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    U.S. Securities and Exchange Commission
            Washington, D.C.  20549

                  Form 10-KSB
(Mark One)
  [X]          ANNUAL REPORT PURSUANT TO SECTION 13
               OR 15(d) OF THE SECURITIES EXCHANGE
               ACT OF 1934 [Fee Required]
               For the fiscal year ended December 31, 1996

  [  ]         TRANSITION REPORT UNDER SECTION 13 OR
               15(d) OF THE SECURITIES EXCHANGE ACT OF
               1934 [No Fee Required]
               For the transition period from ______ to _________________ 

          Commission File No. 0-26276
              R.H. PHILLIPS, INC.
 (Name of small business issuer in its charter)

            California                                       68-0313739
     (State or other jurisdiction of incorporation or     (I.R.S. Employer
     organization)                                       Identification No.)

     26836 County Road 12A, Esparto, California             95627
     (Address of principal executive offices)            (Zip Code)

Issuer's telephone number:  (916) 662-3215

Securities registered under Section 12(b) of the Exchange Act:  None

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

              No Par Common Stock
                (Title of Class)

   Warrants to Purchase Common Stock, Expiring October 1, 1998
                 (Title of Class)

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

Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. [X]

Issuer's revenues for its most recent fiscal year:  $16,928,545

Aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold on
March 24, 1997: $15,532,779

Number of shares outstanding of each of the issuer's classes of common
equity as of March 18, 1997: 5,957,750
Transitional Small Business Disclosure Format:    Yes      No  X 
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                     PART I

Item 1. Description of Business

General

     As used herein, "R.H. Phillips business" will refer to the R.H.
Phillips vineyard and winery business.  The "Company" will refer to
R.H. Phillips, Inc., the issuer to which this report pertains.
 
     The Company makes and sells premium varietal table vines.  The
Company's vineyard, winery and corporate headquarters is located in the
Dunnigan Hills region of California, approximately 30 miles northeast
of the Napa Valley wine region.  The Company's wines are sold
throughout the United States and in several other countries.  Since John
and Karl Giguiere, the Co-Chief Executive Officers of the Company,
founded R.H. Phillips in the early 1980s, sales of R.H. Phillips' wines
have increased from 4,552 cases of wine in 1984 to 402,000 cases of
wine in 1996.

Business of Issuer

     Products

     The Company produces and sells wines in the category
commonly referred to as "table wines."  Table wines are those with 7%
to 14% alcohol by volume and which are generally consumed with
foods.  Table wines that retail for less than $3.00 per 750 ml (milliliter)
bottle are generally referred to as generic or "jug" wines.  Table wines
which retail in the $3.00 to $7.00 range are referred to as "premium" or
"popular premium" wines.  Wines which retail between $7.00 and
$14.00 per bottle are considered "super premium" wines and those
which retail above $14.00 per bottle are considered "ultra premium"
wines.

     R.H. Phillips has developed a diverse line of products including
popular premium and super premium varietal table wines.  The
Company markets its products under primary and secondary labels. 
Primary label products feature the "R.H. Phillips" name, and are divided
into three brand groups, with each group distinguished by a type of wine
and price structure. The secondary label wines have a lower cost base
and are intended to compete aggressively with other lower-priced
premium wines. 
     
     The EXP Series comprises two varietals, Syrah and Viognier,
which are traditional to France's southern Rhone Valley.  The EXP
Series wines are bottled in 750 ml bottles and retail for about $12 each.

     Chardonnay and Cabernet Sauvignon are the two R.H. Phillips
wines considered the Classic Varietals.  R.H. Phillips has become a
recognized quality leader for Chardonnay and Cabernet Sauvignon
priced under $10 per bottle and receives significant positive recognition
from well-known wine critics such as Robert Parker.  The lower
viticultural cost associated with the Dunnigan Hills region has made it
possible for R.H. Phillips to improve wine quality by applying a portion
of production savings to oak barrel fermentation and barrel aging. 
These processes give the wines a competitive quality edge within their
price structure.  The Chardonnay and Cabernet Sauvignon are bottled
in 750 ml and 1.5 liter bottles, and retail for about $8 or $14 per bottle,
depending on the size.  

     The Night Harvest series consists of blends of varietal wines
which are named for the innovative night harvesting methods developed
by the Company to retain grape freshness. This series includes
Sauvignon Blanc, Mistura and White Zinfandel.  The method of night
harvesting allows the processing of 
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cooler fruit, producing maximum flavor from the grapes without
extracting the bitterness which emerges at higher processing
temperatures.  Wines in this group are delicate, smooth-textured blends
which are designed to gain maximum flavor from the blending process. 
Night Harvest wines are bottled in 500 ml, 750 ml and 1.5 liter bottles.
Retail prices for blends in this group, depending on bottle size, range
from about $4 to $10 per bottle. 

     The Diamond G and Chateau St. Nicholas wines are secondary
labels, and the R.H. Phillips name does not appear on the label. These
wines are not barrel aged, allowing the wines to be produced and sold
at a lower price.  Due to its lower retail cost, Diamond G wine can
compete with inexpensive varietals from much larger producers such as
Glen Ellen and Sutter Home.  Diamond G  is produced in 750 ml and
1.5 liter bottles, and retails for about $6 or $10 per bottle.  Chateau St.
Nicholas is sold only during the holiday season, and is offered both as
a blended Chardonnay and as a blended White Zinfandel, in a 750 ml
bottle or a gift pack consisting of two 500 ml bottles.  Chateau St.
Nicholas retails for about $6-7 for the 750 ml bottles, and $12 for the
gift pack.   Management believes that Chateau St. Nicholas is a mature
brand, sales of which are not likely to increase. 

     The Company plans to introduce its new Toasted Head Series in April 1997.  
This series will consist of barrel aged Chardonnay
packaged in a 750 ml bottle, and will retail for about $12.  Management
believes this series will be competitive with wines priced in the ultra
premium category.

     Sales By Product

     The varietal makeup of R.H. Phillips wines has changed since the
business was founded.  In the first years of full product line sales,
generic white and red table wine represented a larger portion of R.H.
Phillips' sales than any of its varietals.  In 1996, generic table wines
represented approximately 1% of total sales, while sales of Chardonnay
and White Zinfandel totaled approximately 48% and 15% of total sales,
respectively.

     Management is reducing production of Chateau St. Nicholas to
prevent competition with the R.H. Phillips brand during the holidays,
and to focus its distributors' efforts on building the R.H. Phillips brand. 
Sales of Chateau St. Nicholas, which peaked at a high of approximately
68,000 cases in 1991, declined to approximately 27,000 cases in 1996.

     Although R.H. Phillips primarily focuses on building its
proprietary wines, the Company continues to process a small amount of
private label wine.  Private label wines are packaged and labeled to the
specifications of the customer, and the R.H. Phillips name does not
appear on the face label. In 1996, private label sales represented
approximately 4% of total sales.  

     Distribution

     The Company's sales strategy has focused on the creation,
retention and expansion of a large, nationwide distributor network
supported by sales personnel.  The Company's brands are distributed
nationwide by a network of 95 unrelated wine distributors who buy
inventory at wholesale prices.  Four direct sales representatives, who are 
employees of R.H. Phillips, work with certain distributors and receive
a salary plus volume bonuses.  Seven independent wine brokers have
been appointed by R.H. Phillips to work with other distributors and are
paid a commission on their sales.  Each sales representative and broker
has the responsibility of managing the wholesale network established in
his or her region.  Each distributor represents a large number of
products, so the R.H. Phillips representative is the critical link between
the 
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winery and the wholesaler, and works to facilitate communication, deals
with special promotions, and monitors sales performance.  The
Company also employs a National Sales Manager, whose responsibilities
include reviewing regional sales performances and the extent of brand
penetration within each region.

     The Company's non-employee sales representatives and wine
brokers are paid a commission based on a percentage of the dollar
amount of wine orders they obtain from the Company's distributors. 
The sales representatives generally are not subject to agreements which
obligate them to market the Company's wines  for any specific period,
or which prohibit the Company from replacing any sales representative
upon notice to the representative.  However, one sales representative,
Citadel Trading Corp. ("Citadel"), which accounted for 49% of all
orders placed by distributors for the Company's wines in 1996, has an
agreement with the Company which provides that Citadel is the
exclusive sales representative of the Company in the states of Maine,
New Hampshire, Vermont, Connecticut, New York, Massachusetts,
New Jersey, Pennsylvania and Rhode Island.  The agreement will expire
on January 1, 1998, unless terminated before that date by either party
for cause.  The agreement provides that Citadel will relinquish its
marketing rights to the Company's wines if there is a substantial decline
in sales in Citadel's territory.  During the term of that agreement,
Citadel may not act as representative of another California winery in
competition with the Company without the Company's consent.
 
     There has been substantial consolidation among beverage
distributors during the last several years.  Virtually all of the distributors
the Company uses also sell other brands of wine and other alcoholic
beverages.  As a result, the Company believes that a strong distribution
network which is able and willing to sell the Company's wines is
especially important for the Company.
 
     The three largest distributors of R.H. Phillips' wines are  Lauber
Imports, Ltd., Wine Warehouse,  and M.S. Walker.  In 1996, Lauber
Imports, which distributes wines in the northeastern United States,
accounted for approximately 13% of sales.  Wine Warehouse distributes
wine in California, and accounted for approximately 11% of sales.  M.S.
Walker, also located in the northeast, accounted for approximately 10%
of total sales.

     The Company's wines are sold throughout the United States and
in several other countries.  The northeastern United States was the
region which accounted for the highest percentage of R.H. Phillips' sales
in 1996, constituting approximately 35% of total sales.  The  northern
Midwest was R.H. Phillips' second largest region, with approximately
11% of total sales in 1996.  California, which is divided into two sales
regions, also accounted for approximately 11% of sales.  Approximately
1% of total sales were to other countries, primarily Canada and the
United Kingdom.
     
     The Company's standard sales terms provide that payments for
wines purchased by distributors are due 30 to 60 days after shipment at
prices set forth on the Company's price lists.  The Company does not
have contracts with any of its distributors which obligate them to
purchase any specified amount of wine over any defined period.  It is
therefore possible for a distributor, including one of the Company's
major distributors, to cease purchases of the Company's wines at any
time.

     Management estimates that the end customers of the Company's
wine and spirits distributors consist of approximately 40% liquor stores,
40% grocery stores, and 20% bars and restaurants. 
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     Sales and Marketing

     The Company's sales expenditures take various forms.  The
Company pays salaries, wages and commissions to its sales and sales
support personnel.  In addition, the Company uses advertising and sales
promotional expenses to promote products in either a "push" or "pull"
manner.  "Push" programs include such sales tools as promotional
allowance rebates or discounts, product samples, and spiffs (dollar sales
incentives) paid to distributor sales personnel.  "Pull" programs include
media advertising, travel and entertainment, point of sale materials, a
tasting room, and various promotional events.  Management considers
"push" programs to be the most productive way to generate new sales
per dollar.  Although pull programs are more costly to implement,
management believes that they will provide a greater return over the
long run by building brand recognition.

     Suppliers

     The Company purchases raw materials from outside parties to
conduct its business.  Raw materials include items such as grapevines
and trellis materials, fertilizers and pesticides, and packaging supplies
such as bottles, corks, boxes and labels. Management believes that it has
strong relationships with all of its major vendors, is not dependent on
any single supplier, and would be able to find substitute suppliers if
necessary. 

      Because sales of the Company's products exceed the Company's
current grape production, it has been necessary to purchase bulk wine
and grapes from outside suppliers.  In 1996, approximately 55% of the
wine sold by the Company came from bulk grapes and wine bought on
the open market.  The supply and price of available grapes have
generally been subject to considerable fluctuations.  One factor which
has reduced the available supply of grapes is Phylloxera damage, which
has reduced grape harvests in Napa and Sonoma counties, as described
in Phylloxera, Other Diseases.  Another factor during 1995 and 1996
was adverse weather conditions, which further reduced grape harvest in
the Napa and Sonoma grape growing areas.  The price which Ernest &
Julio Gallo, the largest purchaser of bulk wine and grapes, pays for these
products also has a considerable impact upon the average price of bulk
wines and grapes in the wine industry.

     Research and Development

     R.H. Phillips maintains a three-acre experimental vineyard where
new grape varieties are planted and small-scale viticultural experiments
conducted.  Such variables as the amount of irrigation water received by
a vine, crop level per vine, and different approaches to canopy
management are tested on the plot.  Promising grape varieties and
viticultural practices are then further tested in the main vineyard. 
Research is currently being conducted in the following areas: 

     Dry Land Red Grape Production  The Rhone varieties are being
planted in a dry land, semiarid format.  By shrinking the fruit cluster and
berry size, R.H. Phillips hopes to improve wine color, flavor and
richness.

     Vertical Trellising  The Company is investigating ways to
increase the exposure of fruit to the sun to increase the fruitiness of the 
wines;
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     pH Manipulation  In the warm climate of the Dunnigan Hills,
high pH can cause shifts in fruit flavor and reduce the shelf life of the
finished wine.  Experiments with soil potassium levels, irrigation
amounts and maturity levels at harvest are being conducted; 

     Organic Viticulture  Experiments are underway to actively
promote elimination of both insecticides and herbicides from the
vineyards; 

     Winemaking  A number of winemaking experiments are carried
out each year. Wine variables are changed and the results are evaluated
through blind tastings and statistical analyses. Yeast strains and
fermentation temperatures are examples of two winemaking variables
that are tested. 

