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                        SECURITIES & EXCHANGE COMMISSION
                             Washington, D.C. 20549


                                    FORM 10-Q

(MARK ONE)

[X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
     ACT OF 1934

For the quarterly period ended December 31, 1998

                                       OR

[ ]  TRANSITION  REPORT  PURSUANT  TO  SECTION  13 OR  15(d)  OF THE  SECURITIES
     EXCHANGE ACT OF 1934

For the transition period from _________________ to _________________

                         Commission file number: 0-13406


                          The Chalone Wine Group, Ltd.
             (Exact Name of Registrant as Specified in Its Charter)


           California                                     94-1696731
(State or Other Jurisdiction of             (I.R.S. Employer Identification No.)
 Incorporation or Organization)

          621 Airpark Road
          Napa, California                                   94558
(Address of Principal Executive Offices)                   (Zip Code)


Registrant's Telephone Number, Including Area Code: 707-254-4200


Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months (or for such  shorter  period that the  registrant  was
required  to file  such  reports),  and  (2) has  been  subject  to such  filing
requirements for the past 90 days.

                                Yes _X_   No ___

The number of shares  outstanding of  Registrant's  Common Stock on February 11,
1999 was 8,698,226.


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<PAGE>


                          The Chalone Wine Group, Ltd.

                         PART I. - FINANCIAL INFORMATION

Item 1. Financial Statements                                               Page

     Consolidated Balance Sheets as of December 31, 1998, and
     March 31, 1998.                                                         3

     Consolidated  Statements of  Operations  for the three months and
     nine months ended December 31, 1998 and 1997.                           4


     Consolidated  Statements  of Cash Flows for the three  months and
     nine months ended December 31, 1998 and 1997.                           5

     Notes to Consolidated Financial Statements.                             6

Item 2.  Management's  Discussion and Analysis of Financial  Condition
         and Results of Operations                                           8

Item 3. Disclosures about market risk                                       13


                          PART II. - OTHER INFORMATION

Item 6. Exhibits and Reports on Form 8-K                                    17



<PAGE>


<TABLE>
                                                    The Chalone Wine Group, Ltd.


                                                     CONSOLIDATED BALANCE SHEETS
                                                  (in thousands, except share data)

<CAPTION>
                                                               ASSETS
                                                                                                (unaudited)
                                                                                                December 31,             March 31,
                                                                                                    1998                    1998
                                                                                                  ---------               ---------
<S>                                                                                               <C>                     <C>      
Current assets:
    Cash and cash equivalents                                                                     $   2,913               $   2,232
    Accounts receivable, less allowance for doubtful
        accounts of $79 and $92, respectively                                                         8,419                   6,597
    Notes receivable                                                                                     99                     197
    Income tax receivable                                                                               279                    --
    Note receivable from officer                                                                       --                        65
    Inventory                                                                                        41,063                  34,277
    Prepaid expenses                                                                                    617                     450
    Deferred income taxes                                                                             1,754                      14
                                                                                                  ---------               ---------
        Total current assets                                                                         55,144                  43,832
Investment in Chateau Duhart-Milon                                                                   11,228                   9,480
Notes receivable, long-term portion                                                                     228                     130
Property, plant and equipment - net                                                                  33,573                  30,131
Goodwill and trademarks - net                                                                         6,205                   6,473
Other assets                                                                                            905                     248
                                                                                                  ---------               ---------
             Total assets                                                                         $ 107,283               $  90,294
                                                                                                  =========               =========

                                                LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
    Accounts payable and accrued liabilities                                                      $   3,669               $   3,425
    Bank lines of credit                                                                             15,381                  10,952
    Other short term debt                                                                             5,000                     952
    Convertible subordinated debentures                                                               8,500                    --
    Current maturities of long-term obligations                                                         565                     709
                                                                                                  ---------               ---------
        Total current liabilities                                                                    33,115                  16,038
Long-term obligations, less current maturities                                                        8,357                   9,624
Convertible subordinated debentures                                                                    --                     8,500
Settlement advance                                                                                    4,500                    --
Deferred income taxes                                                                                 1,528                   2,049
                                                                                                  ---------               ---------
             Total liabilities                                                                       47,500                  36,211
                                                                                                  ---------               ---------
Minority interest                                                                                     4,209                   3,678
Shareholders' equity:
    Common stock - authorized 15,000,000 shares, no
          par value; issued and outstanding: 8,698,226
          and 8,393,979, respectively                                                                48,968                  46,871
    Stock subscription receivable                                                                    (1,007)                   --
    Retained earnings                                                                                 9,042                   5,993
    Cumulative foreign currency translation adjustment                                               (1,429)                 (2,459)
                                                                                                  ---------               ---------
             Total shareholders' equity                                                              55,574                  50,405
                                                                                                  ---------               ---------
             Total liabilities and shareholders' equity                                           $ 107,283               $  90,294
                                                                                                  =========               =========

<FN>
                                             The accompanying notes are an integral part
                                              of the consolidated financial statements
</FN>
</TABLE>

                                                                 3

<PAGE>


<TABLE>
                                                    The Chalone Wine Group, Ltd.


                                                Consolidated Statements of Operations
                                          (unaudited, in thousands, except per-share data)

<CAPTION>
                                                                     Three months ended                     Nine months ended
                                                                        December 31,                           December 31,
                                                               ----------------------------            ----------------------------
                                                                 1998                1997                1998                1997
                                                               --------            --------            --------            --------
<S>                                                            <C>                 <C>                 <C>                 <C>     
Gross revenues                                                 $ 12,573            $ 11,178            $ 32,949            $ 28,715
   Excise taxes                                                    (401)               (243)               (852)               (697)
                                                               --------            --------            --------            --------
Net revenues                                                     12,172              10,935              32,097              28,018
Cost of wines sold                                               (6,565)             (6,057)            (17,567)            (15,939)
                                                               --------            --------            --------            --------
   Gross profit                                                   5,607               4,878              14,530              12,079
Custom processing operations                                         43                 186                  66                 303
SG&A expenses                                                    (2,703)             (2,039)             (7,849)             (5,797)
                                                               --------            --------            --------            --------
   Operating income                                               2,947               3,025               6,747               6,585
Other income (expenses)
   Interest expense                                                (439)               (387)             (1,281)             (1,360)
   Other, net                                                        25                --                   (11)                 70
                                                               --------            --------            --------            --------
                                                                   (414)               (387)             (1,292)             (1,290)

Equity in Chateau Duhart-Milon                                      187                 103                 718                 296
Minority interests                                                 (432)               (401)             (1,007)               (799)
                                                               --------            --------            --------            --------
   Income before income taxes                                     2,288               2,340               5,166               4,792
Income tax expense                                                 (936)               (936)             (2,117)             (1,917)
                                                               --------            --------            --------            --------
   Net income                                                  $  1,352            $  1,404            $  3,049            $  2,875
                                                               ========            ========            ========            ========

Net income per common share:
   Basic                                                       $   0.16            $   0.18            $   0.35            $   0.37
   Diluted                                                     $   0.16            $   0.17            $   0.35            $   0.34

Average number of shares used
  in income per share computation:
   Basic                                                          8,697               7,813               8,656               7,692
   Diluted                                                        8,718               8,398               8,828               8,368

<FN>
                                             The accompanying notes are an integral part
                                              of the consolidated financial statements
</FN>
</TABLE>

                                                                 4

<PAGE>


<TABLE>
                                                    The Chalone Wine Group, Ltd.


