UNITED
STATES




SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM 10-K





(Mark
One)




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




For the
fiscal year ended December 31, 2008




or




 ̈
              TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES
      EXCHANGE ACT OF 1934




For the
transition period from _________________ to _______________________




Commission
file number: 000-21522




WILLAMETTE
VALLEY VINEYARDS, INC.


(Exact
name of registrant as specified in its charter)





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


8800
Enchanted Way, S.E.


Turner,
OR 97392


(Address
of principal executive offices)




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





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





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


Common
Stock


(Title
of class)




Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes  ̈No
x




Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Securities Exchange Act. Yes  ̈No
x




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




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




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




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




Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act). Yes  ̈No
x




The
aggregate market value of common stock held by non-affiliates of the registrant
as of June 30, 2008 was approximately $24,979,184.




The
number of outstanding shares of the registrant’s Common Stock as of March 27,
2009 was 4,851,329.





DOCUMENTS
INCORPORATED BY REFERENCE




None


---






Willamette
Valley Vineyards, Inc.




FORM 10-K




TABLE
OF CONTENTS





PagePART
      IItem
      1
                      Business
                      3Item
      1A
                      Risk
      Factors
                      10Item
      1B
                      Unresolved
      Staff Comments
                      13Item
      2
                      Properties
                      13Item
      3
                      Legal
      Proceedings
                      13Item
      4
                      Submission
      of Matters to a Vote of Security Holders
                      13PART
      IIItem
      5
                      Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities
                      14Item
      6
                      Selected
      Financial Data
                      14Item
      7
                      Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                      14Item
      7A
                      Quantitative
      and Qualitative Disclosures About Market Risk
                      21Item
      8
                      Financial
      Statements and Supplementary Data
                      22Item
      9
                      Changes
      in and Disagreements With Accountants on Accounting and Financial
      Disclosure
                      41Item
      9A
                      Controls
      and Procedures
                      41Item
      9B
                      Other
      Information
                      43PART
      IIIItem
      10
                      Directors,
      Executive Officers and Corporate Governance
                      43Item
      11
                      Executive
      Compensation
                      46Item
      12
                      Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
                      47Item
      13
                      Certain
      Relationships and Related Transactions, and Director
      Independence
                      49Item
      14
                      Principal
      Accounting Fees and Services
                      50PART
      IVItem
      15
                      Exhibits,
      Financial Statement Schedules
                      50


2




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





PART
I





Item
1.  Business.





FORWARD
LOOKING STATEMENTS





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





BUSINESS





Introduction





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





Products





Under its
Willamette Valley Vineyards label, the Company produces and sells the following
types of wine in 750 ml bottles: Pinot Noir, the brand's flagship and its
largest selling varietal in 2008, $19 to $50 per bottle; Chardonnay, $16 to $20
per bottle; Pinot Gris, $15 to $18 per bottle; Riesling and Oregon Blossom
(blush blend), $10 to $12 per bottle (all bottle prices included herein are the
suggested retail prices).  The Company’s mission for this brand is to
become the premier producer of Pinot Noir from the Pacific
Northwest.





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





Under its
Tualatin Estate Vineyards label, the Company currently produces and sells the
following types of wine in 750 ml bottles: Pinot Noir, the brand’s flagship, $35
per bottle; Chardonnay, $16 per bottle; Semi-Sparkling Muscat, $15 per
bottle.





Under its
Griffin Creek label, the Company produces and sells the following types of wine
in 750 ml bottles: Syrah, the brand’s flagship, $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 highest quality producer of
Bordeaux and Rhone varietals in Oregon.


3


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





Market
Overview





Wine
Consumption Trends:Beginning in 1994, per
capita wine consumption began to rise. Subsequent to 1994, U.S.
wine consumption has averaged an increase of 4.5% per year. Research has shown
that much of this sales growth is coming from baby boomers and younger
consumers. Recent data released by The Adams Beverage Group has shown that wine
now appeals to a broad spectrum of the population, including Millenials
(consumers between the ages of 21 to 30).  In a recent Gallup Poll,
for the first time, a majority of respondents claimed wine as their alcohol
beverage of choice.  Together, Millenials and Baby Boomers account for
more than half of today’s wine consumers. During the second half of 2008,
consumers in greater number began to purchase wine costing less than $15 per
bottle, giving up more expensive options.  As demand for more
expensive varietals of wine decreased, sales of less expensive varietals
increased leading to an overall nationwide increase in wine sales of 1% in
2008.  Given current economic conditions, wine purchasing trends
towards less expensive varietals are expected to continue into
2009.





The
Oregon Wine Industry





Oregon is
a relatively new wine-producing region in comparison to California and
France.  In 1966, there were only two commercial wineries licensed in
Oregon.  By 2008 there were 395 commercial wineries licensed in Oregon
and 19,300 acres of wine grape vineyards, 14,900 acres of which are currently
producing.  Total production of Oregon wines in 2008 is estimated to
be approximately 2.1 million cases versus 2.3 million cases in
2007.  The reduction in cases produced is mainly due to the lower
harvest yields in 2008 versus 2007.  Oregon's entire 2008 production
has an estimated retail value of approximately $410.9 million, assuming a retail
price of $200 per case, and a FOB value of approximately one-half of the retail
value, or $205.5 million.





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





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





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





Finally,
phylloxera, an aphid-like insect that feeds on the roots of grapevines, has been
found in several commercial vineyards in Oregon.  Contrary to the
California experience, most Oregon phylloxera infestations have expanded very
slowly and done only minimal damage.  Nevertheless, phylloxera does
constitute a significant risk to Oregon vineyards.  Prior to the
discovery of phylloxera in Oregon, all vine plantings in the Company's Vineyard
were with non-resistant rootstock.  As of December 31, 2008, the
Company has not detected any phylloxera at its Turner site.  Beginning
with the Company's plantings in May 1992, only phylloxera-resistant rootstock is
used.  In 1997, the Company purchased Tualatin Vineyards, which has
phylloxera at its site.  All plantings are on and all future planting
will be on phylloxera resistant rootstock.  The Company takes all
necessary precautions to prevent the spread of phylloxera to its Turner
site.





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


4


2008
Oregon Harvest




The
National Agricultural Statistics report states that the total yield per
harvested acre in Oregon was down 17% in 2008. Oregon’s 2008 growing season
produced a lower crop due to inclement weather during fruit set and a later than
usual growing season. This is the third year in a row that Oregon grape growers
planted a record number of new acres, 1,570 in 2008. There was a net gain of 25
wineries in Oregon with a 10% increase in total cooperage. Case sales of Oregon
wine increased 2% and wine sales in dollars increased 15%. The average price per
ton for all grapes harvested in Oregon increased from $1,880 per ton in 2007 to
$2,050 per ton in 2008. Total wine production in Oregon decreased 10% in 2008.
The crop quality was benefited by a long, cool and dry Fall season. Some Oregon
wine makers are calling 2008 Vintage Oregon’s highest quality to
date.


