10-K

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, 2006

or

o  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 Incorporation or Organization)	(IRS Employer Identification No.)

1601 AIRPORT ROAD, UKIAH, CA 95482

(Address of principal executive offices)

(707) 463-6610

(Registrant's Telephone Number, Including Area Code)

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

Securities registered pursuant to section 12(g) of the Act:

Common stock, no par value

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes o No x

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

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

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

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 o  Accelerated Filer oNon-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 o   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 29, 2007 was $2,441,917.

The number of shares of the registrant's Common Stock outstanding as of March 29, 2007 was 11,628,174.

DOCUMENTS INCORPORATED BY REFERENCE

(1) Portions of the registrant's Proxy Statement relating to its 2007 Annual Stockholders' Meeting, to be filed subsequently-Part III.

TABLE OF CONTENTS

		Page
ITEM 1.	BUSINESS	1
ITEM 1A.	RISK FACTORS	8
ITEM 1B.	UNRESOLVED STAFF COMMENTS	9
ITEM 2.	PROPERTIES.	9
ITEM 3.	LEGAL PROCEEDINGS.	10
ITEM 4.	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.	10
PART II		11
ITEM 5.	MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS	11
ITEM 6.	SELECTED FINANCIAL DATA	13
ITEM 7.	MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.	14
ITEM 7A.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	23
ITEM 8.	FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA	23
ITEM 9.	CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.	24
ITEM 9A.	CONTROLS AND PROCEDURES	24
ITEM 9B.	OTHER INFORMATION.	25
ITEM 10.	DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE OF THE COMPANY	25
ITEM 11.	EXECUTIVE COMPENSATION	28
ITEM 12.	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.	28
ITEM 13.	CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR  INDEPENDENCE	29
ITEM 14.	PRINCIPAL ACCOUNTING FEES AND SERVICES	29
ITEM 15.	EXHIBITS AND FINANCIAL STATEMENT SCHEDULES	30

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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 by general economic and political conditions in the markets in which the Company competes. Readers are cautioned not to place undue reliance on these forward-looking statements.

PART I

ITEM 1.BUSINESS

OVERVIEW

Mendocino Brewing Company, Inc., a California corporation, was founded in 1983. It was one of the first modern craft brewers, having opened the first new brewpub in California and the second in the United States following the repeal of Prohibition, 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 41 states and the District of Columbia.

The Company's European operations, which are conducted through its wholly-owned subsidiary United Breweries International (U.K.) Limited ("UBI") and UBI's wholly-owned subsidiary UBSN, Ltd. ("UBSN"), consist primarily of the marketing and distribution of Kingfisher Premium Lager 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.

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

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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 bottling capacity of 90,000 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 ingredients inventory.

On August 13, 2001, the Company acquired UBI together with UBI's wholly-owned subsidiary UBSN, from Inversiones Mirabel, S. A., a Panamanian corporation ("Inversiones"), in exchange for MBC stock then valued at approximately $5,500,000 (the "UBI Acquisition"). 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 widespread distribution outside the Company's geographic markets.

The Company also acquired the United States brewing and distribution rights for Kingfisher Premium Lager as a result of the UBI Acquisition. The Company brews Kingfisher Premium Lager in 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 73% 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 6.6 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 2006, 2005 and 2004 the Company's sales in the United Kingdom constituted approximately 92%, 94% and 94%, respectively, of its total sales in the European Territory.

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

BUSINESS OF THE COMPANY

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 61%, 63% and 63% of the Company's gross sales during fiscal years 2006, 2005 and 2004 respectively, with the Company's manufacturing and distribution in the Domestic Territory accounting for 38%, 36%and 36% of the Company's gross sales during fiscal years 2006, 2005 and 2004, respectively. The Company's retail segment accounted for less than 1% of gross sales for fiscal years 2006, 2005 and 2004. 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 gross sales, income or loss and total assets for each segment, see the Company's Audited Financial Statements for fiscal year 2006 included in this Annual Report.)

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THE HOPLAND TAVERN ALE HOUSE AND MERCHANDISE STORE

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

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

PRODUCTS

The Company brews five ales, one wheat beer, three lagers, one stout and a root beer on a year-round basis, and 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-round in 12 oz. six-packs, 22 oz. bottles, and on-draft. In the European Territory, it is available year-round, in 330ml and 660ml bottles in multi-packs in the United Kingdom, Ireland, and continental Europe and in 330ml bottles in Canada, as well as in a variety of keg sizes. In the United Kingdom, it is also available on draft in Indian restaurants.

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

DISTRIBUTION METHODS

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

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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.

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

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

DEPENDENCE ON MAJOR CUSTOMERS

Sales to the Company's top five customers in fiscal year 2006 totaled $8,032,600, or approximately 24%, of the Company's total net sales, as compared to $7,610,500 or 24% of total net sales for fiscal year 2005 and $7,942,000 or 25% of total net sales for 2004.

In the Company's Domestic Territory, sales to Mesa distributing company totaled approximately 8.5% of the Company's domestic sales (or approximately 3.3% of its total sales) for fiscal year 2006. During the years 2005 and 2004, sales to Alta Marketing totaled approximately to 10.4% and 10.2% respectively of the Company’s domestic sales (or approximately 3.8% of total sales in both years).

Sales to the Company's principal European customer, Shepherd Neame have also remained relatively stable. During fiscal year 2006 they represented approximately 16.2% of the Company's European Territory sales (or approximately 9.9% of the Company's total sales), as compared to approximately 14.6% and 15.3% of European Territory sales (or approximately 9.2% and 9.6% of total net sales) in fiscal years 2005 and 2004, respectively. No other individual customer accounted for more than 5% of the Company's total net sales during fiscal years 2006, 2005 or 2004.

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), WHITE HAWK ORIGINAL IPA word and design mark (Reg. No. 2,956,999), RAPTOR RED LAGER word and design mark (Reg. No. 3,113,619), and BLACK HAWK STOUT word mark (Reg. No. 3,205,652).

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

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

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The Company's United States federal trademark registration for the BLUE HERON word mark (Cancelled Reg. No. 1,820,076) was cancelled as a result of an alleged technical deficiency in registration compliance filings. The Company continues to use the BLUE HERON word mark and claims common law trademark rights in and to that mark. The Company presently has a pending application on file with the United States Patent and Trademark Office for the re-registration of the BLUE HERON word mark.

The Company claims common law trademark rights in and to the TALON BARLEY WINE ALE word mark and TALON BARLEY WINE ALE word and design mark and intends to register the marks with the United States Patent and Trademark Office.

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

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 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 "TTB") (formerly the Bureau of Alcohol, Tobacco, and Firearms) allows the Company to manufacture fermented malt beverages. To keep these licenses and permits in force the Company must pay annual fees and submit timely production reports and excise tax returns. Prompt notice of any changes in the operations, ownership, or company structure must also be made to these regulatory agencies. The TTB must also approve all product labels, which must include an alcohol use warning. These agencies require that individuals owning equity securities 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.

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

The Company's operations in the European Territory are subject to regulation by United Kingdom and European laws, as well as by the laws of various individual countries in which UBI distributes its products. 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, regulation by the provincial Liquor Boards.

COMPLIANCE WITH ENVIRONMENTAL LAWS

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

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

Ukiah. The Company has built its own wastewater treatment plant for the Ukiah facility. As a 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, 2007. 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; the Company believes it is in compliance with such specifications.

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

EMPLOYEES

As of December 31, 2006, MBC employed 54 full-time and 17 part-time individuals in the United States, including 13 in management and administration, 47 in brewing and production operations, 3 in retail and tavern operations and 8 in sales and marketing positions. In England, UBI and UBSN together employed 10 people in sales and marketing and 6 in managerial and administrative positions. Management believes that the Company's relations with its employees are generally good.

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

RESEARCH AND DEVELOPMENT

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

BACKLOG

Management of the Company does not believe that backlog as of any particular date is meaningful to its operations and results.

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 2006. Historically, the Domestic Territory has operated at a net loss. Since the year 2005, the European territory has also been operating at a loss. We believe such losses are attributable to low sales volumes and low production capacity utilization rates at our domestic brewing facilities and higher operating expenses in the European territory. Our business is also subject to certain fixed and semi-variable operating costs, and when combined with the impact of the correlation between current levels of production and maximum production capacity, our gross margins may be sensitive to small increases or decreases in sales volume in the Domestic Territory. In addition, higher cost of materials and energy costs in 2006 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 and losses from our European operations continued to place demands on our working capital. We have loans, lines of credit, other credit facilities, and lease obligations with various creditors. Any breach of a loan by us which leads to our default, or to an attempt by one of our creditors to exercise its rights to certain of our tangible or intangible assets which have been used as collateral or which have been pledged as security for our obligations, could potentially make it difficult, at least in the short term, for us to continue our operations.

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

RAW MATERIALS: We are dependant on a limited number of suppliers, and in some instances on a sole supplier, for the majority of the raw materials and packaging materials used in our operations. As a result, an interruption in the supply chain may have an adverse effect on our operations if we were unable to find an alternative supplier at a comparable price. Our cost of materials including energy costs continued to increase during the year 2006 as well as in the first quarter of the year 2007. While we have increased our selling prices marginally, we may not be in a position to pass the entire cost increase to our customers which may have an adverse effect on our operations.

DEPENDENCY ON CONTRACT BREWING ARRANGEMENTS: We have entered into short term non-binding arrangements with several brewers to brew and package their brands at our brewing facilities, predominantly at our Releta facility. Approximately 17% of our sales volume in the Domestic Territory for fiscal year 2006 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 purchases could have a material adverse effect on our business, results of operations, cash flow or financial position.

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

ITEM 1B.UNRESOLVED STAFF COMMENTS

Not applicable.

ITEM 2.PROPERTIES.

BREWING FACILITIES

The Company owns nine acres of land in Ukiah, California on which its Ukiah brewery is located. Management believes that this facility is adequate for the Company's current capacity and also provides space for future expansion. Grand Pacific Financing Corporation currently holds a first deed of trust on this property in connection with a loan advanced to the Company. (See "Item 7. — Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources - Long-Term Debt".) The principal amount outstanding on the loan as of December 31, 2006 was $2,989,400.

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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 $10,826,200. 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 $120,200.

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 39,700 bbl. or 44% of maximum production capacity, in 2006, as compared with 41,600 bbl. or 46% of maximum production capacity, in 2005, and 43,400 bbl. or 48% of maximum production capacity, in 2004. 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 26,300 bbl. or 44% of its maximum capacity, in 2006, as compared with 17,400 bbl. or 29% of its maximum capacity, in 2005, and 16,300 bbl. or 27% of maximum production capacity in 2004. 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 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.

None.

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

MBC held its 2006 Annual Meeting of Shareholders on November 27, 2006. 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 1,883,898 shares were not cast with respect to any candidate.

Director's Name	Votes for	Withheld
Vijay Mallya	9,704,395	39,881
H. Michael Laybourn	9,731,931	12,345
Jerome G. Merchant	9,716,077	28,199
Sury Rao Palamand	9,695,578	48,698
Kent D. Price	9,729,281	14,995
Yashpal Singh	9,695,878	48,398
Scott R. Heldfond	9,730,031	14,245

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In addition, the Shareholders voted to ratify the selection of PMB Helin Donovan (successor firm of Pohl, McNabola, Berg & Company, LLP) as the Company's independent accountants. 9,708,548 votes were cast for such action, 31,003 votes were cast against such action and there were 4,725 broker non-votes.

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.

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

2005	High		Low
First Quarter	$	0.25	$	0.18
Second Quarter	$	0.25	$	0.16
Third Quarter	$	0.20	$	0.17
Fourth Quarter	$	0.28	$	0.11

The Company had approximately 2,308 holders of its common stock of record as of March 15, 2007. The Company has never paid a cash dividend on its Common Stock and Management does not expect the Company to pay cash dividends in the foreseeable future. The Company's credit agreements provide that the Company may not declare or pay any dividend or other distribution on its Common Stock (other than a stock dividend), or purchase or redeem any Common Stock, without the lender's prior written consent. Management anticipates that similar restrictions will remain in effect for as long as the Company has significant bank financing.

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

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SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS

As of December 31, 2006, the Company had authorized and issued equity compensation in the following amounts.

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

# All the options expired on January 3, 2007.

*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 October 3, 2006 the Company issued 22,221 shares to Scott Heldfond, 27,924 shares to Michael Layborne, 53,576 shares to Sury Rao Palamand and 50,539 shares to Kent Price, totaling 154,260 shares as remuneration to directors for the years 2004 and 2005. 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.

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, 2006, the outstanding principal and interest on the UBA Notes totaled approximately $2,733,392, and the UBA Notes were convertible into 1,822,261 shares of the Company's Common Stock. If the UBA Notes were deemed to be securities, the Company's Management believes that the issuance of all such notes is exempt from registration pursuant to Section 4(2) of the Securities Act of 1983, as amended (the "Act"), because UBA, the sole offeree and recipient thereof, has significant business experience, financial sophistication, and knowledge of and familiarity with the business of the Company. Management believes that if these notes were eventually to be converted into shares of the Company's Common Stock, the issuance of such shares would also be exempt from registration pursuant to Section 4(2) of the Act.

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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
	2006			2005			2004			2003		2002
Sales	$	32,948,900		$	31,927,300		$	32,157,900		$	28,864,300	$	26,085,100
Less Excise Taxes		673,500			635,500			652,400			673,900		651,600
Net Sales		32,275,400			31,291,800			31,505,500			28,190,300		25,433,500
Cost of goods sold		23,063,300			21,754,200			21,045,500			19,145,500		16,892,800
Gross Profit		9,212,100			9,537,600			10,460,000			9,044,800		8,540,700
Operating Expenses		9,657,400			10,054,000			10,006,200			8,067,300		7,312,000
Depreciation & Amortization		1,017,800			903,700			1,031,300			1,127,100		1,049,000
Net income (Loss)		(1,430,600	)		(1,314,700	)		(468,900	)		46,900		(1,729,800	)
Net income (Loss) per common share		(0.12	)		(0.11	)		(0.04	)		0.00		(0.15	)
Average common shares outstanding		11,512,479			11,472,213			11,266,874			11,266,874		11,266,874

BALANCE SHEET DATA

	December 31,
	2006			2005			2004			2003			2002
Cash and Cash equivalent	$	345,900		$	247,700		$	526,600		$	554,300		$	146,800
Working capital		(2,683,400	)		(3,076,800	)		(2,215,100	)		(1,795,600	)		(2,673,000	)
Property and equipment		13,446,000			13,185,600			13,533,900			13,874,800			14,159,400
Deposit and other assets		356,200			372,700			205,100			188,600			73,600
Total assets		24,052,100			22,557,400			24,363,100			23,471,700			22,289,600
Long term debt		7,613,300			5,607,400			5,457,500			5,855,900			5,320,300
Capital lease		65,600			121,500			62,600			204,100			193,900
Total liabilities		20,546,600			17,683,300			18,209,100			16,965,100			15,943,200
Accumulated deficit		(11,661,800	)		(10,231,200	)		(8,916,500	)		(8,447,600	)		(8,494,500	)
Shareholders equity		3,505,500			4,874,100			6,154,000			6,506,600			6,346,400
Cash Dividend Declared Per Common Share		—			—			—			—			—

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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

Changes in 2006

On January 1, 2006, we adopted Statement of Financial Accounting Standards No. 123 (revised 2004), "Share-Based Payment," which requires the measurement and recognition of compensation expense for all share-based awards made to employees and directors, including employee stock options and employee stock purchases, based on estimated fair values. Prior to the adoption of SFAS 123(R), we accounted for stock-based awards to employees and directors using the intrinsic value method in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." Under the intrinsic value method, which had been allowed under the original provisions of Statement 123, no stock compensation expense had been recognized in our statement of operations as the exercise price of our stock options granted to employees and directors equaled the fair market value of the underlying stock at the date of grant.

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:

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

·   Effective January 1, 2006, we adopted SFAS 123(R) to account for all stock-based compensation;

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

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

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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.

Revenue Recognition

We recognize revenues once the following criteria are met:

·   Persuasive evidence of an arrangement exists;

·   Delivery of our obligation to our customer has occurred;

·   The price to be charged to the buyer is fixed or determinable; and

·   Collectibility of the fees to be charged is reasonably assured;

We determine that collectibility is reasonably assured through a standardized credit review to determine each customer's credit worthiness.

OVERVIEW

We reported a net loss for fiscal year 2006, primarily as a result of higher costs of goods sold and higher operational expenses incurred in connection with our operations in the European Territory.

In the Domestic Territory, brewing operations sales (based on volume) were 65,969 bbl. during fiscal year 2006, as compared to 59,046 bbl. and 59,616 bbl. in fiscal years 2005 and 2004, respectively. Sales from the Ukiah facility totaled 39,693 bbl., 41,620 bbl. and 43,358 bbl., for the fiscal years 2006, 2005 and 2004, respectively. Sales from the Saratoga Springs facility totaled 26,276 bbl., 17,426 bbl., and 16,258 bbl. for the fiscal years 2006, 2005 and 2004, respectively. We bottled 3,577 bbl., 2,919 bbl., and 1157 bbl. in fiscal years 2006, 2005 and 2004, respectively, of cider products for California Cider Company.

We sold 67,797 bbl. of beer in our European Territory during fiscal year 2006 as compared to 67,633 bbl. and 67,496 bbl. during fiscal years 2005 and 2004, respectively. Sales in the United Kingdom accounted for 60,187 bbl., 61,077 bbl. and 61,564 bbl. during 2006, 2005 and 2004, respectively. Sales in continental Europe and Canada totaled 7,610 bbl., 6,556 bbl. and 5,929 bbl. during fiscal years 2006, 2005 and 2004, respectively. Although the sales of certain brands have fluctuated over the past few years, overall sales levels have remained consistent. The Company does not predict any material changes in sales’ levels during the upcoming year.

RESULTS OF OPERATIONS

FISCAL YEAR 2006 COMPARED TO FISCAL YEAR 2005

NET SALES

As used herein, the term "net sales" refers to gross sales less excise taxes. Overall net sales for fiscal year 2006 were $32,275,400, an increase of $983,600 or 3.14%, as compared to $31,291,800 in fiscal year 2005 mainly due to higher sales volume in the Domestic Territory.

DOMESTIC OPERATIONS: Net sales in the Domestic Territory totaled $12,149,400 in fiscal year 2006, compared to $11,125,500 for fiscal year 2005, representing an increase of $1,023,900 or 9.2%. Sales of beer for fiscal year 2006 increased by 6,923 barrels, to 65,969 barrels an increase of 11.72% as compared to 59,046 barrels in fiscal year 2005. The increase was due to increases in the sale of contract brands by 5,632 bbl., Company brands by 405 bbl. and Kingfisher Premium Lager by 886 bbl. During fiscal year 2006, we bottled 3,577 bbl. of cider products for California Cider Company on a contract basis compared to 2,919 bbl. in fiscal year 2005. We anticipate continuing to solicit opportunities to enter into non-binding contract brewing arrangements to address the low production capacity utilization rates in our Ukiah and Releta brewing facilities and anticipate that such contract brewing arrangements will continue to impact our net sales in the Domestic Territory.

EUROPEAN TERRITORY: Net sales in the Company's European Territory totaled $20,126,000 (£10,917,900) in fiscal year 2006, compared to $20,166,300 (£11,078,000) during fiscal year 2005. The decrease is attributed to exchange rate fluctuations. Net sales presented in U.S. dollars resulted in a decrease of 0.20%, as compared to fiscal year 2005, alternatively, when presented in pounds sterling, net sales decreased by 1.45% compared to fiscal year 2005. We sold 67,797 bbl. of beer in our European Territory during fiscal year 2006 as compared to 67,633 bbl. in fiscal year 2005, an increase of 164 bbl. or 0.24%.

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COST OF GOODS SOLD:

Overall cost of goods sold during fiscal year 2006 was $23,063,300, as compared to $21,754,200 during fiscal year 2005, an increase of $1,309,100, or 6.02%. As a percentage of net sales, costs of goods sold was 71.5% in fiscal year 2006, as compared to 69.5% during fiscal year 2005. Such amounts are calculated in U.S. dollars, and do not take into account the effect of exchange rate fluctuations on the actual costs of goods sold in the Company's European Territory.

DOMESTIC OPERATIONS: Cost of goods sold as a percentage of net sales in the Domestic Territory during fiscal year 2006 was 70.6%, as compared to 69.5% during the fiscal year 2005. The increase was due mainly to increased costs of raw materials and packaging materials and utilities due to increases in energy costs. We rely heavily on natural gas to operate brewing operations, and electricity to operate our bottling and refrigeration units. Any significant increase in our usage of natural gas or electricity or increases in price rates for these utilities could significantly impact our future operations.

EUROPEAN TERRITORY: As a percentage of net sales, cost of goods sold in the United Kingdom during fiscal year 2006 was 72.5%, as compared to 70% during fiscal year 2005 (in each case as calculated in U.S. dollars, after taking into account the effects of exchange rate fluctuations). The percentage increase was mainly due to increased costs and fees we owed Shepherd Neame pursuant to the standard annual cost adjustment provisions under our production and distribution agreements with them and product mix. Such increases were not fully offset by comparable price increases in our products. When the market allows us to pass on price increases to the purchaser, we do so, but in uncertain markets, we absorb a portion of the costs.

GROSS PROFIT

As a result of increased costs of goods sold, gross profit for fiscal year 2006 (expressed in U.S. dollars) was approximately $9,212,100, a decrease of $325,500, or 3.4%, as compared to gross profit of $9,537,600 in fiscal year 2005. As a percentage of net sales, our overall gross profit during fiscal year 2006 decreased to 28.5%, as compared to 30.5% for fiscal year 2005.

OPERATING EXPENSES

Operating expenses for fiscal year 2006 totaled $9,657,400, a decrease of $396,600, or 3.94%, as compared to $10,054,000 for fiscal year 2005. Operating expenses consist of marketing and distribution expenses, general and administrative expenses, and retail operating expenses. As a percentage of net sales, such expenses decreased to 29.9% in fiscal year 2006, as compared to 32.1% in fiscal year 2005.

MARKETING AND DISTRIBUTION EXPENSES: Our marketing and distribution expenses consist of salaries and commissions, advertising costs, product and sales promotion costs, travel expenses, and related costs. For fiscal year 2006, such expenses equaled $5,011,500, a decrease of $1,204,700 or 19.38%, as compared to $6,216,200 in fiscal year 2005. As a percentage of net sales, our marketing and distribution expenses decreased to 15.5% in fiscal year 2006, as compared to 19.9% in fiscal year 2005.

DOMESTIC OPERATIONS: Marketing and distribution expenses for the Domestic Territory in fiscal year 2006 equaled $1,117,900, a decrease of $249,500, or 18.2%, as compared to $1,367,400 in marketing and distribution expenses incurred during fiscal year 2005. Marketing and distribution expenses equaled 9.2% of Domestic Territory net sales during fiscal year 2006, as compared to 12.3% during fiscal year 2005. The decrease was mainly attributed to reduced salary and travel costs resulting from a reduction in headcount.

EUROPEAN TERRITORY: Marketing and distribution expenses in the European Territory during fiscal year 2006 equaled $3,893,600, a decrease of $955,200, or 19.7%, as compared to $4,848,800 during fiscal year 2005. As a percentage of net sales in the United Kingdom, such expenses increased to 19.4% during 2006, as compared to 34.4% during 2005 (in each case as calculated in U.S. dollars, after taking into account the effects of exchange rate calculations). We ran a special advertising campaign in London in June and July of 2005 which was not repeated in the year 2006, resulting in a significant reduction in marketing costs. The decrease was also due to a decrease in headcount in the United Kingdom and associated reduced salary and travel costs and reduction in freight expenses due to lower sales volumes in the United Kingdom.

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GENERAL AND ADMINISTRATIVE EXPENSES: Our general and administrative expenses totaled $4,548,700 for fiscal year 2006, representing an increase of $813,300, or 21.8%, as compared to $3,735,400 for fiscal year 2005. General and administrative expenses equaled 14% and 12% respectively of net sales for fiscal years 2006 and 2005 respectively.

DOMESTIC OPERATIONS. General and administrative expenses for our Domestic Territory equaled $1,661,200 for fiscal year 2006, representing a decrease of $149,400, or 8.25%, as compared to $1,810,600 for fiscal year 2005. The decrease was primarily due to a portion of common corporate overheads being transferred to UBSN and a reduction in legal expenses partly offset by increases in salaries and loan fees.

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

RETAIL OPERATING EXPENSES: Retail operating expenses for fiscal year 2006 totaled $97,200, representing a decrease of $5,200, or 5.1%, from $102,400 in fiscal year 2005. As a percentage of net sales, retail operating expenses decreased to 0.3% as compared to 0.33% for fiscal year 2005.

OTHER EXPENSES

Other expenses totaled $982,800 in fiscal year 2006, representing an increase of $58,900, or 6.4%, as compared to $923,900 in fiscal year 2005. The increase in other expenses was mainly due to higher interest expenses associated with the increased amount of borrowings as well as due to increases in the prime lending rates in the United States.

INCOME TAXES

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

As a result of the accumulated losses in our U.S. operations we have determined that the deferred tax assets associated with our net operating loss carryforwards and investment tax credits may expire prior to utilization. We recorded a valuation allowance of $4,100,500 for deferred tax assets. We also have $68,433 of California Manufacturers' Investment Tax Credits that can be carried forward to reduce future taxes. These credits begin expiring in 2011.

NET LOSS

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

RETAIL SEGMENT

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

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.

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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 have been a factor in the decrease.

EUROPEAN TERRITORY: Net sales in the Company's European Territory totaled $20,166,300 (£11,078,000) in fiscal year 2005, compared to $20,259,900 (£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.

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.

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 overall marketing expenses was caused by a one-time promotion in the European Territory discussed below.

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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.

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 the estimated refunds due to us on account of excess payments of taxes by us relating to our operations in the United Kingdom.

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

NET LOSS

Our net loss for fiscal year 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.

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RETAIL SEGMENT

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

LIQUIDITY AND CAPITAL RESOURCES

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

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 MBC and Releta’s eligible inventory (the "BFI Line of Credit").

The minimum monthly interest payment under the BFI Line of Credit was approximately $6,000, and because it was outstanding for an initial six month period, there was no prepayment fee. The BFI Facility carried 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 was also subject to a monthly administrative fee of 0.40%.

We issued a $200,000 promissory note to BFI in connection with the BFI Line of Credit on December 27, 2005. This note was repaid in full on July 28, 2006.

We also issued an additional promissory note to BFI on April 5, 2006 in the amount of $289,937.70.

On November 21, 2006, we used the immediately available amount drawable under the Marquette Business Credit Inc. facility (the “MBCI Facility”) discussed below to pay off the entire outstanding balance due to BFI.

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 December 31, 2006. 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, 2006 was $1,915,400, and the accrued but unpaid interest thereon was equal to approximately $818,000, for a total amount due of $2,733,400.

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, 2006, the outstanding principal and interest on the UBA Notes was convertible into 1,822,261 shares of our Common Stock.

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

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

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

LONG TERM DEBT: MBC 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 was 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 was adjustable on every five year anniversary of the agreement to the Treasury Constant Maturity Rate plus 4.17%. The amount of the balloon payment varied depending on the change in interest rates over the term of the loan. In addition to the Ukiah land and facility, this loan was secured by certain other assets of the Company (other than the Releta facility), including, without limitation, most of the Company's equipment. This loan was fully settled on July 3, 2006 out of the proceeds from the loan which we received from Grand Pacific.

GRAND PACIFIC FINANCING CORPORATION LOAN : On July 3, 2006, MBC obtained a $3.0 million loan from Grand Pacific, secured by a first priority deed of trust on the Ukiah land, fixtures attached to the land, and improvements. The loan is payable in partially amortizing monthly installments of $27,261 including interest at the rate of 1.75% over the prime rate published by The Wall Street Journal, maturing June 28, 2011 with a balloon payment. The amount of the balloon payment will vary depending on the change in interest rates over the term of the loan. MBC used the proceeds of the loan to repay in full all the then outstanding loans owed to SBMC. Grand Pacific also collects on a monthly basis an amount of approximately $10,554 towards property taxes payable on the Ukiah property and pays such taxes when they become due.

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

OTHER LOANS AND CREDIT FACILITIES

SAVINGS BANK OF MENDOCINO TEMPORARY LOAN: On December 31, 2003, SBMC extended a temporary loan in the principal amount of approximately $576,200 to MBC in order to finance a buy-out of equipment leased through Finova Capital Corporation. This loan was fully settled on July 3, 2006 out of the proceeds from the loan which the Company received from Grand Pacific.

On July 3, 2006, SBMC provided short term financing in the principal amount of $350,000 for a period of six months, at a variable rate of interest of the higher of 10% or prime plus 1.5%. This loan is secured against the equipment at the Ukiah brewery. This loan was fully paid off on November 21, 2006 out of the proceeds from the loan which the Company received from MBCI.

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

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

WEIGHTED AVERAGE INTEREST: The weighted average interest rates paid on our debts incurred in connection with the Domestic Territory was 11.16% for fiscal year 2006 compared to 9.13% and 7.85% for fiscal year 2005 and (including the long term capital lease of equipment with Finova Capital Corporation Inc.) for the fiscal year 2004, respectively. For loans primarily associated with our European territory, the weighted average interest rates paid were 6.15%, 6.15% and 5.9% in fiscal years 2006, 2005 and 2004, 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, 2006 was 0.79 to 1.0 and our ratio of total assets to total liabilities was 1.17 to 1.0. On December 31, 2005 our ratio of current assets to current liabilities was 0.75 to 1.0 and our ratio of total assets to total liabilities was 1.28 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.

OVERDUE PROPERTY TAXES: We owed 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 an installment payment plan to settle the deficiency. The entire balance outstanding as of June 30, 2006 was paid out of the proceeds of the Grand Pacific loan on July 3, 2006.

RESTRICTED NET ASSETS. Our wholly-owned subsidiary, UBI, had retained losses of approximately GBP 61,600 as of December 31, 2006. 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 GBP1,000,000.

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

OFF-BALANCE SHEET TRANSACTIONS. We are not a party to nor do we engage in any off-balance sheet transactions.

CONTRACTUAL OBLIGATIONS

The following chart sets forth our contractual obligations as of December 31, 2006.

Contractual Obligations	Payments due by period
	Total		Less than 1 year		1 -3 years		3 -5 years		More than 5 years
Long Term Debt Obligations	$	4,463,200	$	236,500	$	506,500	$	3,720,200	$	-
Capital Lease Obligations		148,700		83,100		65,600		-		-
Operating Lease Obligations		1,189,700		229,900		411,400		343,000		205,400
Purchase Obligations		-		-		-		-		-
Other Long Term Liabilities		3,438,500		117,500		235,000		2,968,500		117,500
Total	$	9,240,100	$	667,000	$	1,218,500	$	7,031,700	$	322,900

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ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As of December 31, 2006, 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, 2006 of $11,051,100, of which $10,346,000 was subject to variable rates of interest (either prime or LIBOR plus 1.5% or prime plus 1.75% or LIBOR plus 4.25% or LIBOR plus 5.25%). Its long-term debt (including current portion) as of December 31, 2006 totaled $7,116,800 of which $705,100 had fixed rates of interest and the remaining $6,411,700 was subject to variable rates. Short term debts amounted to $3,934,300, 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 $103,500 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 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 61% of the Company's total sales in 2006, as compared to approximately 63% in 2005 as well as 2004. The Company had a net operating loss in 2006 and 2005, but in 2004 UBSN and UBI contributed about 69.7% of the Company's total operating income. 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 2006, 2005, and 2004 were $1.843, $1.820 and $1.833 respectively, representing an increase in the value of the pound sterling (as compared to the dollar) of 1.26% for 2006 as compared to 2005 and a decrease of 0.7% for 2005 as compared to 2004.

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 at December 31, 2006, 2005, and 2004 were $1.959, $1.719, and $1.916, respectively. These year-end valuations represent an increase in the value of the pound sterling, vis a vis the U.S. dollar, of 13.96% as of December 31, 2006 as compared to December 31, 2005, and a decrease in the value of the pound sterling, as against the U.S. dollar, of 10.3% as of December 31, 2005 as compared to December 31, 2004.

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.

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The following chart sets forth, on a quarterly basis, certain financial information about the Company's results of operations for the 2006 and 2005 fiscal years.

	2006												2005
	Q1			Q2			Q3			Q4			Q1			Q2		Q3			Q4
Net Sales	$	7,272,100		$	8,328,600		$	8,221,700		$	8,453,000		$	7,256,900		$	8,240,600	$	7,919,300		$	7,875,000
Gross profit	$	2,258,800		$	2,481,700		$	2,485,000		$	1,986,600		$	2,270,500		$	2,702,200	$	2,483,100		$	2,081,800
Net income before extra- ordinary items	$	(228,900	)	$	(456,500	)	$	(50,000	)	$	(695,200	)	$	(198,400	)	$	212,100	$	(564,600	)	$	(763,800	)
Net income (loss)	$	(228,900	)	$	(456,500	)	$	(50,000	)	$	(695,200	)	$	(198,400	)	$	212,100	$	(564,600	)	$	(763,800	)
Basic Earnings (Loss) per  share	$	(0.02	)	$	(0.04	)	$	(0.00	)	$	(0.06	)	$	(0.02	)	$	0.02	$	(0.05	)	$	(0.07	)

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, 2006, 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.

24

ITEM 9B.OTHER INFORMATION.

On November 21, 2006, Marquette Business Credit, Inc. extended a total facility of $4,925,000 with a maturity date of June 27, 2011 consisting of (i) a $2,750,000 revolving facility, (ii) a $1,525,000 term loan, and (iii) a $650,000 capital expenditure loan. The rate of interest on the term loan and the capital expenditure loan is the one-month LIBOR rate published in the Wall Street Journal plus a margin of 5.25% and on the revolving facility is the one-month LIBOR rate published in the Wall Street Journal plus a margin of 4.25%. The facility is secured by substantially all of the assets of the Company located in the United States excluding real property and fixtures located at the Company's property in Ukiah, California. The Loan and Security Agreement, Revolving Note, Term Note and CAPEX Note are filed as exhibits to this Annual Report on Form 10-K. For additional information on this facility see "Item 7- Management's Discussion and Analysis of Financial Condition and Results of Operation-Liquidity and Capital Resources-Marquette Business Credit Inc. Facility."

