UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549




FORM 10-K





(Mark
One)




x
            ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934




For the
fiscal year ended December 31, 2009




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: 000-21522




WILLAMETTE
VALLEY VINEYARDS, INC.


(Exact
name of registrant as specified in its charter)





Oregon
              93-0981021(State or other jurisdiction of
              (I.R.S. Employerincorporation or organization)
              Identification No.)


8800
Enchanted Way, S.E.


Turner,
OR 97392


(Address
of principal executive offices)




Registrant’s
telephone number, including area code: (503) 588-9463





Securities
registered pursuant to Section 12(b) of the Act: None





Securities
registered pursuant to Section 12(g) of the Act:


Common
Stock


(Title
of class)




Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.  Yes oNo x




Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Securities Exchange Act. Yes oNo x




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 oNo x




Indicate by check mark whether the
registrant has submitted electronically and posted on its corporate Web site, if
any, every Interactive Data File required to be submitted and posted pursuant to
Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter
period that the registrant was required to submit and post such files).
Yes o
 No o





Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the
best of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. Yes oNo x




Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.




Large accelerated filer o
            Accelerated filer o
            Non-accelerated filer o
            Smaller reporting company x




Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Act).
 Yes oNo x




The
aggregate market value of common stock held by non-affiliates of the registrant
as of June 30, 2009 was approximately $17,111,427.




The
number of outstanding shares of the registrant’s Common Stock as of March 15,
2010 was 4,888,979.










DOCUMENTS INCORPORATED BY
REFERENCE




None







Willamette
Valley Vineyards, Inc.




FORM 10-K




TABLE
OF CONTENTS




PagePART
      IItem
      1
                  
                  Business
                  
                  3Item
      1A
                  
                  Risk
      Factors
                  
                  11Item
      1B
                  
                  Unresolved
      Staff Comments
                  
                  14Item
      2
                  
                  Properties
                  
                  14Item
      3
                  
                  Legal
      Proceedings
                  
                  14Item
      4
                  
                  Submission
      of Matters to a Vote of Security Holders
                  
                  15PART
      IIItem
      5
                  
                  Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities
                  
                  15Item
      6
                  
                  Selected
      Financial Data
                  
                  15Item
      7
                  
                  Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                  
                  15Item
      7A
                  
                  Quantitative
      and Qualitative Disclosures About Market Risk
                  
                  22Item
      8
                  
                  Financial
      Statements and Supplementary Data
                  
                  23Item
      9
                  
                  Changes
      in and Disagreements With Accountants on Accounting and Financial
      Disclosure
                  
                  41Item
      9A
                  
                  Controls
      and Procedures
                  
                  42Item
      9B
                  
                  Other
      Information
                  
                  44PART
      IIIItem
      10
                  
                  Directors,
      Executive Officers and Corporate Governance
                  
                  44Item
      11
                  
                  Executive
      Compensation
                  
                  46Item
      12
                  
                  Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
                  
                  48Item
      13
                  
                  Certain
      Relationships and Related Transactions, and Director
      Independence
                  
                  50Item
      14
                  
                  Principal
      Accounting Fees and Services
                  
                  51PART
      IVItem
      15
                  
                  Exhibits,
      Financial Statement Schedules
                  
                  51


2




As used
in this Annual Report on Form 10-K, “we,” “us”, “our” and “the Company”
refer to Willamette Valley Vineyards, Inc.





PART
I





Item
      1.
            Business.





FORWARD
LOOKING STATEMENTS





This
Annual Report on Form 10-K, including any information incorporated by reference,
contains forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, referred to as the Securities Act, and
Section 21E of the Securities Exchange Act of 1934, as amended, referred to as
the Exchange Act. In some cases, you can identify forward-looking statements by
terms such as "may," "will," "should," "expect," "plan," "intend," "forecast,"
"anticipate," "believe," "estimate," "predict," "potential," "continue" or the
negative of these terms or other comparable terminology, which when used are
meant to signify the statement as forward-looking. These forward-looking
statements include, but are not limited to, statements about our plans,
objectives, expectations and intentions and other statements that are not
historical facts. These forward-looking statements are not guarantees of future
performance and involve known and unknown risks, uncertainties and situations
that are difficult to predict and that may cause our own, or our industry's
actual results, to be materially different from the future results that are
expressed or implied by these statements. Accordingly, actual results may differ
materially from those anticipated or expressed in such statements as a result of
a variety of factors, including those set forth under Item 1A, “Risk
Factors.”





BUSINESS





Introduction





Willamette
Valley Vineyards, Inc. (the "Company" or WVV) was formed in May 1988 to produce
and sell premium, super premium and ultra premium varietal wines (i.e., wine
which sells at retail prices of $7 to $14, $14 to $20 and over $20 per 750 ml
bottle, respectively). Willamette Valley Vineyards was originally established as
a sole proprietorship by Oregon winegrower Jim Bernau in 1983. The Company is
headquartered in Turner, Oregon, where the Company's Turner Vineyard and Winery
are located on 75 acres of Company-owned land adjacent to Interstate 5,
approximately two miles south of Salem, Oregon. The Company's wines are made
from grapes grown on the 791 acres of vineyard owned, leased or contracted by
the Company, and from grapes purchased from other nearby vineyards. The grapes
are harvested, fermented and made into wine at the Company's Turner winery (the
"Winery") and the wines are sold principally under the Company's Willamette
Valley Vineyards label. Willamette Valley Vineyards is the owner of Tualatin
Estate Vineyards and Winery located on approximately 125 acres near Forest
Grove, Oregon, and leases an additional 114 acres of vineyard land at the Forest
Grove location.





Products





Under its
Willamette Valley Vineyards label, the Company produces and sells the following
types of wine in 750 ml bottles: Pinot Noir, the brand's flagship and its
largest selling varietal in 2009, $19 to $50 per bottle; Chardonnay, $16 to $20
per bottle; Pinot Gris, $15 to $18 per bottle; Riesling and Oregon Blossom
(blush blend), $10 to $12 per bottle (all bottle prices included herein are the
suggested retail prices). The Company’s mission for this brand is to become the
premier producer of Pinot Noir from the Pacific Northwest.





The
Company currently produces and sells small quantities of Oregon's Nog (a
seasonal holiday product), $10 per bottle, and Edelweiss, $10 per bottle, under
a "Made in Oregon Cellars" label.





Under its
Tualatin Estate Vineyards label, the Company currently produces and sells the
following types of wine in 750 ml bottles: Pinot Noir, the brand’s flagship, $35
per bottle;Semi-Sparkling Muscat, $15 per bottle.





Under its
Griffin Creek label, the Company produces and sells the following types of wine
in 750 ml bottles: Syrah, the brand’s flagship, $38 per bottle; Merlot, $30 per
bottle; Cabernet Sauvignon, $35 per bottle; Cabernet Franc, $38 per bottle; The
Griffin (a Bordeaux blend), $60 per bottle; and Viognier, $25 per bottle. This
brand’s mission is to be the highest quality producer of Bordeaux and Rhone
varietals in Oregon.


3


The
Company holds U.S. federal and/or Oregon state trademark registrations for the
trademarks material to the business, including but not limited to, the
WILLAMETTE VALLEY VINEYARDS, GRIFFIN CREEK and SIP.SAVE marks.





Market
Overview





The
United States wine industry has seen a rapid increase in the number of wineries
that are being established throughout the country. Since 1999, there has been an
increase of 83 percent in the number of wineries located in the United States.
In addition, wineries are classified as one of the fastest growing segments in
agriculture with an annual growth of 10-15 percent.





In spite
of the sluggish economy, the United States is also experiencing growth in the
revenue generated from the sale of wine. United States wine consumption
registered its 16th consecutive annual gain in 2009 with a mere 0.5 percent
increase (30 percent increase in the past decade), as Americans drank more wine
than Italians for the first time ever and now trail only the French in total
wine consumption. American consumption is expected to further increase in the
foreseeable future, and at current rates, the United States will likely surpass
France as the world's largest wine-consuming market within five years.
Domestically-produced red wines are projected to be the industry's
fastest-growing segment, led by Pinot Noir and Cabernet Sauvignon, according to
The U.S. Wine Market: Impact Databank Review and Forecast, 2009 Edition.
Domestic white varietals are also expected to record volume gains, led by Pinot
Gris and Riesling.





More than
ever, Americans are seeking value. With a few minor exceptions, the biggest
increases in volume among each of the fastest-growing varietals are coming from
wines priced between $3 and $7 per bottle. Pinot Noir is one of the
highest-priced varietals on the market, yet its sales have nearly tripled in the
U.S. since the movie Sideways was released in 2004. Yet inexpensive Pinot Noir
brands, which are those brands priced below the industry average, are now
outpacing the higher-end of the spectrum, by roughly twice the rate for both
domestic and imported wines, according to Impact Databank, a provider of data on
the wine industry owned by M. Shanken Communications, the parent company of Wine
Spectator.





A larger
portion of the U.S. population is drinking wine too – 57 percent in 2007,
compared to 43 percent in 2000. Unlike previous generations, which typically did
not drink wine regularly until they reached their 40s, younger consumers are
discovering wine in their 20s and 30s. The proportion of consumers who drink
wine at least once a week has also risen, reaching 55 percent. Much of the
increase can be attributed to the Millennial generation, those people between
ages 23 and 30, who make up 26 percent of the population and account for about
70 million people, second only to the baby boomer generation with 77 million
people.





The
Oregon Wine Industry





Oregon is
a relatively new wine-producing region in comparison to California and France.
In 1966, there were only two commercial wineries licensed in Oregon. In 2009
there were 387 commercial wineries licensed in Oregon and 19,400 acres of wine
grape vineyards, 15,600 acres of which are currently producing. Total production
of Oregon wines in 2009 is estimated to be approximately 2.3 million cases
versus 2.1 million cases in 2008. The increase in cases produced is mainly due
to the higher harvest yields in 2009 versus 2008. Oregon's entire 2009
production has an estimated retail value of approximately $466 million, assuming
a retail price of $200 per case, and a FOB value of approximately one-half of
the retail value, or $233 million.





Because
of climate, soil and other growing conditions, the Willamette Valley in western
Oregon is ideally suited to growing superior quality Pinot Noir, Chardonnay,
Pinot Gris and Riesling wine grapes. Some of Oregon's Pinot Noir, Pinot Gris and
Chardonnay wines have developed outstanding reputations, winning numerous
national and international awards.





Oregon
does have certain disadvantages as a new wine-producing region. Oregon's wines
are relatively little known to consumers worldwide and the total wine production
of Oregon wineries is small relative to California and French competitors.
Greater worldwide label recognition and larger production levels give Oregon's
competitors certain financial, marketing, distribution and unit cost
advantages.


4


Furthermore,
Oregon's Willamette Valley has an unpredictable rainfall pattern in early
autumn. If significantly above-average rains occur just prior to the autumn
grape harvest, the quality of harvested grapes is often materially diminished,
thereby affecting that year's wine quality.





Finally,
phylloxera, an aphid-like insect that feeds on the roots of grapevines, has been
found in several commercial vineyards in Oregon. Contrary to the California
experience, most Oregon phylloxera infestations have expanded very slowly and
done only minimal damage. Nevertheless, phylloxera does constitute a significant
risk to Oregon vineyards. Prior to the discovery of phylloxera in Oregon, all
vine plantings in the Company's Vineyard were with non-resistant rootstock. As
of December 31, 2009, the Company has not detected any phylloxera at its Turner
site. Beginning with the Company's plantings in May 1992, only
phylloxera-resistant rootstock is used. In 1997, the Company purchased Tualatin
Vineyards, which has phylloxera at its site. All plantings are on and all future
planting will be on phylloxera resistant rootstock. The Company takes all
necessary precautions to prevent the spread of phylloxera to its Turner
site.





As a
result of these factors, subject to the risks and uncertainties identified
above, the Company believes that long-term prospects for growth in the Oregon
wine industry are excellent. The Company believes that over the next several
years the Oregon wine industry will grow at a faster rate than the overall
domestic wine industry, and that much of this growth will favor producers of
premium, super premium and ultra premium wines such as the
Company's.





2009
Oregon Harvest





The
National Agricultural Statistics report states that the total yield per
harvested acre in Oregon was up 11% in 2009. The planting of new grape acreage
slowed in 2009 with 1,098 acres of new acres planted compared to 1,570 in 2008.
There was a net gain of only 1 winery in Oregon with an 11% decrease in total
cooperage.  Case sales of Oregon wine decreased 5% in 2009 and wine sales
in dollars decreased 16% from a year ago. The average price per ton for all
grapes harvested in Oregon decreased from $2,050 per ton in 2008 to $1,910 per
ton in 2009. Total wine production in Oregon increased 16% and topped 40,000
tons for the first time in 2009.





Company
Strategy





The
Company, one of the largest wineries in Oregon by volume, believes its success
is dependent upon its ability to: (1) grow and purchase high quality vinifera
wine grapes; (2) vinify the grapes into premium, super premium and ultra premium
wine; (3) achieve significant brand recognition for its wines, first in Oregon
and then nationally and internationally; and (4) effectively distribute and sell
its products nationally. The Company's goal is to continue as one of Oregon's
largest wineries, and establish a reputation for producing some of Oregon's
finest, most sought-after wines.





Based
upon several highly regarded surveys of the U.S. wine industry, the Company
believes that successful wineries exhibit the following four key attributes: (i)
focus on production of high-quality premium, super premium and ultra premium
varietal wines; (ii) achieve brand positioning that supports high bottle prices
for its high quality wines; (iii) build brand recognition by emphasizing
restaurant sales; and (iv) develop strong marketing advantages (such as a highly
visible winery location, successful self-distribution, and life-long customer
service programs).





To
successfully execute this strategy, the Company has assembled a team of
accomplished winemaking professionals and has constructed and equipped a 22,934
square foot state-of-the-art Winery and a 12,500 square foot outdoor production
area for the harvesting, pressing and fermentation of wine grapes.





The
Company's marketing and selling strategy is to sell its premium, super premium
and ultra premium cork-finished-wine through a combination of (i) direct sales
at the Winery, (ii) self-distribution to Oregon regional restaurants and retail
outlets, and (iii) sales through independent distributors and wine brokers who
market the Company's wine in specific targeted areas where self-distribution is
not economically feasible.





The
Company believes the location of its Winery next to Interstate 5, Oregon's major
north-south freeway, significantly increases direct sales to consumers and
facilitates self-distribution of the Company's products. The Company believes
this location provides high visibility for the Winery to passing motorists, thus
enhancing recognition of the Company's products in retail outlets and
restaurants. The Company's Hospitality Center has further increased the
Company's direct sales and enhanced public recognition of its
wines.


5


Vineyard





The
Company now owns, leases, or contracts for 791 acres of vineyard land. The
vineyards the company owns and leases are all certified sustainable by LIVE (Low
Input Viticulture and Enology) and Salmon Safe. At full production, we
anticipate these vineyards will enable the Company to grow approximately 85% of
the grapes needed to meet the Winery's ultimate production capacity of 298,000
gallons (129,000 cases).





The Property. The Company's
estate vineyard at the Turner site currently has 48 acres planted and producing,
with 24 acres of “certified organic” (by Oregon Tilth) Pinot Noir and 24 acres
of Pinot Gris and Chardonnay. The oldest grapevines were planted in 1985, with
additional grapevines planted in 1992, 1993, and 1999. Vineyards generally
remain productive for 30 to 100 years, depending on weather conditions, disease
and other factors. We estimate these vines will continue to produce for another
35 years under conditions known today.





The
Estate Vineyard uses an elaborate trellis design known as the Geneva Double
Curtain. The Company has incurred the additional expense of constructing this
trellis because it doubles the number of canes upon which grape clusters grow
and spreads these canes for additional solar exposure and air circulation.
Research and practical applications of this trellis design indicate that it
should improve grape quality through smaller clusters and berries over
traditional designs.





Beginning
in 1997, the Company embarked on a major effort to improve the quality of its
flagship varietal by planting new Pinot Noir clones that originated directly
from the cool climate growing region of Burgundy rather than the previous
source, Napa, California, where winemakers believe the variety adapted to the
warmer climate over the many years it was grown there.





These new
French clones are called "Dijon clones" after the University of Dijon in
Burgundy, which assisted in their selection and shipment to a U.S. government
authorized quarantine site, and then seven years later to Oregon winegrowers.
The most desirable of these new Pinot Noir clones are numbered 113, 114, 115,
667 and 777. In addition to certain flavor advantages, these clones ripen up to
two weeks earlier, allowing growers to pick before heavy autumn rains. Heavy
rains can dilute concentrated fruit flavors and promote bunch rot and spoilage.
These new Pinot Noir clones were planted at the Tualatin Estate on disease
resistant rootstock and the 667 and 777 clones have been grafted onto 7 acres of
self rooted, non-disease resistant vines at the Company's Estate Vineyard near
Turner.





New
clones of Chardonnay preceded Pinot Noir into Oregon and were planted at the
Company's Estate Vineyard on disease resistant rootstock.





In 2009
an additional 8 acres of Pinot Noir was planted at the Estate on property
acquired though lot line adjustment and purchase.





The
purchase of Tualatin Vineyards, Inc. in April 1997 (including the subsequent
sale-leasebacks of portions of the property in December 1999 and 2004) added 83
acres of additional producing vineyards and approximately 60 acres of bare land
for future plantings. In 1997, the Company planted 19 acres at the Tualatin site
and planted another 41 acres in 1998, the majority being Pinot Noir. In 2009 and
additional 5 acres was planted at Tualatin Vineyards on property acquired though
lot line adjustment and purchase.





In 1999,
the Company purchased 33 acres of vineyard land adjoining Tualatin Estate for
future plantings and used lot line adjustments to create three separate land
parcels at Tualatin Estate. In 2005 and 2006, the Company planted 23 acres and
10 acres respectively, of mainly Pinot Gris and Pinot Noir.





Grape Supply. In 2009, the
Company's 48 acres of producing estate vineyard yielded approximately 195 tons
of grapes for the Winery's twenty first harvest. Tualatin Vineyards produced 708
tons of grapes in 2009. Elton Vineyards produced 128 tons of grapes in 2009. In
2009, the Company purchased an additional 1,103 tons of grapes from other
growers. The Winery's 2009 total wine production was 314,067 gallons (132,072
cases) from its 2008 and 2009 harvests. The Company expects to produce
approximately 300,000 gallons in 2010 (125,000 cases) from its 2009 harvest. The
Vineyard cannot and will not provide the sole supply of grapes for the Winery's
near-term production requirements.


6


In 2005,
the Company entered into a long-term grape purchase agreement with one of its
Willamette Valley wine grape growers whereby the grower agreed to plant 40 acres
of Pinot Gris and 50 acres of Riesling and the Winery agreed to purchase the
yield at fixed contract prices through 2015, with the first crop received in
2007. In 2006, the Company entered into a long-term grape purchase agreement
with the same Willamette Valley wine grape grower whereby the grower agreed to
plant 100 acres of Pinot Noir, 50 acres of Pinot Gris and 20 acres of Riesling
and the Winery agreed to purchase the yield at fixed contract prices through
2016, with the first crop expected in 2008. The wine grape grower must meet
strict quality standards for the wine grapes to be accepted by the Winery at
time of harvest and delivery. The Company is obligated to purchase 100% of the
crop produced within the strict quality standards and crop loads, equating to
maximum payments of approximately $1,500,000 per year. We cannot calculate the
minimum payment as such a calculation is dependent in large part on an unknown –
the amount of grapes produced in any given year. If there are no grapes produced
in any given year, or if the grapes are rejected for failure to meet contractual
quality standards, the Company has no payment obligation for that year. Failure
of the grower to comply with the provisions of the contracts would constitute a
default, allowing the Company to recover damages, including expected lost
profits. The Company has no right to use of the underlying properties. These new
long-term grape purchase agreements will increase the Company’s supply of high
quality wine grapes and provide a long-term grape supply, at fixed
prices.





In 2007
the Company entered into a lease agreement for approximately 60 acres of
vineyard land at Elton Vineyards. The acreage is mostly planted in Pinot Noir.
This lease is for a 10 year term with four five-year renewals at the Company's
option and a first right of refusal in the event of the vineyard's sale. For
2009, the annual costs of this lease were $109,000. For subsequent years there
is an escalation provision tied to the CPI not to exceed 2% per
annum.





In 2008
the Company purchased 80 acres and also entered into a 34 year lease agreement
with a property owner in the Eola Hills for an additional 124 acres. Both the
purchased and leased properties are adjacent to the existing Elton Vineyards
site. The 80 and 124 acres are currently planted in Christmas trees but will be
developed into vineyards over the next few years. Terms of the lease agreement
contain rent escalation that rises as the vineyard is developed.





The
Company fulfills its remaining grape needs by purchasing grapes from other
nearby vineyards at competitive prices or from bulk wine purchases from
neighboring wineries. The Company believes high quality grapes and bulk wine
will be available for purchase in sufficient quantity to meet the Company's
requirements. The grapes grown on the Company's vineyards establish a foundation
of quality, through the Company’s farming practices, upon which the quality of
the Company’s wines is built. In addition, wine produced from grapes grown in
the Company's own vineyards may be labeled as "Estate Bottled"wines. These
wines traditionally sell at a premium over non-estate bottled
wines.





Viticultural Conditions. Oregon's
Willamette Valley is recognized as a premier location for growing certain
varieties of high quality wine grapes, particularly Pinot Noir, Chardonnay,
Riesling and Pinot Gris. The Company believes that the Vineyard's growing
conditions, including its soil, elevation, slope, rainfall, evening marine
breezes and solar orientation are among the most ideal conditions in the United
States for growing certain varieties of high-quality wine grapes. The Vineyard's
grape growing conditions compare favorably to those found in some of the famous
Viticultural regions of France. Western Oregon's latitude (42o-46o North)
and relationship to the eastern edge of a major ocean is very similar to certain
centuries-old wine grape growing regions of France. These conditions are
unduplicated anywhere else in the world except in the great wine grape regions
of Northern Europe.





The
Vineyard's soil type is Jory/Nekia, a dark, reddish-brown, silky clay loam over
basalt bedrock, noted for being well drained, acidic, of adequate depth,
retentive of appropriate levels of moisture and particularly suited to growing
high quality wine grapes.





