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

FORM 10-K

(Mark One)

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2005
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ________

COMMISSION FILE NUMBER 1-13636

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

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

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

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

Securities registered pursuant to section 12(b) of the Act: none

Securities registered pursuant to section 12(g) of the Act:
Common stock, no par value

Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes [ ] No [X]

Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes [ ] No [X]

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

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

Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, or a non-accelerated filer (as defined in Rule
12b-2 of the Exchange Act)

Large accelerated Filer [ ] Accelerated Filer [ ] Non-accelerated Filer [X]

Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]

The aggregate market value of the Common Stock held by non-affiliates of the
registrant (based on the average of the closing bid and asked prices for such
stock, as reported by the Nasdaq OTC Bulletin Board on March 30, 2006 was
$1,778,456.67.

The number of shares of the registrant's Common Stock outstanding as of March
30, 2006 was 11,473,914.

DOCUMENTS INCORPORATED BY REFERENCE
None

FORWARD-LOOKING INFORMATION

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

PART I

ITEM 1. BUSINESS

OVERVIEW

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

The Company operates in two geographic markets, domestic (the United
States) (referred to in this Annual Report as the "Domestic Territory") and
Europe (including Austria, Belgium, Denmark, Ireland, Italy, the Netherlands,
France, Finland, Germany, Greece, Iceland, Liechtenstein, Luxembourg, Norway,
Portugal, Spain, Sweden, Switzerland, and the United Kingdom) as well as Canada
(collectively, referred to in this Annual Report as the "European Territory").

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

Saratoga Springs, New York, and these beers are distributed in 39 states and the
District of Columbia.

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

Shepherd Neame, Ltd. ("Shepherd Neame"), a prominent English brewer,
holds an exclusive license to brew and distribute Sun Lik Beer in the United
Kingdom from an unrelated entity, the San Miguel Corporation. In September 2001,
Shepherd Neame granted UBSN an exclusive sublicense to distribute this beer in
the United Kingdom. This sublicense was terminated as of April 1, 2005. All of
the Company's beers sold in the European Territory are brewed in England under
contract by Shepherd Neame. Although UBSN is the sole distributor of Kingfisher
Premium Lager in the United Kingdom, Ireland, continental Europe, and Canada, it
does not physically distribute its products to its ultimate trade customers,
relying instead on specialist restaurant trade distributors in the United
Kingdom and Shepherd Neame, acting as UBSN's agent, on a commission basis, for
distribution to the supermarket and liquor and convenience store trade.

COMPANY BACKGROUND

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

The Company's New York subsidiary, Releta Brewing Company, LLC, d/b/a
Ten Springs Brewery ("Releta"), which is located in Saratoga Springs, New York,
commenced production in its leased facilities in February 1998, with an initial
capacity of 60,000 bbl. per year expandable to 200,000 bbl. per year.

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

On August 13, 2001, the Company acquired UBI together with UBI's
wholly-owned subsidiary UBSN, from Inversiones Mirabel, S. A., a Panamanian
corporation ("Inversiones"), in exchange for MBC stock then valued at
approximately $5,500,000 (the "UBI Acquisition"). The UBI Acquisition was
considered to be a related-party transaction because at the time of the
acquisition Inversiones was owned by a trust in which the Company's Chairman,
Dr. Mallya, may have been deemed to have been a beneficial owner at the time.
UBI and UBSN primarily

market, sell, and distribute Kingfisher Premium Lager in the Company's European
Territory. Kingfisher Premium Lager, which is the flagship brand of UB Limited,
an India-based brewing and distribution company, is a recognized international
brand, with wide distribution outside the Company's geographic markets. Until
April 1, 2005, UBI and UBSN marketed and distributed Sun Lik Chinese Lager in
the United Kingdom.

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

During the last quarter of fiscal year 2005, United Breweries of
America, BVI, a British Virgin Islands corporation ("UBA-BVI"), an indirect
beneficial owner of a majority of the Company's outstanding shares, merged into
United Breweries Holdings, Ltd., an Indian Corporation ("UBHL"). As a result of
the merger of UBA-BVI into UBHL, UBHL acquired indirect control over
approximately 75% of the Company's outstanding shares. Dr. Mallya is the
Chairman of the board of directors of UBHL.

INDUSTRY OVERVIEW

DOMESTIC MARKET

The U.S. domestic beer market falls into a number of market categories,
some of which include low-priced, premium, super premium, lite, import, and
specialty/craft beers. In the Domestic Territory, the Company competes in the
specialty/craft category, which is currently estimated to be in the range of 7
million barrels per year. Craft beers are typically all malt, characterized by
their full flavor, and are usually produced using methods similar to those of
traditional European brews.

EUROPEAN MARKET

The vast majority of the Company's sales in the European Territory are
made in the United Kingdom. During fiscal years 2005, 2004 and 2003 the
Company's sales in the United Kingdom constituted approximately 87%, 88% and
87%, respectively, of its total sales in the European Territory.

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

BUSINESS OF THE COMPANY

SEGMENT INFORMATION

Prior to 2001, the Company's business operations were exclusively
located in the United States, where it was divided into two segments, (i)
manufacturing and distribution of beer, which

accounted for the majority of the Company's gross sales, and (ii) retail sales
(primarily at the Company's Hopland, California, tavern and merchandise store)
which generally accounted for less than 5% of annual gross sales (by revenue).
With the Company's acquisition of UBI and UBSN in August 2001, however, the
Company added a new business segment, distribution of beer outside the United
States, primarily in the European Territory. The European Territory accounted
for approximately 63%, 63% and 55% of the Company's gross sales during fiscal
years 2005, 2004 and 2003, respectively, with the Company's manufacturing and
distribution in the Domestic Territory accounting for 36%, 36% and 43% of the
Company's gross sales during fiscal years 2005, 2004 and 2003, respectively. The
Company's retail segment accounted for less than 1% of gross sales for fiscal
years 2005 and 2004 and approximately 1.5% for fiscal year 2003. With the
closure of the restaurant at the Company's Hopland property, Management expects
that the retail sales segment will represent an insignificant portion of the
Company's overall gross sales in the future. (For information on the Company's
net sales, income or loss and total assets for each segment, see the Company's
Audited Financial Statements for fiscal year 2005 included in this Annual
Report.)

THE HOPLAND TAVERN ALE HOUSE AND MERCHANDISE STORE

The historic Hopland tavern ale house and merchandise store serves to
market the Company's products in the Domestic Territory. Located on a tourist
route in Hopland, California, 100 miles north of San Francisco, the Hopland
Brewery opened in 1983 as the first new brewpub in California and the second in
the United States since the repeal of Prohibition.

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

PRODUCTS

The Company brews five ales, one wheat beer, two lagers, one stout and a
root beer on a year-round basis, and three seasonal ales, for distribution in
the Domestic Territory. All of these products are brewed at the Company's
production facilities in Ukiah, California, and Saratoga Springs, New York.

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

The Company's principal products are as follows.

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

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

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

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

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

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

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

DISTRIBUTION METHODS

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

Most of the Company's brands are also available on draft. The Company's
products are delivered to retail outlets by independent distributors whose
principal business is the distribution of beer and in some cases other alcoholic
beverages, and who typically also distribute one or more national beer brands.
Together with its distributors, the Company markets its products to retail
outlets and relies on its distributors to provide regular deliveries, to
maintain retail shelf space, and to oversee timely rotation of inventory. The
Company also offers a variety of ales and lagers directly to consumers at the
tavern and merchandise store in Hopland, California.

In the European Territory, the Company's products are distributed
primarily through Indian restaurants by specialist restaurant trade
distributors. Such points of sale represent approximately 95% of the Company's
total sales volume in the European Territory, with the remaining 5% of sales
volume attributed to the combination of sales in other ethnic restaurants
(primarily Chinese) and to sales by supermarkets, liquor stores, and licensed
shops and convenience stores. The majority of the Company's restaurant sales are
through its approximately 3,500 on-tap draft installations. UBI also exports
Kingfisher Premium Lager to 16 European markets outside of the United Kingdom
and to Canada, and its sales growth in those markets typically correlates with
the establishment and proliferation of Indian restaurants in such locations.

SEASONALITY

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

EUROPEAN OPERATIONS: Beer consumption in the United Kingdom, Ireland,
and continental Europe has historically increased during the winter months.
However, during the past few years, the Company has not seen a significant
increase in sales during the winter. It is not clear to what extent, if any,
seasonality will affect the results of operations of the Company.

Results of operations of any of the Company's segments for any given
fiscal quarter may not necessarily be indicative of results that may be achieved
in the same segment in other fiscal quarters or during the full fiscal year.

COMPETITION

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

The lager market in the United Kingdom is dominated by major
international brands such as Carling, Budweiser, Becks, and Holsten Pils, both
in the restaurant and pub sectors and in sales through supermarkets and other
retail outlets. The Company's products are marketed through Indian and other
restaurants, major supermarket chains, smaller chains, and individual stores. In
all these sectors, the Company faces competition from other ethnic and
international brands produced by local and large international brewers. The
Company vigorously promotes Kingfisher Premium Lager as the worldwide No. 1
selling premium Indian lager brand. The profile of this brand has been raised
significantly through the Company's continued promotion of Kingfisher World
Curry Week in support of the charity "Action Against Hunger" that provides aid
in the Indian sub-continent and southeast Asia.

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

SOURCES AND AVAILABILITY OF RAW MATERIALS

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

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

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

DEPENDENCE ON MAJOR CUSTOMERS

Sales to the Company's top five customers in fiscal year 2005 totaled
$7,610,500, or approximately 24%, of the Company's total net sales, as compared
to $7,942,000 or 25% of total net sales for fiscal year 2004 and $7,088,800 or
25% of total net sales for 2003.

In the Company's Domestic Territory, sales to its principal customer,
Alta Marketing, have remained stable over the past three years, totaling
approximately 10.4% of the Company's domestic sales (or approximately 3.8% of
its total net sales) for fiscal year 2005, as compared to approximately 10.2% of
the Company's domestic sales (or approximately 3.8% of its total sales) in
fiscal year 2004 and approximately 10.1% of its domestic sales (or approximately
4.2% of total net sales) in fiscal year 2003.

Sales to the Company's principal European customer, Shepherd Neame have
also remained relatively stable. During fiscal year 2005 they represented
approximately 14.6% of the Company's European Territory sales (or approximately
9.2% of the Company's total net sales), as compared to approximately 15.3% and
15.5% of European Territory sales (or approximately 9.6% and 9% of total net
sales) in fiscal years 2004 and 2003, respectively. No other individual

customer accounted for more than 5% of the Company's total net sales during
fiscal years 2005, 2004 or 2003.

TRADEMARKS

The Company has U.S. federal trademark registrations on the principal
register of the United States Patent and Trademark Office for the following
marks: MENDOCINO BREWING COMPANY word mark (Reg. No. 2,441,141), RED TAIL ALE
word mark (Reg. No. 2,032,382), RED TAIL design mark (Reg. No. 2,011,817), BLUE
HERON PALE ALE design mark (Reg. No. 2,011,816), EYE OF THE HAWK SELECT ALE word
mark (Reg. No. 1,673,594), EYE OF THE HAWK SPECIAL EDITION ANNIVERSARY ALE
design mark (Reg. No. 2,011,815), YULETIDE PORTER word mark (Reg. No.
1,666,891), BREWSLETTER word mark (Reg. No. 1,768,639), PEREGRINE GOLDEN ALE
word mark (Reg. No. 2,475,522), HOPLAND BREWERY word mark (Reg. No. 2,509,464),
BLACK EYE ALE word mark (Reg. No. 2,667,078), SUN LAGER PREMIUM HANDCRAFTED BREW
word and design mark (Reg. No. 2,583,446), and WHITE HAWK ORIGINAL IPA word and
design mark (Reg. No. 2,956,999).

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

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

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

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

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

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

LICENSE AND FRANCHISE AGREEMENTS

In August 2001, the Company acquired UBI and its wholly-owned subsidiary
UBSN, which hold the exclusive brewing and distribution rights for Kingfisher
Premium Lager in the United Kingdom, Ireland, continental Europe, and Canada
through a Licensing Agreement with UB Limited.. They also held Sun Lik Chinese
Lager distribution rights in the United Kingdom, which expired in March 2005.

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

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

In April 2004, the Company entered into a licensing agreement with
Frank's Famous Foods ("FFF") and granted a non exclusive license to FFF for the
trademark and trade name Red Tail Ale to be used in the manufacture and sale of
barbecue sauces and marinades. FFF pays to the Company licensing fees ranging
from $1.50 to $3.00 per case sold.

GOVERNMENTAL REGULATION

The Company's Domestic Territory operations are subject to licensing by
local, state and federal governments, as well as to regulation by a variety of
state and local agencies. The Company is licensed to manufacture and sell beer
by the Departments of Alcoholic Beverage Control in California and New York. A
federal permit from the United States Treasury

Department, Alcohol and Tobacco Tax and Trade Bureau (the "ITB") (formerly the
Bureau of Alcohol, Tobacco, and Firearms) allows the Company to manufacture
fermented malt beverages. To keep these licenses and permits in force the
Company must pay annual fees and submit timely production reports and excise tax
returns. Prompt notice of any changes in the operations, ownership, or company
structure must also be made to these regulatory agencies. The ITB 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 of character. The
Company's production operations must also comply with the Occupational Safety
and Health Administration's workplace safety and worker health regulations and
comparable state laws. Management believes that the Company is presently in
compliance with the aforementioned laws and regulations. In addition, the
Company has implemented its own voluntary safety program. The Hopland tavern is
regulated by the Mendocino County Health Department, which requires an annual
permit and conducts spot inspections to monitor compliance with applicable
health codes.

In the United States, the federal excise tax rate is $7.00 per bbl. for
up to 60,000 bbl. per year and $18.00 per bbl. for over 60,000 bbl. for brewers
producing less than 2,000,000 barrels per year. The California excise tax rate
is $6.20 per bbl. The State of New York presently imposes an excise tax of $3.88
per bbl. on brewers for over 100,000 bbl. per year.

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

COMPLIANCE WITH ENVIRONMENTAL LAWS

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

The Company's waste products consist of water, spent grains, hops, glass
and cardboard. The Company has instituted a recycling program for its office
paper, newspapers, magazines, glass, and cardboard at minimal cost to the
Company. The Company sells or gives away its spent grain to local cattle
ranchers. The Company has not purchased any special equipment and does not incur
any identifiable fees in connection with environmental compliance at its Hopland
site.

Ukiah. The Company has built its own wastewater treatment plant for the
Ukiah facility. As a consequence, the Company is not currently required to incur
sewer hook-up fees at that location. If the Company's discharge exceeds 55,000
gallons per day, which Management does not expect to occur until annual capacity
exceeds 100,000 bbl. the Company may be required to pay additional fees. The
wastewater treatment facility cost approximately $900,000, and the estimated
cost of operating the plant is between $6,000 and $10,000 per month. The
operating costs of the facility may increase with increased production. The
Company has contracted to

have the liquid sediment that remains from the treated wastewater trucked to a
local composting facility for essentially the cost of transportation. The
Company obtained a Mendocino County Air Quality Control Permit to operate the
natural gas fired boiler in Ukiah; this permit is valid until August 30, 2006.
Management expects this permit to be renewed.

Saratoga Springs. The Saratoga Springs facility is subject to various
federal, state, and local environmental laws which regulate use, storage and
disposal of various materials. The Company's solid waste materials consist of
spent grain, cardboard, glass, and liquid waste. The Company has instituted a
recycling program for cardboard, office paper and glass at a minimal cost to the
Company. Spent grain is sold to local cattle dairy farms. The Company pays
approximately $2,400 per month in sewer fees for liquid waste. The sewer
discharge from the brewery is monitored and is within the standards set by the
Saratoga County Sewer Department. The Company follows and operates under the
rules and regulations of the New York Department of Environmental Conservation
for Air Pollution Control.

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

In general, European packaging regulations are covered by specifications
provided by the European Union, with which the Company believes itself to be in
compliance.

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

EMPLOYEES

As of December 31, 2005, MBC employed 54 full-time and 15 part-time
individuals in the United States, including 11 in management and administration,
46 in brewing and production operations, 3 in retail and tavern operations and 9
in sales and marketing positions. In England, UBI and UBSN together employed 13
people in sales and marketing and 11 in managerial and administrative positions.
Management believes that the Company's relations with its employees are
generally good.

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

FINANCIAL INFORMATION ABOUT GEOGRAPHIC AREAS

See "Item 8. -- Financial Statements and Supplementary Data" for a
discussion of sales, operating income and identifiable assets attributable to
the Company's operations.

AVAILABLE INFORMATION

The Company is subject to the informational reporting requirements of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith periodically files reports, proxy statements, and other
information with the Securities and Exchange Commission (the "Commission"). Such
reports, proxy statements and other information can be inspected and copies can
be made or obtained at or by writing to the SEC's Public Reference Room at 450
Fifth Street, N.W., Washington, D.C. 20549. The public may obtain information on
the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.
Such material may also be accessed electronically through the Edgar filings by
the Company, by means of the Commission's Internet Web site
(http://www.sec.gov).

ITEM 1A. RISK FACTORS

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

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

LIQUIDITY: Low utilization of the production capacity at our Ukiah and
Saratoga Springs facilities has continued to place demands on our working
capital. We have loans, lines of credit, other credit facilities, and lease
obligations with various creditors. We currently do not have sufficient funds
available to repay certain loans as they become due. Any breach of a loan by us
which leads to our default, or to an attempt by one of our creditors to exercise
its rights in certain of our tangible or intangible assets which have been used
as collateral or which have been pledged as security for our obligations, could
potentially make it difficult, at least in the short term, for us to continue
our operations.

OVERDUE PROPERTY TAXES: Our property in Ukiah, California, is the
subject of a delinquent property tax for the period from April 1999 to June
2003. At December 31, 2005, the

amount of taxes due, including penalties and interest totaled $430,900. On July
31, 2003, we entered into a settlement agreement with the county tax officials
pursuant to which we will be required to pay the outstanding balance of such
deficiency through annual installments until 2008. If we fail to make one of the
required payments under the settlement, the county may at its option, sell the
Ukiah property to satisfy the delinquent payments. Such sale could have a
material adverse effect on our business and cash flow position.