     R.H. Phillips actively exchanges viticultural and winemaking
information with other firms in the industry. A close working
relationship with the faculty of the Department of Enology and
Viticulture at the University of California at Davis is also maintained. 
Staff members of R.H. Phillips have visited several wineries in Europe
and Australia, and personnel from French, Australian and South African
wineries and vineyards have toured its facilities.  These visits have
resulted in a valuable exchange of technical information. 

     Competition

     The California table wine industry in 1996 had approximately
$5.2 billion in sales according to the December 1996 edition of 
WINEDATA published by  Gomberg, Fredrikson and Associates.  There
are currently about 800 commercial wineries in California, which are
concentrated in the major viticultural regions of the state.  The three
largest wineries, known as "the Big Three," are E. & J. Gallo,
Canandaigua West, and The Wine Group.  The shipment volume of the
Big Three in 1996 accounted for approximately 63% of total wine sales
in California.  The Company is the 21st largest shipper of wines in
California, according to the 1996 edition of WINEDATA.

     The California wine industry is extremely competitive.  Many
new wineries have been established in the last few years which compete
to some extent with the Company.  The competitive environment will
continue to be intense in all likelihood and management believes it is
doubtful that many of the smaller wineries with comparatively high costs
of production and limited financial resources will be able to survive. 
Management believes that competition in the wine industry will likely
increase, which could potentially reduce future profits.

     Per capita wine consumption in the United States has increased
steadily in the last five years, according to the December 1996 edition
of WINEDATA.  The increase appears to be due to favorable news
about the health benefits of moderate wine consumption, a strong
economy, and innovative packaging introduced by the wine industry,
according to the 1996 edition of WINEDATA.

     Trademarks

     The Company has obtained from the U.S. Patent & Trademark
Office a federal registration for its EXP and Chateau St. Nicholas
trademarks and has applied for registration of several additional
trademarks as well.  The Company has adopted a program to establish
and protect its rights in its trademarks and trade names.  
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     Employees

     R.H. Phillips employs approximately 190 people full-time.  In
addition to the full-time positions, the Company employs temporary
labor for vineyard development, pruning, harvest, and  peak bottling
season.  None of the Company's employees are covered by a collective
bargaining agreement and the Company is unaware of any labor disputes
with its employees.  

     Agricultural Hazards

     The growing of grapes for wine production is heavily dependent
upon favorable weather conditions.  Drought or excessive rain can
adversely affect production.  Excessive heat or cold, especially near the
time for harvest, can adversely affect the quality of grapes for wine
production.  The Company experienced lower than normal crop yields
in 1996 due to adverse weather conditions.  Management estimates that
the yields were approximately 23% lower than normal, and plans to
purchase additional bulk wine on the open market to compensate. 
Management believes that this will cause an increase in the costs of
production in 1997, and plans to raise its prices to compensate.

     Phylloxera, Other Diseases

     Over the past several years many California vineyards have been
severely damaged by Phylloxera, an aphid-sized root louse.  The pest
lives and propagates in the soil and feeds on the roots of vines. 
Phylloxera is not harmful to humans, but can affect grape quality and
causes a progressive decline in grape production until eventual vine
death.  Chemical insecticides can slow the progress of vine
deterioration, but once a vine is infested it is not possible to eradicate
Phylloxera. According to the 1994 George M. Schofield Company
Grape Intelligence report, harvests in Napa and Sonoma Counties were
reduced by 14% and 7%, respectively, in 1994.  Additionally, substantial
infestation is beginning to appear in the other coastal vineyard areas of
Monterey, Mendocino and Lake counties.  According to this report,
production in 1996 of Napa vineyards was expected to be reduced by
up to 28% due to Phylloxera infestation and Sonoma production was
expected to be reduced by 19%.

     Due to the warmer climate and careful farming practices, the
infestation of the R.H. Phillips vineyards was delayed somewhat. 
However, the Company removed during 1996 approximately 80 acres
of the vineyards showing the greatest evidence of decline from
Phylloxera infestation.  Of the Company's current 1,201 acres of
vineyards, approximately 289 acres have rootstock known to be
susceptible to Phylloxera.  Based on tests management has performed,
management believes that of these 289 acres, portions of up to 150
acres have the presence of Phylloxera.  The Company is using a variety
of methods to combat Phylloxera infestation. The Company is applying
grafting techniques by which those vines which are less damaged or are
not yet infested are grafted onto resistant rootstock, and an interplanting
technique in which new vines on resistant rootstock are planted between
the susceptible vines, which are then allowed to deteriorate.  More
damaged vines, as well as those Phylloxera susceptible vines bearing
grape varieties which the Company plans to de-emphasize, are being
replaced.  All replacement vines will have rootstock which is believed
in the industry to be resistant to Phylloxera. 

     In addition to Phylloxera, grape vines are subject to a variety of
other damaging diseases which have afflicted California vineyards.  The
Company is taking steps to reduce the likelihood of infestation.  These
steps include the use of chemical treatments and organic methods, such
as use of natural insect enemies of the pests.
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     Water Supply

     The Company uses drip irrigation from well water supplies to
irrigate its vineyards.  The wells have been a reliable source of water for
the Company.  Although management believes that these sources of
water will remain available for the foreseeable future, there can be no
assurance that sufficient water will be available from underground
aquifers.  The Company is experimenting with dry land farming
techniques for some of its Rhone varietal grapes which are native to
areas with relatively little rainfall.  If successful, this could reduce the
Company's dependence on irrigation. 

     Regulation

     The U.S. wine industry is subject to substantial federal, state and
local regulation.  The Bureau of Alcohol, Tobacco and Firearms
("BATF") is the federal agency primarily responsible for regulating the
production and sale of wine.  The BATF has promulgated the numerous
wine industry-related regulations.  These regulations include the
licensing of wine producers, limitations on chemical additives in wines,
advertising standards, labeling requirements and numerous other aspects
of wine production and sales.

     The BATF also collects federal excise taxes on wine.  The
amount of federal excise tax is based on the total volume of wine
shipped and the alcohol content of that wine.  The tax on wine with an
alcohol content greater than 14% is greater than the tax assessed on
wine with a lesser alcohol content. The current federal excise tax on
wines produced by the Company, all of which contain less than 14%
alcohol, is $1.07 per gallon for a total of $2.55 per case.  The California
state excise tax is $0.20 per gallon of wine sold into California. 
Missouri and Wisconsin also collect excise taxes based on the volume
of sales into those states.

     State governments also regulate the production and shipment of
wine. In California, the wine regulatory agency is the Department of
Alcoholic Beverage Control.  Although the laws and regulatory
requirements of the states differ, most states require that wineries be
licensed by the appropriate state authorities before they are allowed to
ship wine into the state.  The Company has obtained licenses from those
other states in which it believes it is necessary to be licensed.  Most
states also require prior state approval of wine labels and set other
standards for the manufacture and sale of wine.  Wineries are subject to
periodic inspections and audits by the BATF and the state alcohol
regulatory authorities. 

     In addition to alcohol-related governmental regulations, grape
growers, wine producers and wine shippers are subject to a broad range
of other regulatory requirements, such as local zoning regulations. 
Other regulations govern the use, storage and disposition of pesticides,
fuels and lubricants and other chemicals.  The Company believes it is in
substantial compliance with all material applicable laws and regulations
relating to R.H. Phillips' business.  Management is unaware of any
environmental problems on or near the vineyard and winery. 

     Seasonality

     The Company usually experiences substantial seasonal
fluctuations in revenue and expenditures.  Sales volumes generally
increase during the holiday season, which causes a large percentage of
sales to occur during the last three months of each year.  In 1996,
approximately 33% of total sales occurred during this period.  The
Company's expenditures fluctuate throughout the year based on
vineyard and winery activities.  Expenditures typically peak during the
summer and early autumn, due to harvest and crush activities and
expenditures to fund vineyard and winery expansions.
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     Working Capital
     
     The Company typically keeps large amounts of inventories on
hand.  Inventories include unfinished products such as the current grape
crop, bulk wine stored in tanks and barrels, and packaging supplies, as
well as finished wines.  The Company generally keeps sufficient finished
product on hand to allow rapid turnaround of wine orders. 
Management believes that large inventories are standard in the wine
industry for these reasons.
     
     Several of the Company's largest customers receive payment
terms in excess of its standard thirty day terms.  The extended payment
terms are offered to remain competitive with other wineries, and they 
have the effect of increasing accounts receivable.  As of December 31,
1996, approximately 34% of trade accounts receivable were aged more
than thirty days due to extended terms.

Item 2. Description of Property

     The Company owns 2,696 acres of land in California's Dunnigan
Hills region, located in northern Yolo County.  A total of 1,201 acres
are currently planted in vineyards.  All the vineyards are harvested for
wines produced by R.H. Phillips, with the exception of 45 acres on
which grapes are grown under a production contract with Heublein, Inc. 
The Company also farms 485 additional acres of vineyards under an
annually renewable contract for C. Mondavi & Sons.  

     Of the wine sold by the Company during 1996, approximately
45% was produced from grapes grown on land owned by the Company. 
On site production was supplemented by grapes and bulk wine
purchased from other vineyards and wineries.  The Company is in the
process of expanding its vineyards in an effort to reduce or eliminate
outside grape and bulk wine purchases.  The Company planted 435
acres of new vineyards during 1996, and currently plans to plant an
additional 350 acres in 1997, 175 acres in 1998, and 50 acres each in
1999 and 2000.  The additional acres are being planted on land the
Company currently owns or may purchase in the future, including 100
acres the Company purchased in February 1997.  By the year 2000, the
Company intends to have approximately 1,700 acres of vineyard under
cultivation on approximately 2,700 acres of land.  However, there can
be no assurance that the Company will be able to expand the vineyards
at that rate.

     The Company's winery facility and administrative headquarters
are located on the Company's land.  The winery facility contains
bottling, barrel storage and warehouse buildings, and several exterior
tank and mechanical pads.   Present storage capacity in the Company's
warehouse is approximately 55,000 cases of wine, which is fully utilized. 
The Company owns or leases approximately 5,600 oak barrels, and
storage capacity in its barrel room is approximately 7,500 barrels.  The
barrels are capable of holding approximately 330,000 gallons, and the
Company's current wine tank capacity is approximately 1,445,000
gallons, for a total capacity of approximately 1,775,000 gallons.  The
maximum bulk wine on hand at one time during 1996 was
approximately 1,055,000 gallons.

     The Company has granted to Metropolitan Life Insurance
Company ("Metropolitan") a deed of trust on its real property and a
security interest in certain equipment and other assets as security for a
long term loan the Company received from Metropolitan.  The
Company maintains insurance policies with respect to its principal
properties which, in management's opinion, are adequate in view of the
value of the property and the nature of its business.
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Item 3.  Legal Proceedings

     The Company is not the subject of any material litigation, other
than routine litigation incidental to the Company's business. 

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

     The Company held its 1996 Annual Meeting of Shareholders on
October 17, 1996 at the Company's winery.  A total of 3,963,152
shares, or approximately 67% of the outstanding shares of Common
Stock, were present or represented at the meeting.

     The following persons were elected to the Board of Directors of
the Corporation, each of whom was an existing director of the
Corporation at that time: John E. Giguiere, Karl E. Giguiere, Lane C.
Giguiere, R. Ken Coit and Victor L. Motto.  The number of shares
voting in favor of each nominee was 3,962,452 and the number of
shares voting against each nominee was 700.  No other persons were
nominated for election to the Board of Directors.

     The shareholders also voted to reappoint KPMG Peat Marwick
LLP ("KPMG") as the Company's independent auditors.  A total of
3,962,252 votes were cast in favor of the reappointment of KPMG, 200
votes were cast against the reappointment, and 700 votes abstained. 

                    PART II

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

     The Company's Common Stock and warrants to purchase
Common Stock are listed on the Nasdaq National Market.  As of March
18, 1997, there were 303 holders of record of the Company's Common
Stock.

     On March 31, 1995, the Company completed an initial public
offering of 493,563 equity units at a price of $7.25 per unit.  Each unit
consisted of two shares of Common Stock and one warrant to purchase 
one share of Common Stock.  The units began trading on the Nasdaq
SmallCap Market in April 1995, and the Common Stock and warrants
began trading separately on October 1, 1995.  The Common Stock is
now traded on the Nasdaq National Market.         

     The high and low bid prices for the Common Stock by quarter
for the past two years while the Common Stock has been traded
separately are as follows:

     Year Ended December 31, 1995                  High       Low

          Fourth Quarter . . . . . . . . . . .    $3.25      $3.00


     Year Ended December 31, 1996

          First Quarter. . . . . . . . . . . .    $6.75      $3.00
          Second Quarter . . . . . . . . . . .    $6.75      $4.88
          Third Quarter. . . . . . . . . . . .    $6.50      $3.75
          Fourth Quarter . . . . . . . . . . .    $4.12      $2.75

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     The high and low bid prices for the units prior to the time that
the Common Stock was separately tradeable were as follows:


     Year Ended December 31, 1995                  High       Low
                       
          Second Quarter . . . . . . . . . . .    $7.75      $7.25
          Third Quarter. . . . . . . . . . . .    $7.75      $7.00

     The information concerning the high and low bid prices was
based on reports the Company received from the Nasdaq Stock Market.

