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 June 30, 1999

                                       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
      Incorporation or Organization)        (I.R.S. Employer Identification No.)

             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 August 9, 1999
was 9,363,658.


<PAGE>


<TABLE>

                          The Chalone Wine Group, Ltd.

                         PART I. - FINANCIAL INFORMATION

<CAPTION>

                                                                                                  Page
                                                                                                  ----
<S>                                                                                                <C>
     Item 1. Financial Statements

              Consolidated Balance Sheets as of June 30, 1999, and March 31, 1999.                  3

              Consolidated  Statements of Income for the three months ended June
              30, 1999 and 1998.                                                                    4

              Consolidated  Statements  of Cash Flows for the three months ended
              June 30, 1999 and 1998.                                                               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                                                          12

                          PART II. - OTHER INFORMATION

     Item 6. Exhibits and Reports on Form 8-K                                                       16


</TABLE>

<PAGE>

<TABLE>

                                                    The Chalone Wine Group, Ltd.

                                                     CONSOLIDATED BALANCE SHEETS
                                                  (in thousands, except share data)
<CAPTION>

                                                               ASSETS

                                                                                                     June,                 March 31,
                                                                                                      1999                   1999
                                                                                                    ---------             ---------
<S>                                                                                                 <C>                   <C>
Current assets:
     Cash and cash equivalents                                                                      $   2,163             $   1,670
     Accounts receivable, less allowance for doubtful
         accounts of $106 and $86, respectively                                                         7,597                 8,086
     Notes receivable                                                                                     109                   109
     Income tax receivable                                                                              1,252                   616
     Inventory                                                                                         45,011                40,926
     Prepaid expenses                                                                                     535                   492
     Deferred income taxes                                                                                899                   158
                                                                                                    ---------             ---------
         Total current assets                                                                          57,566                52,057
Investment in Chateau Duhart-Milon                                                                      9,545                10,409
Notes receivable, long-term portion                                                                       119                   119
Property, plant and equipment - net                                                                    37,595                33,591
Goodwill and trademarks - net                                                                           6,612                 6,196
Other assets                                                                                            1,171                 1,099
                                                                                                    ---------             ---------
              Total assets                                                                          $ 112,608             $ 103,471
                                                                                                    =========             =========

                                                LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
     Accounts payable and accrued liabilities                                                       $   5,854             $   2,494
     Current maturities of long-term obligations                                                          309                   371
                                                                                                    ---------             ---------
         Total current liabilities                                                                      6,163                 2,865
Bank line of credit                                                                                    11,218                 3,938
Long-term obligations, less current maturities                                                         22,560                22,835
Convertible subordinated debentures                                                                      --                   8,500
Deferred income taxes                                                                                   3,108                 2,765
                                                                                                    ---------             ---------
              Total liabilities                                                                        43,049                40,903
                                                                                                    ---------             ---------

Minority interest                                                                                       4,282                 4,277
Shareholders' equity:
     Common stock - authorized 15,000,000 shares no par value;
     issued and outstanding: 9,363,658 and 8,720,771 shares,
     respectively                                                                                      54,518                48,965
     Stock subscription receivable                                                                        (38)               (1,007)
     Retained earnings                                                                                 13,555                12,629
     Cumulative foreign currency translation adjustment                                                (2,758)               (2,296)
                                                                                                    ---------             ---------
              Total shareholders' equity                                                               65,277                58,291
                                                                                                    ---------             ---------
              Total liabilities and shareholders' equity                                            $ 112,608             $ 103,471
                                                                                                    =========             =========


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

                                                                  3
<PAGE>

                          The Chalone Wine Group, Ltd.

