**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-KSB**

 

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

 

**For thefiscal year ended December 31, 2007**

 

**OR**

 

| **o**      | ** ** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE** |
|------------|------------|-------------------------------------------------------------------------|
| ** ** | ** ** | **SECURITIES EXCHANGE ACT OF 1934**                                     |

 

**CommissionFile number 0-21522**

 

**WILLAMETTEVALLEY VINEYARDS, INC.**

(Name of SmallBusiness Issuer in Its Charter)

|                             |       |                    |
|----------------------------------|------------|-------------------------|
| **OREGON**                       | ** ** | **93-0981021**          |
| (State or other  jurisdiction of |       | (I.R.S. employer        |
| incorporation or  organization)  |       | identification  number) |

 

| **8800  Enchanted Way, S.E.**             | ** ** | ** ** |
|-------------------------------------------|------------|------------|
| **Turner,  OR**                           | ** ** | **97392**  |
| (Address of  principal executive offices) |       | (Zip Code) |

 

| Issuer’s  telephone number, including area code: **(503) 588-9463**           |
|------------------------------------------------------------------------------------|
|                                                                               |
| Securities  registered under Section 12(b) of the Exchange Act: **None** |

 

| Securities  registered under Section 12(g) of the Exchange Act: | ** ** | **Common  Stock** | ** ** |
|---------------------------------------------------------------------------|------------|-------------------|------------|
|                                                                      |       | (Title of class)  |       |

 

Check whether the issueris not required to file reports pursuant to Section 13 or 15(d) ofthe Exchange Act.  YES x NO o

 

Check whether the issuer(1) filed all reports required to be filed by Section 13 or 15(d) ofthe Exchange Act during the past 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days. YES x NO o

 

Check if there is nodisclosure of delinquent filers pursuant to Item 405 of Regulation S-B is notcontained in this form, and no disclosure will be contained, to the best of theregistrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this form 10-KSB or any amendmentto this Form 10-KSB x.

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).  YES o NO x

 

| Issuer’s revenues for  its most recent fiscal year: |   | $16,710,927 |   |
|----------------------------------------------------------|--------|-------------|--------|

 

Aggregate market value ofthe voting stock held by non-affiliates of the Issuer based upon the closingprice of such stock as of March 31, 2008: $32,953,643

 

Number of shares ofCommon Stock outstanding as of March 31, 2008: 4,837,828

 

DOCUMENTS INCORPORATED BYREFERENCE: None

 

| Transitional Small  Business Disclosure Format: |   | YES o |   | No x |
|-------------------------------------------------|--------|-------|--------|------|

 

 

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**ITEM 1.           DESCRIPTION OF BUSINESS.**

 

Introduction

 

Willamette ValleyVineyards, Inc. (the “Company”) was formed in May 1988 to produce andsell premium, super premium and ultra premium varietal wines (i.e., wine whichsells at retail prices of $7 to $14, $14 to $20 and over $20 per 750 ml bottle,respectively).  Willamette Valley Vineyardswas originally established as a sole proprietorship by Oregon winegrower JimBernau in 1983.  The Company isheadquartered in Turner, Oregon, where the Company’s Turner Vineyard and Wineryare 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 587 acres ofvineyard owned, leased or contracted by the Company, and from grapes purchasedfrom other nearby vineyards.  The grapesare crushed, fermented and made into wine at the Company’s Turner winery (the “Winery”)and the wines are sold principally under the Company’s Willamette ValleyVineyards label.  Willamette ValleyVineyards is the owner of Tualatin Estate Vineyards and Winery located onapproximately 120 acres near Forest Grove, Oregon, and leases an additional 114acres of vineyard land at the Forest Grove location.

 

Products

 

Under its WillametteValley Vineyards label, the Company produces and sells the following types ofwine in 750 ml bottles: Pinot Noir, the brand’s flagship and its largestselling varietal in 2007, $19 to $50 per bottle; Chardonnay, $16 to $20 perbottle; Pinot Gris, $15 to $18 per bottle; Riesling and Oregon Blossom (blushblend), $12 to $10 per bottle (all bottle prices included herein are thesuggested retail prices).  The Company’smission for this brand is to become the premier producer of Pinot Noir from thePacific Northwest.

 

The Company currentlyproduces and sells small quantities of Oregon’s Nog (a seasonal holidayproduct), $10 per bottle, and Edelweiss, $10 per bottle, under a “Made inOregon Cellars” label.

 

Under its Tualatin EstateVineyards label, the Company currently produces and sells the following typesof wine in 750 ml bottles: Pinot Noir, the brand’s flagship, $35 per bottle;Chardonnay, $16 per bottle; Semi-Sparkling Muscat, $15 per bottle.  The Company’s mission for this brand is to beamong the highest quality estate producers of Burgundy and Alsatian varietalsin Oregon.

 

Under its Griffin Creeklabel, the Company produces and sells the following types of wine in 750 mlbottles: Syrah, the brand’s flagship, $35 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 highestquality producer of Bordeaux and Rhone varietals in Oregon.

 

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

 

Market Overview

 

Wine Consumption Trends:** **Beginning in 1994,per capita wine consumption began to rise. U.S. wine consumption rose 2.1 percent in 2005 and 3.4 percent in 2006continuing a 13 year trend of steady growth. Overall wine consumption has risento 283.1 million cases in 2006.  Domesticwine sales rose 2.6 percent in 2006 while imported wine sales rose 5.7%.  Research has shown that much of this salesgrowth is coming from baby boomers and younger consumers. Data released by TheAdams Beverage Group in 2007, for example, showed that wine now appeals to abroad spectrum of the population, including Millenials (consumers 21-30).  In a recent Gallup Poll, for the first time,a majority of respondents claimed wine as their alcohol beverage ofchoice.  Together,

 

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Millenials and BabyBoomers account for more than half of today’s wine consumers. According to theNielsen Company’s Beverage Alcohol Annual Snapshot, in the 52 weeks ended January 13,2007, Pinot Noir sales in particular grew 20.3 percent in dollars, while PinotGris and Riesling grew 17.9 and 25.2 percent, respectively. Data for theyear-ended 2007 is pending.

 

The Oregon Wine Industry.

 

Oregon is a relativelynew wine-producing region in comparison to California and France.  In 1966, there were only two commercialwineries licensed in Oregon.  By 2007there were 370 commercial wineries licensed in Oregon and 17,400 acres of winegrape vineyards, 13,800 acres of which are currently producing.  Total production of Oregon wines in 2007 isestimated to be approximately 2.3 million cases versus 2.1 million cases in2006.  Oregon’s entire 2007 productionhas an estimated retail value of approximately $466.4 million, assuming aretail price of $200 per case, and a FOB value of approximately one-half of theretail value, or $233.2 million.

 

Because of climate, soiland other growing conditions, the Willamette Valley in western Oregon isideally suited to growing superior quality Pinot Noir, Chardonnay, Pinot Grisand Riesling wine grapes.  Some of Oregon’sPinot Noir, Pinot Gris and Chardonnay wines have developed outstandingreputations, winning numerous national and international awards.

 

Oregon does have certaindisadvantages as a new wine-producing region. Oregon’s wines are relatively little known to consumers worldwide andthe total wine production of Oregon wineries is small relative to Californiaand French competitors.  Greaterworldwide label recognition and larger production levels give Oregon’scompetitors certain financial, marketing, distribution and unit costadvantages.

 

Furthermore, Oregon’sWillamette Valley has an unpredictable rainfall pattern in early autumn.  If significantly above-average rains occurjust prior to the autumn grape harvest, the quality of harvested grapes isoften materially diminished, thereby affecting that year’s wine quality.

 

Finally, phylloxera, anaphid-like insect that feeds on the roots of grapevines, has been found inseveral commercial vineyards in Oregon. Contrary to the California experience, most Oregon phylloxerainfestations have expanded very slowly and done only minimal damage.  Nevertheless, phylloxera does constitute asignificant risk to Oregon vineyards. Prior to the discovery of phylloxera in Oregon, all vine plantings inthe Company’s Vineyard were with non-resistant rootstock.  As of December 31, 2007, the Company hasnot detected any phylloxera at its Turner site. Beginning with the Company’s plantings in May 1992, onlyphylloxera-resistant rootstock is used. In 1997, the Company purchased Tualatin Vineyards, which has phylloxeraat its site.  All plantings are on andall future planting will be on phylloxera resistant rootstock.  The Company takes all necessary precautionsto prevent the spread of phylloxera to its Turner site.

 

As a result of thesefactors, subject to the risks and uncertainties identified above, the Company believesthat long-term prospects for growth in the Oregon wine industry areexcellent.  The Company believes thatover the next 20 years the Oregon wine industry will grow at a faster rate thanthe overall domestic wine industry, and that much of this growth will favorproducers of premium, super premium and ultra premium wines such as the Company’s.

 

2007 Oregon Harvest

 

The National AgriculturalStatistics Service reports for the third year in a row Oregon produced andcrushed a record amount of grapes.  Forthe second year in a row Oregon grape growers planted a record number of newacres.  Oregon’s 370 wineries reportedproducing wine under 442 labels. Increased production in 2006 gave wineries the ability to sell 1.7million cases of wine 

 

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for $207.8 million in2007.  Unfilled wine grape needs werehigher in 2007 and many wineries noted the need for mature grapes, mostfrequently Pinot Noir.

 

Oregon’s 2007 growingseason started off strong, with a slightly warmer spring than normal thatprovided ideal conditions for fruit throughout the state.  Moderate temperatures persisted during thesummer, with no major heat spikes, leading to nearly ideal fruit maturation goinginto late September, until significant rain events began and didn’t let upuntil late October. The cool down and rain caused many wineries to make choicesof either harvesting quickly or waiting it out.

 

Company Strategy

 

The Company, one of thelargest wineries in Oregon by volume, believes its success is dependent uponits ability to: (1) grow and purchase high quality vinifera wine grapes; (2) vinifythe grapes into premium, super premium and ultra premium wine; (3) achievesignificant brand recognition for its wines, first in Oregon and thennationally and internationally; and (4) effectively distribute and sellits products nationally.  The Company’sgoal is to continue as one of Oregon’s largest wineries, and establish areputation for producing some of Oregon’s finest, most sought-after wines.

 

Based upon several highlyregarded surveys of the US wine industry, the Company believes that successfulwineries exhibit the following four key attributes:  (i) focus on production of high-qualitypremium, super premium and ultra premium varietal wines;  (ii) achieve brand positioning thatsupports high bottle prices for its high quality wines;  (iii) build brand recognition byemphasizing restaurant sales; and  (iv) developstrong marketing advantages (such as a highly visible winery location,  successful self-distribution, and life-longcustomer service programs).

 

To successfully executethis strategy, the Company has assembled a team of accomplished winemakingprofessionals and has constructed and equipped a 22,934 square footstate-of-the-art Winery and a 12,500 square foot outdoor production area forthe crushing, pressing and fermentation of wine grapes.

 

The Company’s marketingand selling strategy is to sell its premium, super premium and ultra premiumcork-finished-wine through a combination of (i) direct sales at theWinery, (ii) self-distribution to local and regional restaurants andretail outlets, and (iii) sales through independent distributors and winebrokers who market the Company’s wine in specific targeted areas whereself-distribution is not economically feasible.

 

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

 

Vineyard

 

The Company now owns,leases, or contracts for 587 acres of vineyard land. The vineyards the companyowns and leases are all certified sustainable by LIVE (Low Input Viticultureand Enology) and Salmon Safe.  At fullproduction, we anticipate these vineyards will enable the Company to growapproximately 85% of the grapes needed to meet the Winery’s ultimate productioncapacity of 298,000 gallons (129,000 cases).

 

The Property. The Company’sestate vineyard at the Turner site currently has 48 acres planted andproducing, with 24 acres of “certified organic” (by Oregon Tilth) Pinot Noirand 24 acres of Pinot Gris and Chardonnay. The oldest grapevines were plantedin 1985, with additional grapevines planted in 1992,

 

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1993, and 1999. Vineyardsgenerally remain productive for 30 to 100 years, depending on weatherconditions, disease and other factors. We estimate these vines will continue to produce for another 35 yearsunder conditions known today.

 

The Estate Vineyard usesan elaborate trellis design known as the Geneva Double Curtain.  The Company has incurred the additionalexpense of constructing this trellis because it doubles the number of canesupon which grape clusters grow and spreads these canes for additional solarexposure and air circulation.  Researchand practical applications of this trellis design indicate that it shouldimprove grape quality through smaller clusters and berries over traditionaldesigns.

 

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

 

These new French clones arecalled “Dijon clones” after the University of Dijon in Burgundy, which assistedin their selection and shipment to a US government authorized quarantine site,and then seven years later to Oregon winegrowers.  The most desirable of these new Pinot Noirclones are numbered 113, 114, 115, 667 and 777. In addition to certain flavor advantages, these clones ripen up to twoweeks earlier, allowing growers to pick before heavy autumn rains.  Heavy rains can dilute concentrated fruitflavors and promote bunch rot and spoilage. These new Pinot Noir clones were planted at the Tualatin Estate on diseaseresistant rootstock and the 667 and 777 clones have been grafted onto 7 acresof self rooted, non-disease resistant vines at the Company’s Estate Vineyardnear Turner.

 

New clones of Chardonnaypreceded Pinot Noir into Oregon and were planted at the Company’s EstateVineyard on disease resistant rootstock.

 

The purchase of TualatinVineyards, Inc. in April 1997 (including the subsequentsale-leasebacks of portions of the property in December 1999 and 2004)added 83 acres of additional producing vineyards and approximately 60 acres ofbare land for future plantings.  In 1997,the Company planted 19 acres at the Tualatin site and planted another 41 acresin 1998, the majority being Pinot Noir.

 

In 1999, the Companypurchased 33 acres of vineyard land adjoining Tualatin Estate for futureplantings and used lot line adjustments to create three separate land parcelsat Tualatin Estate. In 2005 and 2006, the Company planted 23 acres and 10 acresrespectively, of mainly Pinot Gris and Pinot Noir.

 

Grape Supply.  In 2007, the Company’s 48 acres of producingestate vineyard yielded approximately 145 tons of grapes for the Winery’snineteenth  crush.  Tualatin Vineyards produced 603 tons ofgrapes in 2007.  Elton Vineyards produced95 tons of grapes in 2007.  In 2007, theCompany purchased an additional 901 tons of grapes from other growers. TheWinery’s 2007 total wine production was 274,245 gallons (115,466 cases) fromits 2006 and 2007 crushes. The Company expects to produce 320,000 gallons in2008 (134,700 cases).  The Vineyardcannot and will not provide the sole supply of grapes for the Winery’snear-term production requirements.

 

In 2005, the Companyentered into a long-term grape purchase agreement with one of its WillametteValley wine grape growers whereby the grower agreed to plant 40 acres of PinotGris and 50 acres of Riesling and the Winery agreed to purchase the yield atfixed contract prices through 2015, with the first crop received in 2007.  In 2006, the Company entered into a long-termgrape purchase agreement with the same Willamette Valley wine grape growerswhereby the grower agreed to plant 100 acres of Pinot Noir, 50 acres of PinotGris and 20 acres of Riesling and the Winery agreed to purchase the yield atfixed 

 

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contract prices through2016, with the first crop expected in 2008. The wine grape grower must meet strict quality standards for the winegrapes to be accepted by the Winery at time of harvest and delivery.  The Company is obligated to purchase 100% ofthe crop produced within the strict quality standards and crop loads, equatingto maximum payments of approximately $1,500,000 per year.  We cannot calculate the minimum payment assuch a calculation is dependent in large part on an unknown – the amount ofgrapes produced in any given year.  Ifthere are no grapes produced in any given year, or if the grapes are rejectedfor failure to meet contractual quality standards, the Company has no paymentobligation for that year.  Failure of theGrower to comply with the provisions of the contracts would constitute adefault, allowing the Company to recover damages, including expected lostprofits.  The Company has no right to useof the underlying properties.  These newlong-term grape purchase agreements will increase the Company’s supply of highquality wine grapes and provide a long-term grape supply, at fixed prices.

 

The Company fulfills itsremaining grape needs by purchasing grapes from other nearby vineyards atcompetitive prices.  The Company believeshigh quality grapes will be available for purchase in sufficient quantity tomeet the Company’s requirements.  Thegrapes grown on the Company’s vineyards establish a foundation of quality,through the Company’s farming practices, upon which the quality of the Company’swines is built.  In addition, wineproduced from grapes grown in the Company’s own vineyards may be labeled as “EstateBottled” wines.  These winestraditionally sell at a premium over non-estate bottled wines.

 

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

 

The Vineyard’s soil typeis Jory/Nekia, a dark, reddish-brown, silky clay loam over basalt bedrock,noted for being well drained, acidic, of adequate depth, retentive ofappropriate levels of moisture and particularly suited to growing high qualitywine grapes.

 

The Vineyard’s elevationranges from 533 feet to 700 feet above sea level with slopes from 2 percent to30 percent (predominately 12-20 percent). The Vineyard’s slope is oriented to the south, southwest and west.  Average annual precipitation at the Vineyardis 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 210days.  These conditions compare favorablywith conditions found throughout the Willamette Valley viticultural region andother domestic and foreign viticultural regions, which produce high qualitywine grapes.

 

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

 

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Winery

 

Wine ProductionFacility.  The Company’s Winery andproduction facilities are capable of efficiently producing up to 104,000 cases(247,000 gallons) of wine per year, depending on the type of wineproduced.  In 2007, the Winery produced 274,245 gallons (115,466 cases) fromits 2006 and 2007 crushes.  The Winery is12,784 square feet in size and contains areas for processing, fermenting, agingand bottling wine, as well as an underground wine cellar, a tasting room, aretail sales room and administrative offices. There is a 12,500 square foot outside production area for crushing,pressing and fermenting wine grapes, and a 4,000 square foot insulated storagefacility with a capacity of 30,000 cases of wine.  The Company also has a 20,000 square footstorage building to store its inventory of bottled product.  The production area is equipped with a settlingtank and sprinkler system for disposing of wastewater from the productionprocess in compliance with environmental regulations.

 

With the purchase ofTualatin Vineyards, Inc., the Company added 20,000 square feet ofadditional production capacity.  Althoughthe Tualatin facility was constructed over twenty years ago, it adds 25,000cases (59,000 gallons) of wine production capacity to the Company, which theCompany felt at the time of purchase was needed.  Until 2007, production and sales volumes havenot expanded enough to necessitate the utilization of the Tualatin facilities.  The Company decided to move currentproduction to its Turner site to meet short-term production requirements.  The capacity at Tualatin is available to theCompany to meet any anticipated future production needs. With the anticipatedvolume of wine production in 2008 it is likely that the Tualatin productionfacility will be utilized.