                                                CONSOLIDATED STATEMENTS OF CASH FLOWS
                                                      (unaudited, in thousands)

<CAPTION>
                                                                               Three months ended              Nine months ended
                                                                                  December 31,                     December 31,
                                                                            -----------------------         -----------------------
                                                                             1998            1997            1998            1997
                                                                            -------         -------         -------         -------
<S>                                                                         <C>             <C>             <C>             <C>    
Cash flows from operating activities:
   Net earnings                                                             $ 1,352         $ 1,404         $ 3,049         $ 2,875
   Non-cash transactions included in earnings:
     Depreciation                                                             2,139           1,700           3,071           2,445
     Amortization                                                               106              41             268             124
     Equity in net income of Chateau Duhart-Milon                              (187)           (103)           (718)           (296)
     Increase in minority interest                                              432             401           1,007             799
     Loss (gain) on sale of equipment                                           (63)              3              29               6
     Changes in:
       Deferred income taxes                                                 (2,261)           --            (2,261)           --
       Settlement advance                                                      --              --             4,500            --
       Accounts and other receivable                                           (124)         (1,527)         (1,822)         (3,436)
       Inventory                                                             (6,619)         (2,512)         (6,786)         (4,641)
       Prepaid expenses and other assets                                       (679)           (110)         (1,103)           (186)
       Accounts payable and accrued expense                                     868           1,827             244           3,746
                                                                            -------         -------         -------         -------
     Net cash provided by operating activities                               (5,036)          1,124            (522)          1,436
                                                                            -------         -------         -------         -------

Cash flows from investing activities:
   Capital expenditures                                                      (1,117)         (1,197)         (6,667)         (5,736)
   Proceeds from disposal of property and equipment                             125              24             125             124
   Net (increase) decrease in notes receivable                                   85          (1,413)             65            (156)
                                                                            -------         -------         -------         -------
     Net cash used in investing activities                                     (907)         (2,586)         (6,477)         (5,768)
                                                                            -------         -------         -------         -------

Cash flows from financing activities:
   Net change under line of credit agreement                                  3,850           1,411           4,429           5,237
   Increase in short-term debt                                                5,237            --             4,285            --
   Distribution to minority interest                                           (405)           --              (476)            (38)
   Repayment of long-term debt                                                  (81)            (79)         (1,648)         (1,177)
   Proceeds from issuance of common stock                                        42              71           1,090             127
                                                                            -------         -------         -------         -------
     Net cash provided by financing activities                                8,643           1,403           7,680           4,149
                                                                            -------         -------         -------         -------

Net increase (decrease) in cash                                               2,700             (59)            681            (183)
Cash at beginning of period                                                     213             122           2,232             246
                                                                            -------         -------         -------         -------
Cash at end of period                                                       $ 2,913         $    63         $ 2,913         $    63
                                                                            =======         =======         =======         =======

<FN>
                                             The accompanying notes are an integral part
                                              of the consolidated financial statements
</FN>
</TABLE>

                                                                 5

<PAGE>


                          The Chalone Wine Group, Ltd.

                   Notes to Consolidated Financial Statements


NOTE 1 - Consolidated Financial Statements

The  consolidated  balance  sheet as of  December  31,  1998,  the  consolidated
statements of operations for the three months and nine months ended December 31,
1998,  and 1997,  and the  consolidated  statements  of cash flows for the three
months and nine months then ended have been  prepared  by the  Company,  without
audit. In the opinion of management,  all adjustments (which include only normal
recurring  adjustments)  necessary  to present  fairly the  Company's  financial
position,  results of operations and cash flow at December 31, 1998, and for all
periods presented have been made.

Certain  information  and footnote  disclosures  normally  included in financial
statements prepared in accordance with generally accepted accounting  principles
have been condensed or omitted.  For further  information,  reference  should be
made  to  the  consolidated  financial  statements  and  notes  included  in the
Company's  Form  10-K  for the year  ended  March  31,  1998,  on file  with the
Securities and Exchange Commission.

NOTE 2 - Reclassifications

Certain prior period amounts have been reclassified in order to conform with the
current period presentation.

NOTE 3 - Comprehensive Income

In June 1997,  the  Financial  Accounting  Standards  Board issued  Statement of
Financial  Accounting  Standards  No.130 ("SFAS 130") - Reporting  Comprehensive
Income.  SFAS 130 requires the  additional  reporting of a new measure of income
which takes into account certain elements  otherwise recorded as part of equity.
For all periods  presented,  the difference between net income and comprehensive
income consists of the changes in the cumulative  foreign  currency  translation
adjustment included as part of the Company's equity.

The following is a  reconciliation  of net income and  comprehensive  income (in
thousands):


                                        Three months ended    Nine months ended
                                            December 31,         December 31,
                                         -----------------    -----------------
                                           1998     1997        1998     1997
                                         -------   -------    -------   -------
Net income                               $ 1,352   $ 1,404    $ 3,049   $ 2,875
Change in cumulative foreign currency
  translation adjustment                       8      (127)     1,030      (576)
                                         -------   -------    -------   -------
Comprehensive income                     $ 1,360   $ 1,277    $ 4,079   $ 2,299
                                         =======   =======    =======   =======

NOTE 4 - Earnings  per Share

The Company has adopted Statement of Financial  Accounting No.128 ("SFAS 128") -
Earnings per Share. As a result of the adoption of SFAS 128,  earnings per share
amounts for the three months and nine months ended December 31, 1997,  have been
restated  to  conform  to  the  new  standard.   This  standard   requires  dual
presentation  of two earnings per share ("EPS")  amounts,  basic EPS and diluted
EPS. Basic EPS represents the income available to common shareholders divided by
the weighted average number of common shares outstanding for the period. Diluted
EPS  represents  the  income  available  to common  shareholders  divided by the
weighted  average of common shares  outstanding  while also giving effect to the
potential  dilution that could occur if  securities or other  contracts to issue
common stock (e.g.  stock options) were exercised and converted into stock.  For
all periods  presented,  the difference  between basic and diluted  earnings per
share for the  Company is the  inclusion  of  dilutive  stock  options and stock
warrants,  the effect of which is calculated  using the treasury stock method as
shown  below.  The  Company's  convertible  debentures  are  excluded  from  the
computation, as these have had, and continue to have, an antidilutive effect.