Company
Strategy





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





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





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





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





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





Vineyard





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





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





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


5


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





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





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





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





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





Grape Supply.  In
2008, the Company's 48 acres of producing estate vineyard yielded approximately
109 tons of grapes for the Winery's twentieth crush.  Tualatin
Vineyards produced 388 tons of grapes in 2008.  Elton Vineyards
produced 54 tons of grapes in 2008.  In 2008, the Company purchased an
additional 874 tons of grapes from other growers. The Winery's 2008 total wine
production was 287,513 gallons (121,027 cases) from its 2007 and 2008 crushes.
The Company expects to produce 309,000 gallons in 2009 (130,000
cases).  The Vineyard cannot and will not provide the sole supply of
grapes for the Winery's near-term production requirements.





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





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


6


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





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





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





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





Winery





Wine Production
Facility.  The Company's Winery and production facilities are
capable of efficiently producing up to 125,000 cases (297,000 gallons) of wine
per year, depending on the type of wine produced.  In 2008, the Winery
produced 287,513 gallons (121,027 cases) from its 2007 crush.  The
Winery is 12,784 square feet in size and contains areas for processing,
fermenting, aging and bottling wine, as well as an underground wine cellar, a
tasting room, a retail sales room and administrative offices.  There
is a 12,500 square foot outside production area for crushing, pressing and
fermenting wine grapes, and a 4,000 square foot insulated storage facility with
a capacity of 30,000 cases of wine.  The Company also has a 20,000
square foot storage building to store its inventory of bottled
product.  The production area is equipped with a settling tank and
sprinkler system for disposing of wastewater from the production process in
compliance with environmental regulations.





With the
purchase of Tualatin Vineyards, Inc., the Company added 20,000 square feet of
additional production capacity.  Although the Tualatin facility was
constructed over twenty years ago, it adds 25,000 cases (59,000 gallons) of wine
production capacity to the Company, which the Company felt at the time of
purchase was needed.  Until 2007, production and sales volumes have
not expanded enough to necessitate the utilization of the Tualatin
facilities.  The Company decided to move current production to its
Turner site to meet short-term production requirements.  The capacity
at Tualatin is available to the Company to meet any anticipated future
production needs. Management decided not to use the production facility in 2008
due to the low crop yield in 2008.  The Company has replaced the roof
and production floor, insulation and walls in anticipation of using it for wine
storage and future production at an approximate cost of $225,000 in
2008.





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





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


7


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





Mortgages on
Properties.  The Company's winery facilities in Turner are
subject to one mortgage with a principal balance of $2,532,782 at December 31,
2008. The mortgage is payable in monthly aggregate installments, including
principal and interest, of approximately $342,000 annually through 2011 and
$137,000 annually from 2012 through 2028 on the new debt service.  The
management and the Board of Directors accepted management’s proposal to purchase
additional land for vineyard expansion in 2008 which was financed by additional
debt financing of $1.6MM.  The company felt this was a reasonably
conservative approach to expansion due to the original mortgage of $1.3MM will
be paid off in three years.





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





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





Tons of
                              
                              Gallons ofCrush
                              
                              Grapes
                              
                              Bulk
                              
                              Production
                              
                              CasesYear
                              
                              Crushed
                              
                              Purchases
                              
                              Year
                              
                              Produced2004
                              
                              
                              994
                              
                              
                              
                              2004
                              
                              
                              73,2122005
                              
                              
                              1,132
                              
                              
                              
                              2005
                              
                              
                              72,2972006
                              
                              
                              1,488
                              
                              
                              
                              2006
                              
                              
                              81,0812007
                              
                              
                              1,746
                              
                              
                              
                              2007
                              
                              
                              115,4662008
                              
                              
                              1,425
                              
                              57,736
                              
                              2008
                              
                              
                              121,027





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





Sales
and Distribution





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





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





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





Direct
sales are profitable because the Company is able to sell its wine directly to
consumers at retail prices rather than to distributors or retailers at wholesale
prices.  Sales made directly to consumers at retail prices result in
an increased profit margin equal to the difference between retail prices and
distributor or wholesale prices, as the case may be.  For 2008, direct
sales contributed approximately 15% of the Company's revenue.


8


Self-Distribution.  In
1990, the Company established a self-distribution wholesale system, now called
Bacchus Fine Wines, to sell its wines to restaurant and retail accounts located
in Oregon.  Eighteen sales representatives, who take wine orders and
make some deliveries primarily on a commission-only basis, currently carry out
the self-distribution program.  Company-provided trucks and delivery
drivers support most of these sales representatives.  The Company
believes this program of self-representation and delivery has allowed its wines
to gain a strong presence in the Oregon market with over 1,500 restaurant and
retail accounts established as of December 31, 2008.





The
Company has expended significant resources to establish its self-distribution
system.  The system initially focused on distribution in the
Willamette Valley, but has expanded to the Oregon coast, southern Oregon and
central Oregon.  For 2008, approximately 49% of the Company's net
revenues were attributable to self-distribution.





Distributors and Wine
Brokers.  The Company uses both independent distributors and
wine brokers primarily to market the Company's wines in specific targeted areas
where self-distribution is not feasible.  Only those distributors and
wine brokers who have demonstrated knowledge of and a proven ability to market
premium, super premium, and ultra premium wines are utilized.  Outside
of Oregon, the Company’s products are distributed in 47 states and the District
of Columbia and 3 non-domestic (export) customers.  In 2008 and 2007,
approximately 37% and 37% of the Company’s net revenues were attributable to out
of state distribution.





Tourists.  Oregon
wineries are a popular tourist destination with many bed & breakfasts,
motels and fine restaurants available.  The Willamette Valley,
Oregon’s leading wine region has two-thirds of the state’s wineries and
vineyards and is home to approximately 300 wineries.  An additional
advantage for the Willamette Valley wine tourist is the proximity of the
wineries to Portland (Oregon’s largest city and most popular
destination).  From Portland, tourists can visit the Willamette Valley
winery of their choice in anywhere from 45 minutes to two hours.





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





Competition





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





The
Company believes that the principal competitive factors in the premium, super
premium, and ultra premium segment of the wine industry are product quality,
price, label recognition, and product supply.  The Company believes it
competes favorably with respect to each of these factors.  The Company
has received “Excellent” to “Recommended” reviews in tastings of its wines and
believes its prices are competitive with other Oregon
wineries.  Larger scale production is necessary to satisfy retailers'
and restaurants' demand and the Company believes that additional production
capacity is needed to meet estimated future demand.  Furthermore, the
Company believes that its ultimate forecasted production level of 306,000
gallons (129,000 cases) per year will give it significant competitive advantages
over most Oregon wineries in areas such as marketing, distribution arrangements,
grape purchasing, and access to financing.  The current production
level of most Oregon wineries is generally much smaller than the projected
production level of the Company's Winery.  With respect to label
recognition, the Company believes that its unique structure as a consumer-owned
company will give it a significant advantage in gaining market share in Oregon
as well as penetrating other wine markets.