The
Vineyard's elevation ranges from 533 feet to 700 feet above sea level with
slopes from 2 percent to 30 percent (predominately 12-20 percent). The
Vineyard's slope is oriented to the south, southwest and west. Average annual
precipitation at the Vineyard is 41.3 inches; average annual air temperature is
52 to 54 degrees Fahrenheit, and the length of each year's frost-free season
averages from 190 to 210 days. These conditions compare favorably with
conditions found throughout the Willamette Valley viticultural region and other
domestic and foreign viticultural regions, which produce high quality wine
grapes.





In the
Willamette Valley, permanent vineyard irrigation generally is not required. The
average annual rainfall provides sufficient moisture to avoid the need to
irrigate the Vineyard. However, if the need should arise, the Company's Estate
property contains one water well which can sustain sufficient volume to meet the
needs of the Winery and to provide auxiliary water to the Vineyard for new
plantings and unusual drought conditions. At Tualatin Estate vineyard the
Company has water rights to a year round spring that feeds an irrigation
pond.


7


Susceptibility of Vineyards to
Disease.The Tualatin Vineyard and the leased vineyards are known to be
infested with phylloxera, an aphid-like insect, which can destroy vines. The
Company has not detected any phylloxera at its Turner Vineyard.





It is not
possible to estimate any range of loss that may be incurred due to the
phylloxera infestation of our vineyards. The phylloxera at Tualatin Estate
Vineyard is believed to have been introduced on the roots of the vines first
planted on the property in the southern most section Gewurztraminer in 1971 that
the Company partially removed in 2004. The remaining vines, and all others
infested, remain productive at low crop levels





Winery





Wine Production Facility. The
Company's Winery and production facilities are capable of efficiently producing
up to 125,000 cases (297,000 gallons) of wine per year, depending on the type of
wine produced. In 2009, the Winery produced 314,067 gallons (132,072 cases) from
its 2008 and 2009 harvests. The Winery is 12,784 square feet in size and
contains areas for processing, fermenting, aging and bottling wine, as well as
an underground wine cellar, a tasting room, a retail sales room and
administrative offices. There is a 12,500 square foot outside production area
for harvesting, pressing and fermenting wine grapes, and a 4,000 square foot
insulated storage facility with a capacity of 30,000 cases of wine. The Company
also has a 20,000 square foot storage building to store its inventory of bottled
product. The production area is equipped with a settling tank and sprinkler
system for disposing of wastewater from the production process in compliance
with environmental regulations.





With the
purchase of Tualatin Vineyards, Inc., the Company added 20,000 square feet of
additional production capacity. Although the Tualatin facility was constructed
over twenty years ago, it adds 25,000 cases (59,000 gallons) of wine production
capacity to the Company, which the Company felt at the time of purchase was
needed. Production and sales volumes have not expanded enough to necessitate the
utilization of the Tualatin facilities. The Company decided to move current
production to its Turner site to meet short-term production requirements. The
capacity at Tualatin is available to the Company to meet any anticipated future
production needs. In 2008, the Company replaced the roof and production floor,
insulation and walls, in anticipation of using it for wine storage and future
production. The space is presently used to store bottled inventory.





Hospitality Facility. The
Company has a large tasting and hospitality facility of 19,470 square feet (the
"Hospitality Center"). The first floor of the Hospitality Center includes retail
sales space and a "great room" designed to accommodate approximately 400 persons
for gatherings, meetings, weddings and large wine tastings. An observation tower
and decking around the Hospitality Center enable visitors to enjoy the view of
the Willamette Valleyand the
Company's Vineyard. The Hospitality Center is joined with the present Winery by
an underground cellar tunnel. The facility includes a basement cellar of 10,150
square feet (including the 2,460 square foot underground cellar tunnel) to
expand storage of the Company's wine in a proper environment. The cellar
provides the Winery with ample space for storing up to 1,600 barrels of wine for
aging.





Just
outside the Hospitality Center, the Company has a landscaped park setting
consisting of one acre of terraced lawn for outdoor events and five wooded acres
for picnics and social gatherings. The area between the Winery and the
Hospitality Center forms a 20,000 square foot quadrangle. As designed, a
removable fabric top can cover the quadrangle, making it an all-weather outdoor
facility to promote sale of the Company’s wines through outdoor festivals and
social events.





The
Company believes the Hospitality Center and the park and quadrangle make the
Winery an attractive recreational and social destination for tourists and local
residents, thereby enhancing the Company's ability to sell its
wines.





Mortgages on Properties. The
Company's winery facilities in Turner are subject to three mortgages with an
aggregate principal balance of $3,718,868 at December 31, 2009. The mortgage is
payable in monthly aggregate installments, including principal and interest, of
approximately $604,000 annually through 2011, $263,000 annually from 2012
through 2024 and $137,000 annually from 2025 through 2028. These payments
include new debt incurred in 2009. The Board of Directors accepted management’s
proposal to incur additional debt on the property of $1.5 million in 2009 for
the purpose of paying down short term revolving credit. The company felt this
was a reasonably conservative approach to expansion in light of the fact that
the original mortgage of $1.3 million will be paid off in two
years.


8


Wine Production. The Company
operates on the principle that winemaking is a natural but highly technical
process requiring the attention and dedication of the winemaking staff. The
Company's Winery is equipped with current technical innovations and uses modern
laboratory equipment and computers to monitor the progress of each wine through
all stages of the winemaking process.





The
Company's recent annual grape harvest and wine production is as
follows:





Tons of
                        
                        
                        Gallons ofHarvest
                        
                        Grapes
                        
                        
                        Bulk
                        
                        Production
                        
                        CasesYear
                        
                        Harvested
                        
                        
                        Purchases
                        
                        Year
                        
                        Produced2005
                        
                        
                        1,132
                        
                        
                        
                        
                        2005
                        
                        
                        72,2972006
                        
                        
                        1,488
                        
                        
                        
                        
                        2006
                        
                        
                        81,0812007
                        
                        
                        1,746
                        
                        
                        
                        
                        2007
                        
                        
                        115,4662008
                        
                        
                        1,425
                        
                        
                        
                        57,736
                        
                        2008
                        
                        
                        121,0272009
                        
                        
                        2,133
                        
                        
                        
                        74,954
                        
                        2009
                        
                        
                        132,072





Cases
produced per ton harvested often varies between years mainly due to the timing
of when the cases are produced.





Sales
and Distribution





Marketing Strategy. The
Company markets and sells its wines through a combination of direct sales at the
Winery, sales directly and indirectly through its shareholders,
self-distribution to local restaurants and retail outlets in Oregon, directly
through mailing lists, and through distributors and wine brokers selling in
specific targeted areas outside of the state of Oregon. As the Company has
increased production volumes and achieved greater brand recognition, sales to
other domestic markets have increased, both in terms of absolute dollars and as
a percentage of total Company sales.





We
believe that online, consumer wine reviews are and will continue to play a
significant role in “word of mouth” recommendations and consumer choices, and
thushave been focusing our efforts in recent years on generating online interest
in Willamette Valley Vineyards and its wines.





Our
online efforts include the world of social marketing, and Willamette Valley
Vineyards is now active on Facebook and Twitter. We also upload videos to
YouTube and have re-launched the company blog. The number of people who follow
us on each of these applications has grown consistently since these programs
have been active.





Direct Sales. The Company's
Winery is located adjacent to the state's major north-south freeway (Interstate
5), approximately 2 miles south of the state's third largest metropolitan area
(Salem), and 50 miles in either direction from the state's first and second
largest metropolitan areas (Portland and Eugene, respectively). The Company
believes the Winery's unique location along Interstate 5 has resulted in a
greater amount of wines sold at the Winery as compared to the Oregon industry
standard. Direct sales from the Winery are an important distribution channel and
an effective means of product promotion. To increase brand awareness, the
Company offers educational Winery tours and product presentations by trained
personnel.





The
Company holds four major festivals and events at the Winery each year. In
addition, open houses are held at the Winery during major holiday weekends such
as Memorial Day, Independence Day, Labor Day and Thanksgiving, where barrel
tastings and cellar tours are given. Numerous private parties, wedding
receptions and political and other events are also held at the
Winery.





Direct
sales are profitable because the Company is able to sell its wine directly to
consumers at retail prices rather than to distributors or retailers at wholesale
prices. Sales made directly to consumers at retail prices result in an increased
profit margin equal to the difference between retail prices and distributor or
wholesale prices, as the case may be. For 2009, direct sales contributed
approximately 15% of the Company's revenue.


9


In
September 2009, Willamette Valley Vineyards launched our partnership with Travel
Salem at their new downtown Travel Café facility. This partnership now offers
visitors and local consumers the opportunity to taste the “Fruit of the Vine” at
a newly created tasting room and retail outlet. The goal of this partnership is
to raise awareness and interest in the region’s rich wine country, and
ultimately lead to an increased regional economic impact from
tourism.





Self-Distribution. In 1990,
the Company established a self-distribution wholesale system, now called Bacchus
Fine Wines, to sell its wines to restaurant and retail accounts located in
Oregon. Eighteen sales representatives, who take wine orders and make some
deliveries primarily on a commission-only basis, currently carry out the
self-distribution program. Company-provided trucks and delivery drivers support
most of these sales representatives. The Company believes this program of
self-representation and delivery has allowed its wines to gain a strong presence
in the Oregon market with over 800 restaurant and retail accounts established as
of December 31, 2009.





The
Company has expended significant resources to establish its self-distribution
system. The system initially focused on distribution in the Willamette Valley,
but has expanded to the Oregon coast, southern Oregon and central Oregon. For
2009, approximately 47% of the Company's net revenues were attributable to
self-distribution.





Distributors and Wine
Brokers. The Company uses both independent distributors and wine brokers
primarily to market the Company's wines in specific targeted areas where
self-distribution is not feasible. Only those distributors and wine brokers who
have demonstrated knowledge of and a proven ability to market premium, super
premium, and ultra premium wines are utilized. Outside of Oregon, the Company’s
products are distributed in 50 states and the District of Columbia and 8
non-domestic (export) customers. In 2009 and 2008, approximately 38% and 37% of
the Company’s net revenues were attributable to out of state
distribution.





Tourists. Oregon wineries are
a popular tourist destination with many bed & breakfasts, motels and fine
restaurants available. The Willamette Valley, Oregon’s leading wine region has
two-thirds of the state’s wineries and vineyards and is home to approximately
400 wineries. An additional advantage for the Willamette Valley wine tourist is
the proximity of the wineries to Portland (Oregon’s largest city and most
popular destination). From Portland, tourists can visit the Willamette Valley
winery of their choice in anywhere from 45 minutes to two hours.





The
Company believes its convenient location, adjacent to Interstate 5, enables the
Winery to attract a significant number of visitors. The Winery is located 45
minutes from Portland and less than one mile from The Enchanted Forest, which
operates from March 15 to September 30 each year and attracts approximately
130,000 paying visitors per year. Adjacent to the Enchanted Forest is the Forest
Glen Recreational Vehicle Park, which contains approximately 110 overnight
recreational vehicle sites. Many of the visitors to the Enchanted Forest and RV
Park visit the Winery.





Competition





The wine
industry is highly competitive. In a broad sense, wines may be considered to
compete with all alcoholic and nonalcoholic beverages. Within the wine industry,
the Company believes that its principal competitors include wineries in Oregon,
California and Washington, which, like the Company, produce premium, super
premium, and ultra premium wines. Wine production in the United States is
dominated by large California wineries that have significantly greater
financial, production, distribution and marketing resources than the Company.
Currently, no Oregon winery dominates the Oregon wine market. Several Oregon
wineries, however, are older and better established and have greater label
recognition than the Company.





The
Company believes that the principal competitive factors in the premium, super
premium, and ultra premium segment of the wine industry are product quality,
price, label recognition, and product supply. The Company believes it competes
favorably with respect to each of these factors. The Company has received
“Excellent” to “Recommended” reviews in tastings of its wines and believes its
prices are competitive with other Oregon wineries. Larger scale production is
necessary to satisfy retailers' and restaurants' demand and the Company believes
that additional production capacity is needed to meet estimated future demand.
Furthermore, the Company believes that its ultimate forecasted production level
of 297,000 gallons (125,000 cases) per year will give it significant competitive
advantages over most Oregon wineries in areas such as marketing, distribution
arrangements, grape purchasing, and access to financing. The current production
level of most Oregon wineries is generally much smaller than the projected
production level of the Company's Winery. With respect to label recognition, the
Company believes that its unique structure as a consumer-owned company will give
it a significant advantage in gaining market share in Oregon as well as
penetrating other wine markets.


10


Governmental
Regulation of the Wine Industry





The
production and sale of wine is subject to extensive regulation by the U.S.
Department of the Treasury, Alcohol and Tobacco Tax and Trade Bureau and the
Oregon Liquor Control Commission. The Company is licensed by and meets the
bonding requirements of each of these governmental agencies. Sale of the
Company's wine is subject to federal alcohol tax, payable at the time wine is
removed from the bonded area of the Winery for shipment to customers or for sale
in its tasting room. The current federal alcohol tax rate is $1.07 per gallon
for wines with alcohol content at or below 14% and $1.57 per gallon for wines
with alcohol content above 14%; however, wineries that produce not more than
250,000 gallons during the calendar year are allowed a graduated tax credit of
up to $0.90 per gallon on the first 100,000 gallons of wine (other than
sparkling wines) removed from the bonded area during that year. The Company also
pays the state of Oregon an excise tax of $0.67 per gallon for wines with
alcohol content at or below 14% and $0.77 per gallon for wines with alcohol
content above 14% on all wine sold in Oregon. In addition, all states in which
the Company's wines are sold impose varying excise taxes on the sale of
alcoholic beverages. As an agricultural processor, the Company is also regulated
by the Oregon Department of Agriculture and, as a producer of wastewater, by the
Oregon Department of Environmental Quality. The Company has secured all
necessary permits to operate its business.





Prompted
by growing government budget shortfalls and public reaction against alcohol
abuse, Congress and many state legislatures are considering various proposals to
impose additional excise taxes on the production and sale of alcoholic
beverages, including table wines. Some of the excise tax rates being considered
are substantial. The ultimate effects of such legislation, if passed, cannot be
assessed accurately since the proposals are still in the discussion stage. Any
increase in the taxes imposed on table wines can be expected to have a
potentially adverse impact on overall sales of such products. However, the
impact may not be proportionate to that experienced by producers of other
alcoholic beverages and may not be the same in every state.





Employees





As of
December 31, 2009 the Company had 98 full-time employees and 37 part-time
employees. In addition, the Company hires additional employees for seasonal work
as required. The Company’s employees are not represented by any collective
bargaining unit. The Company believes it maintains positive relations with its
employees.





Additional
Information





The
Company files quarterly and annual reports with the Securities and Exchange
Commission. The public may read and copy any material that the Company files
with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington,
D.C. 20549. The public may also obtain information on the operation of the
Public Reference Room by calling the SEC at 1-800-SEC-0330. As the Company is an
electronic filer, filings may be obtained via the SEC website at (www.sec.gov.).
Also visit the Company’s website (www.wvv.com).





Item 1A.
            Risk
      Factors.





The
following disclosures should be read in conjunction with Management's Discussion
and Analysis of Financial Condition and Results of Operations. 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.





Agricultural
risks could adversely affect our business





Winemaking
and grape growing are subject to a variety of agricultural risks. Various
diseases, pests, fungi, viruses, drought, frost and certain other weather
conditions can affect the quantity of grapes available to the Company,
decreasing the supply of the Company’s products and negatively impacting
profitability. In particular, certain of the Company’s vines are not resistant
to phylloxera; accordingly, those vines are particularly at risk to the effects
from an infestation of phylloxera. Phylloxera is a pest that attacks the
rootstocks of wine grape plants. Vineyards in the United States, including some
in Oregon and some owned by us, have been infested in recent years with
Phylloxera. Since May of 1992, our vineyard properties have been planted with
rootstocks believed to be resistant to Phylloxera. However, rootstocks planted
by us prior to 1992 are not resistant. There can be no assurance that our
existing vineyards, or the rootstocks we are now using in our planting programs,
will not become susceptible to current or new strains of Phylloxera. Pierce’s
Disease is a vine bacterial disease. It kills grapevines and there is no known
cure. Small insects called Sharpshooters spread this disease. A new strain of
the Sharpshooter was discovered in Southern California and is believed to be
migrating north. We are actively supporting the efforts of the agricultural
industry to control this pest and are making every reasonable effort to prevent
an infestation in our own vineyards. We cannot, however, guarantee that we will
succeed in preventing contamination in our vineyards. Future government
restrictions regarding the use of certain materials used in grape growing may
increase vineyard costs and/or reduce production. Additionally, long-term
changes in weather patterns could adversely affect our business.




11




We
may not be able to grow or acquire enough quality fruit 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.





Loss
of key employees could harm our reputation and business





Our
success depends to some degree upon the continued service of a number of key
employees. The loss of the services of one or more of our key employees,
including the President, Winemaker, and CFO, could harm our business and our
reputation and negatively impact our profitability, particularly if one or more
of our key employees resigns to join a competitor or to form a competing
company.





Investments
in our Bacchus portfolio may harm our business





The
Company has invested heavily in products for resale through our Bacchus Fine
Wines department. The Company believes that having these products for sale will
make it easier to sell additional Company product to the same buyers. If this
strategy proves to be unsuccessful, the Company will have substantial inventory
of non-Company products to sell at prices that may not cover our costs of such
inventory and may result in our selling less Company product than anticipated.
Either or both effects could adversely affect our profitability and shareholder
value.





The
Company’s ability to operate requires utilization of the line of
credit





The
Company’s cash flow from operations historically has not been sufficient to
provide all funds necessary for the Company’s Operations. The Company has
entered into a line of credit agreement to provide such funds and entered into
term loan arrangements, the proceeds of which were used to acquire the Tualatin
operations, construct the Hospitality Center and pay down the revolving line of
credit. There is no assurance that the Company will be able to comply with all
conditions under its credit facilities in the future or that the amount
available under the line of credit facility will be adequate for the Company’s
future needs. Failure to comply with all conditions of the credit facilities or
to have sufficient funds for operations could adversely affect the Company’s
results of operations and shareholder value.





Costs
of being a publicly-held company may put us at a competitive
disadvantage





As a
public company, we incur substantial costs that are not incurred by our
competitors that are privately-held.  These compliance costs may result in
our wines being more expensive than those produced by our competitors and/or may
reduce our profitability compared to such competitors.





We
face significant competition which could adversely affect our
profitability





The wine
industry is intensely competitive and highly fragmented. Our wines compete in
several premium wine market segments with many other premium domestic and
foreign wines, with imported wines coming from the Burgundy and Bordeaux regions
of France, as well as 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. A result of this intense competition has been
and may continue to be upward pressure on our selling and promotional expenses.
In addition, 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’ costs. There can be no assurance that in the future we will be able
to successfully compete with our current competitors or that it will not face
greater competition from other wineries and beverage
manufacturers.


12


We
compete for shelf space in retail stores and for marketing focus by our
independent distributors, most of whom carry extensive product
portfolios




In
Oregon, we sell our products principally through self-distribution to retail
outlets including grocery stores, package liquor stores, club and discount
stores and restaurants. Outside of Oregon, 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. Sales to distributors are expected to continue to represent a
substantial portion of our net revenues in the future. A change in our
relationship with any of our significant distributors or a change in our ability
to compete with distributors in Oregon for shelf space could harm our business
and reduce our sales. The laws and regulations of several states prohibit
changes of distributors, except under certain limited circumstances, making it
difficult to terminate a distributor for poor performance without reasonable
cause, as defined by applicable statutes. Any 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.
There can be no assurance that the distributors and retailers we use will
continue to purchase our products or provide our products with adequate levels
of promotional support. Consolidation at the retail tier, among club and chain
grocery stores in particular, can be expected to heighten competitive pressure
to increase marketing and sales spending or constrain or reduce
prices.




Fluctuations in quantity and quality
of grape supply could adversely affect us




A
shortage in our supply of quality grapes may result from a variety of factors
that determine the quality and quantity of our grape supply, including weather
conditions, pruning methods, diseases and pests and the number of vines
producing grapes. Any shortage in our grape production could cause a reduction
in the amount of wine we are able to produce, which could reduce our sales and
adversely impact our results from operations. Factors that reduce the quantity
of our grapes may also reduce their quality, which in turn could reduce the
quality or amount of wine we produce. Deterioration in the quality of our wines
could harm our brand name and could reduce our sales and adversely impact our
results of operations.




Contamination
of our wines would harm our business




We are
subject to certain hazards and product liability risks, such as potential
contamination, through tampering or otherwise, of ingredients or products.
Contamination of any of our wines could cause us to destroy our wine held in
inventory and could cause the need for a product recall, which could
significantly damage our reputation for product quality. We maintain insurance
against certain of 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 and this insurance
may not be adequate to cover any resulting liability.




A
reduction in consumer demand for premium wines could harm our
business




There
have been periods in the past in which there were substantial declines in the
overall per capita consumption of beverage alcohol products in the United States
and other markets in which we participate. A limited or general decline in
consumption in one or more of our product categories could occur in the future
due to a variety of factors, including: a general decline in economic
conditions; increased concern about the health consequences of consuming
beverage alcohol products and about drinking and driving; a trend toward a
healthier diet including lighter, lower calorie beverages such as diet soft
drinks, juices and water products; the increased activity of anti-alcohol
consumer groups; and increased federal, state or foreign excise and other taxes
on beverage alcohol products. The competitive position of our products could
also be affected adversely by any failure to achieve consistent, reliable
quality in the product or service levels to customers.




Changes
in consumer spending could have a negative impact on our financial condition and
business results




Wine
sales depend upon a number of factors related to the level of consumer spending,
including the general state of the economy, federal and state income tax rates,
deductibility of business entertainment expenses under federal and state tax
laws, and consumer confidence in future economic conditions. Changes in consumer
spending in these and other regions can affect both the quantity and the price
of wines that customers are willing to purchase at restaurants or through retail
outlets. Reduced consumer confidence and spending may result in reduced demand
for our products, limitations on our ability to increase prices and increased
levels of selling and promotional expenses. This, in turn, may have a
considerable negative impact upon our sales and profit margins.