                                       6

<PAGE>


                          The Chalone Wine Group, Ltd.

NOTE 4 - Earnings  per Share (Continued)

<TABLE>
The following is a reconciliation  of the figures used in deriving basic EPS and
those used in calculating diluted EPS:

                                                (in thousands, except per-share data)

<CAPTION>
                                                                         Basic EPS                                       Diluted EPS
                                                                         ---------                                       -----------
                                                                                             Effect of dilutive            Income
                                                                                                 securities             available to
                                                                          Income           ------------------------        common
                                                                       available to                                     shareholders
                                                                          common                            Stock        and assumed
                                                                       shareholders         Warrants       options       conversion
                                                                       ------------         --------       -------       ----------
<S>                                                                        <C>                 <C>              <C>            <C>  
Three months ended December 31, 1998:
  Income                                                                  $1,352              --               --             $1,352
  Shares                                                                   8,697                21             --              8,718
                                                                          ------                                              ------
  EPS                                                                     $ 0.16                                              $ 0.16
                                                                          ======                                              ======

Three months ended December 31, 1997:
  Income                                                                  $1,404              --               --             $1,404
  Shares                                                                   7,813               453              132            8,398
                                                                          ------                                              ------
  EPS                                                                     $ 0.18                                              $ 0.17
                                                                          ======                                              ======

Nine months ended December 31, 1998:
  Income                                                                  $3,049              --               --             $3,049
  Shares                                                                   8,656               172             --              8,828
                                                                          ------                                              ------
  EPS                                                                     $ 0.35                                              $ 0.35
                                                                          ======                                              ======

Nine months ended December, 1997:
  Income                                                                  $2,875              --               --             $2,875
  Shares                                                                   7,692               515              161            8,368
                                                                          ------                                              ------
  EPS                                                                     $ 0.37                                              $ 0.34
                                                                          ======                                              ======
</TABLE>

                                                                  7

<PAGE>


                          The Chalone Wine Group, Ltd.

Item 2.    Management's Discussion and Analysis
           of Financial Condition and Results of Operations

FORWARD LOOKING STATEMENTS

From time to time,  information provided by the Company,  statements made by its
employees  or  information  included  in its  filings  with the  Securities  and
Exchange  Commission  (including this Form 10-Q) may contain statements that are
not historical  facts, so called  "forward  looking  statements,"  which involve
risks and  uncertainties.  Forward  looking  statements are made pursuant to the
safe harbor provisions of the Private Securities  Litigation Reform Act of 1995.
When used in this Form 10-Q, the terms  "anticipates,"  "expects,"  "estimates,"
"believes,"  and  other  similar  terms as they  relate  to the  Company  or its
management  are  intended to  identify  such  forward  looking  statements.  For
example,  statements made herein  relating to the 1998 harvest,  conversion of a
majority of the  currently  outstanding  convertible  debentures,  the Company's
working  capital  requirements,  the  anticipated  future results of Edna Valley
Vineyard  joint  venture  and  Canoe  Ridge  Vineyard,  LLC,  and the  Company's
expectation  that  sufficient  cash  flow  will  continue  to be  provided  from
operations,  are  forward  looking  statements.  Factors  that may cause  actual
results to vary include, but are not limited to: (i) future and past weather and
general farming conditions  affecting the annual grape harvest;  (ii) variations
in consumer taste and preference;  (iii) changes in the wine industry regulatory
environment;  and (iv) changes in the fair market value of the Company's  common
stock. Each of these factors, and others, are discussed from time to time in the
Company's  filings with the  Securities  and Exchange  Commission  including the
Company's annual report on Form 10-K for the year ended March 31, 1998.

DESCRIPTION OF THE BUSINESS

The Chalone Wine Group, Ltd. is a Napa,  California-based company that produces,
markets and sells primarily super and ultra-premium white and red varietal table
wines.  In  California,  the Company owns and operates  Chalone  Vineyard(R)  in
Monterey  County,  Acacia(TM)  Winery in the  Carneros  District of Napa County,
Carmenet(R)  Vineyard in Sonoma County and Edna Valley  Vineyard(R)  in San Luis
Obispo  County  (in  conjunction  with its 50%  joint-venture  partner,  Paragon
Vineyard Co.). In the State of Washington,  the Company owns a 50.5% interest in
Canoe  Ridge(R)  Vineyard.  In the Bordeaux  region of France,  the Company owns
23.5% of the  fourth-growth  estate of Chateau  Duhart-Milon in partnership with
Domaines Barons de Rothschild  (Lafite) ("DBR"),  which owns the remaining 76.5%
interest in Chateau Duhart-Milon.

With a view to  introducing  new  consumers to its wines,  the Company  recently
expanded its product  line with the launch of the  "Echelon(TM)"  brand.  Taking
advantage of the  Company's  diverse  vineyard  resources,  the Echelon label is
expected  to reach a larger and  entirely  new market  segment  due to its lower
price point  (relative to the  Company's  other  wines).  During the nine months
ended December 31, 1998, 64,000 cases of Chardonnay, 25,000 cases of Pinot Noir,
and 7,500 cases of Merlot under the Echelon label were made  available for sale.
Additionally,  a  1998-vintage  Echelon Syrah is planned for release  during the
fall of 1999.

In addition  to, and as a result of, an  investment  in the Company by DBR,  the
Company receives an allocation of DBR wines for resale,  including an allocation
from  Chateau  Lafite-Rothschild,  a first  growth  Bordeaux  chateau,  which is
generally regarded as one of the world's most exclusive wine producers.

                                       8

<PAGE>


                          The Chalone Wine Group, Ltd.

