<PAGE> 1

  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
             For the fiscal year ended December 31, 1997

[  ]         TRANSITION REPORT UNDER SECTION 13 OR
               15(d) OF THE SECURITIES EXCHANGE ACT OF
               1934
          For the transition period from _________ to ___________

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

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


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


Issuer's telephone number:  (530) 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. [  ]

Issuer's revenues for its most recent fiscal year:  $17,258,287

Aggregate market value of the voting stock held by non-affiliates based
on the closing price at which the stock was sold on the Nasdaq
National Market as of March 2, 1998 was approximately $13,739,547.

Number of shares outstanding of each of the issuer's classes of common
equity as of March 13, 1998: 6,433,182

Documents incorporated by reference: Annual Proxy Statement for
Security Holders for fiscal year ended December 31, 1997
Transitional Small Business Disclosure Format:    Yes      No  X

<PAGE>
<PAGE> 2
                   PART I

Item 1. Description of Business

General

     R.H. Phillips, Inc. ("R.H. Phillips" or "the Company")
makes and sells premium and super premium varietal table wines.
The Company's vineyard, winery and corporate headquarters are
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.  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 4,500 cases in 1984 to
371,000 cases in 1997.

     For purposes of the following discussion, a "case" means a
nine liter case of wine.  All numbers are approximate.

Business of Issuer

     Strategy

     R.H. Phillips is a leading California wine producer.  The
Company specializes in the production of Chardonnay as well as
Syrah and Viognier, which are Rhone Valley varietals.  The
Company owns or leases more than 1,500 acres of grapes in the
Dunnigan Hills viticultural region.  The Company's strategy is to
combine high quality wine-making technology with low fruit costs
from its vineyards in order to increase gross margins and production
of its super premium wines.  The Company's Syrah plantings make
it one of the leading producers of Rhone Valley varietals in the
United States.

     Products

     The Company produces and sells wines in the category
known as "table wines."  Table wines contain 7% to 14% alcohol by
volume, and are generally consumed with foods.  Table wines that
retail for less than $3 per 750 ml (milliliter) bottle are generally
referred to as generic or "jug" wines.  Table wines which retail in
the $3 to $7 range are referred to as "premium" or "popular
premium" wines.  Wines which retail between $7 and $14 per bottle
are considered "super premium" wines and those which retail above
$14 per bottle are considered "ultra premium" wines.

     The Company has developed a diverse line of products
including popular premium and super premium varietal table wines.
The Company markets its products under five brand groups, each of
which is defined by a type of wine and price structure.

     EXP .  The EXP Series consists of a Syrah and an estate
bottled Viognier, which are varietals traditionally grown in  France's
southern Rhone Valley.  Rhone Valley varietals adapt well to the
warm Dunnigan Hills climate.  EXP Syrah is fermented using
several yeast strains to encourage a broad range of flavor
development.  Warm fermentation temperatures are employed to aid
in the development of soft tannins and intense color.  EXP Viognier
is estate bottled.  After pressing and cold settling, Viognier juice is
fermented at cool temperatures, creating slow fermentation in
barrels and tanks.  The wine is left in contact with fermentation lees
to encourage yeasty, toasty characteristics.  The EXP wines, which
are produced in 750 ml bottles and have a suggested retail price of
$12, are "super premium" wines that have gained recognition for
quality.
<PAGE> 3
     Toasted Head .  The Company introduced its Toasted
Head Series during 1997.  Toasting is a method used by coopers to
alter and influence the impact of wood barrel aging on the quality of
wine.  Woody aromas are subdued by toasting, while spicy, sweet,
burnt and vanilla aromas are increased by the process.  For Toasted
Head wines, the barrel staves and heads are moderately toasted.
This series includes a 100% estate bottled Chardonnay which is
fermented in French and American oak barrels and is allowed to age
sur lie to develop richness.  Part of the wine goes through malolactic
fermentation to soften its texture.  Toasted Head Chardonnay is aged
up to ten months in oak.  The series also includes a Cabernet
Sauvignon/Syrah blend, which is aged approximately eighteen
months in French and American oak barrels.  The wines are kept in
small individual lots until the final blend is assembled.  The Toasted
Head Series is packaged in a 750 ml bottle and has a suggested retail
price of $12.

     Barrel Cuvee.  Chardonnay and Cabernet Sauvignon
products comprise the Barrel Cuvee Series.  The Company is a
recognized quality leader for Chardonnay and Cabernet Sauvignon
priced under $10 per bottle and has received significant positive
recognition from well-known wine critics.  Approximately 60% of
Barrel Cuvee Chardonnay is either fermented or aged in a
combination of French and American oak barrels.  The wine is left
in contact with fermentation lees in order to encourage yeasty, toasty
characteristics.  These processes give the wines a competitive
quality edge within their price structure.  Wines in the Barrel Cuvee
Series are bottled in 750 ml and 1.5 liter bottles.  The 750 ml bottle
has a suggested retail price of $8 per bottle.

     Night Harvest .  The Night Harvest Series consists of three
products: Sauvignon Blanc, Mistura  and White Zinfandel.
Sauvignon Blanc is fermented and aged in stainless steel tanks to
preserve maximum fruit flavors.  Mistura is a blend produced from
several Rhone Valley varietals from the Dunnigan Hills as well as
select areas of California.  The Company's White Zinfandel uses
cold fermentation to preserve the fruity fermentation esters.  The
wine is blended with Chenin Blanc and Muscat in an effort to
showcase its fruit flavors. Night Harvest wines are bottled in 500 ml,
750 ml and 1.5 liter bottles.  Suggested retail prices for blends in
this group, depending on bottle size, range from $6 to $10 per bottle.

     Chateau St. Nicholas .   The Chateau St. Nicholas Series
is sold only during the holiday season, and consists of Chardonnay
and White Zinfandel.  The wines are sold in a 750 ml bottle or in a
gift pack containing two 500 ml bottles.  Chateau St. Nicholas has
a suggested retail price of $6 to $7 for the 750 ml bottles, and $12
for the gift pack.

     Zinfandel.  The Company plans to introduce its   Zinfandel
Series during 1998.  This series will consist of Zinfandel wines
produced from different California vineyards.  Management intends
to package the wines in a 750 ml bottle with a suggested retail price
of $12 to $14, depending on the vineyard.  Management believes
this wine will be of a quality comparable to the EXP and Toasted
Head series.

     Sales By Product

     Chardonnay, which historically has been the Company's
largest selling varietal, accounted for 47% of sales in 1997.
Sauvignon Blanc was the next largest varietal, with 18% of sales.
Sales by product line have been dominated by the Barrel Cuvee
Series, which generated 55% of 1997 sales.  The Night Harvest
Series accounted for 30% of 1997 sales.  The Company plans to
emphasize sales of its higher priced EXP, Toasted Head, and
Zinfandel products in the future.
<PAGE> 4
     Distribution

     The Company's sales strategy has focused on the creation,
retention and expansion of a large, nationwide distributor network
supported by sales personnel and commissioned brokers.  The
Company's brands are distributed nationwide by a network of 90
unrelated distributors who purchase from the Company at wholesale
prices.  The Company employs a National Sales Manager and five
sales representatives who work with certain distributors to sell the
Company's products.  In addition, the Company uses independent
wine brokers.  The brokers, who are paid a commission based on
sales revenue, accounted for 63% of sales during 1997.  Each sales
representative and broker is responsible for managing the wholesale
network established in his or her region by facilitating
communication, dealing with special promotions, and monitoring
sales performance.

     The Company's largest customers in 1997 were Lauber
Imports, Ltd., Wine Warehouse,  and M.S. Walker.  Lauber Imports,
which distributes wines in the northeastern United States, accounted
for 12% of sales in 1997.  Wine Warehouse distributes wine in
California, and accounted for 11% of sales.  M.S. Walker, also
located in the northeast, accounted for 7% of sales.  In December
1997, the Company moved its California distribution from Wine
Warehouse to Young's Market Company.  Management believes
that the move to Young's Market Company will have the long term
benefit of improving product distribution in California.