9


Governmental
Regulation of the Wine Industry





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





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





Employees





As of
December 31, 2008 the Company had 94 full-time employees and 18 part-time
employees.  In addition, the Company hires additional employees for
seasonal work as required.  The Company’s employees are not
represented by any collective bargaining unit.  The Company believes
it maintains positive relations with its employees.





Additional
Information





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





Item
1A.  Risk Factors.





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





Agricultural
risks could adversely affect our business





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


10


We
may not be able to grow or acquire enough quality fruit for our
wines





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





Loss
of key employees could harm our reputation and business





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





Investments
in our Bacchus portfolio may harm our business





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





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





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





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





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





We
face significant competition which could adversely affect our
profitability





The wine
industry is intensely competitive and highly fragmented. Our wines compete in
several premium wine market segments with many other premium domestic and
foreign wines, with imported wines coming from the Burgundy and Bordeaux regions
of France, as well as Italy, Chile, Argentina, South Africa and Australia. Our
wines also compete with popular priced generic wines and with other alcoholic
and, to a lesser degree, non-alcoholic beverages, for shelf space in retail
stores and for marketing focus by our independent distributors, many of which
carry extensive brand portfolios. A result of this intense competition has been
and may continue to be upward pressure on our selling and promotional expenses.
In addition, the wine industry has experienced significant consolidation. Many
of our competitors have greater financial, technical, marketing and public
relations resources than we do. Our sales may be harmed to the extent we are not
able to compete successfully against such wine or alternative beverage
producers’ costs. There can be no assurance that in the future we will be able
to successfully compete with our current competitors or that it will not face
greater competition from other wineries and beverage
manufacturers.


11


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




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




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




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




Contamination
of our wines would harm our business




We are
subject to certain hazards and product liability risks, such as potential
contamination, through tampering or otherwise, of ingredients or products.
Contamination of any of our wines could cause us to destroy our wine held in
inventory and could cause the need for a product recall, which could
significantly damage our reputation for product quality. We maintain insurance
against certain of these kinds of risks, and others, under various insurance
policies. However, our insurance may not be adequate or may not continue to be
available at a price or on terms that are satisfactory to us and this insurance
may not be adequate to cover any resulting liability.




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




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




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




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


12


Increased
regulation could adversely affect us




The wine
industry is subject to extensive regulation by the Federal Alcohol Tobacco Tax
and Trade Bureau (“TTB”) and various foreign agencies, state liquor authorities,
such as the Oregon Liquor Control Commission (“OLCC”), and local authorities.
These regulations and laws dictate such matters as licensing requirements, trade
and pricing practices, permitted distribution channels, permitted and required
labeling, and advertising and relations with wholesalers and retailers. Any
expansion of our existing facilities or development of new vineyards or wineries
may be limited by present and future zoning ordinances, environmental
restrictions and other legal requirements. In addition, new regulations or
requirements or increases in excise taxes, income taxes, property and sales
taxes or international tariffs, could affect our financial condition or results
of operations. Recently, many states have considered proposals to increase, and
some of these states have increased, state alcohol excise taxes. New or revised
regulations or increased licensing fees, requirements or taxes could have a
material adverse effect on our financial condition or results of operations.
There can be no assurance that new or revised regulations or increased licensing
fees and requirements will not have a material adverse effect on our business
and our results of operations and our cash flows.




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




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





Item
1B.  Unresolved Staff Comments.





None.





Item
2.  Properties.





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





Wine Production
Facility.  The Company's Winery and production facilities are
capable of efficiently producing up to 125,000 cases (297,000 gallons) of wine
per year, depending on the type of wine produced.  In 2008, the Winery
produced 287,513 gallons (121,027 cases) from its 2007 crush.  The
Winery is 12,784 square feet in size and contains areas for processing,
fermenting, aging and bottling wine, as well as an underground wine cellar, a
tasting room, a retail sales room and administrative offices.  There
is a 12,500 square foot outside production area for crushing, pressing and
fermenting wine grapes, and a 4,000 square foot insulated storage facility with
a capacity of 30,000 cases of wine.  The Company also has a 20,000
square foot storage building to store its inventory of bottled
product.  The production area is equipped with a settling tank and
sprinkler system for disposing of wastewater from the production process in
compliance with environmental regulations.  The Company has a large
tasting and hospitality facility of 19,470 square feet (the "Hospitality
Center").  The facility includes a basement cellar of 10,150 square
feet (including the 2,460 square foot underground cellar tunnel) to expand
storage of the Company's wine in a proper environment.  The cellar
provides the Winery with ample space for storing up to 1,600 barrels of wine for
aging.





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





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





Item
3.   Legal Proceedings.





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





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





There
were no matters submitted to a vote of security holders during the Company's
Fourth Quarter ended December 31, 2008.


13


PART
II





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





Market
Information





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





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





Quarters
Ended 2008





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





Quarters
Ended 2007





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





Holders





As of
March 27, 2009, we had approximately 2,786 stockholders of record.





Dividends





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





Recent
Sales of Unregistered Securities





None.





Issuer
Purchases of Equity Securities





None.





Item
6.  Selected Financial Data.





Not
required to be provided.





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





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


14


CRITICAL
ACCOUNTING POLICIES AND ESTIMATES





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





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





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





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





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





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





OVERVIEW





Results
of Operations





The
Company produced revenues of $16,048,238 versus $16,710,927 in the prior year, a
reduction of 4.0%. Net earnings decreased by 58% to $708,594, and diluted
earnings per share to 14 cents from 34 cents, compared to the prior
year.





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





Reductions
in Gross Profit account for approximately one third of the change from the prior
year and increases in expenses account for about two thirds of the unfavorable
change.


15


Gross
Profit reductions were equally affected by three key factors: inventory
shrinkage of purchased wines and glassware for resale through Bacchus Fine
Wines, outages of three Pinot Noir products due to high demand in 2007, and
reduced sales of Willamette Valley Vineyards wines.  Management has
made staffing and process changes to minimize shrinkage, increase the production
of Pinot Noir products and add sales resources and focus to the selling of
winery produced wines.





The
increase in Sales, General and Administrative expenses were effected by:
one-time accounting and legal fees from an improperly implemented tracking
system in the Wholesale Department (Bacchus Fine Wines) and our material
weaknesses identified in the first quarter of 2007, and increased shipping costs
and sales labor.





While
fuel costs can be unpredictable, a new key manager reporting to the CEO was
added in December 2008 to supervise inventory, purchasing, shipping logistics,
and Bacchus delivery in an effort to reduce these costs and inventory
issues.  Increases in sales labor costs are due in part to an increase
in the sales made by commissioned representatives combined with a reduction in
sales from non-commissioned venues as well as a deliberate action by Management
to open new markets and accounts on a long term basis.





The gross
margins received from sales of all the winery's products were 49% in 2008
compared to 50% for 2007.  The reduced margin is due to increases in
the sale of purchased wine versus produced wine. The gross margin received from
the sale of produced wine was 57.2%.