PART III

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

The following table sets forth the names, ages as of February 28, 2007, and certain information regarding each of the Company's current directors and executive officers:

Name	Age	Position(s)	Director Since**
Scott R. Heldfond	62	Director	2005
Michael Laybourn	68	Director	1993
Vijay Mallya, Ph.D.	51	Director and Chairman of the Board	1997
Jerome G. Merchant*+	45	Director	1997
Mahadevan Narayanan	49	Chief Financial Officer and Secretary
Sury Rao Palamand, Ph.D.*+	75	Director	1998
Kent D. Price*+	63	Director	1998
Yashpal Singh	61	Director, President, and Chief Executive Officer	1997

** All directors are elected by the Shareholders at the Annual Meeting to serve until the following Annual Meeting. The term of employment for the Company's Chief Executive Officer has been extended until March 31, 2011. The Company's Chief Financial Officer and Chairman do not have any set date for the expiration of their respective terms of office.

* Member of the Audit/Finance Committee.

+ Member of the Compensation Committee.

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

25

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

Vijay Mallya, Ph.D., became Chairman of the Board in October 1997 and was its Chief Executive Officer until January 2005. Dr. Mallya is Chairman of UBICS, Inc., United Breweries Limited, UB Engineering Limited, Mangalore Chemicals and Fertilizers Ltd., Herbertsons Limited, McDowell & Co. Ltd., and other affiliated companies (collectively the "UB Group"). United Breweries Limited and McDowell & Co., Ltd. are two of Asia's leading beer and spirits companies. The UB Group has annual sales in excess of U.S. dollars $1 billion. He also sits on the boards of several foreign companies and organizations including companies comprising the UB Group, The Institute of Economic Studies (India), and the Federation of the Indian Chamber of Commerce and Industries. Dr. Mallya was recently elected to serve as a member of the Upper House of the Indian Parliament. Dr. Mallya holds a Bachelor of Commerce degree from the University of Calcutta in India and an honorary Doctorate in Business Administration from 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. Mr. Merchant is currently a Managing Director with RSM EquiCo Capital Markets, LLC a mid market investment bank. He has over 20 years experience in investment banking and capital raising. Previously, he held executive positions at Citigroup and MetLife Investors. Mr. Merchant has advised the investment division and clients of Citibank, Smith Barney, Bank of America, Wells Fargo and U.S. Bank amongst others. In executive and strategic planning capacities, he has advised public and private companies and both institutional and high-net worth investors. Between April 1993 and December 2003, Mr. Merchant served in various senior capacities for Cal Fed Investments, a wholly owned subsidiary of Cal Fed Bank. Previously, Mr. Merchant directed the West Coast capital raising for a private equity group making equity oriented management buyouts and strategic acquisitions. He received his B.S. degree in Managerial Economics-Finance from the University of California, at Davis.

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

Sury Rao Palamand became a director of the Company in January 1998. Dr. Palamand is a director and partner of Summit Products, Inc, a beverage development and consulting company serving the food and beverage industry. He is also a director and partner in the Historic Lemp Brewery involved in the development of microbreweries and brewpubs in addition to his real estate activities in the restoration of historic buildings. Dr. Palamand has over 40 years of experience in the brewing industry and has published numerous scientific and technical papers on beer and other fermented beverages in various Technical Journals in the USA and abroad. He is an associate member of the Institute of Brewing, London and is a member of several brewing organizations in the United States. In addition, Dr. Palamand possesses technical and technological expertise in Wine making as well as in the development of soft drinks. Prior to joining the Company as a director, Dr. Palamand served as director of Beer and New Beverage development at Anheuser-Busch Companies, Inc. Dr. Palamand holds a Bachelor of Science degree from the University of Mysore, India, a Master of Science degree in Applied Chemistry from the University of Bombay, India and a Masters degree in Food Microbiology and a Ph.D. degree in Food and Flavor technology from the Ohio State University, Columbus, Ohio. Dr. Palamand is listed in the MARQUIS WHO is WHO in America and in the WHO is WHO in the Midwest.

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

26

Yashpal Singh, President of the Company since January 2000, became a director in October 1997 and has served as its Executive Vice President and Chief Operating Officer since May 1998. Mr. Singh became the Chief Executive Officer in January 2005. From May 1997 to March 1998, Mr. Singh served as Executive Vice-President- Operations for UBA. In that capacity, he was responsible for UBA's United States brewing operations. Between 1992 and 1997, Mr. Singh also served as Senior Vice President-Operations for United Breweries Ltd., an Indian Corporation, where he was responsible for the operations of 12 breweries, instituting new projects, and technical and operational evaluations of potential acquisition opportunities worldwide. Mr. Singh has over 38 years of experience in the brewing industry. Mr. Singh holds a Bachelors degree in Science from Punjab University in India, and has graduate training in the fields of Brewing, Malting, and Mineral Water Technology. Mr. Singh is an associate member of the Institute of Brewing, London, a member of the Master Brewers Association of America, and was a former executive member of the Managing Committee of the All India Brewer's Association.

FAMILY RELATIONSHIPS

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

INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS

None.

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Based solely on its review of the Forms 3, 4 and 5 furnished to the Company during and with respect to the year 2006, the Company is not aware of any person that was a Director, officer, or greater than 10% beneficial owner of the Company that failed to file on a timely basis reports required by Section 16(a) of the Exchange Act during the Company's most recent fiscal year.

AUDIT COMMITTEE

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

AUDIT COMMITTEE FINANCIAL EXPERT

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

CODE OF ETHICS

The Company has adopted a Code of Ethics that applies to its Chief Executive Officer, Chief Financial Officer, and principal accounting officer. The Code of Ethics is posted on the Company's website at www.mendobrew.com. The Company intends to disclose future amendments to certain provisions of its Code of Ethics, or waivers of such provisions granted to executive officers and directors on this website within four (4) business days following the date of such amendment or waiver. Any person desiring a free copy of the Code of Ethics should send a written request to the Company's Secretary, N. Mahadevan at the Company's principal executive offices located at 1601 Airport Road, Ukiah, CA 95482.

DIRECTORS' NOMINATIONS

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

27

ITEM 11.EXECUTIVE COMPENSATION

The information appearing under the headings "Director Compensation," "Report of the Compensation Committee," "Compensation Discussion and Analysis," and "Executive Compensation" of our 2007 Proxy Statement is incorporated by reference in this section.

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 30, 2007, for (a) each shareholder known by the Company to own beneficially 5% or more of the outstanding shares of its Common Stock or Series A Preferred Stock; (b) each director; and (c) all directors and executive officers of the Company as a group. Except as otherwise noted, the Company believes that the beneficial owners of the Common Stock and Series A Preferred Stock listed below, based on information furnished by such owners, have sole investment and voting power with respect to such shares, subject to community property laws where applicable.

Name and Address	Shares Beneficially Owned (1)			Approximate Percentage
COMMON STOCK
United Breweries of America, Inc. 1050, Bridge way, Sausalito, CA 94965		3,087,818	(2)		26.6	%
Inversiones Mirabel S.A. Hong Kong Bank Building 6th Floor, Samuel Lewis Avenue P O Box 6-4298, El Dorado Panama City, Panama		5,500,000	(2)		47.3	%
United Breweries (Holdings) Limited. 100/1, Richmond Road, Bangalore - 560 025, India		8,587,818	(3)		73.9	%
H. Michael Laybourn +		345,664	(4)		2.9	%
Vijay Mallya		8,587,818	(5)		73.9	%
Kent D Price c/o Parker Price Venture Capital, Inc. 101, California Street Suite 2830 San Francisco, CA 94111		189,435	(4)		1.6	%
Sury Rao Palamand, Ph.D. +		154,593	(4)		1.3	%
Jerome G. Merchant+		105,665	(4)		—
Yashpal Singh+		—			—
Scott R. Heldfond +		22,221			—
N. Mahadevan		—			—
All Directors and executive officers as a group (8 persons)		9,405,396	(6)		81	%

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

28

(1)Applicable percentages of ownership are based on 11,628,174 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 1,852,960 shares issuable to UBA upon conversion of certain convertible notes issued by MBC to UBA under a Master Line of Credit Agreement (For additional information, see "Item 13. Certain Relationships and Related Transactions"). UBHL is the ultimate beneficiary of substantially all of the shares owned by both UBA and Inversiones.

(3)Includes all shares held by the Company's two largest shareholders, UBA and Inversiones. UBHL is the beneficial owner of UBA and Inversiones because they are both controlled by Rigby International Corp., a company registered in the British Virgin Island with its primary offices at Vanterpool Plaza, 2nd Floor, Wickhams Cay I, Road Town, Tortola, British Virgin Island 2 and its mailing address c/o CAS SA, 12-14 Avenue, Riverdil, CH-1260, Lyon, Switzerland, which in turn is a wholly-owned subsidiary of UBHL. Such amount does not include 1,852,960 shares issuable to UBA upon conversion of certain convertible notes issued by MBC to UBA under a Master Line of Credit Agreement.

(4)[Intentionally omitted]

(5)Includes all shares indirectly held by UBHL. Does not include 1,852,960 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)Does not include shares which may be obtained upon the conversion of the Notes described in footnotes (2) and (3), above.

CHANGES IN CONTROL

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

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

The information appearing in our 2007 Proxy Statement under the heading "Certain Relationships and Related Transactions" and "Corporate Governance" is incorporated by reference in this section.

ITEM 14.PRINCIPAL ACCOUNTING FEES AND SERVICES.

The Company has appointed PMB Helin Donovan, L.L.P. ("PMB"), formerly Pohl, McNabola, Berg & Company, LLP, as its independent auditors to perform the audit of the Company's financial statements for the year 2006. The estimated audit fees for the audit of the 2006 financial statements are $85,000.

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

AUDIT FEES. The aggregate fees billed by PMB for the audit of the Company's annual consolidated financial statements for the year ended December 31, 2005 was $90,000; fees of an additional $45,685 were billed to the Company during 2006 in connection with PMB’s review of interim financial statements in connection with the Company's Quarterly Reports on Form 10-Q for this year. Such fees represented 90% of the total fees for services rendered to the Company by PMB during 2006.

The aggregate fees billed by Moss Adams for the audit of the Company's annual consolidated financial statements for the year ended December 31, 2004 was $117,885; fees of an additional $35,690 were billed to the Company during 2005 in connection with Moss Adams' review of financial statements in connection with the Company's Quarterly Reports on Form 10-Q for this year. Such fees represented 87% of the total fees for services rendered to the Company by Moss Adams during 2005.

29

AUDIT RELATED FEES. Neither PMB nor Moss Adams billed any amount in fees for assurance or related services to the Company in 2006, 2005 or 2004, respectively.

TAX FEES. The aggregate fees billed during 2006 for tax products and services related to the preparation of the Company's tax returned provided by PMB, other than those described in the foregoing paragraphs, was $15,000. Such fees represented 10% of the total fees for services rendered to the Company by PMB during 2006.

The aggregate fees billed during 2005 for tax products and services related to the preparation of the Company's tax returns provided by Moss Adams, other than those described in the foregoing paragraphs, was $19,611. Such fees represented 11% of the total fees for services rendered to the Company by Moss Adams during 2005.

ALL OTHER FEES. During the year 2006, PMB did not bill the Company for any amount other than those mentioned above.

The aggregate fees billed to the Company for all other services related to correspondence with the SEC and the reissuing of an audit certificates to be included in the Company's restated annual report on Form 10K/A rendered by Moss Adams for the year ended December 31, 2005 was $4,341. Such fees represented 2% of the total fees for services rendered to the Company by Moss Adams during 2005.

The Company is not aware that any significant amount of the work done during the course of the audits of the Company's 2005 and 2004 Financial Statements was performed by persons other than full-time, permanent, employees of PMB and Moss Adams, respectively.

ITEM 15.EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

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

(1) Audited financial statements and financial statement schedules

Report of PMB Helin Donovan., LLP, Independent Registered Auditors

Report of Moss Adams, LLP, Independent Registered Auditors

Consolidated Balance Sheets as of December 31, 2006 and 2005

Consolidated Statements of Operations and Comprehensive Income for the Years Ended December 31, 2006, 2005, and 2004

Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 2006, 2005, and 2004

Consolidated Statements of Cash Flow for the Years Ended December 31, 2006, 2005, and 2004

Notes to Financial Statements

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

(3) LIST OF EXHIBITS.

Exhibit Number		Description of Document
3.1	(T)	Articles of Incorporation of the Company, as amended.
3.2	(T)	Bylaws of the Company, as amended.
10.1		[Intentionally omitted]
10.2		[Intentionally omitted]

30

Exhibit Number		Description of Document
10.3	(A)	Wholesale Distribution Agreement between the Company and Bay Area Distributing.
10.4		[Intentionally omitted]
10.5	(B)	Liquid Sediment Removal Services Agreement with Cold Creek Compost, Inc.
10.6		[Intentionally omitted]
10.7	(C)	Commercial Real Estate Purchase Contract and Receipt for Deposit (previously filed as Exhibit 19.2).
10.8	(D)	Commercial Lease between Stewart's Ice Cream Company, Inc. and Releta Brewing Company LLC.
10.9		[Intentionally omitted]
10.10	(F)	Keg Management Agreement with MicroStar Keg Management LLC.
10.11	(G)	Agreement to Implement Condition of Approval No. 37 of the Site Development Permit 95-19 with the City of Ukiah, California (previously filed as Exhibit 19.6).
10.12		[Intentionally omitted]
10.13		[Intentionally omitted]
10.14		[Intentionally omitted]
10.15	(I)	Hazardous Substances Certificate and Indemnity with the Savings Bank of Mendocino County.
10.16		[Intentionally omitted]
10.17		[Intentionally omitted]
10.18		[Intentionally omitted]
10.19	(K)	Investment Agreement with United Breweries of America, Inc.
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 Line of Credit Agreement between the Company and United Breweries of America Inc. dated August 31, 1999.

31

Exhibit Number		Description of Document
10.36	(O)	Convertible Note in favor of United Breweries of America Inc. dated Sept. 7, 1999.
10.37	(P)	Convertible Note in favor of United Breweries of America Inc. dated October 21, 1999.
10.38	(P)	Convertible Note in favor of United Breweries of America Inc. dated November 12, 1999.
10.39	(P)	Convertible Note in favor of United Breweries of America Inc. dated December 17, 1999.
10.40	(P)	Convertible Note in favor of United Breweries of America Inc. dated December 31, 1999.
10.41	(P)	Convertible Note in favor of United Breweries of America Inc. dated February 16, 2000.
10.42	(P)	Convertible Note in favor of United Breweries of America Inc. dated February 17, 2000.
10.43	(P)	Convertible Note in favor of United Breweries of America Inc. dated April 28, 2000.
10.44	(P)	First Amendment to Master Line of Credit Agreement between the Company and United Breweries of America, Inc., dated April 28, 2000.
10.45	(Q)	Convertible Note in favor of United Breweries of America Inc. dated September 11, 2000.
10.46	(Q)	Convertible Note in favor of United Breweries of America Inc. dated September 30, 2000.
10.47	(Q)	Convertible Note in favor of United Breweries of America Inc. dated December 31, 2000.
10.48	(Q)	Convertible Note in favor of United Breweries of America Inc. dated February 12, 2001.
10.49	(R)	Convertible Note in favor of United Breweries of America Inc. dated July 1, 2001.
10.50	(S)	Confirmation of Waiver Between Mendocino Brewing Company, Inc. and United Breweries of America, Inc., dated as of December 28, 2001.
10.51	(S)	Extension of Term of Notes Under Master Line of Credit Agreement between Mendocino Brewing Company, Inc. and United Breweries of America, Inc., dated February 14, 2002.
10.52	(T)	License Agreement between United Breweries Limited and United Breweries International (U.K.), Limited.
10.53	(T)	Supplemental Agreement to License Agreement between United Breweries Limited and United Breweries International (U.K.), Limited.
10.54	(T)	Distribution Agreement between United Breweries International (U.K.), Limited. and UBSN, Ltd.
10.55	(T)	Supplemental Agreement to Distribution Agreement between United Breweries International (U.K.), Limited. and UBSN, Ltd.
10.56	(T)	Market Development, General and Administrative Services Agreement between Mendocino Brewing Company, Inc. and UBSN, Ltd.

32

Exhibit Number Description of Document

10.57	(T)	Contract to Brew and Supply Kingfisher Products among Shepherd Neame, Limited, United Breweries International (U.K.), Limited. and UBSN, Ltd.
10.58	(T)	Supplemental Agreement to Contract to Brew and Supply Kingfisher Products among Shepherd Neame, Limited, United Breweries International (U.K.), Limited. and UBSN, Ltd.
10.59	(T)	Loan Agreement between Shepherd Neame, Limited and UBSN, Ltd.
10.60	(T)	Brewing License Agreement between UBSN, Ltd. and Mendocino Brewing Company, Inc.
10.61	(T)	Kingfisher Trade Mark and Trade Name License Agreement between Kingfisher of America, Inc. and Mendocino Brewing Company, Inc.
10.62	(U)	First Amendment to Extension of Term of Notes Under Master Line of Credit Agreement between Mendocino Brewing Company, Inc. and United Breweries of America, Inc., dated November 13, 2002.
10.63	(U)	Second Amendment to Extension of Term of Notes Under Master Line of Credit Agreement between Mendocino Brewing Company, Inc. and United Breweries of America, Inc., dated March 31, 2003.
10.64		[Intentionally omitted]
10.65		[Intentionally omitted]
10.66	(W)	Third Amendment to Extension of Term of Notes under Master Line of Credit Agreement, dated August 14, 2003.
10.67		[Intentionally omitted]
10.68	(X)	Fourth Amendment to Extension of Term of Notes Under Master Line of Credit Agreement between Mendocino Brewing Company, Inc. and United Breweries of America, Inc., dated as of August 14, 2004.
10.69		[Intentionally omitted]
10.70	(Z)	Second Agreement dated October 9, 1998 between UBSN, Ltd. and Shepherd Neame, Ltd.
10.71		[Intentionally omitted]
10.72		[Intentionally omitted]
10.73		[Intentionally omitted]
10.74	(BB)	Convertible Promissory Note of Mendocino Brewing Company, Inc. in favor of United Breweries of America, Inc., dated March 2, 2005.
10.75		[Intentionally omitted]
10.76	(DD)	Invoice Discounting Agreement between The Royal Bank of Scotland Commercial Services Limited and UBSN Limited, dated April 26, 2005.
10.77		[Intentionally omitted]
10.78		[Intentionally omitted]
10.79	(EE)	Loan Agreement by and between Mendocino Brewing Company, Inc. and grand Pacific Financing Corporation dated June 28, 2006.
10.80	(EE)	Promissory Note of Mendocino Brewing Company, Inc. in favor of Grand Pacific Financing Corporation, dated June 28, 2006.

33

Exhibit Number Description of Document

10.81		[Intentionally omitted]
10.82	*	Loan and Security Agreement by and among Marquette Business Credit Inc. and Mendocino Brewing Company, Inc. and Releta Brewing Company, LLC, dated November 16, 2006.
10.83	*	Revolving Note of Mendocino Brewing Company, Inc. and Releta Brewing Company, LLC in favor of Marquette Business Credit Inc., dated November 16, 2006.
10.84	*	Term Note of Mendocino Brewing Company, Inc. and Releta Brewing Company, LLC in favor of Marquette Business Credit Inc., dated November 16, 2006.
10.85	*	CAPEX Note of Mendocino Brewing Company, Inc. and Releta Brewing Company, LLC in favor of Marquette Business Credit Inc., dated November 16, 2006.
10.86	*	Fifth Amendment to Extension of Term of Notes Under Master Line of Credit Agreement, effective August 31, 2005.
10.87	*	Sixth Amendment to Extension of Term of Notes under Master Line of Credit Agreement, effective December 31, 2006.
10.88	*	Second Amendment to Convertible Promissory Note, effective December 31, 2006.
14.1	(V)	Code of Ethics

* Filed herewith.

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

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

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

(C) The Company's Quarterly Report on Form 10-QSB for the period ended March 31, 1995.

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

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

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

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

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

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

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

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

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

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

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

34

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

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

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

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

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

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

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

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

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

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

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

10.82 Loan and Security Agreement by and among Marquette Business Credit Inc. and Mendocino Brewing Company, Inc. and Releta Brewing Company, LLC, dated November 16, 2006.

10.83 Revolving Note of Mendocino Brewing Company, Inc. and Releta Brewing Company, LLC in favor of Marquette Business Credit Inc., dated November 16, 2006.

10.84 Term Note of Mendocino Brewing Company, Inc. and Releta Brewing Company, LLC in favor of Marquette Business Credit Inc., dated November 16, 2006.

10.85 CAPEX Note of Mendocino Brewing Company, Inc. and Releta Brewing Company, LLC in favor of Marquette Business Credit Inc., dated November 16, 2006.

10.86 Fifth Amendment to Extension of Term of Notes Under Master Line of Credit Agreement, effective August 31, 2005.

10.87 Sixth Amendment to Extension of Term of Notes Under Master Line of Credit Agreement, effective August 31, 2006.

10.88 Second Amendment to Convertible Promissory Note, effective December 31, 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.

(c) Excluded Financial Statements. None.

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, thereunto duly authorized.

MENDOCINO BREWING COMPANY, INC. (Registrant)
By:	/s/ Yashpal Singh
	Yashpal Singh
	Its President, Director and Chief Executive Officer
	Date: March 31, 2007

35

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

MENDOCINO BREWING COMPANY, INC. (Registrant)
By:
	Dr. Vijay Mallya
	Director and Chairman of the Board
	Date: March 31, 2007

By:	/s/  Yashpal Singh
	Yashpal Singh
	Its President, Director and Chief Executive Officer
	Date: March 31, 2007

By:	/s/ Scott R. Heldfond
	Scott R. Heldfond, Director
	Date: March 31, 2007

By:	/s/ Jerome G. Merchant
	Jerome G. Merchant, Director
	Date: March 31, 2007

By:	/s/ N. Mahadevan
	N. Mahadevan Its Secretary and Chief Financial Officer
	Date: March 31, 2007

By:	/s/ H. Michael Laybourn
	H. Michael Laybourn, Director
	Date: March 31, 2007

By:	/s/ Kent Price
	Kent Price, Director
	Date: March 31, 2007

By:	/s/ Sury Rao Palamand
	Sury Rao Palamand, Director
	Date: March 31, 2007

36

MENDOCINO BREWING COMPANY, INC.

CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED

DECEMBER 31, 2006 AND 2005

MENDOCINO BREWING COMPANY, INC.

CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED

DECEMBER 31, 2006 AND 2005

CONTENTS

Reports of Independent Registered Public Accounting Firms	F-1  –  F-2
Consolidated Balance Sheets	F-3
Consolidated Statements of Operations and Comprehensive Income	F-4
Consolidated Statements of Stockholders' Equity	F-5
Consolidated Statements of Cash Flows	F-6
Notes to Financial Statements	F-7  –  F-33

REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders

Mendocino Brewing Company, Inc.

Ukiah, California

We have audited the accompanying consolidated balance sheets of Mendocino Brewing Company, Inc. (“MBC”) as of December 31, 2006 and 2005, and the related consolidated statements of operations and comprehensive income, stockholders’ equity and cash flows for the years ended December 31, 2006 and 2005. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of MBC, Inc. as of December 31, 2006 and 2005 and the consolidated results of their operations and their consolidated cash flows for the years ended December 31, 2006 and 2005, in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note 1 to the consolidated financials statements, the Company changed its method of accounting for stock-based compensation upon adoption of Financial Accounting Standards No. 123(R), “Share-Based Payment.”

/s/ PMB Helin Donovan, LLP

PMB Helin Donovan, LLP

San Francisco, California

March 27, 2006

F-1

REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders

Mendocino Brewing Company, Inc.

We have audited Mendocino Brewing Company, Inc.’s, consolidated statements of operations and comprehensive income, stockholders’ equity, and cash flows for the year ended December 31, 2004. 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 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 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 audit provide a reasonable basis for our opinion.

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

/s/ Moss Adams LLP

Santa Rosa, California

February 4, 2005

F-2

MENDOCINO BREWING COMPANY, INC.

CONSOLIDATED BALANCE SHEETS

AS OF DECEMBER 31, 2006 AND 2005 

	2006			2005
ASSETS
Current Assets
Cash	$	345,900		$	247,700
Accounts receivable, net of allowance for
doubtful accounts of $60,500 and $54,900, respectively		7,903,100			7,051,500
Inventories		1,329,500			1,151,400
Prepaid expenses		671,400			548,500
Total Current Assets		10,249,900			8,999,100
Property and Equipment
(net of accumulated depreciation)		13,446,000			13,185,600
Other Assets
Income tax receivable		-			116,000
Deposits and other assets		302,300			179,200
Intangibles, (net of amortization)		53,900			77,500
Total Other Assets		356,200			372,700
Total Assets	$	24,052,100		$	22,557,400
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Secured lines of credit	$	3,934,300		$	3,774,000
Note payable		-			576,200
Accounts payable		7,164,300			5,491,800
Accrued liabilities		1,397,600			1,714,800
Current maturities of notes to related parties		117,500			103,100
Current maturities of obligation under long-term debt		236,500			284,400
Current maturities of obligation under capital lease		83,100			131,600
Total Current Liabilities		12,933,300			12,075,900
Long-Term Liabilities
Notes to related parties including accrued
interest of $818,000 and $636,800, respectively		3,321,000			3,171,000
Long term debt, less current maturities		4,226,700			2,314,900
Obligations under capital leases, less current maturities		65,600			121,500
Total Long-Term Liabilities		7,613,300			5,607,400
Total Liabilities		20,546,600			17,683,300
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,
11,628,174 and 11,473,914 shares issued and outstanding		14,815,300			14,747,300
Accumulated comprehensive income		124,400			130,400
Accumulated deficit		(11,661,800	)		(10,231,200	)
Total Stockholders' Equity		3,505,500			4,874,100
Total Liabilities and Stockholders' Equity	$	24,052,100		$	22,557,400

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

F-3

MENDOCINO BREWING COMPANY, INC.

CONSOLIDATED STATEMENTSOF OPERATIONSAND COMPREHENSIVE INCOME (LOSS)

FORTHE YEARS ENDING DECEMBER 31, 2006, 2005 AND 2004 

	2006			2005			2004
Sales	$	32,948,900		$	31,927,300		$	32,157,900
Less excise tax		673,500			635,500			652,400
Net Sales		32,275,400			31,291,800			31,505,500
Cost of Goods Sold		23,063,300			21,754,200			21,045,500
Gross Profit		9,212,100			9,537,600			10,460,000
Operating Expenses
Retail operating		97,200			102,400			139,500
Marketing		5,011,500			6,216,200			5,841,200
General and administrative		4,548,700			3,735,400			3,774,900
Legal dispute settlement		-			-			250,600
Total Operating Expenses		9,657,400			10,054,000			10,006,200
Income (Loss) from Operations		(445,300	)		(516,400	)		453,800
Other Income (Expense)
Miscellaneous income		89,900			60,600			36,800
Profit (loss) on sale of equipment, net		5,000			(6,000	)		15,600
Interest expense		(1,077,700	)		(978,500	)		(853,300	)
Total Other Income (Expense)		(982,800	)		(923,900	)		(800,900	)
Income (Loss) before Income Taxes		(1,428,100	)		(1,440,300	)		(347,100	)
Provision for (Benefit from) Income Taxes		2,500			(125,600	)		121,800
Net Income (Loss)		(1,430,600	)		(1,314,700	)		(468,900	)
Other Comprehensive Income (Loss)
Foreign currency translation adjustment		(6,000	)		(63,900	)		116,300
Comprehensive Income (Loss)	$	(1,436,600	)	$	(1,378,600	)	$	(352,600	)
Net Income (Loss) per
common share (basic and diluted)	$	(0.12	)	$	(0.11	)	$	(0.04	)
Weighted average common shares outstanding
outstanding (basic and diluted)	$	11,512,479		$	11,472,213		$	11,266,874

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

F-4

MENDOCINO BREWING COMPANY, INC.

CONSOLIDATED STATEMENTSOF STOCKHOLDERS’ EQUITY

FOR THE YEARS ENDING DECEMBER 31, 2006, 2005 AND 2004

	Series A								Other
	Preferred				Common				Comprehensive			Accumulated			Total
	Shares		Amount		Shares		Amount		Income/(Loss)			Deficit			Equity
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
Stock issued for accrued compensation		-		-		154,260		68,000		-			-			68,000
Net loss		-		-		-		-		-			(1,430,600	)		(1,430,600	)
Currency translation adjustment		-		-		-		-		(6,000	)		-			(6,000	)
Balance December 31, 2006		227,600	$	227,600		11,628,174	$	14,815,300	$	124,400		$	(11,661,800	)	$	3,505,500

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

F-5

MENDOCINO BREWING COMPANY, INC.

CONSOLIDATED STATEMENTSOF CASH FLOWS

FOR THE YEARS ENDING DECEMBER 31, 2006, 2005 AND 2004 

	2006			2005			2004
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)	$	(1,430,600	)	$	(1,314,700	)	$	(468,900	)
Adjustments to reconcile net income
(loss) to net cash from operating activities:
Depreciation and amortization		1,017,800			903,700			1,031,300
Allowance for doubtful accounts		-			10,200			8,000
Loss (gain) on sale of assets		(5,000	)		6,000			(15,600	)
Interest accrued on related party notes		181,200			142,100			88,600
Deferred income tax		-			(122,900	)		-
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable		(11,300	)		702,600			(1,004,900	)
(Increase) decrease in inventories		(178,100	)		34,000			700
(Increase) decrease in prepaid expenses		(71,400	)		(229,800	)		224,200
(Increase) decrease in deposits and other assets		273,700			59,400			(27,800	)
Increase in accounts payable		1,039,300			47,400			125,700
Increase (decrease) in accrued liabilities		(424,900	)		(420,200	)		338,200
Decrease in income taxes payable		-			(127,400	)		(192,500	)
Net cash provided by (used in) operating activities		390,700			(309,600	)		107,000
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, equipment and leasehold improvements		(988,200	)		(600,900	)		(597,800	)
Proceeds from sale of fixed assets		41,400			77,000			24,300
Net cash used in investing activities:		(946,800	)		(523,900	)		(573,500	)
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowing (repayment) on line of credit		(148,200	)		706,400			1,211,500
Borrowings on long term debt		4,180,900			-			-
Repayment on long-term debt		(2,628,300	)		(285,300	)		(575,900	)
Borrowings on related party debt		-			400,000			-
Repayment on related party debt		(110,600	)		(91,000	)		(128,300	)
Proceeds from notes payable		350,000			-			-
Repayment of notes payable		(926,200	)		-			-
Payments on obligations under long term leases		(168,800	)		(142,900	)		(124,000	)
Net cash provided by financing activities:		548,800			587,200			383,300
EFFECT OF EXCHANGE RATE CHANGES ON CASH		105,500			(32,600	)		55,500
Net Change in Cash		98,200			(278,900	)		(27,700	)
Cash at beginning of period		247,700			526,600			554,300
Cash at end of period	$	345,900		$	247,700		$	526,600
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the period for:
Interest	$	896,500		$	836,400		$	764,700
Income taxes	$	2,500		$	-		$	314,200
Non-cash investing and financing activities:
Common stock issued for accrued compensation	$	68,000		$	98,700		$	-
Seller financed equipment	$	44,600		$	216,400		$	15,400

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

F-6

MENDOCINO BREWING COMPANY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2006

1.Description of Operations and Summary of Significant Accounting Policies

Description of Operations

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

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

Principles of Consolidation

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

Basis of Presentation and Organization

The financial statements for the fiscal years ended December 31, 2006, 2005 and 2004, 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.

F-7

MENDOCINO BREWING COMPANY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2006

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

Trade Accounts Receivable and Allowance for Doubtful Accounts

Trade accounts receivable are stated at the invoiced amount and are the amount the Company expects to collect. The allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses in the Company’s existing accounts receivable; however, changes in circumstances relating to accounts receivable may result in a requirement for additional allowances in the future. Management considers the following factors when determining the collectibility of specific customer accounts: customer credit-worthiness, past transaction history with the customer, current economic industry trends and changes in customer payment terms. Past due balances over 90 days and other higher risk amounts are reviewed individually for collectibility. If the financial condition of the Company's customers were to deteriorate, adversely affecting their ability to make payments, additional allowances would be required. Based on management's assessment, the Company provides for estimated uncollectible amounts through a charge to earnings and a credit to a valuation allowance. Balances that remain outstanding after the Company has used reasonable collection efforts are written off through a charge to the valuation allowance and a credit to accounts receivable.

Allowance for Doubtful Accounts

The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. A considerable amount of judgment is required in assessing the ultimate realization of accounts receivable including the current credit-worthiness of each customer. If the financial condition of the Company’s customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. As of December 31, 2006, the Company maintained a reserve of $60,500 of potentially doubtful accounts receivable. Bad debt expenses totaled $679,300, $49,100, and $60,900 for the years ended December 31, 2006, 2005, and 2004 respectively.

Inventories

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

Property and Equipment

Property and equipment are stated at cost and depreciated or amortized using straight-line method over the assets' estimated useful lives. Leasehold improvements are amortized over the shorter of the life of the related asset or the life of the lease. The Company uses other depreciation methods (generally, accelerated depreciation methods) for tax purposes where appropriate. Costs of maintenance and repairs are charged to expense as incurred; significant renewals and betterments are capitalized. Long-lived assets are assessed for impairment whenever events or changes in circumstances indicate their carrying amounts may not be recoverable. When property and equipment are retired, sold, or otherwise disposed of, the asset’s carrying amount and related accumulated depreciation are removed from the accounts and any gain or loss is included in operations.