     The Company's wines are sold throughout the United States
and in several other countries.  The northeastern United States,
which is the Company's largest region, accounted for 34% of sales
in 1997.  The  northern Midwest was the second largest region with
11% of sales.  The Company exported 1% of its sales, primarily to
Canada.

     The Company's standard sales terms provide that payments
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.

     Sales and Marketing

     The Company's sales and marketing activities take various
forms.  Advertising and sales promotional activities are used to
promote products in either a "push" or "pull" manner.  "Push"
programs include promotional allowance rebates or discounts and
product samples.  "Pull" programs include media advertising, point
of sale materials, a tasting room, and various promotional events.
Management believes that "push" programs are the more cost
effective method to generate new sales.  Although pull programs are
more costly to implement, management believes that they may
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, trellis materials, grapes, bulk wines, and packaging
materials.  Management believes that it has strong relationships with
all of its major suppliers, is not dependent on any single supplier,
and would be able to find substitute suppliers if necessary.
<PAGE> 5
      Because the Company's product sales exceed its current
grape production, it has been necessary to purchase bulk wine and
grapes from outside suppliers.  In 1997, 71% of the Company's wine
sales  came from bulk grapes and wine purchased on the open
market or through supply contracts.  The supply and price of
available grapes have historically been subject to considerable
fluctuations.  The Company has expanded its vineyards to lessen its
dependence on outside sources of bulk wine and grapes, and
anticipates that the full benefit of the vineyard expansion will be
realized over the next several years as the vines mature.

     Research and Development

     The Company conducts research in several areas in an effort
to improve vineyard yield, wine quality and processing efficiency.
Vineyard research includes testing irrigation levels, soil
amendments, cover crops, and trellising, clonal and rootstock
valuations as well as canopy management techniques.  Winemaking
research is carried out on a year round bases, and has included
experiments with yeast strains, enzymes, fermentation techniques,
fruit maturities, and extensive barrel evaluation trials.

     The Company actively exchanges viticultural and
winemaking information with other firms in the industry and
maintains a close working relationship with the faculty of the
Department of Enology and Viticulture at the University of
California at Davis.  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 1997 had
approximately $4.9 billion in sales according to the December 1997
edition of  WINEDATA published by  Gomberg, Fredrikson and
Associates.  There are approximately 850 commercial wineries
currently 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 60% of total wine sales from
California producers.  The Company is the 24th largest shipper of
wines in California, according to the 1997 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.  Management
believes that competition in the wine industry will likely increase,
which could potentially reduce future profits.  Plantings of vineyards
have increased over the last several years.  As a result, there may be
certain grape varietals that will be in oversupply in the future as the
vineyards begin to produce crops.  Such an oversupply may result in
increased pressure on wine prices.

     Trademarks

     The Company has adopted a program to establish and
protect its trademarks and trade names.  The Company has obtained
federal registrations for its EXP, Toasted Head, Night Harvest,
Mistura and Chateau St. Nicholas trademarks from the U.S. Patent
& Trademark Office.
 <PAGE> 6
     Employees

     R.H. Phillips employs 160 people full-time.  In addition, the
Company employs temporary labor for vineyard development,
pruning and harvest, and winery crush and bottling.  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

     Grape growing 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 grape quality and,
consequently, the quality of wine.  Weather has had a large impact
on the California wine industry in recent years, causing fluctuations
in crop yields.

     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 it can affect grape
quality and causes a progressive decline in grape production.
Chemical insecticides can slow the progress of vine deterioration,
but once a vine is infested it is not possible to eradicate Phylloxera.
Phylloxera has impacted several grape growing regions, including
Napa, Sonoma, Monterey, Mendocino and Lake counties.

     Due to the Company's warmer climate and careful farming
practices, the Phylloxera infestation in its vineyards was somewhat
delayed.  However, of the 1,549 acres of vineyards currently owned
or leased by the Company, 187 acres have rootstock known to be
susceptible to Phylloxera.  Based on tests performed by the
Company, management believes that portions of these 187 acres
show physical symptoms of decline.  The Company is using a
variety of methods to combat Phylloxera infestation. Vines which
are not severely damaged or are not yet infested are grafted onto
resistant rootstock, or new vines on resistant rootstock are planted
between the Phylloxera infested vines, which are then allowed to
deteriorate.  The Company replaced the more severely damaged
vines and the Phylloxera susceptible vines bearing grape varieties
which the Company has de-emphasized.  All replacement vines 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.  Management is unaware of any diseases in the
Company's vineyards other than normal grape growing conditions
such as mildew and insect infestation.  The Company is treating
these  with chemical treatments and the use of organic methods,
such as natural insect enemies of the pests.

     Water Supply

     The Company has several wells on its property which have
historically supplied sufficient quantities of water for irrigation.
However, there can be no assurance that the wells will provide
sufficient water during a severe drought.  Future expansion of
vineyards in the Dunnigan Hills region may be limited by the
availability of water.
<PAGE> 7
     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
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 less than 14% is lower than the tax assessed on wine with a
higher 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.

     State governments also regulate the production, shipment
and marketing of wine.  The wine regulatory agency in California is
the Department of Alcoholic Beverage Control.  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. 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 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 its business.
Management is unaware of any environmental problems on or near
the vineyard or winery that would have a material adverse effect on
the financial condition of the Company.

     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 1997,
32% 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  to fund
vineyard and winery expansions.

     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.
<PAGE> 8
     Year 2000

     The Company uses several computer programs, some of
which may be affected by programming limitations due to the
upcoming year 2000.  Management is in the process of reviewing
the Company's computer systems to determine whether any
software requires updating or replacement.  The programmer of the
Company's primary software has advised management that the cost
to reprogram its software will be borne by the programmer.
Management believes that the cost to the Company of Year 2000
expenditures will be zero, and therefore does not expect Year 2000
expenditures to have a material effect on results of operations,
liquidity, or capital resources.

Item 2. Description of Property

     The Company owns or leases 2,696 acres of land in
California's Dunnigan Hills region, located in northern Yolo County.
A total of 1,549 acres are currently planted in vineyards, of which
767 are mature and produce a crop.  The 435 acres which were
planted in 1996 are scheduled to produce their first crop in 1998,
and the 347 acres planted in 1997 will mature in 1999.

     The Company's winery facility and administrative
headquarters are located on the Company's land.  The winery facility
includes bottling, barrel storage and warehouse buildings, wine
storage and fermentation tanks, and grape processing equipment.
Storage capacity in the Company's warehouse is 110,000 cases of
wine, which is fully utilized.  The Company owns or leases 7,400
oak barrels capable of holding 438,000 gallons.  The Company's
wine tank capacity is 1,544,000 gallons, for a total capacity of
1,982,000 gallons.  The maximum bulk wine on hand at one time
during 1997 was 1,530,000 gallons.  The Company plans to increase
its tank capacity, purchase additional barrels, and lease offsite
warehouse space during 1998 to accommodate planned growth.

     In May 1997, the Company sold 371 acres of land being
developed into vineyard to John Hancock Mutual Life Insurance
Company ("Hancock").  In connection with that transaction, the
Company now manages, operates and leases the land and vineyards
from a subtenant of Hancock, Farmland Management Services, for
a term that expires on December 31, 2012.   The lease requires the
Company to pay rent of $161,000 per calendar quarter beginning in
1999 and complete the vineyards that are still under development.

     The Company has granted to Metropolitan Life Insurance
Company ("Metropolitan") a deed of trust on certain 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.

Item 3.  Legal Proceedings

     The Company is not the subject of any material litigation.

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

     None
<PAGE> 9



                          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 13, 1998, there were 318 holders of record of the Company's
Common Stock.