                        CONSOLIDATED STATEMENTS OF INCOME
                (unaudited, in thousands, except per-share data)



                                                              Three months
                                                             ended June 30,
                                                         -----------------------
                                                           1999          1998
                                                         --------      --------
Gross revenues                                           $ 10,828      $  9,015
    Excise taxes                                             (259)         (203)
                                                         --------      --------
Net revenues                                               10,569         8,812
Cost of wines sold                                         (5,538)       (4,720)
                                                         --------      --------
    Gross profit                                            5,031         4,092
Other revenues from operations                                 40          --
Selling, general and administrative expenses               (3,086)       (2,534)
                                                         --------      --------
    Operating income                                        1,985         1,558
Interest expense                                             (493)         (419)
Equity in Chateau Duhart-Milon                                337           316
Minority interests                                           (304)         (243)
Other, net                                                     43             8
                                                         --------      --------
    Income before income taxes                              1,568         1,220
Income taxes                                                 (642)         (500)
                                                         --------      --------
    Net income                                           $    926      $    720
                                                         ========      ========


 Net income per common share
     Basic                                               $   0.10      $   0.08
     Diluted                                             $   0.10      $   0.08

 Average number of shares used
     in income per share computation
     Basic                                                  9,221         8,580
     Diluted                                                9,341         8,873



                   The accompanying notes are an integral part
                    of the consolidated financial statements

                                       4
<PAGE>
                          The Chalone Wine Group, Ltd.

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                            (unaudited, in thousands)

                                                                Three months
                                                               ended June 30,
                                                             ------------------
                                                              1999       1998
                                                             -------    -------
Cash flows from operating activities:
   Net income                                                $   926    $   720
   Non-cash transactions included in earnings:
     Depreciation                                                560        464
     Amortization                                                114         85
     Equity in net income of Chateau Duhart-Milon               (337)      (316)
     Increase in minority interest                               304        243
     Loss on sale of equipment                                     4       --
     Changes in:
      Settlement advance                                        --        4,500
      Accounts and other receivable                               (6)       602
      Inventory                                                 (925)      (908)
      Prepaid expenses and other assets                         (171)      (273)
      Accounts payable and accrued liabilities                 2,812       (875)
                                                             -------    -------
     Net cash provided by operating activities                 3,281      4,242
                                                             -------    -------

Cash flows from investing activities:
   Capital expenditures                                       (2,069)    (2,200)
   Purchase of Staton Hills Winery, net of cash acquired      (6,127)
   Proceeds from disposal of property and equipment                5       --
   Distributions from Duhart-Milon                               738       --
                                                             -------    -------
     Net cash used in investing activities                    (7,453)    (2,200)
                                                             -------    -------

Cash flows from financing activities:
   Borrowings on line of credit - net                          7,280     (3,661)
   Repayment of short-term debt                                 --         (952)
   Distributions to minority interests                          (300)       (71)
   Repayment of long-term debt                                (2,337)      (457)
   Proceeds from issuance of common stock                         22      1,044
                                                             -------    -------
     Net cash provided by financing activities                 4,665     (4,097)
                                                             -------    -------

Net increase (decrease) in cash                                  493     (2,055)
Cash at beginning of period                                    1,670      2,232
                                                             -------    -------
Cash at end of period                                        $ 2,163    $   177
                                                             =======    =======



                   The accompanying notes are an integral part
                    of the consolidated financial statements

                                       5
<PAGE>
                          The Chalone Wine Group, Ltd.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 1 - Consolidated Financial Statements

The consolidated balance sheet as of June 30, 1999, the consolidated  statements
of  Income  for the  three  months  ended  June  30,  1999,  and  1998,  and the
consolidated  statements of cash flows for the three 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 June 30, 1999, 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,  1999,  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  reporting of a new measure of income which takes
into  account  certain  elements  otherwise  recorded  directly  in equity.  The
following  is a  reconciliation  of net  income  and  comprehensive  income  (in
thousands):

                                                              Three months ended
                                                                    June 30,
                                                                ----------------
                                                                  1999      1998
                                                                ------    ------
Net income                                                      $  926    $  720
Change in cumulative foreign currency translation adjustment      (462)      280
                                                                ------    ------
Comprehensive income                                            $  464    $1,000
                                                                ======    ======


NOTE 4 - Earnings per Share

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 an antidilutive effect. In April 1999,  debentures with a face value of
$6.5 million were converted  into 738,014 shares of the Company's  common stock.
At such time, holders of the remaining $2.0 million in debentures elected not to
exercise their  conversion  rights and the Company repaid the $2.0 million using
available borrowings under its line of credit.

                                       6
<PAGE>

                          The Chalone Wine Group, Ltd.

