SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                   FORM 10-KSB

(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
    1934

                   For the fiscal year ended December 31, 1999

[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
    OF 1934

    For the transition period from _________________ to ___________________
                        Commission file number: 1-13636

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

          California                                     68-0318293
(State or other jurisdiction of             (I.R.S. Employee Identification No.)
incorporation or organization)

  13351 South Highway 101, Hopland, CA                     95449
(Address of principal executive offices)                 (Zip code)

                    Issuer's telephone number: (707) 744-1015

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

                               Title of each class
                    Name of each exchange on which registered
                         Common Stock, without par value
                              The Pacific Exchange

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

                                 Not applicable
                                (Title of class)

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

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

State issuer's revenues for its most recent fiscal year:  $9,240,000

The aggregate market value of the voting stock held by  non-affiliates  computed
by reference to the last  reported  sale price of such stock as of March 9, 2000
was: $1,727,877

The number of shares the issuer's Common Stock  outstanding as of March 15, 2000
is: 5,530,177

                       DOCUMENT INCORPORATED BY REFERENCE

Portions of the Proxy  Statement  for the  Registrant's  1999 Annual  Meeting of
Shareholders  to be filed not later  than  April 30,  1999 are  incorporated  by
reference in Part III of this Form 10-K.

Transitional Small Business Disclosure Format     Yes [ ] No [X]
<PAGE>
                                     PART I

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

Item 1.  Description of Business.

Overview

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

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

         The Company's subsidiary, Releta Brewing Company, LLC. ("Releta") d/b/a
Ten Springs Brewery, located in Saratoga Springs, New York, commenced production
in February 1998 with an initial  capacity of 60,000 bbl. per year expandable to
150,000 bbl. per year.  In July 1998,  the Company  purchased  all brand related
assets of Carmel  Brewing  Company,  Inc.,  a  California  corporation  ("Carmel
Brewing"),  in exchange for  unregistered  shares of the Company's  Common Stock
having an aggregate  value of $100,000 based on a per share price of $3.00.  The
transaction  also  involved the  acquisition  by the Company of certain point of
sales and brewing ingredient  inventory from Carmel Brewing and the lease by the
Company from Carmel Brewing of certain  bottling line equipment and certain kegs
on a short-term basis. The Carmel brands were launched from the Ukiah facility.

         During 1998, the Company's  largest  shareholder,  United  Breweries of
America Inc. ("UBA"), agreed to provide the Company with a credit facility of up
to  $2,000,000.  Subsequently,  the Company drew  approximately  $994,000 on the
credit  facility.  In mid 1999, the Company  induced UBA to convert the $994,000
drawn on the credit  facility,  together with  approximately  $61,000 of accrued
interest,  into  938,171  shares of common  stock of the  Company.  After  being
offered an  inducement  by the Company,  UBA agreed to convert all amounts drawn
through August 30, 1999 into common stock of the Company.

         Further,  in early 1999,  the credit  facility was  terminated.  In mid
1999,  UBA agreed to provide  the  Company  with a new credit  facility of up to
$800,000 to fund the  operations of the Company.  Subsequently,  the Company has
requested that UBA increase the amount of the credit facility to $1,200,000.  As
of December 31, 1999, the Company has drawn $565,127 on the credit facility.

         On March 29, 2000 the Company  announced  that it intends to enter into
two concurrent related party  transactions  with affiliates of UBA. In the first
transaction,  the Company intends to acquire UBSN Ltd. UK, which is the European
distributor of the UB Group's flagship brand,  Kingfisher  Premium Lager. In the
second  transaction,  the Company intends to acquire the distribution  rights to
Kingfisher  Premium  Lager  Beer in the  United  States  from  United  Breweries
International, UK Ltd.

Company Background

         Mendocino  Brewing  Company  was  originally  formed in March 1983 as a
California  limited  partnership  (the  "Partnership").  On January 1, 1994, the
business was  incorporated  by  transferring  all of the  Partnership's  assets,
including its name, to a newly formed California corporation in exchange for all

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of  the  Common  and  Preferred  Stock  of  the  corporation.   The  Partnership
distributed  these shares to its partners on January 3, 1994. As used hereafter,
references  to the  "Company"  and  "Mendocino  Brewing"  include  the  business
operations of the Partnership before its incorporation.

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

Industry Overview

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

Segment                             Representative Brands
-------                             ---------------------

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

         The  Company  competes  in  the  domestic  craft  beer  segment,  which
comprises  approximately  2.5%  of  total  U.S.  beer  sales.  Craft  beers  are
characterized by their  full-flavor and are usually  produced along  traditional
European  brewing styles.  While U.S. beer sales were basically flat for several
years,  domestic craft beer sales  increased at a rate of between 5% and 10% per
year since 1996. The rate at which the domestic craft beer segment  continues to
grow will have a material affect on the Company's business, financial condition,
and results of operations.  Actual industry segment  performance depends on many
factors that are outside the control of the Company.

Competition

         The craft beer category consists of:

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

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

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

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<PAGE>
Large brewer             a brand  brewed  by a  national  brewer  which may only
craft-style brews        imitate the style  of a  craft beer.  These craft-style
                         brews are often sold under  the label of a brewery that
                         does  not  exist or  the  label  of a  brewpub  with no
                         bottling  capacity.   The  term  "phantom  brewery"  is
                         sometimes used to describe such brands.

Brewpub brews            "hand-crafted"  brews produced for sale and consumption
                         at the  brewery,  which is  normally  connected  with a
                         restaurant/saloon.  Brewpub brews are not normally sold
                         for off-site consumption in significant quantities.

         Mendocino  Brewing  competes  against all of the above  brewers to some
degree and also against other segments of the U.S. beer market.  Competition for
retail  shelf-space also increased in 1999.  Increased  competition could hinder
distribution of the Company's products and have a material adverse effect on the
Company's business, financial condition, and results of operations.

Products

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

     *    RED TAIL ALE, a full  flavored  amber ale,  is the  flagship  brand of
          Mendocino  Brewing.  It is available  year-round in 12 oz.  six-packs,
          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,
          half-barrel kegs, and 5 gallon kegs.

     *    BLACK  HAWK STOUT is the  fullest in flavor and body of the  Company's
          brews.  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 high gravity deep amber summer ale. It
          is available year round in 12 oz.  six-packs,  half-barrel kegs, and 5
          gallon kegs.

     *    PEREGRINE  GOLDEN  ALE  is  brewed  year-round  in 12  oz.  six-packs,
          half-barrel kegs, and 5 gallon kegs.

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

     *    FROLIC  SHIPWRECK ALE 1850, a  Scottish-style  ale brewed around July,
          was  introduced  in 1994 as a  fund-raiser  for the  Mendocino  County
          Museum to commemorate  the wreck of the clipper ship Frolic,  with its
          cargo of Scottish ale, on the Mendocino coast in 1850. Salvage efforts
          were abandoned when workers,  upon sighting the previously  unreported
          big trees of Mendocino County,  launched the timber industry which has
          characterized  the area ever  since.  It is  available  at the Hopland
          Brewery on draft.

     *    CARMEL  WHEAT BEER is a  light-bodied  and  delicately  flavored  beer
          characterized by its cloudy Hefeweizen  appearance,  refreshing floral
          aromas and subtle wheat flavor.  It is available  year-round in 12 oz.
          six-packs, half-barrel kegs, and 5 gallon kegs.

                                       4
<PAGE>
     *    CARMEL PALE ALE is a full,  smooth  flavored  ale that imparts a malty
          and spicy  character to the palate.  It is available  year-round in 12
          oz. six-packs, half-barrel kegs, and 5 gallon kegs.

     *    FAT BEAR STOUT is a full-bodied  brew  characterized  by smooth roasty
          flavors and malty aromas. It is only available in the East Coast in 12
          oz. six-packs and half-barrel kegs.

     *    WHITEFACE  PALE ALE is a robust and spicy  American  style ale crafted
          with the finest malts and perfect blend of hops. It is only  available
          in the East Coast in 12 oz. six-packs and half-barrel kegs.

     *    SARATOGA  CLASSIC  PILSNER  is a  crisp,  full-flavored,  German-style
          pilsner with a clean hoppy  finish.  It is only  available in the East
          Coast in 12 oz. six-packs and half-barrel kegs.

     *    OLDE  SARATOGA  ROOT  BEER is an  exceptionally  rich  creamy  premium
          gourmet root beer crafted with all natural ingredients and cane sugar.
          It is only available in the East Coast in quarter-barrel kegs.

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

         Mendocino  Brewing's  distinctive brews have been very well received in
the market and within the industry.  In 1999,  products of the Company continued
to win praise  for their  quality.  Red Tail Ale and Eye of the Hawk  Select Ale
were  adjudged  as  exceptional  and Black  Hawk  Stout and Frolic Ale as highly
recommended in their respective  categories by the Beverage Testing Institute of
Chicago,  Illinois,  which  conducts  comprehensive  testing  and tasting of all
leading brands in different categories.

         In October 1997,  Mendocino Brewing Company was awarded three medals at
the World Beer  Championships,  one of the largest and most  comprehensive  beer
competitions in the world. The Company received a Gold Medal for Red Tail Ale, a
Silver  Medal for Eye of the Hawk Select Ale,  and a Bronze Medal for Black Hawk
Stout.  Blue  Heron Pale Ale was  awarded a Gold  Medal with a Special  Award of
Excellence from the  Underground  Wine Journal in February 1997 in a competition
among 183 ales from across the United  States and won a bronze medal at the 1991
Great American Beer Festival. Eye of the Hawk Select Ale won a gold medal at the
1991 Great American Beer Festival after winning a silver in 1990, and also won a
bronze in 1992.  In 1998 the  Company  received  four more  medals at world beer
championships.

         The Saratoga Springs facility  presently performs some contract brewing
services for other brands.

The Hopland Brewery Brewpub and Merchandise Store

         To date,  Mendocino  Brewing's  major  marketing  tools  have  been the
Hopland Brewery brewpub and merchandise store, its Brewsletter  newsletter,  and
its distinctive labels. Located on a major tourist

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route in  Hopland,  California,  100 miles north of San  Francisco,  the Hopland
Brewery  opened in 1983 as the first new brewpub in California and the second in
the United States since the repeal of Prohibition.

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

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

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

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

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

Regional Distribution

         The Company's  products are  distributed  widely in  California  and in
limited quantities at selected accounts in Arizona, Colorado, Delaware, District
of Columbia,  Florida,  Georgia, Idaho, Kansas, Illinois,  Louisiana,  Maryland,
Massachusetts, Minnesota, Missouri, Nevada, Nebraska, New Hampshire, New Jersey,
New Mexico, New York, North Carolina, Oregon, Pennsylvania,  Rhode Island, South
Carolina,   Tennessee,  Texas,  Vermont,  Washington,   Wisconsin,  Wyoming  and
Virginia. The Company plans to add Michigan,  Connecticut, and Maine in the near
future.  Northern  California  is the  Company's  primary  market  and  Southern
California currently is the second largest market.