     The high and low bid prices for the Common Stock by
quarter for the past two years are as follows:
<TABLE>
<CAPTION>
             Year Ended December 31, 1996
<S>                                   <C>    <C>
First Quarter........................ $6.75  $3.00

Second Quarter....................... $6.75  $4.88

Third Quarter........................ $6.50  $3.75

Fourth Quarter....................... $4.12  $2.75

             Year Ended December 31, 1997

First Quarter........................ $4.13  $2.75

Second Quarter....................... $4.38  $3.06

Third Quarter........................ $4.44  $3.44

Fourth Quarter....................... $4.25  $3.00
</TABLE>
     The information concerning the high and low bid prices is
based on reports the Company received from the Nasdaq National
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 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.

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.  All
numbers are approximate.
<PAGE> 10


Forward-Looking Statements

     The Company provides in this report and elsewhere from
time to time forward-looking statements regarding the Company,
its products, the wine business, and general business and
economic conditions.  Examples of forward-looking statements
include projections regarding future expansion, trends in the wine
industry, sources of supply, costs of production, profit margins,
and availability and sources of financing.  The actual results of
the Company may vary due to a variety of factors, including the
following:

     Availability of Future Financing.  The Company may
continue to heavily depend upon its ability to raise additional debt
or equity financing for its working capital and capital expansion
needs.  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 financing sources, and general economic
conditions.  If interest rates increase or other financing becomes
unavailable or more costly to obtain, the Company may not be
able to raise sufficient capital to supply its needs.

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

     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 the cost and availability of bulk wine and grapes
from the spot market.  For example, if 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.  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 management's beliefs
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 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.

     Other Factors.  A variety of other factors could affect the
actual results of the Company.  These include changes in economic
conditions, unexpected adverse weather or growing conditions,
reduction or increases in consumer demand, changes in
governmental regulation concerning the production and sale of
wine, and increased competition from foreign or domestic wine
producers.

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 1997,
32% of total sales occurred during this period.  The Company's
expenditures fluctuate throughout the year based on vineyard and
winery activities.

<PAGE> 11
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 experienced an increase in its cost of goods
during 1997 due to adverse weather conditions during the 1996
growing season, which caused below average crop yields in 1996.
Many other California vineyards suffered similar or greater
reductions of their grape crops.  The reduction in the Company's
grape supply compelled the Company to increase its grape and
bulk wine purchases to meet consumer demand for the
Company's wines.  At the same time, the market price of bulk
wines and grapes had increased substantially due to below
average California grape harvests in 1995 and 1996.

      The Company realized above average yields from its
1997 crop.  The Company's vineyards produced 5,100 tons of
grapes in 1997, compared with 2,400 tons in 1996.  The increase
was primarily due to above average yields per acre due to
favorable growing conditions, and production from new
vineyards.  The increased 1997 grape tonnage reduced the cost
per gallon of wine produced from Company vineyards.
Consequently, management believes that the Company's cost of
goods will likely decline in 1998, and that the Company will have
more wine available for sale.  The Company has expanded the
size of its vineyards to lessen its dependence on outside sources
of bulk wines and grapes and further reduce its cost of goods.
The Company anticipates that the full benefit of the vineyard
expansion should continue to be realized over the next several
years as the vines mature.

Results of Operations

Year Ended December 31, 1996

     Net Sales

     Net sales for the year ended December 31, 1996 were
$16,928,000, an increase of  9% over net sales in the prior year.
Excluding the sales of bulk wines and other items, net sales were
$15,820,000 in 1996, an increase of  9% over 1995.  The average
selling price per case was $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 Company
sold  402,000 cases in 1996, substantially the same as 1995.

     Gross Profit

     Gross profit was $6,792,000 in 1996, an 18% increase over
the previous year.  Excluding the sales of bulk wines and other
items, gross profit was $6,554,000 in 1996, a 21% increase over
1995.  The higher gross profit in 1996 was primarily due to the price
increases discussed above.
<PAGE> 12




     Selling Expenses

     Selling expenses decreased $131,000 in 1996 as compared
to the previous year.  The decrease was primarily due to lower sales
program expenses.

     General and Administrative Expenses

     General and administrative expenses increased $179,000 in
1996 as compared to the prior year.  The increase was primarily due
to an accounts receivable write off and reclass of certain salary
expense.

     Interest Expense

     Interest expense for the year ended December 31, 1996 was
$862,000, a 16% decrease from the prior year.  The Company
capitalized $599,000 of additional interest pertaining to vineyard
and winery development in 1996.  The increase in interest during
1996 was primarily due to increased levels of borrowing by the
Company to finance vineyard and winery expansion in 1996.  The
interest is attributable to the Company's borrowings on its bank
lines of credit and other debt obligations.

     Other Income (Expense)

     Other expense for the year ended December 31, 1996 was
$152,000, compared to other income of $29,000 for the prior year.
The large expense in 1996 was primarily due to a provision for
impairment of vineyards believed to be susceptible to Phylloxera.
An accelerated depreciation schedule had been based on
management's original plan to remove and replace  30 acres per
year.  However, 148 acres were removed 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  $1,293,000 for the
year ended December 31, 1996, a 72% increase over the previous
year.  The increase was primarily due to higher sales prices and
lower product costs, which resulted in higher profit margins.

Year Ended December 31, 1997

     Net Sales

     Net sales in 1997 were $17,258,000, an increase of 2%
over net sales of $16,928,000 during 1996.  Excluding the sales
of bulk wines and other items, net sales were $16,245,000 in
1997, an increase of 3% over sales of $15,820,000 in 1996.  The
average selling price per case increased from $39.33 in 1996 to
$43.73 in 1997.  The Company sold 371,000 cases in 1997, a
decrease of 8% from 402,000 cases in 1996.  The decrease was
primarily due to adverse weather conditions during the 1996
growing season which reduced the availability of wine to sell in
1997.

     Gross profit

     Gross profit was $7,204,000 in 1997, a 6% increase over
$6,792,000 in 1996.  Excluding the sales of bulk wines and other
items, gross profit was $6,999,000 in 1997, compared to
$6,554,000

<PAGE> 13
in 1996.  Gross margins were 42% in 1997, compared to 40% in
1996.  The cost per case increased during 1997, primarily due to
higher prices of bulk wines and grapes purchased from outside
parties and the below average harvest experienced by the
Company in 1996.  The Company implemented price increases
during 1997 to compensate for higher prices of bulk wine and
grapes.  As a result, gross margins increased in 1997 despite
higher costs.

     Selling Expenses

     Selling expenses were $3,359,000, or 19% of sales, in
1997, an increase from $3,054,000, or 18% of sales, in 1996.  The
$305,000 increase is primarily due to increased labor costs.

     General and Administrative Expenses

     General and administrative expenses were $918,000, or
5% of sales, in 1997, an increase from $800,000, or 5% of sales,
in 1996.  The $118,000 increase is primarily due to increased
labor costs.

     Interest Expense

     Interest expense in 1997 was $908,000, compared to
$862,000 in 1996.  The Company capitalized $624,000 of
additional interest pertaining to vineyard and winery development
during 1997, and $599,000 during 1996.  The increase in total
interest in 1997 is primarily due to borrowings to fund winery and
vineyard expansions.  The interest is attributable to the
Company's borrowings on its bank lines of credit and other debt
obligations.

     Other Income (Expense)

     Other income was $105,000 in 1997, compared to other
expense of $152,000 in 1996.  The expense in 1996 was primarily
due to an adjustment to accelerated depreciation of phylloxerated
vineyards.  The income in 1997 was primarily from vineyard
management fees.

     Net Income

     The Company generated net income of $1,334,000 in
1997, compared to $1,293,000 in 1996.  The $41,000 increase
was primarily due to higher gross profit, which was partially
offset by increases in selling, general, and administrative
expenses.