 

HospitalityFacility.  The Company has a largetasting and hospitality facility of 19,470 square feet (the “Hospitality Center”).  The first floor of the Hospitality Centerincludes retail sales space and a “great room” designed to accommodateapproximately 400 persons for gatherings, meetings, weddings and large winetastings.  An observation tower anddecking around the Hospitality Center enable visitors to enjoy the view of theWillamette Valley and the Company’s Vineyard. The Hospitality Center is joined with the present Winery by anunderground cellar tunnel.  The facilityincludes a basement cellar of 10,150 square feet (including the 2,460 squarefoot underground cellar tunnel) to expand storage of the Company’s wine in aproper environment.  The cellar providesthe Winery with ample space for storing up to 1,600 barrels of wine for aging.

 

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

 

The Company believes theHospitality Center and the park and quadrangle make the Winery an attractiverecreational and social destination for tourists and local residents, therebyenhancing the Company’s ability to sell its wines.

 

Mortgages onProperties.  The Company’s wineryfacilities in Turner are subject to one mortgage with a principal balance of$1,231,158 at December 31, 2007. The mortgage is payable in monthlyaggregate installments, including principal and interest, of approximately$362,000 annually through 2011.

 

Wine Production.  The Company operates on the principle thatwinemaking is a natural but highly technical process requiring the attentionand dedication of the winemaking staff. The Company’s Winery is equipped with current technical innovations anduses modern laboratory equipment and computers to monitor the progress of eachwine through all stages of the winemaking process.

 

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The Company’s recentannual grape harvest and wine production is as follows:

 
| ** **          | ** ** | **Tons of** | ** ** | ** **     | ** ** | ** **   | ** ** |
|---------------------|------------|------------------|------------|----------------|------------|--------------|------------|
| ** **          | ** ** | **Grapes**       | ** ** | **Production** | ** ** | **Cases**    | ** ** |
| **Crush Year** | ** ** | **Crushed**      | ** ** | **Year**       | ** ** | **Produced** | ** ** |
| ** **          | ** ** | ** **       | ** ** | ** **     | ** ** | ** **   | ** ** |
| 2003                |       | 917              |       | 2003           |       | 92,208       |       |
| 2004                |       | 994              |       | 2004           |       | 73,212       |       |
| 2005                |       | 1132             |       | 2005           |       | 72,297       |       |
| 2006                |       | 1488             |       | 2006           |       | 81,081       |       |
| 2007                |       | 1746             |       | 2007           |       | 115,466      |       |

 

Sales and Distribution

 

Marketing Strategy.  The Company markets and sells its winesthrough a combination of direct sales at the Winery, sales directly andindirectly through its shareholders, self-distribution to local restaurants andretail outlets in Oregon, directly through mailing lists, and throughdistributors and wine brokers selling in specific targeted areas outside of thestate of Oregon.  As the Company hasincreased production volumes and achieved greater brand recognition, sales toother domestic markets have increased, both in terms of absolute dollars and asa percentage of total Company sales.

 

Direct Sales.  The Company’s Winery is located adjacent tothe state’s major north-south freeway (Interstate 5), approximately 2 milessouth of the state’s third largest metropolitan area (Salem), and 50 miles ineither direction from the state’s first and second largest metropolitan areas(Portland and Eugene, respectively).  TheCompany believes the Winery’s unique location along Interstate 5 has resultedin a greater amount of wines sold at the Winery as compared to the Oregonindustry standard.  Direct sales from theWinery are an important distribution channel and an effective means of productpromotion.  To increase brand awareness,the Company offers educational Winery tours and product presentations by trainedpersonnel.

 

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

 

Direct sales areprofitable because the Company is able to sell its wine directly to consumersat retail prices rather than to distributors or retailers at wholesaleprices.  Sales made directly to consumersat retail prices result in an increased profit margin equal to the differencebetween retail prices and distributor or wholesale prices, as the case may be.  For 2007, direct sales contributedapproximately 14% of the Company’s revenue.

 

Self-Distribution.  In 1990, the Company established aself-distribution wholesale system, now called Bacchus Fine Wines, to sell itswines to restaurant and retail accounts located in Oregon.  Eighteen sales representatives, who take wineorders and make some deliveries primarily on a commission-only basis, currentlycarry out the self-distribution program. Company-provided trucks and delivery drivers support most of these salesrepresentatives.  The Company believesthis program of self-representation and delivery has allowed its wines to gaina strong presence in the Oregon market with over 1,397 restaurant and retailaccounts established as of December 31, 2007.

 

The Company has expendedsignificant resources to establish its self-distribution system.  The system initially focused on distributionin the Willamette Valley, but has expanded to the Oregon coast, southern Oregonand central Oregon.  For 2007,approximately 48% of the Company’s net revenues were attributable toself-distribution.

 

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Distributors and WineBrokers.  The Company uses bothindependent distributors and wine brokers primarily to market the Company’swines in specific targeted areas where self-distribution is not feasible.  Only those distributors and wine brokers whohave demonstrated knowledge of and a proven ability to market premium, superpremium, and ultra premium wines are utilized. Outside of Oregon, the Company’s products are distributed in 44 statesand the District of Columbia and 3 non-domestic (export) customers.  For 2007, approximately 38% of the Company’snet revenues were attributable to out of state distribution.

 

Tourists.  Oregon wineries are a popular touristdestination with many bed & breakfasts, motels and fine restaurantsavailable.  The Willamette Valley, Oregon’sleading wine region has two-thirds of the state’s wineries and vineyards and ishome to more than 200 wineries.  Anadditional advantage for the Willamette Valley wine tourist is the proximity ofthe wineries to Portland (Oregon’s largest city and most populardestination).  From Portland, touristscan visit the Willamette Valley winery of their choice in anywhere from 45minutes to two hours.

 

**The Company believes its convenient location, adjacent toInterstate 5, enables the Winery to attract a significant number ofvisitors.  The Winery is located 45minutes from Portland and less than one mile from The Enchanted Forest, whichoperates from March 15 to September 30 each year and attractsapproximately 130,000 paying visitors per year. Adjacent to the Enchanted Forest is the Thrillville Amusement Park andthe Forest Glen Recreational Vehicle Park, which contains approximately 110 overnightrecreational vehicle sites.  Many of thevisitors to the Enchanted Forest and RV Park visit the Winery.**

** **

Competition

 

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

 

The Company believes thatthe principal competitive factors in the premium, super premium, and ultrapremium segment of the wine industry are product quality, price, labelrecognition, and product supply.  TheCompany believes it competes favorably with respect to each of thesefactors.  The Company has received “Excellent”to “Recommended” reviews in tastings of its wines and believes its prices arecompetitive with other Oregon wineries. Larger scale production is necessary to satisfy retailers’ andrestaurants’ demand and the Company believes that additional productioncapacity is needed to meet estimated future demand.  Furthermore, the Company believes that itsultimate forecasted production level of 306,000 gallons (129,000 cases) peryear will give it significant competitive advantages over most Oregon wineriesin areas such as marketing, distribution arrangements, grape purchasing, andaccess to financing.  The currentproduction level of most Oregon wineries is generally much smaller than theprojected production level of the Company’s Winery.  With respect to label recognition, theCompany believes that its unique structure as a consumer-owned company willgive it a significant advantage in gaining market share in Oregon as well aspenetrating other wine markets.

 

Governmental Regulationof the Wine Industry

 

The production and saleof wine is subject to extensive regulation by the U.S. Department of theTreasury, Alcohol and Tobacco Tax and Trade Bureau and the 

 

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Oregon Liquor ControlCommission.  The Company is licensed byand meets the bonding requirements of each of these governmental agencies.  Sale of the Company’s wine is subject tofederal alcohol tax, payable at the time wine is removed from the bonded areaof the Winery for shipment to customers or for sale in its tasting room.  The current federal alcohol tax rate is $1.07per gallon for wines with alcohol content at or below 14% and $1.57 per gallonfor wines with alcohol content above 14%; however, wineries that produce notmore than 250,000 gallons during the calendar year are allowed a graduated taxcredit of up to $0.90 per gallon on the first 100,000 gallons of wine (otherthan sparkling wines) removed from the bonded area during that year.  The Company also pays the state of Oregon anexcise 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 soldin Oregon.  In addition, all states inwhich the Company’s wines are sold impose varying excise taxes on the sale ofalcoholic beverages.  As an agriculturalprocessor, the Company is also regulated by the Oregon Department ofAgriculture and, as a producer of wastewater, by the Oregon Department ofEnvironmental Quality.  The Company hassecured all necessary permits to operate its business.

 

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

 

Employees

 

As of December 31,2007 the Company had 106 full-time employees and 12 part-time employees.  In addition, the Company hires additionalemployees for seasonal work as required. The Company’s employees are not represented by any collective bargainingunit.  The Company believes it maintainspositive relations with its employees.

 

Additional Information

 

The Company filesquarterly and annual reports with the Securities and Exchange Commission. Thepublic may read and copy any material that the Company files with the SEC atthe SEC’s Public Reference Room at 450 Fifth Street, N.W., Washington D.C.20549. The public may also obtain information on the operation of the PublicReference Room by calling the SEC at 1-800-SEC-0330. As the Company is anelectronic filer, filings may be obtained via the SEC website at(www.sec.gov.). Also visit the Company’s website (www.wvv.com) for links tostock position and pricing.

 

**ITEM 2.           DESCRIPTION OF PROPERTY.**

** **

See “DESCRIPTION OFBUSINESS — Winery” and “— Vineyard”.

 

The Company carriesProperty and Liability insurance coverage in amounts deemed adequate byManagement.

 

**ITEM 3.           LEGAL PROCEEDINGS.**

** **

There are no materiallegal proceedings pending to which the Company is a party or to which any ofits property is subject, and the Company’s management does not know of any suchaction being contemplated.

 

10

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**ITEM 4.           SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS.**

** **

There were no matterssubmitted to a vote of security holders during the Company’s Fourth Quarterended December 31, 2007.

 

**ITEM 5.           MARKETFOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.**

** **

The Company’s CommonStock is traded on the Capital Market (formerly known as the NASDAQ Small CapMarket) under the symbol “WVVI.”  As of December 31,2007, there were  2,812 stockholders ofrecord of the Common Stock.

 

The table below setsforth for the quarters indicated the high and low bids for the Company’s CommonStock as reported on the Capital Market. The Company’s Common Stock began trading publicly on September 13,1994.

 

Quarter Ended

 
| ** ** | ** ** | **3/31/07** | ** ** | **6/30/07** | ** ** | **9/30/07** | ** ** | **12/31/07** | ** ** |
|------------|------------|-------------|------------|-------------|------------|-------------|------------|--------------|------------|
| High       |       | $           | 7.40       |        | $          | 7.08        |       | $            | 6.98       |   | $ | 6.80 |   |
| Low        |       | $           | 6.22       |        | $          | 6.75        |       | $            | 5.87       |   | $ | 5.08 |   |

 

Quarter Ended

 
| ** ** | ** ** | **3/31/06** | ** ** | **6/30/06** | ** ** | **9/30/06** | ** ** | **12/31/06** | ** ** |
|------------|------------|-------------|------------|-------------|------------|-------------|------------|--------------|------------|
| High       |       | $           | 7.56       |        | $          | 9.17        |       | $            | 8.83       |   | $ | 7.45 |   |
| Low        |       | $           | 4.97       |        | $          | 5.90        |       | $            | 5.71       |   | $ | 5.71 |   |

 

The Company has not paid any dividends on the CommonStock, and the Company does not anticipate paying any dividends in theforeseeable future. The Company intends to use its earnings to grow thedistribution of its brands, improve quality and reduce debt.

 

Equity Compensation PlanInformation

 
| ** **                                                  | ** ** | ** **                     | ** ** | ** **                      | ** ** | **Number of**                | ** ** |
|-------------------------------------------------------------|------------|--------------------------------|------------|---------------------------------|------------|-----------------------------------|------------|
| ** **                                                  | ** ** | ** **                     | ** ** | ** **                      | ** ** | **securities**                    | ** ** |
| ** **                                                  | ** ** | **Number of**             | ** ** | ** **                      | ** ** | **remaining available**      | ** ** |
| ** **                                                  | ** ** | **Securities to be** | ** ** | ** **                      | ** ** | **for future issuance** | ** ** |
| ** **                                                  | ** ** | **issued upon**           | ** ** | **Weighted-average**            | ** ** | **under equity**             | ** ** |
| ** **                                                  | ** ** | **exercise of**           | ** ** | **exercise price of** | ** ** | **compensation**                  | ** ** |
| ** **                                                  | ** ** | **outstanding**                | ** ** | **outstanding**                 | ** ** | **plans (excluding**         | ** ** |
| ** **                                                  | ** ** | **options, warrants**     | ** ** | **options, warrants**      | ** ** | **securities reflected**     | ** ** |
| ** **                                                  | ** ** | **and rights**            | ** ** | **and rights**             | ** ** | **in common (a))**      | ** ** |
| **Plan Category**                                      | ** ** | **(a)**                        | ** ** | **(b)**                         | ** ** | **(c)**                           | ** ** |
| ** **                                                  | ** ** | ** **                     | ** ** | ** **                      | ** ** | ** **                        | ** ** |
| Equity  compensation plans approved by security holders     |       | 434,200                        |       | $                               | 3.90       |                              | 124,476    |   |
|                                                        |       |                           |       |                            |       |                              |       |
| Equity compensation  plans not approved by security holders |       | —                         |       | $                               | —     |                              | —     |   |
|                                                        |       |                           |       |                            |       |                              |       |
| Total                                                       |       | 434,200                        |       | $                               | 3.90       |                              | 124,476    |   |

 

The Company does not havecompensations plans under which equity securities of the Company are authorizedfor issuance which were adopted without the approval of security holders.

 

**ITEM 6.           MANAGEMENT’SDISCUSSION AND ANALYSIS OR PLAN OF OPERATION.**

** **

Forward Looking Statement

 

This Management’sDiscussion and Analysis of Financial Condition and Results of Operation andother sections of this Form 10KSB contain forward-looking 

 

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statements within themeaning of the Private Securities Litigation Reform Act of 1995.  Words such as “expects”, “anticipates”, “intends”,“plans”, “believes”, “seeks”, “estimates”, and variations of such words andsimilar expressions are intended to identify such forward-lookingstatements.  Such forward-lookingstatements include, for example, statements regarding general market trends,predictions regarding growth and other future trends in the Oregon wineindustry, expected availability of adequate grape supplies, expected positiveimpact of the Company’s Hospitality Center on direct sales effort, expectedincreases in future sales.  Theseforward-looking statements involve risks and uncertainties that are based oncurrent expectations, estimates and projections about the Company’s business,and beliefs and assumptions made by management. Actual outcomes and results may differ materially from what is expressedor forecasted in such forward-looking statements due to numerous factors,including, but not limited to: availability of financing for growth, availability of adequate supply ofhigh quality grapes, successful performance of internal operations, impact ofcompetition, changes in wine broker or distributor relations or performance,impact of possible adverse weather conditions, impact of reduction in grapequality or supply due to disease, impact of governmental regulatory decisions,and other risks detailed below as well as those discussed elsewhere in this Form 10KSBand from time to time in the Company’s Securities and Exchange Commissionfiling and reports.  In addition, suchstatements could be affected by general industry and market conditions andgrowth rates, and general domestic economic conditions.

 

CRITICAL ACCOUNTINGPOLICIES AND ESTIMATES

 

Management’sDiscussion and Analysis of Financial Condition and Results of Operationsdiscusses Willamette Valley Vineyards’ financial statements, which have beenprepared in accordance with generally accepted accounting principles. As such,management is required to make certain estimates, judgments and assumptionsthat are believed to be reasonable based upon the information available. On anon-going basis, management evaluates its estimates and judgments, includingthose related to product returns, bad debts, inventories, investments, incometaxes, financing operations, and contingencies and litigation. Management basesits estimates and judgments on historical experience and on various otherfactors that are believed to be reasonable under the circumstances, the resultsof which form the basis for making judgments about the carrying values ofassets and liabilities that are not readily apparent from other sources. Actualresults may differ from these estimates under different assumptions orconditions.

 

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

 

The Company valuesinventories at the lower of actual cost to produce the inventory or marketvalue.  We regularly review inventoryquantities on hand and adjust our production requirements for the next twelvemonths based on estimated forecasts of product demand.  A significant decrease in demand could resultin an increase in the amount of excess inventory quantities on hand.  In the future, if our inventory cost isdetermined to be greater than the net realizable value of the inventory uponsale, we would be required to recognize such excess costs in our cost of goodssold at the time of such determination. Therefore, although we make everyeffort to ensure the accuracy of our forecasts of future product demand, anysignificant unanticipated changes in demand could have a significant impact onthe ultimate selling price and, therefore, the carrying value of our inventoryand our reported operating results.

 

We capitalize internalvineyard development costs prior to the vineyard land becoming fullyproductive.  These costs consistprimarily of the costs of the 

 

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vines and expendituresrelated to labor and materials to prepare the land and construct vinetrellises.  Amortization of such costs asannual crop costs is done on a straight-line basis for the estimated economicuseful life of the vineyard, which is estimated to be 30 years.  The Company regularly evaluates therecoverability of capitalized costs.  Amortization of vineyard development costsare included in capitalized crop costs that, in turn are included in inventorycosts and ultimately become a component of cost of goods sold.

 

TheCompany pays depletion allowances to the Company’s distributors based on theirsales to their customers.  The Companysets these allowances on a monthly basis and the Company’s distributors billthem back on a monthly basis.  Alldepletion expenses associated with a given month are expensed in that month asa reduction of revenues. The Company also pays asample 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’sdistributors.  The expenses for samplesare expensed at the time of sale in the selling, general and administrativeexpense.  The Company’s distributors usethe allowance to sample product to prospective customers.

 

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

 

OVERVIEW

 

RESULTSOF OPERATIONS

 

The Company produced itshighest annual earnings to date despite significant constraints oninventory.  Revenues increased by 12% to$16,710,927, net earnings by 31% to $1,686,661, and diluted earnings per shareto 34 cents from 26 cents, compared to the prior year.

 

These historical resultswere due principally to production, out-of-state sales and marketing staffsworking closely together to organize pre-orders and ship when the wine wasready to release.  The winery continuedto receive distributor orders in excess of its supply of Pinot Noir and PinotGris.  In addition, the gross marginsreceived from the sales of the winery’s produced wines were 59% in 2007compared to 58% for 2006.