     The Company has not paid dividends on its Common Stock to
date.  Management intends to reinvest earnings in the development of
its business and does not anticipate paying Common Stock  dividends
for the foreseeable future.  The Board of Directors may reevaluate its
policies with respect to the payment of Common Stock dividends in the
future. 

     Payment of dividends on the Common Stock is subject to certain
limitations under the Company's loan agreements with Metropolitan and
U.S. Bank of California ("U.S. Bank"). In addition, the Senior Preferred
Stock of the Company, which is described below, provides that semi-
annual dividends payable on those shares must be paid in full or set aside
for payment before any dividends are paid on the Common Stock.

     The Company issued 500,000 shares of 12% Senior Redeemable
Preferred Stock (the "Senior Preferred Stock") and warrants to
purchase up to 1,346,788 shares of Common Stock in a private
placement to John Hancock Mutual Life Insurance Company
("Hancock") on March 27, 1996. The shares were issued without
registration under the Securities Act of 1933 (the "Act") pursuant to the
exemption to registration contained in Rule 506 of Regulation D and
Section 4(2) of the Act. The net proceeds the Company derived from
the sale of the Senior Preferred Stock and the warrants, after payment
of offering expenses, were approximately $4,798,000.  The warrants to
purchase Common Stock were valued at approximately $336,000,
making the net value of the Senior Preferred Stock approximately
$4,462,000.  Accretion of approximately $25,000 was recorded during
1996, making the value of the Senior Preferred Stock approximately
$4,487,000 as of December 31, 1996.


Item 6.  Management's Discussion and Analysis of Financial
Condition and Results of Operations.

     In reviewing the following management's discussion and
analysis, the reader should refer to the historical financial statements of
R.H. Phillips, Inc.  The discussion of the results and trends does not
necessarily imply that these results and trends will continue.  For the
following discussion,  a "case" means a 9-liter case of wine.
                                  11
<PAGE> 12

Seasonality

     The Company usually experiences substantial seasonal
fluctuations in revenue and expenditures.  Sales volumes generally
increase during the holiday season, which causes a large percentage of
sales to occur during the last three months of each year.  In 1996,
approximately 33% of total sales occurred during this period.  The
Company's expenditures fluctuate throughout the year based on
vineyard and winery activities.  Expenditures typically peak during the
summer and early autumn, due to harvest and crush activities and
expenditures to fund vineyard and winery expansions.

Costs of Production

     The Company in 1996 experienced a significant increase in its
cost of production due to reduced harvests caused by adverse weather
conditions, and many California vineyards suffered similar or greater
reductions.  The reduction in the Company's grape supply has caused
the Company to purchase a larger  amount of grapes and bulk wines
from outside sources to meet customer demand for the Company's
wines.  Management believes that the Company's costs of producing
wines from grapes or bulk wines from outside sources is significantly
higher than the costs associated with producing wines from its own
grapes.  In addition, the cost of bulk wines and grapes has increased
substantially during the past two years due to the overall reduction of
the California grape harvest and the resulting shortage of grapes and
bulk wines.  These factors are likely to increase the Company's cost of
production for at least the near future.

     Management believes that its vineyard and winery expansion
program will serve to reduce the Company's costs of production in
future years.  The recently completed winery expansion has eliminated
the Company's need to rely on outside sources of processing and
storage for its wines, and the Company is in the process of expanding
the size of its vineyards in order to lessen its dependence on outside
sources of bulk wines and grapes.

Liquidity and Capital Resources

     The Company has financed its working capital and capital
expansion needs through internally generated funds, outside credit
facilities and equity financing.  The Company has made substantial
capital  expenditures to expand its vineyards and winery facilities, and
intends to continue these expansions.  The purpose of the expansion is
to increase the Company's production capabilities so that the Company
can lessen or eliminate its dependence on outside grape and bulk wine
purchases and wine processing.  The Company's cash flows from
operations alone have not been sufficient to satisfy all of the working
capital and capital expenditure requirements needed to keep pace with
its growth.  Consequently, the Company has depended upon, and
continues to rely upon, debt and equity financing for its working capital
and expansion needs.

     The Company's financial obligations consist of long- and short-
term debt, short-term credit facilities and redeemable preferred stock. 
The Company obtained in January 1995 a ten year term loan from
Metropolitan with a principal amount of $7,500,000.  As of December
31, 1996, the total outstanding under this loan was $6,950,000. The
Company also issued convertible promissory notes, with an aggregate
principal amount of $1,500,000.  Amounts owing under these notes bear
interest at a rate of 6% per annum, payable annually, and the principal
amount of the notes is due and payable in December 1999.  All principal
and interest owing under the convertible promissory notes are
automatically convertible into Common Stock of the Company if the
average of the closing bid and ask price for the Common Stock exceeds
$3.50 for any five consecutive trading days subsequent to December 6,
1996.
                                 12
<PAGE> 13

     The Company has a credit facility with U.S. Bank to finance
working capital requirements.  The Company may borrow a maximum
of $6,000,000 under the facility, which is comprised of an operating line
of credit of $5,000,000 and a temporary increase on the operating line
of $1,000,000.  The operating line of credit is secured by accounts
receivable and inventories and matures in April 1998, at which time all
principal and unpaid interest will be due and payable.  However, the
operating line of credit will be reviewed in April 1997, at which time
U.S. Bank may extend the maturity to April 1999.  The annual interest
rate on the operating line is either U.S. Bank's prime rate or IBOR plus
200 basis points, at the Company's option.  The temporary increase on
the operating line bears interest at U.S. Bank's prime rate plus 100 basis
points, is secured by the grape crop and farm equipment, and  expires
in March 1997.  As of December 31, 1996, the total outstanding on
both lines of credit was approximately $5,472,000, leaving an available
balance of approximately $528,000. 

     In February 1997 the Company obtained an additional
$1,000,000 line of credit with U.S. Bank.  This line of credit bears
interest at U.S. Bank's prime rate plus one percent, is secured by a deed
of trust, and expires in April 1997.

     In March 1996, the Company completed a sale of 500,000
shares of Senior Redeemable Preferred Stock (the "Senior Preferred
Stock") and warrants to purchase up to 1,346,788 shares of Common
Stock.  The net proceeds the Company derived from the sale of the
Senior Preferred Stock and the warrants, after payment of offering
expenses, were approximately $4,798,000.  The warrants to purchase
Common Stock were valued at approximately $336,000, making the net
value of the Senior Preferred Stock approximately $4,462,000. 
Accretion of approximately $25,000 was recorded during 1996, making
the value of the Senior Preferred Stock approximately $4,487,000 as of
December 31, 1996.  The Senior Preferred Stock bears a 12%
cumulative annual dividend, payable semiannually.  During the first four
years after issuance, 50% of the dividend will be paid in cash and 50%
of the dividend will be paid in shares of Common Stock at a price equal
to the lower of the market price at the dividend payment date or $4.00
per share.  The Company will be required to redeem one-third of the
Senior Preferred Stock eight years after issuance, and one-third in each
of the succeeding years at a price of $10.00 per share.

     In 1995 and 1996, the Company also raised capital through the
sale of Common Stock in two public offerings.  The Company
completed a sale of Common Stock and warrants to purchase Common
Stock in its initial public offering during 1995.  Net proceeds from the
offering, after payment of commissions and expenses, totaled
approximately $2,873,000.  The Company issued 493,563 units at a
price of $7.25 per unit, with each unit consisting of two shares of
Common Stock and a warrant to purchase one share of Common Stock. 
The warrants are currently exercisable at a price of $3.875 per share,
and the Board of Directors recently decided to extend the expiration
date of the warrants to  October 1, 1998.  As of December 31, 1996,
warrants to purchase 17,065 shares of Common Stock had been
exercised, with net proceeds to the Company totaling approximately
$66,000.  If the warrants are exercised in full, management estimates
that it will receive additional proceeds of approximately $1,847,000.

     The Company completed a second public offering of Common
Stock in July 1996.  The Company issued 1,270,000 shares of Common
Stock in connection with the offering at a price of $4.375 per share, and
the managing underwriter of the offering, Van Kasper & Company,
received a warrant to purchase up to 122,000 shares of Common Stock
at a price of $5.25 per share.  The net proceeds from the offering, after
payment of underwriting discounts and offering expenses, totaled
approximately $4,484,000.
                                13
<PAGE> 14

     The Company's net working capital as of December 31, 1996
was approximately $7,016,000, as compared to approximately
$5,369,000 as of December 31, 1995.  The primary reason for the
increase was an increase in inventories, from approximately $6,354,000
at December 31, 1995 to approximately $7,808,000 at December 31,
1996.  This increase is indicative of the higher costs of purchasing
grapes and bulk wines during 1996 due to the below average crop yields
experienced by many vineyards in 1995 and 1996, and of the below
average crop yields experienced by the Company in 1996.

     Net cash provided by operating activities for the year ending
December 31, 1996 was approximately $2,911,000,  consisting
primarily of net income of approximately $1,293,000, depreciation and
amortization of approximately $1,591,000 and cash used in changes in
assets and liabilities of approximately $329,000.  Net cash used in
investing activities in 1996 was approximately $12,351,000. 
Investments during 1996 included approximately $1,266,000 invested
in land, approximately $5,489,000 in vineyard development,
approximately $1,506,000 in buildings, and approximately $4,139,000
in equipment.  These investments were offset somewhat by the sale of
certain equipment.  Net cash provided by financing activities totaled
approximately $9,431,000, consisting primarily of approximately
$4,798,000 received from the sale of Redeemable Preferred Stock,
approximately $4,550,000 received from the sale of Common Stock,
approximately $17,238,000 borrowed from U.S. Bank, and $1,700,000
borrowed from U.S. Bancorp.  These cash inflows were partially offset
by principal payments made to U.S. Bank totaling approximately
$17,137,000, to Metropolitan totaling $550,000, and to various lenders
totaling approximately $975,000.  Other factors affecting net cash
provided by financing activities included payment of a cash dividend on
the Senior Preferred Stock, payment of loan origination fees, and
payments to shareholders.  As a result of the factors described above,
cash decreased by approximately $9,000 during 1996.

     Over the past two years, the Company has added three buildings
used for bottling, barrel storage, chemical storage and a tasting area to
its winery facility.  Several tank pads, a crush pad, a mechanical pad,
and equipment including 86 stainless steel wine tanks were added during
the same time period.  The Company's wine tank storage capacity
increased from approximately 123,000 gallons to approximately
1,445,000 gallons.  The winery expansion has enabled the Company to
discontinue its former practice of having its wine fermented and stored
at outside facilities, thus reducing the cost of producing its wine while
enabling the winemaking staff to maintain closer controls over wine
quality.  The total cost of the two year expansion was approximately
$9,246,000, of which approximately $4,706,000 is attributable to the
phase completed in 1996. 

     Although the Company plans to continue its winery expansion
in 1997, current plans call for a smaller project.  The Company currently
intends to purchase 24 stainless steel wine tanks and to construct tank
pads for them, and to purchase barrels and other equipment.  The 1997
project also currently contains plans to add 8,000 square feet to the
existing warehouse, and to finish and expand the tasting room area. 
Management estimates that the cost of the third phase of the winery
expansion will be approximately $2,200,000. 
       
     The Company planted approximately 435 acres of new vineyards
in 1996, and currently intends to plant an additional 350 acres in 1997,
175 acres in 1998, and 50 acres each in 1999 and 2000.  The additional
acres are being planted on land the Company currently owns or may
purchase in the future, including approximately 900 acres of land which
the Company purchased in June 1996 and an additional 100 acres
purchased in February 1997.  By the year 2000, the Company plans to
have approximately 1,700 acres of vineyard under cultivation on
approximately 2,700 acres of land.  However, there can be no assurance
that the Company will be able to acquire additional land or expand the
vineyards at that rate.
                                  14
<PAGE> 15

     Management estimates that the total costs of the current phase
of the vineyard and winery expansion will be approximately
$18,500,000 from 1996 through 1997.  The 1996 phase of the
expansion was financed primarily with the proceeds from the sale of the
Senior Preferred Stock and the proceeds from its secondary public
offering.  The Company intends to satisfy additional financing
requirements for further expansion through internally generated funds,
the sale of certain of its land, and borrowings on working capital lines
of credit, although additional long-term debt or equity financing may be
necessary.
       
     Phylloxera infestation may have a negative impact on the
Company's future grape production.  Phylloxera is a root louse which
feeds on the roots of grapes, causing reduced production and eventual
vine death.  Of the 1,201 acres currently under cultivation by the
Company, 289 acres have root stock which is susceptible to Phylloxera. 
Management estimates that the commercially productive life of these
vineyards is ten years from January 1, 1994, as compared with the
twenty-five year life generally estimated for vineyards, and that the
reduction in the useful life of these vineyards will result in an increase
in depreciation of approximately $65,000 per year.  The Company is
chemically treating all vineyards believed to be currently at risk for
Phylloxera, and estimates that these treatments cost approximately
$45,000 per year.  Both the increased depreciation charges and the cost
of treatment are added to the cost of grapes harvested, thus increasing
cost of sales.  The Company plans to remove and replace all Phylloxera-
infested or susceptible vines with rootstock believed to be resistant to
Phylloxera.  Methods of replacement include removing and replacing the
vines, the use of grafting methods whereby existing vines are grafted
onto resistant rootstock, and the use of interplanting, in which vines on
resistant rootstock are planted between the susceptible vines, which are
then allowed to deteriorate.  The Company removed 68 acres in 1995,
and 80 acres were removed in 1996.  Thirty-three acres have been
replanted.  The Company plans to continue the removal and replanting
of these vines at a rate of approximately 30 acres per year.