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

RAW MATERIALS: We are dependant on a limited number of suppliers, and in
some instances on a sole supplier, for the majority of the raw materials and
packaging materials used in our operations. As a result, an interruption in the
supply chain may have an adverse effect on our operations if we were unable to
find an alternative supplier at a comparable price.

DEPENDENCY ON CONTRACT BREWING ARRANGEMENTS: We have entered into short
term non-binding arrangements with several brewers to brew and package their
brands at our brewing facilities, predominantly at our Releta facility.
Approximately 9.7% of our sales volume in the Domestic Territory for fiscal year
2005 includes sales made under such contract brewing arrangements. There is no
certainty that such existing arrangements will be extended in the future or that
we will be able to enter into new arrangements. Any significant variation in
these arrangements could have a material adverse effect on the Company's results
of operations, cash flows and financial position.

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

MATERIAL CONTRACT FOR THE SUPPLY OF KEGS: We have entered into an
exclusive Keg Management Agreement with MicroStar Keg Management LLC
("MicroStar") which expires in September 2009. Under the terms of the agreement
with MicroStar, we receive our entire supply of kegs exclusively from MicroStar.
Moreover, pursuant to the terms of the agreement, if the agreement is
terminated, we are required to purchase three times the average monthly keg
usage for the preceding six-month period from MicroStar at purchase prices
ranging from $54 to $84 per keg. If we are required in the future to purchase
such kegs we may need to incur additional debt financing to fund such purchases.
An interruption in the supply of kegs by MicroStar to us or in case of
termination of the agreement, our failure to obtain the necessary funding to
facilitate such purposes could have a material adverse effect on our business,
results of operations, cash flow or financial position.

LOSS OF INCOME TAX BENEFITS: As of December 31, 2005, we had federal net
operating tax loss carry-forwards ("NOLs") of approximately $11,428,100,
California State NOLs of approximately $2,299,600 and New York State NOLs of
approximately $1,767,300. Of the federal and New York State NOLs, approximately
$1,963,100 Federal NOLs will expire starting in 2013 with the remainder expiring
through 2024. The California State NOLs began expiring in 2005 and will continue
to expire through 2012. We also have a $68,400 California Tax Credit that can be
carried forward until its expiration in 2011. We have recorded a valuation
allowance of $3,717,200 on deferred tax assets for NOLs that may expire prior to
utilization. To the extent that we are unable to generate adequate taxable
income in future periods, we will not be able to recognize additional tax
benefits and may be required to record a greater valuation allowance covering
potentially expiring NOLs.

ITEM 2. PROPERTIES.

BREWING FACILITIES

The Company owns nine acres of land in Ukiah, California on which its
Ukiah brewery is located. Management believes that this facility is adequate for
the Company's current capacity and also provides space for future expansion. The
Savings Bank of Mendocino County currently holds a first deed of trust on this
property in connection with a loan advanced to the Company. (See "Item 7. --
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources - Long-Term Debt".) The principal
amount outstanding on the loan as of December 31, 2005 was $2,168,400. The
Company owes approximately $430,900 to the county in overdue property taxes and
accrued interest.

The Company has estimated the life of the building at 40 years and
depreciates the cost of the building on a straight-line method over its
anticipated life. The Company does not depreciate the cost of the land. The
Company's tax basis on the Ukiah facility is $10,866,300. Various other assets
incorporated in this facility are being depreciated, on a straight-line basis,
at rates of between 10 and 20 years. Property taxes are currently assessed on
the Ukiah property at a rate of 1.11%, for an annual tax of $120,600.

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

The Company's Ukiah and Releta facilities have both been operating at
low production capacity utilization rates. The brewery in Ukiah, California has
a current annual bottling capacity of approximately 90,000 bbl. on a single
shift basis, whereas the annual sales volume from this facility was
approximately 41,600 bbl. or 46% of maximum production capacity, in 2005, as
compared with 43,400 bbl. or 48% of maximum production capacity, in 2004, and
47,300 bbl. or 53% of maximum production capacity, in 2003. The brewery at
Saratoga Springs, New York has an annual bottling capacity of approximately
60,000 bbl. per year a on single shift basis, although its annual sales volume
from this facility was approximately 17,400 bbl. or 29% of its maximum capacity,
in 2005, as compared with 16,300 bbl. or 27% of maximum production capacity in
2004, and 13,600 bbl. or 23% of maximum production capacity, in 2003. Despite
their low production capacity utilization rates, both of these breweries incur
costs for

maintenance, property taxes, and other costs on a level consistent with their
maximum production capacity rather than with the current utilization levels of
these facilities. The inability of the Company to align costs and utilization
rates affects the Company's capital, liquidity, and resources of management.
Failure to adequately align such costs and utilization rates may have a material
adverse affect on the Company's business, financial condition, and results of
operations.

TAVERN

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

MACHINERY AND EQUIPMENT

The Company leases certain equipment and vehicles under capital and
operating leases which expire at varying times through April 2008. Additionally,
the Company leases equipment and vehicles under various other leases. As these
leases expire, it is anticipated that, in accordance with the Company's current
practices, the equipment will be acquired pursuant to the terms of the leases
and the vehicles will be surrendered.

UBSN has leased a 1,365 square foot office premises located at
Faversham, Kent, in England for a period of 10 years beginning in July 2005. The
Company does not own or lease any other material properties in Europe.

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

ITEM 3. LEGAL PROCEEDINGS.

Effective March 28, 2003, the Company terminated a written distribution
agreement with the House of Daniels, Inc., d/b/a Golden Gate Distributing
Company ("GGDC"). On April 1, 2003, GGDC filed an action in Marin County
Superior Court, naming the Company and Mr. Mark Anderson (who was employed by
the Company as a sales manager) as defendants, and seeking actual and punitive
damages in an amount not stated in the complaint (the "Action"). On January 21,
2004, GGDC filed an amended complaint, naming as additional defendants Dr. Vijay
Mallya, the Company's Chairman; United Breweries of America, Inc., one of its
principal shareholders ("UBA") and the distribution companies now servicing the
territory formerly handled by GGDC ("Subsequent Distributors").

Effective on or about November 1, 2004, the Company entered into a
Settlement Agreement and Release (the "Settlement Agreement") with respect to
the Action. The Settlement Agreement releases the claims asserted in, arising
out of, or related to the Action by GGDC against the Company and the other
defendants, and by the Company against GGDC. Under the terms of the Settlement
Agreement, the Company was required to pay GGDC a total of $900,000 in
settlement of all claims asserted by GGDC in the Action (the "Settlement
Amount"). Payment was to be made in three installments: $400,000 by January 31,
2005; $300,000 by June 30, 2005; and the remaining $200,000 by December 31,
2005. UBA

guaranteed, in full, each of the installment payments included in the Settlement
Amount. The Company made all the payments as per the terms of the Settlement
Agreement.

The Company entered into another Settlement Agreement and Release,
effective as of December 9, 2004, with the Subsequent Distributors (the
"Distributors' Settlement Agreement"), under the terms of which the cross-claims
asserted against the Company by the Subsequent Distributors were also released.
Under the terms of the Distributors' Settlement Agreement, the Company agreed to
pay the Subsequent Distributors a total of $34,250 in settlement of all claims.
The Company has paid such settlement in full.

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

MBC held its 2005 Annual Meeting of Shareholders on October 4, 2005. At
that meeting, MBC's shareholders voted to elect all seven of the Board's
nominees for Director. The votes cast for each of the nominees were as follows.
There were no broker non-votes; ballots for a total of 626,004 shares were not
cast with respect to any candidate.

Director's Name Votes for Withheld

-------------------------------------------------------
Vijay Mallya 10,817,338 30,572
H. Michael Laybourn 10,817,888 30,022
Jerome G. Merchant 10,817,938 29,972
Sury Rao Palamand 10,817,413 30,497
Kent D. Price 10,817,838 30,072
Yashpal Singh 10,817,363 30,547
Scott R. Heldfond 10,817,838 30,072

PART II

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

MARKET INFORMATION

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

High Low
---- ---
2005
----

First Quarter $0.25 $0.18
Second Quarter $0.25 $0.16
Third Quarter $0.20 $0.17
Fourth Quarter $0.28 $0.11

High Low
---- ---
2004
----

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

The Company had approximately 2,314 holders of its common stock of
record as of April 14, 2006. The Company has never paid a cash dividend on its
Common Stock and Management does not expect the Company to pay cash dividends in
the foreseeable future. The Company's credit agreements provide that the Company
may not declare or pay any dividend or other distribution on its Common Stock
(other than a stock dividend), or purchase or redeem any Common Stock, without
the lender's prior written consent. Management anticipates that similar
restrictions will remain in effect for as long as the Company has significant
bank financing.

The holders of the Company's 227,600 outstanding shares of Series A
Preferred Stock (which is not listed for trading on any market or to the
Company's knowledge quoted on any bulletin board or other public quotation
system) are entitled to aggregate cash dividends and liquidation proceeds of
$1.00 per share before any dividend may be paid with respect to the Common
Stock. The Series A Preferred Shares must be canceled after the holders of these
shares have received their $1.00 per share aggregate dividend. Management does
not have any present intention to declare or pay a dividend on the Series A
Preferred Stock.

SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS

As of December 31, 2005, the Company had authorized and issued equity
compensation in the following amounts.

- ---------------------------------- ------------------- ---------------------- ----------------------
Number of securities
Number of remaining available
securities to be for future issuance
issued upon under equity
exercise of Weighted-average compensation
outstanding exercise price of plans(excluding
options warrants outstanding options, securities reflected
and rights warrants and rights in column (a))
Plan Category (a) (b) (c)
- ---------------------------------- ------------------- ---------------------- ----------------------

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

Equity compensation plans
approved by security holders 240,385 $0.52 -- **

- ---------------------------------- ------------------- ---------------------- ----------------------
Equity compensation plans not
approved by security holders * * --

- ---------------------------------- ------------------- ---------------------- ----------------------
Total 240,385 $0.52 --
- ---------------------------------- ------------------- ---------------------- ----------------------

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

* See " Recent Sales of Unregistered Securities; Use of Proceeds
from Registered Securities" for a description of the Company's
Director's Compensation Plan.

** The Company's 1994 Stock Option Plan expired in 2004 and has not
been extended.

RECENT SALES OF UNREGISTERED SECURITIES

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

Prior to 2003, the Company had a policy of granting shares of Common
Stock in lieu of cash to non-employee directors at their option, as compensation
for their attendance at meetings of the Board of Directors and of Committees of
the Board on which they served, based on a standard schedule of $3,000 per Board
meeting attended and $1,000 per committee meeting attended. However, because the
market value of the Company's Common Stock fell below $0.50 per share during the
latter half of 2003, and has since remained consistently below $1.00 per share
(at times falling below twenty cents per share) - which would have increased
quite significantly the number of shares otherwise issuable to these directors
- -- the Board of Directors adopted a Directors' Stock Grant Plan under which
non-employee directors would receive, as compensation for Board and Committee
meetings attended, shares of the Company's Common Stock valued at the higher of
the book or market value calculated as of the last day of each year in respect
of which such compensation was due. On January 14, 2005, a former director,
R.H.B Neame, was granted 31,563 shares in exchange for his service on the board
in 2002 and 2003, based on the book value of the Company's common stock,
assuming a fair market value of $0.56 per share for shares so granted with
respect to 2002 and $0.58 per share for shares so granted with respect to 2003.
Management believes that the issuance of the shares was exempt from registration
pursuant to Section 4(2) of the Act because of the limited number of recipients,
and the fact that the recipient had significant business experience, financial
sophistication, and intimate knowledge of and familiarity with the Company's
business.

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

On January 14, 2005, the Company granted 51,000 shares of common stock
to four employees as compensation based on the then-current fair market value of
the shares. Management believes that the issuance of the shares was exempt from
registration pursuant to Section 3(a)(11) of the Act because this issue was
granted only to California residents.

The Company issued thirteen (13) promissory notes pursuant to a Master
Line of Credit Agreement between the Company and United Breweries of America,
Inc. ("UBA") and one note on substantially similar terms to UBA between
September 1999, and March 2005 (the "UBA Notes"). The outstanding principal
amount of the UBA Notes, and the unpaid interest thereon may be converted, at
UBA's discretion, into shares of the Company's unregistered Common Stock at a
conversion rate of $1.50 per share. As of December 31, 2005, the outstanding
principal and interest on the UBA Notes totaled approximately $2,552,206, and
the UBA Notes were convertible into 1,701,471 shares of the Company's Common
Stock. If the UBA Notes were deemed to be securities, the Company's Management
believes that the issuance of all such notes was exempt from registration
pursuant to Section 4(2) of the Securities Act of 1983, as amended (the "Act"),
because UBA, the sole offeree and recipient thereof, has significant business
experience, financial sophistication, and knowledge of and familiarity with the

business of the Company. Management believes that if these notes were eventually
to be converted into shares of the Company's Common Stock, the issuance of such
shares would also be exempt from registration pursuant to Section 4(2) of the
Act.

ISSUER PURCHASE OF EQUITY SECURITIES

None.

ITEM 6. SELECTED FINANCIAL DATA.

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

STATEMENT OF OPERATIONS DATA

--------------------------- --------------------------------------------------------------------------------------------
YEARS ENDED
--------------------------- --------------------------------------------------------------------------------------------
2005 2004 2003 2002 2001
--------------------------- ------------------ ---------------- ------------------ ------------------ ------------------

Sales $31,927,300 $32,157,900 $28,864,300 $26,085,100 $24,638,600
--------------------------- ------------------ ---------------- ------------------ ------------------ ------------------
Less Excise Taxes 635,500 652,400 673,900 651,600 666,000
--------------------------- ------------------ ---------------- ------------------ ------------------ ------------------
Net Sales 31,291,800 31,505,500 28,190,300 25,433,500 23,602,300
--------------------------- ------------------ ---------------- ------------------ ------------------ ------------------
Cost of goods sold 21,754,200 21,045,500 19,145,500 16,892,800 15,907,500
--------------------------- ------------------ ---------------- ------------------ ------------------ ------------------
Gross Profit 9,537,600 10,460,000 9,044,800 8,540,700 8,065,000
--------------------------- ------------------ ---------------- ------------------ ------------------ ------------------
Operating Expenses 10,054,000 10,006,200 8,067,300 7,312,000 7,822,200
--------------------------- ------------------ ---------------- ------------------ ------------------ ------------------
Depreciation & 903,700 1,031,300 1,127,100 1,049,000 1,083,300
Amortization
--------------------------- ------------------ ---------------- ------------------ ------------------ ------------------
Net income (Loss) (1,314,700) (468,900) 46,900 (1,729,800) (2,843,600)
--------------------------- ------------------ ---------------- ------------------ ------------------ ------------------
Net income (Loss) per (0.11) (0.04) 0.00 (0.15) (0.26)
common share
--------------------------- ------------------ ---------------- ------------------ ------------------ ------------------
Average common shares
outstanding 11,472,213 11,266,874 11,266,874 11,266,874 11,083,228
--------------------------- ------------------ ---------------- ------------------ ------------------ ------------------

BALANCE SHEET DATA

------------------------- ----------------------------------------------------------------------------------------------
DECEMBER 31,
------------------------- ----------------------------------------------------------------------------------------------
2005 2004 2003 2002 2001
------------------------- ------------------ ------------------ ------------------ ------------------ ------------------

Cash and Cash equivalent $ 247,700 $ 526,600 554,300 146,800 89,800
------------------------- ------------------ ------------------ ------------------ ------------------ ------------------
Working capital (3,076,800) (2,215,100) (1,795,600) (2,673,00) (2,470,500)
------------------------- ------------------ ------------------ ------------------ ------------------ ------------------
Property and equipment 13,185,600 13,533,900 13,874,800 14,159,400 14,640,600
------------------------- ------------------ ------------------ ------------------ ------------------ ------------------
Deposit and other assets 372,700 205,100 188,600 73,600 87,500
------------------------- ------------------ ------------------ ------------------ ------------------ ------------------
Total assets 22,309,700 24,363,100 23,471,700 22,289,600 23,947,400
------------------------- ------------------ ------------------ ------------------ ------------------ ------------------

------------------------- ------------------ ------------------ ------------------ ------------------ ------------------
Long term debt 3,171,000 2,795,600 3,730,300 3,290,200 3,775,100
------------------------- ------------------ ------------------ ------------------ ------------------ ------------------
Capital lease 121,500 62,600 204,100 193,900 925,000
------------------------- ------------------ ------------------ ------------------ ------------------ ------------------
Total liabilities 17,683,300 18,209,100 16,965,100 15,943,200 16,085,800
------------------------- ------------------ ------------------ ------------------ ------------------ ------------------
Accumulated deficit (10,231,200) (8,916,500) (8,447,600) (8,494,500) (6,764,700)
------------------------- ------------------ ------------------ ------------------ ------------------ ------------------
Shareholders equity 4,874,100 6,154,000 6,506,600 6,346,400 7,861,600
------------------------- ------------------ ------------------ ------------------ ------------------ ------------------

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

The following discussion and analysis should be read in conjunction with
the Financial Statements and the Notes thereto and other financial information
included elsewhere in this Report. The discussion of results and trends does not
necessarily imply that these results and trends will continue. With respect to
certain forward-looking statements contained in the following discussion, please
refer to the paragraph captioned "Forward Looking Statements" set forth
immediately prior to Part I of this Annual Report, above.

CRITICAL ACCOUNTING POLICIES

In the ordinary course of business, we have made a number of estimates
and assumptions relating to the reporting of our results of operations and
financial conditions in the preparation of our financial statements in
conformity with generally accepted accounting principles in the United States.

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

o The average-cost method to value a majority of our inventories;

o The intrinsic value method under APB-25 to account for
stock-based employee compensation;

o A full valuation allowance of deferred tax assets for NOLs that
are expected to expire prior to utilization;

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

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

OVERVIEW

We reported a net loss for fiscal year 2005, primarily as a result of
higher costs of goods sold and higher promotional expenses incurred in
connection with our operations in the European Territory.

