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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 September 30, 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
 Incorporation or Organization)                            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 November 10,
1998 was 8,691,559.

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<PAGE>


                          The Chalone Wine Group, Ltd.

                         PART I. - FINANCIAL INFORMATION

Item 1. Financial Statements                                                Page

        Consolidated Balance Sheets as of September 30, 1998,
        and March 31, 1998.                                                   3

        Consolidated Statements of Operations for the three-month
        and six month periods ended September 30, 1998 and 1997.              4

        Consolidated Statements of Cash Flows for the three-month
        and six month periods ended September 30, 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)
                                                                                                 September 30,            March 31,
                                                                                                      1998                  1998
                                                                                                    --------               --------
<S>                                                                                                 <C>                    <C>     
Current assets:
     Cash and cash equivalents                                                                      $    213               $  2,232
     Accounts receivable, less allowance for doubtful
         accounts of $99 and $92, respectively                                                         8,295                  6,597
     Notes receivable                                                                                    119                    197
     Income tax receivable                                                                                58                   --
     Note receivable from officer                                                                       --                       65
     Inventory                                                                                        34,444                 34,277
     Prepaid expenses                                                                                    344                    450
     Deferred income taxes                                                                                14                     14
                                                                                                    --------               --------
         Total current assets                                                                         43,487                 43,832
Investment in Chateau Duhart-Milon                                                                    11,033                  9,480
Notes receivable, long-term portion                                                                      228                    130
Property, plant and equipment - net                                                                   34,657                 30,131
Goodwill and trademarks - net                                                                          6,311                  6,473
Other assets                                                                                             720                    248
                                                                                                    --------               --------
              Total assets                                                                          $ 96,436               $ 90,294
                                                                                                    ========               ========

               LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
     Accounts payable and accrued liabilities                                                       $  2,793               $  3,425
     Bank lines of credit                                                                             11,531                 10,952
     Other short term debt                                                                              --                      952
     Convertible subordinated debentures                                                               8,500                   --
     Current maturities of long-term obligations                                                         564                    709
                                                                                                    --------               --------
         Total current liabilities                                                                    23,388                 16,038
Long-term obligations, less current maturities                                                         8,202                  9,624
Convertible subordinated debentures                                                                     --                    8,500
Settlement advance                                                                                     4,500                   --
Deferred income taxes                                                                                  2,049                  2,049
                                                                                                    --------               --------
              Total liabilities                                                                       38,139                 36,211
                                                                                                    --------               --------

Minority interest                                                                                      4,190                  3,678
Shareholders' equity:
    Common stock - authorized 15,000,000 shares, no
          par value; issued and outstanding: 8,691,137
          and 8,393,979, respectively                                                                 48,861                 46,871
    Stock subscription receivable                                                                     (1,007)                  --
    Retained earnings                                                                                  7,690                  5,993
    Cumulative foreign currency translation adjustment                                                (1,437)                (2,459)
                                                                                                    --------               --------
              Total shareholders' equity                                                              54,107                 50,405
                                                                                                    --------               --------
              Total liabilities and shareholders' equity                                            $ 96,436               $ 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                     Six months ended
                                                                         September 30                           September 30
                                                                  ---------------------------           ---------------------------
                                                                    1998               1997               1998               1997
                                                                  --------           --------           --------           --------
<S>                                                               <C>                <C>                <C>                <C>     
Gross revenues                                                    $ 11,361           $  9,250           $ 20,376           $ 17,537
     Excise taxes                                                     (248)              (243)              (451)              (454)
                                                                  --------           --------           --------           --------
Net revenues                                                        11,113              9,007             19,925             17,083
Cost of wines sold                                                  (6,282)            (5,224)           (11,002)            (9,882)
                                                                  --------           --------           --------           --------
     Gross profit                                                    4,831              3,783              8,923              7,201
Custom processing operations                                            23                117                 23                117
SG&A expenses                                                       (2,612)            (1,838)            (5,146)            (3,758)
                                                                  --------           --------           --------           --------
     Operating income                                                2,242              2,062              3,800              3,560
Other income (expenses)
     Interest expense                                                 (423)              (518)              (842)              (973)
     Other, net                                                        (44)                51                (36)                70
                                                                  --------           --------           --------           --------
                                                                      (467)              (467)              (878)              (903)