Item 2.    Management's Discussion and Analysis
           of Financial Condition and Results of Operations (Continued)

RESULTS OF OPERATIONS

<TABLE>
The following  table sets forth the percentage  relationship  to net revenues of
certain items in the Company's statements of operations for the three months and
nine months ended December 31, 1998, and 1997, and the percentage change in such
items between the comparable period in those years:

<CAPTION>
                                         Three months ended        Percent     Three months ended        Percent
                                             December 31,           Change         December 31,          Change
                                        ------------------------  ----------  ------------------------ ------------
                                           1998         1997       98 vs 97      1998         1997      98 vs 97
                                        -----------  -----------  ----------  ----------- ------------ ------------
<S>                                          <C>          <C>         <C>         <C>          <C>         <C>   
Net revenues                                 100.0 %      100.0 %     11.3 %      100.0 %      100.0 %     14.6 %
Cost of wines sold                           (53.9)%      (55.4)%      8.4 %      (54.7)%      (56.9)%     10.2 %
                                        -----------  -----------              ----------- ------------
   Gross profit                               46.1 %       44.6 %     14.9 %       45.3 %       43.1 %     20.3 %

Custom processing operations                   0.4 %        1.7 %    (76.9)%        0.2 %        1.1 %    (78.2)%
SG&A expenses                                (22.2)%      (18.6)%     32.6 %      (24.5)%      (20.7)%     35.4 %
                                        -----------  -----------              ----------- ------------
   Operating income                           24.2 %       27.7 %     (2.6)%       21.0 %       23.5 %      2.5 %
                                        -----------  -----------              ----------- ------------

Other income (expenses):
   Interest                                   (3.6)%       (3.5)%     13.4 %       (4.0)%       (4.9)%     (5.8)%
   Other, net                                  0.2 %          --       n/a         (0.0)%        0.2 %   (115.7)%
                                        -----------  -----------              ----------- ------------
                                              (3.4)%       (3.5)%      7.0 %       (4.0)%       (4.6)%      0.2 %

Equity in Chateau Duhart-Milon                 1.5 %        0.9 %     81.6 %        2.2 %        1.1 %    142.6 %
Minority interests                            (3.5)%       (3.7)%      7.7 %       (3.1)%       (2.9)%     26.0 %
                                        -----------  -----------              ----------- ------------
   Income before income taxes                 18.8 %       21.4 %     (2.2)%       16.1 %       17.1 %      7.8 %
                                        -----------  -----------              ----------- ------------

Income tax expense                            (7.7)%       (8.6)%       --         (6.6)%       (6.8)%     10.4 %
                                        -----------  -----------              ----------- ------------
   Net income                                 11.1 %       12.8 %     (3.7)%        9.5 %       10.3 %      6.1 %
                                        ===========  ===========              =========== ============
</TABLE>

Net Revenues

Net  revenues  for the three  months and nine  months  ended  December  31, 1998
increased approximately 11% and 15% respectively, over the comparable periods in
the prior year,  as a result of increased  case-sales  volume in part due to the
new Echelon  brand name,  and increases in the average sales prices per case due
to (i) changes in product mix and (ii) selected price increases.

Gross Profit

Gross  profit for the three  months and nine  months  ended  December  31,  1998
increased by approximately 15% and 20% respectively, over the comparable periods
in the prior year.  The  increased  gross  profit in the  current  quarter was a
result of increased  case sales and higher prices (as mentioned  above)  without
corresponding increases in production costs.

Custom Processing Operations

Custom  processing   revenue  consists  of  revenue  obtained  from  third-party
wineries,  net of related  expenses,  for grape crushing or wine  bottling.  The
Company cannot predict the  materiality of such  operations or future  operating
results,  as this  source  of  revenue  is  highly  unpredictable  and  entirely
contingent on other wineries'  demand for extra production  capacity,  which can
and does vary significantly from year to year.

The  decrease of 77% and 78%  respectively,  in the three months and nine months
ended  December  31,  1998 from the  comparable  periods  in the prior year were
attributable to less custom crush demand (driven in part by the relatively lower
1998

                                       9

<PAGE>


                          The Chalone Wine Group, Ltd.

Item 2.    Management's Discussion and Analysis
           of Financial Condition and Results of Operations (Continued)

harvest tonnage throughout  California as compared to the 1997 harvest tonnage),
partly offset by increased custom bottling demand.

Selling, General and Administrative (SG&A)  Expenses

SG&A  expenses  for the three  months and nine months  ended  December  31, 1998
increased  by  approximately  33% and 35%,  respectively,  over  the  comparable
periods in the prior year.  These  increases  were  attributable  to (i) planned
increases in selling expenses, (ii) marketing costs related to the launch of the
Echelon  brand,  and (iii)  certain  non-recurring  charges in  connection  with
organizational changes.

Operating Income

Operating  income for the three months ended December 31, 1998,  decreased by 3%
compared  to the  comparable  period in the prior  year due to the  decrease  of
$143,000 in custom processing operations.

Operating  income for the nine months ended  December 31, 1999,  increased by 3%
when compared to the same period in the prior year due to increased Net Revenues
which  generated  higher gross  profits,  partly  offset by  increased  Selling,
General and Administrative Expenses and decreased Custom Processing Operations.

Other Income (Expenses)

Interest  expense  comprised  more than 90% of Other Income  (Expenses)  for all
periods presented.

Interest  expense for the three months ended  December 31, 1998 increased by 13%
from the comparable  period in the prior year due to borrowing demands resulting
from increased 1998 production.

Interest  expense for the nine months ended  December  31, 1998  decreased by 6%
when  compared  to the same  period in the  prior  year  primarily  due to lower
interest rates on outstanding indebtedness.

Equity in Net Income of Chateau Duhart-Milon

The Company experienced record results during the nine months ended December 31,
1998   from   its   investment   in   Societe   Civile   Chateau    Duhart-Milon
("Duhart-Milon").  The  Company's  23.5%  equity  interest  in the net income of
Duhart-Milon  for the three months and nine months ended  December 31, 1998, was
$187,000  and  $718,000,  respectively,  as compared to $103,000  and  $296,000,
respectively,  during the comparable periods in the prior year. The 82% and 143%
increases, respectively, are primarily attributable to exceptionally high demand
for the 1996 vintage of Bordeaux  wines.  The 1996 vintage is expected to be one
of the Bordeaux region's most successful  vintages in the past twenty years. Due
to the  exceptional  nature of the 1996 vintage,  this quarter's net income from
the  Company's  investment  in  Duhart-Milon  may not be  indicative  of  future
results.

The Company  monitors  its  investment  in  Duhart-Milon  primarily  through its
on-going   communication   with  Domaines  Barons  de  Rothschild   (DBR).  Such
communication is facilitated by the presence of the Company's  chairman on DBR's
Board  of  Directors,  and  DBR's  representation  on  the  Company's  Board  of
Directors.  Additionally,  various key  employees of the Company  make  frequent
visits to Duhart-Milon's offices and productions facilities.