13


Increased
regulation could adversely affect us




The wine
industry is subject to extensive regulation by the Federal Alcohol Tobacco Tax
and Trade Bureau (“TTB”) and various foreign agencies, state liquor authorities,
such as the Oregon Liquor Control Commission (“OLCC”), and local authorities.
These regulations and laws dictate such matters as licensing requirements, trade
and pricing practices, permitted distribution channels, permitted and required
labeling, and 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 affect our financial condition or results
of operations. Recently, many states have considered proposals to increase, and
some of these states have increased, state alcohol excise taxes. New or revised
regulations or increased licensing fees, requirements or taxes could have a
material adverse effect on our financial condition or results of operations.
There can be no assurance that new or revised regulations or increased licensing
fees and requirements will not have a material adverse effect on our business
and our results of operations and our cash flows.




Our
common stock is thinly traded, and therefore not as liquid as other
investments




The
trading volume of our common stock on NASDAQ is consistently “thin,” in that
there is not a great deal of trading activity on a daily basis. Because the
average active trading volume is thin, there is less opportunity for
shareholders to sell their shares of our common stock on the open market,
resulting in the common stock being less liquid than common stock in other
publicly traded companies.





Item 1B.
            Unresolved
      Staff Comments.





None.





Item
      2.
            Properties.





Vineyards. The Company owns,
leases, or contracts for 791 acres of vineyard land of which 290 acres is owned
and 501 acres leased or under contract for grape purchases.





Wine Production Facility. The
Company's Winery and production facilities are capable of efficiently producing
up to 125,000 cases (297,000 gallons) of wine per year, depending on the type of
wine produced. In 2009, the Winery produced 314,067 gallons (132,072 cases) from
its 2008 harvest. The Winery is 12,784 square feet in size and contains areas
for processing, fermenting, aging and bottling wine, as well as an underground
wine cellar, a tasting room, a retail sales room and administrative offices.
There is a 12,500 square foot outside production area for harvesting, pressing
and fermenting wine grapes, and a 4,000 square foot insulated storage facility
with a capacity of 30,000 cases of wine. The Company also has a 20,000 square
foot storage building to store its inventory of bottled product. The production
area is equipped with a settling tank and sprinkler system for disposing of
wastewater from the production process in compliance with environmental
regulations. The Company has a large tasting and hospitality facility of 19,470
square feet (the "Hospitality Center"). The facility includes a basement cellar
of 10,150 square feet (including the 2,460 square foot underground cellar
tunnel) to expand storage of the Company's wine in a proper environment. The
cellar provides the Winery with ample space for storing up to 1,600 barrels of
wine for aging.





See
additional discussion of vineyard & wine production facility under Item 1.
Business





The
Company carries Property and Liability insurance coverage in amounts deemed
adequate by Management.





Item
      3.
            Legal
      Proceedings.





There are
no material legal proceedings pending to which the Company is a party or to
which any of its property is subject, and the Company's management does not know
of any such action being contemplated.


14


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





There
were no matters submitted to a vote of security holders during the Company's
Fourth Quarter ended December 31, 2009.





PART
II





Item
5. Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities.





Market
Information





The
Company's Common Stock is traded on the NASDAQ Capital Market under the symbol
"WVVI."





The
following table below sets forth for the quarters indicated the high and low
intraday sales prices for the Company's Common Stock as reported on the NASDAQ
Capital Market.





Quarters
Ended 2009





3/31/09
                  
                  
                  6/30/09
                  
                  
                  9/30/09
                  
                  
                  12/31/09High
                  
                  $
                  3.60
                  
                  
                  $
                  4.20
                  
                  
                  $
                  4.19
                  
                  
                  $
                  4.25Low
                  
                  $
                  2.03
                  
                  
                  $
                  2.28
                  
                  
                  $
                  2.66
                  
                  
                  $
                  3.07





Quarters
Ended 2008





3/31/08
                  
                  
                  6/30/08
                  
                  
                  9/30/08
                  
                  
                  12/31/08High
                  
                  $
                  7.50
                  
                  
                  $
                  7.50
                  
                  
                  $
                  5.54
                  
                  
                  $
                  5.35Low
                  
                  $
                  5.61
                  
                  
                  $
                  4.96
                  
                  
                  $
                  4.00
                  
                  
                  $
                  1.88





Holders





As of
March 15, 2010, we had approximately 2,786 stockholders of record.





Dividends





The
Company has not paid any dividends on the Common Stock, and the Company does not
anticipate paying any dividends in the foreseeable future. The Company intends
to use its earnings to grow the distribution of its brands, improve the quality
of its products and reduce debt.





Recent
Sales of Unregistered Securities





None.





Issuer
Purchases of Equity Securities





None.





Item
      6.
            Selected
      Financial Data.





Not
required to be provided.





Item
      7.
            Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations.





The
following Management’s Discussion and Analysis of Financial Condition and
Results of Operations should be read in conjunction with our financial
statements and related notes. Some statements and information contained in this
Management’s Discussion and Analysis of Financial Condition and Results of
Operations are not historical facts but are forward-looking statements. For a
discussion of these forward-looking statements, and of important factors that
could cause results to differ materially from the forward-looking statements
contained in this report, see Item 1 of Part I, “Business — Forward-Looking
Statements”


15





CRITICAL
ACCOUNTING POLICIES AND ESTIMATES





Management’s
Discussion and Analysis of Financial Condition and Results of Operations
discusses Willamette Valley Vineyards’ financial statements, which have been
prepared in accordance with generally accepted accounting principles. As such,
management is required to make certain estimates, judgments and assumptions that
are believed to be reasonable based upon the information available. On an
on-going basis, management evaluates its estimates and judgments, including
those related to product returns, bad debts, inventories, investments, income
taxes, financing operations, and contingencies and litigation. Management bases
its estimates and judgments on historical experience and on various other
factors that are believed to be reasonable under the circumstances, the results
of which form the basis for making judgments about the carrying values of assets
and liabilities that are not readily apparent from other sources. Actual results
may differ from these estimates under different assumptions or
conditions.





The
Company’s principal sources of revenue are derived from sales and distribution
of wine.  Revenue is recognized from wine sales at the time of
shipment and passage of title.  Our payment arrangements with
customers provide primarily 30 day terms and, to a limited extent, 45 day, 60
day or longer terms for some international customers.





The
Company values inventories at the lower of actual cost to produce the inventory
or market value.  We regularly review inventory quantities on hand and
adjust our production requirements for the next twelve months based on estimated
forecasts of product demand.  A significant decrease in demand could
result in an increase in the amount of excess inventory quantities on
hand.  In the future, if our inventory cost is determined to be
greater than the net realizable value of the inventory upon sale, we would be
required to recognize such excess costs in our cost of goods sold at the time of
such determination. Therefore, although we make every effort to ensure the
accuracy of our forecasts of future product demand, any significant
unanticipated changes in demand could have a significant impact on the ultimate
selling price and, therefore, the carrying value of our inventory and our
reported operating results.





We
capitalize internal vineyard development costs prior to the vineyard land
becoming fully productive.  These costs consist primarily of the costs
of the vines and expenditures related to labor and materials to prepare the land
and construct vine trellises.  Amortization of such costs as annual
crop costs is done on a straight-line basis for the estimated economic useful
life of the vineyard, which is estimated to be 30 years.  The Company
regularly evaluates the recoverability of capitalized
costs.  Amortization of vineyard development costs are included in
capitalized crop costs that, in turn are included in inventory costs and
ultimately become a component of cost of goods sold.





The
Company pays depletion allowances to the Company’s distributors based on their
sales to their customers.  The Company sets these allowances on a
monthly basis and the Company’s distributors bill them back on a monthly
basis.  All depletion expenses associated with a given month are
expensed in that month as a reduction of revenues. The Company also pays a
sample allowance to some of the Company’s distributors in the form of a 1.5%
discount applied to invoices for product sold to the Company’s
distributors.  The expenses for samples are expensed at the time of
sale in the selling, general and administrative expense.  The
Company’s distributors use the allowance to sample product to prospective
customers.





Amounts
paid by customers to the Company for shipping and handling expenses are included
in the net revenue.  Expenses incurred for outbound shipping and
handling charges are included in selling, general and administrative expense.
Inbound freight costs for Bacchus purchased wines our capitalized into inventory
at the time of purchase.  The Company’s gross margins may not be
comparable to other companies in the same industry as other companies may
include shipping and handling expenses as a cost of goods sold.





OVERVIEW





Results
of Operations





The
Company produced revenues of $16,563,712 in 2009 versus $16,048,238 in the prior
year, an increase of 3.2%. Income from operations decreased by 18.0% to
$1,117,399 in 2009, in comparison to $1,363,158 in 2008.  Net earnings
increased by 3.2% to $731,470 versus $708,594 in the prior year, and diluted
earnings per share were 15 cents per share which compares to 14 cents per share
in the prior year.





These
results are a combination of several key factors affecting reductions in gross
profit, increased expenses and reductions in income tax
expense.


16


Reductions
in Gross Profit account for approximately 42% of the change in income from
operations versus the prior year and increases in expenses account for about 58%
of the unfavorable change.





Gross
Profit reductions were equally affected by two key factors: (1) increased
production costs of produced brands which resulted in a higher cost of goods
sold and (2) sales at cost of two separate supplier purchased brands from
Bacchus Fine Wines to another Oregon distributor of purchased brands in
connection with decisions made by two brand suppliers to move their distribution
to another local supplier of purchases brands in the second half of
2009.





The
increase in Sales, General and Administrative expense versus the prior year
resulted from increased wages and salary expense in sales and logistics coupled
with related expenses for payroll taxes and benefits. This was partially offset
by the reduction in professional services for accounting and legal fees versus
the prior year.





Increases
in sales and logistics labor costs were mainly due to an increase in headcount
required to effectively staff the warehouse during the period where inventory
management and control was a material weakness for our
operations.   Additionally, the Company has replaced some sales
commission expense with a sales compensation subsidy as the Company replaced
certain sales personnel and expanded territories.





The gross
margin percent received from sales of all the winery's products were 47% in 2009
compared to 49% for 2008.  The reduced margin is due to increases in
the cost of produced wine and sales at cost to another Oregon distributor for
some purchased brands. The gross margin received from the sale of produced wine
in 2009 was 54.0% compared to 57.2% in 2008.





Out-of-state
distributor sales revenue increased 7.3% for the year ended December 31, 2009 as
compared to the prior year.  Retail sales increased
0.6%   Bacchus Fine Wines suffered a decrease of 7.2% in the
sales of purchased wine and merchandise from other suppliers but an increase
(approximately 15.0%) in sales of winery produced products. Bacchus Fine Wines
was constrained by the loss of two key brand suppliers who moved their brand
distribution to another Oregon distributor in the second half of
2009.  In-state and out-of-state sales were both favorably impacted by
additional placements of core produced brands at a key customer.





The
winery had a credit line balance of $140,964 at December 31, 2009.





Sales





In the
year ended December 31, 2009, the Company sold approximately 16,000 cases of
Willamette Valley Pinot Noir (vintage level), 6,000 cases of Barrel Select Pinot
Noir, 2,000 cases of Founders Reserve Pinot Noir, 16,000 cases of Whole Cluster
Pinot Noir, 27,000 cases of Pinot Gris and 19,000 cases of
Riesling.





At
December 31, 2009 the Company had inventory on-hand of approximately 50,000
cases of Willamette Valley Pinot Noir (vintage level), 3,400 cases of Barrel
Select Pinot Noir, 1,700 cases of Founders Reserve Pinot Noir, 7,000 cases of
Whole Cluster Pinot Noir, 12,700 cases of Pinot Gris and 14,000 cases of
Riesling.





The
Company has or plans to bottle 3,500 cases of 2009 Estate Pinot Noir, 20,000
cases of 2009 Willamette Valley Pinot Noir (vintage level), 19,500 cases of 2009
Whole Cluster Pinot Noir, 30,000 cases of 2009 Pinot Gris and 22,000 cases of
2009 Riesling by December  2010.





The
Company sold approximately 159,000 cases of wine in 2009 of which 108,000 cases
were winery produced wines.  Of the winery produced case sales in
2009, approximately 86,000 were the above listed varieties.  Total
purchased wine case sales in 2009 were approximately 51,000
cases.  The 2009 harvest produced 2,133 tons of wine grapes. The 2009
harvest yielded higher volumes, approximately 50% higher than prior
year.  The expected 2009 vintage yield is expected to produce
approximately 134,000 cases, which includes a few selected bulk wine
sales.


17


Wine
Inventory





The
Company had approximately 107,000 cases of bottled wine on-hand at the end of
2009.  Approximately 20% of the on-hand inventory is 2007 vintage
Pinot Noir. Management took steps in 2009 to address short-term inventory
shortages relative to orders by purchasing 75,000 gallons of bulk wine. 53% of
these bulk purchases were Pinot Noir to be used mainly in the production of 2007
and 2008 Vintage Pinot Noir.  In 2008 the Company addressed long-term
grape shortages by acquiring an additional 80 acres of undeveloped vineyard land
in the Eola Hills adjacent to the existing Elton Vineyards property currently
under lease.  The Company also executed a long-term lease for an
additional 104 acres at the same Eola Hills site.  These sites remain
undeveloped.  The Company also acquired 15 acres of property in 2008
adjacent to the existing Estate site at the Winery in Turner, OR.  Of
these 15 acres at the Estate Winery, 8 acres were developed and been planted in
grapes in 2009. Lastly, the Company acquired 5 acres of additional vineyard land
at its Tualatin Estate Vineyard in 2008 and these acres were also developed and
planted in 2009.





These
actions bring to a total of 791 acres of vineyard owned, leased or contracted by
the Company, with 23 of those acres recently planted and not
productive.  The 204 acres recently acquired and leased are
undeveloped and therefore not planted.  The total acres of Pinot Noir
are 300, of which nine are young, non-productive vines; the total acres of Pinot
Gris are 122 of which 14 are young, non-productive vines; the total acres of
Riesling are 95, all of which are producing vines.





Production
Capacity





Management
purchased capital assets in 2009 at a significantly lower level than 2008 mainly
due to the absence of additional vineyard land purchases. 2009 purchases were
mainly replacement barrels for production and some minor machinery and equipment
purchases also for production. Capital purchases in 2010 will be reviewed
closely to address future production requirements based on the expected
increases in wine grape quantities. The Company had a carryover project from
2008, namely, to install additional water storage capacity on the Turner
property and fire sprinklers in its 20,000 square foot wine warehouse, which
also required significant capital investment in 2009.  This project is
nearing completion in Q1 2010.  Management decided not to use the
Tualatin production facility in 2009 due to the need to utilize the facility for
storage of excess inventory.  In 2008, the Company replaced the roof
and production floor, insulation and walls in anticipation of using it for wine
storage and future production .





Wine
Quality





Continued
awareness of the Willamette Valley Vineyards brand, the Company and the quality
of its wines, was enhanced by national and regional media coverage throughout
2009.





In
February 2009 Willamette Valley Vineyards’ 2006 Estate Pinot Noir and 2006
Signature Cuvee Pinot Noir both took Gold at the Grand Harvest Awards. This
international competition is sponsored by Vineyard & Winery Management
Magazine and has a special focus on terroir, meaning that these wines were
recognized for how well they represent quality Pinot Noirs specifically from
Willamette Valley, Oregon.





In March
2009 several WVV wines won an additional terroir-based award through the
Best-of-Appellation, or BOA awards put on by AppellationAmerica.com. Both our
2006 WVV Pinot Noir and our 2006 Tualatin Estate Pinot Noir were recognized with
Double Gold medals  and our 2006 Estate Pinot Noir and 2007 Whole
Cluster Pinot Noir were recognized with Gold medals in the BOA
awards.





March
2009 marked the conclusion of the first annual Oregon Wine Awards, a competition
for and by Oregon wine industry specialists. Three of our wines took Double Gold
Awards in their categories, an honor that the competition classifies as “Best of
the Best”: 2007 WVV Riesling, 2006 WVV Signature Cuvee Pinot Noir and the 2003
Griffin Creek Syrah.





The 2006
Estate Pinot Noir also took "Double Gold" and was nominated for Best of Show at
the Hilton Head Island Wine and Food Festival in South Carolina;  the
2006 Dijon Clone Chardonnay took Critic’s Gold at the 2009 Critic’s Challenge,
judged by many of America’s most accomplished wine journalists; and the 2007 Dry
Riesling took a Gold medal at the Tasters Guild 22nd annual International Wine
Judging, where forty experienced judges from around the country completed over
2,100 evaluations of wine from 36 states/provinces and 13 countries. The judging
panels were comprised of a carefully selected mix of winemakers, retailers, wine
writers, restaurateurs, and knowledgeable consumers.





The 2007
Riesling took the only Gold medal in the Food & Wine pairing competition at
the 2009 Hong Kong International Wine & Spirits competition.





In the
2010 San Francisco Chronicle Wine Competition, which is the largest wine
competition in the United States with over 4900 entries, Willamette Valley
Vineyards received more awards than any other Oregon winery winning two “Best of
Class, Judge’s Choice” awards.  Our 2008 Riesling was rated the “Best
of Class, Judge’s Choice” in the category of Riesling above 1.5% Residual
Sugar.  Our 2007 Elton Vineyard Pinot Noir won the same award “Best of
Class, Judge’s Choice” for Pinot Noir in the $40-$49.99 price
range.  Our 2008 Pinot Gris took a Gold medal as
well.


18


Sustainability
Initiatives





In
January of 2009 we launched our Cork ReHarvest program in partnership with Whole
Foods, Rainforest Alliance and Western Pulp. Willamette Valley Vineyards was the
first winery in the world to receive certification from the Rainforest Alliance
for using 100 percent Forest Stewardship Council (FSC) certified
cork.  With the new Cork Re-Harvest program, we are also the first
winery to launch a cradle-to-cradle cork recycling program with zero increase to
our carbon footprint. Cork recycling boxes were placed in the 11 Whole Foods
stores in Oregon and Washington. When distributors deliver wine to these stores,
they pick up the cork and return it to WVV’s Turner-based warehouse. The cork
will then be delivered to Western Pulp, where it is remanufactured into wine
shippers.





The April
issue of Shape Magazine, available on shelves in March 2009, debuted Shapes’
2009 Green Living Awards. Starting on page 41, twenty-nine companies and
products were recognized for their sustainable efforts. WVV received one of the
awards for our commitment to sustainable practices, and producing sustainable
products. The sustainable certification of our vineyards through LIVE (Low Input
Viticulture and Enology) was highlighted.





In April
2009, the Oregon Certified Sustainable Wine (“OCSW”) website launched. Hosted by
the Oregon Wine Board, OCSW is a certification program that encompasses LIVE,
Organic and Biodynamic wine certifications under one symbol in the hopes of
making it easier for the consumer to choose sustainable wines. Willamette Valley
Vineyards was one of the first wineries to qualify for this new
certification.





Other
Developments





In June
2009, at the annual SEDCOR (Strategic Economic Development Corporation) honors
luncheon, Willamette Valley Vineyards was awarded the Agri-Business of the year
award. This award is presented to an active SEDCOR member who has demonstrated
excellence in agri-business in the past year, and who supports and maintains the
significant role and future of agriculture in the Mid-Willamette Valley
economy.  SEDCOR is a private, non-profit member organization
comprised of more than 500 business and community leaders.





In June
2009 Willamette Valley Vineyards, in cooperation with Ken Wright Cellars, EIEIO
& Company Ltd. and Federal Express, hosted Oregon’s first virtual wine
tasting with Hong Kong. The video conference and wine tasting brought together
more than two dozen Hong Kong wine distributors, sommeliers and retailers to
taste through a flight of high-quality Oregon wines. The event came on the heels
of Hong Kong lifting duties on U.S. wine imports in February 2008, which could
improve the importation of Oregon wines. As a result of this event the Company
secured distribution through a prominent Hong Kong importer.





Seasonal
and Quarterly Results





The
Company has historically experienced and expects to continue experiencing
seasonal fluctuations in its revenues and net income. The Company has
historically reported a net loss during its first quarter and expects the first
quarter to be the weakest of the year, including the first quarter of
2010.  Sales volumes increase progressively beginning in the second
quarter through the fourth quarter because of consumer buying
habits.





The
following table sets forth certain information regarding the Company's revenues,
excluding excise taxes, from Winery operations for the three and twelve months
ended December 31, 2009:





Three
      months ended
                      
                      
                      Twelve
      months endedDecember
      31,
                      
                      
                      December
      31,2009
                      
                      
                      2008
                      
                      
                      2009
                      
                      
                      2008Retail
      Sales, RentalIncome
      and Events
                      
                      $
                      682
                      
                      
                      $
                      627
                      
                      
                      $
                      2,475
                      
                      
                      $
                      2,460In-state
      sales
                      
                      
                      2,465
                      
                      
                      
                      2,382
                      
                      
                      
                      8,037
                      
                      
                      
                      7,929Out-of-state
      sales
                      
                      
                      1,444
                      
                      
                      
                      1,761
                      
                      
                      
                      6,436
                      
                      
                      
                      5,998Bulk
      wine/ Misc. sales
                      
                      
                      64
                      
                      
                      
                      79
                      
                      
                      
                      75
                      
                      
                      
                      79Total
      Revenue
                      
                      
                      4,655
                      
                      
                      
                      4,849
                      
                      
                      
                      17,023
                      
                      
                      
                      16,466Less
      excise taxes
                      
                      
                      (144
                      )
                      
                      
                      (145
                      )
                      
                      
                      (459
                      )
                      
                      
                      (418
                      )Net
      Revenue
                      
                      $
                      4,511
                      
                      
                      $
                      4,704
                      
                      
                      $
                      16,564
                      
                      
                      $
                      16,048


19
  2009
Compared to 2008





Retail
sales for the year ended December 31, 2009 increased $14,593, or 0.6%, as
compared to the corresponding prior year period.  Retail sales
increased slightly during the year ended December 31, 2009, due primarily to an
increase of $146,019 or 10.3% in tasting room sales.  The focus on
customers for life through telephone, mail order and retail sales will continue
with the goal of expanding the customer base and continuing the trend of
increasing revenue generation by the Retail department.  Retail
experienced an increase in revenue during 2009 in on-site and off-site festivals
revenue of 8.1%, or $11,569 as compared to 2008.  Attendance, wine
sales, sales per head and net income at retail events increased compared to last
year.