Equity in Chateau Duhart-Milon                                         215               --                  531                193
Minority interests                                                    (332)              (255)              (575)              (398)
                                                                  --------           --------           --------           --------
     Income before income taxes                                      1,658              1,340              2,878              2,452
Income tax expense                                                    (681)              (536)            (1,181)              (981)
                                                                  --------           --------           --------           --------
     Net income                                                   $    977           $    804           $  1,697           $  1,471
                                                                  ========           ========           ========           ========

Net income per common share:
     Basic                                                        $   0.11           $   0.10           $   0.20           $   0.19
     Diluted                                                      $   0.11           $   0.10           $   0.19           $   0.18

Average number of shares used
   in income per share computation:
     Basic                                                           8,692              7,790              8,636              7,665
     Diluted                                                         8,892              8,283              8,883              8,370

<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               Six months ended
                                                                                 September 30                     September 30
                                                                            -----------------------         -----------------------
                                                                             1998             1997            1998            1997
                                                                            -------         -------         -------         -------
<S>                                                                         <C>             <C>             <C>             <C>    
Cash flows from operating activities:
    Net earnings                                                            $   977         $   804         $ 1,697         $ 1,471
    Non-cash transactions included in earnings:
      Depreciation                                                              468             364             932             745
      Amortization                                                               82              41             162              86
      Equity in net income of Chateau Duhart-Milon                             (215)           --              (531)           (193)
      Increase in minority interest                                             340             255             583             398
      Exchange rate gain                                                       --                 9            --              --
      Loss on sale of equipment                                                  92               1              92               3
      Changes in:
        Settlement advance                                                     --              --             4,500            --
        Accounts and other receivable                                        (2,300)           (756)         (1,698)           (664)
        Inventory                                                               741          (2,045)           (167)         (2,129)
        Prepaid expenses and other assets                                      (156)           --              (424)            (68)
        Accounts payable and accrued expense                                    243           1,646            (632)          1,919
                                                                            -------         -------         -------         -------
      Net cash provided by operating activities                                 272             319           4,514           1,568
                                                                            -------         -------         -------         -------

Cash flows from investing activities:
    Capital expenditures                                                     (3,350)         (2,520)         (5,550)         (4,539)
    Proceeds from disposal of property and equipment                           --                95            --               100
    Net increase in notes receivable                                            (20)            (125)           (20)            --
                                                                            -------         -------         -------         -------
      Net cash used in investing activities                                  (3,370)         (2,550)         (5,570)         (4,439)
                                                                            -------         -------         -------         -------

Cash flows from financing activities:
    Net change under line of credit agreement                                 4,240           2,968             579           3,826
    Decrease in short-term debt                                                --              --              (952)           --
    Distribution to minority interest                                          --              --               (71)            (38)
    Repayment of long-term debt                                              (1,110)           (760)         (1,567)         (1,097)
    Proceeds from issuance of common stock                                        4              11           1,048              56
                                                                            -------         -------         -------         -------
      Net cash provided by (used in) financing activities                     3,134           2,219            (963)          2,747
                                                                            -------         -------         -------         -------

Net increase (decrease) in cash                                                  36             (12)         (2,019)           (124)
Cash at beginning of period                                                     177             134           2,232             246
                                                                            -------         -------         -------         -------
Cash at end of period                                                       $   213         $   122         $   213         $   122
                                                                            =======         =======         =======         =======

<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  September  30, 1998,  the  consolidated
statements  of  operations  for the  three-month  and  six-month  periods  ended
September 30, 1998, and 1997, and the consolidated  statements of cash flows for
the  three-month  and  six-month  periods  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 September
30, 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.

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

<CAPTION>
                                                                                   Three months ended             Six months ended
                                                                                     September 30                  September 30
                                                                                 ---------------------        ---------------------
                                                                                  1998           1997          1998          1997
                                                                                 -------       -------        -------       -------
<S>                                                                              <C>           <C>            <C>           <C>    
Net income                                                                       $   977       $   804        $ 1,697       $ 1,471
Change in cumulative foreign currency translation adjustment                         742           (74)         1,022          (449)
                                                                                 -------       -------        -------       -------
Comprehensive income                                                             $ 1,719       $   730        $ 2,719       $ 1,022
                                                                                 =======       =======        =======       =======
</TABLE>