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<PAGE>
Social Responsibility

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

Product Distribution

         Mendocino Brewing's beers are sold through distributors to consumers in
bottles at  supermarkets,  warehouse  stores,  liquor stores,  taverns and bars,
restaurants, and convenience stores. All brands are also available in draft. The
Company's  products are delivered to retail outlets by independent  distributors
whose  principal  business is the  distribution  of beer and in some cases other
alcoholic beverages, and who typically also distribute one or more national beer
brands. Mendocino Brewing, together with its distributors,  markets its products
to retail outlets and relies on its distributors to provide regular  deliveries,
to maintain retail shelf space, and to oversee timely rotation of inventory. The
Company  also offers its products  directly to consumers at the Hopland  Brewery
brewpub  and  merchandise  store.  Beer sales  (wholesale  and retail  combined)
constituted  95.6%  of  the  Company's  total  sales  in  1999,  with  food  and
merchandise  retail and catalogue sales  constituting the balance.  Sales to the
top five  customers  totaled  $4,191,700  and  $3,029,000  for the  years  ended
December 31, 1999 and 1998, respectively representing 45% and 44% of sales.

Suppliers

         The Company's major  suppliers are Great Western  Malting Co.,  Yakima,
Washington,  and Briess Malting,  Milwaukee,  Wisconsin  (malt);  Lupofresh Inc.
Wapato, Washington (hops); Ball Foster Glass, Muncie, Indiana (bottles); Gaylord
Container Corporation,  Antioch, California (cartons); Sierra Pacific Packaging,
Oroville,  California  (carriers);  and Inland Printing Company Inc.,  Lacrosse,
Wisconsin (labels).

Employees

         As of December  31,  1999,  the Company  employed  63  full-time  and 8
part-time  individuals  including 11 in  management  and  administration,  32 in
brewing and production operations, 16 in retail and brewpub operations and 12 in
sales and marketing positions.  Management believes that the Company's relations
with its  employees  are  excellent.  The Company  does not have any union labor
contracts with any of its employees.

Trademarks

         The  Company  has  federal  trademark  registrations  of the  MENDOCINO
BREWING COMPANY word mark (Reg. No. 1,785,745), RED TAIL ALE word mark (Reg. No.
2,032,382), RED TAIL DESIGN (Reg. No. 2,011,817), BLUE HERON word mark (Reg. No.
1,820,076), BLUE HERON PALE ALE DESIGN (Reg. No. 2,011,816),  PEREGRINE PALE ALE
word mark (Reg. No.  1,667,796),  EYE OF THE HAWK SELECT ALE word mark (Reg. No.
1,673,594),  EYE OF THE HAWK SELECT ALE DESIGN (Reg. No. 2,011,818),  EYE OF THE
HAWK SPECIAL EDITION ANNIVERSARY ALE AND DESIGN (Reg. No. 2,011,815), BLACK HAWK
STOUT  word mark (Reg.  No.  1,791,807),  YULETIDE  PORTER  word mark (Reg.  No.
1,666,891), and BREWSLETTER word mark (Reg. No. 1,768,639).

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         Releta has federal  trademark  registrations  of the FAT BEAR word mark
(Reg. No. 2,267,709),  TEN SPRINGS word mark (Reg. No. 2,243,852), and WHITEFACE
word mark  (Reg.  No.  2,322,226),  Releta  has also  applied  for intent to use
registrations of the trademarks NORTH COUNTRY ALES and SARATOGA CLASSIC PILSNER.

         The Company has also  acquired the  trademark,  whether  registered  or
unregistered  of CARMEL  BREWING  COMPANY  and any other  variation  of the name
Carmel Brewing Company used by Carmel Brewing.

         The  registration  of the word  mark  BLUE  HERON is a  concurrent  use
registration  which gives the Company the  exclusive  right to use the word mark
BLUE HERON  throughout  the United States with the  exception of Oregon,  Idaho,
Washington, and Montana. BridgePort Brewing Company, the other concurrent owner,
has the exclusive right to use the word mark BLUE HERON in those states.

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

         The Company  also  acquired  use of the word mark RAZOR EDGE  through a
License  Agreement with Beverage Mates,  Ltd. This Agreement,  together with the
amendment  completed  in 1999,  gives the Company an  exclusive  license for ten
years to use the mark in connection with the manufacture,  production,  labeling
and packaging of Beverage Mates' products  throughout the United States with the
exception  of North  Carolina,  and South  Carolina,  until  certain  agreements
pertaining to these states permit the Company to sell in such states.

Government Regulation

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

         Taxation  of  alcohol  has  increased  significantly  in recent  years.
Currently, the Federal tax rate is $7.00 per bbl. for up to 60,000 bbl. per year
and $18.00 per bbl.  for over 60,000 bbl. The  California  tax rate is $6.20 per
bbl. The State of New York presently  imposes an excise tax of $4.19 per bbl. on
brewers for over 100,000 bbls. per year.

         The Hopland  Brewery's  brewpub is  regulated by the  Mendocino  County
Health Department, which requires an annual permit and conducts spot inspections
to monitor compliance with applicable health codes.

         The  Company's   production   operations  must  also  comply  with  the
Occupational  Safety and  Health  Administration's  workplace  safety and worker
health  regulations and applicable  state laws thereunder.  Management  believes
that the Company  presently is in compliance  with the  aforementioned  laws and
regulations and has implemented its own voluntary safety program.

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Environmental Regulation

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

         The Company's waste products consist of water, spent grains,  hops, and
glass and  cardboard.  The Company has  instituted  a recycling  program for its
office paper, newspapers, magazines, glass, and cardboard at minimal cost to the
Company.  The Company pays  approximately $550 per month in sewage fees relating
to waste water from its Hopland  facility.  The Company  sells or gives away its
spent grain to local cattle ranchers.  The Company has not purchased any special
equipment  and does not  incur  any  identifiable  fees in  connection  with its
environmental compliance at its Hopland site. The Company earned the distinction
of being a 1998 Waste Reduction  Awards Program (WRAP) winner which is sponsored
by  the  California   Environmental   Protection  Agency  and  Integrated  Waste
Management Board.

         The Company has built its own wastewater  treatment plant for the Ukiah
facility.  As a  consequence,  the  Company  will not be required to incur sewer
hook-up fees at that location. If the Company's discharge exceeds 55,000 gallons
per day, which Management does not expect to occur until annual capacity exceeds
100,000 bbl., the Company will be required to pay additional fees. The estimated
cost of the wastewater  treatment facility was $900,000,  and the estimated cost
of  operating  the plant is between  $6,000 and $10,000 per month.  The cost may
increase with increased production.  The Company is exploring various methods of
recycling  treated  wastewater and could realize some revenue from doing so. The
Company has contracted to have the liquid sediment that remains from the treated
wastewater  trucked to a local  composting  facility for essentially the cost of
transportation.  A Mendocino  County Air Quality Control Permit will be required
to operate the natural gas fired boiler in Ukiah.

         The Saratoga Springs facility is subject to various state,  federal and
local  environmental  laws which  regulate use,  storage and disposal of various
materials. The Company's solid waste products consist of spent grain, cardboard,
glass and liquid waste.  As for solid waste,  the Company has instituted at this
facility a recycling program for cardboard, office papers and glass at a minimal
cost to the Company.  The Company sells spent grain to local cattle dairy farms.
The Company  pays  approximately  $870 per month  towards  sewer fees for liquid
waste.  The sewer  discharge  from the  brewery is  monitored  and is within the
standards  set by Saratoga  County  Sewer  Department.  The Company  follows and
operates  under rules and  regulations of New York  Department of  Environmental
Conservation for Air Pollution Control.

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

Research and Development

         Research and development activity in 1999 was minimal.

Qualified Small Business Issuer

         Federal and  California  tax laws  provide a 50%  exclusion of any gain
from the sale of "qualified small business stock." For shares to qualify for the
exclusion, several tests must be met. For instance, the shares must be purchased
directly from the Company,  not in any later trading market, and the shares must
be held for at least five years.

         A  "qualified  small  business"  must not have more than $50 million in
assets,  at  least  80% of  which  are used in a  qualified  trade  or  business
throughout the holding period.  A "qualified trade or

                                       9
<PAGE>
business" does not include  "operating a hotel,  motel,  restaurant,  or similar
business."  It is  uncertain  whether  the  Company's  operation  of the Hopland
Brewery brewpub currently  prevents it from meeting the definition of "qualified
small business",  as the brewing equipment in Hopland was used in both wholesale
and retail  operations  and no  applicable  regulations  have been  published to
assist in making such determination.  Management believes, after consulting with
its  accountants,  that  completing  the new brewery in Ukiah and  acquiring the
brewery in Saratoga  Springs  has reduced the assets of the Company  used in the
operation  of the brewpub to well below 20%, but  Management  does not intend to
request any opinions or rulings on this issue at the present time.

         The  Company  intends  to submit  reports  if and to the extent any are
required  under  federal  law to  make  the 50%  exclusion  from  capital  gains
available, and submitted such a report in California for 1995, the first year in
which  California  required  such a report.  Given  the  absence  of  applicable
regulations, there is no assurance that California taxing authorities will agree
with the  information  contained  in the report.  There are  limitations  on the
persons who may use any exclusion.  Prospective  investors  should consult their
own tax advisors concerning the possible applicability of these exclusions.

Item 2.  Description of Property.

         The Company owns nine acres of land in Ukiah,  California  on which its
Ukiah  brewery is operated.  The Company  currently  leases a 15,500 square foot
building in Hopland on which the Hopland  Brewery is located.  The lease expires
in August 2004. The Company leases 3.66 acres in Saratoga Springs,  New York, on
which  Ten  Springs  Brewery  operates  under a  lease  expiring  October  2002.
Additionally,  the Company leases certain equipment and vehicles under operating
leases which expire  through  March 2000.  The Company  leases  certain  brewing
equipment from FINOVA Capital Corporation which expires November 11, 2003.

Item 3.  Legal Proceedings.

         The Company is engaged in ordinary and routine litigation incidental to
its business.  Management  does not anticipate  that any amounts which it may be
required to pay by reason  thereof will have a material  effect on the Company's
financial position.

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

         No matters  were  submitted  to a vote of security  holders  during the
fourth quarter of fiscal 1999.