     The above discussion concerning future financing needs,
vineyard and winery expansion, the impact of Phylloxera and factors
affecting liquidity are forward looking statements.  Although
management believes that these statements are reasonable in view of the
facts available to it, the Company's past experience, and trends in the
wine industry, there can be no assurance that any of these statements
will prove to be true.  There are many factors which could have a
material impact upon whether these projections will be realized or
whether these trends will continue.  Among these factors are the
following:

     Availability of Future Financing.  The rate at which the
Company is able to expand its facilities is heavily dependent upon its
ability to raise additional debt or equity financing.  The ability to raise
financing is in turn dependent upon a variety of factors, some of which
are outside the control of the Company.  These factors include, but are
not limited to, interest rates, the availability of sources of financing and
the exercise of warrants issued in the Company's initial public offering. 
If all of the warrants are not exercised, interest rates increase, or other
financing becomes unavailable or more costly to obtain, the Company
may need to reduce its rate of expansion.

     Costs of Expansion.  Management has based its assumptions
concerning the costs of expansion on estimates which it believes are
reasonable.  However, there can be no assurance that the Company's
estimates as to the costs of expansion will prove to be correct.  If these
costs are higher than anticipated, the Company may be required to raise
an even greater amount of financing or reduce the rate of expansion of
its facilities.
                                  15
<PAGE> 16


     Costs of Production.  Statements with respect to the general
decline in the Company's cost of production are based on management's
assumptions concerning the likely levels of future sales by the Company,
projected yields from the Company's vineyards and beliefs as to the cost
and availability of bulk wine and grapes from the spot market.  If, for
example, the Company's sales increase at a faster rate than anticipated
or the Company's grape production is lower than projected, the
Company could be forced to make additional purchases of grapes and
wine on the spot market.  In view of current prices and lack of
availability of good quality California bulk wines and grapes,
management believes that such events could increase the Company's
costs of production.

     Market Conditions.  Assumptions as to the desirability of
expansion are based to a great extent on the Company's belief
concerning the current status of and trends within the wine industry. 
Market conditions in the wine industry have changed substantially from
time to time.  To the extent that market conditions change substantially
in the future, the rate at which the Company deems it advisable to
expand its vineyard and winery facilities may be adjusted.

Results of Operations

     Year Ended December 31, 1995

     Net Sales

     Net sales for the year ended December 31, 1995 were
approximately $15,498,000, an increase of approximately 20% over
those for the prior year.  The number of cases shipped in 1995 increased
approximately 11% over the previous year, to approximately 401,000. 
The average selling price per case was approximately $36.50 in 1995,
an increase of approximately $1.90 over the previous year.  The increase
in the average selling price per case resulted partially from a price
increase in the third quarter on the Company's Night Harvest line of
wines, and partially from management's decision to shift the primary
focus of the Company's marketing efforts to wines with higher gross
profit margins, mainly Chardonnay. 

     Gross Profit

     Gross profit was approximately $5,838,000, or approximately
38% of sales in 1995, an increase of approximately 5% over the prior
year.  Net sales and cost of sales  include the sales of bulk wines and
grapes.  Excluding these sales, the gross margin was approximately 37%
in 1995, an increase of approximately 2% over the previous year.  The
higher gross margin in 1995 was primarily due to the price increase, the
marketing shift to Chardonnay, and lower costs on the 1994 vintage of
Chardonnay, which was sold primarily in 1995, as compared to the 1993
vintage sold in 1994.

     Operating Expenses

     Selling, general and administrative expenses were approximately
$3,803,000 in 1995, a decrease of approximately 1% as a percentage of
sales to approximately 25%.  Although these expenses were higher in
1995 than they were in the previous year, the increase was offset by
higher sales revenue.  The increase in expenses was primarily due to
increased sales labor costs and sales promotion costs required to
support the higher levels of sales in 1995.  Sales labor and commissions
increased by approximately 14% from the prior year, to approximately
$1,405,000 in 1995.  Promotional expenses increased by approximately
29%, to approximately $1,300,000.  General and administrative
expenses remained substantially the same over the two years.
                               16
<PAGE> 17

     Interest Expense

     Total interest expense for 1995 was approximately $1,025,000,
or approximately 7% of sales.  The Company capitalized approximately
$295,000 of additional interest pertaining to vineyard development and
winery expansion during 1995.  Total interest expense in the prior year
was approximately $1,121,000, or approximately 9% of sales. 
Approximately $122,000 of additional interest was capitalized during
that year.  The increase in total interest, consisting of interest expense
and capitalized interest, during 1995 compared with the prior year was
primarily due to increased levels of borrowing by the Company to
finance the 1995 phase of the vineyard and winery expansions.

     Other Income (Expense)

     Other income (expense) - net changed from expense of
approximately ($409,000) in 1994 to income of approximately $29,500
for 1995.  The large expense in 1994 was primarily due to
management's determination that certain R.H. Phillips wines stored at
another facility did not meet the Company's standards for inclusion in
its wine program.  These wines, which were all sold by December 31,
1995, had been written down to their estimated fair market value in the
prior year.  This resulted in a charge of approximately $360,000 to other
income (expense).  In addition, the Company wrote off approximately
$110,000 of intangible assets, consisting mainly of organizational costs
of R.H. Phillips Partners, due to the conversion of R.H. Phillips from a
limited partnership to a corporation through the merger with the
Company.

     Income Taxes

     In 1995, the Company had income tax expense of approximately
$289,000, compared with approximately $364,000 in 1994.  The 1995
income tax expense was primarily attributable to federal and state
income tax at statutory rates, which was offset primarily by utilization
of net operating loss carryforwards.  The 1994 income tax expense was
primarily attributable to the required adoption by the Company of
Financial Accounting Standards No. 109 (FAS 109, "Accounting for
Income Taxes").

     Net Income (Loss)

     Net income changed from a net loss of approximately
$1,001,000 in 1994 to net income of approximately $751,000 in 1995. 
The increased net income in 1995 was primarily due to the higher sales
and gross margins recorded in 1995 as compared to 1994, as discussed
above.

     Year Ended December 31, 1996

     Net Sales

     Net sales for the year ended December 31, 1996 were
approximately $16,929,000, an increase of approximately 9% over net
sales of approximately $15,498,000 recorded in 1995.  Net sales during
both periods included the sale of bulk wines and grapes, and in 1996
also included the sale of grain.  Excluding these sales, net sales of case
wines were approximately $15,820,000 in 1996, an increase of
approximately 9% over case sales totaling approximately $14,549,000
in 1995.  The average selling price per case 
                               17
<PAGE> 18
increased from approximately $36.50 during 1995 to approximately
$39.33 in 1996.  The increase in the average selling price resulted
primarily from price increases on the Company's Chardonnay and
Cabernet Sauvignon.  The number of cases sold during 1996 was
approximately 402,000, substantially the same as the approximately
401,000 cases shipped in 1995.

     Gross Profit
     
     Gross profit increased from approximately 38% of sales for year
ended December 31, 1995 to approximately 40% of sales for the year
ended December 31, 1996.  Excluding the sales of grapes, bulk wine
and grain, the gross margins were approximately 37% in 1995 and 41%
in 1996.  The higher gross margin in 1996 was primarily due to the price
increases discussed above, and to lower costs on the most recent
vintages sold in 1996 as compared to the vintages sold during 1995. 
The average cost per case sold in 1996 decreased by approximately 6%
from that sold in 1995, from approximately $20.29 per case to
approximately $19.08 per case.  The increase in gross margins and
reduction in costs per case is attributable primarily to the increased
production the Company derived from its vineyards in 1995, and the
installation in 1995 and 1996 of its expanded winery production
facilities, which eliminated the Company's use of more expensive
outside storage and processing facilities. 

     Management believes that the trend toward lower costs will
reverse in 1997, and that the Company will experience higher costs per
case in the near future due to the below average yields obtained recently
from the Company's vineyards as well as from other wineries from
whom the Company purchases grapes and bulk wines.  The Company
plans to increase its prices in 1997 to compensate.  However,
management cannot determine at this point whether the price increases
will be sufficient to offset the increase in costs.

     Operating Expenses

     Although selling, general and administrative expenses remained
substantially the same for the year ended December 31, 1996 as
compared to the year ended December 31, 1995, these expenses
decreased as a percentage of sales, from approximately 25% in 1995 to
approximately 23% in 1996.  The decrease in these expenses as a
percentage of sales was primarily due to increased sales revenue during
1996 as compared to 1995, as discussed above.  Selling expenses
decreased from approximately $3,186,000 in 1995 to approximately
$3,055,000 in 1996, primarily due to lower sales program expenses. 
General and administrative expenses increased from approximately
$542,000 in 1995 to approximately $721,000 in 1996, primarily due to
the write off of an insolvent account receivable and the partial reclass of
an officer's salary from sales to general and administrative in 1996.

     Interest Expense

     Total interest expense for the year ended December 31, 1996
was approximately $862,000, or approximately 5% of net sales,
compared to approximately $1,025,000, or approximately  7% of net
sales, for the year ended December 31, 1995.  The Company capitalized
approximately $599,000 of additional interest pertaining to vineyard and
winery development in 1996, and approximately $295,000 in 1995.  The
increase in total interest cost during 1996 as compared to 1995 was
primarily due to increased levels of borrowing by the Company to
finance vineyard and winery expansion in 1996.  The increase in
capitalized interest in 1996 as compared to 1995 reflects the increase in
vineyards under development during 1996.
                                 18
<PAGE> 19


     Other Income (Expense)

     Other income (expense) for the year ended December 31, 1996
was an expense of approximately $152,000, compared to income of
approximately $29,000 for the year ended December 31, 1995.  The
large expense in 1996 was primarily due to a provision for impairment
of vineyards believed to be susceptible to Phylloxera, as discussed above
in Liquidity and Capital Resources.  An accelerated depreciation
schedule was based on management's original plan to remove and
replace approximately 30 acres per year.  However, the decision was
made to remove a total of 148 acres during 1995 and 1996.  The
provision for impairment was recorded to reduce the book value of the
remaining vineyards to their estimated economic value as of December
31, 1996.

     Net Income

     The Company recorded net income of approximately $1,293,000
for the year ended December 31, 1996, compared with net income of
approximately $751,000 for the year ended December 31, 1995.  This
increase was primarily due to higher sales prices and lower product
costs, which resulted in higher profit margins.   

Item 7.  Financial Statements

     The audited financial statements of the Company are set forth in
this report beginning at page F-1.

Item 8.  Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure

     Form 8-K, Item 4. Changes in Registrant's Certifying
Accountants, dated August 1, 1995, was filed with the Securities and
Exchange Commission on August 8, 1995, and is incorporated by
reference.
                              19
<PAGE> 20

                    PART III

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

     The directors, executive officers and other key personnel, their
positions and ages are as follows:


     Name                 Position                                    Age

John E. Giguiere          Co-President, Co-Chief Executive            45
                          Officer, Chairman of the Board, Director

Karl E. Giguiere          Co-President, Co-Chief Executive            51
                          Officer, Vice-Chairman of the Board,
                          Director

Lane C. Giguiere          Vice President Operations, Director         43

Robert T. Moore           Vice President Finance, Chief Financial     51
                          Officer, Secretary

Richard A. Pierce         Controller, Chief Accounting Officer        45

Barry L. Bergman          Winemaker                                   38

Steven L. Crosta          Sales Manager                               46

R. Ken Coit               Director                                    53

Victor L. Motto           Director                                    57 

  
     John and Karl Giguiere are brothers.  John and Lane Giguiere
are husband and wife.  There are no other familial relationships between
members of the Board of Directors or the executive officers of the
Company.

     John E. Giguiere.  Raised on the Giguiere family farm, John
Giguiere has spent his entire professional life in agribusiness.  With his
brother Karl, Mr. Giguiere founded R.H. Phillips in 1981.  Mr. Giguiere
is the President of The R.H. Phillips Vineyard, Inc., the second largest
shareholder of the Company, and he has managed the sales and
marketing aspects of R.H. Phillips since 1983.  Mr. Giguiere attended
Willamette University and California State University at San Jose.  Mr.
Giguiere resides on the R.H. Phillips property near Esparto, California.

     Karl E. Giguiere.  Karl Giguiere was also raised on the Giguiere
family farm.  Since 1983, Mr. Giguiere has managed the farming and
vineyard operations of R.H. Phillips.  Karl Giguiere is the President of
RHP Vineyards, Inc., the largest shareholder of the Company.  Mr.
Giguiere graduated from California State Polytechnic University with
a B.A. in Agribusiness.  Mr. Giguiere resides in Woodland, California.

     Lane C. Giguiere.  Ms. Giguiere, wife of John Giguiere, is the
Vice President Operations, and has managed the sales administration
aspects of R.H. Phillips since the business was established in 1983.  Ms.
Giguiere attended California State University at San Jose and California
State University at Chico.  Ms. Giguiere resides on the R.H. Phillips
property.
                                 20
<PAGE> 21

     Robert T. Moore.  Mr. Moore is the Chief Financial Officer of
the Company.  Mr. Moore joined R.H. Phillips as Chief Financial Officer
in 1991. Mr. Moore received a B.B.A. in Accounting and an M.B.A. in
Finance from the University of Michigan.  He is a Certified Management
Accountant and a Certified Financial Planner.  Mr. Moore resides in
Vacaville, California.