NOTE 4 - Earnings  per Share

The Company  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 month and six month periods ended September 30, 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 stockholders divided by
the weighted average number of common shares outstanding for the period. Diluted
EPS  represents  the  income  available  to common  stockholders  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 securities         Income
                                                                             -----------------------------       available to
                                                         Income                                                     common
                                                      available to                                               stockholders
                                                         common                                                  and assumed
                                                      stockholders           Warrants       Stock options        conversion
                                                      ------------           --------       -------------        ----------
<S>                                                          <C>                 <C>              <C>                <C>  
Three months ended September 30, 1998:
   Income                                                  $   977                --               --                $   977
   Shares                                                    8,692               198                2                  8,892
                                                     --------------                                          ------------------
   EPS                                                     $  0.11                                                   $  0.11
                                                     ==============                                          ==================

Three months ended September 30, 1997:
   Income                                                  $   804                --               --                $   804
   Shares                                                    7,790               375              118                  8,283
                                                     --------------                                          ------------------
   EPS                                                     $  0.10                                                   $  0.10
                                                     ==============                                          ==================

Six months ended September 30, 1998:
   Income                                                  $ 1,696                --               --                $ 1,696
   Shares                                                    8,636               214               33                  8,883
                                                     --------------                                          ------------------
   EPS                                                     $  0.20                                                   $  0.19
                                                     ==============                                          ==================

Six months ended September 30, 1997:
   Income                                                  $ 1,471                --               --                $ 1,471
   Shares                                                    7,665               538              167                  8,370
                                                     --------------                                          ------------------
   EPS                                                     $  0.19                                                   $  0.18
                                                     ==============                                          ==================

</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  in  conjunction  with  its  50%
joint-venture  partner,  Paragon  Vineyard  Co.,  owns and operates  Edna Valley
Vineyard(R) in San Luis Obispo County.  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 family of 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 mid-priced
Echelon  label is expected to reach a larger and  entirely  new market  segment,
while  permitting the Company's super and  ultra-premium  labels to maintain its
reputation for quality.  During the six months ended September 30, 1998,  60,000
cases of Echelon  Chardonnay  and 25,000 cases of Pinot Noir were made available
for sale. A Merlot and Syrah are planned for the Echelon label during 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 month and
six month periods ended September 30, 1998, and 1997, and the percentage  change
in such items between the comparable period in those years:

<CAPTION>
                                              Three months ended           Percent             Six months ended           Percent
                                                  September 30              Change               September 30             Change
                                          ----------------------------    -----------    ---------------------------    ------------
                                              1998            1997         98 vs 97          1998            1997         98 vs 97
                                          ------------    ------------    -----------    ------------    -----------    ------------
<S>                                             <C>             <C>          <C>               <C>             <C>           <C>   
Net revenues                                    100.0 %         100.0 %      23.4 %            100.0 %         100.0 %       16.6 %
Cost of wines sold                              (56.5)%         (58.0)%      20.3 %            (55.2)%         (57.8)%       11.3 %
                                          ------------    ------------                   ------------    ------------
   Gross profit                                  43.5 %          42.0 %      27.7 %             44.8 %          42.2 %       23.9 %

Custom processing operations                      0.2 %           1.3 %     (80.3)%              0.1 %           0.7 %      (80.3)%
SG&A expenses                                   (23.5)%         (20.4)%      42.1 %            (25.8)%         (22.0)%       36.9 %
                                          ------------    ------------                   ------------    ------------
   Operating income                              20.2 %          22.9 %       8.7 %             19.1 %          20.8 %        6.7 %
                                          ------------    ------------                   ------------    ------------

Other income (expenses):
   Interest                                      (3.8)%          (5.8)%     (18.3)%             (4.2)%          (5.7)%      (13.5)%
   Other, net                                    (0.4)%           0.6 %    (186.3)%             (0.2)%           0.4 %     (151.4)%
                                          ------------    ------------                   ------------    ------------
                                                 (4.2)%          (5.2)%        --               (4.4)%          (5.3)%       (2.8)%

Equity in Chateau Duhart-Milon                    1.9 %            --         n/a                2.7 %           1.1 %      175.1 %
Minority interests                               (3.0)%          (2.8)%      30.2 %             (2.9)%          (2.3)%       44.5 %
                                          ------------    ------------                   ------------    ------------
   Income before income taxes                    14.9 %          14.9 %      23.7 %             14.4 %          14.4 %       17.4 %
                                          ------------    ------------                   ------------    ------------