                                     PART II

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

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

                                       10
<PAGE>
                       1999                                 1998
        ----------------------------------    ----------------------------------
          1st      2nd      3rd      4th        1st      2nd      3rd      4th
        Quarter  Quarter  Quarter  Quarter    Quarter  Quarter  Quarter  Quarter
        -------  -------  -------  -------    -------  -------  -------  -------

High     $1.50    $2.00    $2.13    $1.25      $3.31    $2.75    $1.68    $1.18

Low      $0.56    $1.06    $0.88    $0.63      $2.00    $1.18    $1.06    $0.56

         The Company had approximately  2,431 shareholders of record as of March
15, 2000.  Management intends to retain Mendocino  Brewing's earnings for use in
the  business  and does not expect  the  Company  to pay cash  dividends  in the
foreseeable  future.  The Company's credit  agreements  provide that the Company
shall not declare or pay any dividend or other  distribution on its Common Stock
(other than a stock  dividend) or purchase or redeem any Common  Stock,  without
the  lender's  prior  written   consent.   Management   anticipates   that  such
restrictions  will remain in effect for as long as the  Company has  significant
bank  financing,  including  the  long-term  debt on the Ukiah real estate.  The
holders of the Company's 227,600  outstanding shares of Series A Preferred Stock
are entitled to aggregate cash dividends and  liquidation  proceeds of $1.00 per
share  before any dividend  may be paid with  respect to the Common  Stock.  The
Series A Preferred  Shares are canceled after they have received their $1.00 per
share  aggregate  dividend.  Management  does not have any present  intention to
declare or pay a dividend on the Series A Preferred Stock.

Item 6.  Management's Discussion and Analysis.

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

Forward-Looking Information

         The  Management's  Discussion  and Analysis of Financial  Condition and
Results  of  Operations   and  other   sections  of  this  Form  10-KSB  contain
forward-looking  information. The forward-looking 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 such words and  similar
expressions   are  intended  to  identify  such   forward-looking   information.
Therefore,  actual  outcomes  and  results  may differ  materially  from what is
expressed or  forecasted  in such  forward-looking  information  due to numerous
factors,   including,   but  not  limited  to,  availability  of  financing  for
operations,   successful   performance   of  internal   operations,   impact  of
competition, changes in distributor relationships or performance and other risks
detailed below as well as those discussed elsewhere in this Form 10-KSB and from
time to time in the Company's  Securities  and Exchange  Commission  filings and
reports. In addition,  such statements could be affected by general industry and
market  conditions and growth rates, and general domestic  economic  conditions.
Readers  are  cautioned  not to place undue  reliance  on these  forward-looking
statements, which are valid as of the date of this filing.

Overview

         The  year was  highlighted  by  introduction  of new  products  and new
packaging in both the Ukiah and Saratoga Springs facilities.

                                       11
<PAGE>
         In Ukiah,  Carmel  Pale Ale and  Peregrine  Golden  Ale  products  were
launched  during the second quarter of the year. New packaging for Carmel Wheat,
Red Tail 12 pack and Eye of the Hawk Millennium Edition was introduced.

         In Saratoga Springs,  a new non-alcoholic brew of OLDE SARATOGA CLASSIC
ROOT BEER was launched during the third quarter.

         All the new  products  have  been  well  received  in the  market.  The
licensed  brand Razor Edge also rolled out during the first  quarter of the year
from both the Ukiah and Saratoga Springs facilities.

         In addition, bottling line equipment such as a carrier erector and bulk
glass  handling  equipment  were  installed  in Ukiah and  Saratoga  facilities,
respectively,  which has brought  about  reductions  in  manpower.  At the Ukiah
facility,  two additional 240 bbl  fermentation  tanks were installed to satisfy
greater production and flexibility demand.

         Pursuant to the October 1997 Investment  Agreement  between the Company
and UBA, UBA agreed to provide,  or arrange for the provision of funding for the
working  capital  requirements  of Releta.  UBA has fulfilled this commitment by
making  available  to the  Company a credit  facility  of up to  $2,000,000  for
working  capital  purposes (the "1998  Facility").  By mid 1999, the Company had
borrowed $994,000 drawn on the credit facility and slightly more than $61,000 of
interest  had accrued  thereon.  Subsequently,  UBA agreed to convert all of the
outstanding  convertible  notes (together with all accrued but unpaid  interest)
into common  stock after the Board of  Directors  of the Company  offered UBA an
inducement to convert.  As a result of the  conversion,  UBA became the majority
owner of Company.

         In  mid-1999,  the  1998  Facility  was  terminated,  and a new  credit
facility (the "1999  Facility") in the maximum amount of $800,000 was offered to
the Company on substantially the same terms as the 1998 Facility.  On August 31,
1999, the Company and UBA entered into a Master Line of Credit Agreement setting
forth the terms of the 1999  Facility.  Pursuant to the terms of the Master Line
of Credit Agreement,  advances on the credit facility bear interest at the prime
rate of the Bank of America in San Francisco  plus 1.5%, up to a maximum of 10%,
and is due and payable quarterly. The principal amount of each advance, together
with any accrued but unpaid interest on such advance, is due 18 months after the
date of such  advance.  UBA can, at its option,  convert the  principal  and any
accrued but unpaid  interest into  unregistered  shares of the Company's  common
stock at a rate of one share of common  stock for each  $1.50 of  principal  and
unpaid  interest.  As of December 31, 1999,  the Company has made 5 draws on the
credit facility. As of December 31, 1999, the aggregate amount drawn on the line
of credit,  together with interest accrued thereon, is equal to $576,284,  which
corresponds  to the right to acquire up to 384,189 shares of common stock of the
Company.

         Net sales  for 1999  increased  by 33.2%  over  1998 due  primarily  to
increased and improved marketing efforts. Production and sales in 1999 (measured
in barrels,  brewed and shipped out of Ukiah and  Saratoga  Springs  facilities,
including  brands  being  brewed  under  contract)  increased by 30.5% and 31.4%
respectively,  when  compared to 1998.  Production  in 1999  increased to 48,973
barrels as compared to 37,514 barrels in 1998. Sales in 1999 increased to 47,154
barrels as compared to 35,882 barrels in 1998. The Company ended the year with a
net loss of $1,306,300.  Increased  fixed costs  associated  with the breweries,
higher selling and marketing  expenses,  increased interest expenses and induced
conversion expense, contributed to the net loss of $1,306,300 for the year ended
December 31, 1999.

                                       12
<PAGE>

         On March 29, 2000 the Company  announced  that it intends to enter into
two concurrent  related party  transactions with affiliates of UBA. In the first
transaction,  the Company intends to acquire UBSN Ltd. UK, which is the European
distributor of the UB Group's flagship brand,  Kingfisher  Premium Lager. In the
second  transaction,  the Company  intends to acqire the  distribution  right to
Kingfisher  Premium  Lager  Beer in the  United  States  from  United  Breweries
International, UK Ltd.

Results of Operations

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

                                                     ----------------------
                                                     Year Ended December 31
                                                     ----------------------
                                                      1999            1998
                  Statements of Operations Data:        %               %
                                                     ------          ------
     Sales                                           106.22          105.95
     Less Excise taxes                                 6.22            5.95
                                                     ------          ------
     Net Sales                                       100.00          100.00

     Costs of Sales                                   66.31           75.16
                                                     ------          ------
     Gross Profit                                     33.69           24.84
                                                     ------          ------
     Retail Operating Expenses                         4.80            7.38

     Marketing Expense                                19.44           20.09

     General and Administrative Expenses              18.99           29.12
                                                     ------          ------

     Total Operating Expenses                         43.23           56.59
                                                     ------          ------

     Loss from Operations                             (9.54)         (31.75)
     Other Expense                                    (4.13)           0.10

     Interest Expense                                 (9.73)          (9.71)
                                                     ------          ------

     Loss before income taxes                        (23.40)         (41.36)
     Benefit from income taxes                        (8.39)         (17.44)
                                                     ------          ------

     Net Loss                                        (15.02)         (23.92)
                                                     ======          ======

                                               -----------------------------
                                                  Year Ended December 31
                                               -----------------------------
                                                 1999               1998
     Balance Sheet Data:                           $                  $
                                               ----------        -----------
     Cash and Cash Equivalents                          0            42,000
     Working Capital                           (1,500,400)         (630,700)
     Property and Equipment                    14,727,200        15,259,800
     Deposits and Other Assets                     22,900            34,600
     Total Assets                              19,629,900        18,923,200
     Long-term Debt                             4,165,900         4,753,200
     Obligation Under Capital Lease             1,396,900         1,525,800
     Total Liabilities                          9,327,500         8,781,400
     Accumulated Deficit                       (3,805,100)       (2,498,800)
     Shareholder's equity                      10,257,400        10,141,800

Net Sales

         Net  sales  for 1999  increased  by 32.2%  from  $6,529,700  in 1998 to
$8,698,600 in 1999.  The sales volume  increased to 47,154  barrels  during 1999
from 35,882  barrels in 1998,  representing  an

                                       13
<PAGE>
increase of 31.4%.  Of the total sales of barrels in 1999,  the sales out of the
Ukiah  facility  accounted for 37,156  barrels and the  shipments  from Saratoga
Springs facility was 9,998 barrels. Management attributes the increased sales to
improved  marketing  strategies,  including  new  point  of sale  materials  and
increased sales personnel. The increase in overall net sales was achieved solely
by higher  wholesale  shipments  during 1999 when  compared to 1998.  In view of
management's  focus on  wholesale  beer  sales,  retail  sales for the year 1999
decreased by $102,400 while the wholesale beer sales for the year 1999 increased
by $2,423,600.

Cost of Goods Sold

         Cost of goods sold as a  percentage  of net sales  decreased in 1999 to
66.31% when compared to that of 75.16% in 1998.  During 1999, as a percentage of
net sales as compared  to 1998,  depreciation  decreased  from 10.64% in 1998 to
7.96% in 1999,  property  taxes  decreased  from 2.13% in 1998 to 1.49% in 1999,
labor  costs  decreased  from  12.48%  in 1998,  to  11.61%  in 1999,  utilities
decreased from 4.59% in 1998 to 3.89% in 1999,  wastewater  decreased from 0.47%
in 1998 to 0.26% in 1999,  repair & maintenance  decreased from 1.31% in 1998 to
1.21%  in  1999,  telephone  decreased  from  0.19%  in 1998 to  0.09%  in 1999,
equipment  rental  decreased  from  0.46%  in 1998 to  0.26%  in  1999,  thereby
contributing  to the decrease of 8.85% of the cost of goods sold as a percentage
of net sales for the year of 1999.  Management  attributes  the  balance  of the
decrease to higher sales volumes thereby lowering per barrel production costs at
both the Ukiah and Saratoga breweries.

Gross Profit

         As a result of the higher net sales as  explained  above,  gross profit
increased in 1999 to $2,930,700  from  $1,621,700 for the  comparable  period of
1998,  representing an increase of 81%. As a percentage of net sales,  the gross
profit during 1999 increased to 33.69% from that of 24.84% for the corresponding
period of 1998.

Operating Expenses

         Operating  expenses were  $3,760,800 in 1999, as compared to $3,695,000
for 1998,  representing  an increase  of 1.78%.  Operating  expenses  consist of
retail operating expenses,  marketing and distribution expenses, and general and
administrative expenses.