In the Domestic Territory, brewing operations sales (based on volume)
were 59,046 bbl. during fiscal year 2005, as compared to 59,616 bbl. and 60,871
bbl. in fiscal years 2004 and 2003, respectively. Sales from the Ukiah facility
totaled 41,621 bbl., 43,358 bbl. and 47,315 bbl., for the fiscal years 2005,
2004 and 2003, respectively. Sales from the Saratoga Springs facility totaled
17,425 bbl., 16,258 bbl., and 13,556 bbl. for the fiscal years 2005, 2004 and
2003, respectively. We bottled 2,919 bbl., 1,157 bbl., and nil in fiscal years
2005, 2004 and 2003, respectively, of cider products for California Cider
Company.

We sold 67,633 bbl. of beer in our European Territory during fiscal year
2005 as compared to 67,493 bbl. and 64,115 bbl. during fiscal years 2004 and
2003, respectively. Sales in the United Kingdom accounted for 61,077 bbl.,
61,564 bbl. and 58,501 bbl. during 2005, 2004 and 2003, respectively. Sales in
continental Europe and Canada totaled 6,556 bbl., 5,929 bbl. and 5,614 bbl.
during fiscal years 2005, 2004 and 2003, respectively. Although the sales of
certain brands have waxed and waned over the past few years, overall sales
levels have remained consistent. The Company does not predict any material
differences in sales during the upcoming year.

RESULTS OF OPERATIONS

FISCAL YEAR 2005 COMPARED TO FISCAL YEAR 2004

NET SALES

As used herein, the term "net sales" refers to gross sales less excise
taxes. Overall net sales for fiscal year 2005 were $31,291,800, a decrease of
$213,700, or 0.68%, as compared to $31,505,500 in fiscal year 2004. Lower sales
volume in both the Domestic Territory and in the European Territory contributed
to the decrease in net sales.

DOMESTIC OPERATIONS: Net sales in the Domestic Territory totaled
$11,125,500 in fiscal year 2005, compared to $11,245,600 for fiscal year 2004,
representing a decrease of $120,100 or 1.1%. Sales of beer for fiscal year 2005
decreased by 570 barrels, to 59,046 barrels a decrease of 2.1% as compared to
59,616 barrels in fiscal year 2004. The decrease was mainly due to decreases in
the sale of our brands (other than Kingfisher Premium Lager) by 751 bbl., offset
partially by increases in sales of Kingfisher Premium Lager by 98 bbl. and
contract brands by 83 bbl. During fiscal year 2005, we bottled 2,919 bbl. of
cider products for California Cider Company on a contract basis compared to
1,157 bbl. in fiscal year 2004. The decrease in our overall net sales during
fiscal year 2005 was mainly due to a decrease of $112,000 associated with the
wholesale shipment of beer. The Northern California market was soft in 2005 and

increased competition may also be a factor in the decrease. We anticipate
continuing to solicit opportunities to enter into non-binding contract brewing
arrangements to address the low production capacity utilization rates in our
Releta brewing facility and anticipate that such contract brewing arrangements
will continue to impact our net sales in the Domestic Territory.

EUROPEAN TERRITORY: Net sales in the Company's European Territory
totaled $20,166,300 ((pound)11,078,000) in fiscal year 2005, compared to
$20,259,900 ((pound)11,052,900) during fiscal year 2004. The decrease is
attributed to exchange rate fluctuations. Net sales presented in U.S. dollars
resulted in a decrease of 0.46%, as compared to fiscal year 2004, alternatively,
when presented in pounds sterling, net sales increased by 0.23% compared to
fiscal year 2004. We sold 67,633 bbl. of beer in our European Territory during
fiscal year 2005 as compared to 67,493 bbl. in fiscal year 2004, an increase of
140 bbl. or 0.2%.

COST OF GOODS SOLD:

Overall cost of goods sold during fiscal year 2005 was $21,754,200, as
compared to $21,045,500 during fiscal year 2004, an increase of $708,700, or
3.4%. As a percentage of net sales, costs of goods sold was 69.5% in fiscal year
2005, as compared to 66.8% during fiscal year 2004. Such amounts are calculated
in U.S. dollars, and do not take into account the effect of exchange rate
fluctuations on the actual costs of goods sold in the Company's European
Territory.

DOMESTIC OPERATIONS: Cost of goods sold as a percentage of net sales in
the Domestic Territory during fiscal year 2005 was 69.5%, as compared to 66.4%
during the fiscal year 2004, representing an increase of 3.1%. The increase was
due mainly to increased costs of packaging materials and utilities due to
increases in energy costs. We rely heavily on natural gas to operate brewing
operations, and electricity to operate our bottling and refrigeration units. Any
significant increase in our usage of natural gas or electricity or increases in
price rates for these utilities could significantly impact our future
operations.

EUROPEAN TERRITORY: As a percentage of net sales, cost of goods sold in
the United Kingdom during fiscal year 2005 was 70%, as compared to 67.5% during
fiscal year 2004 (in each case as calculated in U.S. dollars, after taking into
account the effects of exchange rate fluctuations). The percentage increase was
mainly due to increased costs and fees we owed Shepherd Neame pursuant to the
standard annual cost adjustment provisions under our production and distribution
agreements with them. Such increases were not fully offset by comparable price
increases in our products. When the market allows us to pass on price increases
to the purchaser, we will do so, but in uncertain markets, we must absorb a
portion of the costs.

GROSS PROFIT

As a result of lower sales volumes and increased costs of goods sold,
gross profit for fiscal year 2005 (expressed in U.S. dollars) was approximately
$9,537,600, a decrease of approximately $922,400, or 8.8%, as compared to gross
profit of $10,460,000 in fiscal year 2004. As a percentage of net sales, our
overall gross profit during fiscal year 2005 decreased to

30.5%, as compared to 33.2% for fiscal year 2004, largely as a result of
increases in cost of goods sold.

OPERATING EXPENSES

Operating expenses for fiscal year 2005 totaled $10,054,000, an increase
of $47,800, or 0.5%, as compared to $10,006,200 for fiscal year 2004. Operating
expenses consist of marketing and distribution expenses, general and
administrative expenses, and retail operating expenses.

MARKETING AND DISTRIBUTION EXPENSES: Our marketing and distribution
expenses consist of salaries and commissions, advertising costs, product and
sales promotion costs, travel expenses, and related costs. For fiscal year 2005,
such expenses equaled $6,216,200, an increase of $375,000 or 6.4%, as compared
to $5,841,200 in fiscal year 2004. As a percentage of net sales, our marketing
and distribution expenses increased to 19.9% in fiscal year 2005, as compared to
18.5% in fiscal year 2004.

DOMESTIC OPERATIONS: Marketing and distribution expenses for the
Domestic Territory in fiscal year 2005 equaled $1,367,400, a decrease of
$194,500, or 12.5%, as compared to $1,561,900 in marketing and distribution
expenses incurred during fiscal year 2004. Marketing and distribution expenses
equaled 12.3% of Domestic Territory net sales during fiscal year 2005, as
compared to 13.9% during fiscal year 2004. The decrease was mainly attributed to
reduced salary and travel costs resulting from a reduction in the number of our
personnel. The increase in marketing expenses was caused by a one-time promotion
in the European Territory discussed below. We do not expect to incur marketing
expenses at the same level in 2006.

EUROPEAN TERRITORY: Marketing and distribution expenses in the European
Territory during fiscal year 2004 equaled $4,848,800, an increase of $569,500,
or 13.3%, as compared to $4,279,300 during fiscal year 2004. As a percentage of
net sales in the United Kingdom, such expenses increased to 34.4% during 2005,
as compared to 21.1% during 2004 (in each case as calculated in U.S. dollars,
after taking into account the effects of exchange rate calculations). The
increase resulted mainly from a special advertising campaign that we ran in
London in June and July of 2005. The increase was also due to an increase in the
number of our personnel in the United Kingdom and associated increased salary
and travel costs. As stated above, we do not expect to incur marketing expenses
at this level in 2006.

GENERAL AND ADMINISTRATIVE EXPENSES: Our general and administrative
expenses totaled $3,735,400 for fiscal year 2005, representing a decrease of
$39,500, or 1%, as compared to $3,774,900 for fiscal year 2004. General and
administrative expenses equaled 12% of net sales for fiscal year 2005 and fiscal
year 2004.

DOMESTIC OPERATIONS. General and administrative expenses for our
Domestic Territory equaled $1,810,600 for fiscal year 2005, representing a
decrease of $144,600, or 7.4%, as compared to $1,955,200 for fiscal year 2004.
The decrease in general and administrative expenses was primarily due to a
decrease in legal expenses, incurred in 2005 vis a vis 2004 as a material legal
dispute with one of our former distributors was settled in 2004.

EUROPEAN TERRITORY. General and administrative expenses for our European
Territory equaled $1,924,800 in fiscal year 2005, representing an increase of
$105,100, or 5.8%,

as compared to $1,819,700 for fiscal year 2004. The increase in general and
administrative expenses was mainly due to higher personnel costs.

RETAIL OPERATING EXPENSES: Retail operating expenses for fiscal year
2005 totaled $102,400, representing a decrease of $37,100, or 26.6%, from
$139,500 in fiscal year 2004. As a percentage of net sales, retail operating
expenses decreased to 0.3% as compared to 0.4% for fiscal year 2004. The
decrease in retail operating expenses consisted mainly of decreases in labor
expenses as a result of a reduction in the hours of operation of the Hopland
tavern.

LEGAL DISPUTE SETTLEMENT: We settled a legal dispute with one of our
former distributors in fiscal year 2004. The amount of the settlement
represented a non-recurring expense.

OTHER EXPENSES

Other expenses totaled $923,900 in fiscal year 2005, representing an
increase of $123,000, or 15.4%, as compared to $800,900 in fiscal year 2004. The
increase in other expenses was mainly due to higher interest expenses associated
with an increase in the amount of our outstanding credit facilities as well as
due to increased prime lending rates in the United States.

INCOME TAXES

We received an income tax benefit of $125,600 for fiscal year 2005,
which represented a decrease in liability of $247,400, as compared to an income
tax expense of $121,800 for fiscal year 2004. The income tax benefit for fiscal
year 2005 relates to our estimated future net operating loss carry forwards
which we anticipate using to offset future net profits of our operations in the
United Kingdom.

As of December 31, 2005, we had approximately $10,928,400, $10,928,400
and $3,522,400 of federal, State of California, and State of New York net
operating losses, respectively, available to carry forward. Approximately
$1,963,100 of the federal and New York State net operating loss carry forwards
will expire in 2013, and the remainder will expire through 2024. The California
net operating loss carry forwards begin to expire in 2005 and will continue to
expire through 2012. We also have $141,400 of California Manufacturers'
Investment Tax Credits that can be carried forward to offset future taxes. Such
California Manufacturers' Investment Tax Credits begin to expire in 2007. We
have recorded a valuation allowance of $3,375,000 on deferred tax assets for net
operating loss carryforwards that may expire prior to utilization.

NET LOSS

Our net loss for fiscal year 2005 was $1,314,700, an increase of
$845,800 as compared to a net loss of $468,900 for fiscal year 2004. After
taking into account a foreign currency translation adjustment of $63,900 for
fiscal year 2005 ($116,300 for fiscal year 2004), our comprehensive fiscal year
2005 net loss was $1,378,600, as compared to a net loss of $352,600 in fiscal
year 2004.

RETAIL SEGMENT

The Company operates brew pubs at Hopland and Saratoga Springs. Although
sales revenues at the brew pubs, $203,100 in 2005 and $211,200 in 2004, are not
significant, the Company views the pubs as a marketing opportunity for the
Company's products. The pubs serve the Company's brew on tap and also sell logo
merchandise.

FISCAL YEAR 2004 COMPARED TO FISCAL YEAR 2003

NET SALES

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

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

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

COST OF GOODS SOLD:

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

DOMESTIC OPERATIONS: Cost of goods sold as a percentage of net sales in
our Domestic Territory during fiscal year 2004 was 66.4%, as compared to 70.3%
during the fiscal year 2003, representing a decrease of 3.9%. The decrease was
due mainly to a decrease in depreciation and retail operation costs because of
the closure of the restaurant at the Hopland location.

EUROPEAN TERRITORY: As a percentage of net sales, cost of goods sold in
the United Kingdom during fiscal year 2004 was 67.5%, as compared to 66.8%
during fiscal year 2003 (in each case as calculated in U.S. dollars, after
taking into account the effects of exchange rate fluctuations). The increase was
mainly due to exchange rate fluctuations and standard annual price increases
pursuant to the adjustment provisions of our brewing and distribution agreements
with them.

GROSS PROFIT

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

OPERATING EXPENSES

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

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

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

EUROPEAN TERRITORY. Marketing and distribution expenses in our European
Territory during fiscal year 2004 were $4,279,300, an increase of $1,195,100, or
38.8%, as compared to $3,084,200 during fiscal year 2003. As a percentage of net
sales in the United Kingdom, such expenses increased to 21.1% during fiscal year
2004, as compared to 18.3% during fiscal year 2003 (in each case as calculated
in U.S. dollars, after taking into account the effects of exchange rate
adjustments). The increase was due primarily to increased advertising and
promotional activities, including marketing and sales promotion expenses, higher
personnel costs, and higher sales commissions due to increased sales in
supermarkets and convenience

stores, startup costs associated with the launch of Kingfisher Natural Spring
Water, freight costs due to higher sales volumes and distribution; and increases
in the costs of repair and replacement of beer dispensing equipment which we
installed in bars. These increases were partially offset by decreases in freight
costs due to a reduction in export sales, and other miscellaneous distribution
expenses.

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

DOMESTIC OPERATIONS. General and administrative expenses in our Domestic
Territory were $1,955,200 for fiscal year 2004, representing an increase of
$121,600, or 6.6%, over $1,833,600 for fiscal year 2003. The increase was
primarily due to $88,600 in increased legal expenses relating to a legal dispute
with a distributor and $65,200 in loan and lease fee related to our refinancing
efforts. This increase was partly offset by decreases primarily in director's
compensation, uncollectible accounts receivable, rent for the California sales
office, certain one time professional fees incurred in the year 2003 and bank
charges.

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

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

LEGAL DISPUTE SETTLEMENT: We settled a legal dispute with a former
distributor in 2004. The amount of the settlement represents a one-time expense.

OTHER EXPENSES

Other expenses totaled $800,900 in fiscal year 2004, representing an
increase of $135,000, or 20.3%, vis a vis other expenses of $665,900 in 2003.
Other expenses for fiscal year 2003 were historically lower than in past
comparable periods due to a one-time payment of $122,000 paid to us as a result
of the early termination of a brewing contract by Wolavers Enterprises, LLC,
which offset other expenses incurred by us in fiscal year 2003.

INCOME TAXES

Our income tax expense was $121,800 for fiscal year 2004, a decrease of
$142,900, or 54%, as compared to $264,700 for fiscal year 2003. Income tax
expense includes approximately $118,000 in taxes imposed by taxing authorities
in the United Kingdom for 2004.

As of December 31, 2004, we had approximately $10,928,400, $3,522,400
and $1,767,300 of federal, California, and New York net operating losses,
respectively, available to carry forward. Of the federal and New York net
operating losses, approximately $1,963,100 will expire in 2013, and the
remainder will expire through 2024. The State of California had suspended the
ability to use net operating loss carryforwards until 2005. The California net
operating losses began to expire in 2005 and will continue to expire through
2012. We also have $141,400 of California Manufacturers' Investment Tax Credits
that can be carried forward to offset future taxes until they begin to expire in
2007. We have recorded a valuation allowance of $3,375,000 on deferred tax
assets for net operating loss carryforwards that may expire prior to
utilization.

NET INCOME

We incurred a net loss for fiscal year 2004 of $468,900, a decrease of
$515,800 as compared to a net income of $46,900 for fiscal year 2003. After
providing for a foreign currency translation adjustment of $116,300 for fiscal
year 2003 ($113,300 for fiscal year 2003), our comprehensive fiscal year 2004
net loss was $352,600, as compared to net income of $160,200 in fiscal year
2003.

RETAIL SEGMENT

Following the Company's closure of the restaurant at the Hopland
property, sales attributed to the Company's brew pubs in Hopland and Saratoga
Springs dropped from $423,500 in 2003 to $211,200 in 2004.

LIQUIDITY AND CAPITAL RESOURCES

Low production capacity utilization rates at our Ukiah and Saratoga
Springs facilities has continued to place demands on our working capital.
Beginning approximately in the second quarter of 1997, the time at which the
Ukiah brewery commenced operations, proceeds from operations have not been able
to provide sufficient working capital. As a result we have entered into a
substantial number of loans, lines of credit, other credit facilities, and lease
agreements over the last several years. In order to continue our operations, we
will have to make timely payments of our debt and lease commitments as they
become due. Any breach of a loan or lease which actually leads to default, or to
an attempt by a creditor to exercise its rights against our tangible or
intangible assets, could potentially make it difficult, at least in the short
term, for us to continue our operations.

We do not currently have sufficient funds available to repay certain
loans as they become due. Currently, the lenders have extended their loans to
facilitate refinancing, however we cannot guarantee that such loans will be
continued to be extended in the future.

BFI LOAN AND LINE OF CREDIT

On May 5, 2005, we entered into a receivables and inventory-based line
of credit transaction with BFI Business Finance ("BFI"), pursuant to which BFI
provided us with a $2,000,000 maximum revolving line of credit with an advance
rate based on 80% of MBC's

qualified accounts receivable, 70% of Releta's qualified accounts receivable,
and 50% of the eligible inventory carried by both MBC and Releta (the "BFI Line
of Credit").

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

On May 6, 2005, we used the entire immediately available amount drawable
under the BFI Facility to pay off the outstanding remaining balance owed under
the CIT Group Line of Credit discussed below.

We issued a $200,000 promissory note to BFI in connection with the BFI
Line of Credit on December 27, 2005. This note is secured by the collateral set
forth agreements executed in connection with the Loan and Security Agreement
executed as part of the BFI Line of Credit and is payable in weekly installments
of $6,665 commencing in January 2006. A final installment of $6,715 is due on
the maturity date, July 28, 2006.