Total
wholesale sales in the state of Oregon, through the Company's in-state sales
force and through direct sales from the winery increased $108,423, or 1.4%, in
the year ended December 31, 2009, as compared to the prior year.  2009
in-state sales of purchased wines and glassware were -7.2% lower than 2008. 2009
in-state sales of Willamette Valley Vineyards branded wine were higher than 2008
by 15.0% and contributed mostly to the 1.4% increase in overall in-state
sales.  There was a sales increase of $402,969 in 2009 related to the
transfer of inventory to another Oregon distributor.  These transfer
sales are at cost and therefore unfavorably impact gross margin as a percent of
sales.  The Company’s direct in-state sales to its largest customer
increased $463,939, or 51.4%, in the year ended December 31, 2009, as compared
to the prior year period.  This increase is largely due to increased
availability of core produced brands and the related increase in placements and
orders of these produced brands.





Out-of-state
sales in the year ended December 31, 2009 increased $437,743, or 7.3%, as
compared to the prior year.  The higher sales are primarily a result
of the increased availability of core products resulting in increased order
activity by our out-of-state distributors.  Additionally, we
experienced increased placements of our Pinot Gris in 2009 to a key national
customer.  Additionally, the national sales team has actively pursued
increasing our points of distribution and have opened markets through new
distribution channels. The Company now sells wine in all 50 states and exports
wine to eight countries.  The Pinot Noir variety led sales in
2009.





The
Company pays alcohol excise taxes to both the Oregon Liquor Control Commission
and to the U.S. Department of the Treasury, Alcohol and Tobacco Tax and Trade
Bureau.  These taxes are based on product sales
volumes.  The Company is liable for the taxes upon the removal of
product from the Company’s warehouse on a per gallon basis.  The
Company also pays taxes on the grape harvest on a per ton basis to the Oregon
Liquor Control Commission for the Oregon Wine Board.  The Company’s
excise taxes for the year ended December 31, 2009 increased 7.7% as compared to
the prior year period. This was due primarily to increased volume of sales in
state in 2009 which are taxed by the OLCC. Sales data in the discussion above is
quoted before the exclusion of excise taxes.





As a
percentage of net revenue, gross profit was 47% in the year ended December 31,
2009, a decrease of 4.1% compared to the 49% gross profit percentage from the
prior year period.  This reduction in the gross profit percent is
mainly due to the increase in production costs on produced
wine.  Additionally, the purchased brand sales at cost for those
in-state wholesale suppliers that moved their brand to another Oregon
distributor has adversely affected gross margin as a percent of
sales.





The
Company is continuing its focus on improved distribution of higher margin
products and strives to minimize increases in grape and production
costs.  Management anticipates that the  increased
representation of brands other than our own through our Oregon sales force will
continue to erode the gross margins as a percent of sales due to the lower
margins associated with selling those brands.  The Company believes
that the cost of administration, accounting and inventory management of
purchased brands has historically been much higher than
anticipated.  Management believes that we can effectively increase
sales long-term at appropriate levels of administrative costs.





Amortization
of vineyard development costs is included in capitalized crop costs that, in
turn, are included in inventory costs and ultimately become a component of cost
of goods sold.  For the years ending December 31, 2009 and 2008,
approximately $70,000 and $68,000, respectively, were amortized into inventory
costs.


20


Selling,
general and administrative expenses for the year ended December 31, 2009
increased $141,310 or 2.19% compared to the prior year.  This increase
was due primarily to increased labor costs in sales departments and shared
support services coupled with the related increase in payroll taxes and fringe
benefits.  The increase in labor expenses in 2009 was partially offset
by the reduction in outbound freight costs and professional service fees for
accounting and legal services versus the prior year. As a percentage of net
revenue from winery operations, selling, general and administrative expenses
stayed at 40% for the year ended December 31, 2009, unchanged from the prior
year.





Interest
income decreased by 54% or $19,704 for the year ended December 31, 2009 versus
the  prior year.  This is mainly due to the elimination of
our CD investments which were converted to cash for working capital needs.
Interest expense increased 39% or $45,730 in the year ended December 31, 2009 as
compared to the prior year.  The increase in interest expense was due
to the increase in outstanding debt during the period.





The
provision for income taxes and the Company's effective tax rate was $244,001 and
25%, respectively of pre-tax income in the year ended December 31, 2009,
compared to $554,541 and 44% of pre-tax income recorded for the prior year. The
favorable change in tax provision in 2009 is mainly due to a one-time accounting
change which allows the Company to expense, for tax purposes, farming costs
incurred in November and December of 2009 versus capitalizing into inventory
costs.





As a
result of the above factors, net income increased 3.2% to $731,470 in the year
ended December 31, 2009 from $708,594 for the prior year
period.  Earnings per share were $0.15 per share in the year ended
December 31, 2009 and $0.15, in the prior year.





First
Quarter 2010 Outlook





Sales in
the first quarter of 2010 are slightly lower than the prior year's first quarter
sales for the following principle reasons: in-state sales through Bacchus Fine
Wines are down due to the reduction in order activity from its largest customer
and the loss of sales activity from a key purchased brand supplier which moved
to another Oregon distributor.    This is largely offset by
the increase in sales to our out-of-state distributors.





Liquidity
and Capital Resources





At
December 31, 2009, the Company had a working capital balance of $11.4 million
and a current ratio of 4.98:1. At December 31, 2008, the Company had a working
capital balance of $9.4 million and a current ratio of 4.21:1. The Company had a
cash balance of $0 at December 31, 2009 compared to a cash balance of $350,361
at December 31, 2008. The decrease in cash year over year was primarily due to
the increased use of cash for inventory building and capital
expenditures.





Total
cash used in operating activities for the year ended December 31, 2009 was
$950,466, compared to cash provided of $396,594 for the prior year period,
primarily as a result of the cash used in the Company’s build-up in inventory in
2009.





Total
cash used in investing activities in the year ended December 31, 2009 was
$781,994, compared to $2,465,310 in the prior year.  Cash used in
investing activities consisted mainly of additions to property and equipment and
vineyard development expenditures.





Total
cash provided by financing activities in the year ended December 31, 2009 was
$1,382,099, compared to $1,335,672 in 2008.  Cash provided by
financing activities primarily consisted of the increase in debt related to the
new loan from NW Farm Credit Services required for the pay down of the short
term line of credit.  The Company has a cash overdraft position of
$271,911 at the period ended December 31, 2009.  This represents check
remittances that have not yet cleared the bank. As these checks post they will
be automatically funded by our revolving line of credit to bring our overdraft
position to zero.





At
December 31, 2009, the line of credit balance was $140,964 on a maximum
borrowing amount of $2,000,000.  The Company has a loan agreement with
Umpqua Bank that contains, among other things, certain restrictive
financialcovenants
with respect to total equity, debt-to-equity and debt coverage that must be
maintained by the Company on a quarterly basis.  As of December 31,
2009, the Company was in compliance with all of the financial covenants. The
current line of credit loan agreement with Umpqua Bank is due to renew in June
2010.  The Company is seeking an increase in its credit line up to
$3,000,000 from its current $2,000,000 line of credit and a term of two years or
more.


21


As of
December 31, 2009, the Company had a total long-term debt balance of $3,679,527
owed to NW Farm Credit Services. The debt with NW Farm Credit Services was used
to finance the Hospitality Center, invest in winery equipment to increase the
Company’s winemaking capacity, complete the storage facility, acquire new
vineyard land for future development and most recently to pay down our short
term line of credit.





The
Company believes that cash flow from operations and funds available under its
existing credit facilities will be sufficient to meet the Company’s foreseeable
short and long-term needs.





The
Company’s contractual obligations as of December 31, 2009 including long-term
debt, grape payables and commitments for future payments under non-cancelable
lease arrangements are summarized below:





Payments Due by PeriodLess than
                      
                      
                      
                      
                      
                      
                      
                      
                      After 5Total
                      
                      
                      1 year
                      
                      
                      1-3 years
                      
                      
                      4-5 years
                      
                      
                      yearsLong-term
      debt and capital lease obligations
                      
                      $
                      3,718,868
                      
                      
                      $
                      432,863
                      
                      
                      $
                      724,940
                      
                      
                      $
                      141,541
                      
                      
                      $
                      2,419,524Grape
      Payables
                      
                      
                      657,371
                      
                      
                      
                      657,371
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Operating
      Leases
                      
                      
                      3,171,788
                      
                      
                      
                      374,103
                      
                      
                      
                      674,739
                      
                      
                      
                      492,712
                      
                      
                      
                      1,630,235Total
      Contractual Obligations
                      
                      $
                      7,548,027
                      
                      
                      $
                      1,464,337
                      
                      
                      $
                      1,399,679
                      
                      
                      $
                      634,253
                      
                      
                      $
                      4,049,759





Item
7A.  Quantitative and Qualitative Disclosures About Market
Risk.





Not
Required.


22


Item
8.     Financial Statements and Supplementary
Data.





Willamette
Valley Vineyards, Inc.


Index to
Financial Statements





Report
      of Independent Registered Public Accounting Firms
                    24Financial
      StatementsBalance
      Sheet
                    25Statements
      of Operations
                    26Statements
      of Shareholders' Equity
                    27Statements
      of Cash Flows
                    28Notes
      to Financial Statements
                    29


23


REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





To the
Board of Directors and Shareholders


Willamette
Valley Vineyards, Inc.





We have
audited the accompanying balance sheets of Willamette Valley Vineyards, Inc. as
of December 31, 2009 and 2008 and the related statements of
income, shareholders’ equity and cash flows for each of the years in the
two year period ended December 31, 2009. These financial statements are the
responsibility of the Company’s management. Our responsibility is to express an
opinion on these financial statements based on our audits.





We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audits included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.





In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Willamette Valley Vineyards, Inc.
as of December 31, 2009 and 2008 and the results of its operations and its
cash flows for each of the years in the two year period ended December 31, 2009,
in conformity with U.S. generally accepted accounting principles.





/s/ Moss
Adams LLP





Seattle,
Washington


March 29,
2010


24


Willamette
Valley Vineyards, Inc.


Balance
Sheet


December 31,
                                            
                                            
                                            December 31,2009
                                            
                                            
                                            2008ASSETSCurrent
      assets:Cash
      and cash equivalents
                                            
                                            $
                                            -
                                            
                                            
                                            $
                                            350,361Accounts
      receivable, net (Note 2)
                                            
                                            
                                            1,458,497
                                            
                                            
                                            
                                            1,204,881Inventories
      (Note 3)
                                            
                                            
                                            12,169,407
                                            
                                            
                                            
                                            10,604,204Prepaid
      expenses and other current assets
                                            
                                            
                                            58,746
                                            
                                            
                                            
                                            68,834Current
      portion of notes receivable
                                            
                                            
                                            62,415
                                            
                                            
                                            
                                            62,415Income
      tax receivable
                                            
                                            
                                            464,958
                                            
                                            
                                            
                                            -Deferred
      income taxes (Note 9)
                                            
                                            
                                            -
                                            
                                            
                                            
                                            81,700Total
      current assets
                                            
                                            
                                            14,214,023
                                            
                                            
                                            
                                            12,372,395Vineyard
      development costs, net
                                            
                                            
                                            1,732,979
                                            
                                            
                                            
                                            1,693,769Property
      and equipment, net (Note 4)
                                            
                                            
                                            6,192,229
                                            
                                            
                                            
                                            6,069,408Debt
      issuance costs
                                            
                                            
                                            41,353
                                            
                                            
                                            
                                            29,581Notes
      receivable
                                            
                                            
                                            120,248
                                            
                                            
                                            
                                            165,491Other
      assets
                                            
                                            
                                            4,456
                                            
                                            
                                            
                                            4,456Total
      Assets
                                            
                                            $
                                            22,305,288
                                            
                                            
                                            $
                                            20,335,100LIABILITIES
      AND SHAREHOLDERS' EQUITYCurrent
      liabilities:Bank
      overdraft
                                            
                                            $
                                            271,911
                                            
                                            
                                            $
                                            -Line
      of credit (Note 5)
                                            
                                            
                                            140,964
                                            
                                            
                                            
                                            -Current
      portion of long-term debt (Note 6)
                                            
                                            
                                            432,863
                                            
                                            
                                            
                                            354,536Accounts
      payable
                                            
                                            
                                            823,517
                                            
                                            
                                            
                                            1,111,499Accrued
      expenses
                                            
                                            
                                            467,588
                                            
                                            
                                            
                                            510,768Income
      taxes payable
                                            
                                            
                                            -
                                            
                                            
                                            
                                            350,870Deferred
      income taxes (Note 9)
                                            
                                            
                                            62,000
                                            
                                            
                                            
                                            -Grape
      payables
                                            
                                            
                                            657,371
                                            
                                            
                                            
                                            594,734Total
      current liabilities
                                            
                                            
                                            2,856,214
                                            
                                            
                                            
                                            2,922,407Long-term
      debt (Note 6)
                                            
                                            
                                            3,286,005
                                            
                                            
                                            
                                            2,178,246Deferred
      rent liability
                                            
                                            
                                            218,205
                                            
                                            
                                            
                                            217,742Deferred
      gain (Note 11)
                                            
                                            
                                            313,835
                                            
                                            
                                            
                                            345,930Deferred
      income taxes (Note 9)
                                            
                                            
                                            491,000
                                            
                                            
                                            
                                            355,207Total
      liabilities
                                            
                                            
                                            7,165,259
                                            
                                            
                                            
                                            6,019,532Commitments
      and contingencies (Note 11)
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -Shareholders'
      equity (Notes 7 and 8):Common
      stock, no par value - 10,000,000 shares authorized, 4,888,977 issued and
      outstanding at December 31, 2009
                                            
                                            
                                            8,608,658
                                            
                                            
                                            
                                            8,515,667Retained
      earnings
                                            
                                            
                                            6,531,371
                                            
                                            
                                            
                                            5,799,901Total
      shareholders' equity
                                            
                                            
                                            15,140,029
                                            
                                            
                                            
                                            14,315,568$
                                            22,305,288
                                            
                                            
                                            $
                                            20,335,100





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


25


Willamette
Valley Vineyards, Inc.


Statements
of Operations


For the
Years Ended December 31, 2009 and 2008


2009
                                        
                                        
                                        2008Net
      revenues
                                        
                                        $
                                        16,563,712
                                        
                                        
                                        $
                                        16,048,238Cost
      of goods sold
                                        
                                        
                                        8,849,800
                                        
                                        
                                        
                                        8,229,877Gross
      margin
                                        
                                        
                                        7,713,912
                                        
                                        
                                        
                                        7,818,361Selling,
      general and administrative expenses
                                        
                                        
                                        6,596,513
                                        
                                        
                                        
                                        6,455,203Income
      from operations
                                        
                                        
                                        1,117,399
                                        
                                        
                                        
                                        1,363,158Other
      income (expenses):Interest
      income
                                        
                                        
                                        17,042
                                        
                                        
                                        
                                        36,746Interest
      expense
                                        
                                        
                                        (162,113
                                        )
                                        
                                        
                                        (116,383
                                        )Other
      income/(expense)
                                        
                                        
                                        3,143
                                        
                                        
                                        
                                        (20,386
                                        )(141,928
                                        )
                                        
                                        
                                        (100,023
                                        )Income
      before income taxes
                                        
                                        
                                        975,471
                                        
                                        
                                        
                                        1,263,135Income
      tax provision (Note 9)
                                        
                                        
                                        244,001
                                        
                                        
                                        
                                        554,541Net
      income
                                        
                                        $
                                        731,470
                                        
                                        
                                        $
                                        708,594Basic
      net income per common share
                                        
                                        $
                                        0.15
                                        
                                        
                                        $
                                        0.15Diluted
      net income per common share
                                        
                                        $
                                        0.15
                                        
                                        
                                        $
                                        0.14





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


26


Willamette
Valley Vineyards, Inc.


Statements
of Shareholders' Equity


For the
Years Ended December 31, 2009 and 2008





Common stock
                
                
                
                
                
                RetainedShares
                
                
                Dollars
                
                
                earnings
                
                
                TotalBalances
      at December 31, 2007
                
                
                4,835,902
                
                
                $
                8,425,389
                
                
                $
                5,091,307
                
                
                $
                13,516,696Stock
      based compensation expense
                
                
                -
                
                
                
                56,230
                
                
                
                -
                
                
                
                56,230Common
      stock issued and options exercised
                
                
                15,425
                
                
                
                34,048
                
                
                
                -
                
                
                
                34,048Net
      income
                
                
                -
                
                
                
                -
                
                
                
                708,594
                
                
                
                708,594Balances
      at December 31, 2008
                
                
                4,851,327
                
                
                $
                8,515,667
                
                
                $
                5,799,901
                
                
                $
                14,315,568Stock
      based compensation expense
                
                
                -
                
                
                
                17,976
                
                
                
                -
                
                
                
                17,976Common
      stock issued and options exercised
                
                
                37,650
                
                
                
                75,015
                
                
                
                -
                
                
                
                75,015Net
      income
                
                
                -
                
                
                
                -
                
                
                
                731,470
                
                
                
                731,470Balances
      at December 31, 2009
                
                
                4,888,977
                
                
                $
                8,608,658
                
                
                $
                6,531,371
                
                
                $
                15,140,029





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


27


Willamette
Valley Vineyards, Inc.


Statements
of Cash Flows


For the
Years Ended December 31, 2009 and 2008


2009
                                      
                                      
                                      2008Cash
      flows from operating activities:Net
      income
                                      
                                      $
                                      731,470
                                      
                                      
                                      $
                                      708,594Reconciliation
      of net income to net cash from operating activities:Depreciation
      and amortization
                                      
                                      
                                      674,200
                                      
                                      
                                      
                                      620,180Stock
      based compensation expense
                                      
                                      
                                      17,976
                                      
                                      
                                      
                                      56,230Deferred
      income taxes
                                      
                                      
                                      279,493
                                      
                                      
                                      
                                      10,507Bad
      debt expense
                                      
                                      
                                      28,660
                                      
                                      
                                      
                                      7,606Deferred
      rent liability
                                      
                                      
                                      463
                                      
                                      
                                      
                                      (6,194
                                      )Deferred
      gain
                                      
                                      
                                      (32,095
                                      )
                                      
                                      
                                      (32,095
                                      )Gain
      on sale of assets
                                      
                                      
                                      (800
                                      )
                                      
                                      
                                      -Changes
      in assets and liabilities:Accounts
      receivable
                                      
                                      
                                      (282,276
                                      )
                                      
                                      
                                      599,287Inventories
                                      
                                      
                                      (1,565,203
                                      )
                                      
                                      
                                      (2,627,775
                                      )Prepaid
      expenses and other current assets
                                      
                                      
                                      10,088
                                      
                                      
                                      
                                      10,818Other
      assets
                                      
                                      
                                      -
                                      
                                      
                                      
                                      61,437Bank
      Overdraft
                                      
                                      
                                      271,911
                                      
                                      
                                      
                                      -Accounts
      payable
                                      
                                      
                                      (287,982
                                      )
                                      
                                      
                                      537,512Accrued
      expenses
                                      
                                      
                                      (43,180
                                      )
                                      
                                      
                                      89,944Income
      taxes receivable/payable
                                      
                                      
                                      (815,828
                                      )
                                      
                                      
                                      274,355Grape
      payables
                                      
                                      
                                      62,637
                                      
                                      
                                      
                                      86,188Net
      cash from operating activities
                                      
                                      
                                      (950,466
                                      )
                                      
                                      
                                      396,594Cash
      flows from investing activities:Additions
      to property and equipment
                                      
                                      
                                      (718,092
                                      )
                                      
                                      
                                      (2,465,976
                                      )Vineyard
      development expenditures
                                      
                                      
                                      (109,945
                                      )
                                      
                                      
                                      (21,428
                                      )Proceeds
      from sale of fixed assets
                                      
                                      
                                      800
                                      
                                      
                                      
                                      -Payments
      received on notes receivable
                                      
                                      
                                      45,243
                                      
                                      
                                      
                                      22,094Net
      cash from investing activities
                                      
                                      
                                      (781,994
                                      )
                                      
                                      
                                      (2,465,310
                                      )Cash
      flows from financing activities:Proceeds
      from stock options exercised
                                      
                                      
                                      75,015
                                      
                                      
                                      
                                      27,250Net
      borrowings on line of credit
                                      
                                      
                                      140,964
                                      
                                      
                                      
                                      -Borrowings
      of long-term debt
                                      
                                      
                                      1,543,417
                                      
                                      
                                      
                                      1,568,748Payment
      of loan fees related to new debt
                                      
                                      
                                      (19,966
                                      )
                                      
                                      
                                      -Payments
      on long-term debt
                                      
                                      
                                      (357,331
                                      )
                                      
                                      
                                      (267,124
                                      )Excess
      tax benefit on stock option exercises
                                      
                                      
                                      -
                                      
                                      
                                      
                                      6,798Net
      cash from financing activities
                                      
                                      
                                      1,382,099
                                      
                                      
                                      
                                      1,335,672Net
      change in cash and cash equivalents
                                      
                                      
                                      (350,361
                                      )
                                      
                                      
                                      (733,044
                                      )Cash
      and cash equivalents:Beginning
      of year
                                      
                                      
                                      350,361
                                      
                                      
                                      
                                      1,083,405End
      of year
                                      
                                      $
                                      -
                                      
                                      
                                      $
                                      350,361





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


28


Willamette
Valley Vineyards, Inc.


Notes to
Financial Statements





1.
            Summary
      of Operations, Basis of Presentation and Significant Accounting
      Policies





Organization
and Operations





Willamette
Valley Vineyards, Inc. (the "Company") owns and operates vineyards and a winery
located in the state of Oregon, and produces and distributes premium, super
premium, and ultra premium wines, primarily Pinot Noir, Pinot Gris, Chardonnay,
and Riesling.  In 2009 we have one customer that represents
approximately 13% of our total revenues.  In 2008 no one customer
represented more than 10% of total revenues.