     Richard A. Pierce.  Mr. Pierce is the Controller and Chief
Accounting Officer of the Company.  Mr. Pierce joined R.H. Phillips in
1991 as Controller.  Mr. Pierce received a B.S. in Accounting and
Computer Science at California State University at Chico.  Mr. Pierce
is a Certified Public Accountant, Certified Management Accountant 
and a Certified Computing Professional.  Mr. Pierce resides in Brooks,
California.

     Barry L. Bergman.  Mr. Bergman is the Company's Winemaker. 
He was promoted to that position in July 1994 after serving as assistant
winemaker since March 1989.  Mr. Bergman is responsible for all
winery production activities.  He is a graduate of the University of
California at Davis, where he received a B.S. degree in Fermentation
Science.  Mr. Bergman resides in Woodland, California.

     Steven L. Crosta.  Mr. Crosta was hired in August 1994 to
serve as the Company's National Sales Manager.  Mr. Crosta was the
South Bay Regional Manager of Wine Warehouse, a major alcohol
distributor, from 1992 until he joined the Company, and was National
Sales Manager of  Flora Springs Wine Company of St. Helena,
California from 1991 through 1992.  Mr. Crosta received a B.A. from
the University of California at Davis.  Mr. Crosta resides in Davis,
California.

     R. Ken Coit.  Mr. Coit was elected a director of the Company
soon after its incorporation and served on the limited partners' Advisory
Committee of  R.H. Phillips Partners from 1989 through 1994.  Mr.
Coit is the owner of Coit Financial Group, a firm which specializes in
real estate investments.  Mr. Coit is also a licensed broker-dealer
affiliated with Sequoia Equity Securities Corporation of Walnut Creek,
California and from 1988 to June 1994 was a registered representative
of American Investors Company of Hayward, California. Mr. Coit
received an M.B.A. from Pepperdine University and a B.S. in Pharmacy
from the University of Arizona.  Mr. Coit resides in Danville, California.
 
     Victor L. Motto.  Mr. Motto was elected to the Board of
Directors in June 1996.  Mr. Motto is a founding partner of Motto,
Kryla & Fisher, an accounting and business consulting firm devoted
exclusively to the wine industry.  Mr. Motto is also a partner of MKF
Systems, a wine industry computer systems business.  Mr. Motto serves
as a director or financial advisor to several wine industry trade groups,
teaches university courses and is a frequent lecturer on wine industry
issues.  Mr. Motto is also a frequent contributor to Wine Business
Update, a quarterly newsletter published by Motto, Kryla & Fisher, as
well as to various other wine industry publications.  Mr. Motto is a
Certified Public Accountant.  Mr. Motto received a B.A. in Business
from the University of South Florida.

     Directors are elected at the annual meetings of the shareholders. 
Directors serve terms of one year and until their successors have been
duly elected and qualified.  The Company's Bylaws provide that the
authorized number of directors is fixed between 4 and 7, with the exact
number of directors within that range to be determined by the Board of
Directors.  The Board of Directors has fixed the current authorized
number of directors at 5.  
                               21
<PAGE> 22
     Based on its review of all filings on Form 3, 4 and 5 the
Company received from its directors, executive officers and principal
shareholders, the Company is unaware of any such person who was
required to file any of these forms pursuant to Section 16 of the
Securities Exchange Act of 1934 who did not do so in a timely manner.

Item 10.  Executive Compensation

     The following is a summary of all compensation paid for services
rendered to R.H. Phillips during 1994, 1995 and 1996 by John and Karl
Giguiere, the Company's current Co-Chief Executive Officers of the
Company (the "Named Executive Officers").  No other employee or
officer received a salary and bonus in excess of $100,000 in 1996.
           Summary Compensation Table




                                                        Long Term Compensation 

              Annual Compensation                               Awards



Name and
Principal Position  Year  Salary   Bonus($)   ($)     Awards (#)  Options(#)

John Giguiere, Co-  1996  $80,625  $26,662   20,000(1)        0           0
President, Co-
Chief Executive     1995   80,625      662   20,000(1)        0      54,480  
Officer
                    1994   87,394   16,258   20,000(1)        0           0

Karl Giguiere, Co-  1996   80,625   26,662        0           0           0
President, Co-
Chief Executive     1995   80,625      662        0           0      81,720
Officer
                    1994   87,394   16,258        0           0           0
          
(1) The amounts listed under "Other Compensation" consist of a $500
per month automobile allowance for John Giguiere and the fair rental
value of the farm house located at the R.H. Phillips winery where John
and Lane Giguiere reside on a rent-free basis.  Management estimates
that the fair rental value of the housing is approximately $14,000 per
year. 
                                  22
<PAGE> 23
Aggregated Option/SAR Exercises in Last Fiscal Year and FY-End
              Option/SAR Values

(a)              (b)            (c)           (d)                (e)
                                           Number of
                                           Securites          Value of
                                           Underlying         Unexercised
                                           Options/SARs at    Options/SARs at
                                           FY-End(#)          FY-End($)(1)
           Shares Acquired                 Exercisable/       Exercisable/
Name        on Exercise  Value Realized ($)Unexercisable      Unexercisable
                                                   
John Giguiere       0              0         13,620           $      0(2)      
                                             40,860

Karl Giguiere       0              0         20,430                  0(2)
                                             61,290

(1)  Based on the closing price of the Common Stock on December
     31, 1996, as reported by the Nasdaq National Market ($2.87 per
     share).

(2)  The exercise price was in excess of the market price at
     December 31, 1996.   
 
     The Company does not have written employment agreements
with any of its employees which obligate those persons to remain
employed by the Company for any specific term or otherwise restrict
their right to leave their employment at any time.
                                                                           
     There are no agreements between the Company and any of its
officers or directors which concern changes of control of the Company. 
However, the loan agreement with Metropolitan provides that all
principal and interest will be due and payable, at Metropolitan's option,
if any person or group other than John or Karl Giguiere or their
immediate families control a majority of the Board of Directors. 
Metropolitan has represented to the Company that this provision will be
eliminated if and when the Company enters into employment agreements
with John and Karl Giguiere which obligate them to remain employed
by the Company for at least 5 years.    

     Victor Motto receives compensation of $1,000 per meeting and
travel expenses for attending meetings of the Board of Directors.  He
is also to receive options to purchase a maximum of 20,000 shares of
Common Stock at a price equal to the fair market value of the
Company's Common Stock, subject to approval of a final stock option
agreement by Mr. Motto and the Board of Directors.  The total
compensation paid Victor Motto in 1996 for attending meetings of the
Board of Directors was $8,000.  No other members of the Board of
Directors are currently compensated for attending meetings of the
Board of Directors or Board committees.  The Board of Directors may
institute a policy of compensating directors for attending such meetings
in the near future. 
                              23
<PAGE> 24

Item 11.  Security Ownership of Certain Beneficial Owners and
Management

     The following table sets forth certain information regarding the
number of shares of the voting securities which each director and
executive officer of the Company owns as of March 18, 1997 as well as
the percentage of shares which the executive officers own as a group. 

Name and Address of    Position with the Company  Amount and Nature  Percent of
Beneficial Owner                                   of Beneficial      Class
                                                       Owner(1)

John E. Giguiere(2)(3)   Co-President, Co-Chief       1,618,324         27.16
26836 County Road 12A    Executive Officer,
Esparto, CA  95627       Chairman

Karl E. Giguiere(2)(4)   Co-President, Co-Chief       1,600,306         26.86
26836 County Road 12A    Executive Officer, Vice-
Esparto, CA 95627        Chairman

Lane C. Giguiere(2)(5)   Vice-President Operations,   1,614,919         27.10
26836 County Road 12A    Director
Esparto, CA 95627

R. Ken Coit(6)           Director                       300,322          5.04
1655 North Main Street #270
Walnut Creek, CA 94596

Victor L. Motto          Director                             0             0
899 Adams Street
St. Helena, CA 94574

All Executive Officers and Directors(7)               1,949,291         32.71

 (1) This table is based upon information supplied by officers,
     directors and principal shareholders and Schedules 13D and 13G
     filed with the Securities Exchange Commission (the
     "Commission").  Unless otherwise indicated in the footnotes to
     this table subject to community property laws where applicable,
     the Company believes each of the shareholders named in this
     table has sole voting and investment power with respect to the
     shares indicated as beneficially owned.  Percentages are based
     on 5,957,750 shares of  Common Stock outstanding on March
     18, 1997, adjusted as required by the rules of the Commission.

(2)  Includes 865,773 shares of Common Stock owned by RHP
     Vineyards, Inc. and 714,103 shares of Common Stock owned by
     R.H. Phillips Vineyard, Inc.  John and Karl Giguiere each own
     33.33% of the outstanding stock of RHP Vineyards, Inc.,
     constitute two of the three members of the Board of Directors,
     and are the Secretary and President, respectively, of that
     corporation.  John and Karl Giguiere also own a majority of the
     outstanding shares of R.H. Phillips Vineyard, Inc., constitute
     two of the three members of the Board of Directors and serve
     as the President and Secretary, respectively, of that corporation. 
     Because they share majority ownership of the stock of those
     corporations and constitute a majority of those corporation's
     directors, John and Karl Giguiere may be deemed beneficial
     owners of the shares held by those two corporations.

(3)  Also includes 16,552 shares of Common Stock held as joint
     tenants with Lane Giguiere, a warrant, which is presently
     exercisable, to purchase 8,276 shares of Common Stock which
     he holds as a joint tenant with Lane Giguiere, and 13,620 shares
     of Common Stock subject to that portion of a stock option
     which is exercisable within 60 days of the date set forth above.
                              24
<PAGE>> 25

(4)  Also includes 20,430 shares subject to that portion of a stock
     option which is exercisable within 60 days of the date set forth
     above.
 
(5)  Also includes 16,552 shares of Common Stock held as joint
     tenants with John Giguiere, a warrant, which is presently
     exercisable, to purchase 8,276 shares of Common Stock which
     she holds as a joint tenant with John Giguiere, and 10,215 shares
     subject to that portion of a stock option exercisable within 60
     days of the date of the date set forth above. 

(6)  Mr. Coit holds 252,634 shares as a joint tenant with Donna
     Coit, his wife, and 47,688 shares are held individually by Mr.
     Coit.

(7)  Includes shares purchasable upon exercise of stock options
     within 60 days of the date of the date set forth above.

     The following table sets forth information with respect to
persons or entities, in addition to those listed above, who are known by
the Company to own 5% or more of the Company's voting securities. 



Name and Address of Shareholder           Amount and Nature of    Percent of
                                            Beneficial Owner(1)     Class

John Hancock Mutual Life Insurance             1,462,173            19.80
Company    (2)
200 Clarendon Street
Boston, MA   02117
 
RHP Vineyards  Inc.  (3)                         865,773            14.53
26836 County Road 12A
Esparto, CA  95627

The R.H. Phillips Vineyard, Inc. (3)             714,103            11.98
26836 County Road 12A
Esparto, CA  95627

(1)  This table is based upon information and assumptions set forth
     in footnote 1 of the previous table.

(2)  This includes shares purchasable by Hancock under stock
     purchase warrants the Company granted  in 1996, and stock
     dividends issued to Hancock by the Company.  The Company
     issued to Hancock warrants to purchase up to 1,346,788 shares
     of Common Stock in March 1996.  By operation of the anti-
     dilution provisions of those warrants following the Company's
     second public offering, Hancock may, as of the date set forth
     above,  purchase up to 1,381,321 shares of Common Stock at
     a price of $3.90 per share pursuant to those stock purchase
     warrants.  Hancock received a stock dividend of 37,500 shares
     of Common Stock during 1996, and in March 1997, the
     Company issued 43,352 additional shares of Common Stock to
     Hancock as a stock dividend.  

(3)  John and Karl Giguiere own a majority of the outstanding shares
     of RHP Vineyards, Inc. and The R.H. Phillips Vineyard, Inc. and
     constitute a majority of those corporation's boards of directors. 
     See footnote 1 of the previous table for further information
     regarding these corporations.
                                25
<PAGE> 26

Item 12.  Certain Relationships and Related Transactions.
     
     R. Ken Coit received a commission payment for his services in
connection with the Company's initial public offering completed in 1995
and another commission payment in connection with the Company's
secondary public offering in 1996.  The commissions for obtaining
purchasers of the equity units had terms similar to those granted to other
participating broker-dealers in the offerings.     

     The Company is the holder of a promissory note payable by
RHP Vineyards, Inc.  The note evidences a loan to that corporation by
R.H. Phillips Partners and the assumption in 1993 of payment
obligations of certain persons to R.H. Phillips Partners.  The amount
payable under the note as of December 31, 1996 was $210,410.  The
note bears interest at a rate of 7% per annum.  The note and other
obligations are payable in full on June 30, 1999.

     The Board of Directors has adopted a policy pursuant to which
all future material transactions and loans with affiliated parties will be
made or entered into on terms no less favorable than those that can be
obtained from unaffiliated third parties.  All future material affiliated
transactions and loans, and any forgiveness thereof, must be approved
by a majority of independent outside members of the Board of Directors
who do not have an interest in the transaction.