 

Out-of-state distributorsales revenue increased 12% for the year ended December 31, 2007 ascompared to the prior year and generated the largest share of the increase innet profit. Retail sales increased 16% and generated positive contribution tonet income growth.  The Oregon WholesaleDepartment called Bacchus Fine Wines produced an increase of 20% in the salesof purchased wine from other wineries but a slight reduction (approximately1.0%) in sales in winery produced products.   The Board of Directors and Management took steps to improve Oregonwholesale operations by purchasing a state-of-the-art order fulfillment systemin Q2 2007 and strengthening Oregon marketing support. There were significantissues with the implementation of this system mostly related to the accountsreceivable and purchase order functionality of the system.  This was mainly due to the personnel changesthat occurred in the Accounting department in the midst of the implementation.These issues caused delays in financial reporting and made it increasinglydifficult to reconcile cash in the general ledger versus the bank balance.

 

The winery had a zerocredit line balance at December 31, 2007.

 

During the fourth quarterof 2007 the Company experienced some material weaknesses with respect tointernal controls related to Accounts Receivable, Cash and Inventory. This wasmainly due to significant changes in key accounting personnel and thesimultaneous implementation of a new order fulfillment and accounting systemfor the in-state distribution business, Bacchus Fine Wines. The Company hastaken steps to mitigate these weaknesses through the addition of key andcompensating controls.

 

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Sales

 

In the year ended December 31,2007, the Company sold approximately 2,000 cases of Estate Pinot Noir, 23,000cases of Willamette Valley Pinot Noir (vintage level), 5,000 cases of BarrelSelect Pinot Noir, 14,000 cases of Whole Cluster Pinot Noir, 18,000 cases ofPinot Gris and 16,000 cases of Riesling.

 

The Company has or plansto bottle 2,500 cases of ‘07 Estate Pinot Noir, 33,000 cases of ‘07 WillametteValley Pinot Noir (vintage level), 5,000 cases of ‘07 Barrel Select Pinot Noir,23,000 ‘07 cases of Whole Cluster Pinot Noir, 24,000 cases of ‘07 Pinot Grisand 23,000 cases of ‘07 Riesling in December of 2007 and in 2008.  In December 2007, 400 cases of the ‘07Whole Cluster Pinot Noir were sold.

 

The Company soldapproximately 153,000 cases of wine in 2007 of which 115,000 cases were wineryproduced wines.  Of the winery producedcase sales in 2007, approximately 76,000 were the above listed varieties.  Total purchased wine case sales in 2007 wereapproximately 38,000 cases.  The 2007harvest produced 1,746 tons of wine grapes. Fortunately, the 2007 harvest yielded higher volumes, approximately 10%more than expected.  The expected ‘07vintage yield is expected to produce approximately 134,000 cases, including afew selected bulk wine purchases.

 

Wine Inventory

 

Management has takensteps to address inventory shortages relative to orders by increasingproduction through additional plantings in 2006 of 5 acres, contracting for anadditional 170 new acres of wine grapes on a long-term basis, and in 2007,providing a loan to a key grower for vineyard establishment costs and leasingthe 60 acre Elton Vineyard in the Eola Hills. Elton Vineyard is regarded as one of Oregon’s best sources of Pinot Noirwine grapes.  This lease is for a 10 yearterm with four 5 year renewals at the Company’s option and a first right ofrefusal in the event of the vineyard’s sale. Betty M. O’Brien, a Director of the Company, is a principal owner ofElton Vineyards.

 

These actions bring to atotal of 587 acres of vineyard owned, leased or contracted by the Company, with23 of those acres recently planted and not productive.  The total acres of Pinot Noir are 300, ofwhich 9 are young, non-productive vines; Pinot Gris 122 and 14; Riesling 95 and0 respectively.

 

The Company continues toallocate its Pinot Noir and Pinot Gris to distributors to fairly apportion availablesupplies.  Management expects theshortage of these products to limit the potential for growth until such time ascurrent plantings mature.

 

Production Capacity

 

In addition to securingadditional wine grape supplies, Management purchased capital assets at asignificantly higher level in 2007 than in past years.  2008 purchases will be made to address futureproduction requirements based on the expected increases in wine grapequantities.   Management is planning forincreasing production capacity with the expectation additional construction andequipment expenses will be made through 2009. The Company is required to install additional water storage capacity onthe Turner property and fire sprinklers in its 20,000 square foot winewarehouse, which  also requiredsignificant capital investment in 2007 and additional capital investmentanticipated for 2008.

 

Wine Quality

 

Continued awareness ofthe Willamette Valley Vineyards brand, the Company and the quality of itswines, was enhanced by national and regional media coverage throughout 2007.

 

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As the company celebratesits 25th anniversary it continues to receive high accolades from wine reviewersand press.  As if to mark the occasion,Willamette Valley Vineyards earned the coveted title “#1 Hottest Small Brand of2007” by Wine Business Monthly, the industry’s leading trade publication forwineries and growers, in their February, 2008 issue. Editor Cyril Penn wrote: “WillametteValley Vineyards is one of those wineries demonstrating that you can increasequality while increasing production; the two aren’t mutually exclusive.”

 

The winery’s premiumPinot Noir continues to score well with reviewers. The 2005 Tualatin EstatePinot Noir earned 90 points from Wine Spectator in their February 12, 2008Insider edition. The Estate Pinot Noir was rated 89 points by the WineEnthusiast in the April, 2007 edition and 90 points in the August 2007edition of Wine & Spirits. It also received a gold medal from the CriticsChallenge.

 

The WVV 2005 WillametteValley Pinot Noir received 86 points from Wine Spectator on the web.  Wine Spectator rates wines that score between85-89 points as “very good: a wine with special qualities.” This same winereceived 88 points from Wine Enthusiast in their April, 2007 issue and waslisted as one of San Francisco Chronicles top rated wines of 2007, earningthree stars in a category dominated by $45-$65 wines.  It also earned a gold medal from the Taster’sGuild International Wine Competition and the Pacific Rim International WineCompetition. The 2006 Pinot Noir, which was just released, earned gold medalsat Dallas Morning News Wine Competition and the San Francisco ChronicleInternational Wine competition. This is the first wine in the world to bebottled with an FSC (Forest Stewardship Council) certified sustainably producedcork.

 

The 2006 Whole ClusterPinot Noir was rated 89 points by Wine Advocate in the Nov/December issuesaying “Nicely balanced, this is truly a wine of pleasure at a great price.”  It was reviewed by the Wall Street Journal asa “favorite American Pinot Noir under $20” in the September 7th article “Chartingthe Sideway’s Effect,” by Dorothy Gaiter and John Brecher.  The wine reviewers note, “Our other favoritewas an utter delight from Willamette Valley Vineyards. In our notes, wedescribed it as “Beaujolais-like” because of its jazzy color and vibrant,just-picked tastes.” It also received 87 points from Wine Spectator, July 15,2007 edition, and an “outstanding” from Wine Press Northwest.

 

The 2006 Pinot Griscontinues a legacy of success earning 93 points from Wine & Spirits,where it was chosen as one of the top Pinot Gris in the world.  The review appeared in the August, 2007issue. Wine Enthusiast rated it 90 points in their April issue and WineSpectator and Wine Advocate both rated it 86 points on their websites.  Most recently this wine was reviewed by theNew York Times and picked as one of the top Oregon Pinot Gris. The reviewappeared in the December 26, 2007 article “A Low Profile, and a Price toMatch.”  In addition, it received 6 goldmedals from major competitions, a 99 points rating from Just Wine Points, waswritten up in Ray Isle’s blog for Food & Wine as one of the best PinotGris in the world, and received 94 points from Epicurean Traveler.

 

The 2003 EstateChardonnay received 90 points in the April, 2007 Wine Enthusiast magazine withPaul Gregutt writing, “The Dijon Clones and extra bottle time have produced aChardonnay that is at the top of its form, and outshines most of the Californiacompetition in this price range.” The 2004 Dijon Clone Chardonnay received 89points in the same issue. Additionally, the February issue of Wines &Vines magazine highlighted the company for being one of the first to plant theDijon chardonnay clones in Oregon.

 

Wine Enthusiast magazinerated the 2007 Riesling as a “Best Buy” in the November, 2007 edition, givingit 87 points. This Riesling also earned a double gold in the Wine PressNorthwest Platinum wine competition, where wines that have already earned goldmedals in top competitions are judged.

 

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Media continue to takenotice of the wineries stewardship pledge. In July, 2007 Willamette ValleyVineyards became the first winery in the world use FSC (Forest StewardshipCouncil) certified cork in wine bottles, starting with the 2006 Pinot Noir. Thewinery was certified by the Rainforest Alliance to FSC standards.  The initiative was marked by an internationalnews story written by the Oregon Associated Press and released August 25,2007. The story garnered national and international press attention andappeared in many publications including Chicago Sun-Times, Seattle Times, USAToday, Wine Spectator online, Time.com, Wines & Vines, Wine BusinessMonthly and Food & Beverage magazine to name just a few.  National Geographic’s “Fresh Finds” blog on May 29,2007 highlighted the company’s landmark achievement in the article “Put a CorkIn It” as did Martha Stewart Living Body & Soul magazine in thearticle “A Guide to Eco-Wine.” The same article highlighted the company’sbiodiesel use. Wine Spectator highlighted WVV as an eco-pioneer for biodieseluse in the June 7, 2007 issue, in an article titled “Earth FriendlyWinemaking.”

 

In July 2007,Willamette Valley Vineyards pledged to become carbon neutral by 2010 in stepwith the Oregon Governor’s and Oregon Environmental Council’s Carbon NeutralChallenge.  The initiative was covered inseveral newspapers including the Seattle Times and a Wine Spectator.com articleon September 7, 2007.

 

The companies resveratrollabeling initiative was featured in a July 24, 2007 article in theOregonian, the March, 2007 issue of Shape Magazine, the February, 2007 issue ofGrocery Headquarters magazine, the April 30, 2007 issue of Wine Spectator,and most recently in the Winter 2007 edition of Better Homes and Gardens ‘HeartHealthy Magazine’. The 2007 Whole Cluster Pinot Noir is just released and touts25 micromolars of resveratrol.  Cornell Universityresearcher Leroy Creasy found that wines containing above ten micromolars ofresveratrol “extraordinary.”

 

The winery continued agreat partnership with McCormick & Schmick’s Seafood Restaurants in2007, working together on a “wild salmon” campaign.  WVV Pinot Noir and Pinot Gris can be found ontheir wine lists nationwide. Additionally, the company received a national placement with the PinotNoir at Safeway stores.  And in astrategic move, the company’s sales offices moved into the Oregon RestaurantAssociation Plaza in January, 2007 where the Oregon Restaurant Association andNational Grocers Association are headquartered.

 

Company Founder, JimBernau, garnered much community recognition in 2007 for the winery’sachievements in the areas of growth, community involvement andsustainability.  Bernau earned thecoveted Ernst & Young Pacific Northwest Entrepreneur of the Year Awardin July, 2007, the Oregon Restaurant Association 2007 Purveyor of the Yearaward, and the Oregon Agri-Business Councils’ 2007 Agriculturalist of the Yearaward.  Additionally the company washonored with the SOLV Citizenship of the Year Award for commitment tosustainability and the Oregon community.

 

The winery continues todevelop new marketing techniques, including re-development of the website.  A new site officially launched in January 2008complete with a new sustainability commitment section, up-to-date news section,new shopping cart, and stunning visuals.

 

Seasonal and QuarterlyResults

 

The Company hashistorically experienced and expects to continue experiencing seasonalfluctuations in its revenues and net income. In the past, the Company has reported a net loss during its firstquarter and expects the first quarter to be the weakest of the year, includingthe first quarter of 2008.  Sales volumesincrease progressively beginning in the second quarter through the fourthquarter because of consumer buying habits.

 

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The following table setsforth certain information regarding the Company’s revenues, excluding excisetaxes, from Winery operations for each of the last eight fiscal quarters:

 
| ** **                      | ** ** | **Fiscal 2007 Quarter Ended ** | ** ** | **Fiscal 2006 Quarter Ended** | ** ** |
|---------------------------------|------------|----------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                      | ** ** | **(in thousands)**                            | ** ** | **(in thousands)**                      | ** ** |
| ** **                      | ** ** | **3/31**                                           | ** ** | **6/30**                                     | ** ** | **9/30** | ** ** | **12/31** | ** ** | **3/31** | ** ** | **6/30** | ** ** | **9/30** | ** ** | **12/31** | ** ** |
| Tasting room and  retail sales  |       | $                                                  | 445        |                                         | $          | 517 |   | $ | 518 |   | $ | 735 |   | $ | 379 |   | $ | 429 |   | $ | 560 |   | $ | 607 |   |
| On-site and  off-site festivals |       | 50                                                 |       | 15                                           |       | 57 |   | 59 |   | 36 |   | 14 |   | 38 |   | 17 |   |
| In-state sales                  |       | 1,767                                              |       | 1,878                                        |       | 1,886 |   | 2,668 |   | 1,548 |   | 1,719 |   | 1,835 |   | 2,367 |   |
| Bulk/Grape sales                |       | 9                                                  |       | 9                                            |       | 3 |   | 134 |   | 9 |   | 9 |   | 15 |   | 8 |   |
| Out-of-state sales              |       | 1,409                                              |       | 1,420                                        |       | 1,870 |   | 1,652 |   | 1,824 |   | 1,352 |   | 942 |   | 1,569 |   |
| Total winery revenues           |       | $                                                  | 3,680      |                                         | $          | 3,839 |   | $ | 4,334 |   | $ | 5,248 |   | $ | 3,796  |   | $ | 3,523 |   | $ | 3,390 |   | $ | 4,568 |   |

 

Period-to-PeriodComparisons

 

Revenue.  The following table sets forth, for theperiods indicated, select revenue data from Company operations:

 
| **Year Ended December 31** | ** ** | ** ** | ** ** | ** ** | ** ** |
|-------------------------------------------|------------|------------|------------|------------|------------|
| **(in thousands)**                   | ** ** | **2007**   | ** ** | **2006**   | ** ** |
| ** **                                | ** ** | ** ** | ** ** | ** ** | ** ** |
| Tasting room and  retail sales            |       | $          | 2,215      |       | $          | 1,975 |   |
| On-site and  off-site festivals           |       | 181        |       | 105        |       |
| In-state sales                            |       | 8,199      |       | 7,469      |       |
| Bulk /Grape  Sales                        |       | 155        |       | 41         |       |
| Out-of-state  sales                       |       | 6,351      |       | 5,687      |       |
| Revenues from  winery operations          |       | $          | 17,101     |       | $          | 15,277 |   |
|                                      |       |       |       |       |       |
| Less Excise  Taxes                        |       | 390        |       | 361        |       |
|                                      |       |       |       |       |       |
| Net Revenue                               |       | $          | 16,711     |       | $          | 14,916 |   |

 

2007 Compared to 2006

 

Tasting room andretail sales for the year ended December 31, 2007 increased $239,834, or12%, as compared to the corresponding prior year period.  Tasting room sales increased during the yearended December 31, 2007, due primarily to increased customer traffic flowsat the Company’s winery tasting room, and a 9% increase in purchases in thetasting room.  The focus on customers forlife through telephone, mail order and retail sales will continue with the goalof expanding the customer base and continuing the trend of increasing revenuegeneration by the retail department.  TheCompany experienced an increase in revenue during 2007 in on-site and off-sitefestivals revenue of 72%, or $76,893 as compared to the same period in2006.  This increase is due primarily tothe improved attendance of on-site and off-site events.

 

Total sales in the stateof Oregon, through the Company’s in-state sales force and through direct salesfrom the winery increased $730,574, or 10%, in the year ended December 31,2007, as compared to the corresponding prior year period.  2007 in-state sales of purchased wines were 20%higher than 2006 and contributed mostly to the 10% growth in overall in-statesales.  2007 in-state sales of WillametteValley Vineyards branded wine were slightly lower (1%) than 2006.  The Company’s direct in-state sales to itslargest customer increased $34,000, or 3%, in the year ended December 31,2007, as compared to the prior year period. These increases are largely the result of the broader product linespresented and increased product placements through the development of BacchusFine Wines.

 

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Out-of-state salesin the year ended December 31, 2007 increased $662,901, or 12%, ascompared to the prior year period.  Thehigher sales are primarily a result of strong demand for the Company’svarietals and significant sales efforts undertaken by the Company’sout-of-state sales force.  The Pinot Noir variety led sales in 2007.

 

The Company paysalcohol excise taxes to both the Oregon Liquor Control Commission and to theU.S. Department of the Treasury, Alcohol and Tobacco Tax and Trade Bureau.  These taxes are based on product salesvolumes.  The Company is liable for thetaxes upon the removal of product from the Company’s warehouse on a per gallonbasis.  The Company also pays taxes onthe grape harvest on a per ton basis to the Oregon Liquor Control Commissionfor the Oregon Wine Board.  The Company’sexcise taxes for the year ended December 31, 2007 increased 8% as comparedto the prior year period.  This was dueprimarily to the increased sales, by volume, in the year ended December 31,2007 as compared to the prior year period, thereby increasing overall salesvolumes and taxes calculated based on volume. Sales data in the discussion above is quoted before the exclusion ofexcise taxes.

 

As a percentage ofnet revenue, gross profit was 50% in the year ended December 31, 2007, a 3%point improvement from  the prior yearperiod.  While the Company is continuingits focus on improved distribution of higher margin products as well ascontinuing to reduce grape and production costs, we anticipate that ourincreased representation of brands other than our own through our Oregon salesforce will erode the gross margins as a percent of sales due to the lowermargins associated with selling those brands. While the gross margin may erode due to such representation, the Companydoes not anticipate that net income will follow that trend.

 

Amortization of vineyard development costs is included in capitalizedcrop costs that, in turn, are included in inventory costs and ultimately becomea component of cost of goods sold.  Forthe years ending December 31, 2007 and 2006, approximately $84,000 and$83,000, respectively, were amortized into inventory costs.

 

Selling, generaland administrative expenses for the year ended December 31, 2007 increased19% compared to the prior year period. This increase is due primarily to increased staffing and relatedemployee benefit expenses, increased Marketing related spending andprofessional service fees.  As apercentage of net revenue from winery operations, selling, general andadministrative expenses increased to 33% for the year ended December 31,2007, as compared to 31% for the prior year period, primarily as a result ofincreased expenditures as mentioned above in relation to revenues.

