated at $0.39
                per share being the average value of the stock during the year 2007.




Stock awards
        also include ad hoc compensation of $11,000 to Messieurs Heldfond, Laybourn
        Merchant, Palamand and Price in the form of common stock of the Company
        calculated at the rate of $0.22 per share based on the trading value of the
        stock on the date of issuance.
  26





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, 2007, 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
                  Percentage**COMMON
                  STOCK**United
                  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 STOCK**H.
                  Michael Laybourn +
              
              
              6,100
              
              
              2.7
              %All
                  Directors and executive officers as a group (8 persons)
              
              
              6,100
              
              
              2.7
              %




*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 1, 944, 198
      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 1,944,198 shares
      issuable to UBA upon conversion of certain convertible notes issued by MBC
      to
      UBA under a Master Line of Credit Agreement.




27




(4)  Includes
      all shares indirectly held by UBHL. Does not include 1,944,198 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




The
      Company's Directors' Compensation Plan reserved an aggregate of 500,000 shares
      of the Company's unregistered Common Stock to be issued to Directors. 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 average of the daily 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 2007 and 2006, 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:




**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,
      2008.




As
      of
      February 29, 2008, the aggregate outstanding principal amount of the UBA Notes
      is $1,915,400, and the accrued but unpaid interest thereon is equal to
      approximately $1,028,800. 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 the date of this report,
      United Brewers of America beneficially owns approximately 25.7% 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 2007 and 2006, the largest
      aggregate amount of principal outstanding was 1,915,400 **** No
      principal or interest was paid during either 2007 or 2006,
      respectively.




28




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 2007,
      the
      purchases from Shepherd Neame by UBSN equaled approximately
      $16,235,100 **** at
      the
      average exchange rate in effect during 2007. For 2006, the purchases from
      Shepherd Neame by UBSN equaled approximately $14,589,300 at the average exchange
      rate in effect during 2006.





**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 2007 and 2006 was (pounds)
      60,000 or $120,100 **** and
      $110,600 at the average exchange rate during 2007 and 2006,
      respectively.




29





**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 $1.00
      at the average exchange rates in effect during fiscal year 2007) for every
      100
      liters (26 gallons) of beer brewed for sale in the European Territory, will
      expire (unless its term is extended) in October 2013. The royalty due to UBI
      for
      the year 2007 was approximately $79,200. The royalty due to UBI for the year
      2006 was approximately $44,000.





**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 2007 was approximately $101,700. The royalty
      due
      to UBSN pursuant to the Brewing License Agreement for the year 2006 was
      approximately $102,200.





**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.





30





COMPANY
      RELATIONSHIPS





UBA
      and
      Inversiones own 25.7% and 45.9% of the outstanding shares of the Company's
      common stock respectively.  UBA has also advanced to the Company a
      principal amount of $1,915,400 under separate convertible notes. As of December
      31, 2007 the principal amount outstanding on the notes together with the accrued
      interest is convertible into 1,944,198 shares of common stock. Because UBHL
      is
      the ultimate parent of both UBA and Inversiones, UBHL is the ultimate
      beneficiary of 71.6% 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.




**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 2007.




AUDIT
      FEES. The aggregate fees billed by PMB for the audit of the Company's annual
      consolidated financial statements for the year ended December 31, 2007 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 that year. Such fees
      represented approximately 90% of the total fees for services rendered to the
      Company by PMB during 2007.




The
      aggregate fees billed by PMB for the audit of the Company's annual consolidated
      financial statements for the year ended December 31, 2006 was $90,000; fees
      of
      an additional $45,685 were billed to the Company during 2006 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 2006.




AUDIT
      RELATED FEES. PMB did not bill any amount in fees for assurance or related
      services to the Company in 2007 or 2006.




TAX
      FEES.
      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.




The
      aggregate fees billed during 2006 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 2006.




ALL
      OTHER
      FEES. During the years 2007 and 2006, 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 2007 and 2006 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




31




Consolidated
      Balance Sheets as of December 31, 2007 and 2006




Consolidated
      Statements of Operations and Comprehensive Income for the Years Ended December
      31, 2007, 2006 and 2005




Consolidated
      Statements of Stockholders' Equity for the Years Ended December 31, 2007, 2006,
      and 2005




Consolidated
      Statements of Cash Flow for the Years Ended December 31, 2007, 2006, and
      2005




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]10.10
              
              (F)
              
              Keg
                  Management Agreement with MicroStar Keg Management LLC.10.11
              
              (G)
              
              Agreement
                  to Implement Condition of Approval No. 37 of the Site Development
                  Permit
                  95-19 with the City of Ukiah, California (previously filed as Exhibit
                  19.6).10.12
              
              
              
              [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.
 
 32
 Exhibit
                  Number
              
              
              
              Description
                of Document10.20
              
              
              
              [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,
                  2000.10.47
              
              (Q)
              
              Convertible
                  Note in favor of United Breweries of America Inc. dated December
                  31,
                  2000.
  33
 Exhibit
                  Number
              
              
              
              Description
                of Document10.48
              
              (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]10.68
              
              (X)
              
              Fourth
                  Amendment to Extension of Term of Notes Under Master Line of Credit
                  Agreement between Mendocino Brewing Company, Inc. and United Breweries
                  of
                  America, Inc., dated as of August 14, 2004.10.69
              
              
              
              [Intentionally
                  omitted]
  34
 Exhibit
                  Number
              
              
              
              Description
                of Document10.70
              
              (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]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,
                  200710.91
              
              *
              
              Employment
                  Agreement of Yashpal Singh (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.




*
      Filed
      herewith.




35




**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.




(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.




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




10.91  Employment Agreement of Yashpal Singh (Management Contract)




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.




36




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
                SINGH**Yashpal
                  Singh
                Its
                  President and Chief Executive OfficerDate:
                April 14, 2008




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 Board




By:
              /s/ **YASHPAL
                SINGH**Yashpal
                  Singh
                Its
                  President, Director and Chief Executive OfficerDate:
                April 14, 2008




By:
              /s/ **SCOTT
                R. HELDFOND**Scott
                R. Heldfond, DirectorDate:
                April 14, 2008


By:
                /s/ **JEROME
                  G. MERCHANT**Jerome
                  G. Merchant, DirectorDate:
                    April 14, 2008


By:
                /s/ **N.
                  MAHADEVAN**N.
                    Mahadevan
                  Its
                    Secretary and Chief Financial OfficerDate:
                  April 14, 2008


37
  By:
                /s/ **H.****MICHAEL
                  LAYBOURN**H.
                    Michael Laybourn, DirectorDate:
                  April 14, 2008




By:
              /s/ **KENT
                PRICE**Kent
                Price, DirectorDate:
                April 14, 2008




By:
              /s/ 
                **SURY RAO PALAMAND**Sury
                Rao Palamand, DirectorDate:
                  April 14, 2008


38




**MENDOCINO
        BREWING COMPANY, INC.**
 
 **CONSOLIDATED
        FINANCIAL STATEMENTS**
 **FOR
        THE YEARS ENDED**
 **DECEMBER
        31, 2007 AND 2006**


**MENDOCINO
        BREWING COMPANY, INC.**
 
 **CONSOLIDATED
        FINANCIAL STATEMENTS**
 **FOR
        THE YEARS ENDED**
 **DECEMBER
        31, 2007 AND 2006**





**CONTENTS**





Reports
                of Independent Registered Public Accounting Firm
            
            
            F-2Consolidated
                Balance Sheets
            
            
            F-3Consolidated
                Statements of Operations and Comprehensive Income (Loss)
            
            
            F-4Consolidated
                Statements of Stockholders' Equity
            
            
            F-5Consolidated
                Statements of Cash Flows
            
            
            F-6Notes
                to Financial Statements
            
            
            F-7
                  -F-30


F-1




**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, 2007 and 2006, and the related
        consolidated statements of operations and comprehensive income (loss),
        stockholders’ equity and cash flows for the years ending December 31, 2007, 2006
        and 2005. 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, Inc.
      as of
      December 31, 2007 and 2006 and the consolidated results of their operations
      and
      their consolidated cash flows for the years ending December 31, 2007, 2006
      and
      2005, in conformity with accounting principles generally accepted in the United
      States of America.