         Retail operating  expenses for 1999 were $417,500  compared to $481,900
in 1998.  This  represents  a  decrease  of $64,400  or 13.36%  from 1998.  As a
percentage of net sales, retail operating expenses decreased to 4.80% in 1999 as
compared to 7.38% for 1998. The decrease in retail operating  expenses consisted
of a decrease in labor costs of $66,200 and an increase in other net expenses of
$1,800.

         Marketing  and   distribution   expenses  were   $1,691,100  for  1999,
representing  an increase of 29% compared to $1,311,700 in 1998. As a percentage
of net sales,  marketing and distribution expenses represented 19.44% in 1999 as
compared to 20.09% in 1998. The increase in marketing and distribution  expenses
consisted  of an increase in marketing  and sales labor of  $128,400;  telephone
expenses increased by $9,500;  sales promotions  expenses increased by $162,500;
point of sale  expenses  increased by $31,900;  media  advertising  increased by
$12,900; auto expenses increased by $8,500;  travel and entertainment  decreased
by $8,300;  freight increased by $32,500;  and an increase in other net expenses
of $1,500.

                                       14
<PAGE>
         General  and  administrative  expenses  were  $1,652,200  in  1999,  as
compared  to  $1,901,400  in 1998  representing  a decrease  of  $249,200.  As a
percentage of net sales, the general and administrative  expenses  represented a
decrease of 10.2% in 1999 to 18.9% as compared to 29.1% in 1998. The decrease of
general and administrative  expenses consisted of a decrease in professional and
legal fees of $225,100,  supplies decreased by $10,400, travel and entertainment
decreased by $100,800,  labor (which includes directors compensation of $102,600
for 1999) increased by $87,700; and all other expenses decreased by $600.

Other Income/(Expense)

         The other income/(expense) for the year 1999 was $1,205,700 as compared
to $627,800 in 1998. The increase of $577,900 was due to an increase in interest
expense of $210,500,  an increase of $263,900 in induced  conversion expense for
convertible  debt,  an  increase  in other  expenses  of  $103,500  relative  to
potential  acquisitions that were not consummated,  and miscellaneous  income of
$8,000.

Benefit From Income Taxes

         The  benefit  from  income  taxes  for the year  1999 was  $729,500  as
compared to  $1,138,800  in 1998.  The benefit  from income  taxes is due to the
expected  future  benefit of  carrying  forward net  operating  losses and other
timing differences.

         As of December 31, 1999,  the Company has  available  for  carryforward
approximately $6,747,000, $2,551,000 and $794,000 of Federal, California and New
York net operating  losses.  Approximately  $940,000 of the Federal and New York
net  operating  losses will expire in 2012 and the remaining  through 2019.  The
California  net  operating  losses expire  beginning in 2001 through  2004.  The
Company also has $28,000 of California  Manufactures Investment Tax Credits that
can be carried  forward to future taxes and begin to expire in 2005. The benefit
from these loss  carryforwards  and credits has been  recorded,  resulting  in a
deferred tax asset.  A valuation  allowance  is not  provided  since the Company
believes  it is more  likely  than  not the  loss  carryforwards  will be  fully
utilized.

         The Company  recognizes  deferred  tax  liabilities  and assets for the
expected  future  tax  consequences  of events  that have been  included  in the
financial  statements  or tax  returns,  including  the  future  benefit  of its
carryforwards.  Temporary  differences  and  carryforwards  which  give  rise to
deferred assets on December 31, 1999 are as follows:


     Benefits from net operating loss carryforwards            $ 2,590,800
     Investment tax credit carryforwards                            28,000
     Inventory                                                       6,900
     Accruals                                                       39,700
     Depreciation and amortization                                 (78,600)
     Other                                                        (103,400)
                                                               -----------
     Net deferred income taxes                                   2,483,400
     Deferred income taxes expected to be utilized in 2000          43,100
                                                               -----------
     Deferred income taxes                                     $ 2,440,300
                                                               -----------

                                       15
<PAGE>
Net Loss

         The net loss for the year 1999 was $1,306,300 as compared to $1,562,300
for the year 1998. As a percentage of net sales,  the net loss for the year 1999
represented 15.0% when compared to 23.9% in 1998.

Segment Information

         Mendocino  Brewing's business  presently consists of two segments.  The
first is brewing for wholesale to distributors and other retailers. This segment
accounted  for 94% of the  Company's  total gross sales during 1999.  The second
segment consists of brewing beer for sale along with food and merchandise at the
Company's  brewpub and retail  merchandise store located at the Hopland Brewery.
This segment accounted for 6% of the Company's total gross sales during 1999.

         With  expanded  wholesale  beer  production  in both Ukiah and Saratoga
Springs,  Management  expects that retail sales, as a percentage of total sales,
will decrease proportionally to the expected increase in the Company's wholesale
sales.

Seasonality

         Beer consumption nationwide has historically increased by approximately
20% during the summer months.  It is not clear to what extent  seasonality  will
affect the Company as it expands its capacity and its geographic markets.

Capital Demands

         The Releta facility  commenced brewing operations in February 1998. The
Company expects both the Ukiah and Releta facilities to operate at significantly
less than full capacity  during all or part of 2000.  Both breweries have placed
demands  upon  the  Company's  assets,  liabilities,   commitments  for  capital
expenditures, and liquidity. Failure to adequately meet those demands may have a
material  adverse affect on the Company's  business,  financial  condition,  and
results of operations.

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

Liquidity and Capital Resources

         Long Term Debt. Mendocino Brewing has obtained a $2.7 million long term
loan  secured  by a  first  priority  deed  of  trust  on  the  Ukiah  land  and
improvements.  The loan is payable in monthly  installments of $24,443 including
interest at the Treasury  Constant  Maturity Index plus 4.17%,  currently 5.83%,
maturing  December  2012  with a balloon  payment  in the  amount of  $1,872,300
secured by some of the assets of the Company  (other than the Releta  facility),
including,  without limitation, a first priority deed of trust on the Ukiah land
and improvements, fixtures and most of the equipment of the Company.

         Shareholder Commitment. UBA, the Company's largest shareholder,  agreed
to provide the  Company  with a credit  facility of up to $2 million  (the "1998
Facility").  In mid-1999,  the 1998  Facility was  terminated,  and a new credit
facility (the "1999  Facility") in the maximum amount of $800,000 was

                                       16
<PAGE>
offered to the Company on substantially the same terms as the 1998 Facility.  On
August 31,  1999,  the  Company  and UBA  entered  into a Master  Line of Credit
Agreement setting forth the terms of the 1999 Facility. Pursuant to the terms of
the  Master  Line of Credit  Agreement,  advances  on the credit  facility  bear
interest at the prime rate of the Bank of America in San Francisco plus 1.5%, up
to a maximum of 10%, and is due and payable  quarterly.  The principal amount of
each advance,  together with any accrued but unpaid interest on such advance, is
due 18 months after the date of such  advance.  Each advance made on the line of
credit will be evidenced by a convertible note. Each convertible note includes a
conversion  feature whereby UBA could, at its option,  convert the principal and
any accrued but unpaid interest into unregistered shares of the Company's common
stock on or after the maturity  date, at a rate of one share of common stock for
each $1.50 of principal and unpaid interest. The arrangement was approved by the
independent directors (Robert Neame, Kent Price and Sury Rao Palamand) on August
30, 1999. As of December 31, 1999, the Company has made five draws on the credit
facility.  The aggregate amount drawn,  together with interest accrued,  equaled
$576,284  which  corresponds to the right of UBA to acquire up to 384,189 shares
of Common Stock of the Company at a conversion price of $1.50 per share.

         Conversion of Certain  Promissory Notes. On August 30, 1999, UBA agreed
to convert all of the outstanding  convertible  notes (together with all accrued
but unpaid interest)  issued to UBA under the 1998 Facility.  By their terms the
convertible  notes were  convertible at $1.50 per share.  However,  the Board of
Directors of the Company  offered to induce UBA to convert the notes into common
stock at a price of $1.125,  which was the  then-current  price of the Company's
common stock as traded on the Pacific  Exchange.  The total amount converted was
approximately $1,055,442, which is equal to 938,171 shares of common stock. As a
result of the  conversion,  UBA became the  majority  owner of Company,  holding
55.8% of the issued and outstanding shares of common stock. Further, as a result
of the conversion, the Company recognized an expense of $263,900 for the induced
conversion.  The induced  conversion was approved by the  independent  directors
(Robert Neame, Kent Price and Sury Rao Palamand) on August 30, 1999.

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

         Credit Facility.  The CIT Group/Credit  Finance,  Inc. has provided the
Company with a $3,000,000  maximum line of credit with an advance rate of 80% of
the qualified  accounts  receivable and 60% of the inventory at an interest rate
of the  prime  rate of Chase  Manhattan  Bank of New  York  plus  2.25%  payable
monthly,  maturing  September  23,  2000.  The line of credit is  secured by all
accounts,  general intangibles,  inventory,  and equipment of the Company except
for the  specific  equipment  and  fixtures  of the  Company  leased from FINOVA
Capital Corporation, as well as by a second deed of trust on the Company's Ukiah
land improvements.  $1,484,000 of the line of credit was advanced to the Company
as an  initial  term  loan,  which is  repayable  in sixty  consecutive  monthly
installments of principal,  each in the amount of $24,700. The Company commenced
repayment  of the term loan in March 1999 and  approximately  $1,236,600  of the
term loan was  outstanding  as of  December  31,  1999.  Based on the  Company's
current level of accounts  receivable and  inventory,  the Company has drawn the
maximum amount permitted under the line of credit.  As of December 31, 1999, the
total amount outstanding on the line of credit was $2,396,400.

                                       17
<PAGE>
         Keg  Management  Arrangement.  The  Company  has  entered  into  a  keg
management  agreement with MicroStar Keg Management LLC. Under this arrangement,
MicroStar  provides the Company with half-barrel kegs for which the Company pays
a filling and use fee.  Distributors return the kegs to MicroStar instead of the
Company.  MicroStar  then  supplies the Company  with  additional  kegs.  If the
agreement  terminates,  the Company is required to purchase a certain  number of
kegs from  MicroStar.  The Company would probably  finance the purchase  through
debt or lease financing, if available.  However, there can be no assurances that
the  Company  will be able to finance  the  purchase  of kegs and the failure to
purchase the necessary kegs from MicroStar is likely to have a material  adverse
effect on the Company.

         Current  Ratio.  The  Company's  ratio of  current  assets  to  current
liabilities  on December  31, 1999 was 0.61 to 1.0 and its ratio of total assets
to total liabilities was 2.09 to 1.0.