F-8

MENDOCINO BREWING COMPANY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2006

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

Property and Equipment (continued)

Assets Held under Capital Leases

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

Estimated useful lives of property and equipment are as follows:

Building	40 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

Impairment of Long-Lived Assets

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

Intangibles

Intangibles consist of, trade names, trademarks, and other intangibles. Purchased trademarks are initially measured based on their fair values. Trademarks include purchased trademarks, brand names, logos or other recognizable symbols associated with the Company's products. Trademarks are not amortized because they have indefinite lives. Intangibles that are amortized are deferred financing costs. Assets determined to have indefinite lives are no longer amortized in accordance with SFAS No. 142, GOODWILL AND OTHER INTANGIBLES, but are tested for impairment on an annual basis. The carrying amount of intangibles not subject to amortization is $47,600 for December 31, 2006 and 2005.

F-9

MENDOCINO BREWING COMPANY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2006

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

Deferred Financing Costs

Costs relating to obtaining financing are capitalized and amortized over the term of the related debt using the straight-line method. Deferred financing costs were $311,300, and the related accumulated amortization at December 31, 2006 and 2005 was $32,700 and $21,600, respectively. Amortization of deferred financing costs charged to operations was $54,300 for the year ended December 31, 2006 and $2,700 for each of the years ended 2005 and 2004. The Company will continue to amortize these fees until 2011. When a loan is paid in full, any unamortized financing costs are removed from the related accounts and charged to operations.

Impairment of Intangible Assets

The Company evaluates the recoverability of identifiable intangible assets whenever events or changes in circumstances indicate that an intangible asset's carrying amount may not be recoverable. Such circumstances could include, but are not limited to: (1) a significant decrease in the market value of an asset, (2) a significant adverse change in the extent or manner in which an asset is used, or (3) an accumulation of costs significantly in excess of the amount originally expected for the acquisition of an asset. The Company measures the carrying amount of the asset against the estimated undiscounted future cash flows associated with it. Should the sum of the expected future net cash flows are less than the carrying value of the asset being evaluated, an impairment loss would be recognized. The impairment loss would be calculated as the amount by which the carrying value of the asset exceeds its fair value. The fair value is measured based on quoted market prices, if available. If quoted market prices are not available, the estimate of fair value is based on various valuation techniques, including the discounted value of estimated future cash flows. The evaluation of asset impairment requires the Company to make assumptions about future cash flows over the life of the asset being evaluated. These assumptions require significant judgment and actual results may differ from assumed and estimated amounts. During the year ended December 31, 2006, 2005 and 2004, the Company recorded no impairment losses related to an intangible asset.

Concentration of Credit Risks

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

Wholesale distributors account for substantially all accounts receivable; therefore, this risk concentration is limited due to the number of distributors and the laws regulating the financial affairs of distributors of alcoholic beverages. The Company has approximately $290,200 in cash deposits and $6,090,800 of accounts receivable due from customers located in the United Kingdom as of December 31, 2006.

F-10

MENDOCINO BREWING COMPANY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2006

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

Income Taxes

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

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

In July 2006, the Financial Accounting Standards Board issued FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes.” The Interpretation requires that realization of an uncertain income tax position must be estimated as "more likely than not" (i.e., greater than 50% likelihood of receiving a benefit) before it can be recognized in the financial statements. Further, the Interpretation requires the recognition of tax benefits recorded in the financial statements to be based on the amount most likely to be realized assuming a review by tax authorities having all relevant information. The Interpretation also clarifies the financial statement classification of tax-related penalties and interest and sets forth new disclosures regarding unrecognized tax benefits. MBC will adopt the Interpretation when required in the first quarter 2007. The company expects minimal impact from adoption of this Interpretation.

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:

·   Persuasive evidence of an arrangement exists;

·   Delivery has occurred or services have been rendered;

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

·   Collectibility is reasonably assured.

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

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

F-11

MENDOCINO BREWING COMPANY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2006

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

Revenue Recognition (continued)

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

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

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

Taxes Collected From Customers

Taxes collected from customers and remitted to tax authorities are state and federal excise taxes on beer shipments. Excise taxes are shown in a separate line item in the consolidated statement of operations as reduction of gross sales. Sales taxes collected from customers are recognized as a liability, with the liability subsequently reduced when the taxes are remitted to the tax authority. Total sales taxes collected from customers and remitted to tax authorities were not material in 2006, 2005 and 2004.

Delivery Costs

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

Costs incurred by the Company to deliver beer to customers are included in marketing, distribution and administrative expenses. These costs are considered marketing related because in addition to product delivery, drivers provide marketing and other customer service functions to customers including product display, shelf space management, distribution of promotional materials, and product rotation. Shipping costs included in marketing expense totaled $879,100, $929,100, and $978,600 for the years ended December 31, 2006, 2005, and 2004, respectively.

F-12

MENDOCINO BREWING COMPANY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2006

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

Stock-Based Compensation

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

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

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

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

F-13

MENDOCINO BREWING COMPANY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2006

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

Stock-Based Compensation (continued)

SFAS 123(R) requires the calculation of the beginning balance of the pool of excess tax benefits (additional paid in capital pool or “APIC pool”) available to absorb tax deficiencies recognized subsequent to its adoption. SFAS 123(R) states that this beginning APIC pool shall include the net excess tax benefits that would have arisen had the company adopted the original Statement 123. FASB Staff Position (“FSP”) 123(R)-3 provides a simplified method for determining this APIC pool, which the Company may elect to adopt up to one year from its initial adoption of SFAS 123(R). The Company has not yet determined whether to elect the simplified method for determining its APIC pool as provided in FSP No. 123(R)-3.

In 2006, 2005 and 2004, the Company did not grant any options or warrants, and all options outstanding were vested.

Stock-based Compensation - Non-employees

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

Basic and Diluted Earnings (Loss) per Share

In accordance with SFAS No. 128, "Earnings Per Share," the basic earnings (loss) per share is computed by dividing the loss attributable to common stockholders by the weighted average number of common shares outstanding during the period. Basic net loss per share excludes the dilutive effect of stock options or warrants and convertible notes. Diluted net loss per share was the same as basic net loss per share for 2006, 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. The following table sets forth the computation of basic and diluted net loss per common share: 

	Year Ended December 31,
	2006			2005			2004
Net income (loss) - available to common shareholders	$	(1,430,600	)	$	(1,314,700	)	$	(468,900	)
Weighted average common shares outstanding: Basic and diluted		11,512,479			11,472,213			11,266,874
Total shares outstanding at end of period		11,628,174			11,473,914			11,266,874
Net income (loss) per common share: Basic and diluted	$	(0.12	)	$	(0.11	)	$	(0.04	)

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,
	2006		2005		2004
Options to purchase common stock		240,385		240,385		340,385
Potential equivalent shares excluded		240,385		240,385		340,385

F-14

MENDOCINO BREWING COMPANY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2006

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

Foreign Currency Translation

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

Cash at UBIUK was translated at exchange rates in effect at December 31, 2006, 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 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 $1,094,100, $2,239,700 and $1,674,000 for the years ended December 31, 2006, 2005, and 2004.

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-15

MENDOCINO BREWING COMPANY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2006

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

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

SFAS 154 replaces APB Opinion No. 20 and SFAS 3 and became effective in the first quarter of 2006. The standard introduces a new requirement to retrospectively apply accounting principle changes to prior years’ comparative financial statements as if the Company had always applied the newly adopted accounting principle. Changes in depreciation, amortization and depletion methods previously considered a change in accounting principle are now considered a change in estimate under SFAS 154, requiring prospective adoption. New pronouncements may contain specific implementation guidance which would supersede the requirements of SFAS 154. The adoption of SFAS 154 did not have an impact on the consolidated financial statements included herein.

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. The Company adoption of SFAS No. 155 will not have any material effect on its consolidated financial position, results of operations or cash flows.

F-16

MENDOCINO BREWING COMPANY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2006

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

Recent Accounting Pronouncements (continued)

In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of Financial Assets—an amendment of FASB Statement No. 140. Companies are required to apply SFAS No. 156 as of the first annual reporting period that begins after September 15, 2006. The Company does not believe adoption of SFAS No. 156 will have a material effect on its unaudited condensed consolidated financial position, results of operations or cash flows.

In June 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109 (FIN 48). FIN 48 provides guidance for the recognition, derecognition and measurement in financial statements of tax positions taken in previously filed tax returns or tax positions expected to be taken in tax returns. FIN 48 requires an entity to recognize the financial statement impact of a tax position when it is more likely than not that the position will be sustained upon examination. If the tax position meets the more-likely-than-not recognition threshold, the tax effect is recognized at the largest amount of the benefit that is greater than fifty percent likely of being realized upon ultimate settlement. The Company will be required to adopt FIN 48 as of January 1, 2007, with any cumulative effect of the change in accounting principle recorded as an adjustment to opening retained earnings. The Company is currently evaluating the impact of FIN 48 and does not expect a significant impact on its earnings or financial position.

In June 2006, the FASB ratified the consensus on Emerging Issues Task Force (“EITF”) Issue No. 06-3, “How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement” (“EITF No. 06-3”). The scope of EITF No. 06-3 includes any tax assessed by a governmental authority that is directly imposed on a revenue-producing transaction between a seller and a customer and may include, but is not limited to, sales, use, value added, Universal Service Fund (“USF”) contributions and some excise taxes.  The Task Force affirmed its conclusion that entities should present these taxes in the income statement on either a gross or a net basis, based on their accounting policy, which should be disclosed pursuant to APB Opinion No. 22, “Disclosure of Accounting Policies.”  If such taxes are significant and are presented on a gross basis, the amounts of those taxes should be disclosed.  The consensus on EITF No. 06-3 will be effective for interim and annual reporting periods beginning after December 15, 2006.  The Company currently does not show sales tax billed to its customers on the income statement but records the same as a liability. 

In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin (“SAB”) No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Current Year Misstatements.” SAB No. 108 requires analysis of misstatements using both an income statement (rollover) approach and a balance sheet (iron curtain) approach in assessing materiality and provides for a one-time cumulative effect transition adjustment. SAB No. 108 is effective for the Company’s fiscal year 2007 annual financial statements. The Company is currently assessing the potential impact that the adoption of SAB No. 108 will have on its financial statements; however, the impact is not expected to be material.

F-17

MENDOCINO BREWING COMPANY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2006

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

Recent Accounting Pronouncements (continued)

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS No. 157 does not require any new fair value measurements, but provides guidance on how to measure fair value by providing a fair value hierarchy used to classify the source of the information. This statement is effective on the Company beginning July 1, 2008. The Company is currently assessing the potential impact that the adoption of SFAS No. 157 will have on its financial statements. In September 2006, the FASB issued SFAS No. 158, Employer’s Accounting for Defined Benefit Pension and Other Postretirement Plans, an Amendment of FASB Statements No. 87, 88, 106 and 132(R), which applies to all plan sponsors who offer defined benefit postretirement plans. SFAS No. 158 requires recognition of the funded status of a defined benefit postretirement plan in the statement of financial position and expanded disclosures in the notes to financial statements. The Company adopted this provision for the year ended December 31, 2006 and the adoption did not have a material impact on its consolidated financial position. In addition, SFAS No. 158 requires measurement of plan assets and benefit obligations as of the date of the plan sponsor’s fiscal year end. The Company is required to adopt the measurement provision of SFAS No. 158 for its fiscal year ending December 31, 2008. The Company is in the process of evaluating the impact of the measurement provision of SFAS No. 158 on its 2008 consolidated financial position, operations and cash flows. The Company is currently assessing the potential impact that the adoption of SFAS 158 will have on its financial statements; however, the impact is not expected to be material.

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

F-18

MENDOCINO BREWING COMPANY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2006

2.Liquidity and Management Plans

At December 31, 2006, the Company had cash and cash equivalents of $345,900, a working capital deficit of $2,683,400 and an accumulated deficit of $11,661,800. 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, 2007, including obtaining a secured line of credit, reductions in discretionary expenditures, and additional debt financing. In 2006, the Company successfully obtained additional financing and repaid several debts and raised additional working capital. Management believes that these actions will enable the Company to meet its working capital needs through December 31, 2007.

3.Inventories

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

	2006		2005
Raw materials	$	481,900	$	447,900
Work-in-progress		199,600		143,900
Finished goods		630,000		539,800
Merchandise		18,000		19,800
	$	1,329,500	$	1,151,400

4.Property and Equipment

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

	2006			2005
Machinery and equipment	$	12,956,600		$	11,094,500
Buildings		7,202,300			7,202,300
Equipment under capital lease		6,300			580,800
Land		810,900			810,900
Leasehold improvements		1,432,400			1,432,400
Vehicles		424,600			429,500
Furniture and fixtures		176,900			165,500
Equipment in progress		5,900			27,500
		23,015,900			21,743,400
Less: Accumulated depreciation and amortization		(9,569,900	)		(8,557,800	)
	$	13,446,000		$$	13,185,600

The Company has property and equipment located in the United Kingdom with a net book value of approximately $1,919,200 as of December 31, 2006. Amortization of assets under capital leases is included in depreciation and amortization expense.

F-19

MENDOCINO BREWING COMPANY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2006

5.Line of Credit and Note Payable

Effective May 5, 2005, the Company obtained a secured lending facility from BFI Business Finance (BFI). The Company's borrowings were secured by the underlying trade receivables and inventory. The borrowings were collateralized, with recourse, by certain eligible trade receivables up to a maximum percentage of 80% of the qualified net amounts of such receivables of MBC and 70% of the qualified net amounts of such receivables of Releta, and 50% of MBC’s and Releta’s eligible inventory located in the US. On December 31, 2005 BFI advanced the Company $200,000 under a promissory note repayable in 30 weekly installments. On April 5, 2006 BFI advanced the Company approximately $289,900 under another promissory note repayable in 39 weekly installments. The entire outstanding amount due to BFI was repaid by the Company in November 2006 out of proceeds of a new loan from Marquette Business Credit, Inc.

On December 31, 2003, Savings Bank of Mendocino County ("SBMC") extended the Company a temporary note of approximately $576,200 to finance the end of term buy-out of certain equipment previously leased from Finova Capital Corporation. This note was repaid by the Company in full in July 2006 out of the proceeds of a borrowing with Grand Pacific Financing Corporation.

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

The Company retains the right to recall any of the collateralized receivables under the line of credit, and the receivables are subject to recourse. Therefore, the transaction does not qualify as a sale under the terms of Financial Accounting Standards Board Statement No. 125 (Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities). Included in the Balance Sheets as receivable at December 31, 2006, are account balances totaling $1,812,300 of uncollected receivables collateralized to the financial institution under this facility.

On April 26, 2005, Royal Bank of Scotland Commercial Services Limited ("RBS") provided an invoice discounting facility to UBSN Limited for a maximum amount of 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, 2006 was approximately $2,570,700.

F-20

MENDOCINO BREWING COMPANY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2006

6.Long-Term Debt

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

	2006		2005
Note to a financial institution, payable in monthly installment of $18,200, plus interest at one month LIBOR plus 5.25% with a balloon payment of $544,600 in June 2011; secured by substantially all assets of the Releta Brewing Company and Mendocino Brewing Company excluding real property at Ukiah	$	1,506,900	$	-
Note to a financial institution, payable in monthly installment of $27,300 including interest at prime plus 1.75% with a balloon payment of approximately $2,867,900 in June 2011. (net of discount of $33,100)		2,956,300		-
Note to a bank; payable in monthly installments of $24,400, including interest at the Treasury Constant Maturity Index, plus 4.17% paid in full in July 2006		-		2,168,400
Payable to Mendocino County in four annual installments of $143,600, plus interest at 18%, paid in full in July 2006		-		430,900
		4,463,200		2,599,300
Less current maturities		236,500		284,400
	$	4,226,700	$	2,314,900

Payments due during Year Ending December 31,
2007	$	236,500
2008		249,900
2009		256,600
2010		260,500
2011		3,492,800
Thereafter		-
	$	4,496,300

On July 3, 2006, MBC obtained a $3.0 million loan from Grand Pacific Financing Corporation("GP"), 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 $27,261 including interest at the rate of 1.75% over the prime rate published by The Wall Street Journal, maturing July 2, 2011 with a balloon payment. The amount of the balloon payment will vary depending on the change in interest rates over the term of the loan. MBC used the proceeds of the loan to repay in full all the then outstanding loans owed to SBMC.

F-21

MENDOCINO BREWING COMPANY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2006

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, 2006, are as follows:

Year Ending December 31,
2007	$	91,600
2008		74,200
2009		1,500
2010		-
2011		-
		167,300
Less amounts representing interest		(18,600	)
Present value of minimum lease payments		148,700
Less current maturities		(83,100	)
Non-current leases payable	$	65,600

8.Notes to Related Party - Subordinated

Notes payable to a related party consist of unsecured convertible notes to United Breweries of America (UBA), with interest at the prime rate plus 1.5%, but not to exceed 10% per year. The notes are convertible into common stock at $1.50 per share. The notes have been extended until June 2007. UBA may demand payment within 60 days of the end of the extension period but is precluded from doing so because the notes are subordinated to long-term debt agreements with Grand Pacific Financing Corporation and Marquette Business Credit, Inc., both maturing in June 2011. Therefore, the Company will not require the use of working capital to repay any of the UBA notes until the above facilities are repaid. Accordingly, the entire amount due of $2,733,400 and $2,552,200 as of December 31, 2006 and 2005 under the notes is classified as a long term liability. The notes include $818,000 and $636,800 of accrued interest at December 31, 2006 and 2005.

Notes payable also includes an unsecured loan from Shepherd Neame Limited to UBSN Limited payable in annual installment of $117,500 with interest at 5% per year beginning June 2003 and maturing June 2012. The amounts outstanding, under this loan as of December 31, 2006 and 2005 were $705,100 and $721,900 respectively.

Payments due during Year Ending December 31,
2007	$	117,500
2008		117,500
2009		117,500
2010		117,500
2011		2,851,000
Thereafter		117,500
	$	3,438,500

F-22

MENDOCINO BREWING COMPANY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2006

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, 2006, 2005, and 2004.

10.Commitments and Contingencies

Legal

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

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

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

Operating Leases

The Company leases many of its operating and office facilities for various terms under long-term, non-cancelable operating lease agreements. The leases expire at various dates through 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 certain costs (real estate taxes, insurance and repairs).

The Company and its subsidiaries have various lease agreements for the brewpub and gift store in Hopland, California; land at its Saratoga Springs, New York, facility; a building in the United Kingdom; and certain personal property. The land lease includes a renewal option for two additional five-year periods, which the Company intends to exercise, and some leases are adjusted annually for changes in the consumer price index. The leases begin expiring in 2007. Rent expense charged to operations was $212,800, $206,600, and $202,700 for the years ended December 31, 2006, 2005, and 2004.

F-23

MENDOCINO BREWING COMPANY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2006

10.Commitments and Contingencies (continued)

Operating Leases (continued)

Future minimum lease payments under these agreements are as follows:

Year Ending December 31,
2007	$	229,900
2008		216,400
2009		195,000
2010		178,900
2011		164,100
Thereafter		205,400
	$	1,189,700

Keg Management Agreement

In September 2004, the Company renewed the keg management agreement with MicroStar Keg Management LLC. Under this arrangement, MicroStar provides all kegs for which the Company pays a service fee between $5 and $15, depending on the applicable territory. The agreement is effective for five years ending in September 2009. If the agreement is terminated, the Company is required to purchase three times the average monthly keg usage for the preceding six-month period from MicroStar at purchase prices ranging from $54 to $84 per keg. The Company expects to continue this relationship. Rental expense associated with this agreement was $62,300, $65,500, and $91,400 for the years ended December 31, 2006, 2005, and 2004.

11.Related-Party Transactions

The Company conducts business with United Breweries of America (UBA), which owns approximately 74% of the Company's common stock through common ownership. Additionally, UBSN Limited has significant transactions with Shepherd Neame, Ltd., which is a related party to a former Board member. The Company also had transactions with AUBI, a company affiliated with one of the Board members. The following table reflects balances outstanding and the value of the transactions with these related parties for the years ended December 31, 2006, 2005, and 2004: 

	2006		2005		2004
TRANSACTIONS
Sales to Shepherd Neame Ltd.	$	3,255,300	$	2,871,100	$	3,099,500
Purchases from Shepherd Neame Ltd.		14,589,300		14,108,500		14,541,100
Expenses reimbursement to Shepherd Neame Ltd.		1,105,300		1,143,300		1,239,300
Interest expenses associated with UBA notes (see note 8)		181,200		142,100		88,500
Interest paid to Shepherd Neame Ltd. (see note 6)		35,900		40,500		46,300
ACCOUNT BALANCES
Accounts payable and accrued liabilities to Shepherd Neame Ltd.		5,575,000		4,080,400		4,160,300
Accounts receivable and prepayments to Shepherd Neame Ltd.		781,900		629,700		841,700
Amounts payable to AUBI		20,000		20,000		20,000

F-24

MENDOCINO BREWING COMPANY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2006

12.Major Customers

Sales to the top five customers totaled $8,032,600, $7,610,500, and $7,942,000 for the years ended December 31, 2006, 2005, and 2004, which represents 24%, 24%, and 25% of sales for the years ended December 31, 2006, 2005, and 2004.

13.Stockholders' Equity

Independent outside members of the Board of Directors are compensated for attending Board of Directors and committee meetings through the issuance of common stock. Expenses related to this compensation totaled $32,000, $44,000, and $24,000 for the years ended December 31, 2006, 2005, and 2004. Common Stock has been issued for accrued compensation from the years 2004 and 2005 in the year 2006.

In October 2006, the Company issued 154,260 shares of its unregistered common stock to independent outside directors totaling $68,000 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.

14.Stock Option Plan

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

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

F-25

MENDOCINO BREWING COMPANY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2006

14.Stock Option Plan (continued)

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

	Shares under option			Weighted-average exercise price
Balance at December 31, 2003		429,273		$	$ 0.82
Options granted		-		$	-
Options expired		(88,888	)	$	$ 1.13
Balance at December 31, 2004		340,385		$	$ 0.73
Options granted		-		$	-
Options expired		(100,000	)	$	$ 1.25
Balance at December 31, 2005		240,385		$	$ 0.52
Options granted		-		$	-
Options expired		-		$	-
Balance at December 31, 2006		240,385		$	$ 0.52

Current year ended December 31, 2006

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

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

	Twelve Months Ended December 31, 2006
Loss from continuing operations before income taxes	$	1,428,100
Loss from continuing operations after income taxes	$	1,430,600
Cash flows from operations	$	390,700
Cash flows from financing activities	$	548,800
Basic and Diluted EPS	$	(0.12	)

During the year ended December 31, 2006, the Company granted no performance based options to executives and senior management.

As of December 31, 2006, there is no compensation cost related to non-vested awards not yet recognized. SFAS 123(R) requires the cash flows resulting from the tax benefits resulting from tax deductions in excess of the compensation cost recognized for those options to be classified as financing cash flows. Due to the Company’s loss position and not having any such compensation expense, there were no such tax benefits for the years ended December 31, 2004, 2005 and 2006. Prior to the adoption of SFAS 123(R), those benefits would have been reported as operating cash flows had the Company received any tax benefits related to stock option exercises.

F-26

MENDOCINO BREWING COMPANY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2006

14.Stock Option Plan (continued)

Current year ended December 31, 2006 (continued)

The fair value of stock-based awards to officers, directors and employees is calculated using the Black-Scholes option pricing model, even though this model was developed to estimate the fair value of freely tradable, fully transferable options without vesting restrictions, which differ significantly from the Company’s stock options. The Black-Scholes model also requires subjective assumptions, including future stock price volatility and expected time to exercise, which greatly affect the calculated values. The expected term of options granted is derived from historical data on employee exercises and post-vesting employment termination behavior. The risk-free rate selected to value any particular grant is based on the bond equivalent yields that corresponds to the pricing term of the grant effective as of the date of the grant. The expected volatility is based on the historical volatility of the Company’s stock price. These factors could change in the future, affecting the determination of stock-based compensation expense in future periods.

The following is a summary of changes to outstanding stock options during the fiscal year ended December 31, 2006: 

			Weighted		Weighted Average
	Number of		Average		Remaining		Aggregate
	Share		Exercise		Contractual		Intrinsic
	Options		Price		Term		Value
Outstanding at December 31, 2005		240,385	$	0.52		1.1	$	-
Granted		-		-		-		-
Exercised		-		-		-		-
Forfeited or expired		-		-		-		-
Outstanding at December 31, 2006		240,385		0.52		0.1		-
Vested and expected to vest at December 31, 2006		240,385				0.1		-
Options exercisable at December 31, 2006		240,385	$	0.52		0.1	$	-

The table below presents information related to stock option activity for the fiscal ended December 31, 2006 and 2005 (in thousands): 

	Fiscal year ended December 31,
	2006		2005
Total intrinsic value of stock options exercised	$	-	$	-
Cash received from stock option exercises	$	-	$	-
Gross income tax benefit from the exercise of stock options	$	-	$	-

The aggregate intrinsic value of $0 as of December 31, 2006 is based on MBC's closing stock price of $0.21 on that date and represents the total pretax intrinsic value, which would have been received by the option holders had all option holders exercised their options as of that date. The total intrinsic value of options exercised during the twelve months ended December 31, 2006 was nil as no options were exercised. The total number of in-the-money options exercisable as of December 31, 2006 was $0.

F-27

MENDOCINO BREWING COMPANY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2006

14.Stock Option Plan (continued)

Valuation and Expense Information under SFAS 123

Prior to the adoption of Statement of Financial Accounting Standards No. 123(R) “Accounting for Stock-Based Compensation-Revised “(SFAS 123(R)), at March 31, 2006, the Company would not have recognized compensation expense for employee share-based awards, when the price of such awards equaled the market price of the underlying stock on the date of the grant. The Company previously had adopted the provisions of Statement of SFAS 123 as amended by SFAS 148, “Accounting for Stock Based Compensation, Transition and Disclosure” (SFAS 148) through disclosure only.

There were no stock options granted during the fiscal year ended December 31, 2005 and 2004.

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
Net income (loss) - as reported	$	(1,314,700	)	$	(468,900	)
Compensation expense - APB 25		-			-
Compensation expense - SFAS 123		-			-
Net income (loss) - pro forma	$	(1,314,700	)	$	(468,900	)
Income (loss) per share - pro forma	$	(0.11	)	$	(0.04	)

Total options under the Plan at December 31, 2005, comprised the following:

	Number		Weighted		Number
	Outstanding		Average		Exercisable
Option	as of		Remaining		as of
Exercise	December 31,		Contractual life		December 31,
Price	2005		(Years)		2005
$0.52		240,385		1.1		240,385
Total options under the Plan at December 31, 2006, comprised the following:
		Number		Weighted		Number
		Outstanding		Average		Exercisable
Option		as of		Remaining		as of
Exercise		December 31,		Contractual life		December 31,
Price		2006		(Years)		2006
$0.52		240,385		0.1		240,385

F-28

MENDOCINO BREWING COMPANY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2006

15.Income Taxes

The accumulated 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 $4,100,500 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.

	2006		2005			2004
Provision for income taxes
US Federal	$	-	$	-		$	-
US States		2,500		1,800			3,800
United Kingdom		-		(127,400	)		118,000
Current provision		2,500		(125,600	)		121,800
Change in deferred income taxes		-		-			-
Total provision for income taxes	$	2,500	$	(125,600	)	$	121,800

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

	2006			2005			2004
US Federal income tax expense (benefit) at 34%	$	24,800		$	(110,700	)	$	(232,400	)
US State income tax expense (benefit)		6,500			(28,800	)		(15,000	)
United Kingdom income tax expense (benefit)		(450,300	)		(296,800	)		118,000
Other		38,200			(31,500	)		(6,500	)
Change in valuation allowance		383,300			342,200			257,700
Total	$	2,500		$	(125,600	)	$	121,800

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

	2006			2005			2004
Benefit of net operating loss carryforwards	$	4,956,200		$	4,295,700		$	4,190,000
Undistributed earnings of UBIUK		(448,900	)		(393,900	)		(800,300	)
Investment in UBIUK		349,900			358,100			321,600
Depreciation and amortization		(871,900	)		(670,000	)		(490,000	)
Other		115,200			127,300			153,700
Subtotal		4,100,500			3,717,200			3,375,000
Less valuation allowance		(4,100,500	)		(3,717,200	)		(3,375,000	)
Total	$	-		$	-		$	-
Change in valuation allowance	$	383,300		$	342,200		$	257,700

F-29

MENDOCINO BREWING COMPANY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2006

15.Income Taxes (continued)

The Company has net operating losses available for carry forward. The US Federal net operating losses total approximately $11,826,000 and expire beginning 2013 and ending in 2026. The US state operating losses total approximately $3,770,000 and expire beginning 2012 and ending 2026. The Company’s United Kingdom operating losses total approximately $2,065,000 and they do not expire.

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 38%, 36%, and 36% of the Company's gross sales during 2006, 2005 and 2004. The second consists of distributing alcoholic beverages to retail establishments and restaurants in the United Kingdom and Europe. This segment accounted for approximately 61%, 63%, and 63% of the Company's gross sales during 2006, 2005, and 2004. 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 2006, 2005 and 2004. A summary of each segment is as follows: 

	Year Ended December 31,2006
	Brewing Operations		Tavern & Tasting Room		Distributor Operations			Corporate and Other		Total
Sales	$	12,601,600	$	221,300	$	20,126,000		$	-	$	32,948,900
Operating income (Loss)		753,400		45,700		(1,244,400	)		-		(445,300	)
Identifiable assets		12,784,200		61,600		8,768,800			2,437,500		24,052,100
Depreciation and amortization		505,600		4,600		480,300			27,300		1,017,800
Capital expenditures		327,200		-		705,600			-		1,032,800

F-30

MENDOCINO BREWING COMPANY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2006

16.Segment Information (continued) 

	Year Ended December 31,2005
	Brewing Operations		Tavern & Tasting Room		Distributor Operations			Corporate and Other		Total
Sales	$	11,557,900	$	203,100	$	20,166,300		$	-	$	31,927,300
Operating income (Loss)		168,200		32,300		(716,900	)		-		(516,400	)
Identifiable assets		12,670,400		63,400		7,864,800			1,868,800		22,557,400
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 Operations			Tavern & Tasting Room		Distributor Operations		Corporate and Other		Total
Sales	$	11,686,800		$	211,200	$	20,259,900	$	-	$	32,157,900
Operating income (Loss)		(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

F-31

MENDOCINO BREWING COMPANY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2006

17.Unrestricted Net Assets

The Company's wholly-owned subsidiary, UBI, has retained losses of approximately $26,900 as of December 31, 2006. Under UBSN's line of credit agreement with RBS, distributions and other payments to the Company from its subsidiary are not permitted if the retained earnings drop below approximately $1,958,600. Condensed financial information of the parent company, Mendocino Brewing Company, Inc., is as follows: 

Balance Sheets	2006			2005
Assets
Cash	$	55,700		$	11,500
Accounts receivable		1,812,300			1,388,500
Inventories		1,329,500			1,151,400
Other current assets		209,100			212,600
Total current assets		3,406,600			2,764,000
Investment in subsidiary		1,225,000			1,225,000
Property and equipment		11,526,800			11,682,900
Other assets		349,900			245,700
Total assets	$	16,508,300		$	15,917,600
Liabilities
Line of credit and note payable	$	1,363,600		$	2,181,000
Accounts payable		1,333,000			1,486,000
Accrued liabilities		579,700			892,900
Current maturities of debt and leases		246,200			352,800
Total current liabilities		3,522,500			4,912,700
Intercompany payable		1,079,800			1,319,500
Long-term debt and capital leases		4,233,700			2,332,700
Notes payable to related party		2,733,400			2,552,300
Total liabilities		11,569,400			11,117,200
Stockholders' equity
Common stock		14,815,300			14,747,300
Preferred stock		227,600			227,600
Accumulated deficit		(10,104,000	)		(10,174,500	)
Total stockholders' equity		4,938,900			4,800,400
Total Liabilities and stockholders' equity	$	16,508,300		$	15,917,600

F-32

MENDOCINO BREWING COMPANY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2006

17.Unrestricted Net Assets (continued) 

Statement of Operations	2006			2005			2004
Net sales	$	12,149,400		$	11,125,500		$	11,245,600
Cost of goods sold		8,576,200			7,737,000			7,467,000
Selling, marketing, and retail expenses		1,215,100			1,469,800			1,701,400
General and administrative expenses		1,661,200			1,810,600			1,955,200
Legal dispute settlement		-			-			250,600
Income (loss) from operations		696,900			108,100			(128,600	)
Other income and (expense)
Interest expenses		(832,000	)		(760,800	)		(725,900	)
Other income		208,100			329,100			356,800
Provision for taxes		(2,500	)		(1,800	)		(3,800	)
		(626,400	)		(433,500	)		(372,900	)
Net income (loss)	$	70,500		$	(325,400	)	$	(501,500	)

Statements of Cash Flows	2006			2005			2004
Cash flows from operating activities	$	(65,500	)	$	(426,300	)	$	462,800
Cash flow from investing activities
Purchase of property and equipment		(327,200	)		(34,200	)		(38,700	)
Proceeds from sale of assets		11,000			-			16,700
Net cash from investment activities		(316,200	)		(34,200	)		(22,000	)
Cash flow from financing activities
Net borrowing (repayment) on line of credit		(241,200	)		52,100			343,400
Borrowing on long-term debt		4,180,900			-			-
Repayment of long-term debt		(2,628,300	)		(285,300	)		(575,900	)
Proceeds from note payable		350,000
Repayment of notes payable		(926,200	)		-			-
Payment on obligation under capital lease		(69,500	)		(122,900	)		(124,000	)
Net change in inter company payable		(239,800	)		142,100			(99,800	)
Proceeds from related party		-			400,000			-
Net cash flow from financing activities		425,900			186,000			(456,300	)
Cash, beginning of year		11,500			286,000			301,500
Cash, end of year	$	55,700		$	11,500		$	286,000
Cash dividend received from subsidiary	$	-		$	149,900		$	215,100

18.Subsequent Events

During January 2007, the 240,385 non-statutory stock options issued in January 2002 to the independent members of the Board of Directors expired prior being exercised.