Item 13.  Exhibits and Reports on Form 8-K

     (a)  Audited Financial Statements of the Company are attached
to this annual report beginning on page F-1.  Other exhibits attached to
this annual report are as follows:


(a)  Exhibits


Exhibit No.       Description

 3.1*             Articles of Incorporation

 3.2**            Bylaws

 4.1**            Form of Common Stock Certificate

 4.2**            Form of Publicly Traded Warrant

10.1**            Loan Agreement between the Company and Metropolitan Life
                  Insurance Company and Related Agreements, dated January 20,
                  1995

10.2****          Loan Agreement between the Company and U.S. Bank and Related
                  Agreements, dated June 7, 1996.

10.3*             Loan Agreement between the Company and Heller Financial and
                  Related Documents, dated October 20, 1995

10.4**            Promissory Note, dated December 31, 1993, by RHP Vineyards,
                  Inc., payable to R.H. Phillips Partners 

10.5**            Form of Convertible Promissory Note Purchase Agreement and
                  Form of 6% 5 Year Convertible Promissory Note.
                                  26
<PAGE> 27
10.6***           R.H. Phillips, Inc. 1995 Stock Option Plan and Forms of
                  Incentive Stock Option and Nonstatutory Stock Option
                  Agreements

10.7**            Securities Purchase Agreement between the Company and John
                  Hancock Mutual Life Insurance Company, dated March 27, 1996

10.8**            Form of Common Stock Purchase Warrant issued to John Hancock
                  Mutual Life Insurance Company, dated March 27, 1996

10.9              Common Stock Purchase Warrant, dated July 30, 1996, issued
                  to Van Kasper & Company 

10.10****         Underwriting Agreement, dated July 30, 1996, between the
                  Company and Van Kasper & Company 

10.11**           Common Stock Purchase Warrant issued to Capitol Bay
                  Securities, dated March 31, 1995.

10.12*****        Description of Compensation Arrangements with Victor Motto,
                  director of the Company 

10.13             Loan agreement between the Company and U.S. Bancorp and
                  related  Agreements, dated December 31, 1996

16.1******        Letter from Deloitte & Touche LLP with respect to change of
                  Certified Public Accountant

20.1*****         Current Report on Form 8-K, Item 4, dated August 1, 1995 and
                  filed with the Securities and Exchange Commission on August
                  8, 1995

23.1              Consent of KPMG Peat Marwick LLP, Certified Public
                  Accountants


* Filed as an exhibit to the Company's Annual Report on Form 10-KSB
for the fiscal year ended December 31, 1995 and incorporated by
reference herein.

** Filed as an exhibit to the Company's Annual Report on Form 10-
KSB for the fiscal year ended December 31, 1994 and incorporated by
reference herein.

*** Filed as an exhibit to the Company's Quarterly Report on Form 10-
QSB for the three month period ended September 30, 1995 and
incorporated by reference herein. 

**** Filed as an exhibit to the Company's Registration Statement on
Form SB-2, dated June 5, 1996, and incorporated by reference herein.

***** Filed as an exhibit to the Company's Registration Statement on
Form SB-2, Amendment No. 2, dated July 16, 1996, and incorporated
by reference herein.

****** Filed as an exhibit to the Company's Current Report on Form
8-K, dated August 1, 1995, and incorporated by reference herein

     (b) Current Reports on Form 8-K.

     None.
                               27
<PAGE> 28                   SIGNATURES

      In accordance with Section 13 or 15(d) of the Exchange Act,
the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.


                                    R.H. PHILLIPS, INC.  


                                    By: //s/ John E. Giguiere                
                                        John E. Giguiere, Co-President and
                                        Co-Chief Executive Officer

     In accordance with the Exchange Act, this report has been
signed below by the following persons on behalf of the registrant and in
the capacities and on the dates indicated.


   Signature               Title                               Date

//s// John E. Giguiere                                         March 31, 1997
John E. Giguiere           Co-President, Co-Chief
                           Executive Officer, Director
                           (Principal Executive Officer)
               
//s// Karl E. Giguiere                                         March 31, 1997
Karl E. Giguiere           Co-President, Co-Chief
                           Executive Officer, Director
                           (Principal Executive Officer)
               
//s// Robert T. Moore                                          March 31, 1997  
Robert T. Moore            Vice President, Finance             
                           (Principal Financial Officer)
               
//s// Richard Allen Pierce                                     March 31, 1997
Richard Allen Pierce       Controller (Principal Accounting
                           Officer)
               
//s// Lane C. Giguiere                                         March 31, 1997
Lane C. Giguiere           Vice-President Operations,
                           Director 
                
//s// Victor L. Motto                                          March 28, 1997
Victor L. Motto            Director
                                 28
<PAGE> 29

                     R.H. PHILLIPS, INC., dba
                    THE R.H. PHILLIPS VINEYARD
                    (A California Corporation) 
                      
                   INDEX TO FINANCIAL STATEMENTS

                                                                 Page 

INDEPENDENT AUDITORS' REPORT                                      F1
                                                                 
FINANCIAL STATEMENTS AS OF DECEMBER 31, 
  1996 AND FOR THE YEARS ENDED DECEMBER 
  31, 1995 AND 1996:

    Balance Sheet                                                 F2    

    Statements of Operations                                      F3    

    Statements of Shareholders' Equity                            F4    

    Statements of Cash Flows                                      F5    

    Notes to Financial Statements                               F6-F15  


<PAGE>30



        Independent Auditors' Report


The Board of Directors
R.H. Phillips, Inc.:

We have audited the accompanying balance sheet of R.H. Phillips, Inc.
as of December 31, 1996, and the related statements of operations,
shareholders' equity, and cash flows for each of the  years in the two
year period ended December 31, 1996. These financial statements are
the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements based on our
audits.

We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. 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 that our audits provides a reasonable basis
for our opinion.

In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of R.H. Phillips,
Inc. as of December 31, 1996, and the results of its operations and its
cash flows for each of the years in the two year period ended
December 31, 1996 in conformity with generally accepted accounting
principles.

                                   //s// KPMG Peat Marwick LLP               

Sacramento, California
March 5, 1997
                                    F1
<PAGE> 31

                    R.H. PHILLIPS, INC., dba
                   THE R.H. PHILLIPS VINEYARD
                  (A California Corporation) 
                                
                         BALANCE SHEET 
                       DECEMBER 31, 1996


ASSETS                                               
                                                            
CURRENT ASSETS:
   Cash                                                        $   308,535 
   Accounts receivable                                           3,131,250 
   Inventories                                                   7,807,711 
   Deferred income taxes and prepaid expenses                      471,538 
                                                               -----------
       Total current assets                                     11,719,034 

PROPERTY, PLANT, AND EQUIPMENT - net                            27,429,675 

OTHER ASSETS:
   Note receivable from shareholder                                210,410 
   Deferred loan fees and other, net                               570,281 
                                                               -----------
       Total other assets                                          780,691 
                                                               -----------
TOTAL ASSETS                                                   $39,929,400 
                                                               ===========
              LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES:
   Current maturities of long-term debt                        $ 1,073,000 
   Notes payable                                                   440,167 
   Accounts payable                                              2,177,989 
   Accrued liabilities                                           1,011,602 
                                                               -----------
      Total current liabilities                                  4,702,758 

LONG-TERM DEBT                                                  14,334,476 
SUBORDINATED DEBT                                                1,500,000 
DEFERRED INCOME TAXES                                              935,000 
COMMITMENTS AND CONTINGENCIES                                           --  
REDEEMABLE PREFERRED STOCK, redeemable at $5,000,000             4,486,780 
SHAREHOLDERS' EQUITY:
   Non-redeemable preferred stock, no par value, 4,500,000              --
      shares authorized, none issued and outstanding
   Common stock, no par value, 12,500,000 shares authorized,    12,323,475
      5,957,550 shares issued and outstanding
   Additional paid-in capital                                      336,697 
   Retained earnings                                             1,310,214 
                                                               -----------
      Total shareholders' equity                                13,970,386 
                                                               -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                     $39,929,400 
                                                               ===========
                                
                                
See accompanying notes to financial statements.
                                  F2
<PAGE> 32

                   R.H. PHILLIPS, INC., dba 
                  THE R.H. PHILLIPS VINEYARD 
                  (A California Corporation) 
                                
                   STATEMENTS OF OPERATIONS 
             YEARS ENDED DECEMBER 31, 1995 AND 1996


                                                  1995          1996       
                                                                              

NET SALES                                      $15,498,210   $16,928,545 

COST OF SALES                                    9,660,266    10,135,896 
                                               -----------   -----------
GROSS PROFIT                                     5,837,944     6,792,649 

SELLING, GENERAL AND  ADMINISTRATIVE EXPENSES    3,802,538     3,854,791 
                                               -----------   -----------
OPERATING INCOME                                 2,035,406     2,937,858 

INTEREST EXPENSE                                (1,025,142)     (861,659)

OTHER INCOME (EXPENSE) - NET                        29,492      (151,943)
                                               -----------   -----------
INCOME BEFORE INCOME TAXES                       1,039,756     1,924,256

PROVISION FOR INCOME TAXES                        (289,000)     (631,000)
                                               -----------   -----------
NET INCOME                                     $   750,756   $ 1,293,256 
                                               ===========   ===========

NET INCOME                                     $   750,756   $ 1,293,256 

DIVIDENDS ON REDEEMABLE PREFERRED STOCK                 --      (225,000)

ACCRETION OF REDEEMABLE PREFERRED STOCK                 --       (25,099)
                                               -----------   -----------
NET INCOME APPLICABLE TO COMMON STOCK          $   750,756   $ 1,043,157 
                                               ===========   ===========

NET INCOME  PER SHARE                          $       .17   $       .20 
                                               ===========   ===========
COMMON AND COMMON EQUIVALENT 
   SHARES OUTSTANDING                            4,442,454     5,231,870 
                                               ===========   ===========









See accompanying notes to financial statements.
                                      F3
<PAGE> 33
<TABLE>                                
                                
                        R.H. PHILLIPS, INC., dba
                       THE R.H. PHILLIPS VINEYARD
                       (A California Corporation) 
                                    
                   STATEMENTS OF SHAREHOLDERS' EQUITY 

<CAPTION>                              
                           
                                                                  Non-                                Retained    
                        Series A      Series A-1  Series A-2   Redeemable                Additional    Earnings/    
                        Preferred     Preferred    Preferred   Preferred      Common      Paid-in    (Accumulated 
                          Stock         Stock        Stock       Stock        Stock       Capital      Deficit)      Total
<S>                    <C>          <C>          <C>          <C>          <C>          <C>          <C>          <C>
SHAREHOLDERS' EQUITY
JANUARY 31, 1995       $ 1,087,150  $   230,608  $ 1,829,466  $        --  $ 1,428,771  $        --  $  (333,699) $ 4,242,296

ISSUANCE OF 
COMMON STOCK                    --           --           --           --    3,047,019           --           --    3,047,019

CONVERSION OF PREFERRED
STOCK TO COMMON
STOCK                   (1,087,150)    (230,608)  (1,829,466)          --    3,147,224           --           --           --

NET INCOME YEAR ENDED
DECEMBER 31, 1995               --           --           --           --           --           --      750,756      750,756 
                       -----------  -----------  -----------  -----------  -----------  -----------  -----------  -----------
SHAREHOLDERS' EQUITY
DECEMBER 31, 1995               --           --           --           --    7,623,014           --      417,057    8,040,071 

WARRANTS ASSOCIATED 
WITH REDEEMABLE
PREFERRED STOCK                 --           --           --           --           --      336,697           --      336,697

ACCRETION OF
REDEEMABLE
PREFERRED STOCK                 --           --           --           --           --           --      (25,099)     (25,099)

ISSUANCE OF
COMMON STOCK                    --           --           --           --    4,550,461           --           --    4,550,461

DIVIDEND                        --           --           --           --           --           --     (225,000)    (225,000)

ISSUANCE OF STOCK          
DIVIDEND                        --           --           --           --      150,000           --     (150,000)          --

NET INCOME YEAR ENDED      
DECEMBER 31, 1996               --           --           --           --           --           --    1,293,256    1,293,256 
                       -----------  -----------  -----------  -----------  -----------  -----------  -----------  -----------
SHAREHOLDERS' EQUITY
DECEMBER 31, 1996      $        --  $        --  $        --  $        --  $12,323,475  $   336,697  $ 1,310,214  $13,970,386 
                       ===========  ===========  ===========  ===========  ===========  ===========  ===========  ===========
</TABLE>


See accompanying notes to financial statements
                                   F4
<PAGE> 34
                                
                    R.H. PHILLIPS, INC., dba
                   THE R.H. PHILLIPS VINEYARD
                  (A California Corporation) 
                                
                   STATEMENTS OF CASH FLOWS 
             YEARS ENDED DECEMBER 31, 1995 AND 1996
                                
                                                           1995        1996   
CASH FLOWS FROM OPERATING ACTIVITIES:                            
   Net income                                         $   750,756  $ 1,293,256 
   Adjustments to reconcile net income to net cash 
      provided by operating activities:
      Deferred income taxes                                62,000      126,000 
      Depreciation and amortization                     1,002,405    1,590,630 
      Loss on disposal of property, plant and equipment    22,645      230,746 
      Changes in assets and liabilities:
         Accounts receivable                             (830,406)     (64,562)
         Inventories                                     (285,292)  (1,013,074)
         Prepaid expenses                                (103,895)      75,397 
         Other assets                                      (6,370)     (85,082)
         Accounts payable and accrued liabilities         556,741      757,865 
         Deferred revenue                                (227,220)          --
                                                      -----------  -----------
Net cash provided by  operating activities                941,364    2,911,176
                                                                              