**PMB
      Helin Donovan, LLP**


San
      Francisco, California


March
        28,
        2008


F-2


**MENDOCINO
        BREWING COMPANY, INC.**
 **CONSOLIDATED
        BALANCE SHEETS**
 **AS
        OF DECEMBER 31, 2007 AND 2006**
 
 2007
                
                2006ASSETSCurrent
                    AssetsCash
                
                $
                339,700
                
                $
                345,900Accounts
                    receivable, net of allowance fordoubtful
                    accounts of $52,600 and $60,500, respectively
                
                
                7,411,400
                
                
                7,818,300Inventories
                
                
                1,461,200
                
                
                1,329,500Prepaid
                    expenses
                
                
                585,800
                
                
                671,400Total
                    Current Assets
                
                
                9,798,100
                
                
                10,165,100Property
                    and Equipment(net
                    of accumulated depreciation)
                
                
                13,218,300
                
                
                13,446,000Other
                    AssetsDeposits
                    and other assets
                
                
                313,600
                
                
                302,300Intangibles,
                    (net of amortization)
                
                
                47,600
                
                
                53,900Total
                    Other Assets
                
                
                361,200
                
                
                356,200Total
                    Assets
                
                $
                23,377,600
                
                $
                23,967,300LIABILITIES
                    AND STOCKHOLDERS' EQUITYCurrent
                    LiabilitiesSecured
                    lines of credit
                
                $
                3,801,400
                
                $
                3,934,300Accounts
                    payable
                
                
                7,167,800
                
                
                7,164,300Accrued
                    liabilities
                
                
                1,309,100
                
                
                1,312,800Current
                    maturities of notes to related parties
                
                
                119,100
                
                
                117,500Current
                    maturities of obligation under long-term debt
                
                
                254,400
                
                
                236,500Current
                    maturities of obligation under capital lease
                
                
                69,500
                
                
                83,100Total
                    Current Liabilities
                
                
                12,721,300
                
                
                12,848,500Long-Term
                    LiabilitiesNotes
                    to related parties including accruedinterest
                    of $1,000,900 and $818,000, respectively
                
                
                3,392,500
                
                
                3,321,000Long
                    term debt, less current maturities
                
                
                3,972,600
                
                
                4,226,700Obligations
                    under capital leases, less current maturities
                
                
                49,800
                
                
                65,600Total
                    Long-Term Liabilities
                
                
                7,414,900
                
                
                7,613,300Total
                    Liabilities
                
                
                20,136,200
                
                
                20,461,800Stockholders'
                    EquityPreferred
                    stock, Series A, no par value, withliquidation
                    preference of $1 per share; 10,000,000shares
                    authorized, 227,600 shares issued and outstanding
                
                
                227,600
                
                
                227,600Common
                    stock, no par value 30,000,000 shares authorized,11,991,686
                    and 11,628,174 shares issued and outstanding
                
                
                14,902,300
                
                
                14,815,300Accumulated
                    comprehensive income
                
                
                157,300
                
                
                124,400Accumulated
                    deficit
                
                
                (12,045,800
                )
                
                (11,661,800
                )Total
                    Stockholders' Equity
                
                
                3,241,400
                
                
                3,505,500Total
                    Liabilities and Stockholders' Equity
                
                $
                23,377,600
                
                $
                23,967,300
 The
        accompanying notes are an integral part of
        these financial statements.
 F-3


**MENDOCINO
        BREWING COMPANY, INC.**
 **CONSOLIDATED
        STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)**
 **FOR
        THE YEARS ENDING DECEMBER 31, 2007, 2006 AND 2005**


2007
                
                2006
                
                2005Sales
                
                $
                37,774,500
                
                $
                32,948,900
                
                $
                31,927,300Less
                    excise tax
                
                
                956,800
                
                
                673,500
                
                
                635,500Net
                    Sales
                
                
                36,817,700
                
                
                32,275,400
                
                
                31,291,800Cost
                    of Goods Sold
                
                
                26,342,800
                
                
                23,063,300
                
                
                21,754,200Gross
                    Profit
                
                
                10,474,900
                
                
                9,212,100
                
                
                9,537,600Operating
                    ExpensesRetail
                    operating
                
                
                110,200
                
                
                97,200
                
                
                102,400Marketing
                
                
                5,561,600
                
                
                5,011,500
                
                
                6,216,200General
                    and administrative(1)
                
                
                4,192,100
                
                
                4,548,700
                
                
                3,735,400Total
                    Operating Expenses
                
                
                9,863,900
                
                
                9,657,400
                
                
                10,054,000Income
                    (Loss) from Operations
                
                
                611,000
                
                
                (445,300
                )
                
                (516,400
                )Other
                    Income (Expense)Miscellaneous
                    income
                
                
                68,400
                
                
                89,900
                
                
                60,600Profit
                    (loss) on sale of equipment, net
                
                
                (6,800
                )
                
                5,000
                
                
                (6,000
                )Interest
                    expense
                
                
                (1,049,600
                )
                
                (1,077,700
                )
                
                (978,500
                )Total
                    Other Income (Expense)
                
                
                (988,000
                )
                
                (982,800
                )
                
                (923,900
                )Income
                    (Loss) before Income Taxes
                
                
                (377,000
                )
                
                (1,428,100
                )
                
                (1,440,300
                )Provision
                    for (Benefit from) Income Taxes
                
                
                7,000
                
                
                2,500
                
                
                (125,600
                )Net
                    Income (Loss)
                
                
                (384,000
                )
                
                (1,430,600
                )
                
                (1,314,700
                )Other
                    Comprehensive Income (Loss)Foreign
                    currency translation adjustment
                
                
                32,900
                
                
                (6,000
                )
                
                (63,900
                )Comprehensive
                    Income (Loss)
                
                $
                (351,100
                )
                $
                (1,436,600
                )
                $
                (1,378,600
                )Net
                    Income (Loss) percommon
                    share (basic and diluted)
                
                $
                (0.03
                )
                $
                (0.12
                )
                $
                (0.11
                )Weighted
                    average common sharesoutstanding
                    (basic and diluted)
                
                $
                11,855,369
                
                $
                11,512,479
                
                $
                11,472,213


(1)
      Includes $103,000, $32,000, and $44,000 of stock based compensation, for 2007,
      2006, and 2005, respectively..