         Impact of  Expansion on Cash Flow.  Mendocino  Brewing must make timely
payment of its debt and lease  commitments  to  continue  in  operation.  Unused
capacity at the Ukiah and  Saratoga  Springs  facilities  has placed  additional
demands on the  Company's  working  capital.  Beginning  approximately  with the
second  quarter  of  1997,  the  time  at  which  the  Ukiah  brewery  commenced
operations,  proceeds from operations  have not been able to provide  sufficient
working capital for day to day operations. UBA agreed to provide a loan of up to
$2 million for working capital purposes. In addition, pursuant to the Investment
Agreement dated October 24, 1997, between the Company and UBA, UBA has agreed to
provide, directly or indirectly, funding for the working capital requirements of
the Releta  facility in the amount of $1 million until October 24, 1999 or until
the brewery's operations are profitable, whichever comes first. UBA, through its
affiliated  entities,  has fulfilled  this  obligation by  facilitating  the CIT
Group/Credit  Finance  $3  million  loan  transaction.  To  fund  its  operating
deficits,  the  Company  has  relied  upon  lines of  credit  and  other  credit
facilities.  However,  there can be no  assurances  that the  Company  will have
access to any such sources of funds in the future,  and the  inability to secure
sufficient funds will have a materially adverse effect on the Company.

Year 2000

         Year  2000  issues  could  affect  the  performance  of  the  Company's
business. While not all Year 2000 date-related disruption scenarios have passed,
through  the date of this  filing,  the  Company  has  experienced  no  material
disruptions or other significant problems. There is a possibility of disruptions
in the future including errors that could still arise in the Company's  internal
and network  information systems because of their failure to correctly recognize
and process date  information  after the calendar  change from 1999 to 2000,  or
their inability to properly process the date February 29, 2000. The Company also
may yet experience  supplier-related  Year 2000  problems.  If any of these Year
2000 problems occur, the Company's  operations could be significantly  hampered.
The Company is continuing  to monitor and mitigate its exposure as  appropriate,
but based on currently available  information,  the Company continues to believe
that Year  2000-related  disruptions or other problems,  if any, will not have a
significant  adverse  impact on the Company's  operational  results or financial
condition. However, the Company cannot be certain that Year 2000 issues will not
have a material adverse impact since it is still early in 2000.

Item 7.  Financial Statements.

         The information required by this item is set forth at Pages F-1 through
F-17 to this Report.

                                       18
<PAGE>
Item  8.  Changes  In and  Disagreements  With  Accountants  on  Accounting  and
          Financial Disclosure.

         None.

                                    PART III

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

         The  information  required by Item 9 will be contained in the Company's
Definitive  Proxy  Statement for its 2000 Annual  Meeting of  Shareholders  (the
"2000  Proxy  Statement")  called to be held in June  2000,  which  the  Company
intends to file with the  Commission  in April  2000,  and such  information  is
incorporated herein by reference.

Item 10.  Executive Compensation.

         The information required by Item 10 will be contained in the 2000 Proxy
Statement, and such information is incorporated herein by reference.

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

         The information required by Item 11 will be contained in the 2000 Proxy
Statement, and such information is incorporated herein by reference.

Item 12.  Certain Relationships and Related Transactions.

         On March 29, 2000, the Company  announced that it intends to enter into
two concurrent related-party transactions.

         In the first  transaction,  the  Company  will  acquire  UBSN  Ltd.  by
acquiring  all  of  the  issued  and  outstanding  shares  of  United  Breweries
International  UK, Ltd.  ("UBI UK,  Ltd."),  which is the parent company of UBSN
Ltd.  In the  transaction,  the  Company  has  offered  to  issue  approximately
5,000,000 shares of the Company's common stock in exchange for the shares of UBI
UK,  Ltd.  Upon  the  closing  of the  transaction,  UBI UK Ltd.  will  become a
wholly-owned  subsidiary  of the  Company.  The  closing of the  transaction  is
expected  to  occur in late  May  2000,  or as soon  thereafter  as the  various
conditions to closing have been satisfied or waived.

         The  closing  of the  transaction,  the  obligation  of the  Company to
proceed  with the  acquisition  of the shares of UBI UK,  Ltd.,  and the precise
number of shares of common stock to be issued are subject to the satisfaction or
waiver  of  certain  conditions  including:  (i) the  approval  of the  proposed
acquisition  by the Board of Directors of the Company;  (ii) the approval of the
transaction  by the  shareholders  of the  Company;  (iii) the  approval  by the
Securities and Exchange Commission of the Company's Proxy Statement with respect
to the transaction; and (iv) the receipt by the Company of a "fairness opinion",
in a form  satisfactory to the Board of Directors of the Company,  regarding the
transaction from Sage Capital LLC.

         In a second and  concurrent  transaction,  the Company  will obtain the
distribution  rights to the "Kingfisher" brand of beer in the United States from
UBI UK, Ltd. As compensation,  the Company will issue  additional  shares of its
common stock based on a valuation  established in the fairness  opinion obtained
from  Sage  Capital  LLC.  Under the terms of the  distribution  agreement,  the
Company will also have an option to brew  "Kingfisher"  brand beer in the United
States,  for  distribution  primarily in the United States,  on mutually  agreed
terms and conditions. However, in order to commence the brewing and distribution
of the  "Kingfisher"  beer, the Company will have to obtain a license to use the
"Kingfisher"  trademark from Kingfisher of America Inc ("KAI"). The Company will
be solely responsible for obtaining that trademark license, at its sole expense,
and there are no assurances that such license will be obtained.

         The transactions described above are related party transactions because
the corporation  that owns all of the shares of UBI UK, Ltd. is held by a trust,
which is controlled by fiduciaries  who may exercise  discretion in favor of Dr.
Mallya,  amongst  others.  Dr. Vijay Mallya is the Chairman and Chief  Executive
Officer of the  Company.  Further,  KAI is owned by a foreign  corporation,  the
shares of which are  controlled by  fiduciaries  who may exercise  discretion in
favor of Dr. Mallya, amongst others.

         Additional  information  required by Item 12 will be  contained  in the
2000 Proxy Statement, and such information is incorporated herein by reference.

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

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

  3.1     (A)   Articles of Incorporation, as amended, of the Company.

  3.2     (B)   Bylaws of the Company

  4.1           Articles 5 and 6 of the Articles of Incorporation, as amended,
                of the Company (Reference is made to Exhibit 3.1).

  4.2           Article 10 of the Restated Articles of Incorporation, as
                amended, of the Company (Reference is made to Exhibit 3.1).

 10.1     (A)   Mendocino Brewing Company Profit Sharing Plan.

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

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

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

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

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

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

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

                                       19
<PAGE>
Exhibit
 Number         Description of Document
 ------         -----------------------

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

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

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

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

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

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

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

 10.23    (J)   Equipment Lease with FINOVA Capital Corporation.

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

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

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

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

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

 10.29    (Q)   Indemnification Agreement with Vijay Mallya.

 10.30    (Q)   Indemnification Agreement with Michael Laybourn.

 10.31    (Q)   Indemnification Agreement with Jerome Merchant.

 10.32    (Q)   Indemnification Agreement with Yashpal Singh.

 10.33    (Q)   Indemnification Agreement with P.A. Murali.

 10.34    (Q)   Indemnification Agreement with Robert Neame.

 10.35    (Q)   Indemnification Agreement with Sury Rao Palamand.

 10.36    (Q)   Indemnification Agreement with Kent Price.

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

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

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

 10.41    (U)   Employment Agreement with Yashpal Singh.

 10.42    (U)   Employment Agreement with P.A. Murali.

 10.43    (V)   Master Loan Agreement between the Company and the United
                Breweries of America Inc.

 10.44    (V)   Convertible Note in favor of the United Breweries of America
                Inc.

 27             Financial Data Schedule.

----------

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

                                       20
<PAGE>
Exhibit
 Number         Description of Document
 ------         -----------------------

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

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

     (F)  Incorporated by reference from the Company's Report on Form 10-KSB for
          the annual period ended December 31, 1995,  previously  filed with the
          Commission.

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

     (J)  Incorporated  by reference from the Company's  Registration  Statement
          dated  February  6,  1997,  as  amended,  previously  filed  with  the
          Commission, Registration No. 33-15673.

     (K)  Incorporated by reference from the Company's Report on Form 10-KSB for
          the annual period ended December 31, 1996,  previously  filed with the
          Commission.

     (L)  Incorporated  by  reference  from  the  Schedule  13D  filed  with the
          Commission on November 3, 1997, by United  Breweries of America,  Inc.
          and Vijay Mallya.

     (M)  Incorporated by reference from the Company's Report on Form 10-QSB for
          the quarterly period ended September 30, 1997.

     (N)  Incorporated  by reference from the Company's  Report on Form 10-QSB/A
          No. 1 for the quarterly period ended September 30, 1997.

     (O)  Incorporated by reference from the Company's Report on Form 10-KSB for
          the annual period ended December 31, 1997,  previously  filed with the
          Commission.

     (Q)  Incorporated by reference from the Company's Report on Form 10-QSB for
          the quarterly period ended June 30, 1998.

     (R)  Incorporated by reference from the Company's Report on Form 10-QSB for
          the quarterly period ended September 30, 1998.

     (T)  Incorporated by reference from the Company's Report on Form 10-KSB for
          the annual period ended December 31, 1998,  previously  filed with the
          Commission.

     (U)  Incorporated by reference from the Company's Report on Form 10-QSB for
          the quarterly period ended June 30, 1999.

     (V)  Incorporated  by reference  from the  Amendment  No. 5 to Schedule 13D
          filed with the  Commission on September 15, 1999, by United  Breweries
          of America, Inc. and Vijay Mallya.

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


The  Registrant  filed a report on Form 8-K on March  29,  2000  announcing  the
Company's  acquisition  of UBSN and the U.S. distribution  rights to  Kingfisher
Premium  Lager Beer from UBI, UK Ltd.,  responsive  to Item 5 of Form 8-K (Other
Events). No financial statements were filed.

                                       21
<PAGE>
                                   SIGNATURES

         Pursuant to the  requirements  of Section 13 of the  Exchange  Act, the
registrant  caused  this  report to be signed on its behalf by the  undersigned,
thereto duly authorized.

                                    (Registrant) Mendocino Brewing Company, Inc.


                                    By: /s/ Vijay Mallya
                                        ----------------------------------------
                                        Vijay Mallya, Chief Executive Officer
                                        Date: March 30, 2000


         Pursuant to the  requirements  of Section 13 of the Exchange  Act, this
report has been signed by the following  persons on behalf of the registrant and
in the capacities and on the dates indicated.


                                    By: /s/ Vijay Mallya
                                        ----------------------------------------
                                        Vijay Mallya, Chief Executive Officer
                                        and Director
                                        Date: March 30, 2000


                                    By: /s/ Yashpal Singh
                                        ----------------------------------------
                                        Yashpal Singh, President, Chief
                                        Operating Officer and Director
                                        Date: March 30, 2000


                                    By: /s/ Jerome G. Merchant
                                        ----------------------
                                        Jerome G. Merchant, Director
                                        Date: March 30, 2000


                                    By: /s/ P.A. Murali
                                        ----------------------------------------
                                        P.A. Murali, Secretary and Chief
                                        Financial Officer
                                        Date: March 30, 2000

                                       22
<PAGE>
--------------------------------------------------------------------------------



                        MENDOCINO BREWING COMPANY, INC.,
                                 AND SUBSIDIARY

                          INDEPENDENT AUDITOR'S REPORT
                                       AND
                        CONSOLIDATED FINANCIAL STATEMENTS

                           DECEMBER 31, 1999 AND 1998

<PAGE>
--------------------------------------------------------------------------------



                                    CONTENTS


                                                                           PAGE

INDEPENDENT AUDITOR'S REPORT...............................................F - 1


CONSOLIDATED FINANCIAL STATEMENTS

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

     Statements of operations..............................................F - 4

     Statements of stockholders' equity....................................F - 5

     Statements of cash flows..............................................F - 6

     Notes to financial statements.........................................F - 7
<PAGE>
INDEPENDENT AUDITOR'S REPORT


To the Board of Directors
Mendocino Brewing Company, Inc.