Since the investment in Duhart-Milon is a long-term investment  denominated in a
foreign currency, the Company maintains a reserve for currency translation which
was valued at $1,429,000 as of December 31, 1998.  This reserve was reduced from
$2,459,000  as of March 31, 1998 and  $1,437,000 as of September 30, 1998 due to
the increase in the relative worth of the French Franc when compared to the U.S.
dollar during the nine months ended  December 31, 1998.  Although the transition
to the "EURO" currency became  effective as of January 1, 1999, the Company does
not  anticipate  that  this  transition  will  have  a  material  impact  on its
investment  in  Duhart-Milon.  Currency  fluctuations  will,  as in the past, be
recorded in the  "Cumulative  foreign  currency  translation  adjustment" in the
equity section of the Company's  consolidated  balance sheet, and be included in
comprehensive  income  as  defined  by the  Statement  of  Financial  Accounting
Standards No.130 ("SFAS 130") - Reporting Comprehensive Income.

                                       10

<PAGE>


                          The Chalone Wine Group, Ltd.

Item 2.    Management's Discussion and Analysis
           of Financial Condition and Results of Operations (Continued)

Minority Interest

<TABLE>
The  Edna  Valley  Vineyard  ("EVV")  and  Canoe  Ridge  Vineyard,  LLC  ("CRV")
individual  financial  statements are  consolidated in full within the Company's
financial statements. The interests of parties other than the Company in the net
earnings of EVV and CRV are accounted for as "minority  interests." The minority
interests  for the three  months and nine months ended  December  31, 1998,  and
1997, were as follows (in thousands):

<CAPTION>
                                                      Three months ended     Nine months ended
                                                          December 31,          December 31,
                                           Minority  ---------------------- ----------------------
 Venture           Minority Owner          Percent      1998       1997        1998       1997
----------- ----------------------------- ---------- ----------- ---------- ----------- ----------
<S>         <C>                               <C>         <C>        <C>       <C>          <C>  
EVV         Paragon Vineyard Co., Inc.        50.0%       $ 333      $ 339     $   733      $ 695
CRV         Various                           49.5%          99         62         274        104
                                                     =========== ========== =========== ==========
                                                          $ 432      $ 401     $ 1,007      $ 799
                                                     =========== ========== =========== ==========
</TABLE>


The  approximately 8% and 26% increase in the minority  interests of EVV and CRV
for the  three  months  and nine  months  ended  December  31,  1997,  and 1998,
respectively,  reflects improved net income of EVV and CRV during those periods.
The Company  expects  the net income of EVV and CRV to continue to improve  from
year to year, and for the minority interests to increase accordingly.

Net Income

Net income  for the three  months  ended  December  31,  1998,  was  $1,352,000,
reflecting  a decrease of  approximately  4% from the  comparable  period in the
prior year. As with the Operating Income, this decrease was largely attributable
to the decrease of $143,000 in Custom Processing Operations.

Net  income  for the nine  months  ended  December  31,  1998,  increased  6% to
$3,049,000  from the same period in the prior  year.  This  increase  was due to
increased gross profit and the return on the Company's  equity in  Duhart-Milon,
offset by higher Selling,  General and Administrative  Expenses and lower Custom
Processing Operations.

"EL NINO"

The weather  phenomenon  commonly  referred to as "El Nino" produced heavy rains
and  cooler  weather  during the Spring of 1998,  which  resulted  in colder and
wetter  soils  than  are  typical  during  California's  grape  growing  season.
Consequently,  the 1998 harvest was postponed by approximately four to six weeks
- depending on the geographical  location and varietals.  Although,  the primary
risk  associated  with such a delay is possible  exposure to early  winter rains
resulting in rot, the Company believes that rot was largely avoided.

Nevertheless,  the unusual  weather  conditions  resulting from El Nino impacted
quantity  and  quality of the  Company's  1998 estate  harvest.  The size of the
Company's  most  significant  crops  ranged from  normal-sized  yields to 50% of
normal yields (depending on the varietal and the particular estate).

Despite the  foregoing  reduction in the yield of certain  crops,  the harvested
estate crops, in combination  with contracted grape purchases (most of which are
tonnage-based),   are  expected  to  permit  the  Company  to  meet   originally
anticipated  sales-projections  in its 1998  vintage  Chardonnay,  Cabernet  and
Merlot varietals which,  together,  have historically  comprised between 80% and
85% of its aggregate annual production.

                                       11

<PAGE>


                          The Chalone Wine Group, Ltd.

Item 2.    Management's Discussion and Analysis
           of Financial Condition and Results of Operations (Continued)

LIQUIDITY AND CAPITAL RESOURCES

Working Capital:

During the nine months ending December 31, 1998,  working  capital  decreased by
$5.8 million,  or 21%, from $27.8 million to $22.0  million.  This was primarily
due to the  following:  (i) a  change  in  classification  for $8.5  million  of
convertible  subordinated  debentures  from long-term debt to current debt; (ii)
capital  expenditures  of $6.7  million  incurred  both as a  result  of  normal
operations  and selected  expansion of certain  Company  production  facilities;
(iii)  payment of $1.7  million in taxes  relating  to  proceeds  received  from
Pacific  Gas and  Electric  ("PG&E")  (which  are  recorded  as an advance as of
December  31,  1998 - refer to  discussion  of PG&E  below);  offset  by 4) $1.0
million received from the net proceeds of warrant exercises (which resulted in a
purchase of 142,857 shares of the Company's common stock); 5) an advance of $4.5
million from PG&E related to the Carmenet Vineyard fire of July 1996; and 6) net
inventory increases of $6.8 million.

Convertible  subordinated  debentures,  with a face value of $8.5  million,  are
convertible to 965,098  shares of the Company's  common stock and will mature in
April,  1999.  The Company  believes  that the  majority of the holders of these
debentures  will elect to convert into common  stock when due.  The  convertible
debentures  were more fully  described in the  Company's  Form 10-K for the year
ended March 31, 1998, on file with the Securities and Exchange Commission.

Cash Flows:

During the three months  ended  December  31,  1998,  cash flow from  operations
decreased by $6.1 million vs. the comparable  period in the prior year. This was
primarily a result of (i) an increased  inventory  levels of $4.1 million,  (ii)
payment of $1.7 million in taxes relating to the $4.5 million  advance from PG&E
(discussed  below),  offset by (iii) timing  differences in payments of payables
and receipts of receivables.  Cash used in investing activities decreased by 65%
from the  comparable  period in the prior year,  primarily due to  non-recurring
increases  in notes  receivable  of $1.4 million  which  occurred in the quarter
ended December 31, 1997.  Cash flow from financing  activities were $7.2 million
higher  than  in the  comparable  period  in the  prior  year  due to  increased
short-term debt attributable to new bridge financing of $5.0 million obtained in
December of 1998, combined with increased borrowing under the Company's existing
lines of credit. The bridge financing will mature on March 31, 1999. The Company
presently plans to refinance the bridge loan at maturity.