Sales in
Oregon through the Company's in-state sales force and through direct sales from
the winery represented approximately 58% and 59% respectively, of revenues for
2009 and 2008. In-state sales of purchased wines and glassware represented 49%
and 59% of total 2009 and 2008 in-state sales, respectively. In-state sales of
Willamette Valley Vineyards branded wines represented 44% and 38% of total 2009
and 2008 in-state sales, respectively.





Out-of-state
sales represented approximately 38% and 36% respectively, of revenues for 2009
and 2008.  Foreign sales represent less than 1% of total
sales.  The Company also sells its wine through the tasting room at
its winery.





Basis
of Presentation





The
accompanying financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America, which
require management to make certain estimates and assumptions.  These
estimates and assumptions affect the reported amounts of assets and liabilities
and the disclosure of contingent assets and liabilities as of the date of the
financial statements, and the reported amounts of revenues and expenses during
the reporting period.  The Company bases its estimates on historical
experience and on various assumptions that are believed to be reasonable under
the circumstances at the time.  Actual results could differ from those
estimates under different assumptions or conditions.




Financial
Instruments and Concentrations of Risk





The
Company has the following financial instruments: cash and cash equivalents,
accounts receivable, accounts payable, accrued liabilities, and long-term debt.
The carrying value of these instruments approximates fair value.





Cash and
cash equivalents are maintained with several financial institutions. Deposits
held with banks may exceed the amount of insurance provided on such deposits.
Generally, these deposits may be redeemed upon demand and are maintained with
financial institutions of reputable credit and therefore bear minimal credit
risk.





Other
Comprehensive Income





The
nature of the Company's business and related transactions do not give rise to
other comprehensive income.





Cash
and Cash Equivalents





Cash and
cash equivalents include highly liquid short-term investments with an original
maturity of less than 90 days.





Accounts
Receivable





The
Company performs ongoing credit evaluations of its customers and does not
require collateral. A reserve is maintained for potential credit losses. The
allowance for doubtful accounts is based on an assessment of the collectability
of customer accounts. The Company regularly reviews the allowance by considering
factors such as historical experience, credit quality, the age of the accounts
receivable balances, and current economic conditions that may affect a
customer’s ability to pay. The Company has credit risk associated with
uncollateralized trade accounts receivable totaling $1,494,715 and $1,215,350 as
of December 31, 2009 and 2008, respectively.


29


Notes
Receivable





The notes
receivable balance relates to a note entered into in 2007 with one of our key
grape suppliers with whom we purchase grapes from under contract. The purpose of
the note was to provide the grower with the capital necessary for their vineyard
land development.   The original amount of the note was
$250,000.  The note accrues interest at 8.5% per year and is payable
in semi-annual payments through March 2012.





Inventories





For
Company produced wines, after a portion of the vineyard becomes commercially
productive, the annual crop and production costs relating to such portion are
recognized as work-in-process inventories.  Such costs are accumulated
with related direct and indirect harvest, wine processing and production costs,
and are transferred to finished goods inventories when the wine is produced,
bottled, and ready for sale.  For purchased wines distributed through
the Company’s in-state distribution division, Bacchus Fine Wines, the supplier
invoiced costs of the wine, including freight, are recognized into finished
goods inventories at the point of receipt.





The cost
of finished goods is recognized as cost of sales when the wine product is
sold.  Inventories are stated at the lower of first-in, first-out
("FIFO") cost or market by variety. Bacchus inventory is accounted for on a
separate accounting system which calculates average invoice cost on the
purchased brands.  The average cost for the Bacchus inventory
approximates FIFO in all material respects.





In
accordance with general practices in the wine industry, wine inventories are
generally included in current assets in the accompanying balance sheet, although
a portion of such inventories may be aged for more than one year (Note
3).





Vineyard
Development Costs





Vineyard
development costs consist primarily of the costs of the vines and expenditures
related to labor and materials to prepare the land and construct vine
trellises.  The costs are capitalized until the vineyard becomes
commercially productive, at which time annual amortization is recognized using
the straight-line method over the estimated economic useful life of the
vineyard, which is estimated to be 30 years.  Accumulated amortization
of vineyard development costs aggregated $657,934 and $587,199 at December 31,
2009 and 2008, respectively.





Amortization
of vineyard development costs are included in capitalized crop costs that in
turn are included in inventory costs and ultimately become a component of cost
of goods sold.  For the year ending December 31, 2009 and 2008,
approximately $70,735 and $68,136, respectively, was amortized into inventory
costs.





Property
and Equipment





Property
and equipment are stated at cost and are depreciated on the straight-line basis
over their estimated useful lives as follows:


Land
      improvements
              15
      yearsWinery
      building
              30
      yearsEquipment
              3-10 years
              (depending
      on classification of the
asset)





Expenditures
for repairs and maintenance are charged to operating expense as
incurred.  Expenditures for additions and betterments are
capitalized.  When assets are sold or otherwise disposed of, the cost
and related accumulated depreciation are removed from the accounts, and any
resulting gain or loss is included in operations.  The Company reviews
the carrying value of investments for impairment whenever events or changes in
circumstances indicate the carrying amounts may not be recoverable.





Debt
Issuance Costs





Debt
issuance costs are amortized on the straight-line basis, which approximates the
effective interest method, over the life of the debt. The Company incurred an
additional $19,966 of debt issuance costs in 2009 related to the new long-term
debt from NW Farm Credit Service. For the years ended December 31, 2009 and
2008, amortization of debt issuance costs was approximately $8,194 and $7,200
respectively. The following table shows the debt issuance amortization scheduled
for the next five years:


Year
                    
                    Amount2010
                    
                    $
                    8,9152011
                    
                    
                    2,1122012
                    
                    
                    2,1122013
                    
                    
                    2,1122014
                    
                    
                    2,112




30





Income
Taxes





Income
taxes are recognized using enacted tax rates, and are composed of taxes on
financial accounting income that is adjusted for requirements of current tax
law, and deferred taxes. Deferred taxes are estimated using the asset and
liability approach whereby deferred income taxes are calculated for the expected
future tax consequences of temporary differences between the book basis and tax
basis of the Company's assets and liabilities.





On
January 1, 2007, we adopted the provisions of ASC 740 related to income tax
uncertainties (formerly FASB Interpretation No. 48, Accounting for Uncertainty
in Income Taxes-an Interpretation of FASB Statement No. 109) which clarifies the
accounting for income taxes by prescribing a minimum recognition threshold a tax
position is required to meet before being recognized in the financial
statements. ASC 740 also provides guidance on derecognition, measurement,
classification, interest and penalties, accounting in interim periods,
disclosure and transition. This adoption did not have an impact on our financial
statements. We had no unrecognized tax benefits as of December 31, 2009 or 2008.
We recognize interest assessed by taxing authorities as a component of tax
expense. We recognize any penalties assessed by taxing authorities as a
component of tax expense.  Interest and penalties for the years ended
December 31, 2009 and  2008 were not material.





We file
U.S. federal income tax returns with the Internal Revenue Service (“IRS”) as
well as income tax returns in Oregon. We may be subject to examination by the
IRS for tax years 2006 through 2009. Additionally, we may be subject to
examinations by state taxing jurisdictions for tax years 2006 through 2009. We
are currently not under examination by the IRS or the Oregon Department of
Revenue.





Deferred
Rent Liability





The
Company leases land under a sale-leaseback agreement.  The long-term
operating lease has minimum lease payments that escalate every
year.  For accounting purposes, rent expense is recognized on the
straight-line basis by dividing the total minimum rents due during the lease by
the number of months in the lease.  In the early years of a lease with
escalation clauses, this treatment results in rental expense recognition in
excess of rents paid, and the creation of a long-term deferred rent
liability.  As the lease matures, the deferred rent liability will
decrease and the rental expense recognized will be less than the rents actually
paid.  For the year ended December 31, 2009 rent costs recognized in
excess of amounts paid totaled $462. For the year ended December 31, 2008, rent
amounts paid in excess of rent costs recognized totaled $6,194.





Revenue
Recognition





The
Company recognizes revenue when the product is shipped and title passes to the
customer.  The Company's standard terms are 'FOB' shipping point, with
no customer acceptance provisions.  The cost of price promotions and
rebates are treated as reductions of revenues.  No products are sold
on consignment.  Credit sales are recorded as trade accounts
receivable and no collateral is required.  Revenue from items sold
through the Company's retail locations is recognized at the time of
sale.  Net Revenues reported herein are shown net of sales allowances
and excise taxes.





Cost
of Goods Sold





Costs of
goods sold include costs associated with grape growing, external grape costs,
packaging materials, winemaking and production costs, vineyard and production
administrative support and overhead costs, purchasing and receiving costs and
warehousing costs.





Administrative
support, purchasing, receiving and most other fixed overhead costs are expensed
as Selling, General and Administrative expenses without regard to inventory
units.  Warehouse and production facilities costs, which make up less
than 10 percent of total costs, are allocated to inventory units on a per gallon
basis during the production of wine, prior to bottling the final
product.  No further costs are allocated to inventory units after
bottling.


31





Selling,
General and Administrative Expenses





Selling,
general and administrative expenses consist primarily of non-manufacturing
administrative and overhead costs, advertising and other marketing
promotions.  Advertising costs are expensed as incurred or the first
time the advertising takes place. For the years ended December 31, 2009 and
2008, advertising costs incurred were approximately $34,000 and $44,000
respectively.





The
Company provides an allowance to distributors for providing sample of products
to potential customers.  For the years ended December 31, 2009 and
2008, these costs, which are included in selling, general and administrative
expenses, totaled approximately $72,000 and $92,000 respectively.





Shipping
and Handling Costs





Amounts
paid by customers to the Company for shipping and handling costs are included in
the net revenue.  Costs incurred for shipping and handling charges are
included in selling, general and administrative expense.  For the
years ended December 31, 2009 and 2008, such costs totaled approximately
$332,000 and $437,000 respectively.  The Company's gross margins may
not be comparable to other companies in the same industry as other companies may
include shipping and handling costs as a cost of goods sold.





Excise
Taxes





The
Company pays alcohol excise taxes based on product sales to both the Oregon
Liquor Control Commission and to the U.S. Department of the Treasury, Alcohol
and Tobacco Tax and Trade Bureau.  The Company is liable for the taxes
upon the removal of product from the Company's warehouse on a per gallon
basis.  The federal tax rate is affected by a small winery tax credit
provision which declines based upon the number of gallons of wine production in
a year rather than the quantity sold.  The Company also pays taxes on
the grape harvest on a per ton basis to the Oregon Liquor Control Commission for
the Oregon Wine Advisory.  For the years ended December 31, 2009 and
2008, excise taxes incurred were approximately $459,000 and $418,000
respectively.





Stock
Based Compensation





The
Company expenses stock options on a straight line basis over the options’
related vesting term. For the year ended December 31, 2009, the Company
recognized pretax compensation expense related to stock options of
$17,976.  This compares to $56,230 of pretax compensation expense for
the period ended December 31, 2008.





Tax
Benefit of Disqualifying Disposition of Stock Options





The
Company has certain incentive stock options in 2009 that had been exercised and
the related stock subsequently sold before a required tax holding
period.  The sale of the stock thus became a disqualifying
disposition, which allows the Company to deduct as employee compensation the
difference between the exercise price for the stock option and the stock’s
selling price.





Basic
and Diluted Net Income per Share





Basic
earnings per share are computed based on the weighted-average number of common
shares outstanding each year.  Diluted earnings per share are computed
using the weighted average number of shares of common stock and potentially
dilutive securities assumed to be outstanding during the
year.  Potentially dilutive shares from stock options and other common
stock equivalents are excluded from the computation when their effect is
anti-dilutive.





Options
to purchase 355,700 shares of common stock were outstanding at December 31, 2009
and diluted weighted-average shares outstanding at December 31, 2009 include the
effect of 7,112 stock options.  Options to purchase 442,200 shares of
common stock were outstanding at December 31, 2008 and diluted weighted-average
shares outstanding at December 31, 2008 include the effect of 60,908 stock
options.


32





2009
                
                
                2008Weighted
                
                
                
                
                
                
                
                
                Weightedaverage
                
                
                Earnings
                
                
                
                
                
                average
                
                
                Earningsshares
                
                
                per
                
                
                
                
                
                shares
                
                
                perIncome
                
                
                outstanding
                
                
                share
                
                
                Income
                
                
                outstanding
                
                
                shareBasic
                
                $
                731,470
                
                
                
                4,869,298
                
                
                $
                0.15
                
                
                $
                708,594
                
                
                
                4,845,782
                
                
                $
                0.15Options
                
                
                -
                
                
                
                7,112
                
                
                
                -
                
                
                
                -
                
                
                
                60,908
                
                
                
                -Warrant
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Diluted
                
                $
                731,470
                
                
                
                4,876,410
                
                
                $
                0.15
                
                
                $
                708,594
                
                
                
                4,906,690
                
                
                $
                0.14





Statement
of cash flows


Supplemental
disclosure of cash flow information:





2009
                  
                  
                  2008Interest
      paid
                  
                  $
                  162,000
                  
                  
                  $
                  116,000Supplemental
      schedule of noncash investing and financing activities:Issuance
      of common stock(Note 7)
                  
                  $
                  498
                  
                  
                  $
                  8,458Purchases
      of Property Plant& Equipment included in accounts
    payable
                  
                  $
                  40,723
                  
                  
                  $
                  9,493





New
and recently issued accounting pronouncements





In
December 2007, the FASB issued a new statement regarding business combinations
located under ASC Topic 805 Business Combinations (formerly SFAS 141(revised
2007), Business Combinations ), which establishes principles and requirements
for how an acquirer recognizes and measures the identifiable assets acquired,
the liabilities assumed and any non-controlling interest in the acquiree in a
business combination. The new statement requires that assets and liabilities,
including contingencies, be recorded at the fair value determined on the
acquisition date with changes thereafter reflected in results of operations, as
opposed to goodwill. Additionally, the new statement modifies the treatment of
restructuring costs associated with a business combination and requires
acquisition costs to be expensed as incurred. The new statement also provides
guidance on disclosures related to the nature and financial impact of the
business combination and is effective for transactions closing after December
15, 2008 and for fiscal years beginning after December 15, 2008. The new
statement will be applied for future business combinations, if any, entered into
by the Company. The impact of this new standard is dependent on the nature of
completed acquisition. Any impact will be evaluated as part of the economic
evaluation of such a business combination.





In
December 2007, the FASB issued a new statement establishing accounting and
reporting standards for the non-controlling interest in a subsidiary and for the
deconsolidation of a subsidiary located under ASC Topic 810 Consolidation
(formerly SFAS 160, Noncontrolling Interests in Consolidated Financial
Statements – an amendment of ARB No. 51). This statement is effective
prospectively, except for certain retrospective disclosure requirements, for
fiscal years beginning after December 15, 2008. This statement was effective for
the Company at the beginning of the first quarter of 2009 and had no impact on
our financial statements since we have no non-controlling interests in any
subsidiaries and have had no subsidiary deconsolidation.





In May
2009, the FASB issued a new statement that establishes general standards of
accounting for, and disclosure of events that occur after the balance sheet date
but before the financial statements are issued or are available to be issued.
The new statement, located in ASC Topic 855 Subsequent Events (formerly SFAS
165, Subsequent Events) requires entities to disclose the date through which
subsequent events were evaluated as well as the rationale for why that date was
selected, that is, whether that date represents the date the financial
statements were issued or were available to be issued. The new statement is
effective for interim or annual periods ending after June 15, 2009, which was
the quarter ended June 30, 2009 for the Company. In February 2010, the FASB
amended its guidance removing the requirement for SEC filers to disclose the
date through which an entity has evaluated subsequent events. The adoption of
this new statement did not have a material impact on our financial
statements.





In June
2009, the FASB issued a new statement that provides for the FASB ASC (the
“Codification”) to become the single official source of authoritative,
nongovernmental U.S. generally accepted accounting principles (GAAP). The new
statement, located in ASC Topic 105-10 Generally Accepted Accounting Principles
(formerly SFAS 168, The FASB Accounting Standards CodificationTM and the
Hierarchy of Generally Accepted Accounting Principles – a replacement of FASB
Statement No. 162) is effective for interim and annual periods ending after
September 15, 2009, which was the quarter ended September 30, 2009 for the
Company.  The adoption of this statement did not have a material
impact on our financial statements.




33





2.    Accounts
Receivable





Oregon
law prohibits the sale of wine in Oregon on credit; therefore, the Company's
accounts receivable balances are primarily the result of sales to out-of-state
and foreign distributors. The Company's accounts receivable balance is net of an
allowance for doubtful accounts of $36,216 at December 31, 2009. This compares
to an allowance for doubtful accounts of $10,469 at December 31,
2008.





Changes
in the allowance for doubtful accounts are as follows:





Balance
      at
                                              
                                              Charged
      to
                                              
                                              Charged
      to
                                              
                                              Write-offs
                                              
                                              Balance
      atBeginning
                                              
                                              costs
      and
                                              
                                              other
                                              
                                              net
      of
                                              
                                              end
      ofOf
      period
                                              
                                              expenses
                                              
                                              accounts
                                              
                                              recoveries
                                              
                                              periodFiscal
      year ended December 31, 2009:Allowance
      for Doubtful accounts
                                              
                                              $
                                              10,469
                                              
                                              $
                                              28,660
                                              
                                              $
                                              (2,913
                                              )
                                              $
                                              -
                                              
                                              $
                                              36,216Fiscal
      year ended December 31, 2008:Allowance
      for Doubtful accounts
                                              
                                              $
                                              54,330
                                              
                                              $
                                              7,606
                                              
                                              $
                                              (51,467
                                              )
                                              $
                                              -
                                              
                                              $
                                              10,469





3.    Inventories





Inventories
consist of:


2009
                  
                  
                  2008Winemaking
      and packaging materials
                  
                  $
                  336,813
                  
                  
                  $
                  309,467Work-in-process
      (costs relating to unprocessed and/or unbottled wine
    products)
                  
                  
                  3,068,934
                  
                  
                  
                  3,350,830Finished
      goods (bottled wine and related products)
                  
                  
                  8,763,660
                  
                  
                  
                  6,943,907Current
      inventories
                  
                  $
                  12,169,407
                  
                  
                  $
                  10,604,204





4.    Property
and Equipment


2009
                  
                  
                  2008Land
      and improvements
                  
                  $
                  2,594,155
                  
                  
                  $
                  2,589,560Winery
      building and hospitality center
                  
                  
                  5,315,163
                  
                  
                  
                  4,969,758Equipment
                  
                  
                  5,709,728
                  
                  
                  
                  5,352,83513,619,046
                  
                  
                  
                  12,912,153Less
      accumulated depreciation
                  
                  
                  (7,426,817
                  )
                  
                  
                  (6,842,745
                  )$
                  6,192,229
                  
                  
                  $
                  6,069,408





5.     Line
of Credit Facility





In
December of 2005 the Company entered into a revolving line of credit agreement
with Umpqua Bank that allows borrowings of up to $2,000,000 against eligible
accounts receivables and inventories as defined in the agreement.  The
revolving line bears interest at prime, is payable monthly, and was initially
subject to annual renewal. The Company renewed the credit agreement before the
end of 2008 for a period of 18 months.  The next renewal date is June
6, 2010.  The interest rate was 3.25% at December 31, 2009 and
2008.  At December 31, 2009 there were borrowings of $140,964 on this
revolving line of credit. There was no outstanding balance on this revolving
line of credit at December 31, 2008.




34


The line
of credit agreement includes various covenants, which among other things,
requires the Company to maintain minimum amounts of tangible net worth,
debt-to-equity, and debt service coverage as defined, and limits the level of
acquisitions of property and equipment.  As of December 31, 2009, the
Company was in compliance with these covenants.





Umpqua
Bank Capital borrowings are collateralized by the bulk and case goods inventory
and the proceeds from the sales thereof.





6.    Long-Term
Debt





Long-term
      debt consists of:
                  
                  December
      31,
                  
                  
                  December
      31,2009
                  
                  
                  2008Northwest
      Farm Credit Services Loan #1
                  
                  $
                  648,930
                  
                  
                  $
                  950,242Northwest
      Farm Credit Services Loan #2
                  
                  
                  1,538,493
                  
                  
                  
                  1,582,540Northwest
      Farm Credit Services Loan #3
                  
                  
                  1,492,104Other
      Long Term Debt
                  
                  
                  39,341
                  
                  
                  
                  -3,718,868
                  
                  
                  
                  2,532,782Less
      current portion
                  
                  
                  (432,863
                  )
                  
                  
                  (354,536
                  )$
                  3,286,005
                  
                  
                  $
                  2,178,246





The
Company has three agreements with Northwest Farm Credit Services. Loan #1
requires monthly payments of $28,462, bears interest at a rate of 4.95%, is
collateralized by real estate and equipment, and matures in
2012.  Loan #2 requires monthly payments of $11,417, bears interest at
a rate of 5.95%, is collateralized by real estate and equipment, and matures in
2028.  Loan #3 requires monthly payments of $10,466, bears interest at
a rate of 6.7%, is collateralized by real estate and equipment, and matures in
2024.





The loan
agreements contain covenants, which require the Company to maintain certain
financial ratios and balances.  At December 31, 2009, the Company was
in compliance with these covenants.  In the event of future
noncompliance with the Company's debt covenants, Northwest Farm Credit Services
("FCS") would have the right to declare the Company in default, and at FCS'
option without notice or demand, the unpaid principal balance of the loan, plus
all accrued unpaid interest thereon and all other amounts due shall immediately
become due and payable.





Future
minimum principal payments of long-term debt mature as follows:





Year
ending


December
31,





2010
                  
                  $
                  432,8632011
                  
                  
                  456,1382012
                  
                  
                  131,3712013
                  
                  
                  137,4312014
                  
                  
                  141,541Thereafter
                  
                  
                  2,419,524$
                  3,718,868





The
weighted-average interest rates on the aforementioned borrowings for the fiscal
years ended December 31, are as follows:





2009
                      
                      
                      6.07
                      %2008
                      
                      
                      5.55
                      %




35





7.           Shareholders'
Equity





The
Company is authorized to issue 10,000,000 shares of its common
stock.  Each share of common stock is entitled to one
vote.  At its discretion, the Board of Directors may declare dividends
on shares of common stock, although the Board does not anticipate paying
dividends in the foreseeable future.