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


**MENDOCINO
        BREWING COMPANY, INC.**
 **CONSOLIDATED
        STATEMENTS OF STOCKHOLDERS’ EQUITY**
 **FOR
        THE YEARS ENDING DECEMBER 31, 2007, 2006 AND 2005**


Series
                    A
                
                
                
                
                
                
                
                OtherPreferred
                
                
                
                Common
                
                
                
                Comprehensive
                
                Accumulated
                
                TotalShares
                
                Amount
                
                Shares
                
                Amount
                
                Income/(Loss)
                
                Deficit
                
                EquityBalance
                    December 31, 2004
                
                
                227,600
                
                $
                227,600
                
                
                11,266,874
                
                $
                14,648,600
                
                $
                194,300
                
                $
                (8,916,500
                )
                $
                6,154,000Stock
                    issued for accrued compensation
                
                
                -
                
                
                -
                
                
                207,040
                
                
                98,700
                
                
                -
                
                
                -
                
                
                98,700Net
                    loss
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                (1,314,700
                )
                
                (1,314,700
                )Currency
                    translation adjustment
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                (63,900
                )
                
                -
                
                
                (63,900
                )Balance
                    December 31, 2005
                
                
                227,600
                
                $
                227,600
                
                
                11,473,914
                
                $
                14,747,300
                
                $
                130,400
                
                $
                (10,231,200
                )
                $
                4,874,100Stock
                    issued for accrued compensation
                
                
                -
                
                
                -
                
                
                154,260
                
                
                68,000
                
                
                -
                
                
                -
                
                
                68,000Net
                    loss
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                (1,430,600
                )
                
                (1,430,600
                )Currency
                    translation adjustment
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                (6,000
                )
                
                -
                
                
                (6,000
                )Balance
                    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
                )
                $
                3,241,400
  The
        accompanying notes are an integral part of these financial
        statements.
 F-5
  **MENDOCINO
        BREWING COMPANY, INC.**
 **CONSOLIDATED
        STATEMENTS OF CASH FLOWS**
 **FOR
        THE YEARS ENDING DECEMBER 31, 2007, 2006 AND 2005**   2007
                
                2006
                
                2005CASH
                    FLOWS FROM OPERATING ACTIVITIESNet
                    income (loss)
                
                $
                (384,000
                )
                $
                (1,430,600
                )
                $
                (1,314,700
                )Adjustments
                    to reconcile net income(loss)
                    to net cash from operating activities:Depreciation
                    and amortization
                
                
                1,097,800
                
                
                1,017,800
                
                
                903,700Provision
                    for doubtful accounts
                
                
                (8,300
                )
                
                -
                
                
                10,200Loss
                    (gain) on sale of assets
                
                
                6,800
                
                
                (5,000
                )
                
                6,000Interest
                    accrued on related party notes
                
                
                182,900
                
                
                181,200
                
                
                142,100Non-cash
                    compensation
                
                
                103,000
                
                
                32,000
                
                
                44,000Deferred
                    income tax
                
                
                -
                
                
                -
                
                
                (122,900
                )Changes
                    in operating assets and liabilities:(Increase)
                    decrease in accounts receivable
                
                
                463,300
                
                
                73,500
                
                
                702,600(Increase)
                    decrease in inventories
                
                
                (131,700
                )
                
                (178,100
                )
                
                34,000(Increase)
                    decrease in prepaid expenses
                
                
                92,400
                
                
                (71,400
                )
                
                (229,800
                )(Increase)
                    decrease in deposits and other assets
                
                
                (25,700
                )
                
                273,700
                
                
                59,400Increase
                    in accounts payable
                
                
                (73,400
                )
                
                1,039,300
                
                
                47,400Increase
                    (decrease) in accrued liabilities
                
                
                (30,700
                )
                
                (541,700
                )
                
                (464,200
                )Decrease
                    in income taxes payable
                
                
                -
                
                
                -
                
                
                (127,400
                )Net
                    cash provided by (used in) operating activities
                
                
                1,292,400
                
                
                390,700
                
                
                (309,600
                )CASH
                    FLOWS FROM INVESTING ACTIVITIESPurchases
                    of property, equipment and leasehold improvements
                
                
                (730,400
                )
                
                (988,200
                )
                
                (600,900
                )Proceeds
                    from sale of fixed assets
                
                
                35,800
                
                
                41,400
                
                
                77,000Net
                    cash used in investing activities:
                
                
                (694,600
                )
                
                (946,800
                )
                
                (523,900
                )CASH
                    FLOWS FROM FINANCING ACTIVITIESNet
                    borrowing (repayment) on line of credit
                
                
                (167,600
                )
                
                (148,200
                )
                
                706,400Borrowings
                    on long term debt
                
                
                -
                
                
                4,180,900
                
                
                -Repayment
                    on long-term debt
                
                
                (236,200
                )
                
                (2,628,300
                )
                
                (285,300
                )Borrowings
                    on related party debt
                
                
                -
                
                
                -
                
                
                400,000Repayment
                    on related party debt
                
                
                (120,100
                )
                
                (110,600
                )
                
                (91,000
                )Proceeds
                    from notes payable
                
                
                -
                
                
                350,000
                
                
                -Repayment
                    of notes payable
                
                
                -
                
                
                (926,200
                )
                
                -Payments
                    on obligations under long term leases
                
                
                (132,700
                )
                
                (168,800
                )
                
                (142,900
                )Net
                    cash provided by (used in) financing activities:
                
                
                (656,600
                )
                
                548,800
                
                
                587,200EFFECT
                    OF EXCHANGE RATE CHANGES ON CASH
                
                
                52,600
                
                
                105,500
                
                
                (32,600
                )Net
                    Change in Cash
                
                
                (6,200
                )
                
                98,200
                
                
                (278,900
                )Cash
                    at beginning of period
                
                
                345,900
                
                
                247,700
                
                
                526,600Cash
                    at end of period
                
                $
                339,700
                
                $
                345,900
                
                $
                247,700SUPPLEMENTAL
                    CASH FLOW INFORMATIONCash
                    paid during the period for:Interest
                
                $
                866,700
                
                $
                896,500
                
                $
                836,400Income
                    taxes
                
                $
                7,000
                
                $
                2,500
                
                $
                -Non-cash
                    investing and financing activities:Common
                    stock issued forprior
                    year compensation
                
                $
                32,000
                
                $
                68,000
                
                $
                98,700Seller
                    financed equipment
                
                $
                112,200
                
                $
                44,600
                
                $
                216,400
  The
            accompanying notes are an integral part of these financial
            statements.
 F-6
 **MENDOCINO
            BREWING COMPANY, INC.**
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 **DECEMBER
            31, 2007**


**1.**  **Description
      of Operations and Summary of Significant Accounting
      Policies**





Description
      of Operations





Mendocino
      Brewing Company, Inc., ("the Company" or "MBC"), 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.





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 inter-company balances, profits and transactions have
      been eliminated.





Basis
      of Presentation and Organization





The
      financial statements for the fiscal years ended December 31, 2007, 2006 and
      2005, 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 large commercial banks in the US and the UK. Accounts receivable
      are generally unsecured and customers are subject to an initial credit review
      and ongoing monitoring.


F-7




**MENDOCINO
        BREWING COMPANY, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **DECEMBER
        31, 2007**


**1.**  **Description
      of Operations and Summary of Significant Accounting Policies
      (continued)**





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. 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.
      Management considers the following factors when determining the collectibility
      of specific customer accounts: customer credit-worthiness, past transaction
      history with the customer, current economic 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.





*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. A
      considerable amount of judgment is required in assessing the ultimate
      realization of accounts receivable including the current credit-worthiness
      of
      each customer. If the financial condition of the Company’s customers were to
      deteriorate, resulting in an impairment of their ability to make payments,
      additional allowances may be required. As of December 31, 2007, the Company
      maintained a reserve of $52,600 of potentially doubtful accounts receivable.
      Bad
      debt expenses totaled $393,200, $679,300, and $49,100 for the years ended
      December 31, 2007, 2006, and 2005 respectively.