CASH FLOWS FROM INVESTING ACTIVITIES:
    Purchase of property, plant and equipment          (7,284,426) (12,400,233)
    Proceeds from equipment sold                           56,810       49,348 
                                                      -----------  -----------
           Net cash used in investing activities       (7,227,616) (12,350,885)

CASH FLOWS FROM FINANCING ACTIVITIES:
    Issuance of redeemable preferred stock                     --    4,798,378 
    Issuance of common stock                            3,047,019    4,550,461 
    Payment of cash dividend                                   --     (150,000)
    Proceeds from long-term debt and notes payable     22,601,355   18,937,804 
    Principal payments on long-term debt and
      notes payable                                   (18,519,026) (18,662,429)
    Payment of loan origination fees                     (533,628)     (25,524)
    Note to shareholder                                   (22,389)     (18,070)
                                                      -----------  -----------
           Net cash provided by financing activities    6,573,331    9,430,620 

INCREASE (DECREASE) IN CASH                               287,079       (9,089)
CASH AT BEGINNING OF PERIOD                                30,545      317,624
                                                      -----------  -----------
CASH AT END OF PERIOD                                 $   317,624  $   308,535 
                                                      ===========  ===========
OTHER CASH FLOW INFORMATION: 
    Interest paid (including capitalized interest of 
    $295,000 and $599,000 in 1995 and
    1996, respectively)                               $ 1,382,428  $ 1,224,638
NONCASH TRANSACTIONS:                                 ===========  ===========
    Issuance of notes payable to finance inventory, 
      property, plant and equipment purchased         $ 1,368,757  $   554,584
                                                      ===========  ===========
    Issuance of stock dividend                        $        --  $   150,000
                                                      ===========  ===========
    Accrual of cash dividend                          $        --  $    75,000
                                                      ===========  ===========
    Accretion of redeemable preferred stock           $        --  $    25,099 
                                                      ===========  ===========

See accompanying notes to financial statements.
                                     F5
<PAGE> 35

                 R.H. PHILLIPS, INC. dba
                THE R.H. PHILLIPS VINEYARD
                (A California Corporation) 

                   NOTES TO FINANCIAL
                       STATEMENTS
                   December 31, 1996
                      
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization - Effective June 1, 1994, R.H. Phillips Partners, a
California limited partnership, merged into R.H. Phillips, Inc. (the
"Company").  Pursuant to that merger, the Company acquired and
succeeded to all of the  assets and liabilities of R.H. Phillips Partners.
The general partners of R.H. Phillips Partners received all of the
Common Stock of the Company, and the limited partners of R.H.
Phillips Partners received all of the Preferred Stock of the Company
in connection with the merger.  All outstanding shares of Preferred
Stock were converted to Common Stock on March 31, 1995.  The
total number of shares of Common Stock issued to the general
partners as of the merger and to the limited partners on conversion of
the Preferred Stock was 3,645,859.  On March 31, 1995, the
Company issued 493,563 units in an initial public offering, with each
unit consisting of two shares of Common Stock and one warrant to
purchase one share of Common Stock.  The Company issued 500,000
shares of Senior Redeemable Preferred Stock in a private placement
in March 1996.  An additional 1,270,000 shares of Common Stock
were issued by the Company in its secondary public offering in July
1996. 

The Company produces, markets, and sells premium quality California
table wines.  The Company also farms vineyards which supply a
portion of its annual grape requirements.

Inventories are stated at the lower of  FIFO (first-in, first-out) cost or
market.  Cost includes the cost of grown and purchased grapes, and
harvesting, production, aging and bottling costs.  Wine inventories are
classified as current assets in accordance with recognized trade
practice although certain inventories will be aged for periods longer
than one year.  Crop costs associated with farming vineyards prior to
the harvest are deferred and recognized in the year the grapes are
harvested.

Property, plant and equipment are stated at cost and are depreciated
using primarily the straight-line method over the estimated useful lives
of the assets, which range from 3 to 45 years.  Major property
additions and betterments are capitalized and maintenance and repairs
are expensed as incurred.  The cost of property sold or otherwise
disposed of, and the related accumulated depreciation, are removed
from the accounts at the time of sale and any resulting gain or loss is
included in operations.

Costs of planting new vines and ongoing cultivation costs for vines
not yet bearing, including interest, are capitalized. Interest capitalized
amounted to $295,000 and $599,000 in 1995 and 1996, respectively.
Depreciation commences in the initial year the vineyard yields a
commercial crop, generally in the third year after planting.

Other assets include organization costs, trade name and deferred loan
fees.  Deferred loan fees and other costs are amortized using the
straight-line method over the term of the loan, or over lives ranging
from 2 to 5 years.  Accumulated amortization was $251,824 at
December 31, 1996.

Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period.  Actual results
could differ from those estimates.
                              F6                                (Continued)
<PAGE> 36


Major Customers and Sales Representatives - The Company sells
most of its products to distributors for resale to restaurants, bars and
retail outlets. The Company performs ongoing credit evaluations of 
its customers and generally does not require collateral. The
Company's credit losses have been minimal and within management's
expectations.
                      
The Company's three largest distributors accounted for 13%, 12% and
11% of sales for the year ended December 31, 1995 and 13%, 11%
and 10% for the year ended December 31, 1996. Accounts receivable
from these distributors at December 31, 1996 totaled approximately
$1,380,000.

The Company has eleven sales representatives.  The sales
representative who generated the largest sales volume accounted for
approximately  $7,375,000, or 48% of total sales in 1995 and
approximately $7,722,000, or 46% of total sales in 1996.

Net income per share - Net income per share has been computed
based on the number of common and common equivalent shares
outstanding.  The Company's warrants to purchase Common Stock
and employee stock options which were outstanding at December 31,
1995 and December 31, 1996 were anti-dilutive and were therefore
not included in the calculation of earnings per share.  Net income per
share and common shares outstanding for the year ended December
31, 1995 has been restated to reflect a stock dividend of 37,500 shares
issued in September 1996.    
          
Income taxes - The Company accounts for income taxes using the
asset and liability method, under which deferred income taxes are
provided for the temporary differences between the tax basis of assets
and liabilities and their related financial statement amounts using
current income tax rates.

Recent Pronouncements - The Company  adopted the provisions of
Statement of Financial Accounting Standards No. 121, Accounting for
Impairment of Long-lived Assets and Long-lived Assets to be
Disposed of (SFAS 121) as of January 1, 1996.  This statement
requires that long-lived assets and certain identifiable intangibles held
and used by the Company be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable.  This statement also requires that
long-lived assets and certain identifiable intangibles to be disposed of 
be reported at the lower of carrying or fair value, less cost to sell.  The
adoption of SFAS 121 did not have a material effect on the Company.

Prior to January 1, 1996, the Company accounted for its stock option
plan in accordance with the provisions of Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees (APB 25),
and related interpretations. As such, compensation expense would be
recorded on the date of grant only if the current market price of the
underlying stock exceeded the exercise price. On January 1, 1996, the
Company adopted SFAS 123, Accounting for Stock-Based
Compensation, which permits entities to recognize as expense over
the vesting period the fair value of all stock-based awards on the date
of grant. Alternatively, SFAS 123 also allows entities to continue to
apply the provisions of APB 25 and provide pro forma net income and
pro forma earnings per share disclosures for employee stock option
grants made in 1995 and future years as if the fair-value-based method
defined in SFAS 123 had been applied. The Company has elected to
continue to apply the provisions of APB 25 and provide the pro forma
disclosure provisions of SFAS 123.

Reclassification - Certain 1995 amounts have been reclassified for
comparative purposes to conform to present year presentation.

 



                           F7                                 (Continued)

<PAGE> 37


2. INVENTORIES

Inventories consist of the following at December 31, 1996:
                                                                
  Bulk and bottled wine                                          $ 6,853,329 
  Bottling supplies and other                                        414,960 
  Deferred crop costs                                                539,422 
                                                                 -----------
     Total                                                       $ 7,807,711 
                                                                 ===========

3. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consists of the following at December
31, 1996: 

  Land                                                           $ 3,097,081 
  Vineyard improvements                                            3,943,337 
  Buildings                                                        5,318,871 
  Machinery and equipment                                         10,888,613
  Vehicles and office fixtures                                       758,342
                                                                 -----------
     Total                                                        24,006,244
  Less accumulated depreciation                                    4,721,501 
                                                                 -----------
     Total                                                        19,284,743 

  Vineyard improvements under development                          8,144,932 
                                                                 -----------
  Property, plant, and equipment - net                           $27,429,675 
                                                                 ===========

Total depreciation expense during the years ended December 31, 1995
and 1996 was approximately $938,000 and $1,383,000, respectively.

Property, plant and equipment under capital leases as of December 31,
1996 is as follows:
  
  Machinery and equipment                                        $   808,325 
  Less accumulated depreciation                                      299,757 
                                                                 -----------
  Net                                                            $   508,568 
                                                                 ===========

Depreciation expense for machinery and equipment under capital
leases was approximately $172,000 and $118,000 for the years ended
December 31, 1995 and 1996, respectively.

4. NOTE RECEIVABLE FROM SHAREHOLDER

The Company has a note receivable from RHP Vineyards, Inc., a
major shareholder, which bears interest at 7% and is unsecured. The
note is due June 30, 1999.

5. NOTES PAYABLE

Notes payable at December 31, 1996 consists of a note payable to a
grower in the amount of $440,167.  The note bears interest at an
annual rate of 9.25% and is unsecured.  Principal and interest are due
in eight equal monthly installments beginning January 1997.

                             F8                             (Continued)

<PAGE> 38
6. LONG-TERM DEBT

Long-term debt consists of the following at December 31, 1996:   

  Note payable to insurance company, with interest on            $ 6,950,000
    $4,262,663 of principal at 9.05% per annum, $1,297,337
    of principal at 8.55% and $1,390,000 of principal
    at 8.10%.  Principal and interest payable monthly
    through February 2005, secured by various assets of
    the Company
  Note payable to bank, interest at prime or IBOR plus 200         4,772,010 
     basis points, principal due April 1998, interest payable
     monthly, collateralized by accounts receivable
     and inventory (1)
  Note payable to bank, interest at one month LIBOR plus 330       1,700,000 
     basis points, principal and interest due in 42 monthly 
     payments of $19,911 followed by 42 monthly payments of 
     $29,867, balance due December 2004, secured by certain
     equipment
  Note payable to bank, interest at prime plus 1%,                   700,000
     principal due March 1997, interest payable monthly,
     collateralized by grape crop and farm equipment (2)
  Note payable to finance company, payable in sixty monthly          498,799 
     installments of $10,744 plus interest at one month LIBOR
     plus 332 basis points, due November 2000, secured by
     certain equipment
  Note payable to individual, payable $1,322 per month including     125,140 
     interest at 9%, balance of $104,729 due September 2000,
     secured by land
  Notes payable to shareholders and affiliates, interest at           55,305 
     various rates, due June 1999
  Capital lease obligations                                          520,356 
  Other                                                               85,866 
                                                                 -----------
  Total                                                           15,407,476 

  Less current maturities                                          1,073,000 
                                                                 -----------
  Long-term portion                                              $14,334,476 
                                                                 ===========

(1) Maximum amount that can be borrowed on the note is $5,000,000.  The
amount outstanding as of December 31, 1996 consists of $4,373,069 borrowed
against the line and $398,941 in outstanding checks.  $227,990 was available at
December 31, 1996.
(2) Maximum amount that can be borrowed on the note is $1,000,000, of which
$300,000 was available at December 31, 1996.

Principal payments required on long-term debt (other than capital
leases) for each of the next five years ending December 31, are as
follows:

    1997                                                         $   925,418 
    1998                                                           6,324,178
    1999                                                             859,809
    2000                                                           1,008,106
    2001                                                             865,875
    Thereafter                                                     4,903,735
                                                                 -----------
        Total                                                    $14,887,120
                                                                 ===========
                                   F9                         (Continued)
<PAGE> 39

The Company leases certain winery and other equipment under
noncancellable capital leases.  Future minimum lease payments under
these leases for each of the next five years ending December 31 are as
follows:

   1997                                                          $   210,814
   1998                                                              213,452
   1999                                                              201,486
   2000                                                               10,412
   2001                                                                8,678
                                                                 -----------
Total                                                                644,842
Less amounts representing interest                                   124,486
                                                                 -----------
Net minimum lease payments                                       $   520,356
                                                                 ===========

7. SUBORDINATED DEBT

In December 1994 the Company issued $1,500,000 of  unsecured
subordinated convertible five year promissory notes  in exchange for
the cancellation of indebtedness under certain promissory notes. The
subordinated convertible promissory notes bear interest at 6% per
annum, payable yearly and will be converted into shares of the
Company's Common Stock when the average of the bid and ask price
of such stock as quoted on a national securities exchange or
Nasdaq equals or exceeds $3.50 per share for five consecutive
days, subsequent to December 6, 1996.  The number of shares of
common stock issuable upon conversion shall equal the amount of
unpaid principal and interest divided by the lesser of the quoted price
per share or $3.875. Payment of principal on the notes is due in
December 1999 if not converted to common stock prior to that time.