F-33

EX-10.82

LOAN AND SECURITY AGREEMENT

This Loan and Security Agreement (this “Agreement”) is executed by and among Marquette Business Credit, Inc., a Minnesota corporation (“Lender”), Mendocino Brewing Company, Inc., a California corporation (“Mendocino Brewing”) and Releta Brewing Company LLC, a Delaware limited liability company (“Releta Brewing”); together with Mendocino Brewing, collectively referred to herein as the “Borrowers”), as of November 16, 2006. Lender and Borrowers hereby agree as follows:

ARTICLE I — DEFINITIONS

Section 1.1Definitions. When used in this Agreement, the capitalized terms set forth below shall have the definitions assigned to such terms below:

“Account Debtor” means a Person who is obligated on an account.

“Affiliate” of a Person means another Person which, directly or indirectly, controls, is controlled by, or is under common control with, such former Person. For the purposes of this definition, “control” (including, with correlative meanings, the terms “controlled by” and “under common control with”), as used with respect to any Person, means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, whether through ownership of voting securities or partnership or other interests, by contract or otherwise.

“Agricultural Lien Statute” means, collectively, each statute, law or regulation (or other mandatory provision of state or local law) that could either (a) create or give rise to an “agricultural lien” (as defined in the UCC) in or against any portion of the products purchased, stored or otherwise handled by any Person from whom any Borrower purchases Inventory (or by any other Person from whom such first Person purchases or otherwise receives goods in the ordinary course of business), or (b) create a Lien against, or impose a trust upon, some portion of either Borrower's inventory (and/or the accounts receivable derived therefrom) for the benefit of unpaid agricultural producers, any broker acting on behalf of an agricultural producer, any cooperative whose members consist of agricultural producers or any other Person that purchases goods from an agricultural producer in the ordinary course of business. Without limiting the generality of the foregoing, the term “Agricultural Lien Statute” shall specifically include each of the following statutes: Article 20 of the New York Agriculture and Markets Law and Section 55631, et seq. of Food and Agricultural Code of California.

“Authorized Representatives” means any officers or employees of the Borrowing Agent designated by the Borrowing Agent for purposes of giving and receiving notices hereunder, requesting and repaying Loans, agreeing to rates of interest and otherwise transacting business with the Lender hereunder.

“Availability” means, as of any date, the positive difference between (a) an amount equal to the lesser of (i) the Revolving Facility Limit or (ii) the Borrowing Base on such date, and (b) the aggregate outstanding principal amount of the Revolving Loans on such date.

“Base Rate” means the one-month or 30 day LIBOR rate quoted by Lender from The Wall Street Journal, which shall be that one-month or 30 day LIBOR rate in effect on the first day of each calendar month, adjusted for any reserve requirement and any subsequent costs arising from a change in government regulation, such rate to be reset on the first day of each succeeding calendar month. If the initial advance of any Loan occurs other than on the first day of the month, the initial one-month or 30 day LIBOR rate shall be that one-month or 30 day LIBOR rate in effect on the date of such initial advance, which rate plus the Applicable Margin described on Schedule A, shall be in effect for the remaining days of the month of such initial advance; such one-month or 30 day LIBOR rate to be reset at on the first day of each succeeding month. Lender’s internal records of applicable interest rates shall be determinative in the absence of manifest error.

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“Benefit Plan” means a defined benefit plan as defined in Section 3(35) of ERISA (other than a Multiemployer Plan) in respect of which a Person or any Related Company is, or within the immediately preceding 6 years was, an “employer” as defined in Section 3(5) of ERISA, including such plans as may be established after the date hereof.

“Blocked Account” means an account maintained with a Collecting Bank pursuant to a Blocked Account Agreement.

“Blocked Account Agreement” means an agreement among one or more of the Borrowers, Lender, and a Collecting Bank concerning the collection of payments which represent the proceeds of accounts or of any other Collateral.

“Borrowing Agent” means Mendocino Brewing.

“Borrowing Base” shall have the meaning provided in Section 1.1 of Schedule A hereto.

“Borrowing Base Certificate” means a certificate in the form of Exhibit A attached hereto.

“Capex Loan” shall have the meaning assigned to such term in Section 2.5(a).

“Capex Loan Advance Rate” shall mean a percentage equal to eighty percent (80%) of the original invoice amount of the capital assets acquired in connection with the relevant Qualified Capital Expenditure.

“Capex Loan Amount” shall mean an amount equal to $650,000, it being understood and agreed that in no event shall the aggregate principal amount of all Capex Loans advanced by the Lender from time to time exceed $650,000.

“Capex Note” shall have the meaning assigned to such term in Section 2.5(a).

“Capital Expenditures” means, with respect to any Person, all expenditures made and liabilities incurred for the acquisition of assets (including by entry into a Capitalized Lease) which are required to be capitalized in accordance with GAAP.

“Capitalized Lease” means a lease that is required to be capitalized for financial reporting purposes in accordance with GAAP.

“Capitalized Lease Obligation” means Indebtedness represented by obligations under a Capitalized Lease, and the amount of such Indebtedness shall be the capitalized amount of such obligations determined in accordance with GAAP.

“Code” means the Internal Revenue Code of 1986, as amended from time to time, or any successor statute, together with all regulations promulgated with respect thereto.

“Collateral” means and includes all of each Borrower’s now owned or hereafter acquired personal property and assets, whether tangible or intangible, including without limitation all of each Borrower’s right, title and interest in and to each of the following, wherever located and whether now existing or hereafter arising or acquired: (a) all accounts, (b) all inventory, (c) all equipment and fixtures (except as set forth below), (d) all contract rights, (e) all general intangibles, including without limitation payment intangibles and software, (f) all Intellectual Property, (g) all deposit accounts, cash, drafts, certificates of deposit, and general and special deposits, (h) all investment property and financial assets (other than (i) margin stock within the meaning of Regulation U of the Board of Governors of the Federal Reserve System, and (ii) the equity interest of any Borrower in its subsidiaries), (i) all instruments, (j) all chattel paper, including without limitation, electronic chattel paper, (k) all goods and all accessions thereto, (1) all documents, (m) all letter of credit rights, (n) all insurance and certificates of insurance pertaining to any and all items of Collateral, (o) all books and records, (p) all files, correspondence, computer programs, tapes, disks and related data processing software and other media which contain information identifying or pertaining to any of the Collateral or any Account Debtor or showing the amounts thereof or payments thereon or otherwise necessary or helpful in the realization thereon or the collection thereof, (q) all cash deposited with any Affiliate of Lender, (r) those commercial tort claims, if any, described on Schedule 1.1 hereto, and (s) any and all products and cash and non-cash proceeds of the foregoing (including, but not limited to, any claims to any items referred to in this definition and any claims against third parties for loss of, damage to or destruction of any or all of the Collateral or for proceeds payable under or unearned premiums with respect to policies of insurance) in whatever form. Notwithstanding anything to the contrary contained herein, the term “Collateral” shall not include any of either Borrower’s now owned or hereafter acquired real property or any buildings, structures or improvements now or hereafter erected on such real property.

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“Collecting Bank” means any banking institution with which a Blocked Account has been established pursuant to a Blocked Account Agreement.

“Concentration Limit” shall have the meaning provided in Section 1.1 of Schedule A hereto.

“Contract Rate” shall have the meaning provided in Section 1.1 of Schedule A hereto.

“Cross Aging Percentage” shall have the meaning provided in Section 1.1 of Schedule A hereto.

“Default” means any of the events specified in Section 10.1 that, with the passage of time or giving of notice or both, would constitute an Event of Default.

“Default Rate” means the Contract Rate plus three percent (3%) per annum.

“Dollar” and “$” means freely transferable United States dollars.

“EBITDA” means, for any period, the sum of (a) Net Income (or Net Loss) (including gains and losses from the sales of assets in the ordinary course of business) for such period, (b) the provision for income taxes allocable to such period, (c) the interest expense for such period, and (d) any depreciation or amortization expenses incurred in determining Net Income (or Net Loss) for such period (where the items set forth in sections (a) - (d) above are determined without duplication and on a consolidated basis and, where applicable, in accordance with GAAP).

“Eligible Accounts” shall mean, with respect to each Borrower, all accounts of such Borrower which are deemed by Lender in the exercise of its commercially reasonable discretion to be eligible for inclusion in the calculation of the Borrowing Base, net of any and all interest, finance charges, sales tax, fees, returns, discounts, claims, credits, charges, contra accounts, exchange contracts or other allowances, offsets and rights of offset, deductions, counterclaims, disputes, rejections, shortages or other defenses and all credits owed or allowed by such Borrower upon any of its accounts and further reduced by the aggregate amount of all reserves, limits and deductions provided for in this definition and elsewhere in this Agreement. In no event shall Eligible Accounts include the following:

(a)accounts which remain unpaid more than ninety (90) days past their invoice dates;

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(b)accounts which are not due and payable within thirty (30) days after their invoice dates;

(c)accounts owing by a single Account Debtor if more than the Cross Aging Percentageof such accounts is ineligible pursuant to clauses (a) or (b) above;

(d)accounts with respect to which the Account Debtor is an Affiliate of any Borrower;

(e)accounts with respect to which the obligation of payment by the Account Debtor is or may be conditional for any reason whatsoever including, without limitation, accounts arising with respect to goods that were (i) not sold on an absolute basis, (ii) sold on a bill and hold sale basis, (iii) sold on a consignment sale basis, (iv) sold on a guaranteed sale basis, (v) sold on a sale or return basis, or (vi) sold on the basis of any other similar understanding;

(f)accounts with respect to which the Account Debtor is not a resident or citizen of, or otherwise located in, the continental United States of America or a province of Canada (other than Quebec), or with respect to which the Account Debtor is not subject to service of process in the continental United States of America or a province of Canada (other than Quebec), unless such accounts are backed in full by irrevocable letters of credit or credit insurance in form and substance satisfactory to Lender issued or confirmed by a domestic commercial bank acceptable to Lender and which, if a letter of credit, is in the possession of Lender and which, if credit insurance, is payable to Lender;

(g)accounts with respect to which the Account Debtor is the United States of America or any other federal governmental body, or any state, county or local governmental authority, or (in each case) any department, agency or instrumentality thereof, unless such accounts are duly assigned to Lender in compliance with all applicable governmental requirements (including, without limitation, the Federal Assignment of Claims Act of 1940, as amended, if applicable), or in compliance with all applicable state law requirements (if any), as applicable, and such assignment has been accepted and acknowledged by the appropriate government officers;

(h)accounts (i) with respect to which any Borrower is or may be liable to the Account Debtor for goods sold or services rendered by such Account Debtor, but only to the extent of such liability to such Account Debtor or (ii) with respect to which such Account Debtor disputes the amount owed but only that portion of such accounts which such Account Debtor disputes;

(i)accounts with respect to which the goods giving rise thereto have not been shipped and delivered to and accepted as satisfactory by the applicable Account Debtor or with respect to which the services performed giving rise thereto have not been completed and accepted as satisfactory by the applicable Account Debtor;

(j)accounts which are not invoiced within three (3) days after the shipment and delivery to and acceptance by said Account Debtor of the goods giving rise thereto or the performance of the services giving rise thereto;

(k)accounts which are not subject to a first priority perfected security interest in favor of Lender;

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(l)accounts with respect to which there exists any Lien in favor of any Person other than Lender, unless such Lien has been fully and unconditionally subordinated to the Lender’s security interest pursuant to a written agreement in form and substance acceptable to the Lender in its commercially reasonable discretion;

(m)that portion of the aggregate account balance owed by a single Account Debtor which exceeds the Concentration Limit;

(n)accounts with respect to which the Account Debtor is located in any state requiring the filing of a Notice of Business Activities Report or similar report in order to permit the applicable Borrower to seek judicial enforcement in such state of payment of such account, unless such Borrower has qualified to do business in such state or has filed a Notice of Business Activities Report or equivalent report for the then current year;

(o)accounts which represent a progress billing or which arise in connection with any pre-billing;

(p)accounts with respect to which there are proceedings or actions which are then threatened or pending against the Account Debtor or to which such Account Debtor is a party which might result in any material adverse change in such Account Debtor’s financial condition or in its ability to pay any account in full when due;

(q)accounts which arose out of a contract or order which, by its terms, forbids, restricts or makes void or unenforceable the assignment by the applicable Borrower to the Lender of such account;

(r)accounts with respect to which possession and/or control of the goods sold giving rise thereto is held, maintained or retained by the applicable Borrower or any Affiliate of such Borrower (or by any lender or custodian of such Borrower or any Affiliate of such Borrower) for the account of or subject to further and/or future direction from the Account Debtor with respect thereto;

(s)accounts which, in any way, violate or fail to meet any warranty, representation or covenant contained in the Loan Documents relating directly or indirectly to the applicable Borrower’s accounts;

(t)accounts with respect to which the applicable Borrower has failed to observe and comply with all laws of the jurisdiction in which the Account Debtor with respect to such Account is located which, if not observed or complied with, would deny such Borrower access to the courts of such jurisdiction;

(u)accounts which arise outside of the ordinary course of the applicable Borrower’s business;

(v)accounts which are evidenced by chattel paper or instruments unless the Lender has specifically agreed to include each such account as an Eligible Account, in which case (i) only payments then due and payable under such chattel paper or instrument shall be included as an Eligible Account and (ii) the originals of such chattel paper or instruments have been assigned and delivered to the Lender in a manner satisfactory to the Lender; and

(w)accounts that Lender, in its commercially reasonable discretion, has determined to be ineligible.

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“Eligible Inventory” means, with respect to each Borrower, as at any date of determination, all inventory owned by and in the possession of such Borrower and located in the United States of America that Lender, in its commercially reasonable discretion, deems to be eligible for borrowing purposes. Without limiting the generality of the foregoing, unless otherwise agreed by Lender, the following are not Eligible Inventory:

(a)finished goods which are produced under a contract brewing agreement or are otherwise specific to a particular customer;

(b)finished goods which do not meet the specifications of the purchase order for such goods;

(c)inventory which Lender determines, in its commercially reasonable discretion, to be unacceptable for borrowing purposes;

(d)inventory with respect to which Lender does not have a valid, first priority and fully perfected security interest;

(e)inventory with respect to which there exists any Lien in favor of any Person other than Lender, unless such Lien has been fully and unconditionally subordinated to the Lender’s security interest pursuant to a written agreement in form and substance acceptable to the Lender in its commercially reasonable discretion;

(f)inventory which has been consigned to such Borrower;

(g)packaging and shipping materials, products and labels, with the exclusion of generic, unbranded and unlabeled bottles;

(h)inventory that is slow-moving or obsolete or returned or repossessed or used goods taken in trade;

(i)inventory consisting of consumables (i.e. chemicals used in the brewing process);

(j)inventory produced in violation of the Fair Labor Standards Act, in particular provisions contained in Title 29 U.S.C. 215 (a)(i);

(k)inventory that violates or fails to meet any warranty, representation or covenant contained in the Loan Documents relating directly or indirectly to the applicable Borrower’s inventory;

(l)inventory that was purchased from a Person who did not comply with the Food Security Act;

(m)inventory that is located outside of the continental United States; and

(n)inventory located at a location for which Lender does not have a valid landlord’s or warehouseman’s waiver or subordination on terms and conditions acceptable to Lender in its commercially reasonable discretion and inventory located at any location other than those listed on Schedule 5.1(o).

It is expressly understood and agreed that any hops, malt or other grain products or derivatives, whether located at a facility owned or leased by a Borrower or otherwise, that are covered by a negotiable warehouse receipt, nonnegotiable warehouse receipt, scale weight ticket or load slip, or by any other evidence of ownership or document of title, that is not in the physical possession of the applicable Borrower or the Lender shall in no event constitute Eligible Inventory.

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“Environmental Laws” means all federal, state, local and foreign laws now or hereafter in effect relating to pollution or protection of the environment, including laws relating to emissions, discharges, releases or threatened releases of pollutants, contaminants, chemicals or industrial, toxic or hazardous substances or wastes or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, removal, transport or handling of pollutants, contaminants, chemicals or industrial, toxic or hazardous substances or wastes, and any and all regulations, notices or demand letters issued, entered, promulgated or approved thereunder.

“ERISA” means the Employee Retirement Income Security Act of 1974, as in effect from time to time, and any successor statute, and any rule or regulation issued thereunder.

“Event of Default” means any of the events specified inSection 10.1.

“Financial Statements” shall have the meaning provided in Section 1.1 of Schedule A hereto.

“Fixed Charge Coverage Ratio” shall have the meaning provided in Section 1.1 of Schedule A hereto.

“Food Security Act” means 7 U.S.C. Section 1631, and any successor statute thereto, together with each state statute establishing a “central filing system” (as defined in 7 U.S.C. Section 1631) that has been certified by the Secretary of the United States Department of Agriculture.

“GAAP” means generally accepted accounting principles and practices consistently applied.

“Grower Payables” means, collectively, all unpaid amounts payable by Borrowers (or any of them), in the aggregate, for the purchase of inventory from any “Producer” as defined in Article 20 of the New York Agriculture and Markets Law, from any “Producer” as defined in the Food and Agricultural Code of California or from any other Person engaged in a farming operation, or from any broker or agent selling on behalf of any such Producer or other Person, or from any cooperative whose owners/members consist of any such Producer or other Persons.

“Grower Payables Reserve” means a reserve in such amount as the Lender shall determine from time to time is necessary to cover the aggregate liability of all Borrowers for Grower Payables; provided, however, that the amount of such reserve shall be reduced, dollar for dollar, by the amount of each Grower Payable with respect to which the applicable payee has waived and disclaimed any Lien or other interest such payee might otherwise have or be entitled to in all or any portion of the Collateral, which waiver and disclaimer shall be made pursuant to a written document in form and substance acceptable to the Lender.

“Indebtedness” means, without duplication, (a) all Liabilities, (b) all obligations for Money Borrowed or for the deferred purchase price of property or services or in respect of reimbursement obligations under letters of credit, (c) all obligations represented by bonds, debentures, notes and accepted drafts that represent extensions of credit, (d) Capitalized Lease Obligations, (e) all obligations (including, during the noncancellable term of any lease in the nature of a title retention agreement, all future payment obligations under such lease discounted to their present value in accordance with GAAP) secured by any Lien to which any property or asset owned or held by a Person is subject, whether or not the obligation secured thereby shall have been assumed by such Person, (f) all obligations of other Persons which such Person has guaranteed, including, but not limited to, all obligations of such Person consisting of recourse liability with respect to accounts sold or otherwise disposed of by such Person, and (g) in the case of each Borrower, the Loans.

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“Intellectual Property” means, as to any Person, all of such Person’s then owned and existing and future acquired or arising patents, patent rights, copyrights, works which are the subject of copyrights, trademarks, service marks, trade names, trade styles, patent, trademark and service mark applications, and all licenses and rights related to any of the foregoing, and all rights to sue for past, present and future infringements of any of the foregoing.

“Inventory Advance Rate” shall have the meaning provided in Section 1.1 of Schedule A hereto.

“Inversiones” means Inversiones Mirabel S.A., a company incorporated in Panama.

“Investment” means any investment, whether by means of share purchase, loan, advance, purchase of debt instrument, extension of credit (other than (i) accounts receivable arising from the sale of goods or services in the ordinary course of business, and (ii) notes, accepted in the ordinary course of business, evidencing overdue accounts receivable arising in the ordinary course of business), capital contribution, acquisition of real or personal property (other than personal property acquired in the ordinary course of business) or otherwise, in or to any Person, the guaranty of any Indebtedness of any Person or the subordination of any claim against any Person to other indebtedness of such Person.

“Lender’s Office” means the office of Lender located at 1660 S. Highway 100, Suite 146, Minneapolis, MN 55416-1524, Attention: Credit Department,or such other office as Lender may designate from time to time.

“Liabilities” means all liabilities of a Person determined in accordance with GAAP.

“Lien” means, with respect to any Person, any security interest, chattel mortgage, charge, mortgage, deed to secure debt, deed of trust, lien, pledge, Capitalized Lease, conditional sale or other title retention agreement covering, or any trust upon, or any other security interest or encumbrance of any kind in respect of, any property of such Person or upon the income or profits therefrom.

“Loans” means the Revolving Loans, the Capex Loans and the Term Loan.

“Loan Documents” means, collectively, this Agreement, each agreement or document now or hereafter executed and delivered by any Person to evidence or secure, in whole or in part, the Obligations and each other instrument, agreement and document now or hereafter executed and delivered in connection with this Agreement or the Loans.

“Lockbox” shall have the meaning provided in Section 1.1 of Schedule A hereto.

“Material Adverse Change” means any act, omission, event or undertaking which would, singly or in the aggregate, have a materially adverse effect upon (a) the business, assets, properties, liabilities, condition (financial or otherwise), results of operations or business prospects of any Borrower or any of its subsidiaries, (b) upon the ability of any Borrower or any of its subsidiaries to perform any obligations under this Agreement or any other Loan Document to which it is a party, or (c) the legality, validity, binding effect, enforceability or admissibility into evidence of any Loan Document or the ability of Lender to enforce any rights or remedies under or in connection with any Loan Document.

“Material Agreement” means any contract, agreement, commitment, arrangement or instrument to which, as of any date, any Borrower is a party or by which any Borrower or any of its properties is bound, including any contract brewing agreement, license agreement, distribution agreement, promissory note, indenture, loan agreement, mortgage, lease, or deed, in each case the cancellation, termination or non-existence of which could constitute a Material Adverse Change.

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“Maximum Rate” shall have the meaning provided in Section 3.8.

“Money Borrowed” means Indebtedness (i) that is represented by notes payable, drafts accepted, bonds, debentures or similar instruments that represent extensions of credit, (ii) upon which interest charges are customarily paid (other than trade Indebtedness), (iii) that was issued or assumed as full or partial payment for property, (iv) that is evidenced by a guarantee (but only if the obligations guaranteed would otherwise qualify as Money Borrowed), or (v) that constitutes a Capitalized Lease Obligation.

“Multiemployer Plan” means a “multiemployer plan” as defined in Section 4001(a)(3) of ERISA to which any Borrower or a Related Company is required to contribute or has contributed within the immediately preceding 6 years.

“Net Income” or “Net Loss” means, with respect to any Person, the net income or net loss of such Person for the period in question (after provision for income taxes) determined in accordance with GAAP, provided that the impact of any extraordinary gains and any extraordinary non-cash losses, in each case as determined in accordance with GAAP, shall be excluded from the determination of “Net Income” and “Net Loss.”

“Net Worth” of any Person means the total shareholders’ or members’ equity (including capital stock, additional paid-in capital and retained earnings, after deducting treasury stock) which would appear as such on a balance sheet of such Person prepared in accordance with GAAP.

“New York Banking Day” means any day (other than a Saturday or Sunday) on which commercial banks are open for business in New York, New York.

“Note” shall mean the Revolving Note, the Capex Note, the Term Loan Note and any other promissory note of the Borrowers, or any one or more of them, evidencing any loan or advance (including but not limited to the Loans) made by the Lender to the Borrowers, or any one or more of them, pursuant to this Agreement, as the same may be amended, modified, restated or replaced from time to time.

“Obligations” shall mean (i) all Loans or other advances made by Lender to Borrowers (or any of them) pursuant to this Agreement or otherwise, (ii) all future advances or other value, of whatever class or for whatever purpose, at any time hereafter made or given by Lender to Borrowers (or any of them), whether or not the advances or value are given pursuant to a commitment and whether or not such Borrower(s) is (are) indebted to Lender at the time of such advance; (iii) any and all other debts, liabilities and obligations of every kind and character of Borrowers (or any of them) to Lender, whether now or hereafter existing, and regardless of whether such present or future debts, liabilities or obligations are direct or indirect, primary or secondary, joint, several, or joint and several, fixed or contingent, and regardless of whether such present or future debts, liabilities or obligations may, prior to their acquisition by Lender, be or have been payable to, or be or have been in favor of, some other Person or have been acquired by Lender in a transaction with one other than a Borrower (it being contemplated that Lender may make such acquisitions from others), howsoever such debts, liabilities or obligations shall arise or be incurred or evidenced; (iv) any and all other debts, liabilities and obligations of every kind and character of Borrowers (or any of them) to any Affiliate of Lender, whether now or hereafter existing, and regardless of whether such present or future debts, liabilities or obligations are direct or indirect, primary or secondary, joint, several, or joint and several, fixed or contingent, and regardless of whether such present or future debts, liabilities or obligations may, prior to their acquisition by such Affiliate, be or have been payable to, or be or have been in favor of, some other Person or have been acquired by such Affiliate in a transaction with one other than a Borrower (it being contemplated that Affiliates of Lender may make such acquisitions from others), howsoever such debts, liabilities or obligations shall arise or be incurred or evidenced; (v) interest on all of the debts, liabilities and obligations set forth above; (vi) all costs, fees and expenses payable by Borrowers (or any of them) to Lender or any Affiliate of Lender pursuant to any of the Loan Documents; and (vii) any and all renewals, extensions, modifications and increases of the debts, liabilities and obligations set forth above, or any part thereof.

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“Operating Lease” means any lease (other than a lease constituting a Capitalized Lease) of real or personal property determined in accordance with GAAP.

“PACA” means, collectively, (a) the Perishable Agricultural Commodities Act, 1930, as amended (7 U.S.C. § 499(e)(c)(2) et. seq.), together with all rules and regulations relating thereto or promulgated thereunder (including 7 C.F.R. § 46.1 et seq.), and (b) any other state law or regulation of similar import.

“PACA Payables” means, collectively, all unpaid amounts payable by any Borrower for the purchase of “Perishable Agricultural Commodities” (as defined in PACA) acquired by Borrower as a “dealer” (as defined in PACA). PACA Payables shall include, without limitation, the amount of any outstanding uncashed checks issued by any Borrower in payment of PACA Payables to the extent not otherwise included in the amount of PACA Payables.

“PACA Reserve” shall mean a reserve in such amount as Bank shall determine from time to time is necessary to cover the Borrowers’ aggregate liability for PACA Payables.

“PBGC” means the Pension Benefit Guaranty Corporation or any successor agency.

“Permitted Indebtedness” shall have the meaning provided in Section 1.1 of Schedule A hereto.

“Permitted Investments” means, with respect to each Borrower, Investments of such Borrower in (a) negotiable certificates of deposit issued by any commercial bank having capital and surplus in excess of $100,000,000, and (b) any direct obligation of the United States of America or any agency or instrumentality thereof which has a remaining maturity at the time of repurchase of not more than one year and repurchase agreements relating to the same.

“Permitted Liens” means: (a) Liens securing taxes, assessments and other governmental charges or levies (excluding any Lien imposed pursuant to any of the provisions of ERISA) or the claims of materialmen, mechanics, carriers, warehousemen or landlords for labor, materials, supplies or rentals incurred in the ordinary course of business, but (i) in all cases, only if payment shall not at the time be past due, and (ii) in the case of warehousemen or landlords controlling locations where inventory is located, only if such liens have been waived or subordinated to the security interest of Lender in a manner satisfactory to Lender; (b) the Liens described on Schedule 5.1(g) attached hereto and made a part hereof; and (c) Liens in favor of Lender.

“Person” means an individual, corporation, limited liability company, partnership, joint venture, association, trust or unincorporated organization or a government or any agency or political subdivision thereof.

“Prohibited Distribution” by any Person means (a) the retirement, redemption, purchase, or other acquisition for value of any capital stock or other equity securities or partnership interests issued by such Person, (b) the declaration or payment of any dividend or distribution on or with respect to any such securities (excluding distributions made solely in shares of stock of the same class) or partnership interests, (c) any loan or advance by such Person to, or other Investment by such Person in, any other Person, and (d) any other payment by such Person in respect of such securities or partnership interests, without the prior written consent of Lender, which consent shall not be unreasonably withheld.

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“Prohibited Payment” means (a) any redemption, repurchase or prepayment or other retirement, prior to the stated maturity thereof or prior to the due date of any regularly scheduled installment or amortization payment with respect thereto, of any Indebtedness of a Person (other than the Obligations and trade debt), (b) the payment by any Person of the principal amount of or interest on any Indebtedness (other than trade debt) owing to an Affiliate of such Person, and (c) any payment with respect to any Subordinated Indebtedness that is made in violation of the subordination agreement relating thereto.

“Qualified Capital Expenditure” shall mean a Capital Expenditure which meets the following requirements:

(a)the applicable Borrower shall have paid (or shall cause to be paid contemporaneously with the funding of the applicable Capex Loan), in cash, the full original invoice cost of the capital assets acquired with such Capital Expenditure, and such Borrower shall have provided (or shall provide within five (5) days following the funding of the applicable Capex Loan) to the Lender copies of the original invoice and the canceled check for payment or other evidence of payment in full;

(b)it is made in the ordinary course of the applicable Borrower’s business;

(c)the capital assets acquired with such Capital Expenditure consist solely of one or more items of production equipment which are intended for direct use in the applicable Borrower’s primary business of producing and distributing beer and malt beverages for the specialty “craft” segment of the beer market (without limiting the generality of the foregoing, it is expressly understood and agreed that in no event shall Capital Expenditures for such items as computers, telephone systems, office machinery, office equipment, furniture, fixtures, appliances, vehicles and other similar non-production equipment constitute “Qualified Capital Expenditures” hereunder);

(d)no portion thereof consists of any soft costs relating to the acquisition of the applicable capital assets (for purposes hereof the term “soft costs” shall include, but shall not be limited to, all taxes, delivery charges, setup fees, installation costs, insurance and other similar charges and costs);

(e)no portion thereof has been paid by or financed with any other Person;

(f)no portion of the capital assets acquired with such Capital Expenditure are located outside of the continental United States;

(g)the capital assets acquired with such Capital Expenditure are located on premises that are either owned by the applicable Borrower or leased by such Borrower (provided that in the case of leased premises the Lender has received a landlord’s waiver acceptable to the Lender with respect to such leased premises);

(h)the capital assets acquired with such Capital Expenditure are presently in good and workable condition, ordinary wear and tear excepted;

(i)the capital assets acquired with such Capital Expenditure are not subject to any prior assignment, claim or Lien other than (i) a first priority Lien in favor of the Lender, and (ii) Liens consented to by the Lender in writing;

(j)the capital assets acquired with such Capital Expenditure comply with the applicable Borrower’s specifications and have been delivered to and accepted by such Borrower;

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(k)there exists no dispute with respect thereto between the applicable Borrower and the manufacturer or supplier of the capital assets acquired with such Capital Expenditure including, without limitation, warranties or other claims;

(l)the capital assets acquired with such Capital Expenditure do not, in any way violate or fail to meet any warranty, representation or covenant contained in the Loan Documents relating directly or indirectly to such assets;

(m)the Lender has determined in its commercially reasonable discretion that the capital assets acquired with such Capital Expenditures are not unacceptable due to age, type, condition or quality (without limiting the generality of the foregoing, it is expressly understood and agreed that any capital asset acquired or first used by the applicable Borrower (whether pursuant to a Capitalized Lease or otherwise) more than twelve (12) months prior to the date of the applicable Capex Loan request is unacceptable due to age, unless such capital asset is included on a fixed asset appraisal (in form and substance acceptable to the Lender in its commercially reasonable discretion) prepared by an independent appraiser acceptable to the Lender in its commercially reasonable discretion no more than twelve (12) months prior to the date of such Capex Loan request); and

(n)the Capital Expenditure is not made in payment of obligations arising under any Capitalized Lease, except to the extent such obligations are satisfied in full by such payment and the liability related to such Capitalized Lease is removed from the applicable Borrower’s balance sheet in accordance with GAAP.

“Related Company” means, as to any Person, any (a) corporation which is a member of the same controlled group of corporations (within the meaning of Section 414(b) of the Code) as such Person, (b) partnership or other trade or business (whether or not incorporated) under common control (within the meaning of Section 414(c) of the Code) with such Person, or (c) member of the same affiliated service group (within the meaning of Section 414(m) of the Code) as such Person or any corporation described in clause (a) above or any partnership, trade or business described in clause (b) above.

“Reserve” at any time shall mean the PACA Reserve (if any), plus the Grower Payables Reserve (if any), plus the aggregate amount of royalties and similar charges owed by the Borrowers (or any of them) to Kingfisher America, Inc., a Delaware corporation, UBI, UBSN or any other Affiliate of a Borrower, plus an amount from time to time established by Lender in its commercially reasonable discretion as a reserve in reduction of the Borrowing Base in respect of contingencies or other potential factors (such as, without limitation, rebates, sales taxes, property taxes, installation and delivery expenses, and warranties) which could adversely affect or otherwise reduce the anticipated amount of timely collections in payment of Eligible Accounts or the value (whether at cost, market or orderly liquidation value) of Eligible Inventory. The “Reserve,” if any from time to time, does not represent cash funds. For purposes of this definition and determining the Borrowing Base and without limiting Lender’s other discretion as described above, Lender specifically reserves the right to establish additional commercially reasonable reserves in respect of: any claims, interests, or rights (including Liens) of any Person (“Priming Interests”), whether arising pursuant to an Agricultural Lien Statute or otherwise, which (A) as of the date Lender learns or is notified of the existence of the applicable Priming Interest, has priority over the Liens of Lender on any or all of the Collateral or (B) will have priority over the Liens of Lender on any or all of the Collateral after any required notice or filing, the passage of time, the satisfaction of any other condition, or otherwise.

“Revolving Facility Limit” shall have the meaning provided in Section 1.1 of Schedule A hereto.

“Revolving Loans” means the advances made to Borrowers pursuant to Section 2.1.

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“Schedule of Accounts” means a schedule delivered by Borrowers to Lender pursuant to the provisions of Section 8.3(a).

“Schedule of Inventory” means a schedule delivered by Borrowers to Lender pursuant to the provisions of Section 8.3(c).

“Solvent” means, when used in connection with any Person, that such Person has assets of a fair value which exceeds the amount required to pay its debts (including contingent, subordinated, unmatured and unliquidated liabilities) as they become absolute and matured, and that such Person is able to, and anticipates that it will be able to, meet its debts as they mature and has adequate capital to conduct the business in which it is or proposes to be engaged.

“State of Organization” shall have the meaning provided in Section 1.1 of Schedule A hereto.

“Subordinated Indebtedness” means Indebtedness of Borrowers (or any of them) to a third Person (i) that has been approved in writing by Lender and (ii) that has been subordinated to the payment of the Obligations pursuant to a written subordination agreement executed by Lender and the holder of such Indebtedness containing terms acceptable to Lender in its commercially reasonable discretion.

