In traditional Greek myth, Poseidon caused King Mino's wife to fall in love and bear the offspring of a great white bull he had sent to the king, after Minos refused to sacrifice it in the sea god's honour as he had promised. The resulting child, the beast-minded Minotaur, was then entrapped in a labyrinth created by Mino's inventor, Daedalus, which was meant to be inescapable.
In the plot of the movie, it is Zeus who transformed and imprisoned the Minotaur, and he retains his human intelligence.
In the bar, Iolaus tells a story, in clip show format, to someone who doesn't believe that Hercules is Hercules. However, the story he tells didn't take place, as Iolaus died and Hercules went back in time preventing the events in the flashback from ever occurring.