Liquidity and Capital Resources

     The Company has financed its working capital and capital
expansion needs through internally generated funds, outside credit
facilities, equity financing, and the sale and leaseback of certain
assets.  The Company has made substantial capital expenditures
to expand its vineyards and winery facilities to obtain production
efficiencies through vertical integration and increased product
sales.  The Company's cash flows from operations 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 debt, equity, and
lease financing for its working capital and capital expansion
needs.
<PAGE> 14
     The Company had cash totaling $109,000 on December
31, 1997, a decrease from $309,000 on December 31, 1996.
Sources of cash during 1997 included cash from operations of
$685,000, proceeds from notes payable of $5,170,000, proceeds
from long-term debt of $21,052,000, and proceeds from the sale
of property and vineyards of $5,419,000.  Cash used during 1997
included $6,910,000 invested in plant and equipment, $5,613,000
used to repay notes payable, and $18,985,000 used to repay long-
term debt.

     Current assets increased by $1,677,000 during 1997,
primarily due to an increase in inventories from $7,808,000 on
December 31, 1996 to $9,928,000 on December 31, 1997.  The
increase is primarily due to larger volumes of bulk wine.  Current
liabilities decreased by $1,306,000 during 1997, primarily due to
a decrease in accounts payable from $2,178,000 on December 31,
1996 to $818,000 on December 31, 1997.  The decrease was
primarily due to the timing of accounts payable payments at year
end.  These factors caused net working capital to increase
$2,983,000, from $7,016,000 on December 31, 1996 to
$9,999,000 on December 31, 1997.

     The Company has several long-term loans, the largest of
which was obtained from Metropolitan Life Insurance Company
("Metropolitan").  The Company borrowed $7,500,000 from
Metropolitan in January 1995.  In December 1997, the Company
refinanced that loan at a lower interest rate and borrowed
additional funds from Metropolitan, making the total principal
amount of the loan $11,000,000.  The unpaid principal under the
loan accrues interest at an annual rate of 7.79%.  The Company
is required to make monthly principal payments of $60,000 plus
accrued interest.  The loan matures in January 2013, at which
time the Company will be required to make a balloon payment of
$200,000.

     The Company has a line of credit of $6,000,000 with U.S.
Bank of California ("U.S. Bank") to finance its working capital
requirements.  The line of credit is secured by accounts receivable
and inventory, and matures in April 1999.  The annual interest
rate on the line is either U.S. Bank's prime rate or IBOR plus 200
basis points, at the Company's option.  The balance on the line at
December 31, 1997 was $3,233,000.
     In May 1997, the Company sold 371 acres of land being
developed into vineyard to John Hancock Mutual Life Insurance
Company ("Hancock").  In connection with that transaction, the
Company now manages, operates and leases the land and
vineyards from a subtenant of Hancock, Farmland Management
Services, for a term that expires on December 31, 2012.  The
Company received proceeds from the sale of $4,209,000 in May
1997 and $1,175,000 in June 1997.  The lease provides that the
Company will pay rent of $161,000 per calendar quarter
beginning in 1999.  The lease is accounted for as an operating
lease.

     In March 1996, the Company sold 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 to Hancock.  The net proceeds the Company
derived from the sale of the Senior Preferred Stock and the
warrants, after payment of offering expenses, were $4,785,000.
The Senior Preferred Stock bears a cumulative annual dividend
of $1.20 per share, payable semiannually.  During the first four
years after issuance, 50% of the dividend is payable in cash and
50% of the dividend is payable in shares of Common Stock at a
price equal to the lower of the market price at the dividend
payment date or
<PAGE> 15
$4.00 per share.  The Company is 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 April 1997, the Company converted subordinated
promissory notes in the aggregate amount of $1,500,000 into
387,077 shares of Common Stock. The notes became
automatically convertible into Common Stock at a price of $3.875
when the average of the closing bid and ask price for the
Common Stock exceeded $3.50 for five consecutive trading days
subsequent to December 6, 1996.

     The Company expanded its winery in 1997 by enlarging
its case goods warehouse, increasing stainless steel tank storage
and fermentation capacity, and purchasing support equipment.
The winery expansion cost $2,381,000.  During 1998 the
Company plans to add a tasting room at an estimated cost of
$600,000, and to invest an estimated $3,200,000 in tanks, barrels,
presses and other equipment.  Additional winery expansion
projects are anticipated for the future to handle the increased
production from the Company's recently planted vineyards.  The
Company planted 347 acres of new vineyard in 1997, which
included 115 acres of vineyard sold to and leased back from
Hancock.  The 1997 vineyard expansion, including acres
previously planted but not yet fully productive and excluding
acreage sold to Hancock, cost $2,974,000.  The Company plans
to invest an estimated $1,800,000 to continue the development of
recently planted vineyards during 1998.  The Company financed
1997 capital projects primarily with the proceeds from the
Hancock sale.  The Company plans to fund 1998 capital projects
with internally generated funds and additional debt.

     Phylloxera infestation may have a negative impact on the
Company's future grape production.  Phylloxera is a root louse
which feeds on grape roots, causing reduced production and
eventual vine death.  Of the Company's 1,549 acres of vineyard,
187 acres have root stock which is susceptible to Phylloxera.
Management estimates these vineyards will be commercially
productive for ten years (until 2004), as compared with twenty-
five years generally estimated for vineyards without Phylloxera.
The reduction in vineyard useful life causes an increase in
depreciation and maintenance expense.  The increased expenses
are added to the cost of grapes harvested, thus increasing cost of
sales.  The Company is in the process of replacing the majority of
Phylloxera-infested or susceptible vines with rootstock believed
to be resistant to Phylloxera.

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

     None
<PAGE> 16
                          PART III

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

     Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the Exchange Act is
presented in the Company's Annual Proxy for Security Holders for
fiscal year ended December 31, 1997, and is incorporated by
reference herein.

Item 10.  Executive Compensation

     Executive Compensation is presented in the Company's
Annual Proxy for Security Holders for fiscal year ended December
31, 1997, and is incorporated by reference herein.

Item 11.  Security Ownership of Certain Beneficial Owners and
Management

     Security Ownership of Certain Beneficial Owners and
Management is presented in the Company's Annual Proxy for
Security Holders for fiscal year ended December 31, 1997, and is
incorporated by reference herein.

Item 12.  Certain Relationships and Related Transactions

     Certain Relationships and Related Transactions is presented
in the Company's Annual Proxy for Security Holders for fiscal year
ended December 31, 1997, and is incorporated by reference herein.

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 follow:
<TABLE>
<CAPTION>
(a)  Exhibits

Exhibit
No.
Description


 <S>         <C>
3.1 (A)      Articles of Incorporation

3.2 (B)      Bylaws

4.1 (B)      Form of Common Stock Certificate

4.2 (B)      Form of Publicly Traded Warrant

10.1         Loan Agreement between the Company and
             Metropolitan Life Insurance Company and
             Related Agreements, dated December 22, 1997

10.2 (F)     Loan Agreement between the Company and U.S. Bank and Related
             Agreements, dated April 1, 1997.

10.3 (A)    Loan Agreement between the Company and Heller Financial
            and Related Documents, dated October 20, 1995
<PAGE> 17
10.4 (B)    Promissory Note, dated December 31, 1993, by RHP
            Vineyards, Inc., payable to R.H. Phillips Partners

10.5 (C)    R.H. Phillips, Inc. 1995 Stock Option Plan and
            Forms of Incentive Stock Option and
            Nonstatutory Stock Option Agreements

10.6 (B)    Securities Purchase Agreement between the
            Company and John Hancock Mutual Life
            Insurance Company, dated March 27, 1996

10.7 (B)    Form of Common Stock Purchase Warrant issued
            to John Hancock Mutual Life Insurance
            Company, dated March 27, 1996

10.8 (G)    Common Stock Purchase Warrant, dated July 30,
            1996, issued to Van Kasper & Company

10.9 (D)    Underwriting Agreement, dated July 30, 1996,
            between the Company and Van Kasper & Company

10.10 (B)   Common Stock Purchase Warrant issued to
            Capitol Bay Securities, dated March 31, 1995.