“Tangible Net Worth” means (a) the combined Net Worth of Borrowers at the time in question (excluding the financial condition of all Persons other than the Borrowers), less (b) the amount of all intangible items, investments in subsidiaries, amounts due from Affiliates, employees, officers, managers, directors, members and shareholders, and all other items which should properly be treated as intangibles in accordance with GAAP, plus (c) the Subordinated Indebtedness of Borrowers.

“Term Loan” means the advances made to Borrower pursuant to Section 2.4.

“Termination Date” shall have the meaning provided in Section 1.1 of Schedule A hereto.

“Termination Event” means (a) a “Reportable Event” as defined in Section 4043 of ERISA, but excluding any such event as to which the PBGC has by regulation waived the requirement of Section 4043(a) of ERISA that it be notified within thirty days of the occurrence of such event, provided however, that a failure to meet the minimum funding standard of Section 412 of the Code and of Section 302 of ERISA shall be a Reportable Event regardless of the issuance of any such waiver of the notice requirement in accordance with either Section 4043(a) of ERISA or Section 412(d) of the Code, (b) the filing of a notice of intent to terminate a Benefit Plan or the treatment of a Benefit Plan amendment as a termination under Section 4041 of ERISA, or (c) the institution of proceedings to terminate a Benefit Plan by the PBGC under Section 4042 of ERISA or the appointment of a trustee to administer any Benefit Plan.

“Total Credit Facility” shall have the meaning provided in Section 1.1 of Schedule A hereto.

“UBA” means United Breweries of America, Inc., a Delaware corporation.

“UBH” means United Breweries Holdings Limited, an Indian public limited company.

“UBI” means United Breweries International (U.K.), Limited, a United Kingdom private limited company.

“UBSN” means UBSN Limited, a United Kingdom private limited company.

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“UCC” means the Uniform Commercial Code as in effect from time to time in the State of Minnesota, including without limitation, any amendments thereto which are effective after the date hereof.

“Unfunded Vested Liabilities” shall mean, with respect to each Borrower, the amount (if any) by which (i) the actuarial present value of accumulated benefits under a Benefit Plan which are vested exceeds (ii) such Benefit Plan’s net assets available for benefits (all as determined in connection with the filing of such Borrower’s most recent Annual Report on Form 5500) but only to the extent such excess would, if such Benefit Plan were to terminate as of such date, represent a liability of such Borrower or any ERISA Affiliate to the PBGC under Title IV of ERISA. In each case the foregoing determination shall be made as of the most recent date prior to the filing of said Annual Report as of which such actuarial present value of accumulated Plan benefits is determined.

Section 1.2UCC Terms. Terms defined in the UCC (such as, but not limited to, accounts, chattel paper, commercial tort claims, contract rights, deposit account, documents, equipment, financial assets, general intangibles, goods, instruments, investment property, inventory and proceeds), as and when used (without being capitalized) in this Agreement or the Loan Documents, shall have the meanings given to such terms in the UCC.

Section 1.3Accounting Terms and Determinations. Unless otherwise specified herein, all accounting terms used herein shall be interpreted, all determinations with respect to accounting matters hereunder shall be made, and all financial statements and certificates and reports as to financial matters required to be furnished to the Lender hereunder shall be prepared, in accordance with GAAP, applied on a basis consistent with the audited financial statements of Borrowers referenced in Section 5.1(k).

ARTICLE II — CREDIT FACILITIES

Section 2.1Revolving Loans. Subject to the terms and conditions of this Agreement, prior to the Termination Date Lender shall make advances to Borrowers under the revolving credit facility provided for under this Agreement in an amount not to exceed outstanding at any time the lesser of (a) the Revolving Facility Limit and (b) the Borrowing Base. Borrowers may borrow, repay and reborrow the principal of the Revolving Loans in accordance with the terms of this Agreement.

Section 2.2Advances Under the Revolving Loan. A request for an advance of a Revolving Loan shall be made, or shall be deemed to be made, in the following manner:

(a)Any request by the Borrowing Agent for a Loan shall be in writing (via email, facsimile or an updated Borrowing Base Certificate), and must be given so as to be received by the Lender not later than 12:00 noon, Minneapolis, Minnesota time, on the date of the requested advance. Each such request shall specify the effective date of the borrowing, the amount of the requested advance and which Borrower will be the recipient of such advance. The Borrowing Agent’s failure to comply with the provisions of this Section 2.2(a) with respect to any Loan shall not in any manner affect the joint and several obligation of each Borrower to repay such Loan in accordance with the terms of this Agreement.

(b)Unless payment is otherwise made by a Borrower, the becoming due of any amount required to be paid under any Loan Document or of any Obligation shall be deemed to be a request for an advance under the Revolving Loan on the due date in the amount required to pay such amount, and such request shall be irrevocable. Lender shall not have any obligation to any Borrower to honor any such deemed request for an advance but may do so in its sole and absolute discretion and without regard to the existence of, and without being deemed to have waived, any Default or Event of Default.

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Section 2.3Repayment of the Revolving Loans. The Revolving Loans shall be repaid as follows: (a) unless accelerated in accordance with the terms hereof, the outstanding principal amount of, and all accrued and unpaid interest on, the Revolving Loans is due and payable, without demand, on the Termination Date; (b) if at any time the principal of, and interest upon, the aggregate outstanding Revolving Loans exceeds the lesser of (i) the Revolving Facility Limit or (ii) the Borrowing Base, Borrowers jointly and severally agree to immediately repay the Revolving Loans in the amount of such excess; and (c) each Borrower hereby instructs Lender to repay the Revolving Loans on any day in an amount equal to the amount received by Lender on such day pursuant to Section 6.2.

Section 2.4Term Loan.

(a)Subject to the terms and conditions hereof, Lender agrees to make a Term Loan to Borrowers in the amount equal to $1,525,000. Borrower agrees to repay to Lender the Term Loan, together with interest thereon, in the manner provided herein. The principal owing hereunder in respect of the Term Loan at any given time shall equal the aggregate initial amount of the advance made as the Term Loan minus all principal payments thereon received by Lender in respect of the Term Loan. Amounts repaid in respect of the Term Loan may not be reborrowed hereunder.

(b)The aggregate principal balance of the Term Loan shall be paid, jointly and severally, by Borrowers to Lender in monthly installments, due and payable on the first day of each calendar month, commencing on December 1, 2006. Each monthly principal installment shall be in an amount equal to the original principal balance of the Term Loan divided by eighty-four (84), provided that the remaining unpaid principal balance of the Term Loan and all accrued interest thereon shall be due and payable on the earliest of (i) the payment of the remaining unpaid principal balance of the Revolving Loans, (ii) the Termination Date and (iii) acceleration of the maturity of the Term Loan in accordance with the terms hereof.

(c)Borrowers shall prepay the Term Loan from the proceeds of insurance or condemnation awards paid in respect of any equipment in which Lender has a security interest. Such prepayments shall be applied first to accrued but unpaid interest and the balance to installments of principal in the inverse order of their maturities.

(d)Notwithstanding anything to the contrary contained herein, Borrowers may prepay the Term Loan in accordance with Section 3.4(b)(ii) of Schedule A hereto.

Section 2.5Capital Expenditure Loans.

(a)The Lender agrees to make loans (each, a “Capex Loan”) to the Borrowers from and after the effective date hereof through and including the Termination Date, in such amounts and at such times as the Borrowing Agent may from time to time request, up to but not in excess of (A) with respect to each individual Capex Loan, an amount equal to the Capex Loan Advance Rate multiplied by the amount of the Qualified Capital Expenditures to be paid with the proceeds of such Capital Expenditure Loan, and (B) with respect to Capital Expenditure Loans in the aggregate, the Capex Loan Amount. The proceeds of each Capital Expenditure Loan shall be used by the Borrowers solely to pay Qualified Capital Expenditures. Each request for a Capital Expenditure Loan shall be in a minimum amount of $25,000. The Capital Expenditure Loan shall be evidenced by that certain Capex Note bearing even date herewith made payable, jointly and severally, by the Borrowers to order of the Lender (as the same may be amended, restated, renewed, replaced, supplemented or otherwise modified from time to time, the “Capex Note”).

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(b)Unless otherwise required to be sooner paid pursuant to this Agreement, the principal of each Capex Loan shall mature and be payable in consecutive equal monthly installments in an amount sufficient to fully amortize the principal balance of such Capex Loan by the last day of the seventy-second (72nd) month following the first day of the first month following the first anniversary date of this Agreement occurring after the date on which such Capex Loan was made. Such payments shall commence on the first day of the first month following the first anniversary date of this Agreement occurring after the date on which such Capex Loan was made and shall continue on the first day of each calendar month thereafter until the Termination Date, at which time a final balloon payment equal to the aggregate principal balance of all Capex Loans outstanding on such date shall be due and payable.

(c)The Borrowers may, upon three Business Days’ notice to the Lender, prepay the principal of the Capex Loans in whole or in part without premium. Any partial prepayment of principal of the Capex Loans shall be in a minimum amount of the lesser of (A) the aggregate outstanding principal balance of the Capex Loans, or (B) $25,000 or an integral multiple thereof, and shall be applied to the unpaid installments of the Capex Loans in the inverse order of their maturities. Any principal of the Capex Loans which is repaid may not be reborrowed. Any regularly scheduled payment due in respect of the Capex Loans may be made with the proceeds of a Revolving Loan only if, immediately before and after giving effect to such payment, no Default or Event of Default then exists or would result therefrom. No portion of the Capex Loans may be prepaid with the proceeds of any Revolving Loan.

Section 2.6Disbursement of Loans. Each Borrower hereby irrevocably authorizes Lender to disburse the proceeds of Loans requested, or deemed to be requested, pursuant to this Article II as follows: (i) each advance requested under Section 2.2(a) or Section 2.5(a) shall be disbursed by the Lender in lawful money of the United States of America in immediately available funds, (a) in the case of the initial advances under the Revolving Loan, the Capex Loan and the Term Loan in accordance with the written instructions from Borrowing Agent to Lender, and (b) in the case of each subsequent advance, to a deposit account designated in writing by Borrowing Agent to Lender; and (ii) the proceeds of each advance requested under Section 2.2(b) shall be distributed by the Lender by way of direct payment of the relevant Obligation.

Section 2.7Authorized Representatives. The Borrowing Agent shall act hereunder through the Authorized Representatives designated from time to time and all notices and requests to be given and received by the Borrowing Agent or any Borrower, including requests for Loans, shall be given by and directed to such Authorized Representatives; provided, however, that the Lender may rely on the authority (or apparent authority) of any officer or employee of the Borrowing Agent or any Borrower whom the Lender in good faith believes to be an Authorized Representative.

Section 2.8Borrowing Agency Provisions. Each Borrower hereby irrevocably designates the Borrowing Agent to be its attorney and agent and in such capacity to borrow, sign and endorse notes, and execute and deliver all instruments, documents, writings and further assurances now or hereafter required hereunder, on behalf of such Borrower, and hereby authorizes the Lender to pay over or credit all Loan proceeds hereunder in accordance with the request of the Borrowing Agent. The handling of this credit facility as a co-borrowing facility in the manner set forth in this Agreement is solely as an accommodation to the Borrowers and at their request. The Lender shall not incur liability to any Borrower or any other Person as a result thereof. To induce the Lender to do so and in consideration thereof, each Borrower hereby indemnifies the Lender and holds the Lender harmless from and against any and all liabilities, expenses, losses, damages and claims of damage or injury asserted against the Lender by any Person arising from or incurred by reason of the handling of the financing arrangements of the Borrowers as provided herein, reliance by the Lender on any request or instruction from the Borrowing Agent or any other action taken by the Lender with respect to this Section 2.8, except due to willful misconduct or gross (not mere) negligence of the Lender.

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Section 2.9Obligations Joint and Several. All obligations of the Borrowers under this Agreement and the other Loan Documents shall be joint and several. Each Borrower hereby agrees to make payment upon the maturity of the Obligations, whether by acceleration or otherwise, and such obligation and liability on the part of each Borrower shall in no way be impaired or otherwise affected by any act or omission of the Lender including, without limitation any extension, renewal or forbearance granted by the Lender to any Borrower, any failure of the Lender to pursue or preserve its rights against any Borrower or the release by the Lender of any collateral now or hereafter given as security for all or any part of such obligations.

Section 2.10Waiver of Subrogation. Subject only to the provisions of Section 2.11 below, each Borrower expressly waives any and all rights of subrogation, reimbursement, indemnity, exoneration, contribution or any other claim which such Borrower may now or hereafter have against any other Borrower or any other person directly or contingently liable for the Obligations, or against or with respect to any other Borrower’s property (including, without limitation, any property which is collateral for the Obligations), arising from the existence or performance of this Agreement, until repayment in full of the Obligations.

Section 2.11Contribution and Indemnification Among the Borrowers. Each Borrower is obligated to repay the Obligations as joint and several obligors under this Agreement. To the extent that any Borrower shall, under this Agreement as a joint and several obligor, repay any of the Obligations constituting Loans made to another Borrower (an “Accommodation Payment”), then the Borrower making such Accommodation Payment shall be entitled to contribution and indemnification from, and be reimbursed by, each of the other Borrowers in an amount, for each of such other Borrowers, equal to a fraction of such Accommodation Payment, the numerator of which fraction is such other Borrower’s “Allocable Amount” (as defined below) and the denominator of which is the sum of the Allocable Amounts of all of the Borrowers. As of any date of determination, the “Allocable Amount” of each Borrower shall be equal to the maximum amount of liability for Accommodation Payments which could be asserted against such Borrower hereunder without (a) rendering such Borrower “insolvent” within the meaning of Section 101(31) of Title 11 of the United States Code entitled “Bankruptcy” (as amended, the “Bankruptcy Code”), Section 2 of the Uniform Fraudulent Transfer Act (as amended, the “UFTA”), or Section 2 of the Uniform Fraudulent Conveyance Act (as amended, the “UFCA”), (b) leaving such Borrower with unreasonably small capital or assets, within the meaning of Section 548 of the Bankruptcy Code, Section 4 of the UFTA, or Section 4 of the UFCA, or (c) leaving such Borrower unable to pay its debts as they become due within the meaning of Section 548 of the Bankruptcy Code, Section 4 of the UFTA, or Section 5 of the UFCA. All rights and claims of contribution, indemnification and reimbursement under this Section 2.11 shall be subordinate in right of payment to the prior payment in full of the Obligations.

ARTICLE III — GENERAL LOAN PROVISIONS; FEES AND EXPENSES

Section 3.1Interest.

(a)Loans. Borrowers shall pay interest on the unpaid principal amount of the Obligations at a rate per annum equal to the lesser of (i) the Maximum Rate and (ii) the Contract Rate, payable monthly in arrears on the first day of each calendar month and on the Termination Date.

(b)Default Rate. From and after the occurrence of an Event of Default, the unpaid principal amount of all Obligations shall, at the option of Lender, bear interest until paid in full (or, if earlier, until such Event of Default is cured or waived in writing by Lender) at a rate per annum equal to the lesser of (i) the Maximum Rate and (ii) the Default Rate, payable on demand.

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(c)Computation of Interest. The interest rates provided for in Sections 3.1(a) and (b) shall be computed on the basis of a year of 360 days and the actual number of days elapsed;

Section 3.2Fees and Expenses.

(a)Origination Fee. In consideration for Lender’s agreement to make the Loans in accordance with the terms of this Agreement and in order to compensate Lender in part for the costs associated with the Loans, Borrowers jointly and severally agree to pay to Lender on the date hereof an origination fee in the amount provided in Section 3.2(a) of Schedule A hereto. Such fee is in addition to the expenses that Borrowers have agreed to pay elsewhere in this Agreement. Such fee shall in all respects be limited so that interest on the Obligations is at all times less than interest calculated at the Maximum Rate.

(b)Monthly Facility Fee. In consideration for Lender’s agreement to make the Loans in accordance with the terms of this Agreement and in order to compensate Lender in part for the costs associated with the Loans, Borrowers jointly and severally agree to pay to Lender a monthly facility fee for the period from the date hereof through the Termination Date calculated as provided in Section 3.2(b) of Schedule A hereto. Such facility fee shall be payable monthly in advance on the first day of each calendar month until the Termination Date and on the Termination Date. Such fee is in addition to the expenses that Borrowers have agreed to pay elsewhere in this Agreement. Such fee shall in all respects be limited so that interest on the Obligations is at all times less than interest calculated at the Maximum Rate.

(c)Unused Line Fee. Borrowers jointly and severally agree to pay to Lender an unused line fee for the period from the date hereof through the Termination Date calculated as provided in Section 3.2(c) of Schedule A hereto. Such unused line fee shall be payable monthly in arrears on the last day of each calendar month until the Termination Date and on the Termination Date. The parties hereto agree that such unused line fee, together with the other fees assessed hereunder, constitutes reasonable consideration for Lender’s taking of appropriate actions to be able to make available to Borrowers the amount of the Revolving Facility Limit for such period.

(d)Collateral Monitoring Fee. Lender shall be entitled to charge Borrowers, and if so charged each Borrower jointly and severally agrees to pay, a monthly collateral monitoring fee in the amount provided in Section 3.2(d) of Schedule A hereto. The collateral monitoring fee for each calendar month shall be due and payable on the first day of the next calendar month, and shall be prorated for any partial calendar month until the Termination Date. Such fee shall in all respects be limited so that interest on the Obligations is at all times less than interest calculated at the Maximum Rate.

(e)Minimum Usage Fee. Borrowers jointly and severally agree to pay to Lender a minimum usage fee for the period from the date hereof through the Termination Date calculated as provided in Section 3.2(e) of Schedule A hereto. Such usage fee shall be payable monthly in arrears on the last day of each calendar month until the Termination Date and on the Termination Date. The parties hereto agree that such usage fee, together with the other fees assessed hereunder, constitutes reasonable consideration for Lenders taking appropriate actions to be able to make available to Borrowers the Loans for such period.

(f)Early Termination Fees; Prepayment Fees. See Section 3.4(b).

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(g)Expenses. See Section 11.2.

Section 3.3Manner of Payment.

(a)Timing. Each payment by a Borrower on account of the principal of or interest on the Loans or of any fee or other amount payable to Lender shall be made not later than 1:00 p.m. (Minneapolis, Minnesota, time) on the applicable due date (or if such day is not a Business Day, the next succeeding Business Day, provided that interest shall continue to accrue until such payment is made). All payments shall be made to Lender at Lender’s Office, in Dollars, in immediately available funds and shall be made without any setoff, counterclaim or deduction whatsoever.

(b)Charging Accounts. Each Borrower hereby irrevocably authorizes Lender and each Affiliate of Lender to charge any account of such Borrower maintained with Lender or such Affiliate with such amounts as may be necessary from time to time to pay any Obligations which are not paid when due.

Section 3.4Termination of Agreement.

(a)Required Payments. On the Termination Date and upon any early termination of this Agreement, each Borrower jointly and severally agrees to pay to Lender (i) the principal of, and accrued and unpaid interest on, all Loans outstanding on such date, (ii) all fees accrued and unpaid, (iii) any amounts payable to Lender pursuant to the other provisions of this Agreement or any other Loan Document, and (iv) any and all other Obligations then outstanding.

(b)Early Termination; Prepayment. If Borrowers terminate this Agreement or prepay the Term Loan prior to the Termination Date, each Borrower acknowledges that such termination or prepayment would result in the loss to Lender of the benefits of this Agreement and, as a result thereof, each Borrower jointly and severally agrees to pay to Lender an early termination fee or a prepayment fee (as applicable) in the amount provided in Section 3.4(b) of Schedule A hereto.

Section 3.5Evidence of Indebtedness.

(a)At the request of Lender, the Loans shall be evidenced by one or more promissory notes.

(b)Lender shall maintain accounts in which it will record (i) the amount of each Loan extended hereunder and which Borrower was the recipient of such Loan, (ii) the amount of any principal or interest due and payable or to become due and payable from Borrowers to Lender hereunder, and (iii) the amount of any sum received by Lender hereunder from Borrowers.

(c)The entries in the accounts maintained pursuant to subsection (b) above shall be prima facie evidence of the existence, amounts and recipients of the Obligations therein recorded, provided, however, that the failure of the Lender to maintain such accounts or any error therein shall not in any manner affect the joint and several obligation of each Borrower to repay the Obligations in accordance with their terms.

Section 3.6Changes in Capital Adequacy Regulations. If Lender determines the amount of capital required or expected to be maintained by Lender or any corporation controlling Lender is increased as a result of a Change, then, within fifteen days of demand by Lender, each Borrower jointly and severally agrees to pay Lender the amount necessary to compensate for any shortfall in the rate of return on the portion of such increased capital which Lender determines (in its commercially reasonable discretion) is attributable to this Agreement and any facility hereunder; provided, however, that the Lender shall not demand a payment under this Section 3.6 relating to any time period prior to 90 days before the date on which a demand is made for payment pursuant to this Section. “Change” means (i) any change after the date of this Agreement in the Risk-Based Capital Guidelines (as defined below) or (ii) any adoption of or change in any other law, governmental or quasi-governmental rule, regulation, policy, guideline, interpretation, or directive (whether or not having the force of law) after the date of this Agreement which affects the amount of capital required or expected to be maintained by Lender or any corporation controlling Lender. “Risk-Based Capital Guidelines” means (i) the risk-based capital guidelines in effect in the U.S. on the date of this Agreement, including transition rules, and (ii) the corresponding capital regulations promulgated by regulatory authorities outside the U.S. implementing the July 1988 report of the Basel Committee on Banking Regulation and Supervisory Practices Entitled “International Convergence of Capital Measurements and Capital Standards,” including transition rules, and any amendments to such regulations adopted prior to the date of this Agreement. If the Lender requests compensation under this Section 3.6 or requires any Borrower to pay any additional amount to the Bank pursuant to this Section, then, upon the written request of such Borrower, the Lender shall use reasonable efforts to designate a different lending office for funding or booking its Loans hereunder or to assign its rights and obligations hereunder to another of its offices, branches or affiliates, if, in the commercially reasonable judgment of the Lender, such designation or assignment (A) would eliminate or materially reduce amounts payable pursuant to this Section in the future and (B) would not subject the Lender to any unreimbursed cost or expense and would not otherwise be disadvantageous to the Lender (as determined in its commercially reasonable discretion). Without limitation of the provisions of Section 11.2, the Borrower hereby agrees to pay all reasonable out-of-pocket costs and expenses incurred by the Lender in connection with any such designation or assignment.

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Section 3.7Lender Statements; Survival of Indemnity. Lender shall deliver a written statement to Borrowing Agent as to the amount due, if any, under Section 3.6. Such written statement shall set forth in reasonable detail the calculations upon which Lender determined such amount. Unless otherwise provided herein, the amount specified in the written statement of Lender shall be jointly and severally payable on demand by the Borrowers after receipt by Borrowing Agent of such written statement.

Section 3.8Maximum Interest. If, at any time, the rate of interest contracted for, and computed in the manner provided, in this Agreement (“Applicable Rate”), together with all fees and charges as provided for herein or in any other Loan Document (collectively, the “Charges”), which are treated as interest under applicable law, exceeds the maximum lawful rate (the “Maximum Rate”) allowed under applicable law, it is agreed that such contracting for, charging or receiving of such excess amount was an accidental and bona fide error and the provisions of this Section 3.8 will govern and control. The rate of interest payable hereunder, together with all Charges, shall be limited to the Maximum Rate; provided, however, that any subsequent reduction in the Base Rate shall not reduce the Applicable Rate below the Maximum Rate until the total amount of interest earned hereunder, together with all Charges, equals the total amount of interest which would have accrued at the Applicable Rate if the Applicable Rate had at all times been in effect. If any payment hereunder, for any reason, results in the Borrowers having paid interest in excess of that permitted by applicable law, then all excess amounts theretofore collected by the Lender shall be credited on the principal balance of the Obligations (or, if all sums owing hereunder have been paid in full, refunded to the Borrowers), and the amounts thereafter collectible hereunder shall immediately be deemed reduced, without the necessity of the execution of any new document, so as to comply with applicable law and permit the recovery of the fullest amount otherwise called for hereunder.

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ARTICLE IV — CONDITIONS PRECEDENT

Section 4.1Conditions Precedent. Lender shall not be obligated to make any Loan or advance hereunder (including the first) until (i) it shall have received the documents and items listed in Section 4.1 of Schedule A hereto, each duly executed and delivered in form and substance satisfactory to Lender, in its commercially reasonable discretion (it is understood and agreed that, in the case of the legal opinion delivered pursuant to Section 4.1(h) of Schedule A hereto, such opinion shall be in the form attached hereto as Exhibit C), and (ii) the requirements listed in Section 4.1 of Schedule A hereto have been fulfilled to the satisfaction of Lender, in its commercially reasonable discretion.

Section 4.2Conditions to Subsequent Advances. The obligation of Lender to make any advance subsequent to the initial advance is subject to the following conditions precedent:

(a)Conditions to First Advance. All of the conditions precedent set forth in Section 4.1 have been satisfied.

(b)Borrowing Base Certificate. Lender shall have received from Borrowing Agent a Borrowing Base Certificate executed by Borrowing Agent, prepared as of a date not more than five (5) Business Days prior to the date of the requested advance.

(c)Representations and Warranties. The representations and warranties contained in each of the Loan Documents shall be true in all material respects with the same force and effect as though made on and as of such date.

(d)Defaults and Events of Default. No Default or Event of Default shall have occurred and be continuing.

(e)Adverse Change. No Material Adverse Change (or event or condition that could reasonably be expected to cause or have a Material Adverse Change) has occurred since the date of the Financial Statements.

(f)Legal Restriction. Such advance or financial accommodation shall not be prohibited by any law or regulation or any order of any court or governmental agency or authority.

(g)No Repudiation. No Borrower shall have repudiated or made any anticipatory breach of any of its obligations under any Loan Document.

ARTICLE V — REPRESENTATIONS AND WARRANTIES OF BORROWERS

Section 5.1Representations and Warranties. Each Borrower represents and warrants to Lender as follows:

(a)Organization; Power; Qualification. Each Borrower is the type of entity identified in Section 5.1(a) of Schedule A, duly organized, validly existing and in good standing under the laws of the State of Organization and is authorized to do business in each state in which the nature of its properties or its activities requires such authorization. The jurisdictions in which each Borrower is qualified to do business as a foreign entity are listed on Schedule 5.1(a). Each Borrower’s federal employer identification number and its organizational number with the Secretary of State of the State of Organization (if issued) are as set forth in Section 5.1(a) of Schedule A hereto.

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(b)Authorization; Enforceability. Each Borrower has the power and authority to, and is duly authorized to, execute and deliver the Loan Documents to be executed by such Borrower. All of the Loan Documents to which a particular Borrower is a party, constitute the legal, valid and binding obligations of such Borrower, enforceable in accordance with their terms, except as limited by bankruptcy, insolvency or similar laws of general application relating to the enforcement of creditors’ rights generally.

(c)Subsidiaries; Ownership. Except as shown on Schedule 5.1(c), no Borrower has any subsidiaries. The outstanding capital stock or membership interests of each Borrower have been duly and validly issued and are fully paid and nonassessable, and the significant shareholders/members of each Borrower, and the of the amount of shares of capital stock or membership interests, as applicable, held by such significant shareholders/members, in each case as of the date of this Agreement, are set forth on Schedule 5.1(c).

(d)Conflicts. Neither the execution and delivery of the Loan Documents, nor consummation of any of the transactions therein contemplated nor compliance with the terms and provisions thereof, will contravene any provision of law or any judgment, decree, license, order or permit applicable to any Borrower or will conflict with, or will result in any breach of, any agreement to which any Borrower is a party or by which any Borrower may be bound or subject, or violate any provision of the organizational documents of any Borrower.

(e)Consents, Governmental Approvals, Etc. No governmental approval nor any consent or approval of any third Person (other than those which have been obtained prior to the date hereof) is required in connection with the execution, delivery and performance by any Borrower of the Loan Documents. Each Borrower is in compliance with all applicable governmental approvals and all applicable laws.

(f)Business. Each Borrower is engaged principally in that business described in Section 5.1(b) of Schedule A hereto.

(g)Title; Liens. Except for items described in Schedule 5.1(g) and for Permitted Liens, all of the properties and assets of each Borrower are free and clear of all Liens, and such Borrower has good and marketable title to such properties and assets. Each Lien granted, or intended to be granted, to Lender pursuant to the Loan Documents is a valid, enforceable, perfected, first priority Lien and security interest.

(h)Indebtedness and Guaranties. With respect to each Borrower, set forth on Schedule 5.1(h) is a complete and correct listing of all of such Borrower’s (i) Indebtedness for Money Borrowed, and (ii) guaranties and other contingent obligations.

(i)Suits, Actions, Etc. Except as disclosed on Schedule 5.1(i), no litigation, arbitration, governmental investigation, proceeding or inquiry is pending or, to the knowledge of any Borrower, threatened against any Borrower or that could affect any of the Collateral.

(j)Tax Returns and Payments. All tax returns required to be filed by any Borrower in any jurisdiction have been filed and all taxes (including property taxes) have been paid prior to the time that such taxes could give rise to a lien therefor.

(k)Financial Condition. Borrowers have delivered to Lender copies of the Financial Statements. The Financial Statements fairly present the financial condition of Borrowers as of their respective dates and have been prepared in accordance with GAAP (except, with respect to the unaudited statements, for the presentation of footnotes and for applicable normal year-end audit adjustments). There is no Indebtedness of any Borrower which is not reflected in the Financial Statements, and no event or circumstance has occurred since the date of the Financial Statements which has had or could have or result in a Material Adverse Change.

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(l)ERISA. Neither any Borrower nor any Related Company maintains or contributes to any Benefit Plan other than those listed on Schedule 5.1(l). Further, (i) no Reportable Event (as defined in ERISA) has occurred and is continuing with respect to any Benefit Plan, and (ii) the PBGC has not instituted proceedings to terminate any Benefit Plan. Each Borrower and each Related Company has satisfied the minimum funding standards under ERISA with respect to its Benefit Plans and is in compliance in all material respects with the presently applicable provisions of ERISA and the Code, and has not incurred any liability to the PBGC or a Benefit Plan under Title IV of ERISA other than a liability to the PBGC for premiums under Section 4007 of ERISA.

(m)Compliance; Defaults. Each Borrower is in material compliance with all applicable statutes and governmental rules and regulations (including, without limitation, all statutes and regulations governing or otherwise relating to the production, manufacture, storage, sale, distribution and/or other handling of beer or other intoxicating beverages that apply to such Borrower by virtue of the nature of its business). No Default or Event of Default has occurred and is continuing.

(n)Borrowing Base Reports. All accounts and inventory included in any Borrowing Base Certificate constitute Eligible Accounts or Eligible Inventory, as appropriate, except as disclosed in such Borrowing Base Certificate.

(o)Location of Tangible Collateral. Set forth on Schedule 5.1(o) is (i) the location and address where all inventory and other tangible Collateral is located, and (ii) if the facility is leased or is a third party warehouse or processor location, the name of the landlord or such third party warehouseman or processor.

(p)Place of Business. The place of business of each Borrower (or, if a Borrower has more than one place of business, its chief executive office) is at the address or addresses set forth on Schedule 5.1(p) and the books and records relating to the accounts are located at the address or addresses set forth on Schedule 5.1(p).

(q)Corporate and Fictitious Names; Trade Names. Except as disclosed on Schedule 5.1(q), no Borrower has, during the preceding five (5) years, (i) been known as or used any other corporate, fictitious or trade names (excluding trade names used solely in relation to the Borrowers’ contract and licensed brewing operations), (ii) been the surviving corporation of a merger or consolidation, or (iii) acquired all or substantially all of the assets of any Person.

(r)Intellectual Property. Each Borrower owns or possesses all Intellectual Property required to conduct its business as now and presently planned to be conducted without, to its knowledge, conflict with the rights of others, and Schedule 10.6 lists all Intellectual Property owned by any Borrower.

(s)Payroll Taxes. Each Borrower has made all payroll tax deposits for all of its employees on or before the date when due.

(t)Other Taxes. Each Borrower has filed all federal, state and local tax returns required to be filed and has paid or made provision for the payment of all taxes due and payable pursuant to such returns and pursuant to any assessments made against it or any of its property and all other taxes, fees and other charges imposed on it or any of its property by any governmental authority (other than taxes, fees or charges the amount or validity of which is currently being contested in good faith by appropriate proceedings and with respect to which reserves in accordance with GAAP have been provided on the books of the applicable Borrower). No tax Liens have been filed and no material claims are being asserted with respect to any such taxes, fees or charges. The charges, accruals and reserves on the books of the Borrowers in respect of taxes and other governmental charges are adequate.

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(u)Solvency. Each Borrower is Solvent. No transfer of property is being made by any Borrower and no obligation is being incurred by any Borrower in connection with the transactions contemplated by this Agreement or the other Loan Documents with the intent to hinder, delay or defraud either present or future creditors of such Borrower.

(v)Inventory; PACA and Agricultural Lien Matters. Except for Liens arising in favor of warehousemen that are party to a warehouse or bailee letter in favor of the Lender, no processing, packaging or other work is performed by any Person with respect to inventory of any Borrower giving rise to a Lien in favor of such Person for amounts due for the processing, packaging or other work performed. No Borrower has received written notice from any unpaid seller, supplier, cooperative or agent of such Person’s intent to preserve the benefits of the trust created under PACA or any Agricultural Lien Statute, nor has any action been commenced by (i) any beneficiary of the trust created under PACA or any Agricultural Lien Statute to enforce payment from such trust, or (ii) U.S. Department of Agriculture or other governmental body or regulatory authority against any Borrower to enforce payment from the trust created under PACA or any Agricultural Lien Statute. No Borrower has received (a) any direct notice from any secured party claiming a security interest or agricultural lien in any “farm products” (as defined in the UCC) purchased by such Borrower, or (b) any notice from any eligible claimant or other Person entitled to protection or otherwise afforded rights under an Agricultural Lien Statute, nor is any Borrower aware of any noncompliance with the Food Security Act or any Agricultural Lien Statute on the part of any Person from whom such Borrower has purchased Inventory. Neither Borrower is a “Dealer” as defined in Article 20 of the New York Agriculture and Markets Law, and, as such, neither Borrower maintains a license as a Dealer under such statute. Neither Borrower is a “Processor” as defined in Section 55407 of Food and Agricultural Code of California.