Inventories





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





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 betterments 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.


F-8


**MENDOCINO
        BREWING COMPANY, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **DECEMBER
        31, 2007**


**1.**  **Description
      of Operations and Summary of Significant Accounting Policies
      (continued)**





Property
      and Equipment (continued)





*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
            
            7
                -
                20 yearsVehicles
            
            2
                -
                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.





Intangibles





Intangibles
      consist of, trade names, trademarks, and other intangibles. 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. Intangibles
      that are amortized are deferred financing costs. 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
      for December 31, 2007 and 2006.


F-9


**MENDOCINO
        BREWING COMPANY, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **DECEMBER
        31, 2007**


**1.**  **Description
      of Operations and Summary of Significant Accounting Policies
      (continued)**





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, 2007 and 2006 was $82,600 and $32,700,
      respectively. Amortization of deferred financing costs charged to operations
      was
      $49,900 for the year ended December 31, 2007 and $54,300 for the year ended
      December 31, 2006 and $2,700 for the year December 31, 2005. 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.




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 estimated undiscounted future cash flows
      associated with it. Should the sum of the expected future net cash flows are
      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 estimate of 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, 2007, 2006 and 2005,
      the
      Company recorded no impairment losses related to an intangible
      asset.




Concentration
      of Credit Risks





Financial
      instruments that potentially subject the Company to credit risk consist
      principally of trade receivables, cash deposits in excess of FDIC limits, and
      assets located in the United Kingdom. The Company's cash deposits are placed
      with major financial institutions in the US and UK.





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 $307,700 in cash deposits and $5,768,000 of accounts
      receivable due from customers located in the United Kingdom as of December
      31,
      2007.


F-10


**MENDOCINO
        BREWING COMPANY, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **DECEMBER
        31, 2007**


**1.**  **Description
      of Operations and Summary of Significant Accounting Policies
      (continued)**





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.





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. MBC adopted the Interpretation in the first quarter
      2007.








Revenue
      Recognition





The
      Company recognizes revenue from the brewing and distribution operations in
      accordance with SAB 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 considered performed upon completion
      of Company's contractual obligations.


F-11


**MENDOCINO
      BREWING COMPANY, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**DECEMBER
      31, 2007**


**1.**  **Description
      of Operations and Summary of Significant Accounting Policies
      (continued)**





Revenue
      Recognition (continued)





*"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 EITF - 01-09 “Accounting for Consideration Given by a Vendor
      to a Customer (including a Reseller of the Vendor’s Products)”. This EITF
      requires that certain cash 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.





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.





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.







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-12


**MENDOCINO
        BREWING COMPANY, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **DECEMBER
        31, 2007**
  **1.**  **Description
        of Operations and Summary of Significant Accounting Policies
        (continued)**





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 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 2007, 2006 and 2005.




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 $927,300, $879,100, and $929,100
      for
      the years ended December 31, 2007, 2006, and 2005, respectively.





Stock-Based
      Compensation





Prior
      to
      the adoption of Statement of Financial Accounting Standards No. 123 (revised
      2004), “Share-Based Payment,” (“SFAS 123(R)”), the Company accounted for
      stock-based awards to employees and directors using the intrinsic value method
      in accordance with Accounting Principles Board Opinion No. 25, “Accounting
      for Stock Issued to Employees” (“APB 25”). Under the intrinsic value method that
      was used to account for stock-based awards prior to January 1, 2006, which
      had
      been allowed under the original provisions of Statement 123, no stock
      compensation expense had been recognized in the Company’s statement of
      operations as the exercise price of the Company’s stock options granted to
      employees and directors equaled the fair market value of the underlying stock
      at
      the date of grant.





On
      January 1, 2006, the Company adopted SFAS 123(R) which requires the measurement
      and recognition of compensation expense for all share-based awards made to
      employees and directors, including employee stock options and employee stock
      purchases, based on estimated fair values. SFAS 123(R) supersedes the Company’s
      previous accounting for share-based awards under APB 25 for periods beginning
      in
      2006. In March 2005, the Securities and Exchange Commission issued Staff
      Accounting Bulletin No. 107 (“SAB 107”) relating to SFAS 123(R). The Company has
      applied the provisions of SAB 107 in its adoption of SFAS 123(R). The Company
      adopted SFAS 123(R) using the modified prospective transition method, which
      requires the application of the accounting standard as of the beginning of
      the
      Company’s current year. The Company’s financial statements as of and for the
      year ended December 31, 2007 reflect the impact of SFAS 123(R). In accordance
      with the modified prospective transition method, the Company’s financial
      statements for prior periods have not been restated to reflect, and do not
      include, the impact of SFAS 123(R).


F-13


**MENDOCINO
        BREWING COMPANY, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **DECEMBER
        31, 2007**





**1.**  **Description
      of Operations and Summary of Significant Accounting Policies
      (continued)**





Stock-Based
      Compensation (continued)





Stock
      compensation expense recognized during the period is based on the value of
      share-based awards that are expected to vest during the period. Stock
      compensation expense recognized in the Company’s statement of operations for
      2006 includes compensation expense related to share-based awards granted prior
      to January 1, 2006 that vested during the current period based on the grant
      date
      fair value estimated in accordance with the pro forma provisions of SFAS 123.
      Stock compensation expense during the current period also includes compensation
      expense for the share-based awards granted subsequent to January 1, 2006 based
      on the grant date fair value estimated in accordance with the provisions of
      SFAS
      123(R). As stock compensation expense recognized in the statement of operations
      is based on awards ultimately expected to vest, it has been reduced for
      estimated forfeitures. SFAS 123(R) requires forfeitures to be estimated at
      the
      time of grant and revised, if necessary, in subsequent periods if actual
      forfeitures differ from those estimates. In the Company’s pro forma information
      required under SFAS 123 for the periods prior to 2006, forfeitures were
      estimated and factored into the expected term of the options.





The
      Company’s determination of estimated fair value of share-based awards 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.





In
      2007,
      2006 and 2005, the Company did not grant any options or warrants, and all
      options outstanding were vested and no stock options were outstanding as of
      December 31, 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 2007, 2006 and 2005, 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:


F-14


**MENDOCINO
        BREWING COMPANY, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **DECEMBER
        31, 2007**


**1.**  **Description
      of Operations and Summary of Significant Accounting Policies
      (continued)**





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




Year
                  Ended December 31,2007
              
              2006
              
              2005Net
                  income (loss) - available to common shareholders
              
              $
              (384,000
              )
              $
              (1,430,600
              )
              $
              (1,314,700
              )Weighted
                  average common shares outstanding: Basic and diluted
              
              
              11,855,369
              
              
              11,512,479
              
              
              11,472,213Total
                  shares outstanding at end of period
              
              
              11,991,686
              
              
              11,628,174
              
              
              11,473,914Net
                  income (loss) per common share: Basic and diluted
              
              $
              (0.03
              )
              $
              (0.12
              )
              $
              (0.11
              )




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 31,2007
            
            2006
            
            2005Options
                to purchase common stock
            
            
            -
            
            
            240,385
            
            
            240,385Potential
                equivalent shares excluded
            
            
            -
            
            
            240,385
            
            
            240,385




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.