Out-of-state
distributor sales revenue decreased 5.5% for the year ended December 31, 2008 as
compared to the prior year.  Retail sales increased
2.7%   Bacchus Fine Wines produced an increase of 6.8% in the
sales of purchased wine and merchandise from other suppliers but a reduction
(approximately 15.8%) in sales of winery produced  products. The
Oregon Wholesales department was constrained by the outage of three Pinot Noir
products for the first eleven months of 2008.  Both the wholesale and
retail departments were affected by sever snow and ice conditions
which  included a loss of power for six days during the holiday
selling season.





The
winery had a zero credit line balance at December 31, 2008.





Sales





In the
year ended December 31, 2008, the Company sold approximately 2,000 cases of
Estate Pinot Noir, 20,000 cases of Willamette Valley Pinot Noir (vintage level),
2,000 cases of Barrel Select Pinot Noir, 17,000 cases of Whole Cluster Pinot
Noir, 18,000 cases of Pinot Gris and 19,000 cases of Riesling.





The
Company has or plans to bottle 2,300 cases of '08 Estate Pinot Noir, 25,500
cases of '08 Willamette Valley Pinot Noir (vintage level), 19,000 cases of '08
Whole Cluster Pinot Noir, 24,000 cases of '08 Pinot Gris and 25,000 cases of '08
Riesling by December  2009.





The
Company sold approximately 157,000 cases of wine in 2008 of which 121,000 cases
were winery produced wines.  Of the winery produced case sales in
2008, approximately 111,000 were the above listed varieties.  Total
purchased wine case sales in 2008 were approximately 36,000
cases.  The 2008 harvest produced 1,425 tons of wine grapes.
Unfortunately, the 2008 harvest yielded lower volumes, approximately 18% less
than prior year.  The expected '08 vintage yield is expected to
produce approximately 110,000 cases, not including a few selected bulk wine
purchases.





Wine
Inventory





The
Company had approximately 83,000 cases of bottled wine on-hand at the end of
2008.  Approximately 40% of the on-hand inventory is 2007 vintage
Pinot Noir Management took steps in 2008 to address short-term inventory
shortages relative to orders by purchasing 54,000 gallons of bulk wine. 70% of
these bulk purchases were Pinot Noir to be used mainly in the production of 2007
Vintage Pinot Noir.  The Company also addressed long-term grape
shortages by acquiring an additional 80 acres of undeveloped vineyard land in
the Eola Hills adjacent to the existing Elton Vineyards property currently under
lease.  The Company also executed a long-term lease for an additional
104 acres at the same Eola Hills site.  The Company acquired 15 acres
of property adjacent to the existing Estate site at the Winery in Turner,
OR.  This property is also undeveloped at this
time.  Lastly, the Company acquired 5 acres of additional vineyard
land at its Tualatin Estate Vineyard.


16


These
actions bring to a total of 791 acres of vineyard owned, leased or contracted by
the Company, with 23 of those acres recently planted and not
productive.  The 204 acres recently acquired and leased are
undeveloped and therefore not planted.  The total acres of Pinot Noir
are 300, of which 9 are young, non-productive vines; Pinot Gris 122 and 14;
Riesling 95 and 0, respectively.





Production
Capacity





In
addition to securing additional wine grape supplies, Management purchased
capital assets in 2008 at approximately the same level as in 2007 with the
exception of the land purchases.  2009 purchases will be reviewed
closely to address future production requirements based on the expected
increases in wine grape quantities. The Company is required to install
additional water storage capacity on the Turner property and fire sprinklers in
its 20,000 square foot wine warehouse, which also required significant capital
investment in 2008 and additional capital investment anticipated for
2009.  Management decided  not to use the Tualatin
production facility in 2008 due to the low crop yield in 2008.  The
Company has replaced the roof and production floor, insulation and walls in
anticipation of using it for wine storage and future production at an
approximate cost of $225,000 in 2008.





Wine
Quality





Continued
awareness of the Willamette Valley Vineyards brand, the Company and the quality
of its wines, was enhanced by national and regional media coverage throughout
2008.





In the
February 2008 issue of Wine Business Monthly, the industry’s leading trade
publication for wineries and growers, Willamette Valley Vineyards earned the
coveted title “#1 Hottest Small Brand of 2007”. Editor Cyril Penn wrote:
“Willamette Valley Vineyards is one of those wineries demonstrating that you can
increase quality while increasing production; the two aren’t mutually
exclusive.” This statement is especially significant on this, the 25th
anniversary of the company, which was founded in 1983 by Oregon Winegrower Jim
Bernau.





On April
3, 2008 LIVE (Low Input Viticulture and Enology), Oregon’s leading industry
organization dedicated to sustainable environmental practice, presented
Willamette Valley Vineyard’s Founder and President Jim Bernau with its first
Founders Award. Al MacDonald, LIVE board president, said that Bernau was an
obvious choice for the honor because of his early and continuous support of LIVE
and its sustainability goals.


"The
support Jim has given us has been manifested through contributions of time,
expertise and money," MacDonald said. "He served on the LIVE board of directors
in its formative years. All vineyards under his control at Willamette Valley
Vineyards have been brought into the LIVE program." Willamette Valley Vineyards
became LIVE certified in 2000 and Bernau was one of the original board members
of the 501(c)3 organization created in 1999.





The
winery’s premium Pinot Noir continues to score well with reviewers. The 2006
Tualatin Estate Single Vineyard Designate (SVD) Pinot Noir took both a Gold
medal and the title “Best of Varietal” at the Denver International Wine
Competition, as well as a Double Gold at the Oregon State Fair placing as Best
of Show and Best of Class in the Professional Wine Competition in August. It
also received the ranking of Platinum in the Wine Press Northwest annual
platinum judging which featured in the Winter 2008/2009 issue of the magazine.
This wine was then invited to be poured at the annual Platinum Dinner held at
Columbia Tower Club in Seattle, Washington. The 2006 Tualatin Estate SVD Pinot
Noir also took three additional gold medals in 2008 at the Wine Lovers
International Competition, Riverside International Wine Competition, and the
Dallas Morning News Wine Competition. This Wine also received a score of 90
points from one of the nation’s leading wine consumer magazines, Wine
Enthusiast.





The 2006
Estate Pinot Noir performed equally well this year, taking a Double Gold at the
Taster’s Guild Wine Lovers International Consumer Wine Judging, the top honor
for the $35-$40 price range. This wine took an additional Gold medal at the
Riverside International Wine Competition and was rated 90 points by Wine
Enthusiast Magazine in its July, 2008 Buying Guide, and 89 points by Wine
Spectator Magazine in its September 2008 issue.





Additional
2006 vintage Pinot Noirs that received high scores from Wine Enthusiast Magazine
in 2008 include the 2006 Signature Cuvee Pinot Noir with 91 points, and the 2006
Hannah Vineyard Pinot Noir with 89 points.