In each
of the years ended December 31, 2009 and 2008, the Company granted 150 and 1,425
shares of stock valued at $498 and $8,458, respectively, as compensation to
employees and agents.  The cost of these grants was capitalized as
inventory or included in selling, general and administrative expenses in the
statement of operations.  The effects of these noncash transactions
have been excluded from the cash flow statements in each period.





8.           Stock
Incentive Plan





The
Company has two stock option plans, the 1992 Stock Incentive Plan (“1992 Plan”)
and 2001 Stock Option Plan (“2001 Plan”).  No additional grants may be
made under the 1992 Plan.  The 2001 Plan, which is shareholder
approved, permits the grant of stock options and restricted stock awards for up
to 900,000 shares.  All stock options have an exercise price that is
equal to the fair market value of the Company’s stock on the date the options
were granted.  Administration of the plan, including determination of
the number, term, and type of options to be granted, lies with the Board of
Directors or a duly authorized committee of the Board of
Directors.  Options are generally granted based on employee
performance with vesting periods ranging from date of grant to seven
years.  The maximum term before expiration for all grants is ten
years.





The
following table presents information on stock options outstanding for the
periods shown:





2009
                          
                          
                          2008Weighted
                          
                          
                          WeightedAverage
                          
                          
                          AverageExercise
                          
                          
                          ExerciseShares
                          
                          
                          price
                          
                          
                          Shares
                          
                          
                          priceOutstanding
      at beginning of period
                          
                          
                          442,200
                          
                          
                          $
                          3.77
                          
                          
                          
                          459,200
                          
                          
                          $
                          3.90Granted
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -Exercised
                          
                          
                          (37,500
                          )
                          
                          $
                          2.00
                          
                          
                          
                          (14,000
                          )
                          
                          
                          4.62Forfeited
                          
                          
                          (49,000
                          )
                          
                          
                          -
                          
                          
                          
                          (3,000
                          )
                          
                          
                          -Outstanding
      at end of period
                          
                          
                          355,700
                          
                          
                          $
                          4.16
                          
                          
                          
                          442,200
                          
                          
                          $
                          3.77





The
following table presents information on stock options outstanding for the
periods shown:




2009
                  
                  
                  2008Intrinsic
      value of options exercised in the period
                  
                  $
                  52,520
                  
                  
                  $
                  22,390Stock
      options fully vested and expected to vest
                  
                  
                  355,700
                  
                  
                  
                  442,200Weighted
      average exercise Price
                  
                  $
                  4.16
                  
                  
                  $
                  3.77Aggregate
      intrinsic value
                  
                  $
                  46,015
                  
                  
                  $
                  83,705Weighted
      average contractual term of options
                  
                  3.52
      years
                  
                  
                  4.43
      yearsStock
      options vested and Currently exercisable
                  
                  
                  355,700
                  
                  
                  
                  434,000Weighted
      average exercise Price
                  
                  $
                  4.16
                  
                  
                  $
                  3.80Aggregate
      intrinsic value
                  
                  $
                  46,015
                  
                  
                  $
                  78,477Weighted
      average contractual term of options
                  
                  3.52
      years
                  
                  
                  4.41
      years




36




Weighted-average
options outstanding and exercisable at December 31, 2009 are as
follows:





Options
      outstanding
                  
                  
                  Options
      exercisableWeightedNumber
                  
                  
                  average
                  
                  
                  Weighted
                  
                  
                  Number
                  
                  
                  Weightedoutstanding
      at
                  
                  
                  remaining
                  
                  
                  average
                  
                  
                  exercisable
      at
                  
                  
                  averageExercise
                  
                  December
      31,
                  
                  
                  contractual
                  
                  
                  exercise
                  
                  
                  December
      31,
                  
                  
                  exerciseprice
                  
                  2009
                  
                  
                  life
                  
                  
                  price
                  
                  
                  2009
                  
                  
                  price$
      1.56
                  
                  
                  4,000
                  
                  
                  
                  1.58
                  
                  
                  
                  1.56
                  
                  
                  
                  4,000
                  
                  
                  
                  1.562.31
                  
                  
                  12,000
                  
                  
                  
                  5.40
                  
                  
                  
                  2.31
                  
                  
                  
                  12,000
                  
                  
                  
                  2.312.99
                  
                  
                  16,000
                  
                  
                  
                  5.12
                  
                  
                  
                  2.99
                  
                  
                  
                  16,000
                  
                  
                  
                  2.993.29
                  
                  
                  75,000
                  
                  
                  
                  0.12
                  
                  
                  
                  3.29
                  
                  
                  
                  75,000
                  
                  
                  
                  3.293.76
                  
                  
                  96,000
                  
                  
                  
                  5.58
                  
                  
                  
                  3.76
                  
                  
                  
                  96,000
                  
                  
                  
                  3.764.14
                  
                  
                  4,000
                  
                  
                  
                  0.58
                  
                  
                  
                  4.14
                  
                  
                  
                  4,000
                  
                  
                  
                  4.145.00
                  
                  
                  84,700
                  
                  
                  
                  5.99
                  
                  
                  
                  5.00
                  
                  
                  
                  84,700
                  
                  
                  
                  5.005.50
                  
                  
                  64,000
                  
                  
                  
                  0.99
                  
                  
                  
                  5.50
                  
                  
                  
                  64,000
                  
                  
                  
                  5.50$
      1.56-$5.50
                  
                  
                  355,700
                  
                  
                  
                  3.52
                  
                  
                  $
                  4.16
                  
                  
                  
                  355,700
                  
                  
                  $
                  4.16





All
share-based compensation is measured at the grant date based on the fair value
of the award, and is recognized as an expense in earnings over the requisite
service period.  The fair value of each stock option granted is estimated
on the date of grant using the Black-Scholes based stock option valuation model.
This model uses the assumptions listed in the table below. Expected volatilities
are based on implied volatilities from the Company’s stock, historical
volatility of the Company’s stock, and other factors.  Expected dividends
are based on the Company’s plan not to pay dividends for the foreseeable
future.  The Company uses historical data to estimate option exercises and
employee terminations within the valuation model. The risk-free rate for periods
within the contractual life of the option is based on the U.S. Treasury yield
curve in effect at the time of grant.





2009
                    
                    
                    2008Risk-free
      interest rate
                    
                    
                    3.85
                    %
                    
                    
                    2.25
                    %Expected
      lives
                    
                    10
      years
                    
                    
                    10
      yearsExpected
      volatility
                    
                    
                    32
                    %
                    
                    
                    39
                    %





Adjustments
are made for options forfeited prior to vesting.  For the year ended
December 31, 2009, the total value of the options granted was computed to be
approximately $1,481,489, which would be amortized on the straight-line basis
over the vesting period of the options.





9.
Income Taxes





The
provision for income taxes consists of:


2009
                    
                    
                    2008Current
      tax expense:Federal
                    
                    $
                    (57,869
                    )
                    
                    $
                    443,158State
                    
                    
                    22,376
                    
                    
                    
                    100,999(35,493
                    )
                    
                    
                    544,157Deferred
      tax expense (benefit):Federal
                    
                    
                    245,281
                    
                    
                    
                    5,300State
                    
                    
                    34,213
                    
                    
                    
                    5,084279,494
                    
                    
                    
                    10,384Total
                    
                    $
                    244,001
                    
                    
                    $
                    554,541




37





The
effective income tax rate differs from the federal statutory rate as follows:


Year
      ended December 31,2009
                    
                    
                    2008Federal
      statutory rate
                    
                    
                    34.0
                    %
                    
                    
                    34.0
                    %State
      taxes, net of federal benefit
                    
                    
                    4.7
                    
                    
                    
                    4.5Permanent
      differences
                    
                    
                    2.0
                    
                    
                    
                    0.8Other,
      primarily prior year taxes
                    
                    
                    (1.0
                    )
                    
                    
                    8.3Adjustments
      to deferred tax asset
                    
                    
                    (2.9
                    )
                    
                    
                    (3.7
                    )Prior
      period adjustment
                    
                    
                    (11.8
                    )
                    
                    
                    -25.0
                    %
                    
                    
                    43.9
                    %





Permanent
differences consist primarily of nondeductible meals and entertainment and life
insurance premiums.





Deferred
tax assets and (liabilities) at December 31 consist of:





2009
                    
                    
                    2008Accounts
      receivable
                    
                    $
                    14,000
                    
                    
                    $
                    4,056Inventories
                    
                    
                    -
                    
                    
                    
                    106,650Deferred
      gain on sale-leaseback
                    
                    
                    122,000
                    
                    
                    
                    134,036Stock
      Compensation
                    
                    
                    2,000
                    
                    
                    
                    3,342Other
                    
                    
                    19,000
                    
                    
                    
                    6,818Total
      deferred tax assets
                    
                    
                    157,000
                    
                    
                    
                    254,902Prepaids
                    
                    
                    (23,000
                    )
                    
                    
                    (39,166
                    )Inventories
                    
                    
                    (74,000
                    )
                    
                    
                    -Depreciation
                    
                    
                    (613,000
                    )
                    
                    
                    (489,243
                    )Total
      deferred tax liabilities
                    
                    
                    (710,000
                    )
                    
                    
                    (528,409
                    )Net
      deferred tax liability
                    
                    $
                    (553,000
                    )
                    
                    $
                    (273,507
                    )





10.           Related
Party Transactions





The
Company provides living accommodations in a manufactured home on the Company's
premises for the president as additional compensation for security and lock-up
services the president provides.  Over the years the Company has
recorded annual expenses less than $12,000 related to the housing provided for
its president.





In 2009
the Company advanced the President a total of $30,000 that was subsequently
reimbursed via a reduction of his 2009 annual incentive compensation paid in
2010.





In
February 2007 the Company entered into a lease agreement for approximately 60
acres of vineyard land at Elton Vineyards.  This lease is for a 10
year term with four five-year renewals at the Company's option and a first right
of refusal in the event of the vineyard's sale. For 2009, the annual costs of
this lease were $109,000. For subsequent years there is an escalation provision
tied to the CPI not to exceed 2% per annum.  Betty M. O'Brien, a
Director of the Company, is a principal owner of Elton Vineyards.





11.           Commitments
and Contingencies





Litigation





From time
to time, in the normal course of business, the Company is a party to legal
proceedings.  Management believes that these matters will not have a
material adverse effect on the Company's financial position, results of
operations or cash flows, but due to the nature of the litigation, the ultimate
outcome cannot presently be determined.


38





Operating
Leases





The
Company entered into a lease agreement for approximately 45 acres of vineyards
and related equipment in 1997.  In December 1999, under a
sale-leaseback agreement, the Company sold a portion of the Tualatin Vineyards
property with a net book value of approximately $1,000,000 for approximately
$1,500,000 cash and entered into a 20-year operating lease
agreement.  The gain of approximately $500,000 is being amortized over
the 20-year term of the lease. In December 2004, under a new sale-leaseback
agreement, the Company sold a 75.3 acres portion of the Tualatin Vineyards
property with a net book value of approximately $551,000 for approximately
$727,000 cash and entered into a 14-year operating lease agreement for 42.7
acres of the subject sale agreement.  Approximately $99,000, relating
to the 42.7 acres leased back, of the total gain of $176,000 realized from this
75.3 acre sale/leaseback transaction has been deferred and will be amortized
over the life of the lease agreement.





The
amortization of the deferred gain totals approximately $25,000 per year for the
1999 sale-leaseback agreement and $7,000 for the 2004 sale-leaseback agreement,
and is recorded as an offset to the related lease expense in selling, general
and administrative expenses.





In 2005,
the Company entered into a long-term grape purchase agreement with one of its
Willamette Valley wine grape growers whereby the Winery agreed to purchase the
grape yields at fixed contract prices through 2015, with the first crop received
in 2007.  In 2006, the Company entered into another long-term grape
purchase agreement with the same Willamette Valley wine grape growers whereby
the Winery agreed to purchase additional grape yields at fixed contract prices
through 2016, with the first crop in 2008. The Company is obligated to purchase
100% of the crop produced within the strict quality standards and crop loads,
equating to maximum payments of approximately $1,500,000 per year.  We
cannot calculate the minimum payment as such a calculation is dependent in large
part on an unknown – the amount of grapes produced in any given
year.  If there are no grapes produced in any given year, or if the
grapes are rejected for failure to meet contractual quality standards, the
Company has no payment obligation for that year.





In
February 2007 the Company entered into a lease agreement for approximately 60
acres of vineyard land at Elton Vineyards.  This lease is for a 10
year term with four five-year renewals at the Company's option and a first right
of refusal in the event of the vineyard's sale.  For 2009, the annual
costs of this lease were $109,000. For subsequent years there is an escalation
provision tied to the CPI not to exceed 2% per annum.  Betty M.
O'Brien, a Director of the Company, is a principal owner of Elton
Vineyards.





In
December 2007 the Company entered into a three-year lease agreement for a small,
four-room office space in Wilsonville, Oregon.  This space was leased
to accommodate the out-of-state sales team.





In July
2008 the Company entered into a 34 year lease agreement with a property owner in
the Eola Hills for 104 acres adjacent to the existing Elton Vineyards
site.  These 104 acres are currently planted in Christmas trees but
will be developed into vineyards over the next few years. Terms of this
agreement contain rent escalation that rises as the vineyard is
developed.





As of
December 31, 2009, future minimum lease payments are as follows:





Year
      endingDecember
      31,2010
                  
                  
                  374,1032011
                  
                  
                  346,5062012
                  
                  
                  328,2332013
                  
                  
                  326,9092014
                  
                  
                  165,802Thereafter
                  
                  
                  1,630,235Total
                  
                  $
                  3,171,788





The
Company is also committed to lease payments for various pieces of office
equipment.  Total rental expense for these operating leases amounted
to $15,476 and $20,306 in 2009 and 2008, respectively.  In addition,
payments for the leased vineyards have been included in inventory or vineyard
developments costs and aggregate approximately $309,522 and $307,327 for the
years ended December 31, 2009 and 2008, respectively.





Vineyard
Development





The
Company has approximately 204 acres of undeveloped vineyard land at December 31,
2009.  This estimated cost to develop this for grape production is
approximately $13,000 per acre or $2.6 million in total.  The Company
estimates that this acreage will be developed as projected sales demand dictates
the need for increased grape supply.




39


12.           Employee
Benefit Plan





In
February 2006, the Company instituted a 401(k) profit sharing plan covering all
eligible employees. Employees who participate may elect to make salary deferral
contributions to the Plan up to 100% of the employees’ eligible payroll subject
to annual Internal Revenue Code maximum limitations. We make a matching
contribution of $1 for every $1 contributed by the participant up to 4% of the
participant’s eligible payroll. In addition, the Company may make a
discretionary contribution to the entire qualified employee pool, in accordance
with the Plan.





For the
years ended December 31, 2009 and 2008 the amount expensed under this plan was
approximately $64,745  and $67,416 respectively.





13.           Segment
Reporting





The
Company has identified two operating segments, Produced Wine and Bacchus
Distribution. Bacchus Distribution (dba Bacchus Fine Wines), is the company’s
in-state distribution department. Bacchus distributes produced wine, purchased
wine and glassware at wholesale prices to in-state customers. Produced wine
represents all Willamette Valley Vineyard branded wine which is produced at the
winery.  Purchased wines and glassware are brands purchased from other
wine distributors and wineries for sale to in-state customers. For segment
reporting, the produced wines distributed by Bacchus are consolidated with
Retail and Out-of-State sales and shown as Produced Wines.





Discrete
financial information for these operating segments was not available in prior
years, which resulted in the segments being aggregated and reflected as a single
segment.  Effective as of the three months ended March 31, 2008,
certain discrete financial information became available with the implementation
of new accounting and inventory tracking software.  The two segments
reflect how the Company’s operations are evaluated by senior management and the
structure of its internal financial reporting.  The Company evaluates
performance based on the gross profit of the respective business
segment.  Sales, general and administrative expenses are not allocated
between operating segments, therefore net income information for the respective
segments is not available.  Discrete financial information related to
segment assets, other than inventory, is not available and that information
continues to be aggregated.





The
following tables outline the sales, cost of sales and gross profit, for the
twelve month periods ended December 31, 2009 and 2008 by operating
segment:





Twelve months ended December 31,
      2009Bacchus
                        
                        
                        ProducedDistribution
                        
                        
                        Wine
                        
                        
                        TotalNet
      Sales
                        
                        $
                        4,532,176
                        
                        
                        $
                        12,031,536
                        
                        
                        $
                        16,563,712Cost
      of Sales
                        
                        $
                        3,319,689
                        
                        
                        $
                        5,530,111
                        
                        
                        $
                        8,849,800Gross
      Profit
                        
                        $
                        1,212,487
                        
                        
                        $
                        6,501,425
                        
                        
                        $
                        7,713,912%
      of sales
                        
                        
                        26.8
                        %
                        
                        
                        54.0
                        %
                        
                        
                        46.6
                        %Twelve months ended December 31,
      2008Bacchus
                        
                        
                        ProducedDistribution
                        
                        
                        Wine
                        
                        
                        TotalNet
      Sales
                        
                        $
                        4,881,162
                        
                        
                        $
                        11,167,076
                        
                        
                        $
                        16,048,238Cost
      of Sales
                        
                        $
                        3,452,284
                        
                        
                        $
                        4,777,594
                        
                        
                        $
                        8,229,877Gross
      Profit
                        
                        $
                        1,428,878
                        
                        
                        $
                        6,389,482
                        
                        
                        $
                        7,818,361%
      of sales
                        
                        
                        29.3
                        %
                        
                        
                        57.2
                        %
                        
                        
                        48.7
                        %




40





Total
inventory for Bacchus Distribution at the period ended December 31, 2009 was
$1,664,799 of purchased wines and $338,822 of non-wine merchandise at period end
December 31, 2009.  This compares to produced bottled wine inventory
of $6,602,463, produced bulk wine inventory of $2,947,005 and $616,318 of
non-wine merchandise and work-in-process for the same period. For the period
ended December 31, 2008 total inventory for Bacchus Distribution was $2,012,796
of purchased wines and $231,049 of non-wine merchandise.  This
compared to produced bottled wine inventory of $4,566,902, produced bulk wine
inventory of $3,249,527 and $543,930 of non-wine merchandise and work-in-process
for the same period.





14.  Quarterly
Financial Information (Unaudited)




Following
is a summary of unaudited quarterly financial information for fiscal 2009 and
2008.





Condensed
      Consolidated Statements of IncomeYear
      Ended December 31, 2009
                  
                  
                  Q1
                  
                  
                  
                  Q2
                  
                  
                  
                  Q3
                  
                  
                  
                  Q4(in
      thousands, except per share data)Revenue
                  
                  $
                  3,629
                  
                  
                  $
                  4,052
                  
                  
                  $
                  4,360
                  
                  
                  $
                  4,523Gross
      profit
                  
                  
                  1,866
                  
                  
                  
                  1,996
                  
                  
                  
                  2,129
                  
                  
                  
                  1,723Income
      (loss) from operations
                  
                  
                  304
                  
                  
                  
                  458
                  
                  
                  
                  460
                  
                  
                  
                  (105
                  )Net
      income (loss)
                  
                  
                  165
                  
                  
                  
                  254
                  
                  
                  
                  248
                  
                  
                  
                  64Basic
      net income (loss) per share
                  
                  $
                  .03
                  
                  
                  $
                  .05
                  
                  
                  $
                  .05
                  
                  
                  $
                  .01Diluted
      net income (loss) per share
                  
                  $
                  .03
                  
                  
                  $
                  .05
                  
                  
                  $
                  .05
                  
                  
                  $
                  .01Shares
      used in calculation of net income (loss) per share:Basic
                  
                  
                  4,852,244
                  
                  
                  
                  4,858,480
                  
                  
                  
                  4,877,020
                  
                  
                  
                  4,888,977Diluted
                  
                  
                  4,864,444
                  
                  
                  
                  4,877,738
                  
                  
                  
                  4,888,667
                  
                  
                  
                  4,907,325





Condensed
      Consolidated Statements of IncomeYear
      Ended December 31, 2008
                  
                  
                  Q1
                  
                  
                  
                  Q2
                  
                  
                  
                  Q3
                  
                  
                  
                  Q4(in
      thousands, except per share data)Revenue
                  
                  $
                  3,402
                  
                  
                  $
                  3,885
                  
                  
                  $
                  4,057
                  
                  
                  $
                  4,704Gross
      profit
                  
                  
                  1,649
                  
                  
                  
                  1,911
                  
                  
                  
                  1,981
                  
                  
                  
                  2,277Income
      (loss) from operations
                  
                  
                  120
                  
                  
                  
                  265
                  
                  
                  
                  462
                  
                  
                  
                  516Net
      income (loss)
                  
                  
                  60
                  
                  
                  
                  158
                  
                  
                  
                  244
                  
                  
                  
                  247Basic
      net income (loss) per share
                  
                  $
                  .01
                  
                  
                  $
                  .03
                  
                  
                  $
                  .05
                  
                  
                  $
                  .05Diluted
      net income (loss) per share
                  
                  $
                  .01
                  
                  
                  $
                  .03
                  
                  
                  $
                  .05
                  
                  
                  $
                  .05Shares
      used in calculation of net income (loss) per share:Basic
                  
                  
                  4,837,288
                  
                  
                  
                  4,844,475
                  
                  
                  
                  4,850,327
                  
                  
                  
                  4,798,258Diluted
                  
                  
                  4,997,082
                  
                  
                  
                  5,006,888
                  
                  
                  
                  4,948,301
                  
                  
                  
                  4,840,530




The
following is a summary of the significant fourth quarter adjustments for our
fiscal year 2009:





Allocation
      of produced wine expenditures to costs of goods sold
                  
                  $
                  373,691





Item
9.  Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.





None.


41





Item
9A.  Controls and Procedures.