 

Interest expensedecreased 36% or $61,875 in the year ended December 31, 2007 as comparedto the prior year period.  Interest costswere lower primarily due to less debt outstanding during the period.

 

The provision forincome taxes and the Company’s effective tax rate were $1,034,170 and 38% ofpre-tax income in the year ended December 31, 2007 with $889,621 or 41% ofpre-tax income recorded for the prior year period.

 

As a result of theabove factors, net income increased to $1,686,661 in the year ended December 31,2007 from $1,291,774 for the prior year period. Earnings per share were $0.35 and $0.27, in the years ended December 31,2007 and 2006, respectively.

 

First Quarter 2008Outlook

 

Sales in the firstquarter of 2008 are weaker than the prior year’s first quarter sales for thefollowing principle reasons: inventory outages of three Pinot Noir products anddistributors ordering in smaller quantities to reduce their inventory levelspossibly to improve their cash position anticipating a weak economy andsubstantially higher fuel costs.  Restaurantcustomers with whom winery management is in contact are reporting less revenuethan the prior year.  Management believesthis weakness could be temporary as additional, new Pinot Noir inventories are aging and sales of the Company’s wines from its distributors’ warehousesto their customers are up nationally for the first quarter by 12%.

 

Liquidity and CapitalResources

 

At December 31,2007, the Company had a working capital balance of $9.1 million and a currentratio of 5.91:1.  At December 31,2006, the Company had a working capital balance of $7.8 million and a currentratio of 4.28:1.  The Company had a cashbalance of $1,083,405 at December 31, 2007 compared to a cash balance of$1,612,470 at December 31, 2006. The decrease in cash was 

 

18

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primarily due to theincreased use of cash for inventory building, accounts payable and capitalexpenditures.

 

Total cash provided byoperating activities in the year ended December 31, 2007 was $470,223,compared to $2,192,986 for the prior year period, primarily as a result of thebuild-up in inventory and related use of cash. Additionally, trade payables due at the year ended December 31,2006 and paid in 2007 contributed to the decrease in cash from operatingactivities compared to the prior year period.

 

Total cash used ininvesting activities in the year ended December 31, 2007 was $1,185,891,compared to $495,145 in the prior year period. Cash used in investing activities consisted of property and equipmentadditions, vineyard development costs and notes receivable from a grapeproducer.

 

Total cash provided byfinancing activities in the year ended December 31, 2007 was $186,603,compared to $500,962 used in the prior year period.  Cash provided by financing activitiesprimarily consisted of proceeds of stock option exercises offset by the paymentson the long-term debt.

 

At December 31,2007, the line of credit balance was $0, on a maximum borrowing amount of$2,000,000.  The Company has a loanagreement with Umpqua Bank that contains, among other things, certainrestrictive financial covenants with respect to total equity, debt-to-equityand debt coverage that must be maintained by the Company on a quarterlybasis.  As of December 31, 2007, theCompany was in compliance with all of the financial covenants.

 

As of December 31,2007, the Company had a total long-term debt balance of $1,231,158 owed to FarmCredit Services. The debt with Farm Credit Services was used to finance theHospitality Center, invest in winery equipment to increase the Company’swinemaking capacity, and complete the storage facility.

 

The Company believes thatcash flow from operations and funds available under its existing creditfacilities will be sufficient to meet the Company’s foreseeable short andlong-term needs.

 

The Company’s contractualobligations as of December 31, 2007 including long-term debt, grapepayables and commitments for future payments under non-cancelable leasearrangements are summarized below:

 
| ** **                                    | ** ** | **Payments Due by Period** | ** ** |
|-----------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                    | ** ** | ** **                                | ** ** | **Less than** | ** ** | ** ** | ** ** | ** ** | ** ** | **After 5** | ** ** |
| ** **                                    | ** ** | **Total**                                 | ** ** | **1 year** | ** ** | **1-3 years** | ** ** | **4-5 years** | ** ** | **years** | ** ** |
|                                          |       |                                      |       |   |   |   |   |   |   |   |   |
| Long-term debt  and capital lease obligations |       | $                                         | 1,231,158  |   | $ | 284,786 |   | $ | 615,927 |   | $ | 330,445 |   | — |   |
| Grape Payables                                |       | 508,545                                   |       | 508,545 |   | — |   | — |   | — |   |
| Operating Leases                              |       | 3,900,586                                 |       | 310,331 |   | 645,161 |   | 635,168 |   | 2,309,926 |   |
| Total  Contractual Obligations                |       | $                                         | 5,640,289  |   |  $1,103,662 |   | $ | 1,261,088 |   | $ | 965,613 |   | $ | 2,309,926 |   |
|                                               |            |                                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Risk Factors

 

The following disclosuresshould be read in conjunction with Management’s Discussion and Analysis ofFinancial Condition and Results of Operations. These disclosures are intended to discuss certain material risks of theCompany’s business as they appear to Management at this time.  However, this list is not exhaustive.  Other risks may, and likely will, arise fromtime to time.

 

19

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Agricultural Risks CouldAdversely Affect Our Business

 

Winemaking and grapegrowing are subject to a variety of agricultural risks.  Various diseases, pests, fungi, viruses,drought, frost and certain other weather conditions can affect the quantity ofgrapes available to the Company, decreasing the supply of the Company’sproducts and negatively impacting profitability.  In particular, certain of the Company’s vinesare not resistant to phylloxera; accordingly, those vines are particularly atrisk to the effects from an infestation of phylloxera.

 

We May Not Be Ableto Grow or Acquire Enough Quality Fruit for Our Wines

 

The adequacy of our grapesupply is influenced by consumer demand for wine in relation to industry-wideproduction levels.  While we believe thatwe can secure sufficient supplies of grapes from a combination of our ownproduction and from grape supply contracts with independent growers, we cannotbe certain that grape supply shortages will not occur.  A shortage in the supply of wine grapes couldresult in an increase in the price of some or all grape varieties and acorresponding increase in our wine production costs.

 

Loss of Key EmployeesCould Harm Our Reputation and Business

 

Our success depends tosome degree upon the continued service of a number of key employees.  The loss of the services of one or more ofour key employees, including the President, Winemaker, CFO/Controller and theBacchus General Manager, could harm our business and our reputation andnegatively impact our profitability.

 

Adverse Public OpinionRegarding Our Bacchus Portfolio May Harm Our Business

 

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

 

The Company’s Ability toOperate Requires Utilization of the Line of Credit

 

The Company’s cash flowfrom operations historically has not been sufficient to provide all fundsnecessary for the Company’s Operations. The Company has entered into a line ofcredit agreement to provide such funds and entered into a term loanarrangement, the proceeds of which were used to acquire the Tualatin operationsand to construct the Hospitality Center. There is no assurance that the Company will be able to comply with allconditions under its credit facilities in the future or that the amountavailable under the line of credit facility will be adequate for the Company’sfuture needs.  Failure to comply with allconditions of the credit facilities or to have sufficient funds for operationscould adversely affect the Company’s results of operations and shareholdervalue.

 

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

 

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

 

20

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**ITEM 7.           FINANCIALSTATEMENTS.**

** **

WillametteValley Vineyards, Inc.

Indexto Financial Statements

 
| Report of Independent Registered  Public Accounting Firms | 22     |
|-----------------------------------------------------------|--------|
|                                                      |   |
| Financial Statements                                      |   |
|                                                      |   |
| Balance Sheet                                             | 23     |
|                                                      |   |
| Statements of Operations                                  | 24     |
|                                                      |   |
| Statements of Shareholders’  Equity                  | 25     |
|                                                      |   |
| Statements of Cash Flows                                  | 26     |
|                                                      |   |
| Notes to Financial Statements                             | 27     |

 

21

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REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

Tothe Board of Directors and Stockholders

WillametteValley Vineyards, Inc.

 

Wehave audited the accompanying balance sheet of Willamette Valley Vineyards, Inc.,as of December 31, 2007, and the related statements of operations,shareholders’ equity, and cash flows for the two years then ended. Thesefinancial statements are the responsibility of the Company’s management. Ourresponsibility is to express an opinion on these financial statements based onour audits.

 

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

 

Inour opinion, the financial statements referred to above present fairly, in allmaterial respects, the financial position of Willamette Valley Vineyards, Inc.,as of December 31, 2007, and the results of its operations and cash flowsfor the two years then ended, in conformity with accounting principlesgenerally accepted in the United States of America.

 

Asdescribed in Note 8 to the financial statements, effective January 1,2006, the Company changed the manner in which it accounts for share-basedcompensation.

 
| /s/  Moss Adams LLP     |
|-------------------------|
|                    |
| Santa  Rosa, California |
| May 16,  2008      |

 

22

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WillametteValley Vineyards, Inc.

Balance Sheet

 
| ** **                                                                                                              | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                              | ** ** | **2007**              | ** ** |
| ASSETS                                                                                                                  |       |                  |       |
| Current assets:                                                                                                         |       |                  |       |
| Cash and cash  equivalents                                                                                              |       | $                     | 1,083,405  |   |
| Accounts  receivable, net (Note 2)                                                                                      |       | 1,804,168             |       |
| Inventories  (Note 3)                                                                                                   |       | 7,976,432             |       |
| Prepaid expenses  and other current assets                                                                              |       | 91,981                |       |
| Current portion  of notes receivable                                                                                    |       | 62,415                |       |
| Deferred income  taxes                                                                                                  |       | —                |       |
| Total current  assets                                                                                                   |       | 11,018,401            |       |
|                                                                                                                    |       |                  |       |
| Vineyard development costs, net                                                                                         |       | 1,690,055             |       |
| Property and equipment, net (Note 4)                                                                                    |       | 4,200,155             |       |
| Debt issuance costs                                                                                                     |       | 21,106                |       |
| Notes receivable                                                                                                        |       | 187,585               |       |
| Other assets                                                                                                            |       | 65,893                |       |
| Total Assets                                                                                                            |       | $                     | 17,183,195 |   |
|                                                                                                                    |       |                  |       |
| LIABILITIES AND  SHAREHOLDERS’ EQUITY                                                                              |       |                  |       |
| Current liabilities:                                                                                                    |       |                  |       |
| Line of credit  (Note 5)                                                                                                |       | $                     | —     |   |
| Current portion  of long-term debt (Note 6)                                                                             |       | 284,786               |       |
| Accounts payable                                                                                                        |       | 564,494               |       |
| Accrued expenses                                                                                                        |       | 420,825               |       |
| Income taxes  payable                                                                                                   |       | 76,516                |       |
| Deferred Income  Taxes                                                                                                  |       | 1,000                 |       |
| Grape payables                                                                                                          |       | 508,545               |       |
| Total current  liabilities                                                                                              |       | 1,856,166             |       |
|                                                                                                                    |       |                  |       |
| Long-term debt (Note 6)                                                                                                 |       | 946,372               |       |
| Deferred rent liability                                                                                                 |       | 223,936               |       |
| Deferred gain (Note 11)                                                                                                 |       | 378,025               |       |
| Deferred income taxes (Note 9)                                                                                          |       | 262,000               |       |
| Total  liabilities                                                                                                      |       | 3,666,499             |       |
|                                                                                                                    |       |                  |       |
| Commitments and contingencies (Note 11)                                                                                 |       | —                |       |
|                                                                                                                    |       |                  |       |
| Shareholders’ equity (Notes 7 and 8):                                                                              |       |                  |       |
| Common stock, no  par value - 10,000,000 shares authorized, 4,835,902 issued and outstanding at  December 31, 2007 |       | 8,425,389             |       |
| Retained  earnings                                                                                                      |       | 5,091,307             |       |
| Total shareholders’ equity                                                                                         |       | 13,516,696            |       |
|                                                                                                                    |       | $                     | 17,183,195 |   |

 

Theaccompanying notes are an integral part of the financial statements.

 

23

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WillametteValley Vineyards, Inc.

Statementsof Operations

Forthe Years Ended December 31, 2007 and 2006

 
| ** **                                    | ** ** | **2007**   | ** ** | **2006**   | ** ** |
|-----------------------------------------------|------------|------------|------------|------------|------------|
| ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net revenues                                  |       | $          | 16,710,927 |       | $          | 14,916,072 |   |
| Cost of goods sold                            |       | 8,430,802  |       | 7,963,437  |       |
| Gross margin                                  |       | 8,280,125  |       | 6,952,635  |       |
|                                          |       |       |       |       |       |
| Selling, general  and administrative expenses |       | 5,554,062  |       | 4,678,228  |       |
| Income from  operations                       |       | 2,726,063  |       | 2,274,407  |       |
|                                          |       |       |       |       |       |
| Other income (expenses):                      |       |       |       |       |       |
| Interest income                               |       | 79,814     |       | 59,736     |       |
| Interest expense                              |       | (107,768   | )          | (169,643   | )          |
| Other income                                  |       | 22,722     |       | 16,895     |       |
|                                          |       | (5,232     | )          | (93,012    | )          |
|                                          |       |       |       |       |       |
| Income before  income taxes                   |       | 2,720,831  |       | 2,181,395  |       |
|                                          |       |       |       |       |       |
| Income tax provision (Note 9)                 |       | 1,034,170  |       | 889,621    |       |
|                                          |       |       |       |       |       |
| Net income                                    |       | $          | 1,686,661  |       | $          | 1,291,774 |   |
|                                          |       |       |       |       |       |
| Basic net income  per common share            |       | $          | 0.35       |       | $          | 0.27 |   |
|                                          |       |       |       |       |       |
| Diluted net  income per common share          |       | $          | 0.34       |       | $          | 0.26 |   |

 

Theaccompanying notes are an integral part of the financial statements.

 

24

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WillametteValley Vineyards, Inc.

Statementsof Shareholders’ Equity

Forthe Years Ended December 31, 2007 and 2006

 
| ** **                                 | ** ** | **Common stock** | ** ** | ** **  | ** ** | **Retained** | ** ** | ** ** | ** ** |
|--------------------------------------------|------------|-----------------------|------------|-------------|------------|--------------|------------|------------|------------|
| ** **                                 | ** ** | **Shares**            | ** ** | **Dollars** | ** ** | **earnings** | ** ** | **Total**  | ** ** |
|                                       |       |                  |       |        |       |         |       |       |       |
| Balances at  December 31, 2005        |       | 4,660,202             |       | $           | 7,613,222  |         | $          | 2,112,872  |       | $ | 9,726,094 |   |
| Stock based  compensation expense          |       | 3,325                 |       | 42,712      |       | —       |       | 42,712     |       |
| Common stock  issued and options exercised |       | 129,500               |       | 279,895     |       | —       |       | 279,895    |       |
| Net income                                 |       | —                |       | —      |       | 1,291,774    |       | 1,291,774  |       |
| Balances at  December 31, 2006        |       | 4,793,027             |       | $           | 7,935,829  |         | $          | 3,404,646  |       | $ | 11,340,475 |   |
| Stock based  compensation expense          |       | 1,850                 |       | 45,108      |       | —       |       | 45,108     |       |
| Common stock  issued and options exercised |       | 41,025                |       | 444,452     |       | —       |       | 444,452    |       |
| Net income                                 |       | —                |       | —      |       | 1,686,661    |       | 1,686,661  |       |
| Balances at  December 31, 2007        |       | 4,835,902             |       | $           | 8,425,389  |         | $          | 5,091,307  |       | $ | 13,516,696 |   |

 

Theaccompanying notes are an integral part of the financial statements.

 

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WillametteValley Vineyards, Inc.

Statementsof Cash Flows

Forthe Years Ended December 31, 2007 and 2006

 
| ** **                                                                             | ** ** | **2007**   | ** ** | **2006**  | ** ** |
|----------------------------------------------------------------------------------------|------------|------------|------------|-----------|------------|
| Cash flows from operating activities:                                                  |       |       |       |      |       |
| Net income                                                                             |       | $          | 1,686,661  |      | $          | 1,291,774 |   |
| Reconciliation  of net income to net cash (used for) provided by operating activities: |       |       |       |      |       |
| Depreciation and  amortization                                                         |       | 576,515    |       | 541,848   |       |
| Stock based  compensation expense                                                      |       | 45,108     |       | 42,712    |       |
| Deferred income  taxes                                                                 |       | 128,000    |       | 78,000    |       |
| Bad debt expense                                                                       |       | 8,333      |       | 5,562     |       |
| Changes in  assets and liabilities:                                                    |       |       |       |      |       |
| Accounts  receivable                                                                   |       | (202,807   | )          | (47,004   | )          |
| Inventories                                                                            |       | (1,224,503 | )          | 199,066   |       |
| Prepaid expenses  and other current assets                                             |       | 15,762     |       | (85,182   | )          |
| Other assets                                                                           |       | (8,226     | )          | 22,404    |       |
| Accounts payable                                                                       |       | (381,247   | )          | 134,600   |       |
| Accrued expenses                                                                       |       | 27,873     |       | 44,783    |       |
| Income taxes  receivable/payable                                                       |       | (229,092   | )          | (39,379   | )          |
| Grape payables                                                                         |       | 26,955     |       | 9,717     |       |
| Deferred rent  liability                                                               |       | 32,985     |       | 26,180    |       |
| Deferred gain                                                                          |       | (32,094    | )          | (32,095   | )          |
|                                                                                   |       |       |       |      |       |
| Net cash  provided by operating activities                                             |       | 470,223    |       | 2,192,986 |       |
| Cash flows from  investing activities:                                                 |       |       |       |      |       |
| Additions to  property and equipment                                                   |       | (863,623   | )          | (400,537  | )          |
| Vineyard  development expenditures                                                     |       | (72,268    | )          | (94,608   | )          |
| Loans to grape  producer                                                               |       | (250,000   | )          | —    |       |
|                                                                                   |       |       |       |      |       |
| Net cash  provided by (used for) investing activities                                  |       | (1,185,891 | )          | (495,145  | )          |
| Cash flows from  financing activities:                                                 |       |       |       |      |       |
| Proceeds from  and stock options exercised                                             |       | 156,480    |       | 279,895   |       |
| Repayments of  long-term debt                                                          |       | (257,850   | )          | (780,857  | )          |
| Excess tax  benefit on stock option exercises                                          |       | 287,973    |       | —    |       |
|                                                                                   |       |       |       |      |       |
| Net cash used  for financing activities                                                |       | 186,603    |       | (500,962  | )          |
|                                                                                   |       |       |       |      |       |
| Net (decrease)  increase in cash and cash equivalents                                  |       | (529,065   | )          | 1,196,879 |       |
|                                                                                   |       |       |       |      |       |
| Cash and cash  equivalents:                                                            |       |       |       |      |       |
| Beginning of  year                                                                     |       | 1,612,470  |       | 415,591   |       |
| End of year                                                                            |       | $          | 1,083,405  |      | $          | 1,612,470 |   |

 

Theaccompanying notes are an integral part of the financial statements.