We also issued an additional promissory note to BFI on April 5, 2006 in
the amount of $289,937.70. This note is payable commencing in April 2006 in 17
weekly installments of $3,335.00 and 22 weekly installments of $10,000. A final
installment of $9,908 is due on the maturity date, January 19, 2007. This note
is secured by the collateral set forth in the Loan and Security Agreement.

MASTER LINE OF CREDIT. On August 31, 1999, MBC and UBA, one of our
principal shareholders, entered into a Master Line of Credit Agreement, which
was subsequently amended in April 2000 and February 2001 (the "Credit
Agreement"). The terms of the Credit Agreement provide us with a line of credit
in the principal amount of up to $1,600,000. We have executed an Extension of
Term of Notes under Master Line of Credit Agreement (the "Extension Agreement")
with UBA. The Extension Agreement confirms UBA's and our extension of the terms
of the UBA Notes for a period ending on August 31, 2005. Although this date has
passed, we have had discussions with UBA and anticipate that the terms of the
UBA Notes will be extended again. On December 28, 2001, we entered into a
Confirmation of Waiver with UBA which confirms that as of August 13, 2001, UBA
waived its rights with regard to all conversion rate protection as set forth in
the UBA Notes.

As of the date of this filing, UBA has made thirteen (13) separate
advances to us under the Credit Agreement and one additional advance on
substantially the same terms as those under the Credit Agreement, pursuant to a
series of individual eighteen-month promissory notes issued by us to UBA (the
"UBA Notes"). The aggregate outstanding principal amount of the UBA Notes as of
December 31, 2005 was $1,915,400, and the accrued but unpaid interest thereon
was equal to approximately $636,800, for a total amount due of $2,552,200.

The outstanding principal amount of the notes and the unpaid interest
thereon may be converted, at UBA's discretion, into shares of our unregistered
Common Stock at a conversion rate of $1.50 per share. As of December 31, 2005,
the outstanding principal and interest on the UBA Notes was convertible into
1,701,471 shares of our Common Stock. On December 28, 2001, we entered into a
Confirmation of Waiver with UBA which confirms that as of August 13, 2001, UBA
waived its rights with regard to all conversion rate protection as set forth in
the UBA Notes.

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

These UBA Notes are subordinated to credit facilities extended to us by
BFI and SBMC under a subordination agreement executed by UBA. As per the terms
of the subordination agreement, UBA is precluded from demanding repayment of the
notes due unless the BFI and SBMC facilities are settled in full. Hence, we do
not expect to make payments on any of these UBA Notes within the next year.

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

LONG TERM DEBT: MBC has obtained a $2.7 million loan from Savings Bank
of Mendocino County ("SBMC"), secured by a first priority deed of trust on the
Ukiah land, fixtures, and improvements. The loan is payable in partially
amortizing monthly installments of $24,443 including interest at the rate of
7.24%, maturing December 2012 with a balloon payment in the amount of $932,600.
The interest rate is adjusted on every five year anniversary of the agreement to
the Treasury Constant Maturity Rate plus 4.17%. The amount of the balloon
payment will vary depending on the change in interest rates over the years. In
addition to the Ukiah land and facility, this loan is secured by some of our
other assets (excluding the Releta facility), including, without limitation,
most of our equipment. The amount outstanding as of December 31, 2005 on this
facility was $2,168,400.

OTHER LOANS AND CREDIT FACILITIES.

CIT GROUP/CREDIT FINANCE LINE OF CREDIT: The CIT Group/Credit Finance,
Inc. provided MBC with a $3,000,000 maximum line of credit secured by all
accounts, general intangibles, inventory, and equipment of MBC except for
specific equipment and fixtures which we leased from Finova Capital Corporation,
as well as by a second deed of trust on our Ukiah land improvements. $1,484,000
of the line of credit was advanced to MBC as an initial term loan, which was
repayable in sixty consecutive monthly installments of principal, each in

the amount of $24,700. As of December 31, 2004, the total amount outstanding on
the line of credit was approximately $1,563,300. We used the proceeds from the
BFI Facility to pay off the entire amount outstanding on May 6, 2005.

SAVINGS BANK OF MENDOCINO TEMPORARY LOAN: On December 31, 2003, SBMC
extended a temporary loan in the principal amount of $576,200 to MBC in order to
finance a buy-out of equipment leased through Finova Capital Corporation. In May
2005, the lender committed to extend the loan until May 2006. The rate of
interest on the loan is prime plus 3%.

NEDBANK LIMITED OPTION FACILITY: Nedbank Limited, a South African
registered company ("Nedbank"), provided UBSN with a multi-currency option
facility of (pound)1,250,000. This overdraft facility, which may be terminated
by Nedbank at any time (with or without default) on thirty days' notice, was
secured by all of the assets of UBSN. The agreement restricted UBSN from making
distributions and payments to MBC in excess of approximately (pound)100,000
annually (approximately $189,000). This facility was settled in full utilizing
proceeds from the Royal Bank of Scotland facility discussed below.

ROYAL BANK OF SCOTLAND FACILITY: Royal Bank of Scotland provided UBSN
with a (pound)1,750,000 maximum revolving line of credit with an advance rate
based on 80% of UBSN's qualified accounts receivable. UBSN utilized the proceeds
of this facility to settle the Nedbank facility (discussed above) on April 26,
2005. This facility has a minimum maturity of twelve months, but will be
automatically extended unless terminated by either party upon six months'
written notice.

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

WEIGHTED AVERAGE INTEREST: The weighted average interest rates paid on
our debts incurred in connection with the Domestic Territory was 9.13% for
fiscal year 2005 compared to 7.85% and 7.38% (including the long term capital
lease of equipment by Finova Capital Corporation Inc.) for fiscal years 2004 and
2003, respectively. For loans primarily associated with our European territory,
the weighted average interest rates paid were 6.15%, 5.9% and 6.42% in fiscal
years 2005, 2004 and 2003, respectively.

KEG MANAGEMENT ARRANGEMENT: WE entered into a keg management agreement
(the "Keg Agreement") with MicroStar Keg Management LLC ("Microstar") for a five
year term on September 1, 2004. Under this arrangement, MicroStar provides us
with half-barrel kegs for which we pay a filling and use fee. Distributors
return the kegs to MicroStar instead of to us. MicroStar then supplies us with
additional kegs. Under the terms of the Keg Agreement, if, on any given month,
the agreement is not extended and terminates, we would be required to purchase a
certain number of kegs from MicroStar. We anticipate financing the

purchase of such kegs through debt or lease financing, if available. However,
there can be no assurance that we will be able to finance the purchase of such
kegs. Failure to purchase the necessary kegs from MicroStar upon the termination
of the Keg Agreement is likely to have a material adverse effect on both our
business (if we are unable to find a comparable supplier) as well as on our
working capital (if we are required to purchase the kegs upon early termination
and are unable to obtain adequate financing).

CURRENT RATIO: OUR ratio of current assets to current liabilities on
December 31, 2005 was 0.75 to 1.0 and our ratio of total assets to total
liabilities was 1.28 to 1.0. On December 31, 2004, our ratio of current assets
to current liabilities was 0.83 to 1.0 and our ratio of total assets to total
liabilities was 1.3 to 1.0. On December 31, 2003, our ratio of current assets to
current liabilities was 0.84 to 1.0 and our ratio of total assets to total
liabilities was 1.4 to 1.0.

OVERDUE PROPERTY TAXES: WE owe overdue property taxes on our property in
Ukiah for the period from April 1999 to June 2003. As of June 30, 2003, the
delinquent property taxes due on the Ukiah property, including penalties and
interest, totaled $710,600. On July 31, 2003, we entered into a payment plan to
settle the deficiency, pursuant to which we made an initial payment to the
county of $143,600. In April 2005, we paid the 2005 installment, plus interest,
for a total payment of $324,600. On April 10, 2006, we paid the 2006 installment
plus interest, for a total payment of $221,100. The remaining balance of the
overdue taxes will be paid in three annual installments, due on or before April
10th for each of the years 2006, 2007, and 2008, with such installment payment
representing 20% or more of the original overdue balance, along with accrued
interest calculated at 18% per year. Because of the large amount of taxes owed,
and the county's ability to sell Ukiah property to satisfy a delinquency,
failure to settle these tax deficiencies (including failure to make prompt
payment under the installment plan) could have, a material adverse effect on our
business and financial condition.

RESTRICTED NET ASSETS. Our wholly-owned subsidiary, UBI, had
undistributed earnings of approximately $1,238,700 as of December 31, 2005.
Under UBSN's line of credit agreement with Royal Bank of Scotland, distributions
and other payments from our subsidiaries to us are not permitted if the retained
earnings drop below approximately $1,820,400.

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

OFF-BALANCE SHEET TRANSACTIONS. The Company is not a party to nor does
it engage in any off-balance sheet transactions.

CONTRACTUAL OBLIGATIONS

The following chart sets forth our contractual obligations as of
December 31, 2005.

- ----------------------------------- -------------------------------------------------------------------------------
Contractual Obligations Payments due by period
- ----------------------------------- -------------------------------------------------------------------------------
Total Less than 1 1-3 years 3-5 years More than 5
year years
- ----------------------------------- --------------- --------------- --------------- --------------- ---------------

Long Term Debt Obligations $ 2,599,300 $ 284,400 $ 601,300 $ 361,700 $ 1,351,900
- ----------------------------------- --------------- --------------- --------------- --------------- ---------------
Capital Lease Obligations 262,500 139,200 123,300 - -
- ----------------------------------- --------------- --------------- --------------- --------------- ---------------
Operating Lease Obligations 811,900 174,900 325,600 311,400 -
- ----------------------------------- --------------- --------------- --------------- --------------- ---------------
Purchase Obligations - - - - -
- ----------------------------------- --------------- --------------- --------------- --------------- ---------------
Other Long Term Liabilities 3,274,100 103,100 206,200 206,200 2,758,600
- ----------------------------------- --------------- --------------- --------------- --------------- ---------------
Total $ 6,947,800 $ 701,600 $ 1,256,400 $ 879,300 $ 4,110,500
- ----------------------------------- --------------- --------------- --------------- --------------- ---------------

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As of December 31, 2005, the Company did not hold derivative
instruments, or engage in hedging activities, of any material value or in any
material amount, whether for trading or for hedging purposes. The Company's
direct exposure to risks arises out of changes in interest rates, foreign
currency exchange rate fluctuations and commodity prices.

INTEREST RATE RISK

The Company had total debt as of December 31, 2005 of $9,586,800, of
which $6,265,600 was subject to variable rates of interest (either prime or
LIBOR plus 1.5% or prime plus 3% or prime plus 4.25%). Its long-term debt
(including current portion) as of December 31, 2005 totaled $5,236,600 of which
$3,321,200 had fixed rates of interest and the remaining $1,915,400 was subject
to variable rates. Short term debts amounted to $4,350,200, all of which were
subject to variable rates. At current borrowing levels, an increase in prime and
LIBOR rates of 1% would result in an annual increase of $62,700 in interest
expense on the Company's variable rate loans.

FOREIGN CURRENCY RATE FLUCTUATIONS

The Company's principal reporting currency is the U.S. dollar. However,
the Company's primary operating subsidiary, UBSN, operates in the European
Territory, and primarily in the United Kingdom. As a result, its income and its
expenses are denominated in pounds sterling. The Company's net income sales in
the European Territory may be impacted either positively or negatively depending
on the exchange rate of the pound sterling vis a vis the U.S. dollar. Therefore,
a percentage of the Company's consolidated cash flows and earnings which are
derived from UBSN are subject to fluctuations due to changes in the value of the
pound sterling as compared with the U.S. dollar.

UBSN and its parent, UBI, contributed approximately 63% of the Company's
total sales and in 2005, as compared to approximately 63%, in 2004 and
approximately 58.4%, in 2003. The Company had a net operating loss in 2005, but
in 2004 UBSN and UBI contributed about

69.7% of the Company's total operating income, and approximately 100% in 2003.
All of the percentages in this paragraph account for exchange rate fluctuations.

The Company utilizes the rates published by the Board of Governors of
the Federal Reserve System to convert operational results and cash flow for the
European Territory into U.S. dollars. On that basis, the average annual rates of
exchange for converting pounds sterling into dollars during the years 2005,
2004, and 2003 were $1.820, $1.833 and $1.634 respectively, representing a
decrease in the value of the pound sterling (as compared to the dollar) of 0.7%
for 2005 as compared to 2004 and an increase of 12.18% for 2004 as compared to
2003.

Similarly, the exchange rates used to convert the value of the assets
and liabilities of UBI and UBSN from pound sterling to U.S. dollars as at
December 31, 2005, 2004, and 2003 were $1.719, $1.916, and $1.784, respectively.
These year-end valuations represent a decrease in the value of the pound
sterling, vis a vis the U.S. dollar, of 10.3% as of December 31, 2005 as
compared to December 31, 2004, and an increase in the value of the pound
sterling, as against the U.S. dollar, of 7.4% as of December 31, 2004 as
compared to December 31, 2003.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

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

The following chart sets forth, on a quarterly basis, certain financial
information about the Company's results of operations for the 2005 and 2004
fiscal years.

- ------------------ ----------------------------------------------------- ------------------------------------------------------
2005 2004
- ------------------ ----------------------------------------------------- ------------------------------------------------------
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
- ------------------ ------------ ------------ ------------- ------------- ------------ -------------- ------------- ------------

Net Sales $7,256,900 $8,240,600 $7,919,300 $7,875,000 $6,803,200 $8,187,100 $7,978,300 $8,536,900
- ------------------ ------------ ------------ ------------- ------------- ------------ -------------- ------------- ------------
Gross profit 2,270,500 2,702,200 2,483,100 2,081,800 2,168,400 2,814,600 2,769,500 2,707,500
- ------------------ ------------ ------------ ------------- ------------- ------------ -------------- ------------- ------------
Net income(loss) (198,400) 212,100 (564,600) (763,800) (374,400) 166,400 (34,000) (226,900)
- ------------------ ------------ ------------ ------------- ------------- ------------ -------------- ------------- ------------
Basic Earnings
(Loss) per share $(0.02) $0.02 $(0.05) $(0.07) $(0.03) $0.01 $(0.00) $(0.02)
- ------------------ ------------ ------------ ------------- ------------- ------------ -------------- ------------- ------------

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

None.

ITEM 9A. CONTROLS AND PROCEDURES.

The Company's management, including the Chief Executive Officer ("CEO")
and Chief Financial Officer ("CFO") has evaluated the effectiveness of the
design, maintenance, and operation of the Company's "disclosure controls and
procedures" as of December 31, 2005, the end of the period covered by this
report. Disclosure controls and procedures are controls and other procedures
that are designed to ensure that information required to be disclosed by the
Company in its reports under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), is recorded, processed, summarized, and reported within
the time periods specified in the

Commission's rules and forms. Disclosure controls and procedures are also
designed to ensure that information that the Company is required to disclose in
its reports under the Exchange Act is accumulated and communicated to the
Company's management, including its CEO and CFO, as appropriate to allow timely
decisions regarding the required disclosure.

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

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

LIMITATIONS ON CONTROLS

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

ITEM 9B. OTHER INFORMATION.

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY

The following table sets forth the names, ages as of February 28, 2006,
and certain information regarding each of the Company's current directors and
executive officers:

- ---------------------------------------- --------- ----------------------------------------------------- ------------
Director
--------
Name Age Position(s) Since
---- --- ----------- -----
- ---------------------------------------- --------- ----------------------------------------------------- ------------
Scott R. Heldfond 61 Director 2005
- ---------------------------------------- --------- ----------------------------------------------------- ------------
Michael Laybourn 67 Director 1993
- ---------------------------------------- --------- ----------------------------------------------------- ------------
Vijay Mallya, Ph.D. 50 Director and Chairman of the Board 1997
- ---------------------------------------- --------- ----------------------------------------------------- ------------
Jerome G. Merchant*+ 44 Director 1997
- ---------------------------------------- --------- ----------------------------------------------------- ------------
Mahadevan Narayanan 48 Chief Financial Officer and Secretary
- ---------------------------------------- --------- ----------------------------------------------------- ------------
Sury Rao Palamand, Ph.D.*+ 74 Director 1998
- ---------------------------------------- --------- ----------------------------------------------------- ------------
Kent D. Price*+ 64 Director 1998
- ---------------------------------------- --------- ----------------------------------------------------- ------------
Yashpal Singh 60 Director, President, and Chief Executive Officer 1997
- ---------------------------------------- --------- ----------------------------------------------------- ------------

* Member of the Audit/Finance Committee

+ Member of the Compensation Committee.

Scott R. Heldfond was elected as a director at the Annual Meeting of
Shareholders held on January 14, 2005. Since 1999, Mr. Heldfond has been a
Managing Partner of eSEED Capital, LLC, a technology-focused merchant bank, and
the Executive Director of Nasdaq Insurance, LLC, a national insurance brokerage
and consulting firm. From 1995 to 1999, he was the President and Chief Executive
Officer of Frank Crystal & Co., a New York-based insurance company. Mr. Heldfond
also currently serves as a director of HomeGain, Inc., a private venture backed
company, and UBICS, a NASDAQ traded firm that provides information technology
staffing and solutions for domestic and international businesses. He is a
Commissioner, and the President, of the Health Services Commission of the City
and County of San Francisco, in addition to serving as an advisor to or on the
Board of Directors of a number of local, statewide, and national charitable and
community service organizations. Mr. Heldfond received his undergraduate degree
from the University of California, Berkeley, and a J.D. from the University of
San Francisco Law School.

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

Vijay Mallya, Ph.D., became Chairman of the Board in October 1997 and
was its Chief Executive Officer until January 2005. Dr. Mallya is Chairman of
UBICS, Inc., United Breweries Limited, UB Engineering Limited, Mangalore
Chemicals and Fertilizers Ltd., Herbertsons Limited, McDowell & Co. Ltd., and
other affiliated companies (collectively the "UB Group"). United Breweries
Limited and McDowell & Co., Ltd. are two of Asia's leading beer and spirits
companies. The UB Group has annual sales in excess of U.S. dollars $1 billion.
He also sits on boards of several foreign companies and organizations including
companies comprising the UB Group, The Institute of Economic Studies (India),
and the Federation of the Indian Chamber of Commerce and Industries. Dr. Mallya
was recently elected to serve as a member of the Upper

House of the Indian Parliament. Dr. Mallya holds a Bachelor of Commerce degree
from the University of Calcutta in India and an honorary Doctorate in Business
Administration from the University of California, Irvine.