10.11 (E)   Description of Compensation Arrangements with
            Victor Motto, director of the Company

10.12 (G)   Loan agreement between the Company and U.S.
            Bancorp and Related  Agreements, dated
            December 31, 1996

10.13 (H)   Real Estate Purchase Contract, Agricultural
            Sublease and Related Agreements between the
            Company and Farmland Management Services,
            dated January 24, 1997

10.14 (H)   Amendment to the Real Estate Purchase
            Contract, Agricultural Sublease and Related
            Agreements between the Company and Farmland
            Management Services, dated January 24, 1997

10.15       Employment Agreement between the Company
            and John Giguiere, dated March 3, 1998

            10.16       Employment Agreement between the Company
            and Karl Giguiere, dated March 3, 1998

23.1        Consent of KPMG Peat Marwick LLP, Certified
            Public Accountants

27.1        Financial Data Schedule
</TABLE>
(A) 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.

(B) 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.
<PAGE> 18
(C) Filed as an exhibit to the Company's Quarterly Report on
Form 10-QSB for the nine month period ended September 30,
1995 and incorporated by reference herein.

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

(E) 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.

(F) Filed as an exhibit to the Company's Quarterly Report on
Form 10-QSB for the three month period ended March 31, 1997
and incorporated by reference herein.

(G) Filed as an exhibit to the Company's Annual Report on Form
10-KSB for the fiscal year ended December 31, 1996 and
incorporated by reference herein.

(H) Filed as an exhibit to the Company's Quarterly Report on
Form 10-QSB for the six month period ended June 30, 1997 and
incorporated by reference herein.

     (b) Current Reports on Form 8-K.

              None.
<PAGE> 19
                 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

     Power of Attorney

     KNOW ALL MEN BY THESE PRESENTS, that each
person whose signature appears below appoints John E. Giguiere
and Michael J. Motroni, substitution, for them in any and all
capacities, to sign any amendments to other documents in
connection therewith, with the Securities and Exchange
Commission, hereby ratifying and conferring all that each of said
attorney-in-fact, or his substitute or substitutes, may do or cause
to be done by virtue hereof.

     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.
<TABLE>
<CAPTION>

       Signature                  Title            Date
      ____________                _____            ____
<S>                        <C>                   <C>
//s//John E. Giguiere      John E. Giguiere      3/25/98
_____________________      Co-President, Co-     _______
                           Chief Executive
                           Officer, Director
                           (Principal Executive
                           Officer)
/s//Karl E. Giguiere
___________________        Karl E. Giguiere      3/24/98
                           Co-President, Co-     _______
                           Chief Executive
                           Officer, Director
                           (Principal Executive
                           Officer)

//s//Michael J. Motroni    Michael J. Motroni    3/24/98
_______________________    Vice President,       _______
                           Finance (Principal
                           Financial Officer)

//s//Richard A. Pierce     Richard A. Pierce      3/24/98
_______________________    Controller (Principal  _______
                           Accounting Officer)

//s//Lane C. Giguiere      Lane C. Giguiere       3/24/98
______________________     Vice-President         _______
                           Operations,
                           Secretary, Director

//s//R. Ken Coit           R. Ken Coit, Director  3/27/98
______________________                            _______

//s//Victor L. Motto       Victor L. Motto,       3/27/98
______________________     Director               _______

</TABLE>
<PAGE> 20

           R.H. PHILLIPS, INC.


      INDEX TO FINANCIAL STATEMENTS


Page

INDEPENDENT AUDITORS' REPORT                          F1

FINANCIAL STATEMENTS AS OF DECEMBER 31, 1997 AND
   FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1997:
    Balance Sheet                                     F2
    Statements of Operations                          F3
    Statements of Shareholders' Equity                F4
    Statements of Cash Flows                          F5
    Notes to Financial Statements                     F6-F15
<PAGE> 21

       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, 1997, and the related statements
of operations, shareholders' equity, and cash flows for each of the
years in the two year period ended December 31, 1997.  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 provide 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, 1997, and the results of its
operations and its cash flows for each of the years in the two year
period ended December 31, 1997 in conformity with generally
accepted accounting principles.

//s//KPMG Peat Marwick LLP



Sacramento, California
March 13, 1997
<PAGE>22
<TABLE>

           R.H. PHILLIPS, INC.

              BALANCE SHEET
            DECEMBER 31, 1997
 (IN THOUSANDS, EXCEPT SHARE INFORMATION)

<CAPTION>
                         ASSETS
<S>
                                                 <C>
CURRENT ASSETS:
   Cash                                          $      109
   Accounts receivable                                2,513
   Inventories                                        9,928
   Deferred income taxes and prepaid expenses           846
                                                 __________
       Total current assets                          13,396

PROPERTY, PLANT, AND EQUIPMENT - net                 28,870

OTHER ASSETS:
   Notes receivable from shareholders and
    other affiliates                                    224
   Deferred loan fees and other, net                    474
       Total other assets                               698
                                                 __________
TOTAL ASSETS                                         42,964
                                                 ==========
          LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES:
   Current maturities of long-term debt            $  1,258
   Notes payable                                        396
   Accounts payable                                     818
   Accrued liabilities                                  925
                                                 __________
      Total current liabilities                       3,397

LONG-TERM DEBT                                       16,369
DEFERRED INCOME TAXES                                 1,410
DEFERRED GAIN AND VINEYARD DEVELOPMENT COSTS            892
COMMITMENTS AND CONTINGENCIES                            -
REDEEMABLE PREFERRED STOCK, redeemable at $5,000,000  4,511
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, 6,433,182 shares issued
      and outstanding                                14,041
   Additional paid-in capital                           337
   Retained earnings                                  2,007
                                                 __________
      Total shareholders' equity                     16,385
                                                 __________
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY          $42,964
                                                 ==========
<FN>
See accompanying notes to financial statements.
</TABLE>
<PAGE> 23
<TABLE>

                  R.H. PHILLIPS, INC.

               STATEMENTS OF OPERATIONS
         YEARS ENDED DECEMBER 31, 1996 AND 1997
        (IN THOUSANDS, EXCEPT SHARE INFORMATION)

<CAPTION>
                                     1996                 1997
<S>                                 <C>                  <C>
NET SALES                           $16,928              $17,258

COST OF SALES                        10,136               10,054
                                    _______              _______
GROSS PROFIT                          6,792                7,204

SELLING EXPENSES                      3,054                3,359

GENERAL AND  ADMINISTRATIVE             800                  918
  EXPENSES                          _______              _______
OPERATING INCOME                      2,938                2,927

INTEREST EXPENSE                       (862)                (908)

OTHER INCOME (EXPENSE) - NET           (152)                 105
                                    _______              _______
INCOME BEFORE INCOME TAXES            1,924                2,124

PROVISION FOR INCOME TAXES             (631)                (790)
                                    _______              _______
NET INCOME                          $ 1,293              $ 1,334
                                    =======              =======

NET INCOME                          $ 1,293              $ 1,334

DIVIDENDS AND ACCRETION ON
  REDEEMABLE PREFERRED STOCK           (250)                (337)

NET INCOME APPLICABLE TO            $ 1,043              $   997
     COMMON STOCK

NET INCOME  PER SHARE -
   BASIC AND DILUTED              $     .20              $   .16

COMMON AND COMMON
   EQUIVALENT SHARES
   OUTSTANDING                    5,346,167             6,370,001




<FN>
See accompanying notes to financial statements.
</TABLE>
<PAGE> 24
<TABLE>

                  R.H. PHILLIPS, INC.