 

26

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WillametteValley Vineyards, Inc.

Notesto Financial Statements

 

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

 

Organizationand Operations

 

WillametteValley Vineyards, Inc. (the “Company”) owns and operates vineyards and awinery 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 2007 and2006 no one customer represented more than 10% of revenues.

 

Salesin Oregon through the Company’s in-state sales force and through direct salesfrom the winery represented approximately 48% and 49% respectively, of revenuesfor 2007 and 2006. In-state sales of purchased wines represented 53% and 48% oftotal 2007 and 2006 in-state sales, respectively. In-state sales of WillametteValley Vineyards branded wines represented 44% and 49% of total 2007 and 2006in-state sales, respectively.

 

Out-of-statesales represented approximately 37% and 37% respectively, of revenues for 2007and 2006.  Foreign sales represent lessthan 1% of total sales.  The Company alsosells its wine through the tasting room at its winery.

 

Basisof Presentation

 

Theaccompanying financial statements have been prepared in accordance withaccounting principles generally accepted in the United States of America, whichrequire management to make certain estimates and assumptions.  These estimates and assumptions affect thereported amounts of assets and liabilities and the disclosure of contingentassets and liabilities as of the date of the financial statements, and thereported amounts of revenues and expenses during the reporting period.  The Company bases its estimates on historicalexperience and on various assumptions that are believed to be reasonable underthe circumstances at the time.  Actualresults could differ from those estimates under different assumptions orconditions.

 

SegmentReporting

 

TheCompany’s business activities are reported as a single operating segmentconsisting of the retail, in-state self-distribution and out of state salesdepartments.  Discrete financialinformation is not currently available to measure profit or loss for theCompany’s in-state self-distribution division (dba Bacchus Fine Wines),however, the sales of purchased wines by Bacchus Fine Wines in 2007 were $4,375,306compared to $3,630,072 in 2006.

 

FairValue of Financial Instruments

 

Thefollowing methods and assumptions were used to estimate the fair value of eachclass of financial instrument for which it is practicable to estimate thatvalue:

 

Cashand Cash Equivalents, Accounts Receivables, Prepaid Expenses and Other CurrentAssets, Accounts Payable, Accrued Expenses and Other Current Liabilities

 

Thefair value of the Company’s financial instruments, including cash and cashequivalents, prepaid expenses, accounts payable and other accrued expenses,approximates costs because of their short maturities.

 

TheCompany has established an allowance for doubtful accounts based upon factorspertaining to the credit risk of specific customers, historical trends, andother information.  Delinquent accountsare written-off when it is determined that the amounts are uncollectible.

 

27

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Lineof Credit

 

Borrowingsunder the line of credit arrangement have variable interest rates that reflectcurrently available terms and conditions for similar debt.  The carrying amount of this debt is areasonable estimate of its fair value.

 

Long-TermDebt

 

Thefair value of the Company’s long-term debt, including the current portionthereof, is estimated based on the present value method using AA rates providedby Farm Credit Services for the Northwest Farm Credit Services debt andestimated current rates for similar borrowing arrangements for all other longterm debt.  The carrying value andestimated fair value of long term debt, including current portion is asfollows:

 
| ** **                       | ** ** | **Carrying** | ** ** | **Fair**  | ** ** |
|----------------------------------|------------|--------------|------------|-----------|------------|
| ** **                       | ** ** | **Value**    | ** ** | **Value** | ** ** |
| Northwest Farm   Credit Services |       | $            | 1,231,158  |      | $          | 1,247,359 |   |
|                                  |            |              |            |           |            |  |  |

 

Concentrationof risk

 

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

 

Financialinstruments that potentially subject the Company to credit risk are accountsreceivable. The Company performs ongoing credit evaluations of its customersand does not require collateral. A reserve is maintained for potential creditlosses. The allowance for doubtful accounts is based on an assessment of thecollectibility of customer accounts. The Company regularly reviews theallowance by considering factors such as historical experience, credit quality,the age of the accounts receivable balances, and current economic conditionsthat may affect a customer’s ability to pay.

 

OtherComprehensive Income

 

Thenature of the Company’s business and related transactions do not give rise toother comprehensive income.

 

Cashand Cash Equivalents

 

Cashand cash equivalents include highly liquid short-term investments with anoriginal maturity of less than 90 days.

 

Inventories

 

ForCompany produced wines, after a portion of the vineyard becomes commerciallyproductive, the annual crop and production costs relating to such portion arerecognized 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 goodsinventories when the wine is produced, bottled, and ready for sale.  For purchased wines distributed through theCompany’s in-state distribution division, Bacchus Fine Wines, the supplierinvoiced costs of the wine, including freight, are recognized into finishedgoods inventories at the point of receipt.

 

Thecost of finished goods is recognized as cost of sales when the wine product issold.  Inventories are stated at thelower of first-in, first-out (“FIFO”) cost or market by variety.

 

Inaccordance with general practices in the wine industry, wine inventories aregenerally included in current assets in the accompanying balance sheet,although a portion of such inventories may be aged for more than one year (Note3).

 

NotesReceivable

 

TheCompany loaned $250,000, at an 8.5% per annum interest rate, to a grape growerfor the sole purpose of making improvements to vineyards subject to 

 

28

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grapecontracts with the Company.  The loanwill be repaid, including principal and interest, through payments from theborrower and/or deductions from grape payments owed by the Company to the grapegrower through 2012.  The loan is securedby, along with other instruments, a Deed of Trust on the subject vineyard.

 

VineyardDevelopment Costs

 

Vineyarddevelopment costs consist primarily of the costs of the vines and expendituresrelated to labor and materials to prepare the land and construct vinetrellises.  The costs are capitalizeduntil the vineyard becomes commercially productive, at which time annualamortization is recognized using the straight-line method over the estimatedeconomic useful life of the vineyard, which is estimated to be 30 years.  Accumulated amortization of vineyarddevelopment costs aggregated $569,485 and $649,270 at December 31, 2007and 2006, respectively. The reduction in accumulated amortization of vineyarddevelopment costs in 2007 versus 2006 is due to an adjustment discovered duringa sub-ledger reconciliation.  It wasdiscovered that the general ledger did not tie to the sub-ledger due to the1999 and 2004 sale of vineyards at the Tualatin Estates site.  The correction had no impact on the incomestatement and was entirely a balance sheet adjustment.

 

Amortizationof vineyard development costs are included in capitalized crop costs that inturn are included in inventory costs and ultimately become a component of costof goods sold.  For the year ending December 31,2007 approximately $84,000 was amortized into inventory costs.

 

Propertyand Equipment

 

Propertyand equipment are stated at cost and are depreciated on the straight-line basisover their estimated useful lives as follows:

 
| Land  improvements |   | 15   |   | years |
|--------------------|--------|------|--------|-------|
| Winery  building   |   | 30   |   | years |
| Equipment          |   | 3-10 |   | years |

 

Expendituresfor repairs and maintenance are charged to operating expense as incurred.  Expenditures for additions and bettermentsare capitalized.  When assets are sold orotherwise disposed of, the cost and related accumulated depreciation areremoved from the accounts, and any resulting gain or loss is included inoperations.  The Company reviews thecarrying value of investments for impairment whenever events or changes incircumstances indicate the carrying amounts may not be recoverable.

 

DebtIssuance Costs

 

Debtissuance costs are amortized on the straight-line basis, which approximates theeffective interest method, over the life of the debt.  For the years ended December 31, 2007and 2006, amortization of debt issuance costs was approximately $7,200 and$7,000 respectively.

 

IncomeTaxes

 

Incometaxes are recognized using enacted tax rates, and are composed of taxes onfinancial accounting income that is adjusted for requirements of current taxlaw, and deferred taxes. Deferred taxes are estimated using the asset andliability approach whereby deferred income taxes are calculated for theexpected future tax consequences of temporary differences between the bookbasis and tax basis of the Company’s assets and liabilities.

 

Significantjudgment is required in assessing the timing and amount of deductible andtaxable items, evaluating tax positions and in determining the income taxprovision. Tax benefits are recognized only when it is more likely than not thetax position will be sustained upon review by the applicable taxingauthorities. If the recognition threshold is met, the tax benefit is measuredat the largest amount that is greater than 50 percent likely to be realized.When the outcome of these tax matters changes, the change in estimate impactsthe provision for income taxes in the period that such a determination is made.If applicable, interest and penalties related to unrecognized tax benefits arereflected in the current income tax provision.

 

29

 

DeferredRent Liability

 

TheCompany leases land under a sale-leaseback agreement.  The long-term operating lease has minimumlease payments that escalate every year. For accounting purposes, rent expense is recognized on the straight-linebasis by dividing the total minimum rents due during the lease by the number ofmonths in the lease.  In the early yearsof a lease with escalation clauses, this treatment results in rental expenserecognition in excess of rents paid, and the creation of a long-term deferredrent liability.  As the lease matures,the deferred rent liability will decrease and the rental expense recognizedwill be less than the rents actually paid. For the period ended December 31, 2007 and 2006, rent costsrecognized in excess of amounts paid totaled $32,985 and $26,180, respectively.

 

RevenueRecognition

 

TheCompany recognizes revenue when the product is shipped and title passes to thecustomer.  The Company’s standard termsare ‘FOB’ shipping point, with no customer acceptance provisions.  The cost of price promotions and rebates aretreated as reductions of revenues.  Noproducts are sold on consignment.  Creditsales are recorded as trade accounts receivable and no collateral isrequired.  Revenue from items soldthrough the Company’s retail locations is recognized at the time of sale.  Net Revenues reported herein are shown net ofsales allowances and excise taxes.

 

Costof Goods Sold

 

Costsof goods sold include costs associated with grape growing, external grapecosts, packaging materials, winemaking and production costs, vineyard andproduction administrative support and overhead costs, purchasing and receivingcosts and warehousing costs.

 

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

 

Selling,General and Administrative Expenses

 

Selling,general and administrative expenses consist primarily of non-manufacturingadministrative and overhead costs, advertising and other marketingpromotions.  Advertising costs areexpensed as incurred or the first time the advertising takes place.  For the years ended December 31, 2007and 2006, advertising costs incurred were approximately $36,000 and $29,000respectively.

 

TheCompany provides an allowance to distributors for providing sample of productsto potential customers.  For the yearsended December 31, 2007 and 2006, these costs, which are included inselling, general and administrative expenses, totaled approximately $102,000and $76,000 respectively.

 

Shippingand Handling Costs

 

Amountspaid by customers to the Company for shipping and handling costs are includedin the net revenue.  Costs incurred forshipping and handling charges are included in selling, general andadministrative expense.  For the yearsended December 31, 2007 and 2006, such costs totaled approximately$373,000 and $324,000 respectively.  TheCompany’s gross margins may not be comparable to other companies in the sameindustry as other companies may include shipping and handling costs as a costof goods sold.

 

ExciseTaxes

 

TheCompany pays alcohol excise taxes based on product sales to both the OregonLiquor Control Commission and to the U.S. Department of the Treasury, Alcoholand Tobacco Tax and Trade Bureau.  TheCompany is liable for the taxes upon the removal of product from the Company’swarehouse on a per gallon 

 

30

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basis.  The federal tax rate is affected by a smallwinery tax credit provision which declines based upon the number of gallons ofwine production in a year rather than the quantity sold.  The Company also pays taxes on the grapeharvest on a per ton basis to the Oregon Liquor Control Commission for theOregon Wine Advisory.  For the yearsended December 31, 2007 and 2006, excise taxes incurred were approximately$390,000 and $361,000 respectively.

 

StockBased Compensation

 

TheCompany expenses stock options on a straight line basis over the options’related vesting term.  For the year endedDecember 31, 2007, the Company recognized pretax compensation expenserelated to stock options of $45,108.

 

Tax Benefit ofDisqualifying Disposition of Stock Options

 

While completing the 2006income tax return, the Company became aware of certain incentive stock optionsthat had been exercised and the related stock subsequently sold before arequired tax holding period.  The sale ofthe stock thus became a disqualifying disposition, which allows the Company todeduct as employee compensation the difference between the exercise price forthe stock option and the stock’s selling price. Certain disqualifying dispositions occurred in 2005, and the 2005 taxreturn was amended, which resulted in a tax refund of $149,108.  Those disqualifying dispositions thatimpacted the 2006 return led to a reduction of $111,299 in the Company’s taxliability.  Since the deduction reportedin the income tax returns exceeds the compensation costs recognized in thefinancial statements, the excess tax benefit is recognized as additional paidin capital.  Accordingly, $260,407 of theincrease in common stock is related to the excess tax benefit realized by theCompany.  These disqualifyingdispositions and the resulting tax benefit do not have any impact on the 2006or 2005 income statements.

 

For 2007, thedisqualifying dispositions led to a reduction of $27,566 in the Company’s taxliability.

 

Basicand Diluted Net Income per Share

 

Basicearnings per share are computed based on the weighted-average number of commonshares outstanding each year.  Dilutedearnings per share are computed using the weighted average number of shares ofcommon stock and potentially dilutive securities assumed to be outstandingduring the year.  Potentially dilutiveshares from stock options and other common stock equivalents are excluded fromthe computation when their effect is anti-dilutive.

 

Optionsto purchase 434,200 shares of common stock were outstanding at December 31,2007 and diluted weighted-average shares outstanding at December 31, 2007include the effect of 179,165 stock options. Options to purchase 495,000 shares of common stock were outstanding at December 31,2006 and diluted weighted-average shares outstanding at December 31, 2006include the effect of 210,003 stock options.

 
| ** ** | ** ** | ** ** | ** ** | **2007**        | ** ** | ** **   | ** ** | ** ** | ** ** | **2006**        | ** ** | ** **   | ** ** |
|------------|------------|------------|------------|-----------------|------------|--------------|------------|------------|------------|-----------------|------------|--------------|------------|
| ** ** | ** ** | ** ** | ** ** | **Weighted**    | ** ** | ** **   | ** ** | ** ** | ** ** | **Weighted**    | ** ** | ** **   | ** ** |
| ** ** | ** ** | ** ** | ** ** | **average**     | ** ** | **Earnings** | ** ** | ** ** | ** ** | **average**     | ** ** | **Earnings** | ** ** |
| ** ** | ** ** | ** ** | ** ** | **shares**      | ** ** | **per**      | ** ** | ** ** | ** ** | **shares**      | ** ** | **per**      | ** ** |
| ** ** | ** ** | **Income** | ** ** | **outstanding** | ** ** | **share**    | ** ** | **Income** | ** ** | **outstanding** | ** ** | **share**    | ** ** |
| ** ** | ** ** | ** ** | ** ** | ** **      | ** ** | ** **   | ** ** | ** ** | ** ** | ** **      | ** ** | ** **   | ** ** |
| Basic      |       | $          | 1,686,661  |            | 4,806,345  |         | $          | 0.35       |       | $               | 1,291,774  |         | 4,739,897  |   | $ | 0.27 |   |
| Options    |       | —     |       | 179,165         |       | —       |       | —     |       | 210,003         |       | —       |       |
| Warrant    |       | —     |       | —          |       | —       |       | —     |       | —          |       | —       |       |
| Diluted    |       | $          | 1,686,661  |            | 4,985,510  |         | $          | 0.34       |       | $               | 1,291,774  |         | 4,949,900  |   | $ | 0.26 |   |

 

Statement of cashflows

Supplementaldisclosure of cash flow information:

 
| ** **                                                            | ** ** | **2007** | ** ** | **2006** | ** ** |
|-----------------------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                                  |       |     |       |     |       |
| Interest paid                                                         |       | $        | 108,000    |     | $          | 170,000 |   |
| Supplemental  schedule of noncash investing and financing activities: |       |     |       |     |       |
| Issuance of  common stock(Note 7)                                     |       | $        | 11,808     |     | $          | 9,152 |   |

 

31

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Liquidity

 

TheCompany’s ability to fund operations requires utilization of amounts availablepursuant to a line of credit agreement as further discussed in Note 5. Therewas $0 outstanding on the line of credit with Umpqua Bank as of December 31,2007.   Management believes existing cashand cash flow from operations, combined with the amounts available under theline of credit facility will be sufficient to satisfy all debt serviceobligations and fund the Company’s operating needs and capital expenditures forthe foreseeable future.

 

Recentlyissued accounting pronouncements and proposed accounting changes

InFebruary 2007, the FASB issued FAS 159, The Fair Value Option forfinancial assets and financial liabilities - including an amendment of FASBstatement No. 115 (“FAS 159”). SFAS 159 permits entities to choose tomeasure many financial instruments and certain other items at fair value. Theobjective is to improve financial reporting by providing entities with theopportunity to mitigate volatility in reported earnings caused by measuringrelated assets and liabilities differently without having to apply complexhedge accounting provisions. FAS 159 is expected to expand the use of fairvalue measurement, which is consistent with the long-term measurementobjectives for accounting for financial instruments. FAS 159 is effective forfinancial statements issued for fiscal years beginning after November 15,2007 with early adoption permitted. No entity is permitted to apply thisStatement retrospectively to fiscal years preceding the effective date unlessthe entity chooses early adoption. The Company has not yet determined theeffect, if any, that the implementation of FAS 159 will have on our results ofoperations or financial condition.

 

InSeptember 2006, the FASB issued FAS 157, Fair Value Measurements (“FAS 157”).SFAS 157 clarifies the principle that fair value should be based on theassumptions market participants would use when pricing an asset or liabilityand establishes a fair value hierarchy that prioritizes the information used todevelop those assumptions. Under the standard, fair value measurements would beseparately disclosed by level within the fair value hierarchy. FAS 157 iseffective for financial statements issued for fiscal years beginning after November 15,2007 and interim periods within those fiscal years, with early adoptionpermitted. We have not yet determined the effect, if any, that theimplementation of FAS 157 will have on our results of operations or financialcondition.

 

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 toout-of-state and foreign distributors.  Inthe fourth quarter of 2007 the Company’s in-state distribution business,Bacchus Fine Wines, implemented a new order fulfillment and accounting systemalong with an EFT payment interface which allows in-state customers to remitfunds electronically.  There have beensome problems with both systems which has caused accounts receivable forin-state customers to grow to approximately $400,000 at December 31,2007.  The Company’s accounts receivablebalance is net of an allowance for doubtful accounts of $54,330 at December 31,2007.