We
maintain disclosure controls and procedures that are designed to ensure that the
information required to be disclosed in the reports that we file or submit under
the Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the SEC’s rules and forms, and that such information is
accumulated and communicated to our management, including our Chief Executive
Officer and Chief Financial Officer/Controller as appropriate, to allow timely
decisions regarding required disclosure. In connection with the preparation of
this Annual Report on Form 10-K, our management carried out an evaluation, under
the supervision and with the participation of our CEO and CFO/Controller, as of
December 31, 2009, of the effectiveness of the design and operation of our
disclosure controls and procedures, as such term is defined under Rule 13a-15(e)
and 15d-15(e) under the Exchange Act.  Based upon this evaluation, our
CEO and CFO concluded that our disclosure controls and procedures were not
effective as of December 31, 2009.  Management’s conclusion was based
on discoveries and observations made during the 2009 year-end audit in
conjunction with our independent audit firm, Moss-Adams
LLP.  Management identified the following material
weaknesses:





·
            Lack
      of sufficient procedures and controls related to the allocation of costs
      to our produced wines. This material weakness was identified during the
      2008 year-end audit by management and accounting staff present at the time
      of the audit, in conjunction with our independent auditors, Moss-Adams
      LLP.  During the 2009 year-end audit significant analysis and
      review was completed and ultimately resulted in an adjustment to inventory
      and cost of goods sold of $373,691. Accordingly, the material weakness
      identified in 2008 was still present as of December 31,
    2009.




Management’s
Report on Internal Control over Financial Reporting


Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting. Our internal control over financial reporting
is a process designed to provide reasonable assurance regarding the reliability
of our financial reporting and the preparation of our financial statements for
external purposes in accordance with generally accepted accounting principles.
Internal control over financial reporting is defined in Rules 13a-15(f) and
15d-15(f) promulgated under the Exchange Act and includes those policies and
procedures that: (a) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and
dispositions of our assets; (b) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that
our receipts and expenditures are being made only in accordance with
authorizations of our management and directors; and (c) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition,
use or disposition of our assets that could have a material effect on our
financial statements. All internal controls, no matter how well designed, have
inherent limitations. Therefore, even those systems determined to be effective
can provide only reasonable assurance with respect to financial statement
preparation and presentation.




Our
management assessed the effectiveness of our internal control over financial
reporting as of December 31, 2009. In making this assessment, management
used the criteria set forth by the Committee of Sponsoring Organizations of the
Treadway Commission (“COSO”) in Internal Control – Integrated
Framework.  In performing this assessment, management
identified the following material weakness:





·
            Lack
      of sufficient procedures and controls related to the allocation of costs
      to our produced wines. This weakness was identified during the 2008
      year-end audit by management and accounting staff present at the time of
      the audit, in conjunction with our independent auditors, Moss-Adams
      LLP.  During the 2009 year-end audit significant analysis and
      review was completed and ultimately resulted in an adjustment to inventory
      and cost of goods sold of $373,691.




Based on
its assessment, our management concluded that, as of December 31, 2009, our
internal control over financial reporting was not
effective.  Management believes that the one material weakness has not
affected our ability to present GAAP-compliant financial statements in this Form
10-K.  During the year-end financial statement close we were able to
recognize and adjust our financial records to properly present our financial
statements and we were therefore able to present GAAP-compliant financial
statements.  Management does not believe that its weakness with
respect to its procedures and controls have had a pervasive effect upon our
financial reporting and the overall control environment due to our ability to
make the necessary reconciling adjustments to our financial
statements.


42




The
reconciling adjustment posted to our 2009 closing trial balance was identified
by both the company’s internal accounting personnel and our auditors after our
closing trial balance was provided to our auditors for their final fieldwork in
February.  This
adjustment was deemed to be a significant fourth quarter adjustment and was
disclosed in Footnote 14 of our 2009 financial
statements.  There were other insignificant adjustments
identified by both management and our auditor after the commencement of the
audit final fieldwork.




Given the
reconciling adjustments posted during the year-end financial statement close, we
undertook an evaluation of the underlying causes of this error, including an
evaluation the accounting and finance personnel, in connection with our
assessment of the effectiveness of internal control over financial reporting at
December 31, 2009.   We expanded the scope of the related
reconciliations and as well as additional analysis of other accounts in light of
the material weakness identified.  We believe the additional
procedures performed by management subsequent to the commencement of our
auditors fieldwork, but prior to the filing of our Form 10-K mitigated the risk
of material misstatement in the financial statements.




This
annual report does not include an attestation report of our registered public
accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation by our registered public
accounting firm pursuant to temporary rules of the Securities and Exchange
Commission that permit the Company to provide only management’s report in this
annual report.





Management’s
Remediation Initiatives





In
addition to the remediation efforts specifically discussed above, management has
commenced a number of initiatives to address the material weakness noted above
and those disclosed in our 2008 report on Internal Controls Over Financial
Reporting, including the following





Management
has hired additional experienced resources in the last quarter of 2009 to ensure
that a process design is created and implemented with proper training of
accounting personnel.  The Company has shown significant improvement
in remediating material weaknesses previously identified and disclosed in prior
years and recognizes the importance of having critical accounting resources
employed to fully remediate any material weakness.





Management
is undertaking a review of its inventory costing processes and intends to
increase the frequency and depth of the analysis of produced wine inventory
costs.





Key
managers and accounting personnel will work closely with our independent audit
firm in evaluating our progress in remediating this material weakness with
oversight by the audit committee.





Elements
of our remediation plan can only be accomplished over time and we can offer no
assurances that those initiatives will ultimately have the intended
effects.





Management
will continue the process of reviewing existing controls, procedures and
responsibilities to more closely identify financial reporting risks and the
required controls to address them.  Key control and compensating
control procedures will be developed to ensure that material weaknesses are
properly addressed and related financial reporting risks are mitigated. Periodic
control validation and testing will also be implemented to ensure that controls
continue to operate consistently and as designed.





Changes
in Internal Control over Financial Reporting





In 2009
the Company revised the procedures for cash reconciliation which resulted in
improved accuracy and therefore no adjusting entries were recognized during the
audit review.  It is management’s belief that this former material
weakness has been fully remediated in 2009.  In the third quarter of
2009 management engaged consulting resources to review and improve its perpetual
inventory maintenance and procedures. It is management’s belief that this former
material weakness has been fully remediated in 2009.  In November 2009
the Company supplemented its accounting resources and hired a full-time,
experienced controller to assist in improving the internal controls over
financial reporting. The Company utilizes contract accounting resources to help
supplement accounting activities as necessary.  It is management’s belief
that this former material weakness has been fully remediated in
2009.  There have not been any other changes in the Company’s internal
control over financial reporting (as such term is defined in Rules 13a-15(f) and
15d-15(f) under the Exchange Act) during the Company’s fourth fiscal quarter
that have materially affected, or are reasonably likely to materially affect,
the Company’s internal control over financial reporting.


43





Item
9B.  Other Information.





None.





PART
III





Item
10.     Directors, Executive Officers and Corporate
Governance.





Directors,
nominees for election as a director, and each such person's age at December 31,
2009 and position with the Company.





Name
                
                Position(s) with the
Company
                
                AgeJames
      W. Bernau ***
                
                Chairperson
      of the Board,President
      and Director
                
                56Craig
      Smith **
                
                Secretary
      and Director
                
                63Jeffrey
      J. Fox
                
                Chief
      Financial Officer
                
                45James
      L. Ellis ***
                
                Director
                
                65Sean
      M. Cary
                
                Director
                
                36Thomas
      M. Brian **
                
                Director
                
                61Delna
      L. Jones * ***
                
                Director
                
                69Betty
      M. O'Brien *
                
                Director
                
                65Stan
      G. Turel * ** ***
                
                Director
                
                62





*Member
of the Compensation Committee


**Member
of the Audit Committee


***Member
of the Executive Committee





All
directors hold office until the next annual meeting of shareholders or until
their successors have been elected and qualified.  Executive officers
are appointed by the Board of Directors and serve at the pleasure of the Board
of Directors.  Set forth below is additional information as to each
director and executive officer of the Company.





James W.
Bernau.  Mr. Bernau has been President and Chairperson of the
Board of Directors of the Company since its inception in May
1988.  Willamette Valley Vineyards was originally established as a
sole proprietorship by Oregon winegrower Jim Bernau in 1983, and he co-founded
the Company in 1988 with Salem grape grower, Donald Voorhies.  From
1981 to September 1989, Mr. Bernau was Director of the Oregon Chapter of the
National Federation of Independent Businesses ("NFIB"), an association of 15,000
independent businesses in Oregon. Mr. Bernau has served as the President of the
Oregon Winegrowers Association and the Treasurer of the association's Political
Action Committee (PAC) and Chair of the Promotions Committee of the Oregon Wine
Advisory Board, the State of Oregon's agency dedicated to the development of the
industry.  In March 2005, Mr. Bernau received the industry's Founder's
Award for his service.





Craig Smith, CPA, MBA, JD.
Mr. Smith has served as a Director since October 2007 and as Secretary since
2009.  Mr. Smith is the Vice President/Chief Financial Officer of
Chemeketa Community College in Salem, Oregon.  He was an Adjunct
Professor at the Atkinson Graduate School of Management at Willamette
University, as well as Managing Partner of a large local CPA firm.  He
has served on many State of Oregon commissions and he has served as the Board
Chairperson for many of the local non-profit and educational institutions
including the Salem Keizer School Board, Chemeketa Community College Board of
Education, State Fair Dismissal Appeals Board, Mid-Willamette Valley Council of
Governments, Oregon School Boards Association and the United Way.  Mr.
Smith is an active member of the Oregon State Bar and a Certified Public
Accountant.





Jeffrey J.
Fox.  Mr. Fox has been Chief Financial Officer since October
2007.  Previously, from 2006 to 2007, Mr. Fox served as the Chief
Financial Officer for Traeger Pellet Grills LLC based in Wilsonville,
Oregon.  The principal business of Traeger Pellet Grills LLC is the
manufacturing and distribution of barbecue grills.  From 2005 to 2006
he served as Analysis Manager and acting Controller for the Georgia-Pacific
paper mill based in Bellingham, Washington.  The principal business of
Georgia-Pacific is the manufacturing of consumer paper products. Prior to that,
from 2001 to 2005, he served as Controller for Georgia-Pacific Northwest
Handling Division located in Portland, Oregon. The principal business of
Georgia-Pacific Northwest Handling Division is the distribution of
Georgia-Pacific brand consumer paper products.  None of the foregoing
organizations are a parent, subsidiary or other affiliate of the
Company.  Mr. Fox holds a Bachelor of Science Degree in Finance from
Oregon State University.




44


James L.
Ellis.  Mr. Ellis has served as a Director since July 1991.
Mr.
Ellis retired from full time duties with the Company in July of 2009 and
currently works part-time on selected projects.Mr. Ellis previously
served as the Company's Director of Human Resources from 1993 to
2009.  He also served as the Company’s Secretary from 1997 to 2009,
and Vice President /Corporate from 1998 to 2009.  From 1990 to 1992,
Mr. Ellis was a partner in Kenneth L. Fisher, Ph.D. & Associates, a
management-consulting firm.  From 1980 to 1990, Mr. Ellis was Vice
President and General Manager of R.A. Kevane & Associates, a Pacific
Northwest personnel-consulting firm.  From 1962 to 1979, Mr. Ellis was
a member of and administrator for the Christian Brothers of California, owner of
Mont La Salle Vineyards and producer of Christian Brothers wines and
brandy.





Sean M. Cary.  Mr.
Cary was elected to the Board of Directors in 2007.  Mr. Cary is the
Corporate Controller of National Warranty Corporation, a Eugene, Oregon based
provider of finance and insurance products sold through automobile dealers
located in the Pacific Northwest.  Previously, Mr. Cary served as the
CFO of Cascade Structural Laminators, a laminated bean manufacturer
headquartered in Eugene, Oregon and prior to that as Controller of Willamette
Valley Vineyards.  Mr. Cary served in the U.S. Air Force as a
Financial Officer.  Mr. Cary holds a Master of Business Administration
degree from the University of Oregon and a Bachelor of Science Degree in
Management from the U.S. Air Force Academy.





Thomas M.
Brian.  Mr. Brian was appointed to the Board of Directors in
June of 2004.  Mr. Brian has served as Chairman of the Washington
County Board of Commissioners since 1999.  Previously, he served for
10 years in the Oregon House of Representatives.  While in the
legislature, Mr. Brian was Chairman of the Revenue Committee and served on the
Judicial and Ways and Means Committees. He also served 10 years as City
Councilor and Mayor of Tigard, OR.  Mr. Brian has successfully owned
and operated a commercial/industrial real estate company for eighteen
years.





Delna L.
Jones.  Ms. Jones has served as a Director since November 1994.
Ms. Jones resigned from the Board in December of 2002 having moved to Southern
California and was reappointed by the Board in March of 2005 having returned to
Oregon.  Currently Ms. Jones is President of Delna Jones and
Associates, an independent consulting firm.  Ms. Jones was elected in
1998 and served as a County Commissioner for Washington County, Oregon from 1998
to 2000.  Ms. Jones has served as project director for the CAPITAL
Center, an education and business consortium from 1994 to 1998.  From
1985 to 1990, Ms. Jones served as Director of Economic Development with US West
Communications.  Beginning in 1982, she was elected six times to the
Oregon House as the State Representative for District 6.  During her
tenure, she served as the Assistant Majority Leader; she also chaired the
Revenue and School Finance committee,and served on
the Legislative Rules and Reorganization committee and the Business and Consumer
Affairs committee.





Betty M.
O'Brien.  Ms. O'Brien has served as a Director since July 1991.
Ms. O'Brien is co-owner of Elton Vineyards L.L.C., a commercial vineyard located
in Eola Hills in Yamhill County, Oregon and established in 1983.  Ms.
O'Brien was the Executive Director of the Oregon Wine Board from 2001 to
2004.  Ms. O'Brien was employed by Willamette University as its
Director of News and Publications from 1988 to 2000.  She is a member
of the Oregon Winegrowers Association, having previously served as its President
and Treasurer and as a director.  Ms. O’Brien is a member of the
Vineyard Management/Winemaking Program Advisory Committee at Chemeketa Community
College (CCC). She headed a wine industry task force developing a new wine
marketing program and curriculum leading to a two-year degree at
CCC.  She now teaches Introduction to Wine Marketing.  She
serves as Chair of the Board of Directors of LIVE (Low Input Viticulture and
Enology).





Stan G. Turel.  Mr.
Turel has served as a Director since November of 1994. Mr. Turel is President of
Turel Enterprises, a real estate management company managing his own properties
in Oregon, Washington and Idaho. Prior to his current activities, Mr. Turel was
the Principal and CEO of Columbia Turel, (formally Columbia Bookkeeping, Inc.) a
position which he held from 1974 to 2001. Prior to the sale of the company to
Fiducial, one of Europe's largest accounting firms, Columbia had 26,000 annual
tax clients including 4,000 small business clients. Additionally Mr. Turel
successfully operated as majority owner two cable TV companies during the 80's
and 90's which were eventually sold to several public corporations. Mr. Turel is
a pilot, was a former delegate to the White House Conference on Small Business
and held positions on several state and local Government
committees.


45




Section
16(a) Beneficial Ownership Reporting Compliance





Section
16(a) of the Securities Exchange Act of 1934, as amended, requires the
Company's officers, directors and persons who own more than ten percent of a
registered class of the Company's equity securities to file certain reports with
the Securities and Exchange Commission (the “SEC”) regarding ownership of, and
transactions in, the Company's securities. These officers, directors and
stockholders are also required by SEC rules to furnish the Company with copies
of all Section 16(a) reports that are filed with the SEC.  Based
solely on a review of copies of such forms received by the Company and written
representations received by the Company from certain reporting persons, the
Company believes that for the year ended December 31, 2009 all Section 16(a)
reports required to be filed by the Company's executive officers, directors and
10% stockholders were filed on a timely basis.





Code
of Ethics





The
Company adopted a code of ethics applicable to its principal executive officer,
principal financial officer, principal accounting officer or controller, or
persons performing similar functions, which is a "code of ethics" as defined by
applicable rules of the Securities and Exchange Commission. A copy of the Code
of Business Conduct and Ethics is posted on the Company’s web site, www.willamettevalleyvineyards.com.  Amendments
to the code of ethics or any grant of a waiver from a provision of the code of
ethics requiring disclosure under applicable SEC rules, if any, will be
disclosed on our website at www.willamettevalleyvineyards.com.   Any
person may request a copy of the code of ethics, at no cost, by writing to us at
the following address:





Willamette
Valley Vineyards, Inc.


Attention:
Corporate Secretary


8800
Enchanted Way SE


Turner,
OR 97392





Nominating
Committee





The Board
of Directors acts as a nominating committee for selecting nominees for election
as directors.  Independent directors select nominees, and such
selections are ratified by the Board of Directors.





Audit
Committee





The
Company has a separately designated standing audit committee established in
accordance with Section 3(a)(58)(A) of the Securities Exchange Act of 1934,
as amended.  The members of the Audit Committee are Thomas M. Brian,
Craig Smith, and Stan G. Turel.  All members of the Audit Committee
are independent as defined under the applicable rules and regulations of the SEC
and the director independence standards of the NASDAQ Stock Market, as currently
in effect.





Audit
Committee Financial Expert





Chairperson
Craig Smith serves as the Audit Committee’s financial expert. Mr. Smith is
independent as defined under the applicable rules and regulations of the SEC and
the director independence standards of the NASDAQ Stock Market, as currently in
effect.





Compensation
Committee





The
Company has a separately designated compensation committee.  The
members of the Compensation Committee are Betty M. O’Brien, Delna Jones, and
Stan G. Turel.  All members of the Compensation Committee are
independent as defined under the applicable rules and regulations of the SEC and
the director independence standards of the NASDAQ Stock Market, as currently in
effect.





Item
11.  Executive Compensation.





Summary
Compensation Table





The
following table sets forth certain information concerning compensation paid or
accrued by the Company, to or on behalf of the Company's principal executive
officer, James W. Bernau and principal financial officer, Jeffrey J. Fox (the
“Named Executive Officers”) for the years ending December 31, 2009 and
2008.  No other officer, director or other employee of the Company
other than Mr. Bernau and Mr. Fox received total compensation in 2009 in excess
of $100,000.  In accordance with Item 402(m) of Regulation S-K, Mr.
Bernau and Mr. Fox are the only executive officers of the Company for whom
disclosure is required.


46





SUMMARY
      COMPENSATION TABLENonqualifiedNon-Equity
                            
                            
                            Deferred
                            
                            
                            AllStock
                            
                            
                            Option
                            
                            
                            Incentive
      Plan
                            
                            
                            Compensation
                            
                            
                            OtherSalary
                            
                            
                            Bonus
                            
                            
                            Awards
                            
                            
                            Awards
                            
                            
                            Compensation
                            
                            
                            Earnings
                            
                            
                            Compensation
                            
                            
                            TotalName
      and Principal Position
                            
                            Year
                            
                            ($)
                            
                            
                            ($)
                            
                            
                            ($)
                            
                            
                            ($)
                            
                            
                            ($)
                            
                            
                            ($)
                            
                            
                            ($)
                            
                            
                            ($)Bernau,
      James W.,
                            
                            2009
                            
                            
                            173,379
                            
                            
                            
                            43,653
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            5,663
                            
                            
                            
                            222,695President,
      Chief Executive
                            
                            2008
                            
                            
                            167,840
                            
                            
                            
                            41,960
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            14,476
                            
                            
                            
                            224,276Officer
      and ChairmanFox,
      Jeffrey J.Chief
      Financial Officer
                            
                            2009
                            
                            
                            113,031
                            
                            
                            
                            113,031





Bernau
Employment Agreement





The
Company and Mr. Bernau are parties to an employment agreement dated August 3,
1988 and amended in February 1997 and again amended in January of
1998.  Under the amended agreement, Mr. Bernau is paid an annual
salary of $173,379 with annual increases tied to increases in the consumer price
index.  Pursuant to the terms of the employment agreement, the Company
must use its best efforts to provide Mr. Bernau with housing on the Company's
property.  Mr. Bernau lives in the mobile home free of rent and must
continue to reside there for the duration of his employment in order to provide
additional security and lock-up services for late evening events at the Winery
and Vineyard.  The employment agreement provides that Mr. Bernau's
employment may be terminated only for cause, which is defined as non-performance
of his duties or conviction of a crime.





Stock
Options





In order
to reward performance and retain high-quality employees, the Company often
grants stock options to its employees.  The Company does not
ordinarily directly issue shares of stock to its employees.  Options
are typically issued at a per share exercise price equal to the closing price as
reported by the Capital Market at the time the option is granted.  The
options vest to the employee over time.  Three months following
termination of the employee's employment with the Company, any and all
unexercised options terminate.





Outstanding
Equity Awards at Fiscal Year-End





The
following table provides information, with respect to the Named Executive
Officers, concerning exercised options during the last fiscal year and
unexercised options held as of December 31, 2009.