Income tax expense                               (6.1)%          (6.0)%      27.1 %             (5.9)%          (5.7)%       20.4 %
                                          ------------    ------------                   ------------    ------------
   Net income                                     8.8 %           8.9 %      21.5 %              8.5 %           8.6 %       15.4 %
                                          ============    ============                   ============    ============
</TABLE>


Net Revenues

Sales for the  three-month  and  six-month  periods  ended  September  30, 1998,
increased approximately 23% and 17% respectively, over the comparable periods in
the prior year,  primarily  as a result of  increased  case  sales.  The current
quarter's  results  were  materially  affected  by sales of wines  under the new
Echelon label, and improved average sales prices per case resulting from changes
in product mix and selected price increases.

Gross Profit

Gross  profit for the three  months and six months  ended  September  30,  1998,
increased by approximately 28% and 24% 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.

Selling, General and Administrative (SG&A)  Expenses

SG&A  expenses  for the three months and six months  ended  September  30, 1998,
increased by approximately 42% and 37% respectively, over the comparable periods
in the prior year. These increases primarily are the result of planned increases
in selling expenses.

Also contributing to these increased SG&A expenditures are certain non-recurring
charges attributable to organizational changes.

                                       9

<PAGE>


                          The Chalone Wine Group, Ltd.


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


Custom Processing Operations

Custom processing revenue is 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 80% in  both  the  three-month  and  six-month  periods  ended
September 30, 1998 compared to the comparable periods in the prior year were due
to less custom crush demand, partly offset by increased custom bottling demand.

Operating Income

Operating  income for the three months and six months ended  September 30, 1998,
increased by 9% and 7%,  respectively,  from the comparable periods in the prior
year. These increases were due to higher gross profits, offset by increased SG&A
expenses and fewer custom processing fees (Other Revenue from  Operations),  all
of which are discussed above.

Other Income (Expenses)

Interest  expense  comprised more than 90% of total Other Income  (Expenses) for
all periods  presented.  Interest  expense  for the three  months and six months
ended  September  30,  1998,  decreased by 18% and 14%,  respectively,  from the
comparable  periods in the prior year,  primarily due to improved  terms on, and
lower average levels of, outstanding indebtedness.

Equity in Net Income of Chateau Duhart-Milon

The Company experienced record results during the six months ended September 30,
1998   from   its   investment   in   Societe   Civile   Chateau    Duhart-Milon
("Duhart-Milon").  Specifically,  the Company's 23.5% equity interest in the net
income of  Duhart-Milon  for the three months and six months ended September 30,
1998,  was $215,000 and $531,000  respectively,  as compared to $0 and $193,000,
respectively,  during the comparable  periods in the prior year.  These 100% and
175% 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,  current year results
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
French Francs,  the Company  maintains a reserve for currency  translation which
was valued at $1,437,000 as of September 30, 1998. This reserve was reduced from
$2,459,000  as of March 31, 1998 and  $2,179,000  as of June 30, 1998 due to the
steady  increase in the relative  worth of the French Franc when compared to the
U.S. dollar during the six months ended September 30, 1998.

                                       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-month  and six-month  periods ended September 30, 1998,
and 1997, were as follows (in thousands):

<CAPTION>
                                                         Three months ended         Six months ended
                                                             September 30              September 30
                                             Minority  -------------------------  -------------------------
  Venture            Minority Owner           Percent      1998         1997          1998         1997
------------- ------------------------------ --------- ------------ ------------  ------------ ------------
<S>                                             <C>          <C>          <C>           <C>          <C>  
EVV           Paragon Vineyard Co., Inc.        50.0%        $ 228        $ 235         $ 400        $ 356
CRV           Various                           49.5%          104           20           175           42
                                                       ------------ ------------  ------------ ------------
                                                             $ 332        $ 255         $ 575        $ 398
                                                       ============ ============  ============ ============
</TABLE>


The approximately 30% and 45% increase in the minority  interests of EVV and CRV
for the three months and six-months  periods ended  September 30, 1997, and 1998
respectively, reflects the improved net results of EVV and CRV between the those
periods. The Company anticipates that such net results for both EVV and CRV will
continue to improve  from year to year,  and that  minority  interest  will thus
increase accordingly.