17


The 2007
Pinot Gris also took a score of 90 points from Wine Enthusiast in their
November, 2008 issue, and was listed under the feature article “Best Buys of
2008: Top Wines Under $15” as a Best Buy. This recognition was furthered in the
December issue of Wine Enthusiast where the 2007 Pinot Gris was titled one of
the Top 100 Best Buys of 2008, ranking #67 out of the 744 wines that had
received Best Buy status throughout the year. This wine was also featured in the
October, 2008 issue of Food&Wine Magazine as one of the “top bottles from
eco-conscious wineries”. Willamette Valley Vineyards was noted in this article
for their bio-diesel program and participation in Oregon Governor Ted
Kulongoski’s carbon neutral pledge. This wine also took two Gold medals in 2008
at the LA International Wine Competition and the National Women’s Wine
Competition, and was selected as a winner at the Pacific Coast Oyster Wine
Competition for the third consecutive year.





The
previous vintage, the 2006 Pinot Gris was recognized by Consumer Reports
magazine in their July issue as among one of the best warm-weather wines. The
winery’s Riesling had previously been recognized by Consumer Reports in December
of 2007. Additionally, in its March 15, 2008 issue, Food&Wine Magazine named
Willamette Valley Vineyards’ 2006 Pinot Gris as one of “America’s Best Wines” at
or under $15 per bottle.





The
regional wine publication, Wine Press Northwest, in its Fall 2008 issue gave the
2006 Willamette Valley Pinot Noir, the winery’s flagship wine, a rating of
“Excellent”. This wine also received a score of 88 points from Wine
Enthusiast.





In the
November issue of Food&Wine Magazine, the 2007 Whole Cluster Pinot Noir was
noted in the article “Top Regions, Top Reds: A guide to America’s top wine
regions and some of the grape varieties for which they’re famous”. Additionally,
in the October issue of Martha Stewart Living Magazine this wine was listed as
“affordable, food-friendly, and sure to please”.





Also
placing in the Wine Press Northwest Platinum Judging was the 2004 Griffin Creek
Syrah. Griffin Creek is the label owned by Willamette Valley Vineyards for its
wines whose grapes are grown outside of the Willamette Valley, in Southern
Oregon. The 2004 Syrah was also recognized in the February 2008 issue of
Wine&Spirits Magazine’s “Year’s Best Syrah” edition. It received a score of
90 points and was included in the article “94 Greats from Around the World”.
This wine also took Gold at the Northwest Wine Summit Competition and Gold at
the Pacific Rim International Competition.





Other
Willamette Valley Vineyards’ wines that took Gold medals in competitions during
2008 include the 2007 Riesling, 2006 Dijon Clone Chardonnay, 2006 Pinot Noir,
2005 Griffin Creek Viognier and the 2007 Tualatin Estate Semi-Sparkling
Muscat.





The
company website, www.WillametteValleyVineyards.com, added a new section titled
“Noteworthy” in December, 2008. This web page will display regional and national
media coverage garnered by Willamette Valley Vineyards and its wines with the
intention to keep consumers and distributors up to date on the acclaim that
these products are receiving in the market place.





In
December 2008 Willamette Valley Vineyards’ production facility in Turner, Oregon
received a LIVE winery certification. All WVV owned vineyards are certified
LIVE, beginning with the Estate property in 2000, but the new program allows for
the production facility to be certified sustainable as well.





In order
to support a growing sales organization, WVV has established its sales
headquarters in the offices of the Oregon Restaurant Association and across the
hall from the Northwest Grocery Association. This strategic move aims to
accommodate growing sales staff, improve contact with these organizations, allow
easy access to the Portland airport and reduce the commute winery sales
employees were making from the Portland area to the winery.





2008 saw
the development of the book Oregon: The Taste of Wine by renowned photographer
Janis Miglavs. Willamette Valley Vineyards underwrote the project, which tells
the story of the founding of the Oregon wine industry in the winegrowers’ own
words, accompanied by Janis’s breathtaking photography. Nearly 200 hours of
interviews with more than 80 owners, winemakers and vineyard managers were
recorded, some revealing stories never before told. All net proceeds from the
sale of this book, which was released in October 2008, will be donated to Salud,
an organization that works to provide healthcare services for Oregon‘s seasonal
vineyard workers and their families.





The media
continues to take notice of the winery’s stewardship pledge. In July, 2007
Willamette Valley Vineyards became the first winery in the world to use FSC
(Forest Stewardship Council) certified cork in wine bottles, starting with the
2006 Pinot Noir. In 2008 the winery prepared for the launch of a cork recycling
program called Cork Re-Harvest, which reinforces their commitment to this
all-natural, renewable resource. The program launched in February 2009 with the
placement of cork recycling boxes in the 11 Whole Foods stores throughout Oregon
and Washington state. The cork that consumers return to these boxes will
ultimately be remanufactured into new and useable products, and all with a zero
carbon footprint. The launch of this program received local and international
media coverage.


18


Seasonal
and Quarterly Results





The
Company has historically experienced and expects to continue experiencing
seasonal fluctuations in its revenues and net income. The Company has
historically reported a net loss during its first quarter and expects the first
quarter to be the weakest of the year, including the first quarter of
2009.  Sales volumes increase progressively beginning in the second
quarter through the fourth quarter because of consumer buying habits. Oregon’s
2008 growing season produced a lower crop due to inclement weather during fruit
set and a later than usual growing season.





The
following table sets forth certain information regarding the Company's revenues,
excluding excise taxes, from Winery operations for the three and twelve months
ended December 31, 2008:





Three
      months ended
                    
                    
                    Twelve
      months endedDecember
      31,
                    
                    
                    December
      31,2008
                    
                    
                    2007
                    
                    
                    2008
                    
                    
                    2007Retail
      Sales, RentalIncome
      and Events
                    
                    $
                    627
                    
                    
                    $
                    794
                    
                    
                    $
                    2,460
                    
                    
                    $
                    2,396In-state
      sales
                    
                    
                    2,382
                    
                    
                    
                    2,668
                    
                    
                    
                    7,929
                    
                    
                    
                    8,199Out-of-state
      sales
                    
                    
                    1,761
                    
                    
                    
                    1,652
                    
                    
                    
                    5,998
                    
                    
                    
                    6,350Bulk
      wine/Misc.
      sales
                    
                    
                    79
                    
                    
                    
                    134
                    
                    
                    
                    79
                    
                    
                    
                    156Total
      Revenue
                    
                    
                    4,849
                    
                    
                    
                    5,248
                    
                    
                    
                    16,466
                    
                    
                    
                    17,101Less
      excise taxes
                    
                    
                    (145
                    )
                    
                    
                    (84
                    )
                    
                    
                    (418
                    )
                    
                    
                    (390
                    )Net
      Revenue
                    
                    $
                    4,704
                    
                    
                    $
                    5,164
                    
                    
                    $
                    16,048
                    
                    
                    $
                    16,711





2008
Compared to 2007





Retail
sales for the year ended December 31, 2008 increased $63,772, or 2.7%, as
compared to the corresponding prior year period.  Retail sales
increased during the year ended December 31, 2008, due primarily to an increase
of $310,154 or 68.9% in mail order sales.  The focus on customers for
life through telephone, mail order and retail sales will continue with the goal
of expanding the customer base and continuing the trend of increasing revenue
generation by the Retail department.  Retail experienced a decrease in
revenue during 2008 in on-site and off-site festivals revenue of -32.3%, or
$58,499 as compared to the same period in 2007.  Attendance at these
events actually increased, however there was lower volume of wine sales compared
to prior year.