Cash
      at
      UBIUK was translated at exchange rates in effect at December 31, 2007, 2006
      and
      2005, 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 assets.


F-15


**MENDOCINO
        BREWING COMPANY, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **DECEMBER
        31, 2007**
  **1.**  **Description
        of Operations and Summary of Significant Accounting Policies
        (continued)**





Advertising





Advertising
      costs are expensed as incurred and were $1,369,900, $1,094,100 and $2,239,700
      for the years ended December 31, 2007, 2006, and 2005.





Fair
      Value of Financial Instruments





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.





Reportable
      Segments





The
      Company manages its operations through three 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 No. 159, “The Fair Value Option
      for Financial Assets and Financial Liabilities—Including an amendment of FASB
      Statement No. 115” (“SFAS 159”). SFAS 159 expands the use of fair value
      accounting but does not affect existing standards which require assets or
      liabilities to be carried at fair value. Under SFAS 159, a company may elect
      to
      use fair value to measure accounts and loans receivable, available-for-sale
      and
      held-to-maturity securities, equity method investments, accounts payable,
      guarantees and issued debt. Other eligible items include firm commitments for
      financial instruments
      that otherwise would not be recognized at inception and non-cash warranty
      obligations where a warrantor is permitted to pay a third party to provide
      the
      warranty goods or services. If the use of fair value is elected, any upfront
      costs and fees related to the item must be recognized in earnings and cannot
      be
      deferred, e.g., debt issue costs. The fair value election is irrevocable and
      generally made on an instrument-by-instrument basis, even if a company has
      similar instruments that it elects not to measure based on fair value. At the
      adoption date, unrealized gains and losses on existing items for which fair
      value has been elected are reported as a cumulative adjustment to beginning
      retained earnings. Subsequent to the adoption of SFAS 159, changes in fair
      value
      are recognized in earnings. SFAS 159 is effective for fiscal years beginning
      after November 15, 2007 and is required to be adopted by the Company in the
      first quarter of fiscal 2009. MBC is currently is determining whether fair
      value
      accounting is appropriate for any of its eligible items and cannot estimate
      the
      impact, if any, which SFAS 159 will have on its consolidated results of
      operations and financial condition.


F-16




**MENDOCINO
        BREWING COMPANY, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **DECEMBER
        31, 2007**


**1.**  **Description
      of Operations and Summary of Significant Accounting Policies
      (continued)**





Recent
      Accounting Pronouncements (continued)




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.  We are required to adopt the provisions of SFAS No. 141(R)
      beginning with our 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) 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. We are presently evaluating the impact of the adoption of SFAS 160
      and believe there will be no material impact on our 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.


F-17


**MENDOCINO
        BREWING COMPANY, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **DECEMBER
        31, 2007**




**2.**  **Liquidity
      and Management Plans**





At
      December 31, 2007, the Company had cash and cash equivalents of $339,700, a
      working capital deficit of $2,923,200 and an accumulated deficit of $12,045,800.
      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 $611,000 for the year 2007, and
      cash
      from operations of $1,292,400 for the year 2007.





Management
      has taken several actions to ensure that the Company will have sufficient cash
      for its working capital needs through December 31, 2008, including reductions
      in
      discretionary expenditures. In addition, Company’s majority shareholder issued a
      letter of support to provide financial assistance when required. The Company
      would also seek additional capital infusion to support operations. Management
      believes that these actions will enable the Company to meet its working capital
      needs through December 31, 2008.





**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:




2007
            
            
            2006Raw
                materials
            
            $
            601,000
            
            $
            481,900Work-in-progress
            
            
            177,200
            
            
            199,600Finished
                goods
            
            
            647,200
            
            
            630,000Merchandise
            
            
            35,800
            
            
            18,000$
            1,461,200
            
            $
            1,329,500





**4.**  **Property
      and Equipment**





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




2007
            
            
            2006Machinery
                and equipment
            
            $
            13,614,800
            
            $
            12,956,600Buildings
            
            
            7,202,300
            
            
            7,202,300Equipment
                under capital lease
            
            
            6,300
            
            
            6,300Land
            
            
            810,900
            
            
            810,900Leasehold
                improvements
            
            
            1,432,400
            
            
            1,432,400Vehicles
            
            
            373,000
            
            
            424,600Furniture
                and fixtures
            
            
            183,800
            
            
            176,900Equipment
                in progress
            
            
            106,300
            
            
            5,90023,729,800
            
            
            23,015,900Less:
                Accumulated depreciation and amortization
            
            
            (10,511,500
            )
            
            (9,569,900
            )$
            13,218,300
            
            $
            13,446,000





The
      Company has property and equipment located in the United Kingdom with a net
      book
      value of approximately $1,990,100 as of December 31, 2007. Amortization of
      assets under capital leases is included in depreciation and amortization
      expense.


F-18




**MENDOCINO
        BREWING COMPANY, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **DECEMBER
        31, 2007**


**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 real property of the 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 receivable at December 31, 2007, are account balances totaling
      $1,713,400 of uncollected receivables collateralized to the financial
      institution under this facility. The amount outstanding on this line of credit
      as of December 31, 2007 was approximately $1,313,500.





On
      April
      26, 2005, Royal Bank of Scotland Commercial Services Limited ("RBS") provided
      an
      invoice discounting facility to UBSN Limited for a maximum amount of £1,750,000
      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,
      2007 was approximately $2,487,900.





**6.**  **Long-Term
      Debt**





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




2007
            
            
            2006Note
                to a financial institution, payable in monthly installment of $18,200,
                plus interest at one month LIBOR plus 5.25% with a balloon payment
                of
                $544,600 in June 2011; secured by substantially all assets of the
                Releta
                Brewing Company and Mendocino Brewing Company excluding real property
                at
                Ukiah.
            
            $
            1,289,000
            
            $
            1,506,900Note
                to a financial institution, payable in monthly installment of $23,200
                including interest at prime plus 1.75% with a balloon payment of
                approximately $2,845,900 in June 2011. (net of discount of $25,900),
                secured by property in Ukiah, CA.
            
            
            2,938,000
            
            
            2,956,3004,227,000
            
            
            4,463,200Less
                current maturities
            
            
            254,400
            
            
            236,500$
            3,972,600
            
            $
            4,226,700





Payments
                due during Year Ending December 31,2008
            
            $
            254,4002009
            
            
            258,0002010
            
            
            261.4002011
            
            
            3,453,2002012
                and thereafter
            
            
            -$
            4,227,000


F-19





**MENDOCINO
      BREWING COMPANY, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**DECEMBER
      31, 2007**




**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, 2007, are as follows:





Year
                Ending December 31,2008
            
            $
            81,0002009
            
            
            37,6002010
            
            
            18,7002011
                and thereafter
            
            
            -137,300Less
                amounts representing interest
            
            
            (18,000
            )Present
                value of minimum lease payments
            
            
            119,300Less
                current maturities
            
            
            (69,500
            )Non-current
                leases payable
            
            $
            49,800




**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 2008. 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 amount due of $2,916,300 and $2,733,400 as of December
      31, 2007 and 2006 under the notes is classified as a long term liability. The
      notes include $1,000,900 and $818,000 of accrued interest at December 31, 2007
      and 2006.





Notes
      payable also includes an unsecured loan from Shepherd Neame Limited to UBSN
      Limited payable in annual installment of $119,100 with interest at 5% per year
      beginning June 2003 and maturing June 2012. The amounts outstanding, under
      this
      loan as of December 31, 2007 and 2006 were $595,300 and $705,100
      respectively.