Section 5.2Survival of Representations. All representations and warranties by Borrowers (or any of them) herein shall be deemed to have been made on the date hereof and the date of each advance of a Loan.

ARTICLE VI — SECURITY INTEREST AND COLLATERAL COVENANTS

Section 6.1Security Interest. To secure the payment and performance of the Obligations, each Borrower hereby mortgages, pledges and assigns to Lender all of the Collateral and grants to Lender a continuing security interest and Lien in and upon all of the Collateral.

Section 6.2Collection of Accounts.

(a)If any Borrower receives any monies, checks, notes, drafts, and other payments relating to or constituting proceeds of accounts or of any other Collateral, such Borrower shall immediately deposit such items in kind in a Blocked Account, fully-endorsed. Each Borrower shall advise each Account Debtor that remits amounts payable on the accounts, and any other Person that remits amounts to such Borrower in respect of any of the Collateral, by wire transfer or ACH to make such remittances directly to a Blocked Account.

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(b)Each Borrower shall enter into a Lockbox agreement and shall cause all moneys, checks, notes, drafts and other payments relating to or constituting proceeds of accounts, or of any other Collateral, to be forwarded to a Lockbox for deposit in a Blocked Account in accordance with the procedures set out in the corresponding Blocked Account Agreement. In particular, each Borrower will (i) advise each Account Debtor to address to a Lockbox specified by Lender all remittances with respect to amounts payable on all accounts, and (ii) stamp all invoices relating to any such amounts with a legend satisfactory to Lender indicating that payment is to be made to such Borrower via such specified Lockbox.

(c)Borrowers and Lender shall cause all collected balances in each Blocked Account to be transmitted daily to the Lender by wire transfer or depository transfer check or Automated Clearing House transfer in accordance with the procedures set forth in the corresponding Blocked Account Agreement.

(d)Amounts transmitted to the Lender pursuant to subsection (c) above shall be credited to the payment of the Obligations three (3) Business Days after the date of actual receipt of such amounts by the Lender. The delay in applying funds received by the Lender to the Obligations shall in all respects be limited so that interest on the Obligations is at all times less than interest calculated at the Maximum Rate.

(e)Any payments which are received by any Borrower (including any payment evidenced by a promissory note or other instrument) shall be held in trust for Lender and shall be (i) deposited in the Blocked Account, or (ii) delivered to Lender, as promptly as possible in the exact form received, together with any necessary endorsements.

Section 6.3Verification and Notification. Lender shall have the right at any time at Borrowers’ expense and in its own name, any Borrower’s name, or an assumed name (a) to verify the validity, amount or any other matter relating to any accounts, and (b) to notify Account Debtors to make payment of all amounts directly to Lender and enforce collection of any such accounts and to adjust, settle or compromise the amount or payment thereof, in the same manner as the applicable Borrower.

Section 6.4Disputes, Returns and Adjustments.

(a)Each Borrower shall provide Lender with prompt written notice of amounts in excess of $25,000 that are in dispute between any Account Debtor and such Borrower.

(b)Each Borrower shall notify Lender promptly of all returns and credits in respect of any account, which notice shall specify the accounts affected and be included in the Borrowing Base Certificate delivered to Lender in accordance with Section 8.3(d). Each Borrower shall notify Lender promptly of any pending return or credit in excess of $15,000 and shall specify the account affected, the related Account Debtor and the goods to be returned.

(c)Each Borrower may, in the ordinary course of business and prior to a Default or an Event of Default, grant any extension of time for payment of any account or compromise, compound or settle the same for less than the full amount thereof or release wholly or partly any Person liable for the payment thereof or allow any credit or discount whatsoever thereon, provided that (i) such Borrower shall not have taken any such action that results in the reduction of more than ten percent (10%) of the amount payable with respect to any account or of more than ten percent (10%) of the amount payable with respect to all accounts of such Borrower in any fiscal year, and (ii) such Borrower shall promptly notify Lender (but not less often than ten (10) days after the end of each month) of the amount of such adjustments and the account(s) affected thereby.

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Section 6.5Invoices. Upon request, each Borrower shall deliver to Lender copies of customers’ invoices or the equivalent, original shipping and delivery receipts or other proof of delivery, customers’ statements, the original copy of all documents, including, without limitation, repayment histories and present status reports, relating to accounts and such other documents and information relating to the accounts as Lender shall specify.

Section 6.6Ownership; Defense of Title.

(a)Each Borrower shall defend its title in and to the Collateral and shall defend the security interest of Lender in the Collateral against the claims and demands of all Persons.

(b)Each Borrower shall (i) protect and preserve all properties material to its business, including Intellectual Property, and maintain all tangible property in good and workable condition in all material respects, with reasonable allowance for wear and tear, and (ii) from time to time make or cause to be made all needed and appropriate repairs, renewals, replacements, and additions to such properties necessary for the conduct of its business.

Section 6.7Location of Offices and Collateral; Organizational Information. No Borrower shall change the location of its place of business (or, if it has more than one place of business, its chief executive office) or the place where it keeps its books and records relating to the Collateral or change its name, identity, corporate structure or jurisdiction of organization without giving Lender at least thirty (30) days’ prior written notice thereof (provided, however, that such Borrower may change its corporate structure or jurisdiction of organization with less than thirty (30) days prior written notice to Lender if Lender consents in writing, which consent shall not be unreasonably withheld). All inventory, other than inventory in transit to any such location, shall at all times be kept by the applicable Borrower at one or more of the locations set forth in Schedule 5.1(o).

Section 6.8Records Relating to Collateral.

(a)Each Borrower shall at all times keep and maintain (i) complete and accurate records of inventory on a basis consistent with past practices of such Borrower, itemizing and describing the kind, type and quantity of inventory and such Borrower’s cost therefor and a current price list for such inventory, (ii) complete and accurate records of all other Collateral, (iii) a list of all customers of such Borrower with names, addresses and phone numbers, (iv) a list of all distributors for each product line included in such Borrower’s inventory, (v) a current customer open order report against current inventory, and (vi) a current list of all salesmen and employees of such Borrower. Data bases containing the foregoing shall at all times be accessible and available to Lender.

(b)Each Borrower will conduct a physical count of all inventory, wherever located, at least annually and make adjustments to its books and records to reflect the findings of such count and such adjustments shall be immediately reported to Lender.

Section 6.9Inspection. Lender (by any of its officers, employees, or agents) shall have the right at any time or times to (a) visit the properties of each Borrower, inspect the Collateral and the other assets of each Borrower and inspect and make extracts from the books and records of each Borrower, all during customary business hours, (b) discuss each Borrower’s business, financial condition, results of operations and business prospects with such Borrower’s (i) principal officers, (ii) independent accountants and other professionals providing services to such Borrower, and (iii) any other Person (except that any such discussion with any third parties shall be conducted only in accordance with Lender’s standard operating procedures relating to the maintenance of confidentiality of confidential information of such Borrower), (c) verify the amount, quantity, value, and condition of, or any other matter relating to, any of the Collateral and in this connection review, audit and make extracts from all records and files related to any of the Collateral, and (d) access and copy the records, lists, reports and data bases referred to in Section 6.8; provided, however, that so long as no Default or Event of Default has occurred and is continuing, Lender agrees to provide at least three (3) business days prior notice to Borrowers before exercising any of its inspection or visitation rights under this Section. Each Borrower will deliver to the Lender upon request any instrument necessary to authorize an independent accountant or other professional to have discussions of the type outlined above with the Lender or for the Lender to obtain records from any service bureau maintaining records on behalf of such Borrower.

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Section 6.10Maintenance. Each Borrower shall maintain all equipment of such Borrower in good and working order and condition, reasonable wear and tear accepted.

Section 6.11Power of Attorney. Each Borrower hereby appoints Lender as its attorney, with power (a) to endorse the name of such Borrower on any checks, notes, acceptances, money orders, drafts or other forms of payment or security that may come into Lender’s possession, and (b) to sign the name of such Borrower on any invoice or bill of lading relating to any accounts, inventory or other Collateral. Each Borrower also authorizes Lender to file financing statements, without such Borrower’s signature, covering part or all of the Collateral in such jurisdictions as Lender shall determine to be advisable.

ARTICLE VII — AFFIRMATIVE COVENANTS

So long as this Agreement shall be in effect or any of the Obligations shall be outstanding, each Borrower covenants and agrees as follows:

Section 7.1Preservation of Corporate Existence and Similar Matters. Each Borrower shall preserve and maintain its existence as a corporation or limited liability company, as the case may be, and qualify and remain qualified as a foreign entity authorized to do business in each jurisdiction in which the character of its properties or the nature of its business requires such qualification or authorization.

Section 7.2Compliance with Applicable Law. Each Borrower shall comply with all applicable laws (including, without limitation, PACA, the Food Security Act, any applicable Agricultural Lien Statute, and any applicable statute, regulation or ordinance governing or otherwise relating to (a) ecology, human health or the environment, or (b) the production, manufacture, storage, sale, distribution and/or other handling of beer or other intoxicating beverages).

Section 7.3Conduct of Business. Each Borrower shall engage only in substantially the same businesses conducted by such Borrower on the date hereof.

Section 7.4Payment of Taxes and Claims. Each Borrower shall pay or discharge when due (a) all taxes, assessments and governmental charges imposed upon it or its properties and (b) all lawful claims which, if unpaid, might become a Lien on any properties of such Borrower, except that this Section 7.4shall not require the payment or discharge of any such tax, assessment, charge, levy or claim which is being contested in good faith by appropriate proceedings and for which adequate reserves have been established on the appropriate books of such Borrower.

Section 7.5Accounting Methods and Financial Records. Each Borrower shall maintain a system of accounting, and keep such books, records and accounts (which shall be true and complete), as may be required or as may be necessary to permit the preparation of financial statements in accordance with GAAP consistently applied.

Section 7.6Use of Proceeds. Each Borrower shall (a) use the proceeds of the Loans for the repayment of its outstanding bank debt and for working capital and general business purposes, and (b) not use any part of such proceeds to purchase or carry, or to reduce or retire or refinance any credit incurred to purchase or carry, any margin stock (within the meaning of Regulation U of the Board of Governors of the Federal Reserve System) or for any other purpose which would violate Regulation U or Regulation T or X of such Board of Governors or for any other purpose prohibited by law or by the terms and conditions of this Agreement.

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Section 7.7Hazardous Waste and Substances; Environmental Requirements. Each Borrower shall comply with all occupational health and safety laws and Environmental Laws.

Section 7.8Accuracy of Information. All written information, reports, statements and other papers and data furnished to Lender shall be, at the time the same is so furnished, complete and correct in all material respects.

Section 7.9Revisions or Updates to Schedules. Should any of the information or disclosures provided on any of the Schedules attached hereto become outdated or incorrect in any material respect, Borrowers shall provide promptly to Lender such revisions or updates to such Schedule(s) as may be necessary or appropriate to update or correct and update such Schedule(s). Notwithstanding the foregoing, the delivery to Lender of a revised or updated schedule shall not constitute a waiver of, or consent to, any Default or Event of Default arising as a result of any erroneous or incorrect information provided in any Schedule previously delivered to Lender.

Section 7.10ERISA. Each Borrower shall provide to Lender, as soon as possible and in any event within 30 days after the date that (a) any Termination Event with respect to a Benefit Plan of such Borrower has occurred or will occur, (b) the aggregate present value of the Unfunded Vested Liabilities under all Benefit Plans of such Borrower has increased to an amount in excess of $0, or (c) such Borrower is in “default” (as defined in Section 4219(c)(5) of ERISA) with respect to payments to a Multiemployer Plan required by reason of its complete or partial withdrawal (as described in Section 4203 or 4205 of ERISA) from such Multiemployer Plan, a certificate of the president or the chief financial officer of such Borrower setting forth the details of such of the events described in clauses (a) through (c) as applicable and the action which is proposed to be taken with respect thereto and, simultaneously with the filing thereof, copies of any notice or filing which may be required by the PBGC or other agency of the United States government with respect to such of the events described in clauses (a) through (c) as applicable.

Section 7.11Insurance. Each Borrower shall keep or cause to be kept adequately insured by financially sound and reputable insurers all of its property usually insured by Persons engaged in the same or similar businesses. Without limiting the foregoing, each Borrower shall insure the Collateral of such Borrower against loss or damage by fire, theft, burglary, pilferage, loss in transit, business interruption, and such other hazards as usual and customary in such Borrower’s industry or as Lender may specify in amounts and under policies by insurers acceptable to Lender, and all premiums thereon shall be paid by such Borrower and copies of the policies delivered to Lender. If any Borrower fails to do so, Lender may procure such insurance and charge the cost to such Borrower’s account. Each policy of insurance covering the Collateral shall provide that at least ten (10) days prior written notice of cancellation or notice of lapse must be given to Lender by the insurer. All insurance policies required under this Section 7.11 shall name Lender as an additional named insured and as a loss payee. Any proceeds of insurance referred to in this Section 7.11 which are paid to Lender shall be, at the option of Lender in its commercially reasonable discretion, either (i) applied to rebuild, restore or replace the damaged or destroyed property, or (ii) applied to the payment of the Obligations (or, if any Default or Event of Default has occurred and is continuing, to the prepayment of the Obligations).

Section 7.12Payroll Taxes. Each Borrower shall at all times make all payroll tax deposits for all of its employees on or before the date when due.

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Section 7.13Notice of Certain Matters. Each Borrower shall provide to Lender prompt notice of (a) the commencement, to the extent such Borrower is aware of the same, of all actions and proceedings in any court against any Borrower or any of the Collateral, (b) any amendment of any of the organizational documents of any Borrower, including but not limited to articles of incorporation or bylaws, (c) any change in the business, financial condition, results of operations or business prospects of any Borrower and any change in the executive officers of any Borrower (including, without limitation, if either (x) Yashpal Singh shall for any reason cease to hold the office of President and Chief Executive Officer of Mendocino Brewing, or (y) N. Mahadevan shall for any reason cease to hold the office of Chief Financial Officer of Mendocino Brewing), and (d) any (i) Default or Event of Default, or (ii) event that would constitute a default or event of default by any Borrower under any Material Agreement (other than this Agreement) to which such Borrower is a party. In addition, each Borrower will promptly notify Bank in writing upon receiving from any unpaid seller, supplier or agent any written notice of intent to preserve the benefits of the trust created under PACA or any Agricultural Lien Statute, the commencement of any action by any beneficiary of the trust created under PACA or any Agricultural Lien Statute to enforce payment from such trust, or any action commenced by the U.S. Department of Agriculture or any governmental body or regulatory authority against Borrower to enforce payment from the trust created under PACA or any Agricultural Lien Statute. In addition, each Borrower will promptly notify Lender in writing (a) upon receiving any direct notice from any secured party claiming a security interest or agricultural lien in any “farm products” (as defined in the UCC) purchased by such Borrower, (b) upon receiving any notice from any eligible claimant or other Person entitled to protection under an Agricultural Lien Statute, (c) upon learning that any Person from whom such Borrower has purchased Inventory has failed to comply with the Food Security Act or any Agricultural Lien Statute, and (d) upon receiving any written notice or other written communication from any licensing authority under any Agricultural Lien Statute. In addition, so long as any of UBH, UBA or Inversiones remain significant shareholders, directly or indirectly, of Mendocino Brewing, Mendocino Brewing agrees that it will promptly notify Lender in writing upon learning of the occurrence of any of the following events or circumstances:

(A)UBH, UBA or Inversiones shall (i) apply for or consent to the appointment of a receiver, trustee, custodian, intervenor or liquidator of such Person or of all or a substantial part of such Person’s assets, (ii) file a voluntary petition in bankruptcy, (iii) admit in writing that such Person is unable to pay its debts as they become due, (iv) make a general assignment for the benefit of creditors, (v) file a petition or answer seeking reorganization or an arrangement with creditors or to take advantage of any bankruptcy or insolvency proceeding, or (vii) take corporate, company or partnership action for the purpose of effecting any of the foregoing; or

(B)An involuntary petition or complaint shall be filed against UBH, UBA or Inversiones seeking bankruptcy or reorganization of such Person or the appointment of a receiver, custodian, trustee, intervenor or liquidator of such Person, or of all or substantially all of such Person’s assets; or an order, order for relief, judgment or decree shall be entered by any court of competent jurisdiction or other competent authority approving a petition or complaint seeking reorganization of such Person or appointing an intervenor or liquidator of such Person, or of all or substantially all of such Person’s assets.

Section 7.14Additional Affirmative Covenants. The covenants set forth in Section 7.14 of Schedule A hereto are incorporated herein by reference.

ARTICLE VIII — FINANCIAL AND COLLATERAL REPORTING

So long as this Agreement shall be in effect or any of the Obligations shall be outstanding, each Borrower covenants and agrees as follows:

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Section 8.1Financial Statements.

(a)Audited Year-End Statements. As soon as available, but in any event within one hundred twenty (120)days after the end of each fiscal year of Borrowers, Borrowers shall furnish to Lender copies of the audited consolidated and consolidating balance sheet of Mendocino Brewing and its subsidiaries as of the end of such fiscal year and the related audited consolidated and consolidating statements of income, shareholders’ equity and cash flow for such fiscal year, in each case setting forth in comparative form the figures for the previous year of Mendocino Brewing and its subsidiaries, together with an unqualified audit report certified by independent certified public accountants selected by Borrowers and acceptable to Lender in its commercially reasonable discretion; provided that consolidating statements need not be certified by such accountants. In addition, on or before such date, Borrowers shall provide Lender with copies of all management reports received from their certified public accountants.

(b)Monthly Financial Statements. As soon as available, but in any event within twenty (20) days after the end of each month, Borrowers shall furnish to Lender copies of the unaudited consolidated and consolidating balance sheet of Mendocino Brewing and its U.S. subsidiaries as of the end of such month and the related unaudited consolidated and consolidating income statement and statement of cash flow of Mendocino Brewing and its U.S. subsidiaries for such month and for the portion of the fiscal year of Borrowers through such month, certified by the chief financial officer of Mendocino Brewing as presenting fairly the financial condition and results of operations of Mendocino Brewing and its subsidiaries as of the date thereof and for the periods ended on such date, subject to normal year-end adjustments.

(c)Projected Financial Statements. At least thirty (30) but not more than sixty (60) days prior to the end of each fiscal year of Borrowers, Borrowers shall furnish to Lender forecasted financial statements, prepared by Borrowers’ management, consisting of consolidated and consolidating balance sheets, cash flow statements and income statements of Mendocino Brewing and its U.S. subsidiaries, reflecting projected borrowing hereunder and setting forth the assumptions on which such forecasted financial statements were prepared, covering the one-year period until the next fiscal year end.

All such financial statements shall be complete and correct in all material respects and all such financial statements referred to in clauses (a) and (b) shall be prepared in accordance with GAAP (except, with respect to interim financial statements, for the omission of footnotes) applied consistently throughout the periods reflected therein. Further, all such financial statements shall be in a form acceptable to Lender. It is expressly understood and agreed that, if the financial statements referred to in clauses (a) and (b) above combine and consolidate the financial condition and results of operation of the Borrowers with those of any other Person, or if such financial statements do not combine and consolidate the financial condition and results of operation of the Borrowers, then the Borrowers, in addition to such financial statements referred to above, shall deliver to the Lender with such financial statements a separate set of financial statements for the same periods (and, in the case of the financial statements referred to in clause (a), prepared by the same independent certified public accountants) which combine and consolidate solely the financial condition and results of operation of the Borrowers.

Section 8.2Compliance Certificate. Together with each delivery of financial statements required by Sections 8.1(a) and (b), Borrowers shall furnish to Lender a certificate of each Borrower’s president or chief financial officer in the form of Exhibit B.

Section 8.3Collateral Information and Reports.

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(a)Schedules of Accounts. Within twenty (20) days after the end of each month, Borrowers shall furnish to Lender a Schedule of Accounts listing all accounts of each Borrower as of the last Business Day of such month setting forth (i) the name of each Account Debtor together with account balances detailed by invoice number, amount (and any applicable rebate or discount), invoice date and terms, (ii) aging of all accounts setting forth accounts thirty (30) days past the invoice date or less, accounts over thirty (30) days past the invoice date but less than sixty-one (61) days past the invoice date, accounts over sixty (60) days past the invoice date but less than ninety-one (91) days past the invoice date, accounts over ninety (90) days past the invoice date and less than one hundred twenty-one (121) days past the invoice date and accounts over one hundred twenty (120) days past the invoice date, and (iii) a reconciliation of the Schedule of Accounts to the Borrowing Base Certificate as of the most recent month end and to each Borrower’s general ledger as of such month end.

(b)Schedules of Accounts Payable. Within twenty (20) days after the end of each month, Borrowers shall furnish to Lender a schedule of accounts payable of each Borrower as of the last Business Day of such month setting forth (i) a detailed aged trial balance of all of each Borrower’s then existing accounts payable, specifying the name of and the balance due to each creditor and (ii) a reconciliation to the schedule of accounts payable to each Borrower’s general ledger as of such month end. Together with the above-described accounts payable agings, each Borrower shall deliver to the Lender (i) a listing of all Grower Payables (if any) of such Borrower, certified as true and complete by a duly authorized officer of such Borrower, which listing may be relied upon by the Lender in determining the Grower Payables Reserve, and (b) a listing of all PACA Payables (if any) of such Borrower, certified as true and complete by a duly authorized officer of such Borrower, which listing may be relied upon by Bank in determining the PACA Reserve.

(c)Schedule of Inventory. Within twenty (20) days after the end of each month, Borrowers shall furnish to Lender (i) (A) a Schedule of Inventory, based upon each Borrower’s perpetual inventory, as of the last Business Day of such month, itemizing and describing the kind, type, quantity and location of all inventory of each Borrower and the cost thereof with a summary of inventory by category, and (B) a detailed statement of all inventory that is not located on the premises described on Schedule 5.1(o), in each case in form and substance acceptable to Lender, and (ii) a reconciliation of the Schedule of Inventory to the Borrowing Base Certificate as of the most recent month end and to each Borrower’s general ledger as of such month end.

(d)Borrowing Base Certificate. Not less often than weekly, Borrowers shall furnish to Lender a Borrowing Base Certificate prepared as of the close of business on the last Business Day of such week, along with supporting documentation, in form and substance satisfactory to Lender (including but not limited to information on sales, credits, collections and adjustments).

(e)Certification. Each of the schedules and certificates delivered to Lender by Borrowers pursuant to this Section 8.3 shall be in a form acceptable to Lender in its commercially reasonable discretion and shall be signed and certified by the president, chief financial officer or treasurer of each Borrower to be true, correct and complete as of the date indicated thereon. In the event any of such schedules or certificates are delivered electronically or without signature, such schedules and/or certificates shall, by virtue of their delivery, be deemed to have been signed and certified by the president of each Borrower to be true, correct and complete as of the date indicated thereon.

(f)Other Information. Lender may, in its commercially reasonable discretion, from time to time require Borrowers to deliver the schedules and certificates described in Section 8.3 more or less often and on different schedules than specified in such Section. Borrowers shall also furnish to Lender such other additional information as Lender may from time to time request in its commercially reasonable discretion.

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ARTICLE IX — NEGATIVE COVENANTS

So long as this Agreement shall be in effect or any of the Obligations shall be outstanding, each Borrower covenants and agrees as follows:

Section 9.1Financial Covenants. Refer to Section 9.1 of Schedule A hereto.

Section 9.2Prohibited Distributions and Payments, Etc. No Borrower shall, directly or indirectly, declare or make any Prohibited Distribution or Prohibited Payment without the prior written consent of Lender, which consent shall not be unreasonably withheld, provided, that so long as (i) a Borrower is a limited liability company and has elected to be taxed as a partnership for Federal income tax purposes or has a valid election to be taxed as an “S corporation” for Federal income tax purposes and (ii) no Default or Event of Default has occurred or would result therefrom, such Borrower may pay dividends or make distributions to its shareholders or members (as applicable) in an aggregate amount not greater than the amount necessary for such shareholders or members to pay their actual state and United States federal income tax liabilities in respect of taxable income earned by such Borrower.

Section 9.3Indebtedness. Except as disclosed on Schedule 5.1(h), no Borrower shall, directly or indirectly, create, assume, or otherwise become or remain obligated in respect of, or permit or suffer to exist or to be created, assumed or incurred or to be outstanding, any Indebtedness, except for Permitted Indebtedness. Without limiting the generality of the foregoing, Borrowers specifically covenant and agree that they will not, directly or indirectly, create, assume or otherwise become or remain obligated in respect of, or permit or suffer to exist or to be created, assumed or incurred or to be outstanding, any Indebtedness owed to any subsidiary or other Affiliate of any Borrower, other than Indebtedness that is expressly contemplated by and subject to a Subordination Agreement (in form and substance acceptable to the Lender in its commercially reasonable discretion) executed by the holder(s) of such Indebtedness in favor of the Lender.

Section 9.4Liens. No Borrower shall, directly or indirectly, create, assume or permit or suffer to exist or to be created or assumed any Lien on any of the property or assets of such Borrower, real, personal or mixed, tangible or intangible, except for Permitted Liens or the liens identified on Schedule 5.1(g).

Section 9.5Loans. No Borrower shall make any loans or advances to or for the benefit of any officer, director, manager, shareholder, member, or partner of any Borrower except advances for routine expense allowances in the ordinary course of business. No Borrower shall make or suffer to exist any loans or advances to or for the benefit of any subsidiary of other Affiliate of any Borrower. No Borrower shall make any payment on any obligation owing to any officer, director, manager, shareholder, member, partner or Affiliate of any Borrower, except payments of salary and payments to the holder of any Subordinated Indebtedness, if any, in accordance with the terms of the subordination agreement among such subordinated creditor, such Borrower, and Lender.

Section 9.6Merger, Consolidation, Sale of Assets, Acquisitions. No Borrower shall, directly or indirectly, merge or consolidate with any other Person or sell, lease or transfer or otherwise dispose of any assets to any Person (other than sales of inventory in the ordinary course of business) or acquire all or substantially all of the assets of any Person or the assets constituting the business or a division or operating unit of any Person.

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Section 9.7Transactions with Affiliates. No Borrower shall, directly or indirectly, effect any transaction with any Affiliate on a basis less favorable to such Borrower than would be the case if such transaction had been effected with a Person not an Affiliate, provided that no Borrower shall enter into any lease with any Affiliate.

Section 9.8Licensure. No Borrower is required to maintain a license, and no Borrower maintains a license, under either PACA or any Agricultural Lien Statute.

Section 9.9Warehouse Receipts. Each Borrower represents that it does not issue, and covenants that it will not issue, any negotiable warehouse receipts, nonnegotiable warehouse receipts, scale weight tickets or load slips, or any other evidence of ownership or document of title, covering any hops, malt or other grain products or derivatives, whether located at a facility owned or leased by a Borrower or otherwise, that are or were included within such Borrower’s inventory.

Section 9.10Guaranties. No Borrower shall, directly or indirectly, either (a) endorse, guarantee, contingently agree to purchase or to provide funds for the payment of, or otherwise become contingently liable upon, any obligation of any other Person, except by the endorsement of negotiable instruments for deposit or collection (or similar transactions) in the ordinary course of business, or (b) agree to maintain the net worth or working capital of, or provide funds to satisfy any other financial test applicable to, any other Person.

Section 9.11Operating Leases. No Borrower shall, directly or indirectly, suffer to exist or enter into any lease other than a Capitalized Lease which would cause the annual payment obligations of such Borrower under all leases (other than Capitalized Leases and the real property leases described on Schedule 9.11 attached hereto) to exceed $50,000in the aggregate.

Section 9.12Benefit Plans. No Borrower shall, directly or indirectly, permit, or take any action which would cause, the Unfunded Vested Liabilities under all Benefit Plans of such Borrower to exceed $0.

Section 9.13Sales and Leasebacks. No Borrower shall, directly or indirectly, enter into any arrangement with any Person providing for the leasing from such Person of real or personal property which has been or is to be sold or transferred, directly or indirectly, by such Borrower to such Person.

Section 9.14Investments. No Borrower shall, directly or indirectly, make or acquire any Investment without the prior written consent of the Lender, which consent shall not be unreasonably withheld; provided, however, each Borrower may make Permitted Investments.

Section 9.15Amendments. No Borrower shall amend or modify, or permit any amendment or modification to, whether orally, in writing, or otherwise, any agreement evidencing or relating to Subordinated Indebtedness that would affect the validity or enforceability of the subordination agreement referred to in Section 4.11(q) of Schedule A hereto, without the prior written consent of the Lender.

Section 9.16USA Patriot Act. No Borrower shall (a) be or become subject at any time to any law, regulation, or list of any government agency (including, without limitation, the U.S. Office of Foreign Asset Control list) that prohibits or limits Lender from making any advance or extension of credit to such Borrower or from otherwise conducting business with such Borrower or (b) fail to provide documentary and other evidence of such Borrower’s or its officers’ or managers’ identities as may be requested by Lender at any time to enable Lender to verify such Borrower’s identity or to comply with any applicable law or regulation, including, without limitation, Section 326 of the USA Patriot Act of 2001, 31 U.S.C. §5318.

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Section 9.17Additional Negative Covenants. The covenants set forth in Section 9.16 of Schedule A hereto are incorporated herein by reference.

ARTICLE X — DEFAULT

Section 10.1Events of Default. Each of the following events shall constitute an Event of Default:

(a)The failure or refusal of any Borrower to make any payment of the Obligations when due;

(b)The failure of any Borrower to perform properly any covenant in this Agreement or in any of the other Loan Documents;

(c)The occurrence of any default or event of default under any of the other Loan Documents;

(d)Any representation or warranty contained herein or in any of the other Loan Documents is false or misleading in any material respect when made or deemed made;

(e)Any Borrower shall (i) apply for or consent to the appointment of a receiver, trustee, custodian, intervenor or liquidator of such Borrower or of all or a substantial part of such Borrower’s assets, (ii) file a voluntary petition in bankruptcy, (iii) admit in writing that such Borrower is unable to pay its debts as they become due, (iv) make a general assignment for the benefit of creditors, (v) file a petition or answer seeking reorganization or an arrangement with creditors or to take advantage of any bankruptcy or insolvency proceeding, or (vii) take corporate, company or partnership action for the purpose of effecting any of the foregoing;

(f)With respect to any Borrower, either (i) an involuntary petition or complaint shall be filed against such Borrower seeking bankruptcy or reorganization of such Borrower or the appointment of a receiver, custodian, trustee, intervenor or liquidator of such Borrower, or of all or substantially all of such Borrower’s assets or (ii) an order, order for relief, judgment or decree shall be entered by any court of competent jurisdiction or other competent authority approving a petition or complaint seeking reorganization of such Borrower or appointing an intervenor or liquidator of such Borrower, or of all or substantially all of such Borrower’s assets; or (iii) such Borrower shall become subject to a proceeding ancillary commenced in connection with any insolvency proceeding involving UBI, UBSN or any other foreign Affiliate of such Borrower;

(g)Any money judgment is rendered against any Borrower that is not paid within thirty (30) days after the entry thereof (or, if later, by the date on which such payment is due pursuant to a written settlement agreement duly executed by or on behalf of the applicable judgment creditor), or the failure, within a period of ten (10) days after the commencement thereof, to have discharged any attachment, sequestration, or similar proceedings against any Borrower’s assets;

(h)Lender shall cease to have a valid, perfected and first priority Lien on any of the Collateral, except as otherwise expressly permitted herein or consented to in writing by Lender;

(i)Any failure by UBI, UBSN or any other foreign Affiliate owned, directly or indirectly, by any Borrower to consistently observe all necessary and proper corporate formalities consistent with its status as an independent legal entity; or

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(j)Any other event described in Section 10.1 of Schedule A hereto shall occur.

Section 10.2Remedies.

(a)Automatic Acceleration and Termination of Facilities. Upon the occurrence of an Event of Default specified in Section 10.1(e) or (f)(ii), (i) the principal of and the accrued interest on the Loans at the time outstanding, and all other amounts owed to Lender under this Agreement or any of the Loan Documents and all other Obligations, shall thereupon become due and payable without presentment, demand, protest, notice of protest and non-payment, notice of default, notice of acceleration or intention to accelerate, or other notice of any kind, all of which are expressly waived, anything in this Agreement or any of the Loan Documents to the contrary notwithstanding, and (ii) the commitment of Lender to make Loans hereunder shall immediately terminate.

(b)Other Remedies. Without limiting the terms of Section 10.2(a) above, if any Event of Default shall have occurred and be continuing, Lender, in its sole and absolute discretion, may (i) declare the principal of and accrued interest on the Loans at the time outstanding, and all other amounts owed to Lender under this Agreement or any of the Loan Documents and all other Obligations, to be forthwith due and payable, whereupon the same shall immediately become due and payable without presentment, demand, protest, notice of protest and non-payment, notice of default, notice of acceleration or intention to accelerate, or other notice of any kind, all of which are expressly waived, anything in this Agreement or the Loan Documents to the contrary notwithstanding; (ii) terminate any commitment of Lender to make Loans hereunder; (iii) enter upon any premises where Collateral is located; (iv) require that Mendocino Brewing execute and deliver to Lender a Pledge Agreement (in form and substance acceptable to Lender in its commercially reasonable discretion) covering all of its capital stock in Releta Brewing (which Mendocino Brewing specifically agrees it will execute and deliver to Lender without delay); and (v) exercise any or all rights and remedies available under the Loan Documents, at law and/or in equity including, without limitation, the rights and remedies of a secured party under the UCC (whether or not the UCC is applicable). Each Borrower agrees that, to the extent notice of sale shall be required by law, 10 days’ notice to such Borrower of the time and place of any public sale or the time after which any private sale is to be made shall constitute reasonable notice, but notice given in any other reasonable manner or at any other reasonable time shall also constitute reasonable notification.

Section 10.3Application of Proceeds. All proceeds from each sale of, or other realization upon, all or any part of the Collateral following an Event of Default shall be applied to the payment of the Obligations (with each Borrower remaining jointly and severally liable for any deficiency) in any order which Lender may elect with the balance (if any) paid to Borrowers or to whomsoever is entitled thereto.