During the nine  months  ended  December  31,  1998,  cash flow from  operations
decreased  by $2.0  million,  or 136%,  compared to the same period in the prior
year.  This was  primarily  the result of (i)  receiving  $4.5 million from PG&E
(discussed below),  offset by (ii) increased  investments in inventory resulting
in a net  inventory  change which is $2.1 million  higher than in the prior year
and (iii) payment of $1.7 million in taxes relating to the $4.5 million  advance
from PG&E,  and (iv) timing  differences in payments of payables and receipts of
receivables.  Cash used in investing  activities was $709,000 or 12% higher than
during the nine months  ended  December  31,  1997 due  primarily  to  increased
capital expenditures.  Cash provided by financing activities was $3.5 million or
85% higher than during the comparable period last year mostly due to an increase
in short-term debt primarily attributable to the bridge financing.

General:

As of February 2, 1999 the Company had lines of credit  totaling  $16.3 million,
of which $14.9 million had been drawn.

The  Company is not aware of any  potential  impairments  to its  liquidity  and
believes  that its capital  resources  are adequate to meet current and historic
levels of capital  expenditures  and liquidity  needs of the Company,  including
repayment of the $8.5 million convertible  subordinated  debentures due in April
1999.  This belief is based,  in part, on currently  on-going bank  negotiations
which  have lead the  Company  to be  confident  about its  potential  to borrow
adequate  funds from  prospective  lenders as well as to  refinance  its current
bridge financing loan.

As previously  stated,  the Company does not expect to have to repay most of the
convertible subordinated debentures when due. Rather, it expects holders thereof
to convert such debentures into common stock. Based on this assumption and other
factors set forth herein, the Company  anticipates that the funds available from
the bridge financing and its existing lines of credit will be sufficient to meet
its liquidity needs for the foreseeable  future.  However, if all holders of the
convertible  subordinated  debentures  elected to redeem  such  debentures  upon
maturity, or if the foregoing borrowings cannot be secured on

                                       12

<PAGE>


                          The Chalone Wine Group, Ltd.

Item 2.    Management's Discussion and Analysis
           of Financial Condition and Results of Operations (Continued)

terms  favorable  to the Company  because of general  market  conditions  or the
Company's operations, the Company might be required to scale back its operations
unless alternative sources of capital can be obtained.

PACIFIC GAS AND ELECTRIC SETTLEMENT

In January,  1999,  an  agreement  was  reached  with  Pacific Gas and  Electric
("PG&E")  regarding  a fire which  occurred  on July 31,  1996 at the  Company's
Carmenet  Vineyard,  located  in Sonoma,  California.  This event was more fully
described in the Company's  Form 10-K for the year ended March 31, 1998, on file
with the Securities and Exchange  Commission.  A final  settlement  agreement is
expected to be signed by the  parties in  February.  As part of the  settlement,
PG&E agreed to pay the Company an  additional  $150,000,  of which  $140,000 has
been  received by the Company.  The balance of $10,000 is expected to be paid on
March 5, 1999. These amounts,  together with the $4.5 million advance  discussed
above will be  recognized  in the Company's  income  statement  during the three
months ending March 31, 1999.

Since this  settlement did not occur until after December 31, 1998, the proceeds
of $4.5 million  received in April of 1998 were still reflected as a "Settlement
advance" on the Company's  December 31, 1998 consolidated  balance sheet.  Since
the  Company  is  likely  to keep the  proceeds  as part of a final  settlement,
however,  a payment of related  taxes was required in the 1998  calendar year by
applicable Treasury  regulations  promulgated under the Internal Revenue Code of
1986, as amended.

YEAR 2000

The year 2000 issue  ("Y2K") is the result of computer  programs  being  written
using two digits  rather than four digits to determine the  applicable  year. As
presently programmed, the Company's computer programs and systems that have time
sensitive  software  would  recognize  a date using "00" as the year 1900 rather
than the year 2000.  Unless  reprogrammed,  in the future  this could  result in
miscalculations  causing  disruptions  of  operations,  including,  among  other
things, temporary  inefficiencies in processing transactions,  sending invoices,
or engaging in similar normal business activities.

Nevertheless,  the  Company has an ongoing  program  designed to ensure that its
operational and financial systems will not be adversely affected by Y2K software
failures.  The  Company  believes  that  its  exposure  to  Y2K  issues  remains
relatively  minor in comparison to most  industrial  enterprises  because of its
relatively low reliance on computerized systems. The Company is doing everything
technologically possible to assure its computers function properly upon the turn
of the century.  Compliance is to some extent dependent upon vendor cooperation.
Preliminary  estimates  of  the  compliance-related  costs,  based  on  internal
projections,  are  approximately  $15,000.  The Company  recognizes that any Y2K
system related  compliance  failures could result in additional  expenses to the
Company, the materiality of which cannot be predicted at this time.

                                       13

<PAGE>


                          The Chalone Wine Group, Ltd.

Item 3.    Disclosures About Market Risk

You should carefully consider,  among other factors, the matters described below
before  purchasing  any  Chalone  common  stock.  This  list of  factors  is not
exhaustive.

Our Revenues  and  Operating  Results  Fluctuate  Significantly  from Quarter to
Quarter

As a result,  we believe  that  period-to-period  comparisons  of our  operating
results are not necessarily meaningful,  and cannot be relied upon as indicators
of future performance.  In addition, there can be no assurance that our revenues
will grow or be sustained in future periods or that we will maintain our current
profitability   in  the   future.   Significant   factors  in  these   quarterly
fluctuations,  none of which are within our  control,  are  changes in  consumer
demand for our wines,  the affect of weather and other natural forces on growing
conditions  and, in turn,  the quality  and  quantity of grapes  produced by us,
interest rates and other  business and economic  conditions.  Additionally,  our
sales volume tends to be affected by price  increases,  distributors'  inventory
levels and the timing of  releases  for  certain  wines,  among  other  factors.
Consequently,  we have  experienced,  and  expect  to  continue  to  experience,
seasonal fluctuations in revenues and operating results.

A large  portion of our  expenses  are fixed and  difficult to reduce in a short
period of time.  In quarters  when  revenues do not meet our  expectations,  our
level of fixed expenses tends to exacerbate the adverse effect on net income. In
quarters when our operating  results are below the expectations of public market
analysts or investors, the price of our common stock may be adversely affected.