Net Income

Net income for the three months and six months  ended  September  30, 1998,  was
$977,000 and $1,697,000, respectively, reflecting increases of approximately 22%
and 15% over the comparable  periods in the prior year. By  comparison,  the net
income for the three  months  ended June 30, 1998 was only 8% higher than in the
comparable  period in the prior year. The improved  relative  performance in the
three  months  ended  September  30, 1998 was  primarily  attributable  to gross
profits and equity in Duhart-Milon.

"EL NINO"

The weather  phenomenon  commonly referred to as "El Nino" produced heavy Spring
rains and cooler  weather,  which  resulted in colder and wetter  soils than are
typical during California's grape growing season. Consequently,  the harvest was
postponed by  approximately  four to six weeks - depending  on the  geographical
location and varietals. The primary risk associated with such a delay in harvest
is rot, due to possible exposure to early winter rains, which can affect quality
and  quantity.  Mostly as a result of 1) arctic  weather  fronts  which  brought
colder  weather  conditions  than normal during  September  and October,  and 2)
experiencing  very few early winter  rains,  the Company  believes  that rot was
largely  avoided.

The unusual  weather  conditions  resulting  from El Nino impacted  quantity and
quality of the Company's 1998 estate  harvest.  Quantities 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 Chardonnay,  Cabernet and Merlot varietals
which together, historically have 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 six-month period ending September 30, 1998, working capital decreased
by $7.7 million, or 28%, from $27.8 million to $20.1 million. This was primarily
due to the  following:  1) a  change  in  classification  for  $8.5  million  of
convertible  subordinated  debentures  from  long-term  debt to current debt; 2)
capital  expenditures  of $5.6  million  incurred  both as a  result  of  normal
operations  and selected  expansion of certain  Company  production  facilities;
offset by 3) $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);
and 4) an advance of $4.5 million from Pacific Gas and Electric ("PG&E") related
to the Carmenet Vineyard fire of July 1996.

The $8.5 million of  convertible  subordinated  debentures  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 such debentures will convert to stock when
due.  The  advance  of $4.5  million  from PG&E was  recorded  as a  "Settlement
Advance"  on  the  Company's  balance  sheet  as of  September  30,  1998.  Upon
settlement,  this  amount  will be  recognized  in the  Company's  Statement  of
Operations.  The Company  currently  anticipates that settlement will be reached
during the three month period  ending  December 31, 1998.  Both the  convertible
debentures and the PG&E advance 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:

Cash flow from operations  increased by $2.9 million, or 188%, in the six months
ended  September 30, 1998 vs. the comparable  period in the prior year. This was
primarily a result of the receipt of the $4.5 million from PG&E discussed above.
Cash flow from investing activities decreased by 30% and 24% from the comparable
periods  in the prior  year,  respectively,  in the  three-month  and  six-month
periods  ended  September  30,  1998,  mostly as a result of  increased  capital
expenditures.  Cash flow  from  financing  activities  was $3.1  million  in the
three-month  period  ended  September  30,  1998,  primarily  due  to  increased
borrowing under the Company's line of credit, offset by an early payment of long
term debt of $1.1  million.  During the six months  ended  September  30,  1998,
however,  cash flow from financing  activities was $(1.0) million primarily as a
result of cash  outflows of $2.5 million due to  repayments  of  short-term  and
long-term  debt,  offset by cash  inflows  of $1.0  million  received  due to an
exercise of warrants (as mentioned above).

General:

As of October 26, 1998, the Company had lines of credit  totaling $16.3 million,
of which $11.6 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 all
amounts  potentially  due in April  1999 to repay the  convertible  subordinated
debentures.

YEAR 2000

The year 2000 issue is the result of computer  programs  being written using two
digits rather than four to determine the  applicable  year. Any of the Company's
computer programs that have  time-sensitive  software may recognize a date using
"00" as the  year  1900  rather  than  the  year  2000.  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 year 2000 software failures.
However,  the Company  believes  that its  exposure to year 2000 issues  remains
relatively  minor in comparison to most  industrial  enterprises  because of its
relatively low reliance on computerized systems.

While the Company  believes it is doing everything  technologically  possible to
assure  year  2000  compliance,  it 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
year 2000  compliance  failures  could  result  in  additional  expenses  to the
Company, the materiality of which cannot be predicted at this time.

                                       12

<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.