Total
Wholesale sales in the state of Oregon, through the Company's in-state sales
force and through direct sales from the winery decreased $270,043, or -3.3%, in
the year ended December 31, 2008, as compared to the corresponding prior year
period.  2008 in-state sales of purchased wines and glassware were
6.8% higher than 2007. 2008 in-state sales of Willamette Valley Vineyards
branded wine were lower than 2007 by -15.8% and contributed mostly to the -3.3%
reduction in overall in-state sales.  The Company’s direct in-state
sales to its largest customer decreased $141,525, or -12.7%, in the year ended
December 31, 2008, as compared to the prior year period.  This
decrease is largely due to reduced orders of purchased brands and the lack of
availability of a core produced brand placement for the full year.





Out-of-state
sales in the year ended December 31, 2008 decreased $352,392, or -5.5%, as
compared to the prior year period.  The lower sales are primarily a
result of reduced order activity for some of the Company’s products by out of
state distributors although their volume of sales are approximately the same to
the end consumer, therefore the distributors are reducing their inventory
levels.  The Pinot Noir variety led sales in 2008.


19


The
Company pays alcohol excise taxes to both the Oregon Liquor Control Commission
and to the U.S. Department of the Treasury, Alcohol and Tobacco Tax and Trade
Bureau.  These taxes are based on product sales
volumes.  The Company is liable for the taxes upon the removal of
product from the Company’s warehouse on a per gallon basis.  The
Company also pays taxes on the grape harvest on a per ton basis to the Oregon
Liquor Control Commission for the Oregon Wine Board.  The Company’s
excise taxes for the year ended December 31, 2008 increased 7.0% as compared to
the prior year period. This was due primarily to the increased volume of
purchased brands purchases in 2008 which are taxed by the OLCC. Sales data in
the discussion above is quoted before the exclusion of excise
taxes.





As a
percentage of net revenue, gross profit was 49% in the year ended December 31,
2008, a decrease of -1% compared to the 50% gross profit percentage from the
prior year period.  While the Company is continuing its focus on
improved distribution of higher margin products as well as continuing to reduce
grape and production costs, we anticipate that our increased representation of
brands other than our own through our Oregon sales force will continue to erode
the gross margins as a percent of sales due to the lower margins associated with
selling those brands.  While the gross margin may erode due to such
representation, the Company believes that the cost of administration, accounting
and inventory management of purchased brands has been much higher than
anticipated.  We believe we have taken steps resulting in significant
one-time expenses to increase sales long-term at appropriate levels of
administrative costs.





Amortization
of vineyard development costs is included in capitalized crop costs that, in
turn, are included in inventory costs and ultimately become a component of cost
of goods sold.  For the years ending December 31, 2008 and 2007,
approximately $68,000 and $84,000, respectively, were amortized into inventory
costs.





Selling,
general and administrative expenses for the year ended December 31, 2008
increased 16% compared to the prior year period.  This increase is due
primarily to increased sales salaries and commissions related to incremental
sales headcount and a shift in the mix of sales from non-commission sales to
commission sales.  Outbound freight costs and professional service
fees for accounting and legal services also greatly attributed to the increase
in general and administrative expenses. As a percentage of net revenue from
winery operations, selling, general and administrative expenses increased to 40%
for the year ended December 31, 2008, as compared to 33% for the prior year
period, primarily as a result of increased expenditures as mentioned above in
relation to revenues.





Interest
income decreased by 54% or $43,068 for the year ended December 31, 2008 versus
the comparable prior year period.  This is mainly due to the
elimination of our CD investments which were converted to cash for working
capital needs. Interest expense increased 8% or $8,615 in the year ended
December 31, 2008 as compared to the prior year period.  Interest
expense was higher primarily due to the increase in outstanding debt during the
period.





The
provision for income taxes and the Company's effective tax rate were $554,541
and 44% of pre-tax income in the year ended December 31, 2008 with $1,034,170
and 38% of pre-tax income recorded for the prior year period.





As a
result of the above factors, net income decreased to $708,594 in the year ended
December 31, 2008 from $1,686,661 for the prior year period.  Earnings
per share were $0.15 and $0.35, in the years ended December 31, 2008 and 2007,
respectively.





First
Quarter 2009 Outlook





Sales in
the first quarter of 2009 are weaker than the prior year's first quarter sales
for the following principle reasons: in-state sales through Bacchus Fine Wines
are down to the reduction in on-premise sales driven by a weak economy and the
respective reduction in consumer spending.  Also, some turnover in
Bacchus sales personnel is adversely impacting sales. Management believes this
weakness could continue through 2009.





Liquidity
and Capital Resources





At
December 31, 2008, the Company had a working capital balance of $9.4 million and
a current ratio of 4.21:1. At December 31, 2007, the Company had a working
capital balance of $9.1 million and a current ratio of 5.91:1.  The
Company had a cash balance of $350,361 at December 31, 2008 compared to a cash
balance of $1,083,405 at December 31, 2007. The decrease in cash year over year
was primarily due to the increased use of cash for inventory building and
capital expenditures.





Total
cash provided by operating activities in the year ended December 31, 2008 was
$396,594, compared to $470,223 for the prior year period, primarily as a result
of the build-up in inventory and related use of cash.


20


Total
cash used in investing activities in the year ended December 31, 2008 was
$2,465,310, compared to $1,185,891 in the prior year period.  Cash
used in investing activities consisted mainly of real property acquisitions and
property and equipment additions.





Total
cash provided by financing activities in the year ended December 31, 2008 was
$1,335,672, compared to $186,603 in the prior year period.  Cash
provided by financing activities primarily consisted of the increase in debt
related to the new loans from NW Farm Credit Services required for the
acquisition of the new vineyard acreage.





At
December 31, 2008, the line of credit balance was $0, on a maximum borrowing
amount of $2,000,000.  The Company has a loan agreement with Umpqua
Bank that contains, among other things, certain restrictive financialcovenants
with respect to total equity, debt-to-equity and debt coverage that must be
maintained by the Company on a quarterly basis.  As of December 31,
2008, the Company was in compliance with all of the financial
covenants.





As of
December 31, 2008, the Company had a total long-term debt balance of $2,532,782
owed to NW Farm Credit Services. The debt with NW Farm Credit Services was used
to finance the Hospitality Center, invest in winery equipment to increase the
Company’s winemaking capacity, complete the storage facility and most recently
to acquire new vineyard land for future development.