Payments
                due during Year Ending December 31,2008
            
            $
            119,1002009
            
            
            119,1002010
            
            
            119,1002011
            
            
            3,035,3002012
            
            
            119,000Thereafter
            
            
            -$
            3,511,600


F-20


**MENDOCINO
        BREWING COMPANY, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **DECEMBER
        31, 2007**





**9.**  **Profit-Sharing
      Plan**





Subsequent
      to December 31, 2004, the Company terminated its profit sharing plan.
      Contributions to the Plan were made at the discretion of the Board of Directors,
      and any contributions vested over a six year period. The plan covered
      substantially all full-time employees that met certain minimum age and service
      requirements. No contributions were made to the Plan for the years ended
      December 31, 2007, 2006, and 2005.





**10.**  **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 and its legal counsel assess such contingent liabilities, and such
      assessment 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 legal
      counsel 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





Operating
      Leases





The
      Company leases many 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 personal property.
      The
      land lease includes a renewal option for two additional five-year periods,
      which
      the Company intends to exercise, and some leases are adjusted annually for
      changes in the consumer price index. The leases begin expiring in 2008. Rent
      expense charged to operations was $220,600, $212,800, and $206,600 for the
      years
      ended December 31, 2007, 2006, and 2005.


F-21
 **MENDOCINO
      BREWING COMPANY, INC.**


**NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **DECEMBER
        31, 2007**




**10.**
            **Commitments
                and Contingencies
                (continued)**





Operating
      Leases (continued)





Future
      minimum lease payments under these agreements are as follows:





Year
                Ending December 31,2008
            
            $
            267,7002009
            
            
            228,6002010
            
            
            211,9002011
            
            
            188,7002012
            
            
            153,600Thereafter
            
            
            50,000$
            1,100,500





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. 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 $55,500, $62,300, and $65,500 for the years ended December
      31, 2007, 2006, and 2005.





**11.**  **Related-Party
      Transactions**





The
      Company conducts business with United Breweries of America (UBA), which owns
      approximately 74% of the Company's common stock through common ownership.
      Additionally, UBSN Limited has significant transactions, amounting to 10.7%
      of
      sales in the year ending December 31, 2007, 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, 2007, 2006, and
      2005:




2007
            
            2006
            
            2005TRANSACTIONSSales
                to Shepherd Neame Ltd.
            
            $
            4,058,800
            
            $
            3,255,300
            
            $
            2,871,100Purchases
                from Shepherd Neame Ltd.
            
            
            16,235,100
            
            
            14,589,300
            
            
            14,108,500Expenses
                reimbursement to Shepherd Neame Ltd.
            
            
            1,251,200
            
            
            1,105,300
            
            
            1,143,300Interest
                expenses associated with UBA notes (see note 8)
            
            
            182,900
            
            
            181,200
            
            
            142,100Interest
                paid to Shepherd Neame Ltd. (see note 6)
            
            
            33,000
            
            
            35,900
            
            
            40,500ACCOUNT
                BALANCESAccounts
                payable and accrued liabilities to Shepherd Neame Ltd.
            
            
            5,776,700
            
            
            5,575,000
            
            
            4,080,400Accounts
                receivable and prepayments to Shepherd Neame Ltd.
            
            
            1,065,300
            
            
            781,900
            
            
            629,700Amounts
                payable to AUBI
            
            
            20,000
            
            
            20,000
            
            
            20,000


F-22





**MENDOCINO
      BREWING COMPANY, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**DECEMBER
      31, 2007**




**12.**  **Major
      Customers**





Sales
      to
      the top five customers totaled $9,420,000, $8,032,600, and $7,610,500 for the
      years ended December 31, 2007, 2006, and 2005, which represents 25%, 24%, and
      24% of sales for the years ended December 31, 2007, 2006, and 2005.





**13.**  **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 $103,000, $32,000, and $44,000 for the
      years ended December 31, 2007, 2006, and 2005. In July 2007, the Company issued
      113,512 shares of its unregistered common stock to independent outside directors
      totaling $32,000 in accrued compensation and 250,000 shares of its unregistered
      common stock totaling to $55,000 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.





**14.**  **Stock
      Option Plan**





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





The
      exercise price of incentive options was no less than the fair-market value
      of
      the Company's stock at the date the option was granted, while the exercise
      price
      of non-statutory options was no less than 85% of the fair-market value per
      share
      on the date of grant. Options granted to a person possessing more than 10%
      of
      the combined voting power of all classes of the Company's stock had an exercise
      price of no less than 110% of the fair-market value of the Company's stock
      at
      the date of grant. During 2002, 240,385 non-statutory stock options with a
      five-year term were issued to the independent members of the Board of Directors
      at the market price on the date of grant. All 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 in 2005, 2006, or
      2007. The exercise price of the options outstanding as of December 31, 2006
      was
      $0.52 per share. The 240,835 options expired in January 2007.


F-23


**MENDOCINO
        BREWING COMPANY, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **DECEMBER
        31, 2007**





**14.**  **Stock
      Option Plan (continued)**





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, 2004
            
            
            340,385
            
            $
            0.73Options
                granted
            
            
            -
            
            $
            -Options
                expired
            
            
            (100,000
            )
            $
            1.25Balance
                at December 31, 2005
            
            
            240,385
            
            $
            0.52
            
            
            1.1Options
                granted
            
            
            -
            
            $
            -
            
            
            -Options
                expired
            
            
            -
            
            $
            -
            
            
            -Balance
                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 and 2005 were exercisable.





*Current
      year ended December 31, 2007*





In
      conjunction with the adoption of SFAS 123(R), the Company elected to attribute
      the value of share-based compensation to expense using the straight-line method,
      which was previously used for its pro forma information required under SFAS
      123.
      Share-based compensation expense related to stock options was nil for the year
      ended December 31, 2007, 2006, and 2005.





Share-based
      compensation expense (related to common stock granted to members of the Board
      of
      Directors) reduced the Company’s results of operations for the years ended
      December 31, 2007 and 2006 are as follows:




2007
            
            
            2006
            
            
            2005Loss
                from continuing operations before income taxes
            
            $
            (103,000
            )
            $
            (32,000
            )
            
            (44,000
            )Loss
                from continuing operations after income taxes
            
            
            (103,000
            )
            
            (32,000
            )
            
            (44,000
            )Cash
                flows from operations
            
            
            103,000
            
            
            32,000
            
            
            44,000Cash
                flows from financing activities
            
            
            -
            
            
            -
            
            
            -Basic
                and Diluted EPS
            
            $
            (0.01
            )
            $
            (0.00
            )
            
            (0.00
            )




During
      the year ended December 31, 2007, the Company granted no performance based
      options to executives and senior management.