 

Changesin the allowance for doubtful accounts are as follows:

** **
| ** **                                 | ** ** | **Balance at** | ** ** | **Charged to** | ** ** | **Charged to** | ** ** | **Write-offs**  | ** ** | **Balance at** | ** ** |
|--------------------------------------------|------------|---------------------|------------|---------------------|------------|---------------------|------------|-----------------|------------|---------------------|------------|
| ** **                                 | ** ** | **Beginning**       | ** ** | **costs and**  | ** ** | **other**           | ** ** | **net of** | ** ** | **end of**     | ** ** |
| ** **                                 | ** ** | **Of period**  | ** ** | **expenses**        | ** ** | **accounts**        | ** ** | **recoveries**  | ** ** | **period**          | ** ** |
| ** **                                 | ** ** | ** **          | ** ** | ** **          | ** ** | ** **          | ** ** | ** **      | ** ** | ** **          | ** ** |
| Fiscal year  ended December 31, 2006: |       |                |       |                |       |                |       |            |       |                |       |
| Allowance for Doubtful  accounts           |       | $                   | 57,951     |                | $          | 5,562               |       | $               | —     |                | $          | — |   | $ | 63,513 |   |
| Fiscal year  ended December 31, 2007: |       |                |       |                |       |                |       |            |       |                |       |
| Allowance for Doubtful  accounts           |       | $                   | 63,513     |                | $          | —              |       | $               | (9,183     | )                   | $          | — |   | $ | 54,330 |   |

 

32

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3.             Inventories

 

Inventoriesconsist of:

 
| Winemaking and  packaging materials                                              |   | $         | 283,200   |   |
|----------------------------------------------------------------------------------|--------|-----------|-----------|--------|
| Work-in-process  (costs relating to unprocessed and/ or unbottled wine products) |   | 2,710,399 |      |
| Finished goods  (bottled wine and related products)                              |   | 4,982,833 |      |
| Current  inventories                                                             |   | $         | 7,976,432 |   |

 

4.             Property and Equipment

 
| Land and  improvements                  |   | $          | 959,064   |   |
|-----------------------------------------|--------|------------|-----------|--------|
| Winery building  and hospitality center |   | 4,848,249  |      |
| Equipment                               |   | 4,617,040  |      |
|                                    |   | 10,424,353 |      |
|                                    |   |       |      |
| Less accumulated  depreciation          |   | (6,224,198 | )         |
|                                    |   | $          | 4,200,155 |   |

 

5.             Line of Credit Facility

 

InDecember of 2005 the Company has entered into a revolving line of creditagreement with Umpqua Bank that allows borrowings of up to $2,000,000 against eligibleaccounts receivables and inventories as defined in the agreement. The revolvingline bears interest at prime and is payable monthly. The interest rate was6.00% at December 31, 2007. At December 31, 2007 there were noborrowings on this revolving line of credit.

 

Theweighted-average interest rate on the aforementioned borrowings for the fiscalyears ended December 31, are as follows:

 
| 2007   |   | 7.25   | %      |
|--------|--------|--------|--------|
|   |   |   |   |
| 2006   |   | 7.75   | %      |

 

Theline 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 ofacquisitions of property and equipment. As of December 31, 2007, theCompany was in compliance with these covenants.

 

UmpquaBank Capital borrowings are collateralized by the bulk and case goods inventoryand the proceeds from the sales thereof.

 

33

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6.             Long-Term Debt

 
| ** **                           | ** ** | **December 31,  2007** | ** ** |
|--------------------------------------|------------|-----------------------------|------------|
| Long-term debt  consists of:         |       |                        |       |
| Northwest Farm  Credit Services Loan |       | $                           | 1,231,158  |   |
|                                 |       |                        |       |
|                                 |       | 1,231,158                   |       |
| Less current portion       |       | (284,786                    | )          |
|                                 |       |                        |       |
|                                 |       | $                           | 946,372    |   |

 

TheCompany has an agreement with Northwest Farm Credit Services containing a notebearing interest at a rate of 7.85%, which are collateralized by real estateand equipment. This note requires monthly payments of $30,102 until the notesare fully repaid in 2012. The loan agreement contains covenants, which requirethe Company to maintain certain financial ratios and balances. At December 31,2007, the Company was in compliance with these covenants. In the event offuture noncompliance with the Company’s debt covenants, Northwest Farm CreditServices (“FCS”) would have the right to declare the Company in default, and atFCS’ option without notice or demand, the unpaid principal balance of the loan,plus all accrued unpaid interest thereon and all other amounts due shallimmediately become due and payable.

 

Futureminimum principal payments of long-term debt mature as follows:

 
| **Year ending**  | ** ** | ** ** | ** ** |
|-----------------------|------------|------------|------------|
| **December 31,** | ** ** | ** ** | ** ** |
|                  |       |       |       |
| 2008                  |       | $          | 284,786    |   |
| 2009                  |       | 295,921    |       |
| 2010                  |       | 320,006    |       |
| 2011                  |       | 330,445    |       |
|                  |       |       |       |
|                  |       | $          | 1,231,158  |   |

 

7.             Shareholders’ Equity

 

TheCompany is authorized to issue 10,000,000 shares of its common stock. Eachshare of common stock is entitled to one vote. At its discretion, the Board ofDirectors may declare dividends on shares of common stock, although the Boarddoes not anticipate paying dividends in the foreseeable future.

 

Ineach of the years ended December 31, 2007 and 2006, the Company granted1,850 and 3,325 shares of stock valued at $11,808 and $9,152, respectively, ascompensation to employees and agents. The cost of these grants was capitalizedas inventory or included in selling, general and administrative expenses in thestatement of operations. The effects of these noncash transactions have beenexcluded from the cash flow statements in each period.

 

8.             Stock Incentive Plan

 

TheCompany has two stock option plans, the 1992 Stock Incentive Plan (“1992 Plan”)and 2001 Stock Option Plan (“2001 Plan”). No additional grants may be madeunder the 1992 Plan. The 2001 Plan, which is shareholder approved, permits thegrant of stock options and restricted stock awards for up to 900,000 shares. Allstock options have an exercise price that is equal to the fair market value ofthe Company’s stock on the date the options were granted. Administration of theplan, including determination of the number, term, and type of options to begranted, lies with the Board of Directors or a duly authorized committee of theBoard of Directors. Options are generally granted based on employee performancewith vesting periods ranging from date of grant 

 

34

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toseven years. The maximum term before expiration for all grants is ten years.

 

Thefollowing table presents information on stock options outstanding for theperiods shown:

 
| ** **                          | ** ** | **2007**   | ** ** | **2006**     | ** ** |
|-------------------------------------|------------|------------|------------|--------------|------------|
| ** **                          | ** ** | ** ** | ** ** | **Weighted** | ** ** | ** ** | ** ** | **Weighted** | ** ** |
| ** **                          | ** ** | ** ** | ** ** | **Average**  | ** ** | ** ** | ** ** | **average** | ** ** |
| ** **                          | ** ** | ** ** | ** ** | **Exercise** | ** ** | ** ** | ** ** | **exercise** | ** ** |
| ** **                          | ** ** | **Shares** | ** ** | **price**    | ** ** | **Shares** | ** ** | **price** | ** ** |
|                                |       |       |       |         |       |   |   |   |   |
| Outstanding at beginning  of period |       | 495,000    |       | $            | 3.94       |   | 609,500 |   | $ | 3.57 |   |
| Granted                             |       | —     |       | —       |       | — |   | — |   |
| Exercised                           |       | (40,800    | )          | $            | 3.84       |   | (114,500 | ) | 2.00 |   |
| Forfeited                           |       | (20,000    | )          | —       |       | — |   | — |   |
|                                |       |       |       |         |       |   |   |   |   |
| Outstanding at  end of period       |       | 434,200    |       | $            | 3.90       |   | 495,000 |   | $ | 3.94 |   |

 

Thefollowing table presents information on stock options outstanding for theperiods shown:

 
| ** **                                              | ** ** | **2007**   | ** ** | **2006**   | ** ** |
|---------------------------------------------------------|------------|------------|------------|------------|------------|
| Intrinsic value  of options exercised in the period     |       | $          | 105,584    |       | $          | 643,734 |   |
| Stock options  fully vested and expected to vest Number |       | 434,200    |       | 495,000    |       |
| Weighted average  exercise Price                        |       | $          | 3.90       |       | $          | 3.94 |   |
| Aggregate  intrinsic value                              |       | $          | 1,108,426  |       | $          | 1,427,656 |   |
| Weighted average  contractual term of options           |       | 5.90 years |       | 6.90 years |       |
|                                                    |       |       |       |       |       |
| Stock options  vested and Currently exercisable Number  |       | 416,700    |       |       |       |
| Weighted average  exercise Price                        |       | 3.95       |       |       |       |
| Aggregate  intrinsic value                              |       | 1,039,904  |       |       |       |
| Weighted average  contractual term of options           |       | 5.72 years |       |       |       |

 

Weighted-averageoptions outstanding and exercisable at December 31, 2007 are as follows:

 
| **Options outstanding** | ** ** | **Options exercisable** | ** ** |
|------------------------------|------------|------------------------------|------------|
| ** **                   | ** ** | ** **                   | ** ** | **Weighted** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                   | ** ** | **Number**                   | ** ** | **average** | ** ** | **Weighted** | ** ** | **Number** | ** ** | **Weighted** | ** ** |
| ** **                   | ** ** | **outstanding at**      | ** ** | **remaining** | ** ** | **average** | ** ** | **exercisable at** | ** ** | **average** | ** ** |
| **Exercise**                 | ** ** | **December 31,**        | ** ** | **contractual** | ** ** | **exercise** | ** ** | **December 31,** | ** ** | **exercise** | ** ** |
| **price**                    | ** ** | **2007**                     | ** ** | **life** | ** ** | **price** | ** ** | **2007** | ** ** | **price** | ** ** |
| ** **                   | ** ** | ** **                   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| $                            | 1.50       |                         | 1,500      |   | 0.03 |   | 1.50 |   | 1,500 |   | 1.50 |   |
| 1.56                         |       | 4,000                        |       | 2.58 |   | 1.56 |   | 4,000 |   | 1.56 |   |
| 1.75                         |       | 3,000                        |       | 0.17 |   | 1.75 |   | 3,000 |   | 1.75 |   |
| 1.81                         |       | 1,500                        |       | 1.24 |   | 1.81 |   | 1,500 |   | 1.81 |   |
| 2.30                         |       | 60,000                       |       | 6.58 |   | 2.30 |   | 45,300 |   | 2.30 |   |
| 2.31                         |       | 12,000                       |       | 7.40 |   | 2.31 |   | 12,000 |   | 2.31 |   |
| 2.99                         |       | 16,000                       |       | 7.12 |   | 2.99 |   | 16,000 |   | 2.99 |   |
| 3.29                         |       | 75,000                       |       | 2.12 |   | 3.29 |   | 75,000 |   | 3.29 |   |
| 3.76                         |       | 96,000                       |       | 7.58 |   | 3.76 |   | 93,200 |   | 3.76 |   |
| 4.14                         |       | 4,000                        |       | 2.58 |   | 4.14 |   | 4,000 |   | 4.14 |   |
| 4.98                         |       | 5,000                        |       | 7.76 |   | 4.98 |   | 5,000 |   | 4.98 |   |
| 5.00                         |       | 92,200                       |       | 7.99 |   | 5.00 |   | 92,200 |   | 5.00 |   |
| 5.50                         |       | 64,000                       |       | 2.99 |   | 5.50 |   | 64,000 |   | 5.50 |   |
|                         |       |                         |       |   |   |   |   |   |   |   |   |
| $1.50-$5.50                  |       | 434,200                      |       | 5.90 |   | $ | 3.90 |   | 416,700 |   | $ | 3.95 |   |
|                              |            |                              |            |  |  |  |  |  |  |  |  |  |  |  |

 

35

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AtJanuary 1, 2006, the Company began recognizing compensation expense forstock options with the adoption of Statement of Financial Accounting Standards(“SFAS”) No. 123 (Revised), “Share-Based Payment,” (“SFAS 123R”). The fairvalue of each stock option granted is estimated on the date of grant using theBlack-Scholes based stock option valuation model. This model uses theassumptions listed in the table below. Expected volatilities are based onimplied volatilities from the Company’s stock, historical volatility of theCompany’s stock, and other factors. Expected dividends are based on the Company’splan not to pay dividends for the foreseeable future. The Company useshistorical data to estimate option exercises and employee terminations withinthe valuation model. The risk-free rate for periods within the contractual lifeof the option is based on the U.S. Treasury yield curve in effect at the timeof grant.

 
| ** **               | ** ** | **2007** | ** ** | **2006** | ** ** |
|--------------------------|------------|----------|------------|----------|------------|
| Risk-free  interest rate |       | 4.04     | %          | 4.26     | %          |
| Expected lives           |       | 10 years |       | 10 years |       |
| Expected  volatility     |       | 44       | %          | 47       | %          |

 

Adjustmentsare made for options forfeited prior to vesting. For the year ended December 31,2007, the total value of the options granted was computed to be approximately$1,647,811, which would be amortized on the straight-line basis over thevesting period of the options.

 

9.             Income Taxes

 
| ** **                       | ** ** | **2007** | ** ** | **2006** | ** ** |
|----------------------------------|------------|----------|------------|----------|------------|
| Current tax  expense:            |       |     |       |     |       |
| Federal                          |       | $        | 821,714    |     | $          | 660,888 |   |
| State                            |       | 176,456  |       | 150,733  |       |
|                             |       | 998,170  |       | 811,621  |       |
| Deferred tax  expense (benefit): |       |     |       |     |       |
| Federal                          |       | 31,912   |       | 69,142   |       |
| State                            |       | 4,088    |       | 8,858    |       |
|                             |       | 36,000   |       | 78,000   |       |
| Total                            |       | $        | 1,034,170  |     | $          | 889,621 |   |

 

The effectiveincome tax rate differs from the federal statutory rate as follows:

 
| ** **                           | ** ** | **Year ended December 31,** | ** ** |
|--------------------------------------|------------|--------------------------------------------|------------|
| ** **                           | ** ** | **2007**                                   | ** ** | **2006** | ** ** |
| Federal  statutory rate              |       | 34.0                                       | %          | 34.0 | % |
| State taxes, net  of federal benefit |       | 4.4                                        |       | 4.4 |   |
| Permanent  differences               |       | (1.1                                       | )          | 0.6 |   |
| Other, primarily  prior year taxes   |       | 0.7                                        |       | 1.8 |   |
|                                 |       | 38.0                                       | %          | 40.8 | % |

 

36

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Permanentdifferences consist primarily of nondeductible meals and entertainment and lifeinsurance premiums.

 

Deferredtax assets and (liabilities) at December 31 consist of:

 
| ** **                             | ** ** | **2007** | ** ** |
|----------------------------------------|------------|----------|------------|
| Accounts  receivable                   |       | $        | 21,000     |   |
| Inventories                            |       | 74,000   |       |
| Prepaids                               |       | (35,000  | )          |
| Stock  Compensation                    |       | (64,000  | )          |
| Other                                  |       | 3,000    |       |
| Net current  deferred tax liability    |       | (1,000   | )          |
|                                   |       |     |       |
| Depreciation                           |       | (407,000 | )          |
| Deferred gain on  sale-leaseback       |       | 145,000  |       |
| Deferred  liabilities                  |       | —   |       |
| Net noncurrent  deferred tax liability |       | (262,000 | )          |
| Net deferred tax  liability            |       | $        | (263,000   | ) |

 

10.           Related Parties

 

TheCompany provides living accommodations in a manufactured home on the Company’spremises for the president and his family as additional compensation forsecurity and lock-up services the president provides.  Over the years the Company has recordedannual expenses less than $12,000 related to the housing provided for itspresident.

 

11.           Commitments and Contingencies

 

Litigation

Fromtime to time, in the normal course of business, the Company is a party to legalproceedings.  Management believes thatthese matters will not have a material adverse effect on the Company’sfinancial position, results of operations or cash flows, but due to the natureof the litigation, the ultimate outcome cannot presently be determined.

 

OperatingLeases

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

 

Theamortization of the deferred gain totals approximately $25,000 per year for the1999 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, generaland administrative expenses.

 

37

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In 2005, the Companyentered into a long-term grape purchase agreement with one of its WillametteValley wine grape growers whereby the Winery agreed to purchase the grapeyields at fixed contract prices through 2015, with the first crop received in2007.  In 2006, the Company entered intoanother long-term grape purchase agreement with the same Willamette Valley winegrape growers whereby the Winery agreed to purchase additional grape yields atfixed contract prices through 2016, with the first crop expected in 2008. TheCompany is obligated to purchase 100% of the crop produced within the strictquality standards and crop loads, equating to maximum payments of approximately$1,500,000 per year.  We cannot calculatethe minimum payment as such a calculation is dependent in large part on anunknown – the amount of grapes produced in any given year.  If there are no grapes produced in any givenyear, or if the grapes are rejected for failure to meet contractual qualitystandards, the Company has no payment obligation for that year.

 

InFebruary 2007 the Company entered into a lease agreement for approximately60 acres of vineyard land at Elton Vineyards. This lease is for a 10 year term with four 5 year renewals at theCompany’s option and a first right of refusal in the event of the vineyard’ssale.  For 2007, the annual costs of thislease were $105,000. For subsequent years there is an escalation provision tiedto the CPI not to exceed 2% per annum. Betty M. O’Brien, a Director of the Company, is a principal owner ofElton Vineyards.

 

InDecember 2007 the Company entered into a 3 year lease agreement for asmall, one-room office space in Wilsonville, Oregon.  This space was leased to accommodate theout-of-state sales team.

 

Asof December 31, 2007, future minimum lease payments are as follows:

 
| **Year ending**  | ** ** | ** ** | ** ** |
|-----------------------|------------|------------|------------|
| **December 31,** | ** ** | ** ** | ** ** |
| 2008                  |       | $          | 310,331    |   |
| 2009                  |       | 319,656    |       |
| 2010                  |       | 325,505    |       |
| 2011                  |       | 314,523    |       |
| 2012                  |       | 320,645    |       |
| Thereafter            |       | 2,309,926  |       |
| Total                 |       | $          | 3,900,586  |   |

 

TheCompany is also committed to lease payments for various pieces of officeequipment.  Total rental expense for alloperating leases excluding the vineyards, amounted to $12,984 and $13,175 in2007 and 2006, respectively.  Inaddition, payments for the leased vineyards have been included in inventory orvineyard developments costs and aggregate approximately $263,364 and $200,765for the years ended December 31, 2007 and 2006, respectively.