Stock AwardsEquityIncentiveEquity
                                                                                    
                                                                                    
                                                                                    Plan Awards:Option Awards
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    Incentive
                                                                                    
                                                                                    
                                                                                    Market orEquity
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    Plan Awards:
                                                                                    
                                                                                    
                                                                                    PayoutIncentive
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    Market
                                                                                    
                                                                                    
                                                                                    Number of
                                                                                    
                                                                                    
                                                                                    Value ofPlan Awards:
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    Number
                                                                                    
                                                                                    
                                                                                    Value of
                                                                                    
                                                                                    
                                                                                    Unearned
                                                                                    
                                                                                    
                                                                                    UnearnedNumber of
                                                                                    
                                                                                    
                                                                                    Number of
                                                                                    
                                                                                    
                                                                                    Number of
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    of Shares
                                                                                    
                                                                                    
                                                                                    Shares or
                                                                                    
                                                                                    
                                                                                    Shares,
                                                                                    
                                                                                    
                                                                                    Shares,Securities
                                                                                    
                                                                                    
                                                                                    Securities
                                                                                    
                                                                                    
                                                                                    Securities
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    or Units
                                                                                    
                                                                                    
                                                                                    Units of
                                                                                    
                                                                                    
                                                                                    Units or
                                                                                    
                                                                                    
                                                                                    Units orUnderlying
                                                                                    
                                                                                    
                                                                                    Underlying
                                                                                    
                                                                                    
                                                                                    Underlying
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    of Stock
                                                                                    
                                                                                    
                                                                                    Stock
                                                                                    
                                                                                    
                                                                                    Other
                                                                                    
                                                                                    
                                                                                    OtherUnexercised
                                                                                    
                                                                                    
                                                                                    Unexercised
                                                                                    
                                                                                    
                                                                                    Unexercised
                                                                                    
                                                                                    
                                                                                    Option
                                                                                    
                                                                                    
                                                                                    
                                                                                    that
                                                                                    
                                                                                    
                                                                                    that
                                                                                    
                                                                                    
                                                                                    Rights that
                                                                                    
                                                                                    
                                                                                    Rights thatOptions
                                                                                    
                                                                                    
                                                                                    Options
                                                                                    
                                                                                    
                                                                                    Unearned
                                                                                    
                                                                                    
                                                                                    Exercise
                                                                                    
                                                                                    Option
                                                                                    
                                                                                    Have Not
                                                                                    
                                                                                    
                                                                                    Have Not
                                                                                    
                                                                                    
                                                                                    Have
                                                                                    
                                                                                    
                                                                                    Have Not(#)
                                                                                    
                                                                                    
                                                                                    (#)
                                                                                    
                                                                                    
                                                                                    Options
                                                                                    
                                                                                    
                                                                                    Price
                                                                                    
                                                                                    Expiration
                                                                                    
                                                                                    Vested
                                                                                    
                                                                                    
                                                                                    Vested
                                                                                    
                                                                                    
                                                                                    Not Vested
                                                                                    
                                                                                    
                                                                                    VestedName
                                                                                    
                                                                                    Exercisable
                                                                                    
                                                                                    
                                                                                    Unexercisable
                                                                                    
                                                                                    
                                                                                    (#)
                                                                                    
                                                                                    
                                                                                    ($)
                                                                                    
                                                                                    Date
                                                                                    
                                                                                    (#)
                                                                                    
                                                                                    
                                                                                    ($)
                                                                                    
                                                                                    
                                                                                    (#)
                                                                                    
                                                                                    
                                                                                    ($)Bernau,
      James2/11/2005
                                                                                    
                                                                                    
                                                                                    75,000
                                                                                    
                                                                                    
                                                                                    
                                                                                    -
                                                                                    
                                                                                    
                                                                                    
                                                                                    -
                                                                                    
                                                                                    
                                                                                    
                                                                                    3.289
                                                                                    
                                                                                    2/11/2010
                                                                                    
                                                                                    
                                                                                    -
                                                                                    
                                                                                    
                                                                                    
                                                                                    -
                                                                                    
                                                                                    
                                                                                    
                                                                                    -
                                                                                    
                                                                                    
                                                                                    
                                                                                    -8/1/2005
                                                                                    
                                                                                    
                                                                                    4,000
                                                                                    
                                                                                    
                                                                                    
                                                                                    -
                                                                                    
                                                                                    
                                                                                    
                                                                                    -
                                                                                    
                                                                                    
                                                                                    
                                                                                    4.136
                                                                                    
                                                                                    8/1/2010
                                                                                    
                                                                                    
                                                                                    -
                                                                                    
                                                                                    
                                                                                    
                                                                                    -
                                                                                    
                                                                                    
                                                                                    
                                                                                    -
                                                                                    
                                                                                    
                                                                                    
                                                                                    -12/27/2005
                                                                                    
                                                                                    
                                                                                    64,000
                                                                                    
                                                                                    
                                                                                    
                                                                                    -
                                                                                    
                                                                                    
                                                                                    
                                                                                    -
                                                                                    
                                                                                    
                                                                                    
                                                                                    5.50
                                                                                    
                                                                                    12/27/2010
                                                                                    
                                                                                    
                                                                                    -
                                                                                    
                                                                                    
                                                                                    
                                                                                    -
                                                                                    
                                                                                    
                                                                                    
                                                                                    -
                                                                                    
                                                                                    
                                                                                    
                                                                                    -





Director
Compensation




The
following table sets forth information concerning compensation of our directors
other than Mr. Bernau for the fiscal year ended December 31,
2009.




47




Name
                
                Fees Earned
                  or
                  Paid in Cash
                  ($)
                
                
                Stock
                  Awards
                  ($)
                
                
                Option
                  Awards
                  ($)(1)
                
                
                Non-Equity
                  Incentive Plan
                  Compensation
                  ($)
                
                
                Change
                  in Pension
                  Value and
                  Nonqualified
                  Deferred
                  Compensation
                  Earnings
                  ($)
                
                
                All Other
                  Compensation
                  ($)
                
                
                Total
                  ($)James
      L. Ellis
                
                
                0
                
                
                
                0
                
                
                
                0
                
                
                
                0
                
                
                
                0
                
                
                
                0
                
                
                
                0Sean
      M. Cary
                
                
                2,000
                
                
                
                0
                
                
                
                0
                
                
                
                0
                
                
                
                0
                
                
                
                0
                
                
                
                2,000Thomas
      M. Brian
                
                
                0
                
                
                
                0
                
                
                
                0
                
                
                
                0
                
                
                
                0
                
                
                
                0
                
                
                
                0Delna
      L. Jones
                
                
                0
                
                
                
                0
                
                
                
                0
                
                
                
                0
                
                
                
                0
                
                
                
                0
                
                
                
                0Craig
      Smith
                
                
                600
                
                
                
                0
                
                
                
                0
                
                
                
                0
                
                
                
                0
                
                
                
                0
                
                
                
                600Betty
      M. O’Brien
                
                
                2,200
                
                
                
                0
                
                
                
                0
                
                
                
                0
                
                
                
                0
                
                
                
                0
                
                
                
                2,200Stan
      G. Turel
                
                
                2,000
                
                
                
                0
                
                
                
                0
                
                
                
                0
                
                
                
                0
                
                
                
                0
                
                
                
                2,000





(1)
            The amounts provided in this
      column represent the aggregate grant date fair value of option awards
      granted to our directors in the fiscal year ended December 31, 2009 as
      calculated in accordance with FASB ASC Topic 718, Stock
      Compensation.  The aggregate number of option awards outstanding
      for each director as of December 31, 2008 is as follows: Mr. Ellis –
      81,130, Mr. Cary – 16,000, Mr. Brian – 22,000, Ms. Jones –
      27,800, Mr. Smith – 0, Ms. O’Brien – 40,700, and Mr. Turel
      – 37,517.





The
members of the Company's Board of Directors received cash compensation for their
service on the Board in 2009, and were reimbursed for out-of-pocket and travel
expenses incurred in attending Board meetings.  Under the Company's
Stock Incentive Plan adopted by the shareholders in 1992 and further amended by
the shareholders in 1996, beginning in 1997 an option to purchase 1,500 shares
of Common Stock is granted to each Director for service on the Board during the
year.  This option was increased to 4,000 per year when the 50-share
grant per Director’s meeting was discontinued for the year 2000 and
beyond.  In December 2005, each Director was granted 14,000 options
for service during 2005.  In the foreseeable future, as a result of
FASB ASC Topic 718, Stock Compensation, requiring all share-based payments to be
recognized as expenses in the statement of operations based on their fair values
and vesting periods, the Company does not intend to issue stock options to the
Directors for their service.





In
January of 2009 the Board of Directors upon recommendation of the Compensation
Committee who sought outside counsel regarding revision of the Company’s Board
Compensation Plan, adopted the final version of the revised WVV Board Member
Compensation Plan.  Under the terms of the plan, any Board member can
elect not to receive any or all of the compensation components and the Board
reserves the right to suspend this plan at any time depending on the effects of
the economy on the Company. The basic elements of the plan are: $1,000 yearly
stipend for service on the Board, $500 per Board meeting attended in person,
$250 per Board meeting via teleconference, $200 per committee meeting in person
and $100 per committee meeting via teleconference. A set per diem for expenses
associated with meeting attendance, as well as, a yearly wine and glassware
allowance were also approved.





Item
12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters.





Equity
Compensation Plan Information





The
following table summarizes information, as of December 31, 2009, with respect to
shares of our common stock that may be issued under our existing equity
compensation plans.


48





(A)
                                                              
                                                              
                                                              (B)
                                                              
                                                              
                                                              (C)Number of
                                                                securities to be
                                                                issued upon
                                                                exercise of
                                                                outstanding
                                                                options,
                                                                warrants and
                                                                rights
                                                              
                                                              
                                                              Weighted
                                                                average
                                                                exercise
                                                                price of
                                                                outstanding
                                                                options and
                                                                warrants
                                                              
                                                              
                                                              Number of
                                                                securities
                                                                remaining
                                                                available for
                                                                future issuance
                                                                under equity
                                                                compensation
                                                                plans (excluding
                                                                securities reflected
                                                                in column (A))(share numbers in table are
                                                                in thousands except per share amounts)Equity
      compensation plans approved by security holders (1)
                                                              
                                                              
                                                              355,700
                                                              
                                                              
                                                              $
                                                              4.16
                                                              
                                                              
                                                              
                                                              132,476Equity
      compensation plans not approved by security holders
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              -Total
                                                              
                                                              
                                                              355,700
                                                              
                                                              
                                                              $
                                                              4.16
                                                              
                                                              
                                                              
                                                              132,476





(1)
            Includes shares of our common
      stock issuable upon exercise of options from the Company’s 1992 Stock
      Incentive Plan and 2001 Stock Incentive
  Plan.




The
Company does not have compensations plans under which equity securities of the
Company are authorized for issuance which were adopted without the approval of
security holders





Security
Ownership of Certain Beneficial Owners and Management





The
following table sets forth certain information with respect to beneficial
ownership of the Company's Common Stock as of March 15, 2010, by (i) each person
who beneficially owns more than 5% of the Company's Common Stock, (ii) each
Director of the Company, (iii) each of the Company's named executive officers,
and  (iv) all directors and executive officers as a
group.  Except as indicated in the footnotes to this table, each
person has sole voting and investment power with respect to all shares
attributable to such person.





Percent ofNumber of
                                                              
                                                              
                                                              SharesShares Outstanding
                                                              
                                                              
                                                              BeneficiallyStock
                                                              
                                                              
                                                              OwnedJames
      W. Bernau President/CEO, Chair of the Board2545
      Cloverdale Road
                                                              
                                                              
                                                              614,032
                                                              (1)
                                                              
                                                              
                                                              12.6
                                                              %Turner,
      OR  97392James
      L. Ellis Director7850
      S.E. King Road
                                                              
                                                              
                                                              81,130
                                                              (2)
                                                              
                                                              
                                                              **Milwaukie,
      OR  97222Thomas
      M. Brian Director7630
      SW Fir
                                                              
                                                              
                                                              22,000
                                                              (3)
                                                              
                                                              
                                                              **Tigard,
      OR  97223Delna
      L. Jones Director14480
      SW Chardonnay Ave
                                                              
                                                              
                                                              27,800
                                                              (4)
                                                              
                                                              
                                                              **Tigard,
      OR 97224Sean
      M. Cary Director3188
      Blacktail Drive
                                                              
                                                              
                                                              15,283
                                                              (5)
                                                              
                                                              
                                                              **Eugene,
      OR 97405Betty
      M. O'Brien Director22500
      Ingram Lane NW
                                                              
                                                              
                                                              42,200
                                                              (6)
                                                              
                                                              
                                                              **Salem,
      OR  97304Stan
      G. Turel Director2125
      NE 11th
      Place
                                                              
                                                              
                                                              39,517
                                                              (7)
                                                              
                                                              
                                                              **Bend,
      OR  97701Craig
      Smith Director
                                                              
                                                              
                                                              0
                                                              
                                                              
                                                              
                                                              **367
      Sanrodee DriveSalem,
      OR 97317Jeff
      Fox CFO
                                                              
                                                              
                                                              1,000
                                                              
                                                              
                                                              
                                                              **14940
      Seal Rock Ave NEAurora,
      OR 97002All
      Directors, executive
                                                              
                                                              
                                                              842,962
                                                              (8)
                                                              
                                                              
                                                              17.2
                                                              %officers
      and persons owning5%
      or more as a group (7 persons)


49





**         Less
than one percent.





(1)
Includes 68,000 shares issuable upon exercise of options exercisable within 60
days of the date of March 29, 2010.





(2)
Includes 76,000 shares issuable upon the exercise of options exercisable within
60 days of the date of March 29, 2010.





(3)
Includes 22,000 shares issuable upon the exercise of options exercisable within
60 days of the date of March 29, 2010.





(4)
Includes 26,000 shares issuable upon the exercise of options exercisable within
60 days of the date of March 29, 2010.





(5)
Includes 2,083 shares issuable upon the exercise of options exercisable within
60 days of the date of March 29, 2010.





(6)
Includes 30,000 shares issuable upon the exercise of options exercisable within
60 days of the date of March 29, 2010.





(7)
Includes 14,000 shares issuable upon the exercise of options exercisable within
60 days of the date of March 29, 2010.





(8)
Includes 312,500 shares issuable upon exercise of options exercisable within 60
days of the date of March 29, 2010.





Item
13  Certain Relationships and Related Transactions, and Director
Independence.





In 2007,
the Company entered into a long-term lease for Elton vineyards which consists of
60 acres of mature grapevines, of which approximately 42 acres are Pinot Noir.
The agreement was for an initial 10 year lease with the option to renew for 4
successive terms of 5 years each, plus a first right of refusal on the
property’s sale.  Betty O’ Brien, a member of the Company’s Board of
Directors, is a 50% owner of the lessor, Elton Vineyards, LLC.  As
such, she is therefore entitled to 50% of the net income of Elton Vineyards,
LLC.





The
Company believes that the transactions set forth above were made on terms no
less favorable to the Company than could have been obtained from unaffiliated
third parties.  All future transactions between the Company and its
officers, directors, and principal shareholders will be approved by a
disinterested majority of the members of the Affiliated Transactions Committee
of the Company's Board of Directors, and will be on terms no less favorable to
the Company than could be obtained from unaffiliated third
parties.


50





The Board
of Directors has determined that each of our directors, except Mr. Bernau,
Mr. Ellis and Mr. Fox, is “independent” within the meaning of the applicable
rules and regulations of the SEC and the director independence standards of The
NASDAQ Stock Market, Inc. (“NASDAQ”), as currently in effect. Furthermore, the
Board of Directors has determined that each of the members of each of the
committees of the Board of Directors is “independent” under the applicable rules
and regulations of the SEC and the director independence standards of NASDAQ, as
currently in effect.





Item
14.  Principal Accounting Fees and Services.





Fees for
professional services provided by our independent registered public accounting
firm in each of the last two fiscal years, in each of the following categories
are:




Years Ended
                      December 31,2009
                    
                    
                    2008Audit
      Fees
                    
                    $
                    209,665
                    
                    
                    $
                    292,917Audit
      - Related Fees
                    
                    
                    -
                    
                    
                    
                    -Tax
      Fees
                    
                    
                    28,053
                    
                    
                    
                    29,830Other
      Fees
                    
                    
                    -
                    
                    
                    
                    -$
                    237,718
                    
                    
                    $
                    322,747




Moss
Adams LLP served as the Company’s independent registered public accounting firm
for the years ended December 31, 2009 and 2008.




Pre-Approval Policies and
Procedures





It is the
policy of the Company not to enter into any agreement for Moss Adams LLP to
provide any non-audit services to the Company unless (a) the agreement is
approved in advance by the Audit Committee or (b) (i) the aggregate
amount of all such non-audit services constitutes no more than 5% of the total
amount the Company pays to Moss Adams LLP during the fiscal year in which such
services are rendered, (ii) such services were not recognized by the
Company as constituting non-audit services at the time of the engagement of the
non-audit services and (iii) such services are promptly brought to the
attention of the Audit Committee and prior to the completion of the audit were
approved by the Audit Committee or by one or more members of the Audit Committee
who are members of the Board of Directors to whom authority to grant such
approvals has been delegated by the Audit Committee.  The Audit Committee
will not approve any agreement in advance for non-audit services unless
(1) the procedures and policies are detailed in advance as to such
services, (2) the Audit Committee is informed of such services prior to
commencement and (3) such policies and procedures do not constitute
delegation of the Audit Committee’s responsibilities to management under the
Securities Exchange Act of 1934, amended.  To date, the Audit Committee has
not established such policies and procedures because we do not intend to have
our auditors provide any non-audit services in the foreseeable future.  If
our intentions change, the Audit Committee will adopt the appropriate
pre-approval policies and procedures as outlined above.





Item
15.  Exhibits, Financial Statement Schedules.





(a)  The following documents
are filed as part of this report:





(1)   Financial
Statements.





See
“Index to Financial Statements” in Item 8 on page 23 of this Annual Report on
Form 10-K.


51





(2)   Financial
Statement Schedules.





All
financial statement schedules are omitted either because they are not required,
not applicable or the required information is included in the financial
statements or notes thereto.





(3)   Exhibits.





Exhibit
                  Number
                
                Description3.1
                
                Articles
      of Incorporation of Willamette Valley Vineyards, Inc. (incorporated by reference
      from the Company's Regulation A Offering Statement on Form 1-A [File No.
      24S-2996])3.2
                
                Bylaws
      of Willamette Valley Vineyards, Inc. (incorporated by reference
      from the Company's Regulation A Offering Statement on Form 1-A [File No.
      24S-2996])10.1*
                
                Employment
      Agreement between Willamette Valley Vineyards, Inc. and James W. Bernau
      dated August 3, 1988 (incorporated by reference
      from the Company's Regulation A Offering Statement on Form 1-A [File No.
      24S-2996])10.2
                
                Indemnity
      Agreement between Willamette Valley Vineyards, Inc. and James W. Bernau
      dated May 2, 1988 (incorporated by reference
      from the Company's Regulation A Offering Statement on Form 1-A [File No.
      24S-2996])10.3
                
                Indemnity
      Agreement between Willamette Valley Vineyards, Inc. and Donald E. Voorhies
      dated May 2, 1988 (incorporated by reference
      from the Company's Regulation A Offering Statement on Form 1-A [File No.
      24S-2996])10.4
                
                Shareholders
      Agreement among Willamette Valley Vineyards, Inc. and its founders, James
      Bernau and Donald Voorhies, dated May 2, 1988 (incorporated by reference
      from the Company's Regulation A Offering Statement on Form 1-A [File No.
      24S-2996])10.5
                
                Revolving
      Note and Loan Agreement dated May 28, 1992 by and between Northwest Farm
      Credit Services, Willamette Valley Vineyards, Inc. and James W. and Cathy
      Bernau (incorporated by
      reference from the Company's Regulation A Offering Statement on Form 1-A
      [File No. 24S-2996])10.6
                
                Founders'
      Escrow Agreement among Willamette Valley Vineyards, Inc., James W. Bernau,
      Donald Voorhies and First Interstate Bank of Oregon, N.A. dated September
      20, 1988 (incorporated
      by reference from the Company's Regulation A Offering Statement on Form
      1-A [File No. 24S-2996])10.7
                
                Amendment
      to Founders' Escrow Agreement dated September 20, 1988 (incorporated by reference
      from the Company's Regulation A Offering Statement on Form 1-A [File No.
      24S-2996])10.8
                
                Stock
      Escrow Agreement among Willamette Valley Vineyards, Inc., Betty M. O'Brien
      and Charter Investment Group, Inc. dated July 7, 1992 (incorporated by reference
      from the Company's Regulation A Offering Statement on Form 1-A [File No.
      24S-2996])10.9
                
                Stock
      Escrow Agreement among Willamette Valley Vineyards, Inc., Daniel S. Smith
      and Piper Jaffray & Hopwood, Inc. dated July 7, 1992 (incorporated by reference
      from the Company's Regulation A Offering Statement on Form 1-A [File No.
      24S-2996])14.1
                
                Code
      of Ethics (incorporated
      by reference from the Company's Proxy Statement on Schedule 14A, filed on
      June 30, 2004)23.1
                
                Consent
      of Moss Adams LLP, Independent Registered Public Accounting Firm (Filed
      herewith)31.1
                
                Certification
      of Chief Executive Officer required by Rule 13a-14(a) of the Securities
      Exchange Act of 1934 (Filed
      herewith)


52





31.2
              
              Certification
      of Chief Financial Officer required by Rule 13a-14(a) of the Securities
      Exchange Act of 1934 (Filed
      herewith)32.1
              
              Certification
      of James W. Bernau pursuant to 18 U.S.C. Section 1350 as adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Furnished, not filed,
      herewith)32.2
              
              Certification
      of Jeffrey J. Fox pursuant to 18 U.S.C. Section 1350 as adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Furnished, not filed,
      herewith)





*
Management contract or compensatory plan or arrangement required to be filed as
an Exhibit to this Annual Report on Form 10-K pursuant to
Item 15(b) thereof





(b)  The
exhibits listed under Item 15(a)(3) hereof are filed as part of this Form
10-K, other than Exhibits 32.1 and 32.2, which shall be deemed
furnished.





(c)  All
financial statement schedules are omitted either because they are not required,
not applicable or the required information is included in the financial
statements or notes thereto.


53




SIGNATURES





Pursuant
to the requirements of Section 13 or 15(d) 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.





WILLAMETTE
      VALLEY VINEYARDS, INC.(Registrant)By:James
      W. Bernau,Chairperson
      of the Board, PresidentDate:
      March 29, 2010


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Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.





Signature
                                    
                                    Title
                                    
                                    DateChairperson
      of the Board,
                                    
                                    March
      29, 2010James
      W. Bernau
                                    
                                    President(Principal
      Executive Officer)CFO
                                    
                                    March
      29, 2010Jeffrey
      J. Fox
                                    
                                    (Principal
      Accounting Officer)Director
                                    
                                    March
      29, 2010James
      L. EllisDirector
                                    
                                    March
      29, 2010Thomas
      M. BrianDirector
                                    
                                    March
      29, 2010Delna
      L. JonesDirector
                                    
                                    March
      29, 2010Craig
      SmithDirector
                                    
                                    March
      29, 2010Betty
      M. O'BrienDirector
                                    
                                    March
      29, 2010Stan
      G. TurelDirector
                                    
                                    March
      29, 2010Sean
      M. Cary


55