F-24


**MENDOCINO
        BREWING COMPANY, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **DECEMBER
        31, 2007**


**14.**  **Stock
      Option Plan (continued)**





The
      following is a summary of changes to outstanding stock options during the fiscal
      year ended December 31, 2007:




Number
                  of
                Share
            
            
            Weighted
                  Average
                  Exercise
            
            
            Weighted
                    Average
                  Remaining
                  Contractual
            
            
            Aggregate
                IntrinsicOptions
            
            
            Price
            
            
            Term
            
            
            ValueOutstanding
                at December 31, 2006
            
            
            240,385
            
            $
            0.52
            
            
            0.1
            
            $
            -Granted
            
            
            -
            
            
            -
            
            
            -
            
            
            -Exercised
            
            
            -
            
            
            -
            
            
            -
            
            
            -Forfeited
                or expired
            
            
            (240,385
            )
            $
            0.52
            
            
            -
            
            
            -Outstanding
                at December 31, 2007
            
            
            -
            
            
            -
            
            
            -
            
            
            -Vested
                and expected to vest at December 31, 2007
            
            
            -
            
            
            -
            
            
            -
            
            
            -Options
                exercisable at December 31, 2007
            
            
            -
            
            $
            -
            
            
            -
            
            $
            -





Prior
      to
      the adoption of Statement of Financial Accounting Standards No. 123(R)
“Accounting for Stock-Based Compensation-Revised “(SFAS 123(R)), at January 1,
      2006, the Company would not have recognized compensation expense for employee
      share-based awards, when the price of such awards equaled the market price
      of
      the underlying stock on the date of the grant. The Company previously had
      adopted the provisions of Statement of SFAS 123 as amended by SFAS 148,
“Accounting for Stock Based Compensation, Transition and Disclosure” (SFAS 148)
      through disclosure only.





The
      following table illustrates the effect on net loss and loss per share if the
      Company had applied the fair value recognition provisions of FASB Statement
      No.
      123, Accounting for Stock-Based Compensation, to stock-based employee
      compensation.




2005Net
                income (loss) - as reported
            
            $
            (1,314,700
            )Compensation
                expense - APB 25
            
            
            -Compensation
                expense - SFAS 123
            
            
            -Net
                income (loss) - pro forma
            
            $
            (1,314,700
            )Income
                (loss) per share - pro forma
            
            $
            (0.11
            )


F-25




**MENDOCINO
        BREWING COMPANY, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **DECEMBER
        31, 2007**





Total
                options under the Plan at December 31, 2005, comprised the following:Option
                      Exercise
                      Price
            
            Number
                      Outstandingas
                        of
                  December
                    31,
                  2005
            
            WeightedAverageRemaining
                  Contractual
                    life
                  (Years)
            
            Number
                      Exercisableas
                        of
                  December
                    31,
                  2005$0.52
            
            
            240,385
            
            
            1.1
            
            
            240,385




Total
                options under the Plan at December 31, 2006, comprised the following:Option
                      Exercise
                      Price
            
            Number
                      Outstandingas
                        of
                  December
                    31,
                  2006
            
            Weighted
                      AverageRemaining
                  Contractual
                    life
                  (Years)
            
            Number
                        Exercisableas
                          of
                    December
                      31,
                    2006$0.52
            
            
            240,385
            
            
            0.1
            
            
            240,385




**15.**  **Income
        Taxes**





The
      accumulated losses during the past in the U.S. operations has resulted in the
      Company determining that the deferred tax assets associated with net operating
      loss carryforwards and investment tax credits may expire prior to utilization.
      The Company recorded a valuation allowance of $4,545,600 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.




2007
            
            2006
            
            2005Provision
                for income taxesUS
                Federal
            
            $
            -
            
            $
            -
            
            $
            -US
                States
            
            
            7,000
            
            
            2,500
            
            
            1,800United
                Kingdom
            
            
            -
            
            
            -
            
            
            (127,400
            )Current
                provision
            
            
            7,000
            
            
            2,500
            
            
            (125,600
            )Change
                in deferred income taxes
            
            
            -
            
            
            -
            
            
            -Total
                provision for income taxes
            
            $
            7,000
            
            $
            2,500
            
            $
            (125,600
            )


F-26


**MENDOCINO
          BREWING COMPANY, INC.**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **DECEMBER
          31, 2007**


**15.**  **Income
      Taxes (continued)**





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:




2007
            
            
            2006
            
            
            2005US
                Federal income tax expense (benefit) at 34%
            
            $
            42,700
            
            $
            24,800
            
            $
            (110,700
            )US
                State income tax expense (benefit)
            
            
            11,100
            
            
            6,500
            
            
            (28,800
            )United
                Kingdom income tax expense (benefit)
            
            
            (150,800
            )
            
            (450,300
            )
            
            (296,800
            )Other
            
            
            (341,100
            )
            
            38,200
            
            
            (31,500
            )Change
                in valuation allowance
            
            
            445,100
            
            
            383,300
            
            
            342,200Total
            
            $
            7,000
            
            $
            2,500
            
            $
            (125,600
            )




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




2007
            
            
            2006
            
            
            2005Benefit
                of net operating loss carryforwards
            
            $
            5,116,500
            
            $
            4,956,200
            
            $
            4,295,700Undistributed
                earnings of UBIUK
            
            
            (454,800
            )
            
            (448,900
            )
            
            (393,900
            )Investment
                in UBIUK
            
            
            349,000
            
            
            349,900
            
            
            358,100Depreciation
                and amortization
            
            
            (523,000
            )
            
            (871,900
            )
            
            (670,000
            )Other
            
            
            57,900
            
            
            115,200
            
            
            127,300Subtotal
            
            
            4,545,600
            
            
            4,100,500
            
            
            3,717,200Less
                valuation allowance
            
            
            (4,545,600
            )
            
            (4,100,500
            )
            
            (3,717,200
            )Total
            
            $
            -
            
            $
            -
            
            $
            -Change
                in valuation allowance
            
            $
            445,100
            
            $
            383,300
            
            $
            342,200




The
      Company has net operating losses available for carry forward. The US Federal
      net
      operating losses total approximately $12,376,000 and expire beginning 2013
      and
      ending in 2027. The US state operating losses total approximately $1,563,000
      and
      expire beginning 2012 and ending 2027. The Company’s United Kingdom operating
      losses total approximately $2,568,000 and they do not expire.





Tax
      years
      that remain open for examination by the Internal Revenue Service include 2004,
      2005, 2006, and 2007 (expected to be filed in 2008), and by the State of
      California include 2003 through 2007. In addition, tax years from 1997 to 2003
      may 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-27




**MENDOCINO
        BREWING COMPANY, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **DECEMBER
        31, 2007**





**16.**  **Segment
      Information**





The
      Company's business presently consists of three segments. The first is brewing
      for wholesale to distributors and other retailers. This segment accounted for
      39%, 38%, and 36% of the Company's gross sales during 2007, 2006 and 2005.
      The
      second consists of distributing alcoholic beverages to retail establishments
      and
      restaurants in the United Kingdom and Europe. This segment accounted for
      approximately 61%, 61%, and 63% of the Company's gross sales during 2007, 2006,
      and 2005. The third segment consists of beer for sale along with merchandise
      at
      the Company's brewpub and retail merchandise store located at the Hopland
      Brewery and at Saratoga Springs brewery. This segment accounted for less than
      one percent of the Company's gross sales during 2007, 2006 and 2005. A summary
      of each segment is as follows:




Year
                Ended December 31,2007Brewing
                Operations
            
            
            Tavern
                & Tasting
              Room
            
            
            Distributor
              Operations
            
            
            Corporate
                and Other
            
            
            TotalSales
            
            $
            14,593,100
            
            $
            307,400
            
            $
            22,874,000
            
            $
            -
            
            $
            37,774,500Operating
                income (Loss)
            
            
            726,600
            
            
            77,700
            
            
            (193,300
            )
            
            -
            
            
            611,000Identifiable
                assets
            
            
            12,619,500
            
            
            69,900
            
            
            8,458,800
            
            
            2,229,400
            
            
            23,377,600Depreciation
                and amortization
            
            
            510,900
            
            
            4,300
            
            
            582,600
            
            
            