NOTE 4 - Earnings  per Share (Continued)

<TABLE>

The following is a reconciliation of share information used to compute basic EPS
and diluted EPS:

<CAPTION>
                      (in thousands, except per-share data)

                                              Basic EPS                                 Diluted EPS
                                            ---------------                            ---------------
                                                                Effect of dilutive
                                                                     securities             Income
                                                            ---------------------------   available to
                                               Income                                       common
                                             available to                                 shareholders
                                               common                       Stock         and assumed
                                             shareholders      Warrants     options       conversion
                                            --------------- ------------- ------------ ---------------
<S>                                                  <C>             <C>           <C>         <C>
Three months ended June 30, 1999:
  Income                                     $         926            --           --   $         926
  Shares                                             9,221           120           --           9,341
                                            ---------------                            ---------------
  EPS                                        $        0.10                              $        0.10
                                            ===============                            ===============

Three months ended June 30, 1998:
  Income                                     $         720            --           --   $         720
  Shares                                             8,580           227           66           8,873
                                            ---------------                            ---------------
  EPS                                        $        0.08                              $        0.08
                                            ===============                            ===============

</TABLE>


NOTE 5 - Acquisition of Staton Hills Winery

On June 15, 1999, the Company  purchased 100% of the  outstanding  shares of SHW
Equity  Company,  a holding  company which,  in turn,  owns 100% of Staton Hills
Winery ("SHW") and its adjacent vineyards in Yakima County, Washington. The cost
of the acquisition, which included $3.3 million of SHW's notes payable that were
repaid by the Company at the date of the  acquisition,  was  approximately  $6.0
million and was financed with the Company's long-term bank line of credit.

The  acquisition  was recorded  using the purchase  method of accounting and the
acquisition  price was allocated to the assets acquired and liabilities  assumed
based on their estimated fair values.  The excess of the acquisition  price over
the fair value of net assets  acquired was recorded as goodwill,  which is being
amortized over 20 years. A breakdown of the allocation of the acquisition  price
is as follows (in thousands):


          Cash                                                $    62
          Accounts receivable                                     140
          Inventory                                             3,160
          Property, plant and equipment                         2,504
          Deferred tax asset                                      741
          Goodwill                                                473
          Accounts payable and accrued liabilities               (548)
          Deferred tax liabilities                               (343)
                                                              -------
               Total                                          $ 6,189
                                                              =======




The  accompanying   condensed  consolidated  financial  statements  include  the
operations  of SHW for the period from June 15, 1999 through June 30, 1999.  The
pro-forma  effect  of  including  the  operations  of SHW  in  the  accompanying
condensed  consolidated  financial  statements as if it had been acquired at the
beginning of the quarter would not be significant.



                                        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 which are
not historical facts, so called "forward looking  statements" that 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,"  "projects," "may,"
"may not,"  "believes," and other similar terms as they relate to the Company or
its  management  are intended to identify such forward  looking  statements.  In
particular, statements made in this Item 2, Management's Discussion and Analysis
of Financial  Condition and Results of  Operations,  relating to  projections or
predictions  about the  Company's  future  investments  in  vineyards  and other
capital  projects are forward looking  statements.  The Company's  actual future
results  may differ  significantly  from  those  stated in any  forward  looking
statements. Factors that may cause such differences include, but are not limited
to (i) reduced  consumer  spending or a change in  consumer  preferences,  which
could reduce  demand for the Company's  wines;  (ii)  competition  from numerous
domestic and foreign wine producers which could affect the Company's  ability to
sustain volume and revenue  growth;  (iii) interest rates and other business and
economic  conditions  which could increase  significantly  the cost and risks of
projected capital  spending;  (iv) the price and availability in the marketplace
of grapes meeting the Company's  quality standards and other  requirements;  (v)
the effect of weather and other  natural  forces on growing  conditions  and, in
turn,  the quality and  quantity of grapes  produced by the Company and (vi) the
risks  associated with the  assimilation  of Staton Hills Winery.  Each of these
factors,  and other risks  pertaining to the Company,  the premium wine industry
and general  business and economic  conditions,  are more fully discussed herein
and  from  time to time in  other  filings  with  the  Securities  and  Exchange
Commission,  including  the  Company's  annual  report on Form 10-K for the year
ended March 31, 1999.