          STATEMENTS OF SHAREHOLDERS' EQUITY
         YEARS ENDED DECEMBER 31, 1996 AND 1997
                     (IN THOUSANDS)




<CAPTION>
                                      Non-      Common   Additional  Retained  Total
                                  redeemable     Stock     Paid-in   Earnings
                                  Preferred                Capital
                                    Stock
<S>                             <C>            <C>         <C>        <C>       <C>
SHAREHOLDERS' EQUITY
JANUARY 1, 1996                 $       --     $  7,623    $     --   $   417   $ 8,040

WARRANTS ASSOCIATED WITH
REDEEMABLE PREFERRED STOCK              --           --         337        --       337

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

ISSUANCE OF COMMON STOCK
                                        --        4,550          --        --     4,550
DIVIDEND ON REDEEMABLE
PREFERRED STOCK                         --           --          --      (225)     (225)

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

NET INCOME YEAR ENDED
DECEMBER 31, 1996                       --           --          --     1,293     1,293
                                __________     ________    ________   _______   _______
SHAREHOLDERS' EQUITY
DECEMBER 31, 1996                       --       12,323         337     1,310    13,970

ACCRETION OF REDEEMABLE
PREFERRED STOCK                         --           --          --       (37)      (37)

ISSUANCE OF COMMON STOCK                --        1,418          --        --     1,418

DIVIDEND ON REDEEMABLE
PREFERRED STOCK                         --           --          --      (300)     (300)

ISSUANCE OF STOCK DIVIDEND              --          300          --      (300)       --

NET INCOME YEAR ENDED
DECEMBER 31, 1997                       --           --          --     1,334     1,334
                                __________     ________    ________   _______   _______
SHAREHOLDERS' EQUITY
DECEMBER 31, 1997               $      --      $ 14,041    $    337   $ 2,007   $16,385
                                ==========     ========    ========   =======   =======


<FN>
See accompanying notes to financial statements.
</TABLE>
<PAGE> 25
<TABLE>

                  R.H. PHILLIPS, INC.

               STATEMENTS OF CASH FLOWS
         YEARS ENDED DECEMBER 31, 1996 AND 1997
                     (IN THOUSANDS)

<CAPTION>

<S>                                                        1996         1997
CASH FLOWS FROM OPERATING ACTIVITIES:                    <C>           <C>
   Net income                                            $  1,293      $  1,334
   Adjustments to reconcile net income to net cash
      provided by operating activities:
      Deferred income taxes                                   126           355
      Depreciation and amortization                         1,590         1,829
      Loss on disposal of property, plant and equipment       231            55
      Net changes in assets and liabilities:
         Accounts receivable                                  (65)          618
         Inventories                                       (1,013)       (1,722)
         Prepaid expenses                                      76          (254)
         Other assets                                         (85)          (83)
         Accounts payable and accrued liabilities             758        (1,447)
                                                         ________      ________
            Net cash provided by operating activities       2,911           685

CASH FLOWS FROM INVESTING ACTIVITIES:
    Purchase of property, plant and equipment             (12,400)       (6,910)
    Proceeds from property, plant and equipment sold           49         5,419
                                                         ________      ________
           Net cash used in investing activities         (12,351)        (1,491)

CASH FLOWS FROM FINANCING ACTIVITIES:
    Issuance of (cost of issuing) redeemable
      preferred stock                                      4,798            (13)
    Issuance of common stock                               4,550             23
    Payment of cash dividend                                (150)          (300)
    Proceeds from long-term debt and notes payable        18,938         26,222
    Principal payments on long-term debt
      and notes payable                                  (18,662)       (24,598)
    Payment for development of leased vineyards
      and related fees                                        --           (637)
    Other financing activities                               (43)           (91)
                                                         _______       ________
           Net cash provided by financing activities       9,431            606

DECREASE IN CASH                                              (9)          (200)
CASH AT BEGINNING OF PERIOD                                  318            309
                                                         _______       ________
CASH AT END OF PERIOD                                    $   309       $    109
                                                         =======       ========
OTHER CASH FLOW INFORMATION:
    Interest paid (including capitalized interest of
    $599 and $624 in 1996 and 1997, respectively)        $ 1,225       $  1,438
    Income tax paid                                      $   453       $    649
NONCASH TRANSACTIONS:
    Issuance of notes payable to finance inventory,
      property, plant and equipment purchased            $   555       $    552
    Issuance of stock dividend                           $   150       $    300
    Accretion of redeemable preferred stock              $    25       $     37
    Accrual of cash dividend                             $    75       $     --
    Conversion of subordinated debt to common stock
      (net of issuance costs of $105)                    $    --       $  1,395
<FN>
See accompanying notes to financial statements.
</TABLE>
<PAGE> 26
           R.H. PHILLIPS, INC.

            NOTES TO FINANCIAL
                STATEMENTS
            DECEMBER 31, 1997


1. ORGANIZATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES

Organization - R.H. Phillips, Inc. (the "Company"), a California
corporation formed in February 1994, produces, markets, and
sells premium quality California table wines.  The Company also
farms vineyards which supply a portion of its annual grape
requirements.  The Company sells most of its products to
distributors for resale to restaurants, food service, wine shops,
independent liquor stores and, to a lesser degree, grocery stores.

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 wines, production costs, and packaging materials.  Wine
inventories are classified as current assets in accordance with
recognized trade practice although certain inventories are 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 the straight-line method over the estimated
useful lives of the assets.  Vineyard lives range from 10 to 25
years, buildings and improvements lives range from 12 to 45
years, and equipment lives range from 5 to 30 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.
Depreciation commences in the first year the vineyard yields a
commercial crop, generally in the third year after development
began.

The Company's long-lived assets and certain identifiable
intangibles are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an
asset may not be recoverable.  Recoverability of assets to be held
and used is measured by a comparison of the carrying amount of
an asset to future net cash flows expected to be generated by the
asset.  If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which
the carrying amount of the assets exceed the fair value of the
assets.  Assets to be disposed of are reported at the lower of the
carrying amount or fair value less costs to sell.

Deferred Loan Fees and Other consists primarily of deferred loan
fees, and 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 $289,700 at December 31, 1997.

Estimates and Certain Risks - 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.

The Company's three largest distributors accounted for 12%, 11%
and 7% of sales in 1997 and 13%, 11% and 10% in 1996.
Accounts receivable from these distributors on December 31,
1997 was $987,000.
<PAGE> 27
The Company employs five sales representatives who work with
certain distributors to sell the Company's products.  In addition,
the Company uses independent wine brokers.  The Company's
largest sales volume is attributable to a broker, whose
organization generated $7,793,000, or 45% of total sales in 1997
and $7,722,000, or 46% of sales,  in 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.

Net income per share - Net income per share is calculated based
on the weighted average number of common shares and dilutive
potential common shares outstanding, including 50,578 shares
from the stock dividend paid on March 16, 1998 related to the
Preferred Stock.  The Company's warrants to purchase Common
Stock and employee stock options, aggregating 2,814,406 at
December 31, 1996 and 2,469,667 at December 31, 1997, were
anti-dilutive and therefore had no effect on net income per share.


Recent Pronouncements - The Company adopted the provisions
of Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" ("SFAS 128") as of January 1, 1997.  This
statement requires a change in the method used to compute
earnings per share and the restatement of all prior periods.  The
adoption of SFAS 128 did not have a material effect on the
Company.

The Company also adopted the provisions of Statement of
Financial Accounting Standards No. 129, "Disclosure of
Information about Capital Structure" ("SFAS 129") as of
December 31, 1997.  This statement lists required disclosures
about capital structure that had been included in a number of
previously existing, separate statements and opinions.  Adoption
of SFAS 129 did not have a material effect on the Company's
financial statements.

Prospective Accounting Developments - In June 1997, the
Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" ("SFAS 130") and Statement of
Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information", ("SFAS
131").  SFAS 130 establishes standards for reporting and display
of comprehensive income and its components (revenues,
expenses, gains and losses) in annual financial statements.  SFAS
131 establishes reporting standards for operating segments in the
annual financial statements of public entities, and requires those
entities to report selected information about operating segments
in interim financial reports issued to shareholders.  It also
establishes standards for related disclosures about products and
services, geographic areas, and major customers.  Both of these
Statements are effective for periods beginning after December 15,
1997.  Management believes that the adoption of these Statements
will not have a material impact on the Company's financial
position, results of operations, or liquidity.

Reclassification - Certain 1996 amounts have been reclassified
for comparative purposes to conform to present year presentation.