We have  audited  the  accompanying  consolidated  balance  sheets of  Mendocino
Brewing Company,  Inc., and subsidiary as of December 31, 1999 and 1998, and the
related  consolidated  statements of operations,  stockholders'  equity and cash
flows for each of the two years ended  December  31,  1999.  These  consolidated
financial  statements are the  responsibility of the Company's  management.  Our
responsibility  is  to  express  an  opinion  on  these  consolidated  financial
statements based on our audits.

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

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects,  the consolidated financial position of Mendocino Brewing
Company,  Inc., and subsidiary as of December 31, 1999 and 1998, and the results
of its  operations  and its cash flows for each of the two years ended  December
31, 1999, in conformity with generally accepted accounting principles.

/s/ Moss Adams LLP

Santa Rosa, California
February 4, 2000

                                    Page F-1
<PAGE>
                                 MENDOCINO BREWING COMPANY, INC., AND SUBSIDIARY
                                                     CONSOLIDATED BALANCE SHEETS
                                                      December 31, 1999 and 1998
================================================================================

                                     ASSETS

                                                      1999              1998
                                                  -----------        -----------
CURRENT ASSETS
  Cash                                            $        --        $    42,000
  Accounts receivable                               1,040,300            679,900
  Inventories                                       1,168,700            978,000
  Prepaid expenses                                     57,200             33,500
  Deferred income taxes                                43,100            138,300
                                                  -----------        -----------

     Total current assets                           2,309,300          1,871,700
                                                  -----------        -----------

PROPERTY AND EQUIPMENT                             14,727,200         15,259,800
                                                  -----------        -----------
OTHER ASSETS
  Deferred income taxes                             2,440,300          1,614,200
  Deposits and other assets                            22,900             34,600
  Intangibles, net of amortization                    130,200            142,900
                                                  -----------        -----------

                                                    2,593,400          1,791,700
                                                  -----------        -----------

     Total assets                                 $19,629,900        $18,923,200
                                                  ===========        ===========

The accompanying notes are an integral part of these financial statements.
================================================================================
                                                                        Page F-2
<PAGE>
                                 MENDOCINO BREWING COMPANY, INC., AND SUBSIDIARY
                                         CONSOLIDATED BALANCE SHEETS (Continued)
                                                      December 31, 1999 and 1998
================================================================================
<TABLE>
<CAPTION>

                      LIABILITIES AND STOCKHOLDERS' EQUITY
                                                                    1999               1998
                                                                ------------      ------------
<S>                                                             <C>               <C>
CURRENT LIABILITIES
  Disbursements in excess of deposits                           $      9,600      $         --
  Line of credit                                                   1,159,800                --
  Accounts payable                                                 1,708,700           806,700
  Accrued wages and related expense                                  204,600           210,800
  Accrued liabilities                                                130,300            91,000
  Current maturities of long-term debt                               321,000           322,000
  Current maturities of obligations under capital lease              275,700           221,300
  Current maturities of notes payable to related party                    --           850,600
                                                                ------------      ------------
     Total current liabilities                                     3,809,700         2,502,400

LONG-TERM DEBT, less current maturities                            3,589,600         3,871,800

LINE OF CREDIT                                                            --           738,000

OBLIGATIONS UNDER CAPITAL LEASE, less
  current maturities                                               1,396,900         1,525,800

NOTES PAYABLE TO RELATED PARTY, less
  current maturities                                                 576,300           143,400
                                                                ------------      ------------
     Total liabilities                                             9,372,500         8,781,400
                                                                ------------      ------------
STOCKHOLDERS' EQUITY
  Preferred stock, Series A, no par value, with
    aggregate  liquidation  preference of $227,600;
    227,600 shares authorized, issued and outstanding                227,600           227,600
  Common stock, no par value; 20,000,000 shares authorized,
    5,530,177 and 4,497,059 shares issued and outstanding
    at December 31, 1999 and 1998, respectively                   13,834,900        12,413,000
  Accumulated deficit                                             (3,805,100)       (2,498,800)
                                                                ------------      ------------
     Total stockholders' equity                                   10,257,400        10,141,800
                                                                ------------      ------------
     Total liabilities and stockholders' equity                 $ 19,629,900      $ 18,923,200
                                                                ============      ============
</TABLE>

The accompanying notes are an integral part of these financial statements.
================================================================================
                                                                        Page F-3
<PAGE>
                                 MENDOCINO BREWING COMPANY, INC., AND SUBSIDIARY
                                           CONSOLIDATED STATEMENTS OF OPERATIONS
                                          Years Ended December 31, 1999 and 1998
================================================================================

                                                   1999                 1998
                                                -----------         -----------
SALES                                           $ 9,240,000         $ 6,918,800

LESS EXCISE TAXES                                   541,400             389,100
                                                -----------         -----------

NET SALES                                         8,698,600           6,529,700

COST OF GOODS SOLD                                5,767,900           4,908,000
                                                -----------         -----------

GROSS PROFIT                                      2,930,700           1,621,700
                                                -----------         -----------
OPERATING EXPENSES
  Retail operating                                  417,500             481,900
  Marketing                                       1,691,100           1,311,700
  General and administrative                      1,652,200           1,901,400
                                                -----------         -----------

                                                  3,760,800           3,695,000
                                                -----------         -----------

LOSS FROM OPERATIONS                               (830,100)         (2,073,300)
                                                -----------         -----------
OTHER INCOME (EXPENSE)
  Induced conversion                               (263,900)                 --
  Interest income                                       500               1,900
  Other income (expense)                            (95,500)              2,900
  Gain on sale of equipment                              --               3,700
  Interest expense                                 (846,800)           (636,300)
                                                -----------         -----------

                                                 (1,205,700)           (627,800)
                                                -----------         -----------

LOSS BEFORE INCOME TAXES                         (2,035,800)         (2,701,100)

BENEFIT FROM  INCOME TAXES                         (729,500)         (1,138,800)
                                                -----------         -----------
NET LOSS                                        $(1,306,300)        $(1,562,300)
                                                ===========         ===========
BASIC LOSS PER COMMON SHARE                     $     (0.27)        $     (0.35)
                                                ===========         ===========
WEIGHTED AVERAGE COMMON SHARES
 OUTSTANDING                                      4,838,151           4,480,222
                                                ===========         ===========

The accompanying notes are an integral part of these financial statements.
================================================================================
                                                                        Page F-4
<PAGE>
                                 MENDOCINO BREWING COMPANY, INC., AND SUBSIDIARY
                                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                                          Years Ended December 31, 1999 and 1998
================================================================================
<TABLE>
<CAPTION>
                                         Series A
                                      Preferred Stock             Common Stock
                                    --------------------    -------------------------   Accumulated       Total
                                     Shares      Amount      Shares         Amount       (Deficit)       Equity
                                     ------      ------      ------         ------       ---------       ------
<S>                                <C>         <C>         <C>           <C>           <C>            <C>
Balance, December 31, 1997          227,600     $227,600    4,463,385     $12,367,200   $  (936,500)   $11,658,300

Stock issued for asset acquisition       --           --       33,674          45,800            --         45,800

Net loss                                 --           --           --              --    (1,562,300)    (1,562,300)
                                    -------     --------    ---------     -----------   -----------    -----------

Balance, December 31, 1998          227,600      227,600    4,497,059      12,413,000    (2,498,800)    10,141,800

Related party debt converted to
 common stock at $1.125 per              --           --      938,171       1,319,300            --      1,319,300

Stock issued for services                --           --       94,947         102,600            --        102,600

Net loss                                 --           --           --              --    (1,306,300)    (1,306,300)
                                    -------     --------    ---------     -----------   -----------    -----------

                                    227,600     $227,600    5,530,177     $13,834,900   $(3,805,100)   $10,257,400
                                    =======     ========    =========     ===========   ===========    ===========
</TABLE>

The accompanying notes are an integral part of these financial statements.
================================================================================
                                                                        Page F-5
<PAGE>
                                 MENDOCINO BREWING COMPANY, INC., AND SUBSIDIARY
                                           CONSOLIDATED STATEMENTS OF CASH FLOWS
                                          Years Ended December 31, 1999 and 1998
================================================================================

                                                       1999              1998
                                                   -----------      -----------
CASH FLOWS FROM OPERATING ACTIVITIES
  Net loss                                         $(1,306,300)     $(1,562,300)
  Adjustments to reconcile net loss to net
   cash used by operating activities:
    Depreciation and amortization                      794,600          779,400
    Induced conversion expense                         263,900               --
    Gain on sale of assets                                  --           (3,700)
    Deferred income taxes                             (730,900)      (1,139,600)
    Stock issued for services                          102,600               --
    Accrued interest converted to stock                 61,200               --
  Changes in:
    Accounts receivable                               (360,400)        (350,200)
    Inventories                                       (190,700)        (433,900)
    Prepaid expenses                                   (23,700)           9,100
    Deposits and other assets                           11,700          (33,100)
    Refundable income taxes                                 --          106,300
    Accounts payable                                   902,000           78,400
    Accrued wages and related expense                   39,300           41,100
    Accrued liabilities                                 (6,200)        (157,800)
                                                   -----------      -----------
       Net cash used by operating activities          (442,900)      (2,666,300)
                                                   -----------      -----------
CASH FLOWS FROM INVESTING ACTIVITIES
  Purchases of property, equipment and leasehold
   improvements                                        (99,800)        (185,900)
  Increase in intangibles                                   --          (63,100)
  Proceeds from sale of fixed assets                        --           24,000
                                                   -----------      -----------
       Net cash used by investing activities           (99,800)        (225,000)
                                                   -----------      -----------
CASH FLOWS FROM FINANCING ACTIVITIES
  Net borrowings on line of credit                     421,800          138,000
  Borrowings on long-term debt                              --        1,433,600
  Principal payments on long-term debt                (283,200)        (153,400)
  Payments on obligations under capital lease         (223,800)        (185,200)
  Disbursements in excess of deposits                    9,600               --
  Proceeds from notes payable to related party         576,300          994,000
                                                   -----------      -----------

       Net cash provided by financing activities       500,700        2,227,000
                                                   -----------      -----------

DECREASE IN CASH                                       (42,000)        (664,300)

CASH, beginning of year                                 42,000          706,300
                                                   -----------      -----------

CASH, end of year                                  $        --      $    42,000
                                                   ===========      ===========

The accompanying notes are an integral part of these financial statements.
================================================================================
                                                                        Page F-6
<PAGE>
                                 MENDOCINO BREWING COMPANY, INC., AND SUBSIDIARY
                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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

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

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

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

Property  and  equipment  -  Property  and  equipment  are  stated  at cost  and
depreciated or amortized using  straight-line  and accelerated  methods over the
assets' estimated useful lives.  Costs of maintenance and repairs are charged to
expense as incurred;  significant  renewals  and  betterments  are  capitalized.
Estimated useful lives are as follows:

               Building                      40 years
               Machinery equipment         5-40 years
               Furniture and fixtures      5-10 years
               Leasehold improvements      7-20 years

Intangibles  - Intangibles  consist of prepaid  interest on the financing of the
Ukiah brewery,  placement fees associated  with debt and purchased  intangibles.
Amounts are amortized using the straight-line  method over the lives of the debt
and estimate useful lives of the intangibles.