DESCRIPTION OF THE BUSINESS

The Company  produces,  markets and sells super,  ultra and super-ultra  premium
white and red varietal table wines,  primarily Chardonnay,  Pinot Noir, Cabernet
Sauvignon,  Merlot and Sauvignon Blanc. The Company operates six wineries;  four
located in  various  counties  of  California,  and two  located in the State of
Washington.  The Company's wines are made  principally  from grapes grown at the
Chalone   Vineyard(R),    Carmenet(R)   Vineyard,   Edna   Valley   Vineyard(R),
Company-owned  vineyards adjacent to the Acacia(TM) Winery in California and the
Canoe  Ridge(R)  Vineyard in Washington  State.  These wines are primarily  sold
under  the  labels  "Chalone  Vineyard,"  "Edna  Valley  Vineyard,"  "Carmenet,"
"Acacia," "Canoe Ridge Vineyard," and "Echelon(TM)".

As a result of a  substantial  investment  in the  Company by  France-based  Les
Domaines  Barons  de  Rothschild  (Lafite)  ("DBR"),  the  Company  receives  an
allocation of DBR wines,  including the wines of Chateau  Lafite-Rothschild  and
Chateau  Duhart-Milon,  first-growth  and  fourth-growth  Bordeaux region wines,
respectively.

The Chalone  Wine Group,  Ltd. was  incorporated  under the laws of the State of
California on June 27, 1969. Unless otherwise  indicated,  the term "Company" as
used in this report refers to The Chalone Wine Group,  Ltd. and its consolidated
subsidiaries. The Company became a publicly held reporting company as the result
of an initial public offering of common stock in 1984. Today, the Company is one
of only nine publicly held U.S.  corporations whose principal business is in the
production, marketing and selling of wine.

                                       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

The following  table  represents  financial data as a percentage of net revenues
for the indicated periods:

                                              Three months ended       Percent
                                                    June 30,           Change
                                           ------------------------- -----------
                                              1999         1998        99 vs 98
                                           ------------ ------------ -----------
 Net revenues                                  100.0 %      100.0 %       19.9%
 Cost of sales                                 (52.4)%      (53.6)%       17.3%
                                               -----        -----
    Gross profit                                47.6 %       46.4 %       22.9%
 Other revenues from operations                  0.4 %        0.0 %       n/a
 Selling, general and admin. expenses          (29.2)%      (28.8)%       21.8%
                                               -----        -----
    Operating income                            18.8 %       17.6 %       27.4%
 Interest Expense                               (4.7)%       (4.8)%       17.7%
 Equity in Chateau Duhart-Milon                  3.2 %        3.6 %        6.6%
 Minority interest                              (2.9)%       (2.7)%       25.1%
 Other, net                                      0.4 %        0.1 %      437.5%
                                               -----        -----
    Income before income taxes                  14.8 %       13.8 %       28.5%
 Income taxes                                   (6.0)%       (5.6)%       28.4%
                                               -----        -----
    Net income (loss)                            8.8 %        8.2 %       28.6%
                                               =====        =====


Net Revenues

Net revenues  increased  approximately  20%, from $8.8 million to $10.6 million,
for the three months ended June 30, 1998 and 1999,  respectively,  primarily due
to a 15% volume increase and a 4% average price-per-unit increase.

Gross Profit

Gross profit increased approximately 23%, from $4.1 million to $5.0 million, for
the three months ended June 30, 1998 and 1999,  respectively,  primarily  due to
increased net revenues.  The  corresponding  gross profit margin  increased from
46.4% to 47.6% during the period due to selected price increases and product-mix
differences.

Other Revenue from Operations

The $40,000 in other revenue from operations for the three months ended June 30,
1999 was attributable to custom bottling  activities which had not begun at this
time last year.

Other revenue from operations  consists of (i) processing and other revenue from
third-party  wineries  and (ii) net profit from sales of bulk wine.  The Company
cannot predict the effect on future operating results, as this source of revenue
is highly  unpredictable  and largely  contingent on other wineries'  demand for
extra production  capacity,  which can and does vary  significantly from year to
year.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased 22%, from $2.5 million to
$3.1 million for the three  months  ended June 30, 1998 and 1999,  respectively,
primarily  as a result of  increased  selling  efforts  associated  with the 20%
increase in net revenues.