2. INVENTORIES

Inventories consist of the following at December 31, 1997:
                                                  (In thousands)
<TABLE>
                <S>                                     <C>
                 Bulk wine                              $ 7,632
                 Bottled wine                             1,083
                 Bottling supplies and other                464
                 Deferred crop costs                        749
                                                        _______
                 Total                                  $ 9,928
                                                        =======
</TABLE>
<PAGE> 28


3. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consists of the following
at December 31, 1997:
<TABLE>
<CAPTION>                                            (In thousands)
                 <S>                                   <C>
                 Land                                  $  2,619
                 Vineyard improvements                    6,526
                 Buildings                                5,176
                 Machinery and equipment                 13,727
                 Vehicles and office fixtures               920
                                                       ________
                 Total                                   28,968

                 Less accumulated depreciation            6,043
                                                       ________
                 Total                                   22,925

                 Construction in progress                 5,945
                                                       ________
                 Property, plant, and equipment - net  $ 28,870
                                                       ========
</TABLE>
Total depreciation expense during the years ended
December 31, 1996 and 1997 was approximately
$1,383,000 and $1,693,000, respectively.

Plant and equipment under capital leases as of December
31, 1997 is as follows:
<TABLE>
<CAPTION>                                            (In thousands)
                 <S>                                 <C>
                 Machinery and equipment             $      886
                 Less accumulated depreciation              391
                                                     __________
                 Net                                 $      495
                                                     ==========
</TABLE>
Depreciation expense for machinery and equipment under
capital leases was approximately $118,000 and $100,000
for the years ended December 31, 1996 and 1997,
respectively.

4. NOTES RECEIVABLE FROM SHAREHOLDERS
AND OTHER AFFILIATES

Notes receivable from shareholders and other affiliates
consist of the following as of December 31, 1997:
<TABLE>                                         (In thousands)
<CAPTION>
    <S>                                             <C>
    Note receivable from RHP Vineyards, Inc.        $ 155
    Notes receivable from employee and affiliate       69
                                                    _____
      Total                                         $ 224
                                                    =====
</TABLE>
The notes receivable bear interest at 7%, are unsecured,
and mature July 30, 2000.  RHP Vineyards, Inc. is a major
shareholder of the Company.  Interest receivable pertaining
to the notes receivable was approximately $49,000 at
December 31, 1997.
<PAGE> 29

5. NOTES PAYABLE

Notes payable at December 31, 1997 consists of a note
payable to a grower in the amount of $396,000.  The note
bears interest at an annual rate of 9.5% and is unsecured.
All outstanding principal and interest were paid in January
1998.

6. LONG-TERM DEBT

Long-term debt consists of the following at December 31,
1997:
<TABLE>
<CAPTION>                                                    (In thousands)
  <S>                                                               <C>
    Note payable to insurance company, interest at 7.79%,           $11,000
     principal and interest payable monthly through January 2013,
     secured by various assets of the Company
  Note payable to bank, interest at prime or IBOR plus 200            3,233
     basis points, principal due April 1999, interest payable
     monthly, collateralized by accounts receivable
     and inventory (1)
  Note payable to bank, interest at one month LIBOR plus 330 basis    1,589
     points, principal and interest due in 42 monthly payments of
     $19,911 followed by 42 monthly payments of $29,867,
     balance due December 2003, secured by certain equipment
  Note payable to finance company, interest at 7.95%, principal         878
     and interest payable in sixty monthly payments of $18,027,
     balance due December 2002, secured by certain equipment
  Note payable to finance company, payable in sixty monthly             360
     installments of $10,744 plus interest at one month LIBOR
     plus 332 basis points, due November 2000, secured by
     certain equipment
  Notes payable to shareholder and employee, interest at 7%,             49
     due June 1999
  Capital lease obligations                                             441
  Other                                                                  77
                                                                    _______
  Total                                                              17,627
  Less current maturities                                             1,258
                                                                    _______
  Long-term portion                                                 $16,369
                                                                    =======
</TABLE>
(1) Maximum amount that can be borrowed on the note is $6,000,000.
The amount outstanding as of December 31, 1997 consists of
$2,552,000 borrowed against the line and $681,000 in outstanding
checks.  $2,767,000 was available at December 31, 1997.

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


<TABLE>
<CAPTION>                                           (In thousands)
                   <S>                                 <C>
                   1998                                $  1,088
                   1999                                   4,367
                   2000                                   1,194
                   2001                                   1,187
                   2002                                   1,215
                   Thereafter                             8,135
                                                        _______
                   Total                                $17,186
                                                        =======
</TABLE>
<PAGE> 30
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:


<TABLE>
<CAPTION>
                                                     (In thousands)
                   <S>                                  <C>
                   1998                                 $    211
                   1999                                      224
                   2000                                       33
                   2001                                       26
                   2002                                       16
                                                        ________
                   Total                                     510
                   Less amounts representing interest         69
                                                        ________
                   Net minimum lease payments           $    441
                                                        ========
</TABLE>
7. INCOME TAXES

The provision for income taxes consists of the following
for the years ended December 31:
<TABLE>
<CAPTION>                                        (In thousands)

                                                1996      1997
                 <S>
                 Current:                       <C>      <C>
                  Federal                       $ 490    $ 439
                   State                           15       (4)
                                                _____    _____
                     Total current provision      505      435

                Deferred:
                   Federal                        155      259
                   State                          (29)      96
                                                _____    _____
                     Total deferred provision     126      355
                                                _____    _____
                                                $ 631    $ 790
                                                =====    =====
</TABLE>
Deferred income taxes included in the balance sheet at
December 31, 1997 are as follows:
<TABLE>
<CAPTION>                                            (In thousands)
      <S>                                                 <C>
      Current deferred tax assets:
          Nondeductible reserves and difference between
              book and tax basis of inventory             $ 379
          State manufacturer's investment credit            124
      Noncurrent deferred tax assets:
          Difference between book and tax basis of
          intangible assets                                 220
          Other                                               2
                                                          _____
          Total deferred tax asset                          725

     Noncurrent deferred tax liability:
         Difference between book and tax basis
            of property, plant and equipment              1,632
                                                         ______
     Net deferred tax liability                          $  907
                                                         ======
</TABLE>
<PAGE> 31

Management believes that it is more likely than not that all
the deferred tax assets as of December 31, 1997 will be
realized and, therefore, no allowance for deferred tax assets
was made as of December 31, 1996 or December 31, 1997.

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  $1,924,000 and $2,124,000 for the
years ended December 31, 1996 and 1997, respectively, as
a result of the following:
<TABLE>
<CAPTION>                                         1996                1997
<S>                                             <C>                   <C>
Expected U.S. Federal income tax                34%                   34%
State franchise tax, net of federal benefit      6%                    6%
Permanent difference in basis of assets          1%                    1%
State manufacturer's investment credit          (7%)                  (6%)
Other                                           (1%)                   2%
                                                ___                   ___
    Total                                       33%                   37%
                                                ===                   ===
</TABLE>
The Company utilized $138,000 of the state
manufacturer's investment credit in 1996 and  $119,000 in
1997. The remaining carry forward of $124,000 is due to
expire in 2007.

8.  DEFERRED GAIN AND VINEYARD
DEVELOPMENT COSTS

In May 1997, the Company sold 371 acres of land being
developed into vineyard to John Hancock Mutual Life
Insurance Company ("Hancock").  In connection with that
transaction, the Company now manages, operates and
leases the land and vineyards from a subtenant of Hancock,
Farmland Management Services, for a term that expires on
December 31, 2012.  The Company received proceeds
from the sale of $5,384,000.  The lease provides that the
Company will pay rent of $161,000 per calendar quarter
beginning in 1999.  At June 30, 1997, the Company held
an option to repurchase the land and vineyard at the end of
the lease term.  The lease was accounted for as a long-term
capital lease.

On September 30, 1997, the Company renegotiated the
lease agreement with Hancock whereby the option to
repurchase the land and vineyard at the end of the lease
was given up by the Company in exchange for a right of
first refusal.  The lease is therefore accounted for as an
operating lease.