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

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

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

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

Yashpal Singh, President of the Company since January 2000, became a
director in October 1997 and has served as its Executive Vice President and
Chief Operating Officer since

May 1998. Mr. Singh became the Chief Executive Officer in January 2005. From May
1997 to March 1998, Mr. Singh served as Executive Vice-President- Operations for
UBA. In that capacity, he was responsible for UBA's United States brewing
operations. Between 1992 and 1997, Mr. Singh also served as Senior Vice
President-Operations for United Breweries Ltd., an Indian Corporation, where he
was responsible for the operations of 12 breweries, instituting new projects,
and technical and operational evaluation of potential acquisition opportunities
worldwide. Mr. Singh has over 38 years of experience in the brewing industry.
Mr. Singh holds a Bachelors degree in Science from Punjab University in India,
and has graduate training in the fields of Brewing, Malting, and Mineral Water
Technology. Mr. Singh is an associate member of the Institute of Brewing,
London, a member of the Master Brewers Association of America, and was a former
executive member of the Managing Committee of the All India Brewer's
Association.

COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT

One of the members of the Company's board of directors, Scott Heldfond,
failed to file a Form 3 upon his appointment to the board of directors in
January 2005. Dr. Vijay Mallya, the Chairman of the Company's board of directors
did not file a Form 4 covering the decrease in his indirect beneficial ownership
of shares of the Company's common stock in relation to the UBHL merger discussed
above. Prior to the merger, Dr Mallya was deemed to be a beneficial owner of
such shares as a result of being a beneficiary of a trust which held voting
power over such shares. Following the merger, Dr. Mallya may be deemed to be a
beneficial owner of such shares as a control person of UBHL.

AUDIT COMMITTEE FINANCIAL EXPERT

The Company's Board of Directors believes that at least one member of
the Company's Audit Committee - Mr. Kent D. Price - is both an independent
Director and qualifies as an "audit committee financial expert" as that term is
defined in the Securities Exchange Act of 1934, as amended, and pursuant to the
rules and regulations promulgated by the Securities and Exchange Commission.

CODE OF ETHICS

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

ITEM 11. EXECUTIVE COMPENSATION

The following table sets forth the annual compensation, including
salary, bonuses, and certain other compensation, paid by the Company to its
Chief Executive Officer and most highly-compensated executive officers and
employees during each of the fiscal years ended December 31, 2005, 2004 and
2003. None of the Company's other executive officers aggregate annual salary and
bonus exceeded $100,000 in any of those years.

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

SUMMARY COMPENSATION TABLE

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

- -------------------- -------- ------------- -------------- ------------- ------------- ------------- ----------- --------------
Vijay Mallya 2005 247,428*
Chairman of the -------- ------------- -------------- ------------- ------------- ------------- ----------- --------------
Board 2004 248,310*
-------- ------------- -------------- ------------- ------------- ------------- ----------- --------------
2003 158,129*
- -------------------- -------- ------------- -------------- ------------- ------------- ------------- ----------- --------------

- -------------------- -------- ------------- -------------- ------------- ------------- ------------- ----------- --------------
Yashpal Singh 2005 120,000 43,300 15,862**
President and Chief -------- ------------- -------------- ------------- ------------- ------------- ----------- --------------
Executive Officer 2004 120,000 43,300 14,914**
-------- ------------- -------------- ------------- ------------- ------------- ----------- --------------
2003 118,875 41,887 13,538**
- -------------------- -------- ------------- -------------- ------------- ------------- ------------- ----------- --------------

- -------------------- -------- ------------- -------------- ------------- ------------- ------------- ----------- --------------
Mark Anderson 2005 *** *** ***
Sales Manager -------- ------------- -------------- ------------- ------------- ------------- ----------- --------------
2004 83,160 27,589 10,108
-------- ------------- -------------- ------------- ------------- ------------- ----------- --------------
2003 79,200 27,091 7,847
-------- ------------- -------------- ------------- ------------- ------------- ----------- --------------

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

* Includes (pound)70,000 (approximately $127,400 in U.S. dollars
at average exchange rate for the year 2005) paid to Dr. Mallya
by UBI during fiscal year 2005, as compensation for promoting
the Company's products in the European Territory outside of the
U.K.

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

*** Ceased to be an employee with effect from September 16, 2005,
partial year compensation was less than $100,000.

COMPENSATION OF DIRECTORS

In the past, the Company has compensated each non-employee Director for
his attendance at the meetings of the Board of Directors and for his attendance
at meetings of committees of the Board of Directors, annually granting each
non-employee Director both (a) that number of shares of the Company's common
stock which had a fair market value of $3,000 for each board meeting, and $1,000
for each committee meeting he attended during the prior year and (b) options to
purchase that number of shares of the Company's common stock which had a fair
market value of $25,000. Since 2003, however, due to the drop in the trading or
quoted price for the Company's Common Stock to less than $1.00 per share, the
Board of Directors agreed to receive Company's shares valued at book cost as of
the end of each year or a value of $1.00 per share whichever is higher and has
suspended the Company's stock option plan. The

Compensation Committee is currently considering a proposal to significantly
modify the previous stock option plan, and it is expected that one or more new
plans and guidelines may be adopted later in the year.

COMPENSATION COMMITTEE INTERLOCKS. Jerome Merchant who is a member of
the Company's Compensation Committee, was a former executive officer of the
Company.

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

The following table sets forth certain information known to the Company
regarding the beneficial ownership of the Company's Common Stock and Series A
Preferred Stock as of March 31, 2006, for (a) each shareholder known by the
Company to own beneficially 5% or more of the outstanding shares of its Common
Stock or Series A Preferred Stock; (b) each director; and (c) all directors and
executive officers of the Company as a group. Except as otherwise noted, the
Company believes that the beneficial owners of the Common Stock and Series A
Preferred Stock listed below, based on information furnished by such owners,
have sole investment and voting power with respect to such shares, subject to
community property laws where applicable.

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

- ------------------------------------------------------- ------------------------- -------------------
COMMON STOCK

- ------------------------------------------------------- ------------------------- -------------------
United Breweries of America, Inc. 3,087,818(2) 26.9%
1050, Bridge way,
Sausalito, CA 94965
- ------------------------------------------------------- ------------------------- -------------------
Inversiones Mirabel S.A. 5,500,000(2) 47.9%
Hong Kong Bank Building
6th Floor, Samuel Lewis Avenue
P O Box 6-4298, El Dorado
Panama City, Panama
- ------------------------------------------------------- ------------------------- -------------------
United Breweries (Holdings) Limited. 8,587,818(3) 74.8%
100/1, Richmond Road,
Bangalore - 560 025, India
- ------------------------------------------------------- ------------------------- -------------------
H. Michael Laybourn + 365,817(4) 3.2%
- ------------------------------------------------------- ------------------------- -------------------
Vijay Mallya 8,587,818(5) 74.8%
- ------------------------------------------------------- ------------------------- -------------------
Kent D Price 186,973(4) 1.6%
c/o Parker Price Venture Capital, Inc.
101, California Street
Suite 2830
San Francisco, CA 94111
- ------------------------------------------------------- ------------------------- -------------------
Sury Rao Palamand, Ph.D. + 149,094(4) 1.3%
- ------------------------------------------------------- ------------------------- -------------------
Jerome G. Merchant+ 153,742(4) 1.3%
- ------------------------------------------------------- ------------------------- -------------------
Yashpal Singh+ -- --
- ------------------------------------------------------- ------------------------- -------------------
Scott R. Heldfond + -- --
- ------------------------------------------------------- ------------------------- -------------------
All Directors and executive officers as a group
(8 persons) 9,443,444(6) 82%
- ------------------------------------------------------- ------------------------- -------------------

- ------------------------------------------------------- ------------------------- -------------------
SERIES A PREFERRED STOCK
- ------------------------------------------------------- ------------------------- -------------------
H. Michael Laybourn + 6,100 2.7%
- ------------------------------------------------------- ------------------------- -------------------
All Directors and executive officers as a group
(8 persons) 6,100 2.7%
- ------------------------------------------------------- ------------------------- -------------------

+ 1601 Airport Road, Ukiah, CA 95402

(1) Applicable percentages of ownership are based on 11,473,914
shares of Common Stock outstanding. Shares of Common Stock
subject to a contract of purchase or options currently
exercisable or exercisable within 60 days after the date of this
Annual Report on Form 10-K are deemed outstanding for purposes
of computing the percentage ownership of the person obligated to
purchase the shares or holding the options, but are not deemed
outstanding for computing the percentage of any other person.

(2) Does not include 1,701,471 shares issuable to UBA upon
conversion of certain convertible notes issued by MBC to UBA
under a Master Line of Credit Agreement (For additional
information, see "Item 13. Certain Relationships and Related
Transactions") including 266,667 shares issuable upon conversion
of a similar convertible note issued to UBA on March 2, 2005,
convertible after a period of 18 months. UBHL is the ultimate
beneficiary of substantially all of the shares owned by both UBA
and Inversiones.

(3) Includes all shares held by the Company's two largest
shareholders, UBA and Inversiones. UBHL is the beneficial owner
of UBA and Inversiones because they are both controlled by Rigby
International Corp., a company registered in the British Virgin
Island with its primary offices at Vanterpool Plaza, 2nd Floor,
Wickhams Cay I, Road Town, Tortola, British Virgin Island 2 and
its mailing address c/o CAS SA, 12-14 Avenue, Riverdil, CH-1260,
Lyon, Switzerland, which in turn is a wholly-owned subsidiary of
UBHL. Such amount does not include 1,701,471 shares issuable to
UBA upon conversion of certain convertible notes issued by MBC
to UBA under a Master Line of Credit Agreement including 266,667
shares issuable upon conversion of a convertible note issued to
UBA on March 2, 2005, which is convertible after a period of 18
months.

(4) Includes 48,077 shares subject to options that are exercisable
or will be exercisable within 60 days.

(5) Includes all shares indirectly held by UBHL. Does not include
1,701,471 shares issuable to UBA upon conversion of certain
convertible notes issued by MBC to UBA described in footnotes
(2) and (3) above. Dr. Mallya disclaims beneficial ownership of
the reported securities except to the extent of his pecuniary
interest therein.

(6) Includes 192,308 shares subject to options that are exercisable
or will be exercisable within 60 days. Does not include shares
which may be obtained upon the conversion of the Notes described
in footnotes (2) and (3), above.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

MASTER LINE OF CREDIT AGREEMENT

As of the date of this filing, UBA has made thirteen (13) separate
advances to the Company under the Credit Agreement and one additional advance on
substantially the same terms as those under the Credit Agreement, pursuant to a
series of individual eighteen-month promissory notes issued by the Company to
UBA (the "UBA Notes"). The aggregate outstanding principal amount of the UBA
Notes as of December 31, 2005 was $1,915,400, and the accrued but unpaid
interest thereon was equal to approximately $636,800, for a total of $2,552,200.

LICENSE OF THE KINGFISHER TRADEMARK

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

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

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

SHEPHERD NEAME, LTD.

As described more fully below, the Company's principal European
subsidiary, UBSN, is a party to a Brewing Agreement and a Loan Agreement with
Shepherd Neame. Shepherd Neame and the Company may be deemed to be related
parties, because Mr. R.H.B. Neame (Shepherd Neame's Chairman of the Board) was
also a director of MBC until 2004, and Mr. David

Townshend (a senior Shepherd Neame employee) was serving as the President of
UBSN (pursuant to an agreement between UBSN and Shepherd Neame) and was also a
director of MBC until 2004.

BREWING AGREEMENT

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

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

LOAN AGREEMENT

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

DISTRIBUTION AGREEMENT

UBI entered into a Distribution Agreement with its wholly-owned
subsidiary UBSN on October 9, 1998. Under this agreement, which was subsequently
amended by a Supplemental Agreement dated as of October 24, 2001 (together, the
"Distribution Agreement"), UBI granted UBSN an exclusive sublicense for the
distribution of all lager and other beer products brewed or prepared for sale in
the Company's European Territory, and a sublicense to use the Kingfisher

trademark and trade name, to manufacture, package, market, distribute, and sell
beer and other products using the Kingfisher trademark and logo, and to enter
into a Brewing License Agreement described below. The Distribution Agreement,
which also requires UBSN to pay UBI a royalty fee of 50 British pence
(approximately $0.91, at the average exchange rates in effect during fiscal year
2005) for every 100 liters (26 gallons) of beer brewed for sale in the European
Territory, will expire (unless its term is extended) in October 2013.

MARKET DEVELOPMENT AGREEMENT

Effective October 26, 2001, MBC and UBSN entered into a Market
Development, General and Administrative Services Agreement (the "Market
Development Agreement"), under the terms of which UBSN engaged MBC to perform a
variety of advertising, promotional, and other market development activities in
the United States, in connection with Kingfisher beer and related consumer
products (the "Products"), provide certain legal and business management support
services to UBSN, and provide assistance with the establishment and management
of distribution channels for the Products in the United States. In consideration
for the services received under this agreement, UBSN agreed to pay MBC service
fees amounting in the aggregate to $1,500,000 over the period from 2001 through
2003. No additional payments are anticipated to be made in the future. MBC and
UBSN agreed to extend the agreement for a further period of five years.

BREWING LICENSE AGREEMENT

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

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.

The Company has appointed PMB & Co, L.L.P. ("PMB"), as its independent
auditors to perform the audit of the Company's financial statements for the year
2005. The estimated audit fees for the audit of the 2005 financial statements is
$90,000.

Moss Adams, L.L.P. ("Moss Adams"), performed the audit of the Company's
financial statements for the years 2004 and 2003. All audit and other services
performed by PMB on behalf of the Company are approved in advance by the Audit
Committee, on a case-by-case basis.

AUDIT FEES. The aggregate fees billed by Moss Adams for the audit of the
Company's annual consolidated financial statements for the years ended December
31, 2003 and 2004 were $92,754 and $117,885, respectively; fees of an additional
$26,955 and $35,690 were billed to the Company during 2004 and 2005,
respectively, in connection with Moss Adams' review of its financial statements
in connection with the Company's Quarterly Reports on Form 10-QSB and 10-Q for
those years. Such fees represented 82% and 87%, respectively, of the total fees
for services rendered to the Company by Moss Adams during 2004 and 2005.

AUDIT RELATED FEES. Moss Adams billed $2,888 in fees to the Company in
2004 (none for 2005) for assurance or related services.

TAX FEES. The aggregate fees billed during 2004 and 2005 for products
and services provided by Moss Adams, other than those described in the foregoing
paragraphs, were $15,837 and $19,611, respectively. Such fees represented 11% of
the total fees for services rendered to the Company by Moss Adams during both
2004 and 2005.

ALL OTHER FEES. The aggregate fees billed to the Company for all other
services rendered by Moss Adams for the years ended December 31, 2004 and 2005
were $7,138 and $4,341, respectively. Such fees represented 5% and 2%
respectively of the total fees for services rendered to the Company by Moss
Adams during 2004 and 2005.

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

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.

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

(1) Audited financial statements and financial statement
schedules

Report of PMB & Co., LLP, Independent Auditors

Consolidated Balance Sheets as of December 31, 2005 and 2004

Consolidated Statements of Operations and Comprehensive
Income for the Years Ended December 31, 2005, 2004, and 2003

Consolidated Statements of Stockholders' Equity for the Years
Ended December 31, 2005, 2004, and 2003

Consolidated Statements of Cash Flow for the Years Ended
December 31, 2005, 2004, and 2003

Notes to Financial Statements

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

(3) LIST OF EXHIBITS.

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

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

3.2 (T) Bylaws of the Company, as amended.

10.1 (A) Mendocino Brewing Company Profit Sharing Plan.

10.2 (T) Amended 1994 Stock Option Plan

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

10.4 [Intentionally omitted]

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

10.6 [Intentionally omitted]

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

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

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

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

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

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

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

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

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

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

10.16 [Intentionally omitted]

10.17 [Intentionally omitted]

10.18 [Intentionally omitted]

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

10.20 [Intentionally omitted]

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

10.22 (L) Indemnification Agreement with Vijay Mallya.

10.23 (L) Indemnification Agreement with Michael Laybourn.

10.24 (L) Indemnification Agreement with Jerome Merchant.

10.25 (L) Indemnification Agreement with Yashpal Singh.

10.27 (L) Indemnification Agreement with Robert Neame.

10.28 (L) Indemnification Agreement with Sury Rao Palamand.

10.29 (L) Indemnification Agreement with Kent Price.

10.30 [Intentionally omitted]

10.31 [Intentionally omitted]

10.32 [Intentionally omitted]

10.33 (N) Employment Agreement with Yashpal Singh.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

10.64 [Intentionally omitted]

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

10.66 [Intentionally omitted]

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

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

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

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

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

10.71 [Intentionally omitted]

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

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

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

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

10.76 (DD) Invoice Discounting Agreement between The Royal Bank of
Scotland Commercial Services Limited and UBSN Limited, dated
April 26, 2005

14.1 (V) Code of Ethics

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

(P) Amendment No. 6 to Schedule 13D filed May 12, 2000, by United
Breweries of America, Inc. and Vijay Mallya.

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

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

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

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

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

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

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

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

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

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

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

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

(CC) The Company's Annual Report on Form 10-K for the period ended
December 31, 2004

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

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

10.77 Secured Promissory Note in favor of BFI Business Finance, dated
December 27, 2005

10.78 Secured Promissory Note in favor of BFI Business Finance, dated
April 5, 2006

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

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

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

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

SIGNATURES

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

(Registrant) MENDOCINO BREWING COMPANY, INC.

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

Date: April 17, 2006

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

(Registrant) MENDOCINO BREWING COMPANY, INC.