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





The
Company’s contractual obligations as of December 31, 2008 including long-term
debt, grape payables and commitments for future payments under non-cancelable
lease arrangements are summarized below:





Payments Due by PeriodLess
      than
                
                
                
                
                
                
                
                
                After
      5Total
                
                
                1 year
                
                
                1-3 years
                
                
                4-5 years
                
                
                yearsLong-term
      debt and capital lease obligations
                
                $
                2,532,782
                
                
                $
                354,536
                
                
                $
                736,069
                
                
                $
                108,464
                
                
                $
                1,333,713Grape
      Payables
                
                
                594,734
                
                
                
                594,734
                
                
                
                -
                
                
                
                -
                
                
                
                -Operating
      Leases
                
                
                3,590,256
                
                
                
                319,656
                
                
                
                640,028
                
                
                
                647,554
                
                
                
                1,983,018Total
      Contractual Obligations
                
                $
                6,717,772
                
                
                $
                1,268,926
                
                
                $
                1,376,097
                
                
                $
                756,018
                
                
                $
                3,316,731





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





Not
Required.


21


Item
8.     Financial Statements and Supplementary
Data.





Willamette
Valley Vineyards, Inc.


Index to
Financial Statements





Report
      of Independent Registered Public Accounting Firms
                  23Financial
      StatementsBalance
      Sheet
                  24Statements
      of Operations
                  25Statements
      of Shareholders' Equity
                  26Statements
      of Cash Flows
                  27Notes
      to Financial Statements
                  28




22


REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





To the
Board of Directors and Shareholders


Willamette
Valley Vineyards, Inc.





We have
audited the accompanying balance sheet of Willamette Valley Vineyards, Inc. as
of December 31, 2008 and 2007 and the related statements of income,
shareholders’ equity and cash flows for each of the years in the two year period
ended December 31, 2008. These financial statements are the responsibility
of the Company’s management. Our responsibility is to express an opinion on
these financial statements based on our audits.





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





In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Willamette Valley Vineyards, Inc.
as of December 31, 2008 and 2007 and the results of its operations and its cash
flows for each of the years in the two year period ended December 31, 2008, in
conformity with U.S. generally accepted accounting principles.


/s/ Moss
Adams LLP
   Seattle,
Washington


March 30,
2009


23


Willamette
Valley Vineyards, Inc.


Balance
Sheet


December 31,
                                  
                                  
                                  December 31,2008
                                  
                                  
                                  2007ASSETSCurrent
      assets:Cash
      and cash equivalents
                                  
                                  $
                                  350,361
                                  
                                  
                                  $
                                  1,083,405Accounts
      receivable, net (Note 2)
                                  
                                  
                                  1,204,881
                                  
                                  
                                  
                                  1,804,168Inventories
      (Note 3)
                                  
                                  
                                  10,604,204
                                  
                                  
                                  
                                  7,976,432Prepaid
      expenses and other current assets
                                  
                                  
                                  68,834
                                  
                                  
                                  
                                  91,981Current
      portion of notes receivable
                                  
                                  
                                  62,415
                                  
                                  
                                  
                                  62,415Deferred
      income taxes
                                  
                                  
                                  81,700
                                  
                                  
                                  
                                  -Total
      current assets
                                  
                                  
                                  12,372,395
                                  
                                  
                                  
                                  11,018,401Vineyard
      development costs, net
                                  
                                  
                                  1,693,769
                                  
                                  
                                  
                                  1,690,055Property
      and equipment, net (Note 4)
                                  
                                  
                                  6,069,408
                                  
                                  
                                  
                                  4,200,155Debt
      issuance costs
                                  
                                  
                                  29,581
                                  
                                  
                                  
                                  21,106Notes
      receivable
                                  
                                  
                                  165,491
                                  
                                  
                                  
                                  187,585Other
      assets
                                  
                                  
                                  4,456
                                  
                                  
                                  
                                  65,893Total
      Assets
                                  
                                  $
                                  20,335,100
                                  
                                  
                                  $
                                  17,183,195LIABILITIES
      AND SHAREHOLDERS' EQUITYCurrent
      liabilities:Line
      of credit (Note 5)
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  -Current
      portion of long-term debt (Note 6)
                                  
                                  
                                  354,536
                                  
                                  
                                  
                                  284,786Accounts
      payable
                                  
                                  
                                  1,111,499
                                  
                                  
                                  
                                  564,494Accrued
      expenses
                                  
                                  
                                  510,768
                                  
                                  
                                  
                                  420,825Income
      taxes payable
                                  
                                  
                                  350,870
                                  
                                  
                                  
                                  76,516Deferred
      Income Taxes (Note 9)
                                  
                                  
                                  -
                                  
                                  
                                  
                                  1,000Grape
      payables
                                  
                                  
                                  594,734
                                  
                                  
                                  
                                  508,545Total
      current liabilities
                                  
                                  
                                  2,922,407
                                  
                                  
                                  
                                  1,856,166Long-term
      debt (Note 6)
                                  
                                  
                                  2,178,246
                                  
                                  
                                  
                                  946,372Deferred
      rent liability
                                  
                                  
                                  217,742
                                  
                                  
                                  
                                  223,936Deferred
      gain (Note 11)
                                  
                                  
                                  345,930
                                  
                                  
                                  
                                  378,025Deferred
      income taxes (Note 9)
                                  
                                  
                                  355,207
                                  
                                  
                                  
                                  262,000Total
      liabilities
                                  
                                  
                                  6,019,532
                                  
                                  
                                  
                                  3,666,499Commitments
      and contingencies (Note 11)
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -Shareholders'
      equity (Notes 7 and 8):Common
      stock, no par value - 10,000,000 shares authorized, 4,851,327 issued and
      outstanding at December 31, 2008
                                  
                                  
                                  8,515,667
                                  
                                  
                                  
                                  8,425,389Retained
      earnings
                                  
                                  
                                  5,799,901
                                  
                                  
                                  
                                  5,091,307Total
      shareholders' equity
                                  
                                  
                                  14,315,568
                                  
                                  
                                  
                                  13,516,696$
                                  20,335,100
                                  
                                  
                                  $
                                  17,183,195




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




24




Willamette
Valley Vineyards, Inc.


Statements
of Operations


For the
Years Ended December 31, 2008 and 2007


2008
                  
                  
                  2007Net
      revenues
                  
                  $
                  16,048,238
                  
                  
                  $
                  16,710,927Cost
      of goods sold
                  
                  
                  8,229,877
                  
                  
                  
                  8,430,802Gross
      margin
                  
                  
                  7,818,361
                  
                  
                  
                  8,280,125Selling,
      general and administrative expenses
                  
                  
                  6,455,203
                  
                  
                  
                  5,554,062Income
      from operations
                  
                  
                  1,363,158
                  
                  
                  
                  2,726,063Other
      income (expenses):Interest
      income
                  
                  
                  36,746
                  
                  
                  
                  79,814Interest
      expense
                  
                  
                  (116,383
                  )
                  
                  
                  (107,768
                  )Other
      expense
                  
                  
                  (20,386
                  )
                  
                  
                  22,722(100,023
                  )
                  
                  
                  (5,232
                  )Income
      before income taxes
                  
                  
                  1,263,135
                  
                  
                  
                  2,720,831Income
      tax provision (Note 9)
                  
                  
                  554,541
                  
                  
                  
                  1,034,170Net
      income
                  
                  $
                  708,594
                  
                  
                  $
                  1,686,661Basic
      net income per common share
                  
                  $
                  0.15
                  
                  
                  $
                  0.35Diluted
      net income per common share
                  
                  $
                  0.14
                  
                  
                  $
                  0.34





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


25


Willamette
Valley Vineyards, Inc.