The Company recognized deferred gain and vineyard
development costs of $1,529,000 at the time of closing,
which consists of the difference between the actual costs of
the property sold and the funds received by the Company.
The Sale and Leaseback agreement with Hancock requires
that the Company complete the vineyards that are still
under development.  The Company expended $637,000
between the date of closing and December 31, 1997 on the
development of the vineyards and related expenses,
decreasing the deferral to $892,000 at December 31, 1997.
Management estimates that the remaining costs to
complete the development will be $479,000.  This amount
will reduce the deferral as incurred.  The remainder,
estimated to be $413,000, will be amortized to income
over the life of the lease.

9. COMMITMENTS AND CONTINGENCIES

As of December 31, 1997, the Company believes that up
to 187 acres of vineyard may be susceptible to Phylloxera.
Based on tests performed, management believes that
portions of these 187 acres show physical symptoms of
decline. The Company is using a variety of methods to
combat Phylloxera infestation. Although this acreage will
ultimately require replacement,  management estimates
that these vineyards will  remain commercially productive
for six more years.  The Company has reduced the
depreciable life of these vineyards to reflect the expected
remaining commercial productivity.
<PAGE> 32
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 operation, or liquidity.

10. REDEEMABLE PREFERRED STOCK

In March 1996, the Company completed a private
placement sale of 500,000 shares of Senior Preferred
Redeemable Stock ("Preferred Stock") and warrants to
purchase up to 1,346,788 shares of Common Stock.
500,000 shares of Preferred Stock are issued and
outstanding as of December 31, 1997.  The net proceeds
the Company derived from the sale of the Preferred Stock
and the warrants, after offering expenses, totaled
$4,785,000.  The 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 average
daily market price over a period of 20 consecutive trading
days before the dividend payment date or $4.00 per share.
Thereafter, the dividend will be payable in cash.  The
Company will be required to redeem one-third of the
Preferred Stock eight years after issuance and one-third of
the Preferred Stock in each of the succeeding years at a
price of $10.00 per share.  The carrying value of the
Preferred Stock was originally $4,449,000, net of offering
expenses and the estimated value of the warrants.  The
carrying value was $4,511,000 at December 31, 1997, and
the Preferred Stock is redeemable at $5,000,000.  The
difference between the carrying value and the redemption
value is being accreted over the life of the Preferred Stock
using the interest method.

11.  SHAREHOLDERS' EQUITY

In connection with its initial public offering of Common
Stock in March 1995, the Company issued  493,563
warrants to purchase one share of Common Stock at a
price of $3.875.  The warrants are currently exercisable
and expire October 1, 1998.  The Board of Directors may
lengthen the exercise period for the warrants at any time.
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.

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.

In April 1997, the Company converted subordinated
promissory notes in the aggregate amount of $1,500,000
into 387,077 shares of Common Stock.  The notes became
automatically convertible into Common Stock at a price of
$3.875 when the average of the closing bid and ask price
for the Common Stock exceeded $3.50 for five consecutive
trading days subsequent to December 6, 1996.  All
outstanding interest and fractional shares were paid in cash
at the same time.  In connection with the conversion, the
Company charged the remaining deferred issuance costs of
$105,000 resulting in a net value of $1,395,000 being
recorded in the Statement of Shareholders' Equity.

As of December 31, 1997, warrants to purchase 19,065
shares of Common Stock had been exercised, with net
proceeds to the Company of approximately $74,000.  The
Company has issued 119,969 shares of Common Stock to
the holder of its Redeemable Preferred Stock as stock
dividends.

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
<PAGE> 33
are currently exercisable.  The total number of warrants
outstanding as of December 31, 1997 was 2,076,532.

Payment of dividends on the Common Stock is subject to
certain limitations under the Company's loan agreements
 .  In addition, the Senior Preferred Stock of the Company
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.

12. STOCK COMPENSATION PLANS AND
WARRANTS

At December 31, 1997, 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.  For purposes of pro forma disclosures,
the estimated fair value of the options is amortized to
expense over the options' vesting periods.
<TABLE>
<CAPTION>                               1996           1997
         <S>
         Net income (in thousands):     <C>            <C>
                    As reported         $1,293         $1,334
                    Pro forma            1,233          1,243

                  Earnings per share:
                    As reported        $  0.20        $  0.16
                    Pro forma             0.18           0.14
</TABLE>
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 generally 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.  The
fair value of options granted during the year ended
December 31, 1997 assumed  a dividend yield of 0%, an
expected volatility of 37%, a risk free interest rate of 5.71%
and an expected term of six years. All assumptions in the
Black-Scholes option pricing model were based on
weighted averages.

The Black-Scholes option valuation model was developed
for use in estimating the fair value of traded options which
have no vesting restrictions and are fully transferable.  In
addition, option valuation models require the input of
highly subjective assumptions including the expected stock
price volatility.  Because the Company's employee stock
options have characteristics significantly different from
those of traded options, and because changes in the
subjective input assumptions can materially affect the fair
value estimate, in management's opinion, the existing
models do not necessarily provide a reliable single measure
of the fair value of its employee stock options.

A summary of the status of the Company's fixed option
plan as of December 31, 1996 and 1997 and changes during
the years ended on those dates is presented below:
<PAGE> 34
<TABLE>
<CAPTION>                                1996                 1997
                                               Average             Average
                                              Exercise            Exercise
                                   Shares       Price   Shares     Price

<S>                                 <C>      <C>        <C>      <C>
Outstanding at beginning of year    449,460  $    3.90  427,668  $    3.90
Granted                                  --         --  196,548       4.14
Exercised                                --         --   (4,086)      3.75
Forfeited                           (21,792)      3.75  (58,566)      3.75
                                    _______  _________  _______  _________
Outstanding at end of year          427,668  $    3.90  561,564  $    4.01
                                    =======  =========  =======  =========
Options exercisable at year end     106,917  $    3.90  202,509  $    3.96
                                    =======  =========  =======  =========
Weighted average fair value of
   Options granted during year               $      --           $    1.26
                                             =========           =========
</TABLE>
The following summarizes information about fixed
options outstanding at December 31, 1997:
<TABLE>
        <S>                                                <C>
        Range of exercise prices                           $3.25 to $4.25
        Number outstanding at December 31, 1997                   561,564
        Options outstanding:
           Weighted average remaining contractual life          8.2 years
           Weighted average exercise price                          $4.01
        Options exercisable:
           Number exercisable at December 31, 1997                202,509
           Weighted average exercise price                          $3.96
</TABLE>
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.  No
warrants were granted during the year ended December 31,
1997.  The fair value of warrants granted during the year
ended December 31, 1996 assumed a dividend yield of 0%,
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 weighted
averages.

A summary of the status of the Company's underwriter
warrant plans as of December 31, 1996 and 1997 and
changes during the years ended on those dates is presented
below:
<TABLE>
<CAPTION>                               1996                1997
                                               Average             Average
                                              Exercise            Exercise
                                   Shares       Price   Shares     Price
<S>                                <C>       <C>        <C>      <C>
Outstanding at beginning of year    98,713   $    5.57  220,713  $    5.39
Granted                            122,000        5.25       --         --
Exercised                               --          --       --         --
Forfeited                               --          --       --         --
                                   _______   _________  _______  _________
Outstanding at end of year         220,713   $    5.39  220,713  $    5.39
                                   =======   =========  =======  =========
<PAGE> 35
Warrants exercisable at year end    98,713   $    5.57  220,713  $    5.39
                                   =======   =========  =======  =========
Weighted average fair value of
   Warrants granted during year              $    0.69           $      --
                                             =========           =========
</TABLE>
The following summarizes information about
underwriter warrants outstanding at December 31, 1997:
<TABLE>
<S>                                                             <C>
Range of exercise prices                                        $5.25 to $5.57
Number of warrants outstanding at December 31, 1997             220,713
Warrants outstanding:
   Weighted average remaining on contractual life               2.9 years
   Weighted average exercise price                              $5.39
Warrants exercisable:
   Number of warrants exercisable at December 31, 1997          220,713
   Weighted average exercise price                              $5.39
</TABLE>
13. 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 is approximately the same
as the carrying value.