 

Susceptibilityof Vineyards to Disease

TheTualatin Vineyard and the leased vineyards are known to be infested withphylloxera, an aphid-like insect, which can destroy vines.  The Company has not detected any phylloxeraat its Turner Vineyard.

 

Itis not possible to estimate any range of loss that may be incurred due to thephylloxera infestation of our vineyards. The phylloxera at Tualatin Estate Vineyard is believed to have beenintroduced on the roots of the vines first planted on the property in thesouthern most section Gewurztraminer in 1971 that the Company partially removedin 2004.  The remaining vines, and allothers infested, remain productive at low crop levels.

 

38

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12.           Employee Benefit Plan

 

InFebruary 2006, the Company instituted a 401(k) profit sharing plan coveringall eligible employees. Employees who participate may elect to make salarydeferral contributions to the Plan up to 100% of the employees’ eligiblepayroll subject to annual Internal Revenue Code maximum limitations. We make amatching contribution of $1 for every $1 contributed by the participant up to4% of the participant’s eligible payroll. In addition, we may make adiscretionary contribution to the entire qualified employee pool, in accordancewith the Plan.

 

Forthe year ended December 31, 2007, total amounts expensed under this planwas approximately $71,650 compared to $61,282 expensed in the prior year.

 

39

 

**ITEM8.     CHANGES IN AND DISAGREEMENTS WITHACCOUNTANTS ON ACCOUNTING ANDFINANCIAL DISCLOSURE.**

 

None.

 

**ITEM 8A(T)   CONTROLS AND PROCEDURES.**

 

The Company maintainsdisclosure controls and procedures that are designed to ensure that informationrequired to be disclosed by us in the reports we file or submit under theSecurities and Exchange Act of 1934, as amended (the “Exchange Act”), isrecorded, processed, summarized and reported within the time periods requiredby the Securities and Exchange Commission, including, without limitation, thosecontrols and procedures designed to insure that such information is accumulatedand communicated to our management to allow timely decisions regarding requireddisclosure.

 

The Company carried outan evaluation, under the supervision and with the participation of the ChiefExecutive Officer, Controller and other management personnel, of theeffectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and15d-15(e) of the Securities and Exchange Act of 1934 as of December 31,2007.  Based on that evaluation, theChief Executive Officer and Controller concluded that the disclosure controlsand procedures as of December 31, 2007 were not effective to ensure thatinformation required to be disclosed by the Company in the reports it files orsubmits under the Securities and Exchange Act of 1934 is recorded, processed,summarized, and reported within the time periods specified in the Securitiesand Exchange Commission’s rules and forms, and is accumulated andcommunicated to management, including the Chief Executive Officer andController, to allow timely decisions regarding required disclosure.

 

The Company does notexpect that its disclosure controls and procedures will prevent all error andall fraud. A control procedure, no matter how well conceived and operated, canprovide only reasonable, not absolute, assurance that the objectives of thecontrol procedure are met. Because of the inherent limitations in all controlprocedures, no evaluation of controls can provide absolute assurance that allcontrol issues and instances of fraud, if any, within the Company have beendetected. These inherent limitations include the realities that judgments indecision-making can be faulty, and that breakdowns can occur because of simpleerror or mistake. Additionally, controls can be circumvented by the individualacts of some persons, by collusion of two or more people, or by managementoverride of the control. The Company considered these limitations during the developmentof its disclosure controls and procedures, and will continually reevaluate themto ensure they provide reasonable assurance that such controls and proceduresare effective.

 

Management’s Report onInternal Control over Financial Reporting

 

Management is responsiblefor establishing and maintaining adequate internal control over financialreporting, as defined in Rule 13a-15(f) of the Securities Act of 1934.Management has assessed the effectiveness of our internal control overfinancial reporting as of December 31, 2007, based on criteria set forth by theCommittee of Sponsoring Organizations of the Treadway Commission in *Internal Control—Integrated Framework.* The Company’sinternal control over financial reporting is a process designed to providereasonable assurance regarding the reliability of financial reporting and thepreparation of financial statements for external purposes in accordance withgenerally accepted accounting principles, and includes those policies andprocedures that:

 

·                  Pertain to the maintenance of recordsthat, in reasonable detail, accurately and fairly reflect the transactions anddispositions   of the assets of the Company; and

 

·                  Provide reasonable assurance thattransactions are recorded as necessary to permit preparation of financialstatements in   accordance with generally accepted accountingprinciples, and that receipts and expenditures of the Company are being   madeonly in accordance with authorizations of management and directors of theCompany; and

 

40

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·                  Provide reasonable assuranceregarding preventions or timely detection of unauthorized acquisition, use ordisposition of   the Company’s assets that could have a materialeffect on the financial statements.

 

Because of its inherentlimitations, internal control over financial reporting may not prevent ordetect misstatements.  Also, projectionsof any evaluation of effectiveness to future periods are subject to the risk thatcontrols may become inadequate because of the changes in conditions, or thatthe degree of compliance with the policies or procedures may deteriorate.

 

A significant deficiencyinvolves matters in the design or operation of the Company’s internal controlthat could adversely affect our ability to record, process, summarize andreport financial data consistent with the assertions of management in theconsolidated financial statements. A material weakness is a control deficiency,or combination of control deficiencies, that results in more than a remotelikelihood that a material misstatement of the annual or interim financialstatements will not be prevented or detected.

 

“Management hasdetermined that our internal controls over financial reporting are noteffective.” In particular, management has determined that material weaknessesexisted within our accounts receivable sub-ledger because of a poorimplementation of a new order fulfillment and accounting system in the fourthquarter of 2007, which led to cutoff issues, cash receipt inaccuracies andultimately led to our inability to properly reconcile our cash accounts.Management also determined there are material weaknesses related to perpetualinventory controls of in-state wholesale purchased wines and the relatedinventory value of these wines also because of the implementation of the newsystem in the fourth quarter of 2007. Lastly, management determined there are significant deficienciesrelating to security permissions for financial systems including order activityand pricing; enforcement of existing controls and proper segregation of duties.

 

This annual report doesnot include an attestation report of the company’s registered public accountingfirm regarding internal control over financial reporting. Management’s reportwas not subject to attestation by the company’s registered public accountingfirm pursuant to temporary rules of the Securities and Exchange Commissionthat permit the company to provide only management’s report in this annualreport.

 

Management’s RemediationInitiatives

 

We are in the process ofaddressing and remedying the material weakness in internal control overfinancial reporting described above, as well as the other significantdeficiencies.  Elements of ourremediation plan can only be accomplished over time and we can offer noassurances that those initiatives will ultimately have the intended effects. Wehave aggregated the above described material weakness and significantdeficiencies into five categories: processes surrounding the sales order toremittance cycle; financial reporting; accounts reconciliation; inventorymanagement; organizational structure and information technology security.

 

Management is in theprocess of reviewing existing controls, procedures and responsibilities to moreclosely identify financial reporting risks and the required controls to addressthem.  Key control and compensatingcontrol procedures will be developed to ensure that material weaknesses areproperly addressed and related financial reporting risks are mitigated.Periodic control validation and testing will also be implemented to ensure thatcontrols continue to operate consistently and as designed.

 

 

41

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Changes in InternalControl over Financial Reporting

 

There have not been anychanges in the Company’s internal control over financial reporting (as suchterm 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, orare reasonably likely to materially affect, the Company’s internal control overfinancial reporting.

 

**ITEM8B.    OTHER INFORMATION.**

 

None.

 

**ITEM9.     DIRECTORS, EXECUTIVE OFFICERS,PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THEEXCHANGE ACT.**

 

Directors, nominees forelection as a director, and each such person’s age at March 31, 2007 andposition with the Company.

 
| **Name**               | ** ** | **Position(s) with the Company** | ** ** | **Age** | ** ** |
|------------------------|------------|-------------------------------------------------|------------|---------|------------|
| James W. Bernau ***    |       | Chairperson of the  Board,                      |       |    |       |
|                   |       | President and Director                          |       | 54      |       |
| James L. Ellis ****    |       | Secretary and Director                          |       | 63      |       |
| Sean M. Cary           |       | Director                                        |       | 34      |       |
| Thomas M. Brian**      |       | Director                                        |       | 59      |       |
| Delna L. Jones * ***   |       | Director                                        |       | 67      |       |
| Craig Smith**          |       | Director                                        |       | 61      |       |
| Betty M. O’Brien* |       | Director                                        |       | 63      |       |
| Stan G. Turel * ** *** |       | Director                                        |       | 60      |       |

 

----

*Member of the CompensationCommittee

**Member of the AuditCommittee

***Member of theExecutive Committee

 

All directors hold officeuntil the next annual meeting of shareholders or until their successors havebeen elected and qualified.  Executiveofficers are appointed by the Board of Directors and serve at the pleasure ofthe Board of Directors.  Set forth belowis additional information as to each director and executive officer of theCompany.

 

James W. Bernau.  Mr. Bernau has been President andChairperson of the Board of Directors of the Company since its inception in May 1988.  Willamette Valley Vineyards was originallyestablished 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. Bernauwas Director of the Oregon Chapter of the National Federation of IndependentBusinesses (“NFIB”), an association of 15,000 independent businesses in Oregon.Mr. Bernau has served as the President of the Oregon WinegrowersAssociation 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 receivedthe industry’s Founder’s Award for his service.

 

James L. Ellis.  Mr. Ellis has served as a Director sinceJuly 1991 and Secretary since June 1997.  Mr. Ellis has served as the Company’sDirector of Human Resources from January 1993, and Vice President/Corporate since 1998. From 1990 to 1992, Mr. Ellis was a partner inKenneth L. Fisher, Ph.D. & Associates, a management-consultingfirm.  From 1980 to 1990, Mr. Elliswas Vice President and General Manager of R.A. Kevane & Associates, aPacific Northwest personnel-consulting firm. From 1962 to 1979, Mr. Ellis was a member of and administrator forthe Christian Brothers of California, owner of Mont La Salle Vineyards andproducer of Christian Brothers wines and brandy.

 

Sean M. Cary.  Mr. Cary was elected to the Board ofDirectors in 2007.  Mr. Cary is theChief Financial Officer of Cascade Structural Laminators, a laminated beammanufacturer headquartered in Eugene, Oregon. Previously, 

 

42

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Mr. Cary served asthe Controller of Willamette Valley Vineyards, Mr. Cary served in the U.S.Air Force as a Financial Officer. Mr. Cary holds a Master of BusinessAdministration degree from the University of Oregon and a Bachelor of ScienceDegree in Management from the U.S. Air Force Academy.

 

Thomas M.  Brian. Mr. Brian was appointed to the Board of Directors in June of2004.  Mr. Brian has served asChairman of the Washington County Board of Commissioners since 1999.  Previously, he served for 10 years in theOregon House of Representatives.  Whilein the legislature, Mr. Brian was Chairman of the Revenue Committee andserved on the Judicial and Ways and Means Committees. He also served 10 yearsas City Councilor and Mayor of Tigard, OR. Mr. Brian has successfully owned and operated acommercial/industrial real estate company for eighteen years.

 

Delna L. Jones.  Ms. Jones has served as a Director sinceNovember 1994. Ms. Jones resigned from the Board in December of2002 having moved to Southern California and was reappointed by the Board in March of2005 having returned to Oregon. Currently Ms. Jones is President of Delna Jones and Associates, anindependent consulting firm.  Ms. Joneswas elected in 1998 and served as a County Commissioner for Washington County,Oregon from 1998 to 2000.  Ms. Joneshas served as project director for the CAPITAL Center, an education andbusiness consortium from 1994 to 1998. From 1985 to 1990, Ms. Jones served as Director of EconomicDevelopment with US West Communications. Beginning in 1982, she was elected six times to the Oregon House as theState Representative for District 6. During her tenure, she served as the Assistant Majority Leader; she alsochaired the Revenue and School Finance committee, and served on the LegislativeRules and Reorganization committee and the Business and Consumer Affairscommittee.

 

Craig Smith, CPA, MBA,JD. Mr. Smith is the Vice President/Chief Financial Officer of ChemeketaCommunity College in Salem, Oregon.  Hewas an Adjunct Professor at the Atkinson Graduate School of Management atWillamette University, as well as Managing Partner of a large local CPAfirm.  He has served on many State ofOregon commissions and he has served as the Board Chairperson for many of thelocal non-profit and educational institutions including the Salem Keizer SchoolBoard, Chemeketa Community College Board of Education, State Fair DismissalAppeals Board, Mid-Willamette Valley Council of Governments, Oregon SchoolBoards Association and the United Way.  Mr. Smithis an active member of the Oregon State Bar and a Certified Public Accountant.  Mr. Smith is an independent director asdefined under NASDAQ rules.

 

Betty M. O’Brien.  Ms. O’Brien has served as a Directorsince July 1991. Ms. O’Brien is co-owner of Elton Vineyards L.L.C., acommercial vineyard located in Eola Hills in Yamhill County, Oregon andestablished in 1983.  Ms. O’Brienwas the Executive Director of the Oregon Wine Board from 2001 to 2004.  Ms. O’Brien was employed by WillametteUniversity as its Director of News and Publications from 1988 to 2000.  She is a member of the Oregon WinegrowersAssociation, having previously served as its President and Treasurer and as adirector.  Ms. O’Brien is a memberof the Vineyard Management/Winemaking Program Advisory Committee at ChemeketaCommunity College (CCC). She headed a wine industry task force developing a newwine marketing program and curriculum leading to a two-year degree at CCC.  She now teaches Introduction to WineMarketing.  She serves as Chair of theBoard of Directors of LIVE (Low Input Viticulture and Enology).

 

Stan G. Turel.  Mr. Turel has served as a Director sinceNovember of 1994. Mr. Turel is President of Turel Enterprises, a realestate management company managing his own properties in Oregon, Washington andIdaho. Prior to his current activities, Mr. Turel was the Principal andCEO of Columbia Turel, (formally Columbia Bookkeeping, Inc.) a positionwhich 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 taxclients including 4,000 small business clients. Additionally Mr. Turelsuccessfully operated as majority owner two cable TV companies during the 80’sand 90’s which were eventually sold to several public corporations. Mr. Turelis a pilot, was a former 

 

43

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delegate to the WhiteHouse Conference on Small Business and held positions on several state andlocal Government committees.

 

Board of DirectorsCommittees.  The Board of Directors actsas a nominating committee for selecting nominees for election asdirectors.  The Board of Directors hasappointed a standing Audit Committee that, during the year ended December 31,2007, conducted four meetings.  Theelected members of the Audit Committee are Thomas M. Brian, Craig Smith, andStan G. Turel.  Chairperson Craig Smith is designated by theBoard of Directors as the “audit committee financial expert” under SEC rules.  The Audit Committee is responsible forengaging the Company’s Independent Registered Public Accounting Firm, andreviews the scope of the independent annual audit, the independent accountants’letter to the Board of Directors concerning the effectiveness of the Company’sinternal financial and accounting controls and the Board of Directors’ responseto that letter, if deemed necessary.  TheBoard of Directors also has appointed a Compensation Committee, which reviewsexecutive compensation and makes recommendations to the full Board regardingchanges in compensation, and also administers the Company’s 1992 StockIncentive Plan.  During the fiscal yearended December 31, 2007, the Compensation Committee held twomeetings.  The members of theCompensation Committee currently are Betty M. O’Brien, Chair, Stan Turel, andDelna Jones.  In 1997 the Board appointedan Executive Committee, members are: James Bernau, James Ellis, and StanTurel.  Delna Jones was appointed to theCommittee in 2007.  The ExecutiveCommittee held two meetings during 2007.

 

Code of Ethics. TheCompany adopted a code of ethics applicable to its Chief Executive Officer,Controller and other finance leaders, which is a “code of ethics” as defined byapplicable rules of the Securities and Exchange Commission. Amendments tothe code of ethics or any grant of a waiver from a provision of the code ofethics requiring disclosure under applicable SEC rules, if any, will bedisclosed on our website at www.WillametteValleyVineyards.com.   Any person may request a copy of the code of ethics, at no cost, by writing to usat the following address:

 

Willamette ValleyVineyards, Inc. 8800 Enchanted Way SETurner, OR 97392Attention: Corporate Secretary

 

**ITEM 10.      EXECUTIVE COMPENSATION.**

** **

Summary of Cash andCertain Other Compensation

 

Thefollowing table sets forth certain information concerning compensation paid oraccrued by the Company, to or on behalf of the Company’s Primary ExecutiveOfficer, James W. Bernau (the “named executive officer”) for the years ending December 31,2007 and 2006.  Except for Mr. Bernau,no officer, director or other employee of the Company received totalcompensation in excess of $100,000, as calculated pursuant to Instruction 1 toItem 402(a)(2) of Regulation S-B.

 

SUMMARY COMPENSATION TABLE

 
|                                           |       |       |       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **              | ** ** | **Nonqualified** | ** ** | ** **       | ** ** | ** ** |       |
|------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|-------------------------|------------|------------------|------------|------------------|------------|------------|------------|
|                                           |       |       |       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Non-Equity**          | ** ** | **Deferred**     | ** ** | **All**          | ** ** | ** ** |       |
|                                           |       |       |       | ** ** | ** ** | ** ** | ** ** | **Stock**  | ** ** | **Option** | ** ** | **Incentive Plan** | ** ** | **Compensation** | ** ** | **Other**        | ** ** | ** ** |       |
| **Name and Principal Position** | ** ** | **Year**   |       | **Salary** | ** ** | **Bonus**  | ** ** | **Awards** | ** ** | **Awards** | ** ** | **Compensation**        | ** ** | **Earnings**     | ** ** | **Compensation** | ** ** | **Total**  |       |
| ** **                                     | ** ** | ** ** | ** ** | **($)**    | ** ** | **($)**    | ** ** | **($)**    | ** ** | **($)**    | ** ** | **($)**                 | ** ** | **($)**          | ** ** | **($)**          | ** ** | **($)**    | ** ** |
| ** **                                     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **              | ** ** | ** **       | ** ** | ** **       | ** ** | ** ** | ** ** |
| Bernau, James W.,                              |       | 2007       |       | 162,511    |       | 40,502     |       | —     |       | —     |       | —                  |       | —           |       | 10,645           |       | 213,658    |       |
| President, Chief  Executive                    |       | 2006       |       | 162,511    |       | 39,475     |       | —     |       | —     |       | —                  |       | —           |       | 17,129           |       | 219,115    |       |
| Officer and  Chairman                          |       |       |       |       |       |       |       |       |       |       |       |                    |       |             |       |             |       |       |       |

 

Bernau EmploymentAgreement

 

The Company and Mr. Bernauare parties to an employment agreement dated August 3, 1988 and amended inFebruary 1997 and again amended in January of 1998.  Under the amended agreement, Mr. Bernauis paid an annual salary of $162,511 

 

44

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with annual increasestied to increases in the consumer price index. Pursuant to the terms of the employment agreement, the Company must useits best efforts to provide Mr. Bernau with housing on the Company’sproperty.  Mr. Bernau and his familylive in the mobile home free of rent and must continue to reside there for theduration of his employment in order to provide additional security and lock-upservices for late evening events at the Winery and Vineyard.  The employment agreement provides that Mr. Bernau’semployment may be terminated only for cause, which is defined asnon-performance of his duties or conviction of a crime.