By: /s/ Dr. Vijay Mallya
-----------------------------
Dr. Vijay Mallya
Director and Chairman of the
Board

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

Date: April 17, 2006

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

Date: April 17, 2006

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

Date: April 17, 2006

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

Date: April 17, 2006

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

Date: April 17, 2006

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

Date: April 17, 2006

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

Date: April 17, 2006

CONTENTS

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM F - 1-2

CONSOLIDATED FINANCIAL STATEMENTS

Balance sheets F - 3

Statements of operations and comprehensive income F - 4

Statements of stockholders' equity F - 5

Statements of cash flows F - 6

Notes to financial statements F - 7-30

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

We have audited the accompanying consolidated balance sheet of Mendocino Brewing
Company, Inc. ("MBC") as of December 31, 2005, and the related consolidated
statements of operations and comprehensive income (loss), stockholders' equity
and cash flows for the year ended December 31, 2005. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of MBC,
Inc. as of December 31, 2005 and the consolidated results of their operations
and their consolidated cash flows for the year ended December 31, 2005, in
conformity with accounting principles generally accepted in the United States of
America.

/s/ POHL, MCNABOLA, BERG & COMPANY, LLP

POHL, MCNABOLA, BERG & COMPANY, LLP
San Francisco, California
March 10, 2006

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

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

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

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

/s/ Moss Adams LLP

Santa Rosa, California
February 4, 2005

F-1

MENDOCINO BREWING COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2005 AND 2004

2005 2004
-------------------- --------------------

ASSETS
CURRENT ASSETS
Cash $ 247,700 $ 526,600
Accounts receivable, net of allowance for doubtful
accounts of $54,900 and $47,500, respectively 7,051,500 8,477,200
Inventories 1,151,400 1,185,400
Prepaid expenses 548,500 347,300
-------------------- --------------------
Total Current Assets 8,999,100 10,536,500
-------------------- --------------------

PROPERTY AND EQUIPMENT(NET OF ACCUMULATED DEPRECIATION) 13,185,600 13,533,900
-------------------- --------------------

OTHER ASSETS
Income tax receivable 116,000 -
Deposits and other assets 179,200 205,100
Intangibles net of amortization 77,500 87,600
-------------------- --------------------
Total Other Assets 372,700 292,700
-------------------- --------------------
Total Assets $ 22,557,400 $ 24,363,100
==================== ====================

LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Line of credit $ 3,774,000 $ 3,282,200
Note payable 576,200 576,200
Accounts payable 5,491,800 5,897,600
Accrued liabilities 1,714,800 1,402,900
Legal dispute settlement - 911,800
Income taxes payable - 134,100
Current maturities of notes to related parties 103,100 115,000
Current maturities of obligation under long-term debt 284,400 285,300
Current maturities of obligation under capital lease 131,600 146,500
-------------------- --------------------
Total Current Liabilities 12,075,900 12,751,600
-------------------- --------------------

LONG-TERM LIABILITIES
Notes to related parties 3,171,000 2,795,600
Long term debt, less current maturities 2,314,900 2,599,300
Obligations under capital lease, less current maturities 121,500 62,600
-------------------- --------------------
Total Long-Term Liabilities 5,607,400 5,457,500
-------------------- --------------------
Total Liabilities 17,683,300 18,209,100
-------------------- --------------------

STOCKHOLDERS' EQUITY
Preferred stock, Series A, no par value, with liquidation
preference of $1 per share; 10,000,000 shares
authorized, 227,600 shares issued and outstanding 227,600 227,600
Common stock, no par value 30,000,000 shares
authorized, 11,473,914 and 11,266,874 shares
issued and outstanding 14,747,300 14,648,600
Accumulated comprehensive income 130,400 194,300
Accumulated deficit (10,231,200) (8,916,500)
-------------------- --------------------
Total Stockholders' Equity 4,874,100 6,154,000
-------------------- --------------------
Total Liabilities and Stockholders' Equity $ 22,557,400 $ 24,363,100
==================== ====================

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.

F-2

MENDOCINO BREWING COMPANY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
DECEMBER 31, 2005, 2004, AND 2003

2005 2004 2003
----------------- ----------------- -----------------

SALES $ 31,927,300 $ 32,157,900 $ 28,864,200

LESS EXCISE TAXES 635,500 652,400 673,900
----------------- ----------------- -----------------

NET SALES 31,291,800 31,505,500 28,190,300

COST OF GOODS SOLD 21,754,200 21,045,500 19,145,500
----------------- ----------------- -----------------

GROSS PROFIT 9,537,600 10,460,000 9,044,800
----------------- ----------------- -----------------

OPERATING EXPENSES
Retail operating 102,400 139,500 323,400
Marketing 6,216,200 5,841,200 4,423,900
General and administrative 3,735,400 3,774,900 3,320,000
Legal dispute settlement - 250,600 -
----------------- ----------------- -----------------
Total Operating Expenses 10,054,000 10,006,200 8,067,300
----------------- ----------------- -----------------

INCOME (LOSS) FROM OPERATIONS (516,400) 453,800 977,500
----------------- ----------------- -----------------

OTHER INCOME (EXPENSE)
Miscellaneous income 60,600 36,800 162,900
Profit (loss) on sale of equipment (6,000) 15,600 (300)
Interest expense (978,500) (853,300) (828,500)
----------------- ----------------- -----------------
Total Other Income (Expense) (923,900) (800,900) (665,900)
----------------- ----------------- -----------------

INCOME (LOSS) BEFORE INCOME TAXES (1,440,300) (347,100) 311,600

PROVISION FOR (BENEFIT FROM) INCOME TAXES (125,600) 121,800 264,700
----------------- ----------------- -----------------

NET INCOME (LOSS) (1,314,700) (468,900) 46,900

OTHER COMPREHENSIVE INCOME (LOSS)
Foreign currency translation adjustment (63,900) 116,300 113,300
----------------- ----------------- -----------------

COMPREHENSIVE INCOME (LOSS) $ (1,378,600) $ (352,600) $ 160,200
================= ================= =================

NET INCOME (LOSS) PER COMMON SHARE -
Basic and diluted $ (0.11) $ (0.04) $ 0.00
================= ================= =================

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING -
basic and diluted 11,472,213 11,266,874 11,266,874
================= ================= =================

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.

F-3

MENDOCINO BREWING COMPANY, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2005, 2004, AND 2003

SERIES A OTHER
PREFERRED COMMON COMPREHENSIVE ACCUMULATED TOTAL
SHARES AMOUNT SHARES AMOUNT INCOME/(LOSS) DEFICIT EQUITY
----------- -------------- ------------ --------------- -------------- -------------- --------------

Balance December 31, 2002 227,600 $ 227,600 1,266,874 $ 14,648,600 $ (35,300) $ (8,494,500) $ 6,346,400
----------- -------------- ------------ --------------- -------------- -------------- --------------

Net Income - - - - - 46,900 46,900
Currency Translation
Adjustment - - - - 113,300 - 113,300
----------- -------------- ------------ --------------- -------------- -------------- --------------

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

Net (Loss) - - - - - (468,900) (468,900)
Currency Translation
Adjustment - - - - 116,300 - 116,300
----------- -------------- ------------ --------------- -------------- -------------- --------------
Balance December 31, 2004 227,600 $ 227,600 11,266,874 $ 14,648,600 $ 194,300 $ (8,916,500) $ 6,154,000
----------- -------------- ------------ --------------- -------------- -------------- --------------

Stock issued for
accrued compensation - - 207,040 98,700 - - 98,700
Net (Loss) - - - - - (1,314,700) (1,314,700)
Currency Translation
Adjustment - - - - (63,900) - (63,900)
----------- -------------- ------------ --------------- -------------- -------------- --------------

Balance December 31, 2005 227,600 $ 227,600 11,473,914 $ 14,747,300 $ 130,400 $(10,231,200) $ 4,874,100
=========== ============== ============ =============== ============== ============== ==============

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.

F-4

MENDOCINO BREWING COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2005, 2004, AND 2003

2005 2004 2003
--------------- --------------- ---------------

CASH FLOWS FROM OPERATING ACTIVITIES
Net Income (Loss) $ (1,314,700) $ (468,900) $ 46,900
Adjustments to reconcile net income (loss) to net cash from operating
activities:
Depreciation and amortization 903,700 1,031,300 1,127,400
Allowance for doubtful accounts 10,200 8,000 (122,700)
Loss (Gain) on sale of assets 6,000 (15,600) 300
Deferred income tax (122,900) - -
Changes in:
Accounts receivable 702,600 (1,004,900) (519,800)
Inventories 34,000 700 288,200
Prepaid expenses (229,800) 224,200 (124,200)
Deposits and other assets 59,400 (27,800) (5,800)
Accounts payable 47,400 125,700 155,800
Accrued liabilities (420,200) 338,200 334,200
Income taxes payable (127,400) (192,500) (24,400)
--------------- --------------- ---------------
Net cash provided by (used for) operating activities: (451,700) 18,400 1,155,900
--------------- --------------- ---------------

CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, equipment, and leasehold improvements (600,900) (597,800) (728,600)
Proceeds from new distributors - - 655,200
Proceeds from sale of fixed assets 77,000 24,300 15,200
--------------- --------------- ---------------
Net cash provided by (used in) investing activities: (523,900) (573,500) (58,200)
--------------- --------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowing on line of credit 706,400 1,211,500 347,600
Borrowings on long term debt - - 403,700
Repayment on long-term debt (285,300) (575,900) (636,700)
Borrowings on related party debt 542,100 88,600 85,200
Repayment on related party debt (91,000) (128,300) (98,000)
Disbursement in excess of deposit - - (134,300)
Payments on obligations under long term leases (142,900) (124,000) (680,900)
--------------- --------------- ---------------
Net cash provided by (used in) financing activities: 729,300 471,900 (713,400)
--------------- --------------- ---------------

EFFECT OF EXCHANGE RATE CHANGES ON CASH (32,600) 55,500 23,200
--------------- -------------- ---------------

NET CHANGE IN CASH (278,900) (27,700) 407,500
CASH, beginning of period 526,600 554,300 146,800
--------------- --------------- ---------------
CASH, end of period $ 247,700 $ 526,600 $ 554,300
=============== =============== ===============

SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the period for:
Interest $ 836,400 $ 764,700 $ 743,300
=============== =============== ===============
Income taxes $ - $ 314,200 $ 305,600
=============== =============== ===============
Non-cash investing activity:
Common stock issued for accrued compensation $ 98,700 $ - $ -
=============== =============== ===============
Seller Financed equipment $ 216,400 $ 15,400 $ 173,900
=============== =============== ===============

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.

F-5

MENDOCINO BREWING COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

DESCRIPTION OF OPERATIONS

Mendocino Brewing Company, Inc., ("the Company" or "MBC"), has operating
subsidiaries, Releta Brewing Company, ("Releta"), and United Breweries
International, Limited (UK), ("UBIUK"). In the United States, MBC and its
subsidiary, Releta, operate two breweries that produce beer and malt beverages
for the specialty "craft" segment of the beer market. The breweries are located
in Ukiah, California and Saratoga Springs, New York. The Company also owns and
operates a brewpub and gift store located in Hopland, California. The majority
of sales for Mendocino Brewing Company are in California. The Company brews
several brands, of which Red Tail Ale is the flagship brand. In addition, the
Company performs contract brewing for several other brands, and MBC holds the
license to distribute Kingfisher Lager in the US.

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

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements present the accounts of Mendocino Brewing
Company, Inc., and its wholly-owned subsidiaries, Releta Brewing Company, LLC,
and UBIUK. All material inter-company balances, profits and transactions have
been eliminated.

BASIS OF PRESENTATION AND ORGANIZATION

The financial statements for the fiscal years ended December 31, 2005, 2004 and
2003, have been prepared in accordance with accounting principles generally
accepted in the United States. The financial statements and notes are
representations of the management and the Board of Directors, who are
responsible for their integrity and objectivity.

CASH AND CASH EQUIVALENTS, SHORT AND LONG-TERM INVESTMENTS

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

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

TRADE ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS

Trade accounts receivable are stated at the amount the Company expects to
collect. The Company maintains allowances for doubtful accounts for estimated
losses resulting from the inability of its customers to make required payments.
Management considers the following factors when determining the collectibility
of specific customer accounts: customer credit-worthiness, past transaction
history with the customer, current economic industry trends and changes in
customer payment terms. If the financial condition of the Company's customers
were to deteriorate, adversely affecting their ability to make payments,
additional allowances would be required. Based on management's assessment, the
Company provides for estimated uncollectible amounts through a charge to
earnings and a credit to a valuation allowance. Balances that remain outstanding
after the Company has used reasonable collection efforts are written off through
a charge to the valuation allowance and a credit to accounts receivable.

INVENTORIES

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

F-6

MENDOCINO BREWING COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

PROPERTY AND EQUIPMENT

Property and equipment are stated at cost and depreciated or amortized using
straight-line method over the assets' estimated useful lives. Leasehold
improvements are amortized over the shorter of the life of the related asset or
the life of the lease. The Company uses other depreciation methods (generally,
accelerated depreciation methods) for tax purposes where appropriate. Costs of
maintenance and repairs are charged to expense as incurred; significant renewals
and betterments are capitalized. Long-lived assets are assessed for impairment
whenever events or changes in circumstances indicate their carrying amounts may
not be recoverable. The evaluation is based on an estimate of the future
undiscounted net cash flows of the related asset or asset grouping over the
assets' remaining life. Long-lived assets that are assessed to be impaired are
reduced to their estimated net fair value.

Estimated useful lives of property and equipment are as follows:

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

INTANGIBLES

Intangibles consist of, trade names, trademarks, and other intangibles.
Intangibles that are amortized are deferred financing costs. Assets determined
to have indefinite lives are no longer amortized in accordance with SFAS No.
142, GOODWILL AND OTHER INTANGIBLES, but are tested for impairment on an annual
basis. The carrying amount of intangibles not subject to amortization is $47,600
for December 31, 2005 and 2004.

DEFERRED FINANCING COSTS

Costs relating to obtaining financing are capitalized and amortized over the
term of the related debt using the straight-line method. Deferred financing
costs were $40,500, and the related accumulated amortization at December 31,
2005 and 2004 was $21,600 and $24,300, respectively. Amortization of deferred
financing costs charged to operations was $2,700 for each of the years ended
December 31, 2005, 2004 and 2003. The Company will continue to amortize these
fees until 2012. When a loan is paid in full, any unamortized financing costs
are removed from the related accounts and charged to operations.

IMPAIRMENT OF INTANGIBLE ASSETS

The Company evaluates the recoverability of identifiable intangible assets
whenever events or changes in circumstances indicate that an intangible asset's
carrying amount may not be recoverable. Such circumstances could include, but
are not limited to: (1) a significant decrease in the market value of an asset,
(2) a significant adverse change in the extent or manner in which an asset is
used, or (3) an accumulation of costs significantly in excess of the amount
originally expected for the acquisition of an asset. The Company measures the
carrying amount of the asset against the estimated undiscounted future cash
flows associated with it. Should the sum of the expected future net cash flows
be less than the carrying value of the asset being evaluated, an impairment loss
would be recognized. The impairment loss would be calculated as the amount by
which the carrying value of the asset exceeds its fair value. The fair value is
measured based on quoted market prices, if available. If quoted market prices
are not available, the estimate of fair value is based on various valuation
techniques, including the discounted value of estimated future cash flows. The
evaluation of asset impairment requires the Company to make assumptions about
future cash flows over the life of the asset being evaluated. These assumptions
require significant judgment and actual results may differ from assumed and
estimated amounts. During the year ended December 31, 2005, 2004 and 2003, the
Company recorded no impairment losses related to an intangible asset.

F-7

MENDOCINO BREWING COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

CONCENTRATION OF CREDIT RISKS

Financial instruments that potentially subject the Company to credit risk
consist principally of trade receivables, cash deposits in excess of FDIC
limits, and assets located in the United Kingdom. The Company's cash deposits
are placed with major financial institutions. In 2004 as part of a note payable
agreement with a bank, the Company was expected to maintain as collateral cash
balances. The amount of compensating balances required at December 31, 2004, was
$420,000. The compensating balance is held under agreements that do not legally
restrict the use of such funds and, therefore, the funds are not segregated on
the face of the balance sheet.

Wholesale distributors account for substantially all accounts receivable;
therefore, this risk concentration is limited due to the number of distributors
and the laws regulating the financial affairs of distributors of alcoholic
beverages. The Company has approximately $236,200 in cash deposits and
$5,547,500 of accounts receivable due from customers located in the United
Kingdom.

INCOME TAXES

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

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

SHIPPING COSTS

Shipping costs are included in marketing expense and totaled $929,100, $978,600,
and $576,500 for the years ended December 31, 2005, 2004, and 2003.

REVENUE RECOGNITION

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

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

o Persuasive evidence of an arrangement exists;
o Delivery has occurred or services have been rendered;
o The fee for the arrangement is fixed or determinable; and
o Collectibility is reasonably assured.

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

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

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

F-8

MENDOCINO BREWING COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

REVENUE RECOGNITION (CONTINUED)

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

STOCK-BASED COMPENSATION

The Company accounts for stock-based compensation in accordance with Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees", and complies with the disclosure provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation". Under APB No. 25 compensation cost is
recognized on the excess, if any, on the date of grant of the fair value of the
Company's shares over the employee's exercise price. The Company has, since
inception, granted options at the fair value of the stock and therefore has had
no compensation expense to record.

When the exercise price of the option is less than the fair value price of the
underlying shares on the grant date, deferred stock compensation is recognized
and amortized to expense in accordance with Financial Accounting Standards Board
("FASB") Interpretation No. 44 over the vesting period of the individual
options.

Accordingly, if the exercise price of the Company's employee options equals or
exceeds the market price of the underlying shares on the date of grant, no
compensation expense is recognized.

The company accounts for equity instruments issued to non-employees in
accordance with the provisions of SFAS No 123 and Emerging Issues Task Force
("EITF") No 96-18, Accounting for Equity Instruments That Are Issued to Other
Than Employees for Acquiring, or in Conjunction with Selling Goods or Services
and complies with the disclosure provisions of SFAS 148, Accounting for
Stock-Based Compensation an Amendment of SFAS 123.