Unpredictability  of Future Operating Results;  Likely Fluctuations in Quarterly
Operating Results

We  have  experienced,  and  expect  to  continue  to  experience,   significant
fluctuations  in revenues and  operating  results 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,  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.

Geographical Concentration of Sales;  Dependence on Certain Types of Wines

In its fiscal year ended  March 31,  1998,  approximately  66% of our wine sales
were  concentrated in [number] of 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.  Reduced  consumer  confidence and spending also may result in reduced
demand  overall  for wines  which may limit our  ability to  increase  prices or
require us to increase selling and promotional expenses.

Approximately  90% of our net  revenues  in the fiscal year ended March 31, 1998
were concentrated in our top four selling varietal wines. Specifically, sales of
Chardonnay, Pinot Noir, Cabernet Sauvignon and Merlot accounted for 61%, 76%, 9%
and 4% of our fiscal 1998 net revenues, respectively.

A sudden and unexpected shift in consumer preferences or a reduction in sales of
wine generally or in a particular  geographic  area, in wine varietals or types,
particularly Chardonnay, could have a material adverse effect on our business.

Competition

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 and Australia.  Our wines also compete with  popular-priced  generic wines
and with other alcoholic and, to a lesser degree,  nonalcoholic  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.  In
view  of  these  factors,  there  can be no  assurance  that  we will be able to
continue to compete effectively with larger or better capitalized companies.

Risks of Seasonality

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.

                                       13

<PAGE>


                          The Chalone Wine Group, Ltd.


Item 3.    Disclosures About Market Risk (Continued)

Agricultural Risks

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
materially  and  adversely  affect the  quality  and supply of our wines and our
operating results.  Future government  restrictions regarding the use of certain
materials  used in grape  growing  also may have a  material  adverse  effect on
vineyard costs and 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 adversely affect our business.

Risks of Fluctuations in Quantity and Quality of Grape Supply

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.

Risks of Dependence on Distribution Network

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  seventeen  largest  distributors   combined,
represented  approximately 5% and 36%, respectively,  of our net revenues during
fiscal 1998.  Sales to our ten largest  distributors are expected to continue to
represent a substantial  portion of our net revenues in the future. 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 have a material adverse effect on our business.

Risk of Government Regulation

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.  Expansion of our existing  facilities
and  development  of new  vineyards  and  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 and international  tariffs,
could  materially  adversely  affect  our  financial  results.  Future  legal or
regulatory challenges to the industry,  either individually or in the aggregate,
could have a material adverse effect our business.

                                       14

<PAGE>


                          The Chalone Wine Group, Ltd.


Item 3.    Disclosures About Market Risk (Continued)

Need for Additional Capital

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.

Risks from Consumer Perception of Health Issues Related to Alcohol Consumption

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 have a material adverse effect on
the industry and our business.

Operating Hazards

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 be substantial and have a material adverse effect
on our business and financial condition.

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.

Risks of Loss of Key Personnel

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 have a material adverse effect on our business,  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.

Risks From Foreign Operations

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.

Risk of Dilution or Infringement of Company Trademarks

Our wines are branded consumer  products,  and we distinguish our wines from our
competitor by strong and vigilant enforcement of our trademarks. There can be no
assurance that  competitors will refrain from using  trademarks,  trade-names 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.

                                       15

<PAGE>


                          The Chalone Wine Group, Ltd.


Item 3.    Disclosures About Market Risk (Continued)

Possible Volatility of Stock Price

The market price of our common stock  fluctuates.  All of the  foregoing  risks,
among others not known or mentioned in this  prospectus,  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 adversely affect the market price of our shares.

                                       16

<PAGE>


                          The Chalone Wine Group, Ltd.


                          PART II. - OTHER INFORMATION

Item 6.  Exhibits and Reports on Form 8-K

     (a) Exhibits.

         Exhibit Number


                  20.8     Form 8-K: Item 5, Exercise of Warrants

                  27       Financial Data Schedule

     (b) Reports.  One report to shareholders  was filed with the Securities and
Exchange Commission on Form 8-K.


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: November 16, 1998                     The Chalone Wine Group, Ltd.
------------------------                     ----------------------------
                                                    (Registrant)


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




Dated: November 16, 1998                     /s/ Francois P. Muse
------------------------                     -----------------------------------
                                             Francois P. Muse
                                             (Acting) Chief Financial Officer
                                             and Treasurer

                                       17