Concentration of credit risks - Financial  instruments that potentially  subject
the Company to credit risk consist  principally  of trade  receivables  and cash
deposits in excess of FDIC limits.  The Company's  cash deposits are placed with
major financial  institutions.  Wholesale distributors account for substantially
all accounts  receivable;  therefore,  this concentration risk is limited due to
the number of distributors  and state laws  regulating the financial  affairs of
distributors of alcoholic beverages.

================================================================================
                                                                        Page F-7
<PAGE>
                                 MENDOCINO BREWING COMPANY, INC., AND SUBSIDIARY
                          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

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

Income  taxes - The  provision  for income  taxes is based on  pre-tax  earnings
reported in the financial  statements,  adjusted for requirements of current tax
law, plus the change in deferred taxes.  Deferred tax assets and liabilities are
recognized  using  enacted  tax  rates  and  reflect  the  expected  future  tax
consequences of temporary differences between the recorded amounts of assets and
liabilities  for financial  reporting  purposes and tax basis of such assets and
liabilities and future benefits from net operating loss  carryforwards and other
expenses previously recorded for financial reporting purposes.

Basic  loss per share - Basic  loss per share was  computed  using the  weighted
average number of common shares outstanding. Diluted loss per share was computed
using the weighted average number of common shares outstanding. Debt convertible
into  384,189  shares of common  stock at $1.50 per  share,  and  101,388  stock
options, at a weighted average price per share of $2.07, have been excluded from
the weighted average shares  outstanding  since the effect of these  potentially
dilutive securities would be antidilutive.

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

Advertising - Advertising costs are expensed as incurred.  Advertising  expenses
for the years ended  December 31, 1999 and 1998,  were  $243,200  and  $214,700,
respectively.

Fair value of financial instruments - The following methods and assumptions were
used by the  Company in  estimating  its fair value  disclosures  for  financial
instruments:

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

New  accounting  pronouncements  -  The  Financial  Accounting  Standards  Board
("FASB") has issued SFAS No. 133  "Accounting  for  Derivative  Instruments  and
Hedging  Activities." It requires companies to record derivatives on the balance
sheet as assets or liabilities,  measured at fair market value.  Gains or losses
resulting  from  changes in the value of those  derivatives  are  accounted  for
depending  on the use of the  derivative  and  whether  it  qualifies  for hedge
accounting.  The  key  criterion  for  hedge  accounting  is  that  the  hedging
relationship  must be highly  effective in achieving the  offsetting  changes in
fair value or cash flows.  SFAS No. 133 is effective for all fiscal  quarters of
fiscal  years  beginning  after  June 15,  1999.  Management  believes  that the
adoption  of  SFAS  No.  133  will  have no  material  effect  on its  financial
statements.

================================================================================
                                                                        Page F-8
<PAGE>
                                 MENDOCINO BREWING COMPANY, INC., AND SUBSIDIARY
                          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

NOTE 2 - INVENTORIES

                                                  1999                   1998
                                                ----------            ----------
Raw materials                                   $  363,600            $  276,800
Work-in-process                                    210,100               210,500
Finished goods                                     562,500               438,900
Merchandise                                         32,500                51,800
                                                ----------            ----------
                                                $1,168,700            $  978,000
                                                ==========            ==========

NOTE  3 -      PROPERTY AND EQUIPMENT

                                                        1999             1998
                                                     -----------     -----------
Buildings                                            $ 7,738,700     $ 7,696,500
Machinery and equipment                                5,381,100       5,263,700
Equipment under capital lease                          2,265,700       2,117,400
Land                                                     810,900         813,000
Leasehold improvements                                   792,200         792,200
Equipment in progress                                     66,900         123,500
Vehicles                                                  69,300          69,300
Furniture and fixtures                                    37,900          37,900
                                                     -----------     -----------
                                                      17,162,700      16,913,500
Less accumulated depreciation and amortization         2,435,500       1,653,700
                                                     -----------     -----------
                                                     $14,727,200     $15,259,800
                                                     ===========     ===========

NOTE  4 -      LINE OF CREDIT

The Company has available a $3,000,000 line of credit with interest at the prime
rate,  plus 2.25%.  Approximately  $1,484,000 was advanced to the Company in the
form of a term loan (see Note 5). The bank's commitment under the line of credit
matures September 2000. The agreement is secured by substantially all the assets
of the Releta Brewing Company,  LLC,  accounts  receivable,  inventory,  certain
securities pledged by a stockholder,  and a second position on the real property
of Mendocino Brewing Company.

================================================================================
                                                                        Page F-9
<PAGE>
                                 MENDOCINO BREWING COMPANY, INC., AND SUBSIDIARY
                          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

NOTE 5 - LONG-TERM DEBT
                                                         1999            1998
                                                      ----------      ----------
Note payable to bank, in monthly installments
of   $24,400,   including   interest  at  the
Treasury Constant  Maturity Index,  currently
5.83% plus  4.17%;  maturing  December  2012,
with   a   balloon   payment,    secured   by
substantially  all the  assets  of  Mendocino
Brewing Company                                       $2,655,800      $2,679,900

Note  payable to  financial  institution,  in
monthly   installments   of   $24,700,   plus
interest   at  the  prime  rate  plus  2.25%,
currently   10.75%;   maturing   March  2004;
secured  by  substantially  all the assets of
the   Releta   Brewing    Company,    certain
securities pledged by a stockholder, accounts
receivable,  inventory and a second  position
on  the  other  assets of  Mendocino  Brewing
Company                                                1,236,600       1,484,000

Note  payable,  in  monthly  installments  of
$1,200, including interest at 5.65%; maturing
March 2001; secured by vehicle                            18,200          29,900
                                                      ----------      ----------
                                                       3,910,600       4,193,800
Less current maturities                                  321,000         322,000
                                                      ----------      ----------
                                                      $3,589,600      $3,871,800
                                                      ==========      ==========

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

               Year Ending December 31,
               ------------------------
                      2000                   $  321,000
                      2001                      373,900
                      2002                      377,100
                      2003                      384,400
                      2004                      145,000
                                              2,309,200
                                             ----------
                      Thereafter             $3,910,600
                                             ==========

================================================================================
                                                                       Page F-10
<PAGE>
                                 MENDOCINO BREWING COMPANY, INC., AND SUBSIDIARY
                          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
================================================================================

NOTE 6 - OBLIGATIONS UNDER CAPITAL LEASE

The Company  leases  brewing and office  equipment  under various  capital lease
agreements with various financial institutions.

Future  minimum  lease  payments  under these capital  lease  agreements  are as
follows:

                            Year Ending December 31,
                            ------------------------
                                   2000                $  430,800
                                   2001                   422,000
                                   2002                   402,400
                                   2003                   824,900
                                   Thereafter              15,600
                                                       ----------
                                                        2,095,700
Less amounts representing interest                        423,100
                                                       ----------
Present value of minimum lease payments                 1,672,600
Less current maturities                                   275,700
                                                       ----------
                                                       $1,396,900
                                                       ==========
NOTE 7 - NOTES PAYABLE TO RELATED PARTY

                                                       1999            1998
                                                     --------         --------
Notes payable  consists of convertible  notes
to United  Breweries  of  America,  a related
party,  with  interest at the prime rate plus
1.5%,  maturing 18 months after the advances,
unsecured,  subordinated  to bank debt,  upon
maturity are convertible into common stock at
$1.50  per share or may be repaid in 60 month
ly  installments,  notes mature  through June
2001, including $11,200 of accrued interest          $576,300         $994,000

Less current maturities                                    --          850,600
                                                     --------         --------
                                                     $576,300         $143,400
                                                     ========         ========

NOTE 8 - PROFIT-SHARING PLAN

The  Company  has a  profit-sharing  retirement  plan  under  which  it may make
employer contributions at the discretion of the Board of Directors,  although no
such  contributions are required.  Employer  contributions vest over a period of
six years. The plan covers substantially all full-time employees meeting certain
minimum age and service  requirements.  There were no contributions made for the
years ended December 31, 1999 and 1998.

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

NOTE 9 - COMMITMENTS AND RELATED PARTY TRANSACTIONS

The Company  leases its  Hopland,  California  facility  under a  noncancellable
operating lease expiring August 2004. The monthly lease payment is $2,100, to be
adjusted  annually by increases in the Consumer  Price Index,  as defined in the
lease  agreement.  The  Company  leases  the land on which the New York  brewery
operates under a noncancellable operating lease expiring October 2002. The lease
contains options,  which management intends to exercise, to extend the lease for
three additional 5 year periods and contains an option to purchase the property.
The monthly  lease  payment is $8,800,  to be adjusted  annually by increases in
Consumer  Price  Index,  as defined in the lease  agreement.  Additionally,  the
Company leases certain  equipment and vehicles  under  noncancellable  operating
leases that expire  through  August  2004.  Total rent  expense was $192,100 and
$201,300 for the years ended  December 31, 1999 and 1998,  respectively.  Future
minimum lease payments are as follows:

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

                     2000                  $144,800
                     2001                   134,100
                     2002                   112,700
                     2003                    29,300
                     2004                    19,600
                                           --------
                                           $440,500
                                           ========

Keg  management  agreement - In January  1997,  the Company  entered  into a keg
management  agreement with MicroStar Keg Management LLC. Under this arrangement,
MicroStar  provides  half-barrel  kegs for which the Company  pays a service fee
between $5 and $15,  depending on volume.  The  agreement is effective  April 1,
1997, for a five-year period.  Mendocino Brewing Company, Inc. has the option to
terminate  the  agreement  with 30 days notice.  If  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. Rental expense associated with this agreement was $101,800 and $124,800 for
the years ended December 31, 1999 and 1998, respectively.