In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure," which amends SFAS No. 123, "Accounting
for Stock-Based Compensation," to provide alternative methods of transition for
a voluntary change to the fair value based method of accounting for stock-based
employee compensation. In addition, SFAS No. 148 expands the disclosure
requirements of SFAS No. 123 to require more prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. The transition provisions of SFAS No. 148 are effective for fiscal
years ended after December 15, 2002. The transition provisions do not currently
have an impact on the Company's consolidated financial position and results of
operations as the Company has not elected to adopt the fair value-based method
of accounting for stock-based employee compensation under SFAS NO. 123. The
disclosure provisions of SFAS No. 148 are effective for financial statements for
interim periods beginning after December 15, 2002. The Company adopted the
disclosure requirements in the first quarter of fiscal year 2003.

The Company accounts for its stock option plans under the recognition and
measurement principles of APB Opinion No. 25, Accounting for Stock Issued to
Employees, and related Interpretations. No stock-based employee compensation
cost is reflected in net loss, except when options granted under those plans had
an exercise price less than the market value of the underlying common stock on
the date of grant.

F-9

MENDOCINO BREWING COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

STOCK-BASED COMPENSATION (CONTINUED)

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

2005 2004 2003
------------------ ------------------ -----------------

Net income (loss) - as reported $ (1,314,700) $ (468,900) $ 46,900
Compensation expense - - -
------------------ ------------------ -----------------

Net income (loss) - pro forma $ (1,314,700) $ (468,900) $ 46,900
================== ================== =================

Income (loss) per share - pro forma $ (0.11) $ (0.04) $ 0.00
================== ================== =================

In 2005, 2004 and 2003, the Company did not grant any options or warrants.

BASIC AND DILUTED EARNINGS (LOSS) PER SHARE

In accordance with SFAS No. 128, "Earnings Per Share," the basic earnings (loss)
per share is computed by dividing the loss attributable to common stockholders
by the weighted average number of common shares outstanding during the period.
Basic net loss per share excludes the dilutive effect of stock options or
warrants and convertible notes. Basic net loss per share includes shares
redeemable by shareholders in accordance with certain dissenter's rights
provisions as these shares are pending repurchase as of September 30, 2005.
Diluted net loss per share was the same as basic net loss per share for 2005 and
2004, since the effect of any potentially dilutive securities is excluded, as
they are anti-dilutive due to the Company's net losses. In 2003, all potentially
dilutive securities were non-dilutive.

The following table sets forth the computation of basic and diluted net loss per
common share:

Year Ended December 31,
----------------------------------------------------------
2005 2004 2003
------------------ ------------------ ------------------

Net income (loss) available to common shareholders $ (1,314,700) $ (468,900) $ 46,900
================== ================== ==================

Weighted average common shares outstanding:
Basic and diluted 11,472,213 11,266,874 11,266,874
================== ================== ==================

Total shares outstanding at end of period 11,473,914 11,266,874 11,266,874
================== ================== ==================

Net income (loss) per common share:
Basic and diluted $ (0.11) $ (0.04) $ 0.00
================== ================== ==================

F-10

MENDOCINO BREWING COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

BASIC AND DILUTED LOSS PER SHARE (CONTINUED)

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

Year Ended December 31,
----------------------------------------
2005 2004 2003
------------ ------------ ------------

Options to purchase common stock 240,385 340,385 429,273

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

Potential equivalent shares excluded 240,385 340,385 429,273
============ ============ ============

FOREIGN CURRENCY TRANSLATION

The assets and liabilities of UBIUK were translated at the United Kingdom pound
sterling - U.S. dollar exchange rates in effect at December 31, 2005 and 2004,
and the statements of operations were translated at the average exchange rates
for the years then ended. Gains and losses resulting from the translations were
deferred and recorded as a separate component of consolidated stockholders'
equity. Cash at UBIUK was translated at exchange rates in effect at December 31,
2005 and 2004, and its cash flows were translated at the average exchange rates
for the years then ended. Changes in cash resulting from the translations are
presented as a separate item in the statements of cash flows.

USE OF ESTIMATES

The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America includes having the Company
to make estimates and assumptions affecting the reported amounts of assets,
liabilities, revenues and expenses, and disclosure of contingent assets and
liabilities. The amounts estimated could differ from actual results. Significant
estimates include, allowance for bad debts, depreciation and amortization
periods, and the future utilization of deferred tax assets. The Company has
determined that deferred tax assets associated with net operating loss
carryforwards in the US may expire prior to utilization. The Company has placed
a valuation allowance on these assets in the US.

ADVERTISING

Advertising costs are expensed as incurred and were $2,239,700, $1,674,000 and
$1,196,100 for the years ended December 31, 2005, 2004, and 2003.

FAIR VALUE OF FINANCIAL INSTRUMENTS

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

COMPREHENSIVE INCOME (LOSS)

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

F-11

MENDOCINO BREWING COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

LONG-LIVED ASSETS

In accordance with Statement of Financial Accounting Standards ("SFAS") No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets" the Company
periodically evaluates the carrying value of long-lived assets to be held and
used, including intangible assets, when events and circumstances warrant such a
review or annually, whichever is sooner. The carrying value of a long-lived
asset is considered impaired when the anticipated discounted cash flow from such
asset is separately identifiable and is less than its carrying value. In that
event, a loss is recognized based on the amount by which the carrying value
exceeds the fair market value of the long-lived asset held for use. Fair market
value is determined primarily using the anticipated cash flows discounted at a
rate commensurate with the risk involved. Losses on long-lived assets to be
disposed of are determined in a similar manner, except that fair market values
are reduced for the cost to dispose.

REPORTABLE SEGMENTS

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

RECLASSIFICATIONS

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

RECENT ACCOUNTING PRONOUNCEMENTS

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

In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets,
an amendment of APB Opinion No. 29. SFAS No. 153 addresses the measurement of
exchanges of nonmonetary assets and redefines the scope of transactions that
should be measured based on the fair value of the assets exchanged. SFAS No. 153
is effective for nonmonetary asset exchanges beginning after June 15, 2005. The
Company does not believe the adoption of SFAS No. 153 will have a material
effect on its consolidated financial position, results of operations or cash
flows.

F-12

MENDOCINO BREWING COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)

In December 2004, the FASB issued SFAS No.123 (revised 2004), "Share-Based
Payment". Statement 123(R) will provide investors and other users of financial
statements with more complete and neutral financial information by requiring
that the compensation cost relating to share-based payment transactions be
recognized in financial statements. That cost will be measured based on the fair
value of the equity or liability instruments issued. Statement 123(R) covers a
wide range of share-based compensation arrangements including share options,
restricted share plans, performance-based awards, share appreciation rights, and
employee share purchase plans. Statement 123(R) replaces FASB Statement No. 123,
Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25,
Accounting for Stock Issued to Employees. Statement 123, as originally issued in
1995, established as preferable a fair-value-based method of accounting for
share-based payment transactions with employees. However, that Statement
permitted entities the option of continuing to apply the guidance in Opinion 25,
as long as the footnotes to financial statements disclosed what net income would
have been had the preferable fair-value-based method been used. Public entities
(other than those filing as small business issuers) will be required to apply
Statement 123(R) as of the first interim or annual reporting period that begins
after June 15, 2005. The Company has evaluated the impact of the adoption of
SFAS 123(R), and does not believe the impact will be significant to the
Company's overall results of operations or financial position.

In March 2005, the FASB issued Staff Accounting Bulletin No. 107 ("SAB 107")
which provides additional guidance to the new stock option expensing provisions
under SFAS 123(R). SAB 107 acknowledges that fair value estimates cannot predict
actual future events and as long as the estimates are made in good faith, they
will not be subsequently questioned no matter what the actual outcome.
Historical volatility should be measured on an unweighted basis over a period
equal to or longer than the expected option term or contractual term, depending
on the option-pricing model that is used. Implied volatility is based on the
market prices of a company's traded options or other financial instruments with
option-like features, and is derived by entering the market price of the traded
option into a closed-form model and solving for the volatility input. SAB 107
provides additional guidance for companies when estimating an option's expected
term. In general, companies are not allowed to consider additional term
reduction and the option term cannot be shorter than the vesting period.
Companies are permitted to use historical stock option exercise experience to
estimate expected term if it represents the best estimate for future exercise
patterns. SAB 107 provides that companies should enhance MD&A disclosures
related to equity compensation subsequent to adoption of Statement 123(R). SAB
107 provided that companies should provide all disclosures required by Statement
123 (R) in the first 10-Q filed after adoption of the new rules.

In December 2004 the Financial Accounting Standards Board issued two FASB Staff
Positions--FSP FAS 109-1, Application of SFAS Statement 109 "Accounting for
Income Taxes" to the Tax Deduction on Qualified Production Activities Provided
by the American Jobs Creation Act of 2004, and FSP FAS 109-2 Accounting and
Disclosure Guidance for the Foreign Earnings Repatriation Provision within the
American Jobs Creation Act of 2004. Neither of these affected the Company as it
does not participate in the related activities.

In March 2005, the FASB issued FASB Interpretation No. 47, "Accounting for
Conditional Asset Retirement Obligations" ("FIN 47"). FIN 47 clarifies that an
entity must record a liability for a conditional asset retirement obligation if
the fair value of the obligation can be reasonably estimated. Asset retirement
obligations covered by FIN 47 are those for which an entity has a legal
obligation to perform an asset retirement activity, even if the timing and
method of settling the obligation are conditional on a future event that may or
may not be within the control of the entity. FIN 47 also clarifies when an
entity would have sufficient information to reasonably estimate the fair value
of an asset retirement obligation. FIN 47 is effective no later than the end of
fiscal years ending after December 15, 2005. The Company does not expect there
to be a material impact from the adoption of FIN 47 on our consolidated
financial position, results of operations, or cash flows.

In June 2005, the FASB issued SFAS No. 154, Accounting Changes and Error
Corrections, a replacement of APB No. 20, Accounting Changes, and SFAS No. 3,
Reporting Accounting Changes in Interim Financial Statements. SFAS No. 154
changes the requirements for the accounting for and reporting of a change in
accounting principle. Previously, most voluntary changes in accounting
principles required recognition via a cumulative effect adjustment within net
income of the period of the change. SFAS No. 154 requires retrospective
application to prior periods' financial statements, unless it is impracticable
to determine either the period-specific effects or the cumulative effect of the
change. SFAS No. 154 is effective for accounting changes made in fiscal years
beginning after December 15, 2005; however, this statement does not change the
transition provisions of any existing accounting pronouncements. The Company
does not believe adoption of SFAS No. 154 will have a material effect on its
consolidated financial position, results of operations or cash flows.

F-13

MENDOCINO BREWING COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)

In February 2006, FASB issued SFAS No. 155, "Accounting for Certain Hybrid
Financial Instruments". SFAS No. 155 amends SFAS No 133, "Accounting for
Derivative Instruments and Hedging Activities", and SFAF No. 140, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities". SFAS No. 155, permits fair value remeasurement for any hybrid
financial instrument that contains an embedded derivative that otherwise would
require bifurcation, clarifies which interest-only strips and principal-only
strips are not subject to the requirements of SFAS No. 133, establishes a
requirement to evaluate interest in securitized financial assets to identify
interests that are freestanding derivatives or that are hybrid financial
instruments that contain an embedded derivative requiring bifurcation, clarifies
that concentrations of credit risk in the form of subordination are not embedded
derivatives, and amends SFAS No. 140 to eliminate the prohibition on the
qualifying special-purpose entity from holding a derivative financial instrument
that pertains to a beneficial interest other than another derivative financial
instrument. This statement is effective for all financial instruments acquired
or issued after the beginning of the Company's first fiscal year that begins
after September 15, 2006.

In June 2005, the EITF reached consensus on Issue No. 05-6, determining the
Amortization Period for Leasehold Improvements ("EITF 05-6.") EITF 05-6 provides
guidance on determining the amortization period for leasehold improvements
acquired in a business combination or acquired subsequent to lease inception.
The guidance in EITF 05-6 will be applied prospectively and is effective for
periods beginning after June 29, 2005. EITF 05-6 is not expected to have a
material effect on its consolidated financial position or results of operations.

In September 2005, the Financial Accounting Standards Board Emerging Issues Task
Force issued EITF 05-02, "The Meaning of `Conventional Convertible Debt
Instrument' in EITF Issue No. 00-19, `Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in, a Company's Own Stock.'"
EITF 05-02 is effective for new instruments entered into and instruments
modified in reporting periods beginning after June 29, 2005. The Company does
not expect there to be a material impact from the adoption of EITF 05-02 on our
consolidated financial position, results of operations, or cash flows.

In September 2005, the Financial Accounting Standards Board Emerging Issues Task
Force issued EITF 05-07, "Accounting for Modifications to Conversion Options
Embedded in Debt Instruments and Related Issues." EITF 05-7 is effective for
future modifications of debt instruments beginning in the first interim or
annual reporting period beginning after December 15, 2005. The Company does not
expect there to be a material impact from the adoption of EITF 05-07 on our
consolidated financial position, results of operations, or cash flows.

In September 2005, the Financial Accounting Standards Board Emerging Issues Task
Force issued EITF 05-08, "Income Tax Consequences of Issuing Convertible Debt
with a Beneficial Conversion Feature." EITF 05-08 is effective for financial
statements beginning in the first interim or annual reporting period beginning
after December 15, 2005. The Company does not expect there to be a material
impact from the adoption of EITF 05-08 on our consolidated financial position,
results of operations, or cash flows.

NOTE 2 - LIQUIDITY AND MANAGEMENT PLANS

At December 31, 2005, the Company had cash and cash equivalents of $247,700, a
working capital deficit of $ 3,076,800 and an accumulated deficit of
$10,231,200. Additionally, the Company has a history of past losses as
infrastructure costs were incurred in advance of obtaining customers.

Management has taken several actions to ensure that the Company will have
sufficient cash for its working capital needs through December 31, 2006,
including obtaining a secured line of credit, and reductions in discretionary
expenditures, and additional debt financing. Management believes that these
actions will enable the Company to meet its working capital needs through
December 31, 2006. The Company is pursuing other refinancing opportunities to
augment working capital, (See Note 5.)

In 2005, the Company successfully refinanced a debt that matured in April 2005
and secured a commitment from another lender for extension of their loan until
May 2006. Additionally, one of the Company's majority stockholders has
guaranteed to provide financial support to avoid any possible default action by
Savings Bank of Mendocino County. In 2006, the Company obtained additional debt
financing of $289,938.

F-14

MENDOCINO BREWING COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3 - INVENTORIES

Inventories, consisting of material, material overhead, labor, and manufacturing
overhead, are stated at the lower of average cost or market and consist of the
following at December 31:

2005 2004
--------------- ---------------
Raw materials $ 447,900 $ 357,500
Work-in-progress 143,900 140,100
Finished goods 539,800 664,700
Merchandise 19,800 23,100
--------------- ---------------
$ 1,151,400 $ 1,185,400
=============== ===============

NOTE 4 - PROPERTY AND EQUIPMENT

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

2005 2004
----------------- -----------------

Machinery and equipment $ 11,094,500 $ 10,744,400
Buildings 7,202,300 7,202,300
Equipment under capital lease 580,800 772,600
Land 810,900 810,900
Leasehold improvements 1,432,400 1,432,400
Vehicles 429,500 419,800
Furniture and fixtures 165,500 129,000
Equipment in progress 27,500 80,800
----------------- -----------------
21,743,400 21,592,200
Less: Accumulated depreciation and amortization 8,557,800 8,058,300
----------------- -----------------
$ 13,185,600 $ 13,533,900
================= =================

The Company has property and equipment located in the United Kingdom with a net
book value of approximately $1,502,700. Amortization of assets under capital
leases is included in depreciation expense.

NOTE 5 - LINE OF CREDIT AND NOTE PAYABLE

Effective May 5, 2005, the Company has obtained a new secured lending facility
from a new financial institution, BFI Business Finance (BFI). The Company's
borrowings are secured by the underlying trade receivables and inventory. The
borrowings are collateralized, with recourse, by certain eligible trade
receivables up to a maximum percentage of 80% of the qualified net amounts of
each MBC's receivable.70% of the qualified net amounts of each Releta's
receivable, and 50% of the eligible inventory carried by both MBC and Releta in
the US. The Company retains the right to recall any of the collateralized
receivables under the program, and the receivables are subject to recourse.
Therefore, the transaction does not qualify as a sale under the terms of
Financial Accounting Standards Board Statement No. 125 (Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities). Included
in the Balance Sheets as receivable at December 31, 2005, are account balances
totaling $1,408,800 of uncollected receivables collateralized to the financial
institution under this agreement. The line of credit is renewable annually by
mutual agreement of the parties. The amount outstanding on this facility as of
December 31, 2005 was $1,404,800.

On December 31, 2005 BFI advanced the Company $200,000 under a promissory note
repayable in 30 weekly installments. The note bears interest of 3.75% over the
bank's prime rate per annum.

On April 5, 2006 BFI advanced the Company $289,900 under another promissory note
repayable in 39 weekly installments. The note bears interest of 3.75% over the
bank's prime rate per annum.

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

F-15

MENDOCINO BREWING COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 5 - LINE OF CREDIT AND NOTE PAYABLE (CONTINUED)

Nedbank Limited, a South African registered company, provided a credit facility
of GBP 1,250,000 to UBSN Ltd. ("UBSN"), a wholly-owned subsidiary of United
Breweries International (UK) Ltd. ("UBI"), which is in turn wholly-owned by the
Company. This facility included a revolving short-term loan, overdraft
protection, and foreign exchange services. It was secured by all of the assets
of UBSN. On April 26, 2005, the balance remaining outstanding on the Nedbank
facility was settled in full using the proceeds from the RBS facility (discussed
below).

On April 26, 2005, Royal Bank of Scotland ("RBS") provided an invoice
discounting facility for a maximum amount of GBP 1,750,000 based on 80%
prepayment against qualified accounts receivable related to UBSN's United
Kingdom customers. The initial term of the facility is for a period of one year
after which the facility can be terminated by either party by providing the
other party a notice of six months. The facility carries an interest rate of
1.38% above RBS base rate and a service charge of 0.10% of each invoice
discounted. The amount outstanding on this line of credit as of December 31,
2005 was approximately $2,169,200.