8. COMMITMENTS AND CONTINGENCIES

As of January 1995, the Company had a total of 437 acres of
vineyards which were believed by management  to be susceptible to
Phylloxera infestation (Biotype A).  During 1995 and 1996, the
Company removed a total of 148 acres of vineyards, 143 of which
were removed because of Phylloxera and 5 of which were removed
for winery expansion, leaving a total of 289 acres which management
believes may be susceptible to Phylloxera. Based on tests management
has performed, management believes that of these 289 acres, portions
of up to 150 acres have the presence of Phylloxera. The Company is
using a variety of methods to combat Phylloxera infestation. Although
this acreage will ultimately require replanting, at this time management
expects that these vineyards will  remain commercially productive for
approximately seven more years.  The Company has reduced the
depreciable life of these vineyards to reflect the expected remaining
useful life (see Note 11). 

The Company is party to various legal proceedings arising in the
ordinary course of business.  In the opinion of management, the
ultimate disposition of these matters will not have a material adverse
impact on the Company's financial position, results of operations or
liquidity.

9.  SHAREHOLDERS' EQUITY

Effective March 31, 1995, the Company completed its initial public
offering of Common Stock.  A total of 493,563 units were sold at a
price of $7.25 per unit.  A unit consisted of two shares of Common
Stock and one warrant to purchase an additional share of Common
Stock at a price of $3.875.  The warrants are currently exercisable and
were due to expire on April 1, 1997.  The Board of Directors may
lengthen the exercise period for the warrants at any time at its
discretion. In March 1997, the Board of Directors extended the
exercise period to October 1, 1998. The Company may repurchase, or
"call", the warrants upon 30 days notice at a price of $0.25 per
warrant while the warrants are exercisable if the closing bid price per
share of Common Stock exceeds $4.50 per share for five consecutive
trading days.  In connection with the public offering, 987,126 shares
of Common Stock were issued.  After payment of commissions and
other expenses of the offering, the Company received proceeds of
approximately $2,873,000.

                             F10                          (Continued)
<PAGE> 40
In connection with the initial public offering, all shares of Preferred
Stock which were outstanding at that time were converted into
2,065,983 shares of Common Stock.  The total number of shares of
Common Stock issued and outstanding as of April 1, 1995,
immediately after the public offering and the conversion of the
Preferred Stock, was 4,632,985 shares.

The Company completed a second public offering of Common Stock
in July 1996.  The Company issued 1,270,000 shares of Common
Stock in connection with the offering at a price of $4.375 per share. 
The net proceeds from the offering, after payment of underwriting
discounts and offering expenses, totaled approximately $4,484,000.

As of December 31, 1996, warrants to purchase 17,065 shares of
Common Stock had been exercised, with net proceeds to the
Company of approximately $66,000.  The Company issued an
additional 37,500 shares of Common Stock to the holder of its
Redeemable Preferred Stock as a stock dividend in September 1996. 

In addition to the warrants issued in connection with the Company's
initial public offering, warrants have been issued to the underwriters
of both public offerings and to the holder of its Redeemable Preferred
Stock.  The Company issued warrants to purchase 98,713 shares of
Common Stock to the underwriter of the initial public offering.  These
warrants are exercisable at $5.57 per share.  The Company issued
warrants to purchase 122,000 shares of Common Stock at a price of
$5.25 to the underwriter of its secondary public offering.  The holder
of the Company's Redeemable Preferred Stock received warrants to
purchase 1,381,321 shares of Common Stock at a price of $3.90. All
underwriter warrants and warrants held by the holder of the
Company's Redeemable Preferred Stock are currently exercisable. 
The total number of warrants outstanding as of December 31, 1996
was 2,078,532.

10. REDEEMABLE PREFERRED STOCK

In March 1996, the Company completed a private placement sale of
500,000 shares of Senior Preferred Redeemable Stock and warrants
to purchase up to 1,381,321 shares of Common Stock.  500,000
shares of Senior Redeemable Preferred Stock are authorized, issued
and outstanding as of December 31, 1996.  The net proceeds the
Company derived from the sale of the Redeemable Preferred Stock
and the warrants, after offering expenses, totaled approximately
$4,798,000.  The Redeemable Preferred Stock bears a 12%
cumulative annual dividend, payable semiannually.  During the first
four years after issuance, 50% of the dividend will be paid in cash and
50% of the dividend will be paid in shares of Common Stock at a
price equal to the lower of the market price at the dividend payment
date or $4.00 per share.  The Company will be required to redeem
one-third of the Redeemable Preferred Stock eight years after issuance
and one-third of the Redeemable Preferred Stock in each of the
succeeding years at a price of $10.00 per share.  The carrying value
of the Redeemable Preferred Stock was approximately $4,462,000,
net of offering expenses and the estimated value of the warrants.  The
Redeemable Preferred Stock is redeemable at $5,000,000.  The
difference between the carrying value and the redemption value will
be accreted over the life of the Redeemable Preferred Stock using the
interest method. 

11. OTHER INCOME (EXPENSE)

Other expense for the year ended December 31, 1996 includes
$237,000, representing a provision for impairment of the vineyards
believed to be susceptible to Phylloxera, as discussed in Footnote 8.
Management accelerated the depreciation on these vineyards over a
ten year period to correspond with the planned removal of
approximately 30 acres per year.  However, the decision was made to
remove a total of 148 acres during 1995 and 1996.  The provision for
impairment was made to reduce the book value of the remaining
vineyards to their estimated economic value as of December 31, 1996.

                           F11                           (Continued)
<PAGE> 41

12. INCOME TAXES

The provision for income taxes consists of the following for the
years ended December 31:
                                                                              
Current:                                              
                                                       1995         1996
                                                    ----------   ----------
    Federal                                         $  219,200   $   490,000 
    State                                                7,800        15,000 
                                                    ----------    ----------
       Total current provision                         227,000       505,000 
                                                      
Deferred:                                             
    Federal                                            (11,000)      155,000 
    State                                               73,000       (29,000)
                                                    ----------   -----------
       Total deferred provision                         62,000       126,000 
                                                    ----------   -----------
                                                    $  289,000   $   631,000 
                                                    ==========   ===========

Deferred income taxes included in the balance sheet at December
31, 1996 are as follows:

Current deferred tax assets:
    Nondeductible reserves and difference between
       book and tax basis of inventory                           $   226,000 
    State manufacturer's investment credit                           157,000 
Noncurrent deferred tax assets:
     Difference between book and tax basis of intangible assets      141,000 
     Other                                                             1,000 
                                                                 -----------
     Total deferred tax asset                                        525,000 

Noncurrent deferred tax liability:
     Difference between book and tax basis of property,
     plant and equipment                                           1,077,000 
                                                                 -----------
Net deferred tax liability                                       $   552,000 
                                                                 ===========
Management believes that it is more likely than not that all the
deferred tax assets as of December 31, 1996 will be realized and,
therefore, no allowance for deferred tax assets has been made.

The provision for income taxes is at an effective rate different from
the statutory tax rate of 34% when applied to the pre-tax income 
of  $1,039,756 and $1,924,256 for the years ended December 31,
1995 and 1996, respectively, as a result of the following:

                                                          1995       1996
                                                        --------   --------
Expected U.S. Federal income tax                             34%        34% 
State franchise tax, net of federal benefit                   6%         6% 
Permanent difference in basis of assets                       2%         1% 
Net operating loss carry forward from 1994, federal         (11%)        0% 
State manufacturer's investment credit                       (6%)       (7%)
Other                                                         3%        (1%)
                                                        --------   --------
    Total                                                     28%       33% 

In 1995 the Company utilized all of the net operating losses that were
generated in 1994 resulting in a tax benefit of approximately
$117,000. The Company utilized approximately $62,000 of the state
manufacturer's investment credit in 1995 and approximately $138,000
in 1996. The remaining carry forward of approximately $157,000 is
due to expire in 2006.

                               F12                         (Continued)
<PAGE> 42
13. STOCK COMPENSATION PLANS

At December 31, 1996, the Company had three stock-based
compensation plans, which are described below.  The Company
applies APB Opinion No. 25 in accounting for its stock compensation
plans.  Accordingly, no compensation cost has been recognized for its
fixed stock option plan and underwriter warrant plans.  Had
compensation cost for the Company's three stock-based compensation
plans been recognized consistent with FASB Statement No. 123, the
Company's net income and earnings per share would have the pro
forma amounts indicated below:

                                                     
                                                      1995          1996     
  Net income:                                      -----------   -----------   
    As reported                                    $   750,756   $ 1,293,256
    Pro forma                                          725,797     1,246,794

  Earnings per share:
    As reported                                          $0.17        $ 0.20
    Pro forma                                             0.16          0.19

Fixed Stock Option Plan - Under the 1995 Employee Stock Option
Plan, the Company may grant options to its employees for up to
815,000 shares of Common Stock.  The exercise price of each option
is no less than the market price of the Company's stock on the date of
the grant and an option's maximum term is ten years.  Options vest
ratably over the four years following the date of grant.

The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with a dividend yield of
0% for all years, an expected volatility of 15%, a risk free interest rate
of 6.35% and an expected term of six years. All assumptions in the
Black-Scholes option pricing model were based on their weighted
averages. 

A summary of the status of the Company's fixed option plan as of
December 31, 1995 and 1996 and changes during the years ended on
those dates is presented below:

                                          1995                  1996
                                   -------------------   ------------------
                                              Average              Average
                                              Exercise             Exercise
                                     Shares    Price     Shares     Price
                                    -------   --------   -------   --------
Outstanding at beginning of year         --   $     --   449,460   $   3.90
Granted                             449,460       3.90        --         -- 
Exercised                                --         --        --         --
Forfeited                                --         --   (21,792)      3.75
                                    -------   --------   -------   --------
Outstanding at end of year          449,460   $   3.90   427,668   $   3.90
                                    =======   ========   =======   ========

Options exercisable at year end          --   $   3.90   106,917   $   3.90
                                    =======   ========   =======   ========

Weighted average fair value of 
   Options granted during year                $   0.71             $     --
                                              ========             ========



                                   F13                      (Continued)
<PAGE> 43

The following summarizes information about fixed options
outstanding at December 31, 1996:

Range of exercise                                             $3.75 to $4.12 
Number outstanding at December 31, 1996                              427,668 
Options outstanding:
   Weighted average remaining contractual life                     8.5 years 
   Weighted average exercise price                                     $3.90 
Options exercisable:
   Number exercisable at December 31, 1996                           106,917 
   Weighted average exercise price                                     $3.90 

Underwriter Warrant Plans - The Company granted warrants for
shares of Common Stock to each of its underwriters for its two public
stock offerings.  The number of shares granted was 98,713 for the
Company's initial public offering, and 122,000 for the Company's
secondary public offering.  Under both plans, the exercise price was
above the market price of the Company's stock on the date of the
grant and each warrant's maximum term is five years. 

The fair value of each warrant  grant is estimated on the date of grant
using the Black-Scholes option pricing model with a dividend yield of
0% for all years, an expected volatility of 15%, a risk free interest rate
of 6% and an expected term of five years. All assumptions in the
Black-Scholes option pricing model were based on their weighted
averages for grants in 1995 and 1996. 

A summary of the status of the Company's underwriter warrant plans
as of December 31, 1995 and 1996 and changes during the years
ended on those dates is presented below:              

                                           1995                1996
                                    -------------------  -------------------
                                              Average              Average
                                              Exercise             Exercise
                                    Shares      Price    Shares      Price
                                    -------   ---------  -------   ---------
Outstanding at beginning of year     98,713   $    5.57   98,713   $    5.57
Granted                                  --          --  122,000        5.25
Exercised                                --          --       --          --
Forfeited                                --          --       --          --
                                    -------   ---------  -------   ---------
Outstanding at end of year           98,713   $    5.57  220,713   $    5.39
                                    =======   =========  =======   =========

Warrants exercisable at year end     98,713   $    5.57   98,713   $    5.57
                                    =======   =========  =======   =========
Weighted average fair value of 
   Warrants granted during year               $      --            $    0.69
                                              =========            =========

The following summarizes information about underwriter warrants
outstanding at December 31, 1996:

Range of exercise price                                       $5.25 to $5.57 
Number of warrants outstanding at December 31, 1996                  220,713 
Options outstanding:
   Weighted average remaining on contractual life                  3.7 years 
   Weighted average exercise price                                     $5.39 
Options exercisable:
   Number of warrants exercisable at December 31, 1996                98,713 
   Weighted average exercise price                                     $5.57 

                                F14                         (Continued)
<PAGE> 44



14. FAIR VALUE OF FINANCIAL INSTRUMENTS

The following methods and assumptions were used to estimate the fair
value of each class of financial instruments.  The carrying amounts of
cash, notes receivable from shareholders, accrued liabilities and notes
payable approximate fair value because of the short maturity of those
instruments. The fair value of the Company's long-term debt is
estimated based on the quoted market prices for the same or similar
issues or on the current rates offered to the Company for debt of the
same remaining maturities and approximates the carrying value.  It is
not practicable for the Company to determine the fair value of its
subordinated debt because the subordinated debt is non-transferable
(except for certain limited exceptions) and because no public market
for the subordinated debt exists.

15.  SUBSEQUENT EVENT

The Company has entered into an agreement providing for the sale
and leaseback of 370 acres of its vineyards.  Under the terms of the
agreement, the Company will receive payments of $5,400,000 in
1997.  The projected gain on the transaction is $400,000.  Payments
on the lease are to begin in 1999 and continue through 2012 at an
annual rate of $645,000.  The Company will have the option to 
repurchase the property in 2012 at a price of $8,400,000.  The
completion of the sale and lease back under the terms described above
is subject to the satisfaction of several conditions set forth in that
agreement. It is therefore possible that the sale and lease back may not
be completed.

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