Section 10.4Power of Attorney. Each Borrower hereby irrevocably designates, makes, constitutes and appoints Lender (and all Persons designated by Lender from time to time) as such Borrower’s true and lawful attorney and agent in fact, and Lender or any agent of Lender may, without notice to any Borrower, and at such time or times as Lender or any such agent in its sole and absolute discretion may determine, in the name of such Borrower or Lender:

(a)demand payment of the accounts, enforce payment thereof by legal proceedings or otherwise, settle, adjust, compromise, extend or renew any or all of the accounts or any legal proceedings brought to collect the accounts, discharge and release the accounts or any of them and exercise all of such Borrower’s rights and remedies with respect to the collection of accounts;

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(b)prepare, file and sign the name of such Borrower on any proof of claim in bankruptcy or any similar document against any Account Debtor or any notice of Lien, assignment or satisfaction of Lien or similar document in connection with any of the Collateral;

(c)use the stationery of such Borrower, open such Borrower’s mail, notify the post office authorities to change the address for delivery of such Borrower’s mail to an address designated by Lender and sign the name of such Borrower to verifications of the accounts and on any notice to the Account Debtors; and

(d)use the information recorded on or contained in any data processing equipment and computer hardware and software relating to the accounts, inventory or other Collateral.

Section 10.5Miscellaneous Provisions Concerning Remedies.

(a)Rights Cumulative. The rights and remedies of Lender under the Loan Documents shall be cumulative and not exclusive of any rights or remedies which it would otherwise have. In exercising such rights and remedies, Lender may be selective and no failure or delay by Lender in exercising any right shall operate as a waiver of such right nor shall any single or partial exercise of any power or right preclude its other or further exercise or the exercise of any other power or right.

(b)Waiver of Marshaling. Each Borrower hereby waives any right to require any marshaling of assets and any similar right.

Section 10.6Trademark License. All trademarks, patents, copyrights, service marks and licenses owned by any Borrower, and all trademarks, patents, copyrights, service marks and software licensed by any Borrower, are listed on Schedule 10.6. Each Borrower hereby grants to Lender the nonexclusive right and license to use all of the trademarks, patents, copyrights, service marks and licenses described on Schedule 10.6 and any other trademarks, patents, copyrights, service marks and licenses now or hereafter used by such Borrower, for the purposes set forth in Section 10.2 and for the purpose of enabling Lender to realize on the Collateral and to permit any purchaser of any portion of the Collateral through a foreclosure sale or any other exercise of Lender’s rights and remedies under the Loan Documents to use, sell or otherwise dispose of the Collateral bearing any such trademarks, patents, copyrights, service marks and licenses. Such right and license is granted free of charge, without the requirement that any monetary payment whatsoever be made to any Borrower or any other Person by Lender.

ARTICLE XI — MISCELLANEOUS

Section 11.1Notices.

(a)Method of Communication. All notices and the communications hereunder and thereunder shall be in writing or by telephone subsequently confirmed in writing. Notices in writing shall be delivered personally or sent by overnight courier service, by certified or registered mail, postage pre-paid, or by facsimile transmission and shall be deemed received, in the case of personal delivery, when delivered, in the case of overnight courier service, on the next Business Day after delivery to such service, in the case of mailing, on the third day after mailing (or, if such day is a day on which deliveries of mail are not made, on the next succeeding day on which deliveries of mail are made) and, in the case of facsimile transmission, upon transmittal, provided that in the case of notices to Lender, Lender shall be charged with knowledge of the contents thereof only when such notice is actually received by Lender. A telephonic notice to Lender as understood by Lender will be deemed to be the controlling and proper notice in the event of a discrepancy with or failure to receive a confirming written notice.

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(b)Addresses for Notices. Notices to any party shall be sent to it at the following addresses, or any other address of which all the other parties are notified in writing.

If to a Borrower:	See Section 11.1 of Schedule A hereto for each Borrower’s address and contact information.
If to Lender:	1660 S. Highway 100 Suite 146 Minneapolis, MN 55416-1524 Attention: Credit Department Facsimile (952) 542-8907

Section 11.2Expenses. Within ten (10) days after presentation of an invoice for such costs and expenses, outlining such items in reasonable detail, each Borrower jointly and severally agrees to pay or reimburse all costs and expenses incurred by Lender arising out of or in connection with this Agreement and the Loans including, without limitation, (a) the reasonable fees and expenses of counsel in connection with the negotiation, preparation, execution, delivery, amendment, enforcement and termination of this Agreement and each of the other Loan Documents, (b) the out-of-pocket costs and expenses incurred in connection with the administration and interpretation of this Agreement and the other Loan Documents, (c) the costs and expenses of appraisals of the Collateral, (d) the costs and expenses of lien searches, (e) all stamp, registration, recordation and similar taxes, fees or charges related to the Collateral and charges of filing financing statements and continuations and the costs and expenses of taking other actions to perfect, protect, and continue the security interest of Lender, (f) costs and expenses related to the preparation, execution and delivery of any waiver, amendment, supplement or consent by Lender relating to this Agreement or any of the Loan Documents, (g) sums paid or obligations incurred in connection with the payment of any amount or taking any action required of any Borrower under the Loan Documents that such Borrower fails to pay or take, (h) costs of inspections and verifications of the Collateral, including, without limitation, $800 per diem per examiner plus out of pocketexpenses for travel, lodging, and meals arising in connection with inspections and verifications of the Collateral and each Borrower’s operations and books and records by Lender’s employees and agents, (i) costs and expenses of forwarding loan proceeds, collecting checks and other items of payment, and establishing and maintaining each account of each Borrower maintained with Lender or owned by Lender for the benefit of any Borrower and each Blocked Account and Lockbox, (j) costs and expenses of preserving and protecting the Collateral, (k) costs and expenses related to consulting with and obtaining opinions and appraisals from one or more Persons, including personal property appraisers, accountants and lawyers, concerning the value of any Collateral for the Obligations or related to the nature, scope or value of any right or remedy of Lender hereunder or under any of the Loan Documents, including any review of factual matters in connection therewith, which expenses shall include the fees and disbursements of such Persons, and (1) costs and expenses paid or incurred to obtain payment of the Obligations, enforce the security interest of Lender, sell or otherwise realize upon the Collateral, and otherwise enforce the provisions of the Loan Documents, or to prosecute or defend any claim in any way arising out of, related to or connected with, this Agreement or any of the Loan Documents, which expenses shall include the reasonable fees and disbursements of counsel and of experts and other consultants retained by Lender. Each Borrower hereby authorizes Lender to debit such Borrower’s loan account by increasing the principal amount of the Loan, or deduct from such Borrower’s accounts maintained with any Affiliate of Lender, the amount of any costs, fees and expenses owed by any Borrower when due.

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Section 11.3Setoff. In addition to any rights now or hereafter granted under applicable law, and not by way of limitation of any such rights, upon and after the occurrence of any Event of Default, Lender and any participant with Lender in the Loans are hereby authorized by each Borrower at any time or from time to time, without notice to any Borrower or to any other Person, any such notice being hereby expressly waived, to set off and to appropriate and to apply any and all deposits (general or special, time or demand, including, but not limited to, indebtedness evidenced by certificates of deposit, whether matured or unmatured) and any other indebtedness at any time held or owing by Lender or any participant to or for the credit or the account of any Borrower against and on account of the Obligations irrespective or whether or not (a) Lender shall have made any demand under this Agreement or any of the Loan Documents, or (b) Lender shall have declared any or all of the Obligations to be due and payable as permitted by Section 10.2 and although such Obligations shall be contingent or unmatured.

Section 11.4Venue; Service of Process. EACH BORROWER HEREBY IRREVOCABLY SUBMITS ITSELF TO THE NON-EXCLUSIVE JURISDICTION OF THE STATE AND FEDERAL COURTS LOCATED IN HENNEPIN COUNTY, MINNESOTA, AND AGREES AND CONSENTS THAT SERVICE OF PROCESS MAY BE MADE UPON IT IN ANY LEGAL PROCEEDING RELATING TO THIS AGREEMENT, ANY BORROWING HEREUNDER OR ANY OTHER RELATIONSHIP BETWEEN OR AMONG LENDER AND BORROWERS (OR ANY OF THEM) BY ANY MEANS ALLOWED UNDER STATE OR FEDERAL LAW. ANY LEGAL PROCEEDING ARISING OUT OF OR IN ANY WAY RELATED TO THIS AGREEMENT, ANY BORROWING HEREUNDER OR ANY OTHER RELATIONSHIP BETWEEN OR AMONG LENDER AND BORROWERS (OR ANY OF THEM) MAY BE BROUGHT AND LITIGATED IN ANY ONE OF THE STATE OR FEDERAL COURTS LOCATED IN HENNEPIN COUNTY, MINNESOTA, HAVING JURISDICTION. BORROWERS AND LENDER WAIVE AND AGREE NOT TO ASSERT, BY WAY OF MOTION, AS A DEFENSE OR OTHERWISE, THAT ANY SUCH PROCEEDING IS BROUGHT IN AN INCONVENIENT FORUM OR THAT THE VENUE THEREOF IS IMPROPER. ANY JUDICIAL PROCEEDING BY BORROWERS (OR ANY OF THEM) AGAINST THE LENDER INVOLVING, DIRECTLY OR INDIRECTLY, ANY MATTER IN ANY WAY ARISING OUT OF, RELATED TO, OR CONNECTION WITH ANY LOAN DOCUMENT SHALL BE BROUGHT ONLY IN A COURT IN MINNEAPOLIS, MINNESOTA.

Section 11.5Assignment; Participation. All the provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, except that no Borrower may assign or transfer any of its rights or obligations under this Agreement. Lender may assign to one or more Persons, or sell participations to one or more Persons in, all or a portion of its rights and obligations hereunder and under this Agreement and any promissory notes issued pursuant hereto and, in connection with any such assignment or sale of a participation, may assign its rights and obligations under the Loan Documents. Each Borrower agrees that Lender may provide any information that Lender may have about such Borrower or about any matter relating to this Agreement to any of its Affiliates or their successors, or to any one or more purchasers or potential purchasers of any of its rights under this Agreement or any one or more participants or potential participants.

Section 11.6Amendments. Any term, covenant, agreement or condition of this Agreement or any of the other Loan Documents may be amended or waived and any departure therefrom may be consented to if, but only if, such amendment, waiver or consent is in writing signed by Lender and, in the case of an amendment, by Borrowers. Unless otherwise specified in such waiver or consent, a waiver or consent given hereunder shall be effective only in the specific instance and for the specific purpose for which given.

Section 11.7Performance of Borrowers’ Duties. If any Borrower shall fail to do any act or thing which it has covenanted to do under this Agreement or any of the Loan Documents, Lender may (but shall not be obligated to) do the same or cause it to be done either in the name of Lender or in the name and on behalf of such Borrower, and each Borrower hereby irrevocably authorizes Lender so to act.

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Section 11.8Indemnification. Each Borrower jointly and severally agrees to reimburse Lender and its Affiliates and their officers, employees, directors, shareholders and agents (collectively, the “Indemnified Parties” and individually, an “Indemnified Party”) for all reasonable costs and expenses, including legal fees and expenses, incurred and shall indemnify and hold the Indemnified Parties harmless from and against all losses suffered by any Indemnified Party, other than losses resulting from an Indemnified Party’s gross negligence or willful misconduct, in connection with (a) the exercise by Lender or any of its Affiliates of any right or remedy granted to it under this Agreement or any of the Loan Documents or at law, (b) any claim, and the prosecution or defense thereof, arising out of or in any way connected with this Agreement or any of the Loan Documents, except in the case of a dispute between Borrowers (or any of them) and Lender in which such Borrower(s) prevail(s) in a final unappealed or unappealable judgment, and (c) the collection or enforcement of the Obligations or any of them.

Section 11.9All Powers Coupled with Interest. All powers of attorney and other authorizations granted to Lender and any Persons designated by Lender pursuant to any provisions of this Agreement or any of the Loan Documents shall be deemed coupled with an interest and shall be irrevocable so long as any of the Obligations remain unpaid or unsatisfied or Lender has any obligations to make advances hereunder.

Section 11.10Entire Agreement; Severability of Provisions. This Agreement and the other Loan Documents embody the entire agreement and understanding between the Borrowers and the Lender with respect to the subject matter hereof and thereof. This Agreement supersedes all prior agreements and understandings relating to the subject matter hereof. Any provision of this Agreement or any other Loan Document which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective only to the extent of such prohibition or unenforceability without invalidating the remainder of such provision or the remaining provisions hereof or thereof or affecting the validity or enforceability of such provision in any other jurisdiction.

Section 11.11Governing Law. This Agreement and the promissory notes issued pursuant hereto shall be construed in accordance with and governed by the law of the State of Minnesota other than its conflict of laws principles.

Section 11.12Jury Waiver. EACH BORROWER AND LENDER HEREBY VOLUNTARILY, KNOWINGLY, IRREVOCABLY AND UNCONDITIONALLY WAIVE ANY RIGHT TO HAVE A JURY PARTICIPATE IN RESOLVING ANY DISPUTE (WHETHER BASED UPON CONTRACT, TORT OR OTHERWISE) BETWEEN OR AMONG BORROWERS (OR ANY OF THEM) AND LENDER AND LENDER’S AFFILIATES ARISING OUT OF OR IN ANY WAY RELATED TO THIS AGREEMENT, ANY OTHER LOAN DOCUMENT OR ANY RELATIONSHIP BETWEEN OR AMONG LENDER AND BORROWERS (OR ANY OF THEM), OR BETWEEN OR AMONG BORROWERS (OR ANY OF THEM) AND ANY AFFILIATE OF LENDER. THIS PROVISION IS A MATERIAL INDUCEMENT TO LENDER TO PROVIDE THE FINANCING DESCRIBED HEREIN OR IN THE OTHER LOAN DOCUMENTS.

Section 11.13Counterparts. This Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and shall be binding upon all parties, their successors and assigns, and all of which taken together shall constitute one and the same agreement. A facsimile or digital copy of any signed Loan Document, including this Agreement, shall be deemed to be an original thereof.

LOANAND SECURITY AGREEMENT - PAGE 39

Section 11.14Patriot Act Notice. IMPORTANT INFORMATION ABOUT PROCEDURES FOR OPENING A NEW ACCOUNT. To help the government fight the funding of terrorism and money laundering activities, Federal law requires all financial institutions to obtain, verify, and record information that identifies each person or entity that opens an account, including any deposit account, treasury management account, loan, other extension of credit, or other financial services product. What this means for each Borrower: When such Borrower opens an account, if such Borrower is an individual, Lender will ask for such Borrower’s name, residential address, date of birth, and other information that will allow Lender to identify such Borrower, and if such Borrower is not an individual, Lender will ask for such Borrower’s name, employer identification number, business address, and other information that will allow Lender to identify such Borrower. Lender may also ask, if such Borrower is an individual, to see such Borrower’s driver’s license or other identifying documents, and if such Borrower is not an individual, to see such Borrower’s legal organizational documents or other identifying documents.

Section 11.15Wire Transfer Fees and Returned Check Charges. Each Borrower jointly and severally agrees to pay a wire transfer charge of $20.00 for every wire transfer processed by the Lender and $20.00 for any returned checks charged against its account for funds deposited on such Borrower’s behalf.

Section 11.16Participations and Information. Lender may sell participation interests in any or all of the Loans to any Person. Lender may furnish any information concerning the Borrowers (or any of them) in the possession of the Lender from time to time to affiliates of the Lender in connection with lending business of the Lender or such affiliates, and to participants and prospective participants, and may furnish information in response to credit inquiries consistent with general commercial lending practice.

[Remainder of page intentionally left blank;

signature page follows]

LOANAND SECURITY AGREEMENT - PAGE 40

THIS WRITTEN LOAN AGREEMENT REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.

MENDOCINO BREWING COMPANY, INC.

By:  

Name:

Title:

RELETA BREWING COMPANY LLC

By:  

Name:

Title:

MARQUETTE BUSINESS CREDIT, INC.

By:  

Name:

Title:

EXHIBITS AND SCHEDULES

EXHIBIT A	FORM OF BORROWING BASE CERTIFICATE
EXHIBIT B	FORM OF COMPLIANCE CERTIFICATE
EXHIBIT C	FORM OF LEGAL OPINION
SCHEDULE A	Additional Terms and Covenants
SCHEDULE 1.1	Commercial Tort Claims
SCHEDULE 5.1 (a)	Jurisdictions in Which Each Borrower is Qualified as a Foreign Corporation
SCHEDULE 5.1 (c)	Capital Stock/Membership Interests and Subsidiaries
SCHEDULE 5.1 (g)	Liens
SCHEDULE 5.1 (h)	Indebtedness for Money Borrowed and Guaranties
SCHEDULE 5.1 (i)	Litigation
SCHEDULE 5.1 (1)	ERISA Benefit Plans
SCHEDULE 5.1 (o)	Locations of inventory
SCHEDULE 5.1 (p)	Location of Chief Executive Office
SCHEDULE 5.1 (q)	Corporate and Fictitious Names
SCHEDULE 9.1	Real Property Leases
SCHEDULE 10.6	List of trademarks, patents, etc.

LOANAND SECURITY AGREEMENT - PAGE 41

ACKNOWLEDGMENT

State of California

County of _________________

On November ____, 2006 before me, _________________________, the _____________________ of MENDOCINO BREWING COMPANY, INC., a California corporation personally appeared _____________________________ personally known to me (or proved to me on the basis of satisfactory evidence) to be the person(s) whose name(s) is/are subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their authorized capacity(ies), and that by his/her/their signature(s) on the instrument the person(s), or the entity upon behalf of which the person(s) acted, executed the instrument.

WITNESS my hand and official seal.

Signature _______________________________

(Seal)

ACKNOWLEDGMENT

State of California

County of _________________

On November ____, 2006 before me, ________________________, the _____________________ of RELETA BREWING COMPANY LLC, a New York limited liability company, personally appeared ______________________________ personally known to me (or proved to me on the basis of satisfactory evidence) to be the person(s) whose name(s) is/are subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their authorized capacity(ies), and that by his/her/their signature(s) on the instrument the person(s), or the entity upon behalf of which the person(s) acted, executed the instrument.

WITNESS my hand and official seal.

Signature _______________________________

(Seal)

LOANAND SECURITY AGREEMENT - PAGE 42

Exhibit A

Borrowing Base Certificate

See attached.

LOANAND SECURITY AGREEMENT - PAGE 43

Exhibit B

Compliance Certificate

TO:Marquette Business Credit, Inc.

THE UNDERSIGNED HEREBY CERTIFIES THAT:

(a)I am a duly elected officer (or deputy thereof) Mendocino Brewing Company, Inc., a California corporation and Releta Brewing Company LLC, a Delaware limited liability company (collectively, the “Borrowers”).

(b)I have reviewed the terms of the Loan and Security Agreement dated as of November 16, 2006 (as previously amended, and as the same may be further amended or otherwise modified from time to time, the "Loan Agreement") among MARQUETTE BUSINESS CREDIT, INC., a Minnesota corporation (the "Lender"), and the Borrowers, and I have made, or have caused to be made under my supervision, a detailed review of the transactions and conditions of the Borrowers during the accounting period covered by the attachment hereto, and the financial information contained in the attachment hereto is accurate as of the date of said attachment for the period specified.

(c)The examinations described in paragraph (b) did not disclose, and I have no knowledge of, whether arising out of such examinations or otherwise, the existence of any condition or event which constitutes a Default or an Event of Default (as such terms are defined in the Loan Agreement) during or at the end of the accounting period covered by the attachment hereto or as of the date of this Certificate, except as described below (or in a separate attachment to this Certificate). The exceptions listing, in detail, the nature of the condition or event, the period during which it has existed and the action which the applicable Borrower has taken, is taking, or proposes to take with respect to each such condition or event, are as follows: (see attached).

(d)No policy of insurance required to be maintained pursuant to the Loan Agreement or any other Loan Document (as such term is defined in the Loan Agreement) has lapsed during the reporting period described on Attachment No. 1 hereto and no such policy will lapse within the next 60 days.

(e)The undersigned is not aware of any change in any law, statute, regulation, rule or ordinance of any governmental authority or regulatory body, or in the prevailing interpretation of any such law, statute, regulation, rule or ordinance, which could reasonably be expected to impair or otherwise adversely affect the Lender's rights or ability to enforce its security interest against, or to otherwise realize the expected value from, the Collateral (or any significant portion thereof), including, without limitation, any change by which any governmental authority, regulatory body or other Person has, or has the right to obtain, a Lien on any material part of the Collateral.

The foregoing certifications, together with the computations set forth in Attachment No. 1 hereto and the financial statements delivered with this Certificate in support hereof, are made and delivered this ___ day of ________________ 200__, pursuant to Section 8.2 of the Loan Agreement.

[_______________________________]

By  

Its

ATTACHMENT NO. 1

TO COMPLIANCE CERTIFICATE

AS OF _______________, 200___, WHICH PERTAINS

TO THE PERIOD FROM _______________, 200___

TO _______________, 200___

Terms defined in the Loan Agreement are used herein as defined therein and Section references herein refer to the Sections in Schedule A to the Loan Agreement.

1.Tangible Net Worth (Section 9.1(a)) (At least $7,000,000)	Actual $ _____________	In Compliance? Yes______ No______
2.Fixed Charge Coverage Ratio (Section 9.1(b)) (At least 1.05 to 1.00 as of each calendar quarter-end)	Actual _____ to 1.00	In Compliance? Yes______ No______
3.Capital Expenditures (Section 9.1(c)) (No more than $300,000 in any fiscal year)	Actual $__________	In Compliance? Yes______ No______
4.Minimum EBITDA (Section 9.1(d)) (Not less than $925,000 for any fiscal year)	Actual $__________	In Compliance? Yes ______ No______

Exhibit C

Form of Legal Opinion

See attached.

SCHEDULE A

Additional Terms and Covenants

Section 1.1Definitions

"Applicable Margin" means (a) with respect to the Revolving Loans, a percentage equal to four and one-quarter percent (4.25%) per annum, and (b) with respect to the Capex Loans, the Term Loan and all of the other Obligations, a percentage equal to five and one-quarter percent (5.25%) per annum; provided, however, that each such percentage shall be subject to adjustment on the first two (2) anniversary dates of the date of this Agreement (each such anniversary date being a “Determination Date”) as set forth in the remainder of this definition based on the Borrowers’ Fixed Charge Coverage Ratio. The Fixed Charge Coverage Ratio will be determined as of each Determination Date for the immediately preceding period of twelve consecutive months ending on, or most recently ended prior to, such Determination Date. On the Lender's receipt of the Borrowers’ financial statements required to be delivered to the Lender pursuant to Section 8.1(b), the Applicable Margin will be reduced by 0.125% per annum if the then Fixed Charge Coverage Ratio equals or exceeds 1.25 to 1.00, so long as no Default or Event of Default has occurred and is continuing as of applicable Determination Date or as of the effective date of such adjustment. The foregoing adjustment, if applicable, to the Applicable Margin will become effective for the unpaid principal balance of Loans outstanding on and after the first day of the first calendar month following delivery to the Lender of the Borrowers’ financial statements required to be delivered to Lender pursuant to Section 8.1(b) until the next succeeding effective date of adjustment pursuant to this definition (if any). Each of the financial statements required to be delivered to the Lender must be delivered to the Lender in compliance with Section 8.1. If Borrower, however, has not timely delivered its financial statements in accordance with Section 8.1, then, without limiting any of the rights and remedies available to the Lender by reason of such noncompliance at the Lender's option, commencing on the date upon which such financial statements should have been delivered in accordance with Section 8.1 and continuing until such financial statements are actually delivered in accordance with Section 8.1, it shall be assumed for purposes of determining the Applicable Margin that the Fixed Charge Coverage Ratio was less than 1.25 to 1.0 and the pricing associated with a Fixed Charge Coverage Ratio of less than 1.25 to 1.0 will be applicable on the then applicable Determination Date. Notwithstanding the foregoing it is expressly understood and agreed that:

(i)in no event shall the Applicable Margin be less than (a) with respect to the Revolving Loans, a percentage equal to four percent (4.00%) per annum, and (b) with respect to the Capex Loans, the Term Loan and all of the other Obligations, a percentage equal to five percent (5.00%) per annum;

(ii)if, as of any date of determination occurring after the Applicable Margin has been adjusted pursuant to the preceding provisions of this definition, the Fixed Charge Coverage is less than 1.25 to 1.00, then the Applicable Margin shall be immediately restored to (a) with respect to the Revolving Loans, a percentage equal to four and one-quarter percent (4.25%) per annum, and (b) with respect to the Capex Loans, the Term Loan and all of the other Obligations, a percentage equal to five and one-quarter percent (5.25%) per annum; and

(iii)nothing contained in this definition shall limit or otherwise affect any of the rights and remedies available to the Lender if the Fixed Charge Coverage Ratio is less than the level required pursuant to Section 9.1(b) of this Schedule A.

“Borrowing Base” means, as of any date, an amount equal to the sum of (a) eighty-five percent (85%) (or such lesser percentage as Lender may in its sole and absolute discretion determine from time to time) of Eligible Accounts on such date, plus (b) the lesser of (i) sixty percent (60%) (or such lesser percentage as Lender may in its sole and absolute discretion determine from time to time) multiplied by the amount of Eligible Inventory on such date and (ii) $750,000, minus (c) the Reserve.

“Concentration Limit” means fifteen percent (15%).

“Contract Rate” means (a) with respect to the Revolving Loans, the sum of the Base Rate in effect from time to time plus the Applicable Margin, and (b) with respect to the Capex Loans, the Term Loan and all of the other Obligations, the sum of the Base Rate in effect from time to time plus the Applicable Margin. Any change in the Contract Rate resulting from a change in the Base Rate shall become effective on the day such change in the Base Rate is quoted and determined by Lender.

“Cross Aging Percentage” shall mean twenty five percent (25%) of the aggregate balance of all accounts owing by a particular Account Debtor.

“Financial Statements” means (i) the consolidated and consolidating balance sheet of Mendocino Brewing and its subsidiaries for its fiscal year ending, December 31, 2005, and the related consolidated and consolidating statements of profit and loss and cash flows for the year ended on such date, auditedby independent public accountants, and (ii) the unaudited consolidated and consolidating balance sheet of Mendocino Brewing and its U.S. subsidiaries as of August 31, 2006, and the related statements of profit and loss and cash flows for the monthly period then ended; provided, however, that if the financial statements referred to in items (i) and (ii) above combine and consolidate the financial condition and results of operation of the Borrowers with those of any other Person, or if such financial statements do not combine and consolidate the financial condition and results of operation of the Borrowers, then the Borrowers, in addition to such financial statements referred to above, shall deliver to the Lender with such financial statements a separate set of financial statements for the same periods (and, in the case of item (i), prepared by the same independent certified public accountants) which combine and consolidate solely the financial condition and results of operation of the Borrowers.

“Fixed Charge Coverage Ratio” means the ratio, determined as of the end of each calendar quarter for the twelve consecutive months then ending of (a) the combined EBITDA of the Borrowers (excluding the results of operation of all Persons other than the Borrowers) for such period minus cash taxes paid by the Borrowers during such period, minus unfinanced Capital Expenditures made by the Borrowers during such period, to (b) without duplication, cash interest expense of the Borrowers, plus scheduled principal payments on Indebtedness made by the Borrowers during such period, plus payments on Capitalized Leases of the Borrowers, plus all dividends and distributions made by the Borrowers in respect of their respective capital stock or other equity interests during such period, all calculated for the Borrowers on a combined basis (excluding the results of operation of all Persons other than the Borrowers).

“Lockbox” means the U.S. Post Office Box(es) specified in, or established pursuant to, (i) a Blocked Account Agreement, or (ii) a Lockbox agreement, in form and substance acceptable to Lender, executed between on or more of the Borrowers and a financial institution acceptable to Lender.

“Permitted Indebtedness” means (i) purchase money Indebtedness incurred by any Borrower to finance, or provide the funds for, the acquisition of assets, which outstanding principal Indebtedness shall not exceed $150,000in the aggregate for all Borrowers at any time outstanding, (ii) the Indebtedness described on Schedule 5.1(h) attached hereto and made a part hereof, and (iii) the Obligations.

“Revolving Facility Limit” means Two Million Seven Hundred Fifty Thousand and no/100 Dollars ($2,750,000.00).

“State of Organization” means (a) with respect to Mendocino Brewing, California, and (b) with respect to Releta Brewing, Delaware.

“Termination Date” means June 27, 2011.

“Total Credit Facility” means an amount equal to the sum of the Revolving Facility Limit, the Capex Loan Amount and the original principal amount of the Term Loan.

Section 3.2Fees and Expenses.

(a)The origination fee shall be $50,000.

(b)The monthly facility fee shall be one-half of one percent (0.50%) per annum of the Total Credit Facility.

(c)The unused line fee shall equal one quarter of one percent (0.25%) per annum of the sum of the average daily unborrowed amount of the Revolving Facility Limit in effect during the period for which payment is made.

(d)The collateral monitoring fee shall be $0 for each calendar month.

(e)The minimum usage fee shall equal, for a particular month, the positive difference (if any) between (i) the interest that would have accrued under this Agreement assuming the aggregate outstanding principal balance of the Revolving Loans averaged the Required Minimum Usage (defined below) during such month, and (ii) the actual interest that accrued on the Loans during such month. For purposes of this Section 3.2(e) the term “Required Minimum Usage” shall mean (x) for all dates of determination before the second anniversary of the date of this Agreement, an amount equal to $2,000,000, (y) for all dates of determination on or after the second anniversary of the date of this Agreement but before the fourth anniversary of the date of this Agreement, an amount equal to $1,750,000, and (z) for all dates of determination on or after the fourth anniversary of the date of this Agreement, an amount equal to $1,500,000.

Section 3.4Early Termination Fee; Prepayment Fee.

(b)(i)Revolving Loan Facility. Upon termination of this Agreement prior to the Termination Date, the early termination fee shall be an amount equal to (A) four percent (4.0%) of the Revolving Facility Limit if the termination occurs on or prior to the first anniversary of the date hereof; (B) three percent (3%) of the Revolving Facility Limit if the termination occurs after the first anniversary of the date hereof but on or prior to the second anniversary of the date hereof.; (C) two percent (2.0%) of the Revolving Facility Limit if the termination occurs after the second anniversary of the date hereof but on or prior to the third anniversary of the date hereof; (D) one-half of one percent (0.50%) of the Revolving Facility Limit if the termination occurs after the third anniversary of the date hereof but on or prior to the fourth anniversary of the date hereof; and (E) one-quarter of one percent (0.25%) of the Revolving Facility Limit if the termination occurs after the fourth anniversary of the date hereof.

(ii)Term Loan.Upon prepayment of the Term Loan prior to the Termination Date, the prepayment fee shall be an amount equal to (A) four percent (4.0%) of the amount prepaid if such prepayment occurs on or prior to the first anniversary of the date hereof; (B) three percent (3%) of the amount prepaid if such prepayment occurs after the first anniversary of the date hereof but on or prior to the second anniversary of the date hereof.; (C) two percent (2.0%) of the amount prepaid if such prepayment occurs after the second anniversary of the date hereof but on or prior to the third anniversary of the date hereof; (D) one-half of one percent (0.50%) of the amount prepaid if such prepayment occurs after the third anniversary of the date hereof but on or prior to the fourth anniversary of the date hereof; and (E) one-quarter of one percent (0.25%) of the amount prepaid if such prepayment occurs after the fourth anniversary of the date hereof; provided, however, that no prepayment fee shall be due under this clause (ii) if the amount of such prepayment is less than or equal to $500,000 in each fiscal year and if the source of the funds used to effectuate such prepayment (which source has been verified to the reasonable satisfaction of the Lender) is an Affiliate of the Borrowers.

Section 4.1Closing Documents and Requirements

(a)this Agreement and promissory notes evidencing the Loans;

(b)with respect to each Borrower, a certificate executed by the President and the Secretary of such Borrower certifying (i) the names and signatures of the officers of such Person authorized to execute Loan Documents to which such Borrower is a party, (ii) the resolutions duly adopted by the Board of Directors of such Person authorizing the execution of this Agreement and the other Loan Documents, as appropriate, and (iii) correctness and completeness of the copy of the bylaws of such Person attached thereto;

(c)with respect to each Borrower, a certificate regarding the due formation, valid existence, and good standing of such Borrower in the state of its organization issued by the appropriate governmental authorities in such jurisdiction and copies of its organizational documents certified by such authorities;

(d)an authorization to file financing statements;

(e)a payoff letter executed by BFI Business Finance;

(f)a landlord’s or mortgagee’s waiver with respect to each premises where collateral is located;

(g)endorsements naming Lender as an additional insured and loss payee on all liability insurance and all property insurance policies of each Borrower;

(h)a favorable opinion of counsel for Borrowers in the form attached hereto as Exhibit C;

(i)establishment of one or more Lockboxes for receipts of proceeds of Collateral;

(j)with respect to each Lockbox, a Lockbox Agreement executed by the financial institution with which such Lockbox has been established and the applicable Borrower(s);

(k)with respect to each Blocked Account, a deposit account control agreement executed by the financial institution with which such Blocked Account is maintained, Lender, and the applicable Borrower(s);

(l)pre-funding verifications of Accounts;

(m)after giving effect to the first advance of a Revolving Loan, the first advance of a Capex Loan, the advance of the Term Loan and the Reserve established by Lender, Borrowers shall have Availability of at least $350,000, plus an amount sufficient so that no trade payables are overdue plus an amount sufficient to pay all book overdrafts;

(n)no Default or Event of Default shall have occurred;

(o)all documents evidencing or relating to any and all Subordinated Indebtedness;

(p)a validity and support agreement executed by each of Yashpal Singh and N. Mahadevan;

(q)a subordination agreement from UBA;

(r)Uniform Commercial Code, state and federal tax lien, judgment and bankruptcy searches covering the Borrowers and such other parties as the Lender may require in such filing offices and locations as the Lender may require, and evidence of the termination and satisfaction of all liens and encumbrances (other than Permitted Liens) against any portion of the Collateral; and

(s)such other documents, certificates, opinions, and information that Lender may require.