NOTE 6 - LONG-TERM DEBT

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

2005 2004
---------------- ----------------

Note to a bank; payable in monthly installments of $24,400, $ 2,168,400 $ 2,299,400
including interest at the Treasury Constant Maturity Index, plus 4.17%
(currently 7.24%); maturing December 2012, with a balloon payment;
secured by substantially all of the assets of Mendocino Brewing Company

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

Payable to Mendocino County in four annual installments of $143,600,
plus interest at 18%, beginning April 2005; maturing April 2008 430,900 574,500

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

2,599,300 2,884,600

Less current maturities 284,400 285,300
---------------- ----------------

$ 2,314,900 $ 2,599,300
================ ================

Year Ending December 31,
2006 $ 284,400
2007 295,000
2008 306,300
2009 174,900
2010 186,800
Thereafter 1,351,900
----------------

$ 2,599,300
=================

F-16

MENDOCINO BREWING COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 7 - CAPITAL LEASE OBLIGATIONS

The Company leases certain brewing equipment, vehicles and office equipment
under agreements that are classified as capital leases. The future minimum lease
payments required under the capital leases and the present value of the net
minimum lease payments as of December 31, 2005, are as follows:

Year Ending December 31,
2006 $ 139,200
2007 76,400
2008 46,900
2009 -
2010 -
-----------------
262,500
Less amounts representing interest (9,400)
-----------------

Present value of minimum lease payments 253,100
Less current maturities (131,600)
-----------------

Non-current leases payable $ 121,500
=================

NOTE 8 - NOTES TO RELATED PARTY - SUBORDINATED

Notes payable to a related party consist of unsecured convertible notes to
United Breweries of America (UBA), with interest at the prime rate plus 1.5%,
but not to exceed 10% per year. The notes are convertible into common stock at
$1.50 per share. The notes have been extended until August 2005. UBA may demand
payment within 60 days of the end of the extension period but is precluded from
doing so because the notes are subordinated to long-term debt agreements with
Savings Bank of Mendocino County and BFI line of credit. The BFI Line of Credit
matures in May 2007 and the SBMC facility matures in the year 2012. Therefore,
the Company will not require the use of working capital to repay any of the UBA
notes until the BFI and SBMC facilities are repaid. Accordingly, the entire
amount due under the Notes is classified as a long term liability. The notes
include $636,800 and $494,700 of accrued interest at December 31, 2005 and 2004.

Note payable also include unsecured loan from Shepherd Neame Limited payable in
annual installment of $109,200 with interest at 5% per year beginning June 2003
and maturing December 2012.

NOTE 9 - PROFIT-SHARING PLAN

Subsequent to December 31, 2004, the Company terminated its profit sharing plan.
Contributions to the Plan were made at the discretion of the Board of Directors,
and any contributions vested over a six year period. The plan covered
substantially all full-time employees that met certain minimum age and service
requirements. No contributions were made to the Plan for the years ended
December 31, 2005, 2004, and 2003.

NOTE 10 - COMMITMENTS AND CONTINGENCIES

LEGAL

The Company is periodically involved in legal actions and claims that arise as a
result of events that occur in the normal course of operations. The Company is
not currently aware of any legal proceedings or claims that the Company believes
will have, individually or in the aggregate, a material adverse effect on the
Company's financial position or results of operations.

F-17

MENDOCINO BREWING COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 10 - COMMITMENTS AND CONTINGENCIES (CONTINUED)

LEGAL (CONTINUED)

OPERATING LEASES

The Company leases many of its operating and office facilities for various terms
under long-term, non-cancelable operating lease agreements. The leases expire at
various dates through 2009 and provide for renewal options ranging from
month-to-month to five years. In the normal course of business, it is expected
that these leases will be renewed or replaced by leases on other properties. The
leases provide for increases in future minimum annual rental payments based on
defined increases which are generally meant to correlate with the Consumer Price
Index, subject to certain minimum increases. Also, the agreements generally
require the Company to pay executory costs (real estate taxes, insurance and
repairs).

The Company and its subsidiaries have various lease agreements for the brewpub
and gift store in Hopland, California; land at its Saratoga Springs, New York,
facility; a building in the United Kingdom; and certain personal property. The
land lease includes a renewal option for two additional five-year periods, which
the Company intends to exercise, and some leases are adjusted annually for
changes in the consumer price index. The leases begin expiring in 2007. Rent
expense charged to operations was $206,600, $202,700, and $210,500 for the years
ended December 31, 2005, 2004, and 2003.

Future minimum lease payments under these agreements are as follows:

Year Ending December 31,
2006 $ 174,900
2007 164,900
2008 160,700
2009 160,700
2010 150,700
----------------

$ 811,900
================

KEG MANAGEMENT AGREEMENT

In September 2004, the Company renewed the keg management agreement with
MicroStar Keg Management LLC. Under this arrangement, MicroStar provides all
kegs for which the Company pays a service fee between $5 and $15, depending on
territory. The agreement is effective for five years ending in September 2009.
If the agreement is terminated, the Company is required to purchase three times
the average monthly keg usage for the preceding six-month period from MicroStar
at purchase prices ranging from $54 to $84 per keg. The Company expects to
continue this relationship. Rental expense associated with this agreement was
$65,500, $91,400, and $76,200 for the years ended December 31, 2005, 2004, and
2003.

NOTE 11 - RELATED-PARTY TRANSACTIONS

The Company conducts business with United Breweries of America (UBA), which owns
approximately 76% of the Company's common stock through common ownership.
Additionally, UBSN Limited has significant transactions with Sheperd Neame,
Ltd., which is related to a former Board member. The Company also has
transactions with AUBI, a company affiliated with one of the Board members. The
following table reflects balances outstanding and the value of the transactions
with these related parties for the years ended December 31, 2005, 2004, and 2003

- ------------------------------------------------------------------ ---------------- ---------------- ----------------
2005 2004 2003
- ------------------------------------------------------------------ ---------------- ---------------- ----------------
TRANSACTIONS
- ------------------------------------------------------------------ ---------------- ---------------- ----------------
Sales to Shepherd Neame Ltd. $ 2,871,100 $ 3,099,500 $ 2,536,000
- ------------------------------------------------------------------ ---------------- ---------------- ----------------
Purchases from Shepherd Neame Ltd. 14,108,500 14,541,100 11,240,000
- ------------------------------------------------------------------ ---------------- ---------------- ----------------
Expenses reimbursement to Shepherd Neame Ltd. 1,143,300 1,239,300 743,000
- ------------------------------------------------------------------ ---------------- ---------------- ----------------
Interest expenses associated with UBA notes (see note 8) 142,100 88,500 85,200
- ------------------------------------------------------------------ ---------------- ---------------- ----------------
Interest paid to Shepherd Neame Ltd. (see note 6) 40,500 46,300 46,600
- ------------------------------------------------------------------ ---------------- ---------------- ----------------

- ------------------------------------------------------------------ ---------------- ---------------- ----------------
ACCOUNT BALANCES
- ------------------------------------------------------------------ ---------------- ---------------- ----------------
Accounts payable and accrued liabilities to Shepherd Neame Ltd. 4,080,400 4,160,300 3,510,000
- ------------------------------------------------------------------ ---------------- ---------------- ----------------
Accounts receivable and prepayments to Shepherd Neame Ltd. 629,700 841,700 660,600
- ------------------------------------------------------------------ ---------------- ---------------- ----------------
Amounts payable to AUBI 20,000 20,000 20,000
- ------------------------------------------------------------------ ---------------- ---------------- ----------------

F-18

MENDOCINO BREWING COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 12 - MAJOR CUSTOMERS

Sales to the top five customers totaled $7,610,500, $7,942,000, and $7,088,800
for the years ended December 31, 2005, 2004, and 2003, which represents 24%,
25%, and 25% of sales for the years ended December 31, 2005, 2004, and 2003.

NOTE 13 - STOCKHOLDERS' EQUITY

Independent outside members of the Board of Directors are compensated for
attending Board of Directors and committee meetings. Compensation is with common
stock. Expenses related to this compensation totaled $44,000, $27,000, and
$45,000 for the years ended December 31, 2005, 2004, and 2003. Stock has been
issued for accrued compensation from the years 2003 and 2002 in the year 2005.

In January 2005, the Company issued 207,040 shares of its unregistered common
stock to directors and four other employees for $98,700 in accrued
compensation.

PREFERRED STOCK

Ten million shares of preferred stock have been authorized, of which 227,600 are
designated as Series A. Series A shareholders are entitled to receive cash
dividends and/or liquidation proceeds equal, in the aggregate, to $1.00 per
share before any cash dividends are paid on the common stock or any other series
of preferred stock. When the entire Series A dividend/liquidation proceeds have
been paid, the Series A shares are automatically canceled and will cease to be
outstanding. Only a complete corporate dissolution will cause a liquidation
preference to be paid.

NOTE 14 - STOCK OPTION PLAN

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

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

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

Shares under Weighted-average
option exercise price
----------------- ------------------

Balance at December 31, 2002 429,273 $ 0.82
Balance at December 31, 2003 429,273 $ 0.82
----------------- ------------------
Options expired (88,888) $ 1.13
Balance at December 31, 2004 340,385 $ 0.73
----------------- ------------------
Options expired (100,000) $ 1.25
Balance at December 31, 2005 240,385 $ 0.52
----------------- ------------------

All stock options outstanding are non-statutory, and were issued with a five
year term and were full vested on date of grant. The exercise price of the
options outstanding as of December 31, 2005 is $0.52 per share. The options
convertible into 240,835 expire in 2007. The exercise price of the options
outstanding as of December 31, 2004 range from $0.52 to $1.25 per share.

NOTE 15 - INCOME TAXES

The continuing losses in the U.S. operations has resulted in the Company
determining that the deferred tax assets associated with net operating loss
carryforwards and investment tax credits may expire prior to utilization. The
Company recorded a valuation allowance of $3,717,200 for deferred tax assets.
The Company also has $68,433 of California Manufacturers' Investment Tax Credits
that can be carried forward to reduce future taxes. These credits begin expiring
in 2011.

F-19

MENDOCINO BREWING COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 15 - INCOME TAXES (CONTINUED)

2005 2004 2003

Provision for income taxes
US Federal $ - $ - $ -
US States 1,800 3,800 16,300
Benefit of state investment tax credit carry forwards - - (15,000)
United Kingdom (127,400) 118,000 263,400
--------------- --------------- ---------------
Current provision (125,600) 121,800 264,700
Change in deferred income taxes - - -
--------------- --------------- ---------------
Total provision for income taxes (125,600) 121,800 264,700

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

US Federal income tax expense (benefit) at 34% (110,700) (232,400) 105,800
US State income tax expense (benefit) (28,800) (15,000) 12,900
United Kingdom income tax expense (benefit) (296,800) 118,000 263,500
Other (31,500) (6,500) 26,800
Change in valuation allowance 342,200 257,700 (144,300)
--------------- --------------- ---------------
Total (125,600) 121,800 264,700

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

Benefit of net operating loss carryforwards 4,295,700 4,190,000 3,758,900
Undistributed earnings of UBIUK (393,900) (800,300) (800,300)
Investment in UBIUK 358,100 321,600 328,400
Depreciation and amortization (670,000) (490,000) (317,500)
Other 127,300 153,700 147,800
--------------- --------------- ---------------
Subtotal 3,717,200 3,375,000 3,117,000
Less valuation allowance (3,717,200) (3,375,000) (3,117,300)
--------------- --------------- ---------------
Total - - -
Change in valuation allowance 342,200 257,700 (144,300)

Net operating losses available for carryforward will expire as follows:

Date of Expiration Federal US States UK
--------------- --------------- ---------------

2006 $ 694,700
2012 250,900
2013 1,686,100 506,300
2014 - 625,000
2015 - -
2016 - -
2017 - -
2018 2,758,800 453,300
2019 2,153,100 341,800
2020 965,600 143,300
2021 1,041,100 171,000
2022 615,800 100,800
2023 - -
2024 1,707,900 280,100
2025 499,700 499,700
Total 11,428,100 4,066,900 564,400

F-20

MENDOCINO BREWING COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 16 - SEGMENT INFORMATION

The Company's business presently consists of three segments. The first is
brewing for wholesale to distributors and other retailers. This segment
accounted for 36%, 36%, and 43% of the Company's gross sales during 2005, 2004
and 2003. The second consists of distributing alcoholic beverages to retail
establishments and restaurants in the United Kingdom and Europe. This segment
accounted for approximately 63%, 63%, and 55% of the Company's gross sales
during 2005, 2004, and 2003. The third segment consists of beer for sale along
with merchandise at the Company's brewpub and retail merchandise store located
at the Hopland Brewery and at Saratoga Springs brewery. This segment accounted
for less than one percent of the Company's gross sales during 2005 and 2004 and
1% during 2003. A summary of each segment is as follows:

Year Ended December 31, 2005
------------------------------------------------------------------------------------------
Brewing Tavern & Distributor Corporate
Operations Tasting Room Operations and Other Total
---------------- ---------------- ---------------- ----------------- ----------------

Sales $ 11,557,900 $ 203,100 $ 20,166,300 $ - $ 31,927,300
Operating income 168,200 32,300 (716,900) - (516,400)
Identifiable assets 12,670,400 63,400 7,864,800 1,868,800 22,557,400
Depreciation and amortization 465,200 4,900 401,600 32,000 903,700
Capital expenditures 34,200 - 753,600 - 787,800

Year Ended December 31, 2004
------------------------------------------------------------------------------------------
Brewing Tavern & Distributor Corporate
Operations Tasting Room Operations and Other Total
---------------- ---------------- ---------------- ----------------- ----------------

Sales $ 11,686,800 $ 211,200 $ 20,259,900 $ - $ 32,157,900
Operating income (49,900) 12,800 490,900 - 453,800
Identifiable assets 13,166,900 99,400 8,729,400 2,367,400 24,363,100
Depreciation and amortization 535,800 5,000 459,300 31,200 1,031,300
Capital expenditures 38,700 - 559,100 - 597,800

Year Ended December 31, 2003
------------------------------------------------------------------------------------------
Brewing Tavern & Distributor Corporate
Operations Tasting Room Operations and Other Total
---------------- ---------------- ---------------- ----------------- ----------------

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

F-21

MENDOCINO BREWING COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 17 - UNRESTRICTED NET ASSETS

The Company's wholly-owned subsidiary, UBI, has undistributed earnings of
approximately $1,238,700 as of December 31, 2005. Under UBSN's line of credit
agreement with RBS, distributions and other payments to the Company from its
subsidiary are not permitted if the retained earning drops below approximately
$1,820,400. Condensed financial information of the parent company, Mendocino
Brewing Company, Inc., is as follows:

Balance Sheets 2005 2004
------------------- -------------------

Assets
Cash $ 11,500 $ 286,000
Accounts receivable 1,388,500 1,569,700
Inventories 1,151,400 1,185,400
Other current assets 212,600 170,200
------------------- -------------------
Total current assets 2,764,000 3,211,300

Investment in subsidiary 1,225,000 1,225,000
Property and equipment 11,682,900 12,148,100
Other assets 245,700 274,300
------------------- -------------------
Total assets $ 15,917,600 $ 16,858,700
=================== ===================

Liabilities
Line of credit and note payable $ 2,181,000 $ 2,128,900
Accounts payable 1,486,000 1,757,000
Accrued liabilities 892,900 752,600
Legal dispute settlement - 911,800
Current maturities of debt and leases 352,800 431,800
------------------- -------------------
Total current liabilities 4,912,700 5,982,100

Intercompany payable 1,319,500 1,177,500
Long-term debt and capital leases 2,332,700 2,661,900
Notes payable to related party 2,552,300 2,010,100
------------------- -------------------
Total liabilities 11,117,200 11,831,600
------------------- -------------------

Stockholders' equity
Common stock 14,747,300 14,648,600
Preferred stock 227,600 227,600
Accumulated deficit (10,174,500) (9,849,100)
------------------- -------------------
Total stockholders' equity 4,800,400 5,027,100
------------------- -------------------
Total liabilities and stockholders' equity $ 16,917,600 $ 16,858,700
=================== ===================

Statements of Operations
2005 2004 2003
------------------ ------------------ ------------------

Net sales $ 11,125,500 $ 11,245,600 $ 11,341,500
Cost of goods sold 7,737,000 7,467,000 7,972,600
Selling, marketing, and retail expenses 1,469,800 1,701,400 1,663,100
General and administrative expenses 1,810,600 1,955,200 1,833,600
Legal dispute settlement - 250,600 -
------------------ ------------------ ------------------
Income (loss) from operations 108,100 (128,600) (127,800)
------------------ ------------------ ------------------
Other income and (expense)
Interest expense (760,800) (725,900) (727,800)
Other income 329,100 356,800 487,600
Provision for taxes (1,800) (3,800) (1,300)
------------------ ------------------ ------------------
(372,900) (372,900) (241,500)
------------------ ------------------ ------------------
Net loss $ (325,400) $ (501,500) $ (369,300)
================== ================== ==================

F-22

MENDOCINO BREWING COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 17 - UNRESTRICTED NET ASSETS (CONTINUED)

Statements of Cash Flows
2005 2004 2003
------------------ ------------------ ------------------

Cash flows from operating activities $ (568,400) $ 374,200 $ (237,500)
Cash flow from investing activities
Purchase of property and equipment (34,200) (38,700) (268,600)
Proceeds from new distributor - - 655,200
Proceeds from sale of assets - 16,700 -
Net cash from investment activities - (22,000) 386,600
Cash flow from financing activities
Net borrowing on line of credit 52,100 343,400 101,800
Borrowing (repayment) on long term debt (285,300) (575,900) 554,800
Payment on obligation under capital lease (122,900) (124,000) (697,100)
Net change in inter company payable 142,100 (99,800) 107,700
Proceeds from related party 542,100 88,600 85,200
Net cash flow from financing activities 328,100 (367,700) 152,400
Cash, beginning of year 286,000 301,500 --
Cash, end of year $ 11,500 $ 286,000 $ 301,500
================== ================== ==================

Cash dividend received from subsidiary $ 149,900 $ 215,100 $ 155,800
================== ================== ==================

NOTE 18 - SUBSEQUENT EVENTS

On April 5, 2006 BFI advanced the Company $289,900 under another promissory note
repayable in 39 weekly installments. The note bears interest of 3.75% over the
prime rate per annum. The proceeds from the financing were used to pay property
taxes in California.

F-23