            
            
            1,097,800Capital
                expenditures
            
            
            166,700
            
            
            -
            
            
            665,000
            
            
            -
            
            
            831,700




Year
                Ended December 31,2006Brewing
                Operations
            
            
            Tavern
                & Tasting
              Room
            
            
            Distributor
              Operations
            
            
            Corporate
                and Other
            
            
            TotalSales
            
            $
            12,601,600
            
            $
            221,300
            
            $
            20,126,000
            
            $
            -
            
            $
            32,948,900Operating
                income (Loss)
            
            
            753,400
            
            
            45,700
            
            
            (1,244,400
            )
            
            -
            
            
            (445,300
            )Identifiable
                assets
            
            
            12,784,200
            
            
            61,600
            
            
            8,768,800
            
            
            2,352,700
            
            
            23,967,300Depreciation
                and amortization
            
            
            505,600
            
            
            4,600
            
            
            480,300
            
            
            27,300
            
            
            1,017,800Capital
                expenditures
            
            
            327,200
            
            
            -
            
            
            705,600
            
            
            -
            
            
            1,032,800




Year
                Ended December 31,2005Brewing
                Operations
            
            
            Tavern
                & Tasting
              Room
            
            
            Distributor
              Operations
            
            
            Corporate
                and Other
            
            
            TotalSales
            
            $
            11,557,900
            
            $
            203,100
            
            $
            20,166,300
            
            $
            -
            
            $
            31,927,300Operating
                income (Loss)
            
            
            168,200
            
            
            32,300
            
            
            (716,900
            )
            
            -
            
            
            (516,400
            )Identifiable
                assets
            
            
            12,670,400
            
            
            63,400
            
            
            7,864,800
            
            
            1,868,800
            
            
            22,557,400Depreciation
                and amortization
            
            
            465,200
            
            
            4,900
            
            
            401,600
            
            
            32,000
            
            
            903,700Capital
                expenditures
            
            
            34,200
            
            
            -
            
            
            753,600
            
            
            -
            
            
            787,800


F-28




**MENDOCINO
          BREWING COMPANY, INC.**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **DECEMBER
          31, 2007**





**17.**  **Unrestricted
      Net Assets**





The
      Company's wholly-owned subsidiary, UBI, has retained losses of approximately
      $625,100 as of December 31, 2007. 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 approximately $1,984,300.
      Condensed financial information of the parent company, Mendocino Brewing
      Company, Inc., is as follows:




Balance
              Sheets
            
            2007
            
            2006AssetsCash
            
            $
            32,000
            
            $
            55,700Accounts
                receivable
            
            
            1,643,400
            
            
            1,727,500Inventories
            
            
            1,461,200
            
            
            1,329,500Other
                current assets
            
            
            192,800
            
            
            209,100Total
                current assets
            
            
            3,329,400
            
            
            3,321,800Investment
                in subsidiary
            
            
            1,225,000
            
            
            1,225,000Property
                and equipment
            
            
            11,228,200
            
            
            11,526,800Other
                assets
            
            
            361,200
            
            
            349,900Total
                assets
            
            $
            16,143,800
            
            $
            16,423,500LiabilitiesLine
                of credit and note payable
            
            $
            1,313,500
            
            $
            1,363,600Accounts
                payable
            
            
            1,270,900
            
            
            1,333,000Accrued
                liabilities
            
            
            510,500
            
            
            494,900Current
                maturities of debt and leases
            
            
            261,500
            
            
            246,200Total
                current liabilities
            
            
            3,356,400
            
            
            3,437,700Intercompany
                payable
            
            
            753,900
            
            
            1,079,800Long-term
                debt and capital leases
            
            
            3,972,600
            
            
            4,233,700Notes
                payable to related party
            
            
            2,916,300
            
            
            2,733,400Total
                liabilities
            
            
            10,999,200
            
            
            11,484,600Stockholders'
                equityCommon
                stock
            
            
            14,902,300
            
            
            14,815,300Preferred
                stock
            
            
            227,600
            
            
            227,600Accumulated
                deficit
            
            
            (9,985,300
            )
            
            (10,104,000
            )Total
                stockholders' equity
            
            
            5,144,600
            
            
            4,938,900Total
                Liabilities and stockholders' equity
            
            $
            16,143,800
            
            $
            16,423,500


F-29




**MENDOCINO
      BREWING COMPANY, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**DECEMBER
      31, 2007**




**17.**  **Unrestricted
      Net Assets (continued)**




Statement
                of Operations
            
            
            2007
            
            
            2006
            
            
            2005Net
                sales
            
            $
            13,943,700
            
            $
            12,149,400
            
            $
            11,125,500Cost
                of goods sold
            
            
            10,209,400
            
            
            8,576,200
            
            
            7,737,000Selling,
                marketing, and retail expenses
            
            
            1,288,600
            
            
            1,215,100
            
            
            1,469,800General
                and administrative expenses
            
            
            1,743,100
            
            
            1,661,200
            
            
            1,810,600Income
                from operations
            
            
            702,900
            
            
            696,900
            
            
            108,100Other
                income and (expense)Interest
                expenses
            
            
            (760,600
            )
            
            (832,000
            )
            
            (760,800
            )Other
                income
            
            
            179,300
            
            
            208,100
            
            
            329,100Provision
                for taxes
            
            
            4,400
            
            
            (2,500
            )
            
            (1,800
            )(576,900
            )
            
            (626,400
            )
            
            (433,500
            )Net
                income (loss)
            
            $
            125,700
            
            $
            70,500
            
            $
            (325,400
            )




Statements
                of Cash Flows
            
            
            2007
            
            
            2006
            
            
            2005Cash
                flows from operating activities
            
            $
            760,400
            
            $
            (65,500
            )
            $
            (426,300
            )Cash
                flow from investing activitiesPurchase
                of property and equipment
            
            
            (166,700
            )
            
            (327,200
            )
            
            (34,200
            )Proceeds
                from sale of assets
            
            
            4,400
            
            
            11,000
            
            
            -Net
                cash from investment activities
            
            
            (162,300
            )
            
            (316,200
            )
            
            (34,200
            )Cash
                flow from financing activitiesNet
                borrowing (repayment) on line of credit
            
            
            (50,100
            )
            
            (241,200
            )
            
            52,100Borrowing
                on long-term debt
            
            
            4,180,900
            
            
            4,180,900
            
            
            -Repayment
                of long-term debt
            
            
            (236,200
            )
            
            (2,628,300
            )
            
            (285,300
            )Proceeds
                from note payable
            
            
            -
            
            
            350,000Repayment
                of notes payable
            
            
            -
            
            
            (926,200
            )
            
            -Payment
                on obligation under capital lease
            
            
            (9,600
            )
            
            (69,500
            )
            
            (122,900
            )Net
                change in inter company payable
            
            
            (325,900
            )
            
            (239,800
            )
            
            142,100Proceeds
                from related party
            
            
            -
            
            
            -
            
            
            400,000Net
                cash flow from financing activities
            
            
            (621,800
            )
            
            425,900
            
            
            186,000Cash,
                beginning of year
            
            
            55,700
            
            
            11,500
            
            
            286,000Cash,
                end of year
            
            $
            32,000
            
            $
            55,700
            
            $
            11,500Cash
                dividend received from subsidiary
            
            $
            -
            
            $
            -
            
            $
            149,900


F-30