Section 5.1Representations and Warranties of Borrowers

(a)Mendocino Brewing is a California corporation. Mendocino Brewing’s federal employer identification number is 68-0318293, and its organizational number with the Secretary of State of the State of Organization is C1876489. Releta Brewing is a Delaware limited liability company. Releta Brewing’s federal employer identification number is 68-0398450, and its organizational number with the Secretary of State of the State of Organization is 2799258.

(b)Each Borrower is engaged principally in the business of producing and distributing beer and malt beverages for the specialty "craft" segment of the beer market.

Section 7.14Additional Affirmative Covenants

[None]

Section 9.1Financial Covenants

(a)Minimum Tangible Net Worth. Borrowers shall not, directly or indirectly, permit the Tangible Net Worth at any time to be less than $7,000,000.

(b)Fixed Charge Coverage Ratio. The Fixed Charge Coverage Ratio as of each calendar quarter-end shall be at least 1.05 to 1.0, commencing with the quarter ending December 31, 2006.

(c)Capital Expenditures. Borrowers shall not, directly or indirectly, make or incur Capital Expenditures which exceed, in the aggregate for all Borrowers, $300,000 in any fiscal year without the prior written consent of the Lender.

(d)Minimum EBITDA. Borrowers shall not permit the combined EBITDA of the Borrowers (excluding the results of operation of all Persons other than the Borrowers) for any fiscal year to be less than $925,000.

Section 9.16Additional Negative Covenants

(a)No Borrower shall make any principal or interest payment on any Indebtedness owing to UBA if a Default or Event of Default is then outstanding or would be caused by such payment or would violate the terms of the Subordination Agreement executed by UBA in favor of the Lender. In addition, no Borrower shall make any principal or interest payment on any Indebtedness owing to UBI or UBSN; provided, however, that so long as no Default or Event of Default has occurred or is continuing at the time of a “Permitted Payment” (defined below), or would result from such Permitted Payment, the Permitted Payments are excepted from the terms of the foregoing provisions of this Section 9.16(a). For purposes of this Section 9.16(a), the term “Permitted Payments” means (i) ordinary course, non-cash offsets of Indebtedness owed by one or more of the Borrowers to UBI and/or UBSN against amounts owed by UBI and/or UBSN to one or more of the Borrowers in connection with (A) overhead expense allocations, and/or (B) amortization of the investment of Mendocino Brewing in the UBI and UBSN, provided that such offsets are made in amounts, at a frequency and in a manner substantially consistent with the past course of dealing among UBI, UBSN and the Borrowers; and (ii) cash payments of principal or interest in respect of any Indebtedness owing to UBI or UBSN, provided that (x) the full amount of each such payment was included within the Reserve at the time of the associated invoicing, and (y) the Lender has consented to such payment in writing (which consent shall not be unreasonably withheld).

(b)The aggregate annual cash and non-cash compensation paid by the Borrowers (or any of them) to the person holding the office of Chairman of Mendocino Brewing in any fiscal year may not exceed the amount paid to the person holding such office in fiscal year 2005 without the prior written consent of Lender, which consent shall not be unreasonably withheld.

Section 10.1Additional Events of Default

(a)Mendocino Brewing shall cease to own, beneficially and of record, 100% of all classes of the membership interests of Releta Brewing.

(b)The occurrence of a default or event of default under any other Indebtedness of Borrowers (or any of them), excluding unsecured trade payables and the Subordinated Indebtedness held by UBA, which Indebtedness exceeds $50,000.

(c)Any material violation of any of the terms or provisions of that certain Subordination Agreement dated as of November 16, 2006, executed by UBA in favor of the Lender, as the same may be amended, restated, supplemented or otherwise modified from time to time, unless the Lender has otherwise consented in writing (which consent shall not be unreasonably withheld). Without limiting the generality of the foregoing each Borrower specifically agrees that the occurrence of any of the following events or circumstances shall constitute an Event of Default hereunder:

(i)if either Borrower shall make any payment or other distribution whatsoever in respect of any Subordinated Indebtedness held by UBA, whether before or after the final maturity of such Subordinated Indebtedness, at any time prior to the date on which all Obligations have been paid in full in cash and this Agreement has been terminated;

(ii)if any property or assets of either Borrower be applied to the purchase or other acquisition or retirement of any Subordinated Indebtedness held by UBA; or

(iii)if UBA takes any action to (A) transfer or assign, or attempt to enforce or collect, or subordinate to any Liabilities other than the Obligations, any Subordinated Indebtedness held by UBA or any rights in respect thereof, (B) take any collateral security for any Subordinated Indebtedness held by UBA, or (C) commence, or join with any other creditor in commencing, any bankruptcy, reorganization or insolvency proceedings with respect to either Borrower, in each case without the prior written consent of the Lender (which consent shall not be unreasonably withheld).

(d)If any material portion of the unsecured trade payables of Borrowers (or any of them) owed to a Major Vendor (defined below) is more than sixty (60) days past due. For purposes of this subsection (d), the term “Major Vendor” shall mean any trade creditor of Borrowers (or any of them) that is owed more than $250,000 in the aggregate by such Borrower(s) at any one time.

Section 11.1Borrowers’ Address for Notice Purposes

Mendocino Brewing:	Releta Brewing:
1601 Airport Road	131 Excelsior Avenue
Ukiah, California 95482	Saratoga Springs, NY 12866
Attention: Yashpal Singh	Attention: Robert Craven
Facsimile No.: (707) 463-2465	Facsimile No.: (518) 581-1804
With a copy to:
Coblentz, Patch, Duffy & Bass LLP
One Ferry Building
Suite 200
San Francisco, California 94111
Attention: Sara Finigan, Esq.
Facsimile No.: (415) 989-1663

SCHEDULE 1.1

Commercial Tort Claims

None.

SCHEDULE 5.1(a)

Jurisdictions in Which Each Borrower is Qualified as a Foreign Corporation

Mendocino Brewing - None

Releta Brewing - New York

SCHEDULE 5.1(c)

Capital Stock/Membership Interests and Subsidiaries

Borrower	Subsidiaries	Owners
Mendocino Brewing	Releta Brewing UBI	UBA - 26.55% Inversiones - 47.30% Others - 26.15%
Releta Brewing	None	Mendocino Brewing - 100%

SCHEDULE 5.1(g)

Liens

Debtor	Secured Party	State/County	Filing No.	Filing Date
Mendocino Brewing Co. Inc.	Colonial Pacific Leasing	CA	9919360413	07/01/99
Mendocino Brewing Company, Inc.	GE Capital Colonial Pacific Leasing	CA	0200760468	01/04/02
Mendocino Brewing Company, Inc.	Citicorp Leasing, Inc.	CA	067073421373	06/12/06
Mendocino Brewing Company	Scott Laboratories, Inc.	CA	067074242688	06/15/06

SCHEDULE 5.1(h)

Indebtedness for Money Borrowed and Guaranties

1.Continuing Corporate Guaranty, dated December 20, 2000 by Mendocino Brewing, as guarantor, on behalf of Releta Brewing, as payor, in favor of Gamer Packing, Inc., a Minnesota corporation, as payee (“Gamer”), relating to amounts due to Gamer in connection with products sold and services provided by Gamer to Releta Brewing.

2.Promissory Note in the principal amount of $3,000,000 dated June 28, 2006 issued by Mendocino Brewing, as borrower, to Grand Pacific Financing Corporation, as lender.

3.Promissory Note in the principal amount of $350,000, dated June 6, 2006, issued by Mendocino Brewing, as borrower, to Savings Bank of Mendocino County, as lender.

4.Continuing Guaranty, dated June 28, 2006, by Releta Brewing, as guarantor, on behalf of Mendocino Brewing, as borrower, to Grand Pacific Financing Corporation (“Grand Pacific”), as lender, relating to Mendocino Brewing’s obligations under the certain loan agreement dated June 28, 2006 between Mendocino Brewing and Grand Pacific.

5.[Additional Capital Leases to Come]

SCHEDULE 5.1(i)

Litigation

None.

SCHEDULE 5.1(l)

ERISA Benefit Plans

None.

SCHEDULE 5.1(o)

Location of Inventory

Mendocino Brewing:

1601 Airport Road

Ukiah, CA 95482

Releta Brewing:

131 Excelsior Avenue

Saratoga Springs, NY 12866

SCHEDULE 5.1(p)

Location of Chief Executive Office

Mendocino Brewing:

1601 Airport Road

Ukiah, CA 95482

Releta Brewing:

131 Excelsior Avenue

Saratoga Springs, NY 12866

SCHEDULE 5.1(q)

Corporate and Fictitious Names

Mendocino Brewing:

None

Releta Brewing:

Ten Springs Brewing Company

Olde Saratoga Brewing Company

Acquisitions

Mendocino Brewing acquired all of the assets of UBI in 2001.

SCHEDULE 9.1

Real Property Leases

1.That certain Commercial Lease dated October, 1997 between Stewart’s Ice Cream Company, Inc., as landlord, and Releta Brewing, as tenant, covering the leased premises commonly known as 131 Excelsior Avenue, Saratoga Springs, NY 12866. The term of such lease has been extended to October 15, 2019.

2.That certain Lease Agreement dated January 1, 2004 between John Fetzer, as landlord, and Mendocino Brewing, as tenant, covering the leased premises located at 13351 S. Highway 101, Hopland, CA 95449.

3.That certain Commercial Lease dated April 1, 2003 between McDowell Business Center, as landlord, and Mendocino Brewing, as tenant, covering the leased premises located at 921 Transport Way, Suite #29, Petaluma, CA 94954. The term of such lease has been extended to March 31, 2007.

SCHEDULE 10.6

List of trademarks, patents, etc.

Mendocino Brewing:

MARK	SERIAL NO.	REGISTRATION NO.	ASSIGNED TO
MENDOCINO BREWING COMPANY word mark	76/049,154	2,441,141	BFI Business Finance
RED TAIL ALE word mark	75/098,240	2,032,382	BFI Business Finance
RED TAIL design mark	74/734,783	2,011,817	BFI Business Finance
BLUE HERON PALE ALE design mark	74/734,782	2,011,816	BFI Business Finance
EYE OF THE HAWK SELECT ALE word mark	74/093,799	1,673,594	BFI Business Finance
EYE OF THE HAWK SPECIAL EDITION ANNIVERSARY ALE design mark	74/734,781	2,011,815	BFI Business Finance
YULETIDE PORTER word mark	74/093,789	1,666,891	BFI Business Finance
BREWSLETTER word mark	74/312,700	1,768,639	BFI Business Finance
PEREGRINE GOLDEN ALE word mark	76/029,927	2,475,522	BFI Business Finance
HOPLAND BREWERY word mark	76/128,830	2,509,464	BFI Business Finance
BLACK EYE ALE word mark	76/202,158	2,667,078	BFI Business Finance
SUN LAGER PREMIUM HANDCRAFTED BREW word and design mark	76/079,875	2,583,446	BFI Business Finance
WHITE HAWK ORIGINAL IPA word and design mark	78/304,844	2,956,999	BFI Business Finance
BLUE HERON word mark	78/117,249	Concurrent Use Proceeding Pending; subject to concurrent use by Bridgepoint Brewing Company	BFI Business Finance
BLACK HAWK STOUT word mark	78/835,504	Not Available Use, 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.”	N/A

MARK SERIAL NO. REGISTRATION NO. ASSIGNED TO

RAPTOR RED LAGER word and design mark	78/304,831	3,113,619	BFI Business Finance
TALON BARLEY WINE ALE word mark		Borrower intends to register with USPTO	N/A
TALON BARLEY WINE ALE word and design mark		Borrower intends to register with USPTO	N/A

Releta Brewing:

MARK	SERIAL NO.	REGISTRATION NO.	ASSIGNED TO
FAT BEAR word mark	75/375,457	2,267,709 [registration cancelled - Section 8; new application to be filed for same]	BFI Business Finance
WHITEFACE word mark	75/375,229	2,322,226 [registration will be cancelled - Section 8; new application to be filed for same]	BFI Business Finance
SARATOGA CLASSIC PILSNER word mark	75/647,278	2,396,601	BFI Business Finance

EX-10.83

REVOLVING NOTE

$2,750,000.00	November 16, 2006
	Minneapolis, Minnesota

FOR VALUE RECEIVED, the undersigned, MENDOCINO BREWING COMPANY, INC., a California corporation and RELETA BREWING COMPANY LLC, a Delaware limited liability company (the "Borrowers"), JOINTLY AND SEVERALLY promise to pay to the order of MARQUETTE BUSINESS CREDIT, INC., a Minnesota corporation (the "Lender), on the Termination Date, or other due date or dates determined under the Loan Agreement hereinafter referred to, the principal sum of TWO MILLION SEVEN HUNDRED FIFTY THOUSAND AND NO/100 DOLLARS ($2,750,000.00), or if less, the then aggregate unpaid principal amount of the Revolving Loans (as such term is defined in the Loan Agreement) as may be borrowed by the Borrowers under the Loan Agreement. All Revolving Loans and all payments of principal thereon shall be recorded by the holder in its records which records shall be conclusive evidence of the subject matter thereof, absent manifest error.

The Borrowers further promise to pay to the order of the Lender interest on the aggregate unpaid principal amount hereof from time to time outstanding from the date hereof until paid in full at the rates per annum which shall be determined in accordance with the provisions of the Loan Agreement. Accrued interest shall be payable on the dates specified in the Loan Agreement.

All payments of principal and interest under this Note shall be made in lawful money of the United States of America in immediately available funds at the Lender's office at 1660 S. Hwy 100, Suite 146, Minneapolis, Minnesota 55416-1524, or at such other place as may be designated by the Lender to the Borrowers in writing.

This Note is a promissory note of the type referred to in Section 3.5 of, and evidences indebtedness incurred under, that certain Loan and Security Agreement dated as of November 16, 2006 (together with all schedules and exhibits attached thereto, herein, as it may be amended, modified or supplemented from time to time, called the "Loan Agreement") among the Borrowers and the Lender, to which Loan Agreement reference is made for a statement of the terms and provisions thereof, including those under which the Borrowers are permitted and required to make prepayments and repayments of principal of such indebtedness and under which such indebtedness may be declared to be immediately due and payable. Capitalized terms used but not otherwise defined herein shall have the meanings given in the Loan Agreement.

All parties hereto, whether as makers, endorsers or otherwise, severally waive presentment, demand, protest and notice of dishonor in connection with this Note.

This Note is made under and governed by the internal laws of the State of Minnesota.

MENDOCINO BREWING COMPANY,

a California corporation

By:  

Its:

RELETA BREWING COMPANY LLC,

a Delaware limited liability company

By:  

Its:

ACKNOWLEDGMENT

State of California

County of _________________

On November ____, 2006 before me, _________________________, the _____________________ of MENDOCINO BREWING COMPANY, INC., a California corporation personally appeared _____________________________ personally known to me (or proved to me on the basis of satisfactory evidence) to be the person(s) whose name(s) is/are subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their authorized capacity(ies), and that by his/her/their signature(s) on the instrument the person(s), or the entity upon behalf of which the person(s) acted, executed the instrument.

WITNESS my hand and official seal.

Signature _______________________________

(Seal)

ACKNOWLEDGMENT

State of California

County of _________________

On November ____, 2006 before me, ________________________, the _____________________ of RELETA BREWING COMPANY LLC, a New York limited liability company, personally appeared ______________________________ personally known to me (or proved to me on the basis of satisfactory evidence) to be the person(s) whose name(s) is/are subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their authorized capacity(ies), and that by his/her/their signature(s) on the instrument the person(s), or the entity upon behalf of which the person(s) acted, executed the instrument.

WITNESS my hand and official seal.

Signature _______________________________

(Seal)

EX-10.84

TERM NOTE

$1,525,000	November 16, 2006
	Minneapolis, Minnesota

FOR VALUE RECEIVED, the undersigned, MENDOCINO BREWING COMPANY, INC., a California corporation and RELETA BREWING COMPANY LLC, a Delaware limited liability company (the "Borrowers"), JOINTLY AND SEVERALLY promise to pay to the order of MARQUETTE BUSINESS CREDIT, INC., a Minnesota corporation (the "Lender), on the Termination Date, or other due date or dates determined under the Loan Agreement hereinafter referred to, the principal sum of ONE MILLION FIVE HUNDRED TWENTY-FIVE THOUSAND AND NO/100 DOLLARS ($1,525,000.00), or if less, the then aggregate unpaid principal amount of the Term Loan (as such term is defined in the Loan Agreement) as may be borrowed by the Borrowers under the Loan Agreement. The Term Loan and all payments of principal thereon shall be recorded by the holder in its records which records shall be conclusive evidence of the subject matter thereof, absent manifest error.

The Borrowers further promise to pay to the order of the Lender interest on the aggregate unpaid principal amount hereof from time to time outstanding from the date hereof until paid in full at the rates per annum which shall be determined in accordance with the provisions of the Loan Agreement. Accrued interest shall be payable on the dates specified in the Loan Agreement.

All payments of principal and interest under this Note shall be made in lawful money of the United States of America in immediately available funds at the Lender's office at 1660 S. Hwy 100, Suite 146, Minneapolis, Minnesota 55416-1524, or at such other place as may be designated by the Lender to the Borrowers in writing.

This Note is a promissory note of the type referred to in Section 3.5 of, and evidences indebtedness incurred under, that certain Loan and Security Agreement dated as of November 16, 2006 (together with all schedules and exhibits attached thereto, herein, as it may be amended, modified or supplemented from time to time, called the "Loan Agreement") among the Borrowers and the Lender, to which Loan Agreement reference is made for a statement of the terms and provisions thereof, including those under which the Borrowers are permitted and required to make prepayments and repayments of principal of such indebtedness and under which such indebtedness may be declared to be immediately due and payable. Capitalized terms used but not otherwise defined herein shall have the meanings given in the Loan Agreement.

All parties hereto, whether as makers, endorsers or otherwise, severally waive presentment, demand, protest and notice of dishonor in connection with this Note. This Note is made under and governed by the internal laws of the State of Minnesota.

MENDOCINO BREWING COMPANY, 

a California corporation

By:  

Its:

RELETA BREWING COMPANY LLC,

a Delaware limited liability company

By:  

Its:

ACKNOWLEDGMENT

State of California

County of _________________

On November ____, 2006 before me, _________________________, the _____________________ of MENDOCINO BREWING COMPANY, INC., a California corporation personally appeared _____________________________ personally known to me (or proved to me on the basis of satisfactory evidence) to be the person(s) whose name(s) is/are subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their authorized capacity(ies), and that by his/her/their signature(s) on the instrument the person(s), or the entity upon behalf of which the person(s) acted, executed the instrument.

WITNESS my hand and official seal.

Signature _______________________________

(Seal)

ACKNOWLEDGMENT

State of California

County of _________________

On November ____, 2006 before me, ________________________, the _____________________ of RELETA BREWING COMPANY LLC, a New York limited liability company, personally appeared ______________________________ personally known to me (or proved to me on the basis of satisfactory evidence) to be the person(s) whose name(s) is/are subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their authorized capacity(ies), and that by his/her/their signature(s) on the instrument the person(s), or the entity upon behalf of which the person(s) acted, executed the instrument.

WITNESS my hand and official seal.

Signature _______________________________

(Seal)

EX-10.85

CAPEX NOTE

$650,000.00	November 16, 2006
	Minneapolis, Minnesota

FOR VALUE RECEIVED, the undersigned, MENDOCINO BREWING COMPANY, INC., a California corporation and RELETA BREWING COMPANY LLC, a Delaware limited liability company (the "Borrowers"), JOINTLY AND SEVERALLY promise to pay to the order of MARQUETTE BUSINESS CREDIT, INC., a Minnesota corporation (the "Lender), on the Termination Date, or other due date or dates determined under the Loan Agreement hereinafter referred to, the principal sum of SIX HUNDRED FIFTY THOUSAND AND NO/100 DOLLARS ($650,000.00), or if less, the then aggregate unpaid principal amount of the Capex Loans (as such term is defined in the Loan Agreement) as may be borrowed by the Borrowers under the Loan Agreement. All Capex Loans and all payments of principal thereon shall be recorded by the holder in its records which records shall be conclusive evidence of the subject matter thereof, absent manifest error.

The Borrowers further promise to pay to the order of the Lender interest on the aggregate unpaid principal amount hereof from time to time outstanding from the date hereof until paid in full at the rates per annum which shall be determined in accordance with the provisions of the Loan Agreement. Accrued interest shall be payable on the dates specified in the Loan Agreement.

All payments of principal and interest under this Note shall be made in lawful money of the United States of America in immediately available funds at the Lender's office at 1660 S. Hwy 100, Suite 146, Minneapolis, Minnesota 55416-1524, or at such other place as may be designated by the Lender to the Borrowers in writing.

This Note is a promissory note of the type referred to in Section 3.5 of, and evidences indebtedness incurred under, that certain Loan and Security Agreement dated as of November 16, 2006 (together with all schedules and exhibits attached thereto, herein, as it may be amended, modified or supplemented from time to time, called the "Loan Agreement") among the Borrowers and the Lender, to which Loan Agreement reference is made for a statement of the terms and provisions thereof, including those under which the Borrowers are permitted and required to make prepayments and repayments of principal of such indebtedness and under which such indebtedness may be declared to be immediately due and payable. Capitalized terms used but not otherwise defined herein shall have the meanings given in the Loan Agreement.

All parties hereto, whether as makers, endorsers or otherwise, severally waive presentment, demand, protest and notice of dishonor in connection with this Note.

This Note is made under and governed by the internal laws of the State of Minnesota.

MENDOCINO BREWING COMPANY,

a California corporation

By:  

Its:

RELETA BREWING COMPANY LLC,

a Delaware limited liability company

By:  

Its:

ACKNOWLEDGMENT

State of California

County of _________________

On November ____, 2006 before me, _________________________, the _____________________ of MENDOCINO BREWING COMPANY, INC., a California corporation personally appeared _____________________________ personally known to me (or proved to me on the basis of satisfactory evidence) to be the person(s) whose name(s) is/are subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their authorized capacity(ies), and that by his/her/their signature(s) on the instrument the person(s), or the entity upon behalf of which the person(s) acted, executed the instrument.

WITNESS my hand and official seal.

Signature _______________________________

(Seal)

ACKNOWLEDGMENT

State of California

County of _________________

On November ____, 2006 before me, ________________________, the _____________________ of RELETA BREWING COMPANY LLC, a New York limited liability company, personally appeared ______________________________ personally known to me (or proved to me on the basis of satisfactory evidence) to be the person(s) whose name(s) is/are subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their authorized capacity(ies), and that by his/her/their signature(s) on the instrument the person(s), or the entity upon behalf of which the person(s) acted, executed the instrument.

WITNESS my hand and official seal.

Signature _______________________________

(Seal)

EX-10.86

FIFTH AMENDMENT TO

EXTENSION OF TERM OF NOTES UNDER MASTER LINE OF CREDIT AGREEMENT

This Fifth Amendment to Extension of Term of Notes under Master Line of Credit Agreement (this "Amendment") is entered into to be effective as of August 31, 2005 (the "Effective Date") by and between Mendocino Brewing Company, Inc., a California corporation ("Borrower"), and United Breweries of America, Inc., a Delaware corporation ("Lender").

RECITALS

A.Borrower and Lender entered into an Extension of Term of Notes Under Master Line of Credit Agreement dated February 14, 2002, and amended as of August 15, 2002, March 31, 2003, August 14, 2003, and August 14, 2004 (the "Original Agreement"), which provides that the terms of certain of the Notes made by Borrower in favor of Lender shall be extended until August 31, 2005.

B.Subject to the terms and conditions of this Amendment, the parties now wish to further extend the terms of certain of the Notes.

C.Any capitalized terms not otherwise defined herein shall have the meanings set forth in the Original Agreement.

NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which is acknowledged, Borrower and Lender agree as follows:

1.Extension of Term. Section 1 of the Original Agreement is amended to read as follows:

The Notes provide that Lender has the right, at any time on or after the respective maturity dates of the Notes, to convert the Notes into shares of Borrower's common stock. However, Section 3 of the Notes provides that in the event that Lender has not converted the entire principal amount of any Note on or before its respective maturity date, Lender has the right to extend the term of such Note for a period of time mutually agreed upon between Lender and Borrower. The parties hereby modify their previous agreement and agree to extend the term of each of the Notes itemized Nos. 1 through 13 on Exhibit A, effective as of the maturity date of each respective Note, for a period of time ending on December 31, 2006.

2.Governing Law. This Amendment shall be governed by and construed in accordance with the laws of the State of California, without regard to the conflicts of laws principles of that or any other jurisdiction.

3.Counterparts. This Amendment may be executed in one or more counterparts, each of which shall be deemed an original, and all taken together shall constitute one and the same instrument.

4.Miscellaneous. This Amendment, in connection with the Original Agreement, contains all of the agreements, conditions, promises and covenants between the parties with respect to the subject matter hereof and supersedes all prior or contemporaneous agreements, representations or understandings with respect to the subject matter hereof. In the event of any conflict between the terms of the Original Agreement and this Amendment, the terms of this Amendment shall govern. Except as set forth in this Amendment, the terms of the Original Agreement shall remain in full force and effect. This Amendment may not be amended, modified, altered or otherwise changed in any respect except by written agreement signed by authorized representatives on behalf of Borrower and Lender. If any one or more of the provisions contained in this Amendment shall be invalid, illegal or unenforceable in any respect, the validity, legality or enforce ability of the remaining provisions contained herein shall not in any way be affected or impaired.

[signature page to follow]

1

IN WITNESS WHEREOF, duly executed representatives of each of the parties hereto have executed and delivered this Amendment, to be effective as of the Effective Date first stated above.

Borrower: MENDOCINO BREWING COMPANY, INC. a California corporation		Lender: UNITED BREWERIES OF AMERICA, INC. a Delaware corporation
By:	/s/ N. Mahadevan	By:	/s/ Anil Pisharody
	Name: N. Mahadevan Title: Chief Financial Officer and Secretary		Name: Anil Pisharody Title:Secretary

2

EX-10.87

SIXTH AMENDMENT TO

EXTENSION OF TERM OF NOTES UNDER MASTER LINE OF CREDIT AGREEMENT

This Sixth Amendment to Extension of Term of Notes under Master Line of Credit Agreement (this "Amendment") is entered into to be effective as of December 31, 2006 (the "Effective Date") by and between Mendocino Brewing Company, Inc., a California corporation ("Borrower"), and United Breweries of America, Inc., a Delaware corporation ("Lender").

RECITALS

A.Borrower and Lender entered into an Extension of Term of Notes Under Master Line of Credit Agreement dated February 14, 2002, and amended as of August 15, 2002, March 31, 2003, August 14, 2003, August 14, 2004 and August 31, 2005 (the "Original Agreement"), which provides that the terms of certain of the Notes made by Borrower in favor of Lender shall be extended until December 31, 2006.

B.Subject to the terms and conditions of this Amendment, the parties now wish to further extend the terms of certain of the Notes.

C.Any capitalized terms not otherwise defined herein shall have the meanings set forth in the Original Agreement.

NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which is acknowledged, Borrower and Lender agree as follows:

1.Extension of Term. Section 1 of the Original Agreement is amended to read as follows:

The Notes provide that Lender has the right, at any time on or after the respective maturity dates of the Notes, to convert the Notes into shares of Borrower's common stock. However, Section 3 of the Notes provides that in the event that Lender has not converted the entire principal amount of any Note on or before its respective maturity date, Lender has the right to extend the term of such Note for a period of time mutually agreed upon between Lender and Borrower. The parties hereby modify their previous agreement and agree to extend the term of each of the Notes itemized Nos. 1 through 13 on Exhibit A, effective as of the maturity date of each respective Note, for a period of time ending on June 30, 2007.

2.Governing Law. This Amendment shall be governed by and construed in accordance with the laws of the State of California, without regard to the conflicts of laws principles of that or any other jurisdiction.

3.Counterparts. This Amendment may be executed in one or more counterparts, each of which shall be deemed an original, and all taken together shall constitute one and the same instrument.

4.Miscellaneous. This Amendment, in connection with the Original Agreement, contains all of the agreements, conditions, promises and covenants between the parties with respect to the subject matter hereof and supersedes all prior or contemporaneous agreements, representations or understandings with respect to the subject matter hereof. In the event of any conflict between the terms of the Original Agreement and this Amendment, the terms of this Amendment shall govern. Except as set forth in this Amendment, the terms of the Original Agreement shall remain in full force and effect. This Amendment may not be amended, modified, altered or otherwise changed in any respect except by written agreement signed by authorized representatives on behalf of Borrower and Lender. If any one or more of the provisions contained in this Amendment shall be invalid, illegal or unenforceable in any respect, the validity, legality or enforceability of the remaining provisions contained herein shall not in any way be affected or impaired.

[signature page to follow]

1

IN WITNESS WHEREOF, duly executed representatives of each of the parties hereto have executed and delivered this Amendment, to be effective as of the Effective Date first stated above.

Borrower: MENDOCINO BREWING COMPANY, INC. a California corporation		Lender: UNITED BREWERIES OF AMERICA, INC. a Delaware corporation
By:	/s/ N. Mahadevan	By:	/s/ Anil Pisharody
	Name: N. Mahadevan Title: Chief Financial Officer and Secretary		Name: Anil Pisharody Title:Secretary

2

EX-10.88

SECOND AMENDMENT TO CONVERTIBLE PROMISSORY NOTE

MENDOCINO BREWING COMPANY, INC.

This Second Amendment to Convertible Promissory Note (this "Amendment") is effective as of December 31, 2006 by and between United Breweries of America, Inc., a Delaware corporation ("Holder") and Mendocino Brewing Company, Inc., a California corporation (the "Company").

RECITALS

A.The Company issued a convertible promissory note (the "Note") to Holder in the principal amount of Four Hundred Thousand Dollars ($400,000) dated March 2, 2005.

B.The Holder and the Company entered into the First Amendment to Convertible Promissory Note effective August 31, 2006, which provides that the term of the Note made by the Company in favor of Holder shall be extended until December 31, 2006.

C.Subject to the terms and conditions of this Amendment, the parties now wish to further extend the term of the Note.

NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which is hereby agreed, the parties agree as follows:

1.Extension of Term. The first sentence of Paragraph 1 of the Note is hereby amended and restated to read as follows:

"Mendocino Brewing Company, Inc., a California corporation having its principal office at 1601 Airport Road, Ukiah, California 95482 and any successor (the "Company"), for value received, promises to pay to United Breweries of America, Inc., a Delaware corporation or to its registered successors or assigns (the "Holder") the principal sum of Four Hundred Thousand Dollars ($400,000.00) on presentation and surrender of this Convertible Note ("Note") on June 30, 2007 (the "Maturity Date"), and to pay interest on that principal sum at a rate equal to the lesser of (i) one and one-half percent (1.5%) per annum above the prime rate offered from time to time by the Bank of America in San Francisco, California, or (ii) ten percent (10%)."

2.Governing Law. This Amendment shall be governed by and construed in accordance with the laws of the State of California, without regard to the conflicts of laws principles of that or any other jurisdiction.

3.Counterparts. This Amendment may be executed in one or more counterparts, each of which shall be deemed an original, and all taken together shall constitute one and the same instrument.

4.Miscellaneous. This Amendment contains all of the agreements, conditions, promises and covenants between the parties with respect to the subject matter hereof and supersedes all prior or contemporaneous agreements, representations or understandings with respect to the subject matter hereof. In the event of any conflict between the terms of the Note and this Amendment, the terms of this Amendment shall govern. Except as set forth in this Amendment, the terms of the Note shall remain in full force and effect. This Amendment may not be amended, modified, altered or otherwise changed in any respect except by written agreement signed by authorized representatives on behalf of Borrower and Holder. If any one or more of the provisions contained in this Amendment shall be invalid, illegal or unenforceable in any respect, the validity, legality or enforceability of the remaining provisions contained herein shall not in any way be affected or impaired.

[signature page to follow]

1

IN WITNESS WHEREOF, duly executed representatives of each of the parties hereto have executed and delivered this Amendment, to be effective as of the Effective Date first stated above.

Borrower: MENDOCINO BREWING COMPANY, INC. a California corporation		Holder: UNITED BREWERIES OF AMERICA, INC. a Delaware corporation
By:	/s/ N. Mahadevan	By:	/s/ Anil Pisharody
	Name: N. Mahadevan Title: Chief Financial Officer and Secretary		Name: Anil Pisharody Title:Secretary

2

EX-31.1

CERTIFICATIONS

I, Yashpal Singh, certify that:

1. I have reviewed this annual report on Form 10-K of Mendocino Brewing Company, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b. [Intentionally omitted pursuant to SEC Release Nos. 33-8238 and 34-47986];

c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 31, 2007

/s/ Yashpal Singh

Yashpal Singh,

President, Director and Chief

Executive Officer

EX-31.2

CERTIFICATIONS

I, N. Mahadevan, certify that:

1. I have reviewed this annual report on Form 10-K of Mendocino Brewing Company, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b. [Intentionally omitted pursuant to SEC Release Nos. 33-8238 and 34-47986];

c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 31, 2007

/s/ N. Mahadevan

N. Mahadevan,

Chief Financial Officer

EX-32.1

CERTIFICATION PURSUANT TO TITLE 18, UNITED STATES CODE,

SECTION 1350

In connection with the Annual Report of Mendocino Brewing Company, Inc. (the “Company”) on Form 10-K for the fiscal year ended December 31, 2006, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Yashpal Singh, Chief Executive Officer of the Company, certify, pursuant to Title 18, United States Code, Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1)   The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

(2)   The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

Date: March 31, 2007

/s/ Yashpal Singh

Name: Yashpal Singh

Title: President, Director and  

Chief Executive Officer

EX-32.2

CERTIFICATION PURSUANT TO TITLE 18, UNITED STATES CODE,

SECTION 1350

In connection with the Annual Report of Mendocino Brewing Company, Inc. (the “Company”) on Form 10-K for the fiscal year ended December 31, 2006, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, N. Mahadevan, Chief Financial Officer of the Company, certify, pursuant to Title 18, United States Code, Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1)   The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

(2)   The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

Date: March 31, 2007

/s/ N. Mahadevan

Name: N. Mahadevan

Title: Chief Financial Officer