 

Stock Options

 

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

 

Option Exercises andHoldings

The following tableprovides information, with respect to the named executive officer, concerningexercised options during the last fiscal year and unexercised options held asof December 31, 2007.

 
| ** **    | ** ** | ** **             | ** ** | ** **         | ** ** | ** **            | ** ** | ** **   | ** ** | ** **     | ** ** | **Stock Awards** | ** ** |
|---------------|------------|------------------------|------------|--------------------|------------|-----------------------|------------|--------------|------------|----------------|------------|-----------------------|------------|
| ** **    | ** ** | ** **             | ** ** | ** **         | ** ** | ** **            | ** ** | ** **   | ** ** | ** **     | ** ** | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** | **Equity** | ** ** |
| ** **    | ** ** | ** **             | ** ** | ** **         | ** ** | ** **            | ** ** | ** **   | ** ** | ** **     | ** ** | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** | **Incentive** | ** ** |
| ** **    | ** ** | ** **             | ** ** | ** **         | ** ** | ** **            | ** ** | ** **   | ** ** | ** **     | ** ** | ** **            | ** ** | ** ** | ** ** | **Equity** | ** ** | **Plan Awards:** | ** ** |
| ** **    | ** ** | **Option Awards** | ** ** | ** **         | ** ** | ** **            | ** ** | ** **   | ** ** | ** **     | ** ** | **Incentive**         | ** ** | **Market or** | ** ** |
| ** **    | ** ** | ** **             | ** ** | ** **         | ** ** | **Equity**            | ** ** | ** **   | ** ** | ** **     | ** ** | ** **            | ** ** | ** ** | ** ** | **Plan Awards:** | ** ** | **Payout** | ** ** |
| ** **    | ** ** | ** **             | ** ** | ** **         | ** ** | **Incentive**         | ** ** | ** **   | ** ** | ** **     | ** ** | ** **            | ** ** | **Market** | ** ** | **Number of** | ** ** | **Value of** | ** ** |
| ** **    | ** ** | ** **             | ** ** | ** **         | ** ** | **Plan Awards:** | ** ** | ** **   | ** ** | ** **     | ** ** | **Number**            | ** ** | **Value of** | ** ** | **Unearned** | ** ** | **Unearned** | ** ** |
| ** **    | ** ** | **Number of**     | ** ** | **Number of** | ** ** | **Number of**    | ** ** | ** **   | ** ** | ** **     | ** ** | **of Shares,**   | ** ** | **Shares or** | ** ** | **Shares,** | ** ** | **Shares,** | ** ** |
| ** **    | ** ** | **Securities**         | ** ** | **Securities**     | ** ** | **Securities**        | ** ** | ** **   | ** ** | ** **     | ** ** | **or Units**     | ** ** | **Units of** | ** ** | **Units or** | ** ** | **Units or** | ** ** |
| ** **    | ** ** | **Underlying**         | ** ** | **Underlying**     | ** ** | **Underlying**        | ** ** | ** **   | ** ** | ** **     | ** ** | **of Stock**     | ** ** | **Stock** | ** ** | **Other** | ** ** | **Other** | ** ** |
| ** **    | ** ** | **Unexercised**        | ** ** | **Unexercised**    | ** ** | **Unexercised**       | ** ** | **Option**   | ** ** | ** **     | ** ** | **that**              | ** ** | **that** | ** ** | **Rights that** | ** ** | **Rights that** | ** ** |
| ** **    | ** ** | **Options**            | ** ** | **Options**        | ** ** | **Unearned**          | ** ** | **Exercise** | ** ** | **Option**     | ** ** | **Have Not**     | ** ** | **Have Not** | ** ** | **Have** | ** ** | **Have Not** | ** ** |
| ** **    | ** ** | **(#)**                | ** ** | **(#)**            | ** ** | **Options**           | ** ** | **Price**    | ** ** | **Expiration** | ** ** | **Vested**            | ** ** | **Vested** | ** ** | **Not Vested** | ** ** | **Vested** | ** ** |
| **Name**      | ** ** | **Exercisable**        | ** ** | **Unexercisable**  | ** ** | **(#)**               | ** ** | **($)**      | ** ** | **Date**       | ** ** | **(#)**               | ** ** | **($)** | ** ** | **(#)** | ** ** | **($)** | ** ** |
|          |       |                   |       |               |       |                  |       |         |       |           |       |                  |       |   |   |   |   |   |   |
| Bernau, James |       |                   |       |               |       |                  |       |         |       |           |       |                  |       |   |   |   |   |   |   |
|          |       |                   |       |               |       |                  |       |         |       |           |       |                  |       |   |   |   |   |   |   |
| 2/11/2005     |       | 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 members of theCompany’s Board of Directors do not receive cash compensation for their serviceon the Board, but are reimbursed for out-of-pocket and travel expenses incurredin attending Board meetings.  Under theCompany’s Stock Incentive Plan adopted by the shareholders in 1992 and furtheramended by the shareholders in 1996, beginning in 1997 an option to purchase1,500 shares of Common Stock is granted to each Director for service on theBoard during the year.  This option wasincreased to 4,000 per year when the 50-share grant per Director’s meeting wasdiscontinued for the year 2000 and beyond. In December 2005, each Director was granted 14,000 options forservice during 2005.  In the foreseeablefuture, as a result of the Financial Accounting Standards Board (“FASB”)Statement of Financial Accounting Standard (“SFAS”) No. 123R, Share-BasedPayment, requiring all share-based payments to be recognized as expenses in thestatement of operations based on their fair values and vesting periods, theCompany does not intend to issue stock options to the Directors for theirservice.

 

Section 16(a) BeneficialOwnership Reporting Compliance

 

None

 

45

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**ITEM 11.      SECURITY OWNERSHIP OF CERTAIN BENEFICIALOWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.**

** **

The following table setsforth certain information with respect to beneficial ownership of the Company’sCommon Stock as of December 31, 2007, by (i) each person who beneficially owns more than 5% of the Company’sCommon Stock  (ii) each Director ofthe Company  (iii) each of theCompany’s named executive officers, and  (iv) alldirectors and executive officers as a group.

 
| ** **                         | ** ** | ** **                        | ** ** | ** **                  | ** ** | **Percent of** | ** ** |
|------------------------------------|------------|-----------------------------------|------------|-----------------------------|------------|---------------------|------------|
| ** **                         | ** ** | ** **                        | ** ** | **Number of**          | ** ** | **Shares**          | ** ** |
| ** **                         | ** ** | ** **                        | ** ** | **Shares Outstanding** | ** ** | **Beneficially**    | ** ** |
| ** **                         | ** ** | ** **                        | ** ** | **Stock**                   | ** ** | **Owned**           | ** ** |
|                               |       |                              |       |                        |       |                |       |
| James W. Bernau                    |       | President/CEO, Chair of the Board |       |                        |       |                |       |
| 2545 Cloverdale  Road              |       |                              |       | 580,096                     | (1)        | 12.0                | %          |
| Turner, OR 97392                   |       |                              |       |                        |       |                |       |
|                               |       |                              |       |                        |       |                |       |
| James L. Ellis                     |       | Secretary, Director               |       |                        |       |                |       |
| 7850 S.E. King  Road               |       |                              |       | 5,300                       | (2)        | **                  |       |
| Milwaukie, OR  97222               |       |                              |       |                        |       |                |       |
|                               |       |                              |       |                        |       |                |       |
| Thomas M. Brian                    |       | Director                          |       |                        |       |                |       |
| 7630 SW Fir                        |       |                              |       | 22,000                      | (3)        | **                  |       |
| Tigard, OR 97223                   |       |                              |       |                        |       |                |       |
|                               |       |                              |       |                        |       |                |       |
| Delna L. Jones                     |       | Director                          |       |                        |       |                |       |
| 14480 SW  Chardonnay Ave           |       |                              |       | 27,800                      | (4)        | **                  |       |
| Tigard, OR 97224                   |       |                              |       |                        |       |                |       |
|                               |       |                              |       |                        |       |                |       |
| Sean M. Cary                       |       | Director                          |       |                        |       |                |       |
| 3188 Blacktail Drive               |       |                              |       | 16,000                      | (5)        | **                  |       |
| Eugene, OR 97405                   |       |                              |       |                        |       |                |       |
|                               |       |                              |       |                        |       |                |       |
| Betty M. O’Brien              |       | Director                          |       |                        |       |                |       |
| 22500 Ingram  Lane NW              |       |                              |       | 41,150                      | (6)        | **                  |       |
| Salem, OR 97304                    |       |                              |       |                        |       |                |       |
|                               |       |                              |       |                        |       |                |       |
| Stan G. Turel                      |       | Director                          |       |                        |       |                |       |
| 2125 NE 11th  Place                |       |                              |       | 10,517                      | (7)        | **                  |       |
| Bend, OR 97701                     |       |                              |       |                        |       |                |       |
|                               |       |                              |       |                        |       |                |       |
| Craig Smith                        |       | Director                          |       | 0                           |       | **                  |       |
| 367 Sanrodee  Drive                |       |                              |       |                        |       |                |       |
| Salem, OR 97317                    |       |                              |       |                        |       |                |       |
|                               |       |                              |       |                        |       |                |       |
| Jeff Fox                           |       | CFO/Controller                    |       | 0                           |       | **                  |       |
| 14940 Seal Rock  Ave NE            |       |                              |       |                        |       |                |       |
| Aurora, OR 97002                   |       |                              |       |                        |       |                |       |
|                               |       |                              |       |                        |       |                |       |
| All Directors,  executive          |       |                              |       | 702,863                     | (8)        | 14.5                | %          |
| officers and  persons owning       |       |                              |       |                        |       |                |       |
| 5% or more as a  group (7 persons) |       |                              |       |                        |       |                |       |

 

----

**         Less than one percent.

 

(1)   Includes143,000 shares issuable upon exercise of options exercisable within 60 days ofthe date of this report.

 

(2)   Includes5,300 shares issuable upon the exercise of options exercisable within 60 daysof the date of this report.

 

(3)   Includes22,000 shares issuable upon the exercise of options exercisable within 60 daysof the date of this report.

 

46

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(4)   Includes 26,000 shares issuable upon the exerciseof options exercisable within 60 days of the date of this report.

 

(5)   Includes2,083 shares issuable upon the exercise of options exercisable within 60 daysof the date of this report.

 

(6)   Includes33,000 shares issuable upon the exercise of options exercisable within 60 daysof the date of this report.

 

(7)   Includes10,517 shares issuable upon the exercise of options exercisable within 60 daysof the date of this report.

 

(8)   Includes241,900 shares issuable upon exercise of options exercisable within 60 days ofthe date of this report.

 

**ITEM 12.     CERTAIN RELATIONSHIPS AND RELATEDTRANSACTIONS.**

** **

In 2007, the Companyentered into a long-term lease for Elton vineyards which consists of 60 acresof mature grapevines, of which approximately 42 acres are Pinot Noir. Theagreement was for an initial 10 year lease with the option to renew for 4successive terms of 5 years each, plus a first right of refusal on the property’ssale.

 

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

 

The following directorsare independent as the term is defined by NASDAQ rules:  Thomas M. Brian, Delna L. Jones, Betty M. O’Brien,Craig Smith and Stan G. Turel.

 

**ITEM 13.     EXHIBITS AND REPORTS ON FORM 8-K.**

** **

(a)   Exhibits

 

(3)   Articlesof Incorporation and Bylaws:

 

(a)   Articlesof Incorporation of Willamette Valley Vineyards, Inc. (incorporated byreference from the Company’s Regulation A Offering Statement on Form 1-A[File No. 24S-2996])

 

(b)   Bylawsof Willamette Valley Vineyards, Inc.(incorporated by reference from theCompany’s Regulation A Offering Statement on Form 1-A [File No. 24S-2996])

 

(10)   MaterialContracts

 

(a)   EmploymentAgreement between Willamette Valley Vineyards, Inc. and James W. Bernaudated August 3, 1988 (incorporated by reference from the Company’sRegulation A Offering Statement on Form 1-A [File No. 24S-2996])

 

(b)   IndemnityAgreement between Willamette Valley Vineyards, Inc. and James W. Bernaudated May 2, 1988 (incorporated by reference from the Company’s RegulationA Offering Statement on Form 1-A [File No. 24S-2996])

 

(c)   IndemnityAgreement between Willamette Valley Vineyards, Inc. and Donald E. Voorhiesdated May 2, 1988 (incorporated by reference from the Company’s RegulationA Offering Statement on Form 1-A [File No. 24S-2996])

 

47

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(d)   ShareholdersAgreement among Willamette Valley Vineyards, Inc. and its founders, JamesBernau and Donald Voorhies, dated May 2, 1988 (incorporated by referencefrom the Company’s Regulation A Offering Statement on Form 1-A [File No. 24S-2996])

 

(h)   RevolvingNote and Loan Agreement dated May 28, 1992 by and between Northwest FarmCredit Services, Willamette Valley Vineyards, Inc. and James W. and CathyBernau (incorporated by reference from the Company’s Regulation A OfferingStatement on Form 1-A [File No. 24S-2996])

 

(i)   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 OfferingStatement on Form 1-A [File No. 24S-2996])

 

(j)   Amendmentto Founders’ Escrow Agreement dated September 20, 1988 (incorporated byreference from the Company’s Regulation A Offering Statement on Form 1-A[File No. 24S-2996])

 

(k)   StockEscrow Agreement among Willamette Valley Vineyards, Inc., Betty M. O’Brienand Charter Investment Group, Inc. dated July 7, 1992 (incorporatedby reference from the Company’s Regulation A Offering Statement on Form 1-A[File No. 24S-2996])

 

(l)   StockEscrow Agreement among Willamette Valley Vineyards, Inc., Daniel S. Smithand Piper Jaffray & Hopwood, Inc. dated July 7, 1992(incorporated by reference from the Company’s Regulation A Offering Statementon Form 1-A [File No. 24S-2996])

 

(m)   Acquisitionof Tualatin Vineyards, Inc. dated April 15, 1997. (File No. 000-21522)

 

(n)   BusinessFinancing Agreement dated July 2, 2002 by and between GE CommercialDistribution Finance and Willamette Valley Vineyards, Inc. (File No. 000-21522)

 

(o)   BusinessLoan Agreement dated December 29, 2004 by and between Umpqua Bank and WillametteValley Vineyards, Inc. (File No. 000-21522)

 

(b)   Reportson Form 8-K

 

None.

 

48

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** **

**ITEM14.      PRINCIPAL ACCOUNTING FEES ANDSERVICES.**

 

The information containedunder the caption entitled “Audit and Related Fees” in the Proxy Statement isincorporated herein by reference.

 

**SIGNATURES**

 

In accordance with Section 13or 15(d) of the Exchange Act, the registrant caused this report to besigned on its behalf by the undersigned, thereunto duly authorized.

 
| WILLAMETTE VALLEY  VINEYARDS, INC. |   |
|------------------------------------|--------|
| (Registrant)                       |   |

 

 
| Date:  May 16, 2008 | By:    | /s/ James W. Bernau |   |
|-------------------------------|--------|---------------------|--------|
| James W. Bernau,              |   |
| Chairperson of the  Board,    |   |
| President                     |   |

 

49

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In accordance with theExchange Act, this report has been signed below by the following persons onbehalf of the registrant and in the capacities and on the dates indicated.

 
| **Signature**             | ** ** | **Title**                       | ** ** | **Date**          | ** ** |
|---------------------------|------------|---------------------------------|------------|-------------------|------------|
|                      |       |                            |       |              |       |
| /s/ James W. Bernau       |       | Chairperson of the  Board,      |       | May 16, 2008 |       |
| James W. Bernau           |       | President                       |       |              |       |
|                      |       | (Principal Executive  Officer)  |       |              |       |
|                      |       |                            |       |              |       |
| /s/ Jeffrey J. Fox        |       | CFO/Controller                  |       | May 16, 2008 |       |
| Jeffrey J. Fox            |       | (Principal Accounting  Officer) |       |              |       |
|                      |       |                            |       |              |       |
| /s/ James L. Ellis        |       | Director and  Vice-President    |       | May 16, 2008 |       |
| James L. Ellis            |       | and Secretary                   |       |              |       |
|                      |       |                            |       |              |       |
| /s/ Thomas M. Brian       |       | Director                        |       | May 16, 2008 |       |
| Thomas M. Brian           |       |                            |       |              |       |
|                      |       |                            |       |              |       |
| /s/ Delna L. Jones        |       | Director                        |       | May 16, 2008 |       |
| Delna L. Jones            |       |                            |       |              |       |
|                      |       |                            |       |              |       |
| /s/ Craig Smith           |       | Director                        |       | May 16, 2008 |       |
| Craig Smith               |       |                            |       |              |       |
|                      |       |                            |       |              |       |
| /s/ Betty M. O’Brien |       | Director                        |       | May 16, 2008 |       |
| Betty M. O’Brien     |       |                            |       |              |       |
|                      |       |                            |       |              |       |
| /s/ Stan G. Turel         |       | Director                        |       | May 16, 2008 |       |
| Stan G. Turel             |       |                            |       |              |       |
|                      |       |                            |       |              |       |
| /s/ Sean M. Cary          |       | Director                        |       | May 16, 2008 |       |
| Sean M. Cary              |       |                            |       |              |       |

 

50

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**EXHIBITINDEX**

 

Exhibit

 

23.1  Consent of Independent RegisteredPublic Accounting Firm

 

31.1  Certification by James W. Bernaupursuant to Rule 13a-14(a) of theSecurities Exchange Act of 1934

 

31.2  Certification by Jeffrey J. Foxpursuant to Rule 13a-14(a) of theSecurities Exchange Act of 1934

 

32.1   Certification pursuant to 18 U.S.C. Section 1350,as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

32.2   Certification pursuant to 18 U.S.C. Section 1350,as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

51

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