                                       9
<PAGE>

                          The Chalone Wine Group, Ltd.

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

Operating Income

Operating income increased 27%, from $1.6 million to $2.0 million, for the three
months ended June 30, 1998 and 1999,  respectively,  primarily  due to increased
gross  profits,   offset  by  a  smaller   increase  in  selling,   general  and
administrative expenses as discussed above.

Interest Expense

Interest expense  increased 18% from $419,000 to $493,000,  for the three months
ended June 30,  1998 and 1999,  respectively,  primarily  due to higher  average
outstanding borrowings.

Equity in Net Income of Duhart-Milon

The Company's  23.5% equity  interest in the net income of Chateau  Duhart-Milon
("Duhart-Milon")  increased 7%, from $316,000 to $337,000,  for the three months
ended June 30, 1998 and 1999,  respectively,  primarily due to continuing demand
for Bordeaux wines.

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.

The Company's investment in Duhart-Milon is a long-term  investment  denominated
in French Francs. The Company's reserve for currency translation  adjustment was
$2,758,000 as of June 30, 1999. This increased by $462,000 since March 31, 1999,
due to the decrease in the relative  worth of the French Franc when  compared to
the U.S.  dollar.  The European  Union's  transition to "EURO"  currency,  which
became effective as of January 1, 1999, is not expected to materially affect the
valuation of the Company's investment in Duhart-Milon. Currency fluctuations are
recorded as a "Cumulative foreign currency translation adjustment" in the equity
section of the Company's consolidated balance sheet, and in comprehensive income
as required by the  Statement of Financial  Accounting  Standards  No.130 ("SFAS
130") - Reporting Comprehensive Income.

<TABLE>

Minority Interest

The  Financial  Statements  of Edna  Valley  Vineyard  ("EVV")  and Canoe  Ridge
Vineyard,  LLC ("CRV") are consolidated with the Company's financial statements.
The interest in the equity and net income of EVV and CRV attributable to parties
other than the Company is accounted for as a "minority  interest".  The minority
interest  in the net income of EVV and CRV for the three  months  ended June 30,
1999 and 1998 consisted of the following (in thousands):

<CAPTION>
                                                                                Three months
                                                                               ended June 30,
                                                              Minority   ---------------------------
Venture                         Minority Owner                 Percent      1999          1998
-----------                     -------------------           ---------- ------------ --------------
<S>                             <C>                              <C>           <C>            <C>
Edna Valley Vineyard            Paragon Vineyard Co., Inc.       50.00%        $ 205          $ 172
Canoe Ridge Vineyard, LLC       Various                          49.50%           99             71
                                                                         ------------ --------------
                                                                               $ 304          $ 243
                                                                         ============ ==============
</TABLE>

The  minority  interest in the net income of EVV and CRV in  earnings  increased
25%,  from  $243,000 to  $304,000,  for the three months ended June 30, 1998 and
1999,  respectively,  due to steadily improving  performance at both EVV and CRV
primarily as a result of increased case sales.


                                       10
<PAGE>

                          The Chalone Wine Group, Ltd.

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

Net Income

Net income increased 29%, from $720,000 to $926,000,  for the three months ended
June 30, 1998 and 1999, respectively,  primarily due to increased gross profits,
only partially offset by (i) higher selling, general and administrative expenses
and (ii) higher financing costs.

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 may 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.

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.  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.

LIQUIDITY AND CAPITAL RESOURCES

Working Capital:

Working capital increased 4%, from $49.2 million to $51.4 million, for the three
months ended June 30, 1998 and 1999,  respectively,  primarily  due to financing
the purchase of Staton Hills Winery assets through the Company's  long-term line
of credit.

Cash Flows:

During the three months ended June 30, 1999, cash flow from operations decreased
by $961,000 from the comparable period in the prior year. This was primarily due
to a $4.5 million advance received in June 1998 from PG&E relating to settlement
income which was ultimately  recognized in the Company's income statement during
the three month period ended March 31, 1999.

During the three months ended June 30, 1999, cash flow from investing activities
decreased by $5.3 million from the comparable period in the prior year. This was
primarily due to the $6.1 million purchase of Staton Hills Winery ("SHW").