Our Profits  Depend  Largely on Sales in Certain  States and on Sales of Certain
Varietals

In the nine months ended December 31, 1998,  approximately 70% of our wine sales
were  concentrated  in 20  states.  Changes in  national  consumer  spending  or
consumer  spending in these states and other regions of the country could affect
both the  quantity  and price  level of wines  that  customers  are  willing  to
purchase.

Approximately 92% of our net revenues in the nine months ended December 31, 1998
were concentrated in our top four selling varietal wines. Specifically, sales of
Chardonnay,  Pinot Noir,  Cabernet  Sauvignon and Merlot accounted for 58%, 11%,
16% and 7% of our net revenues, respectively, for the nine months ended December
31, 1998.

Our Competition May Harm Our Business

The premium table wine industry is intensely  competitive and highly fragmented.
Our wines  compete in all of the premium  wine market  segments  with many other
premium  domestic and foreign wines,  with imported wines coming  primarily from
the  Burgundy  and Bordeaux  regions of France and, to a lesser  extent,  Italy,
Chile,  Argentina,  South  Africa and  Australia.  Our wines also  compete  with
popular-priced  generic wines and with other  alcoholic and, to a lesser degree,
non-alcoholic  beverages,  for shelf  space in retail  stores and for  marketing
focus by our  independent  distributors,  many of which  carry  extensive  brand
portfolios.

Additionally, the wine industry has experienced significant consolidation.  Many
of our  competitors  have greater  financial,  technical,  marketing  and public
relations resources than we do. Our sales may be harmed to the extent we are not
able  to  compete   successfully  against  such  wine  or  alternative  beverage
producers.

Our Business is Seasonal

Our  business  is subject  to  seasonal  as well as  quarterly  fluctuations  in
revenues and operating  results.  Our sales volume tends to increase  during the
summer months and the holiday season. Our sales volume typically decreases after
the holidays.  As a result,  our sales and earnings are typically highest during
the fourth calendar quarter and lowest in the first calendar  quarter.  Seasonal
factors also affect our level of borrowing.  For example,  our borrowing  levels
typically  peak during the winter when we have to pay for harvest  costs and may
have to make contractual payments to grape growers.  These and other factors may
cause fluctuations in the market price of our common stock.

                                       14

<PAGE>


                          The Chalone Wine Group, Ltd.

Item 3.    Disclosures About Market Risk (Continued)

Bad Weather, Pests and Plant Diseases Could Harm Our Business

Winemaking  and grape  growing are subject to a variety of  agricultural  risks.
Various  diseases and pests and extreme  weather  conditions  can materially and
adversely  affect the quality and quantity of grapes available to us. This could
reduce the quality or amount of wine we produce.  A deterioration in the quality
of our wines could harm our brand name, and a decrease in our  production  could
reduce our sales and profits.  Future government  restrictions regarding the use
of certain materials used in grape growing also may also increase vineyard costs
and/or reduce production.

Grape  growing  requires  adequate  water  supplies.  We  generally  supply  our
vineyards'  water needs through wells and reservoirs  located on our properties.
We believe that we have adequate  water supplies to meet the needs of all of our
vineyards.  However,  a substantial  reduction in water supplies could result in
material losses of grape crops and vines.

Many California vineyards, including vineyards in Northern California, have been
infested  with  Phylloxera,  a root  louse  that  renders  a  vine  economically
unproductive  within a few  years  after  infestation.  The  current  strain  of
phylloxera  primarily  affects vines of a certain type. Our vineyard  properties
are  primarily  planted to  rootstocks  believed to be resistant to  Phylloxera.
However,  we cannot be certain that our existing  vineyards or the rootstocks we
are now using in our planting  and  replanting  programs  will not in the future
become  susceptible  to current or new strains of  Phylloxera,  plant insects or
diseases, any of which could harm our business.

We May Not Be Able to Grow or Acquire Enough Quality Grapes for Our Wines

The adequacy of our grape supply is  influenced  by consumer  demand for wine in
relation to industry-wide production levels. While we believe that we can secure
sufficient  supplies of grapes from a combination of our own production and from
grape supply contracts with independent growers, we cannot be certain that grape
supply  shortages  will not occur. A shortage in the supply of wine grapes could
result  in an  increase  in the  price  of some  or all  grape  varieties  and a
corresponding increase in our wine production costs.

Industry  trends point to rapid plantings of new vineyards and replanting of old
vineyards  to  greater  densities,  with the  expected  result of  significantly
increasing  the supply of premium  wine grapes and the amount of wine which will
be produced in the future.  This  expected  increase in grape  production  could
result in an excess of supply  over  demand and force  wineries to reduce or not
increase prices.

We Depend on Third Parties to Sell Our Wine

We sell our products primarily through independent  distributors and brokers for
resale to retail  outlets,  restaurants,  hotels and  private  clubs  across the
United  States and in some  overseas  markets.  To a lesser  degree,  we rely on
direct sales from our wineries,  our wine library and direct mail.  Sales to our
largest  distributor  and  to  our  nineteen  largest   distributors   combined,
represented  approximately 5% and 36%, respectively,  of our net revenues during
the  nine  months  ended  December  31,  1998.  Sales  to our  nineteen  largest
distributors are expected to continue to represent a substantial  portion of our
net  revenues in the future.  We use a broker in order to sell our wines  within
California.  Such sales  represent 31% of our net revenues during the nine-month
period ended  December  31, 1998.  The laws and  regulations  of several  states
prohibit  changes of distributors,  except under certain limited  circumstances,
making it difficult to terminate a  distributor  without  reasonable  cause,  as
defined by applicable statutes. The resulting difficulty or inability to replace
distributors,  poor  performance of our major  distributors  or our inability to
collect accounts receivable from our major distributors could harm our business.

New Regulations or Increased Regulatory Costs Could Harm Our Business

The wine industry is subject to extensive  regulation  by the Federal  Bureau of
Alcohol,  Tobacco  and  Firearms  and various  foreign  agencies,  state  liquor
authorities  and local  authorities.  These  regulations  and laws  dictate such
matters  as  licensing  requirements,  trade and  pricing  practices,  permitted
distribution  channels,   permitted  and  required  labeling,   advertising  and
relations  with  wholesalers  and  retailers.  Any  expansion  of  our  existing
facilities or development of new vineyards or wineries may be limited by present
and  future  zoning  ordinances,  environmental  restrictions  and  other  legal
requirements.  In addition,  new  regulations  or  requirements  or increases in
excise taxes, income taxes,  property and sales taxes or international  tariffs,

                                       15

<PAGE>


                          The Chalone Wine Group, Ltd.