The Company  reimburses  certain  expenses to United  Breweries  of America Inc.
(UBA),  a related  party,  owning  approximately  55% of the common  stock,  for
consulting,  salaries,  corporate  financing  and  marketing  activities.  Total
expenses  for UBA in 1999 and 1998 were $39,300 and  $77,800.  Interest  expense
associated  with the UBA  notes  was  $72,600  and  $64,900  for the year  ended
December 31, 1999 and 1998, respectively.

The Company  currently  has accrued  expenses to related  parties of $42,200 and
$44,600 as December 31, 1999 and 1998, respectively.

The  Company  pays a member  of the  Board of  Directors  $2,700  per  month for
consulting  services.  During  the year  the  Company  paid  $32,400  for  these
consulting services.

================================================================================
                                                                       Page F-12
<PAGE>
                                 MENDOCINO BREWING COMPANY, INC., AND SUBSIDIARY
                          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
================================================================================

NOTE 10 - CONTINGENCIES

Because of the unprecedented nature of the Year 2000 Issue, its effects, if any,
may not be  identified  until a future date.  Management  cannot assure that the
Company has  identified  all Year 2000 Issues,  that the  Company's  remediation
efforts has been  successful  in whole or in part, or that parties with whom the
Company does business will not be significantly impacted by Year 2000 Issues.

NOTE 11 - MAJOR CUSTOMERS

Sales to the top five customers totaled  $4,191,700 and $3,029,000 for the years
ended  December  31,  1999 and 1998,  respectively  representing  45% and 44% of
sales.

NOTE 12 - STOCKHOLDERS' EQUITY

Common Stock

In  August  1999,  the  Company  offered  UBA  an  incentive  to  convert  their
outstanding  debt of  $994,000  plus  accrued  interest  of $61,400 to shares of
common stock.  Per the agreement,  the notes were convertible at $1.50 per share
at UBA's sole  request.  On the date of the  conversion,  the  market  price was
significantly  lower than the conversion  price of $1.50 per share.  In order to
induce UBA to convert their entire debt, which has not matured, to common stock,
the  Company  offered to convert the debt at the market  price of the stock.  As
part of this  transaction the Company  recorded as an expense,  $263,900 for the
inducement of the conversion price at less than the $1.50 conversion price.

Also in August 1999,  the Company voted to compensate  the  independent  outside
members of the Board of  Directors.  The Company  issued  94,947 shares to these
board members as compensation  and recognized  $102,600 of compensation  expense
for the issuance of the common stock.

Preferred Stock

The Company has authorized 2,000,000 shares of preferred stock, of which 227,600
have  been  designated  as  Series  A. At the time of the  incorporation  of the
partnership,  the Company  issued  227,600  shares of  non-voting,  no-par value
Series A Preferred  Stock in exchange for  partnership  assets.  The partnership
distributed  the Series A  Preferred  Stock to its  partners on January 3, 1994.
Series A shareholders are entitled to receive cash dividends and/or  liquidation
proceeds equal in the aggregate to $1.00 per share before any cash dividends are
paid on the Common  Shares or any other  series of  Preferred  Shares.  When the
entire  Series A  dividend/liquidation  proceeds  have been  paid,  the Series A
Shares shall automatically be canceled and cease to be outstanding.

================================================================================
                                                                       Page F-13
<PAGE>
                                 MENDOCINO BREWING COMPANY, INC., AND SUBSIDIARY
                          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

NOTE 13 - STOCK OPTION PLAN

Under the 1994 Stock Option Plan,  the Company may issue  options to purchase up
to 200,000  shares of the  Company's  Common  Stock.  The plan provides for both
incentive stock options, as defined in Section 422 of the Internal Revenue Code,
and  options  that do not qualify as  incentive  stock  options.  The Plan shall
terminate  upon the earlier of (a) the tenth  anniversary of its adoption by the
Board or (b) the date on which all shares  available for issuance under the Plan
have been issued.

The  exercise  price of incentive  options must be no less than the  fair-market
value of such stock at the date the option is granted,  while the exercise price
of nonstatutory  options will be no less than 85% of the  fair-market  value per
share  on the  date of  grant.  With  respect  to  options  granted  to a person
possessing  more than 10% of the  combined  voting  power of all  classes of the
Company's stock, the exercise price will be no less than 110% of the fair-market
value of such share at the grant date.  During 1999,  the Company  issued 88,888
non-statutory  stock options with a five-year term to the independent members of
the Board of Directors at the market price on the date of the grant.

The Company has adopted the disclosure  only provision of Statement of Financial
Accounting  Standards  No.  123  (SFAS  No.  123)  "Accounting  for  Stock-Based
Compensation."  Accordingly,  no  compensation  expense has been  recognized for
stock  options  issued  during 1999.  Had  compensation  cost for the  Company's
options been determined  based on the fair value at the grant date for awards in
1999  consistent with the provisions of SFAS No. 123, the Company's net earnings
and  earnings per share would have  reduced to the pro forma  amounts  indicated
below:

                                                 1999                  1998
                                              -----------          -----------
Net loss - as reported                        $(1,306,300)         $(1,572,400)
Net loss - pro forma                          $(1,363,800)         $(1,572,400)
Loss per share - as reported                  $     (0.27)         $     (0.35)
Loss per share - pro forma                    $     (0.28)         $     (0.35)

The  fair  value  of  each  option  is  estimated  on date of  grant  using  the
Black-Scholes   option-pricing   model  with  the   following   weighted-average
assumptions used for grants in 1999. There were no options granted in 1998.

                                                                       1999
                                                                      ------
Dividends                                                              None
Expected volatility                                                    120%
Risk free interest rate                                                6.51%
Expected life                                                        5 years

Options  issued  during 1999 have an  estimated  weighted  average fair value of
$1.08.

================================================================================
                                                                       Page F-14
<PAGE>
                                 MENDOCINO BREWING COMPANY, INC., AND SUBSIDIARY
                          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

NOTE 13 - STOCK OPTION PLAN (Continued)

The following table summarizes common stock option activity:

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

Balance, December 31, 1997                     12,500               $ 8.80
Granted                                            --                   --
Exercised                                          --
Canceled                                           --                   --
                                              -------
Balance, December 31, 1998                     12,500                 8.80
Granted                                        88,888                 1.13
Exercised                                          --
Canceled                                           --                   --
                                              -------
Balance, December 31, 1999                    101,388               $ 2.07
                                              =======

NOTE 14 - INCOME TAXES

1999 1998
Current

Federal                                     $        --             $        --
State                                             1,400                     800
                                            -----------             -----------
                                                  1,400                     800
                                            -----------             -----------
Deferred

Current                                          95,200                 (98,800)
Non-current                                    (826,100)             (1,040,800)
                                            -----------             -----------
                                               (730,900)             (1,139,600)
                                            -----------             -----------
                                            $  (729,500)            $(1,138,800)
                                            ===========             ===========

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

1999 1998

Income tax benefit at 34%                   $  (692,200)            $  (925,200)
State taxes                                       1,400                     800
State tax benefit of net operating loss
 carry forward                                  (96,900)               (111,300)
Recognition of future tax (deductions)           58,200                (103,100)
                                            -----------             -----------
                                            $  (729,500)            $(1,138,800)
                                            ===========             ===========

================================================================================
                                                                       Page F-15
<PAGE>
                                 MENDOCINO BREWING COMPANY, INC., AND SUBSIDIARY
                          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

NOTE 14 - INCOME TAXES (Continued)

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

                                                      1999              1998
                                                   -----------      -----------

Inventories                                        $     6,900      $     6,600
Accruals                                                39,700          141,800
Other                                                   (3,500)         (10,100)
                                                   -----------      -----------
Current deferred tax asset                         $    43,100      $   138,300
                                                   ===========      ===========

Depreciation and amortization                      $   (78,600)     $   (35,300)
Investment tax credit carryforward                      28,000           43,500
Benefit of net operating loss carryforward           2,590,800        1,700,800
Other                                                  (99,900)         (94,800)
                                                   -----------      -----------

Non-current deferred tax asset                     $ 2,440,300      $ 1,614,200
                                                   ===========      ===========

As  of  December  31,  1999,   the  Company  has  available   for   carryforward
approximately $6,747,000, $2,551,000 and $794,000 of federal, California and New
York net operating  losses.  Approximately  $940,000 of the federal and New York
net operating  losses will expire in 2012, the remaining  portion will expire in
2020. The California  net operating  losses expire  beginning 2002 through 2004.
The Company also has $28,000 of California  Manufactures  Investment Tax Credits
that can be carried  forward  to reduce  future  taxes and  expire in 2005.  The
benefit from these loss  carryforwards and credits has been recorded,  resulting
in a deferred tax asset. A valuation allowance is not provided since the Company
believes it is more likely  than not that the loss  carryforwards  will be fully
utilized.

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

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

NOTE 15 - SEGMENT INFORMATION

The Company's business presently consists of two segments.  The first is brewing
for wholesale to distributors  and other retailers.  This segment  accounted for
93% of the Company's total gross sales during 1999. The second segment  consists
of  brewing  beer for sale  along  with food and  merchandise  at the  Company's
brewpub  and retail  merchandise  store  located at the  Hopland  Brewery.  This
segment  accounted  for 7% of the  Company's  total gross sales  during  1999. A
summary of each segment is as follows:

<TABLE>
<CAPTION>
                                                      Year Ending December 31, 1999
                                   ------------------------------------------------------------
                                    Brewing          Hopland         Corporate
                                   Operations        Brewery         and other          Total
                                   ----------        -------         ---------          -----

<S>                                <C>             <C>            <C>               <C>
Sales                              $ 8,657,000     $583,000       $       --        $ 9,240,000
Operating profit (loss)                855,700      (33,600)              --            822,100
Identifiable assets                 15,816,900       79,000        3,734,000         19,629,900
Depreciation and amortization          710,100        6,500           78,000            794,600
Capital expenditures                   244,000          800            4,100            248,900
Year Ending December  31, 1998

                                                      Year Ending December 31, 1998
                                   ------------------------------------------------------------
                                    Brewing          Hopland         Corporate
                                   Operations        Brewery         and other          Total
                                   ----------        -------         ---------          -----

Sales                             $  6,233,400     $  685,400     $          --     $ 6,918,800
Operating loss                         (89,200)       (82,700)               --        (171,900)
Identifiable assets                 16,056,500         67,100         2,799,600      18,923,200
Depreciation and amortization          694,900          6,100            78,400         779,400
Capital expenditures                   296,400             --           114,100         410,500
</TABLE>

NOTE 16 - STATEMENT OF CASH FLOWS

Supplemental cash flow information includes the following:

                                                         1999            1998
                                                     ----------       ----------
Cash paid during the year for:
Interest                                             $  771,600       $  623,400
Income taxes                                         $    1,400       $    2,300
Non-cash investing and financing activities:

Seller financed equipment                            $  149,200       $  224,300
Issuance of stock for intangibles                    $       --       $   45,800
Transfer of liabilities to long-term debt            $       --       $   80,200
Induced conversion                                   $1,319,300       $       --
Stock issued for services                            $  102,600       $       --

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