During the three months ended June 30, 1999, cash flow from financing activities
increased by $8.8 million from the comparable period in the prior year. This was
primarily  due to an  increase  of $7.3  million  in line of  credit  financing,
largely driven by the $6.1 million purchase of SHW.

General:

The  Company is not aware of any  potential  impairments  to its  liquidity  and
believes its capital  resources are adequate to meet current and historic levels
of capital  expenditures  and its  liquidity  needs for at least the next twelve
months.


                                       11
<PAGE>

                          The Chalone Wine Group, Ltd.

Item 3.  Disclosures About Market Risk

You should read the  following  disclosures  in  conjunction  with  Management's
Discussion and Analysis of Financial  Condition and Results of Operations  which
have been drafted in compliance  with recently  adopted  regulations  of the SEC
concerning the use of "Plain English." These disclosures are intended to discuss
certain material risks of the Company's business as they appear to management at
this time. However, this list is not exhaustive.
Other risks may, and likely will, arise from time to time.

Our Revenues  and  Operating  Results  Fluctuate  Significantly  from Quarter to
Quarter

We  believe  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 three  months ended June 30,  1999,  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 three  months ended June 30, 1999
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 three months ended June
30, 1999.

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 and decrease after the holiday season. 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.

                                       12

<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 may 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.

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.  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  for its 1998  vintage  Chardonnay,  Cabernet and
Merlot varietals which,  together,  have historically  comprised between 80% and
85% of its aggregate annual production.

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 4% and 39%, respectively,  of our net revenues during
the three months ended June 30, 1999. 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 32% of our net revenues during the three month period ended
June 30, 1999. 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.

                                       13

<PAGE>

                          The Chalone Wine Group, Ltd.

Item 3.  Disclosures About Market Risk (Continued)

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,
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 use  pesticides  and  other  hazardous  substances  in the  operation  of our
business. If hazardous substances are discovered on, or emanate 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. Payment
of such costs could have a material  adverse  effect on our business,  financial
condition and results of operations.  We maintain  insurance against these kinds
of risks, and others,  under various 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.

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.

                                       14

<PAGE>

                          The Chalone Wine Group, Ltd.

Item 3.  Disclosures About Market Risk (Continued)

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,  packaging  supplies
and various wine production  needs in foreign  currencies.  We purchase  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.

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.

Our Acquisition of Staton Hills Winery and Potential Future Acquisitions Involve
a Number of Risks

Our  acquisition  of Staton Hills  Winery (and  potential  future  acquisitions)
involves  risks  which  include  assimilating  Staton  Hills  into our  Company;
integrating,  retaining and motivating key Staton Hills  personnel;  integrating
and  managing  geographically-dispersed  operations  because  Staton Hills is in
Washington State and our Company is headquartered in California; integrating the
technology  and  infrastructures  of the two  companies;  risks  inherent in the
production of wine in, and  marketing of wine from,  Washington  State,  and the
risks to our Company of the increased negative cash flow and increased operating
expenses  arising from the  acquisition  of, and plans for,  Staton  Hills.

The integration of the  operations,  technology and personnel of our Company and
Staton Hills' is expected to be a complex,  time consuming and expensive process
and may disrupt our business if not completed in a timely and efficient  manner.
Staton  Hills and  Chalone  must  operate as a combined  organization  utilizing
common information and communications systems,  operating procedures,  financial
controls  and  human   resources   practices.   We  may  encounter   substantial
difficulties,  costs and  delays,  including  potential  incompatibility  of our
business  cultures,  perceived adverse changes in our business plans,  potential
conflicts  in our  supplier  and  customer  relationships  and  the  loss of key
employees  and  diversion of the  attention  of  management  from other  ongoing
business initiatives.

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 our shares.  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.


                                       15

<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.

                  One report to  shareholders,  filed on June 30,  1999 with the
                  Securities  and Exchange  Commission on Form 8-K, with respect
                  to the acquisition of Staton Hills Winery.



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: August 13, 1999               The Chalone Wine Group, Ltd.
----------------------               ----------------------------
                                             (Registrant)


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




Dated: August 13, 1999                  /s/ Francois P. Muse
----------------------               -------------------------------------------
                                     Francois P. Muse
                                     Chief Financial Officer and Treasurer

                                       16