Item 3.    Disclosures About Market Risk (Continued)

could reduce our profits. Future legal or regulatory challenges to the industry,
either individually or in the aggregate, could harm our business.

We Will Need More Working Capital to Grow

The  premium  wine  industry  is a  capital-intensive  business  which  requires
substantial capital expenditures to develop and acquire vineyards and to improve
or expand wine production.  Further, the farming of vineyards and acquisition of
grapes and bulk wine require  substantial amounts of working capital. We project
the  need  for  significant  capital  spending  and  increased  working  capital
requirements  over the next several  years,  which must be financed by cash from
operations or additional borrowings or other financing.

Adverse Public Opinion About Alcohol May Harm Our Business

A number of research  studies  suggest that various  health  benefits may result
from the moderate consumption of alcohol, but other studies suggest that alcohol
consumption  does not have any health benefits and may in fact increase the risk
of  stroke,  cancer and other  illnesses.  If an  unfavorable  report on alcohol
consumption  gains  general  support,  it could harm the wine  industry  and our
business.

We Use  Pesticides  and  Other  Hazardous  Substances  in the  Operation  of Our
Business

We necessarily use pesticides and other hazardous substances in the operation of
our business. Although we take many precautions to minimize and manage the risks
of contamination,  if hazardous substances are discovered on, or emanating from,
any of our  properties  and their  release  presents  a threat of harm to public
health  or the  environment,  we may be held  strictly  liable  for the  cost of
remediation. These costs could harm our business and reduce our profits.

Contamination of Our Wines Would Harm Our Business

We also are subject to certain  hazards and liability  risks,  such as potential
contamination,  through  tampering or  otherwise,  of  ingredients  or products.
Contamination  of any of our wines could result in the need for a product recall
which could  significantly  damage our reputation for product quality,  which we
believe is one of our principle  competitive  advantages.  We maintain insurance
against these kinds of risks,  and others,  under various general  liability and
product liability insurance policies. However, our insurance may not be adequate
or may not continue to be available at a price or on terms that are satisfactory
to us.

The Loss of Key Employees Would Damage Our Reputation and Business

Our success  depends to some degree upon the  continued  services of a number of
key employees.  Although some key employees are under employment  contracts with
us for  specific  terms,  the  loss  of the  services  of one or more of our key
employees  could harm our business and our  reputation,  particularly  if one or
more of our key  employees  resigns to join a competitor  or to form a competing
company. In such an event,  despite provisions in our employment contracts which
are designed to prevent the unauthorized disclosure or use of our trade secrets,
practices or procedures by such personnel under these  circumstances,  we cannot
be certain  that we would be able to enforce  these  provisions  or prevent such
disclosures.

Shifts in Foreign Exchange Rates or the Imposition of Adverse Trade  Regulations
Could Harm Our Business

We  conduct  some of our  import  and  export  activity  for wine and  packaging
supplies  in foreign  currency.  We purchase  our  foreign  currency on the spot
market on an as-needed basis and engage in limited financial hedging  activities
to offset the risk of exchange rate  fluctuations.  There is a risk that a shift
in certain  foreign  exchange  rates or the imposition of unforeseen and adverse
trade  regulations  could adversely  impact the costs of these items and have an
adverse impact on our operating results.

In addition,  the imposition of unforeseen and adverse trade  regulations  could
have an adverse effect on our imported wine  operations.  We do not believe that
our foreign exchange risk and international  operations  exposure is material at
this time, but the volume of  international  transactions  is increasing and may
increase these risks in the future.

                                       16

<PAGE>


                          The Chalone Wine Group, Ltd.

Item 3.    Disclosures About Market Risk (Continued)

Infringement of Our Trademarks May Damage Our Brand Names or Our Business

Our wines are branded consumer  products,  and we distinguish our wines from our
competitors by strong and vigilant  enforcement of our trademarks.  There can be
no assurance that competitors will refrain from using trademarks,  tradenames or
trade dress which dilute our intellectual  property rights, and any such actions
may  require  us to become  involved  in  litigation  to protect  these  rights.
Litigation of this nature can be very expensive and tends to divert management's
time and attention.

We May be Harmed by "Year 2000" Hardware and Software Problems

Many currently  installed  computer  systems and software  products are coded to
accept  only  two-digit  entries  in the date  code  field and  cannot  reliably
distinguish  dates  beginning  on January  1, 2000 from dates  prior to the year
2000. Many companies'  software and computer  systems may need to be upgraded or
replaced in order to process  correctly  dates  beginning  in 2000 and to comply
with the "Year 2000" requirements.  We are reviewing our information systems for
any potential problems that might arise as a result of these requirements and do
not believe such  systems  will be affected by the  upcoming  change in century.
However,  we use  third-party  equipment  and software that may not be Year 2000
compliant.  If such third-party equipment or software fails to process dates for
the year 2000 and  thereafter  properly,  such a failure could cause us to incur
unanticipated expenses to remedy any problems, which could harm our business. In
addition,   we  rely  on  various   service   providers,   including  banks  and
distributors.  The software and computer  systems of any of these entities could
have Year 2000  problems.  A disruption in the supply of services or products we
receive  from any of these  entities  due to Year 2000  problems  could harm our
business.

The Market Price of Our Common Stock  Fluctuates

All of the foregoing risks,  among others not known or mentioned in this report,
may  have  a  significant  effect  on  the  market  price  of  the  our  shares.
Additionally,  stock markets have  experienced  extreme price and volume trading
volatility in recent  months and years.  This  volatility  has had a substantial
effect  on the  market  prices  of  securities  of many  companies  for  reasons
frequently  unrelated or  disproportionate  to the specific company's  operating
performance.  These broad market fluctuations may reduce the market price of our
shares.

                                       17

<PAGE>


                          The Chalone Wine Group, Ltd.

PART II. - OTHER INFORMATION

Item 6.  Exhibits and Reports on Form 8-K

     (a) Exhibits.

         Exhibit Number
         --------------
               27          Financial Data Schedule

     (b) Reports.  None.


Pursuant  to the  requirements  of the  Securities  Exchange  Act of  1934,  the
registrant  has duly  caused  this  report  to be  signed  on its  behalf by the
undersigned, thereunto duly authorized.

Dated: February 12, 1999                   The Chalone Wine Group, Ltd.
------------------------                   ----------------------------
                                                   (Registrant)


                                           /s/ Thomas B. Selfridge
                                           ------------------------------------
                                           Thomas B. Selfridge
                                           President and Chief Executive Officer




Dated: February 12, 1999                   /s/ Francois P. Muse
------------------------                   ------------------------------------
                                           Francois P. Muse
                                           (Acting) Chief Financial Officer and
                                           Treasurer

                                       18