Statements
of Shareholders' Equity


For the
Years Ended December 31, 2008 and 2007





Common stock
                
                
                
                
                
                RetainedShares
                
                
                Dollars
                
                
                earnings
                
                
                TotalBalances
      at December 31, 2006
                
                
                4,793,027
                
                
                $
                7,935,829
                
                
                $
                3,404,646
                
                
                $
                11,340,475Stock
      based compensation expense
                
                
                1,850
                
                
                
                45,108
                
                
                
                -
                
                
                
                45,108Common
      stock issued and options exercised
                
                
                41,025
                
                
                
                444,452
                
                
                
                -
                
                
                
                444,452Net
      income
                
                
                -
                
                
                
                -
                
                
                
                1,686,661
                
                
                
                1,686,661Balances
      at December 31, 2007
                
                
                4,835,902
                
                
                $
                8,425,389
                
                
                $
                5,091,307
                
                
                $
                13,516,696Stock
      based compensation expense
                
                
                1,425
                
                
                
                56,230
                
                
                
                -
                
                
                
                56,230Common
      stock issued and options exercised
                
                
                14,000
                
                
                
                34,048
                
                
                
                -
                
                
                
                34,048Net
      income
                
                
                -
                
                
                
                -
                
                
                
                708,594
                
                
                
                708,594Balances
      at December 31, 2008
                
                
                4,851,327
                
                
                $
                8,515,667
                
                
                $
                5,799,901
                
                
                $
                14,315,568





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


26


Willamette
Valley Vineyards, Inc.


Statements
of Cash Flows


For the
Years Ended December 31, 2008 and 2007





2008
                
                
                2007Cash
      flows from operating activities:Net
      income
                
                $
                708,594
                
                
                $
                1,686,661Reconciliation
      of net income to net cash (used for) provided by operating
      activities:Depreciation
      and amortization
                
                
                620,180
                
                
                
                576,515Stock
      based compensation expense
                
                
                56,230
                
                
                
                45,108Deferred
      income taxes
                
                
                10,507
                
                
                
                128,000Bad
      debt expense
                
                
                7,606
                
                
                
                8,333Deferred
      rent liability
                
                
                (6,194
                )
                
                
                32,985Deferred
      gain
                
                
                (32,095
                )
                
                
                (32,094
                )Changes
      in assets and liabilities:Accounts
      receivable
                
                
                599,287
                
                
                
                (202,807
                )Inventories
                
                
                (2,627,775
                )
                
                
                (1,224,503
                )Prepaid
      expenses and other current assets
                
                
                10,818
                
                
                
                15,762Other
      assets
                
                
                61,437
                
                
                
                (8,226
                )Accounts
      payable
                
                
                537,512
                
                
                
                (381,247
                )Accrued
      expenses
                
                
                89,944
                
                
                
                27,873Income
      taxes receivable/payable
                
                
                274,355
                
                
                
                (229,092
                )Grape
      payables
                
                
                86,188
                
                
                
                26,955Net
      cash provided by  operating activities
                
                
                396,594
                
                
                
                470,223Cash
      flows from investing activities:Additions
      to property and equipment
                
                
                (2,465,976
                )
                
                
                (863,623
                )Vineyard
      development expenditures
                
                
                (21,428
                )
                
                
                (72,268
                )Loans
      to grape producer
                
                
                22,094
                
                
                
                (250,000
                )Net
      cash provided by (used for) investing activities
                
                
                (2,465,310
                )
                
                
                (1,185,891
                )Cash
      flows from financing activities:Proceeds
      from and stock options exercised
                
                
                27,250
                
                
                
                156,480Increases
      in Line of credit
                
                
                -
                
                
                
                -borrowings
      of long-term debt
                
                
                1,568,748
                
                
                
                -Payments
      on long-term debt
                
                
                (267,124
                )
                
                
                (257,850
                )Excess
      tax benefit on stock option exercises
                
                
                6,798
                
                
                
                287,973Net
      cash used for financing activities
                
                
                1,335,672
                
                
                
                186,603Net
      (decrease) increase in cash and cash equivalents
                
                
                (733,044
                )
                
                
                (529,065
                )Cash
      and cash equivalents:Beginning
      of year
                
                
                1,083,405
                
                
                
                1,612,470End
      of year
                
                $
                350,361
                
                
                $
                1,083,405





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


27


Willamette
Valley Vineyards, Inc.


Notes to
Financial Statements





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





Organization
and Operations





Willamette
Valley Vineyards, Inc. (the "Company") owns and operates vineyards and a winery
located in the state of Oregon, and produces and distributes premium, super
premium, and ultra premium wines, primarily Pinot Noir, Pinot Gris, Chardonnay,
and Riesling.  In 2008 and 2007 no one customer represented more than
10% of revenues.





Sales in
Oregon through the Company's in-state sales force and through direct sales from
the winery represented approximately 59% and 59% respectively, of revenues for
2008 and 2007. In-state sales of purchased wines and glassware represented 59%
and 53% of total 2008 and 2007 in-state sales, respectively. In-state sales of
Willamette Valley Vineyards branded wines represented 38% and 44% of total 2008
and 2007 in-state sales, respectively.





Out-of-state
sales represented approximately 37% and 37% respectively, of revenues for 2008
and 2007.  Foreign sales represent less than 1% of total
sales.  The Company also sells its wine through the tasting room at
its winery.





Basis
of Presentation





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




Financial
Instruments and Concentrations of Risk





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





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





For
accounts receivable, the Company performs ongoing credit evaluations of its
customers and does not require collateral. A reserve is maintained for potential
credit losses. The allowance for doubtful accounts is based on an assessment of
the collectability of customer accounts. The Company regularly reviews the
allowance by considering factors such as historical experience, credit quality,
the age of the accounts receivable balances, and current economic conditions
that may affect a customer’s ability to pay.





Other
Comprehensive Income





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





Cash
and Cash Equivalents





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





Inventories





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


28


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





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





Vineyard
Development Costs





Vineyard
development costs consist primarily of the costs of the vines and expenditures
related to labor and materials to prepare the land and construct vine
trellises.  The costs are capitalized until the vineyard becomes
commercially productive, at which time annual amortization is recognized using
the straight-line method over the estimated economic useful life of the
vineyard, which is estimated to be 30 years.  Accumulated amortization
of vineyard development costs aggregated $587,199 and $569,485 at December 31,
2008 and 2007, respectively.





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





Property
and Equipment





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


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





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





Debt
Issuance Costs





Debt
issuance costs are amortized on the straight-line basis, which approximates the
effective interest method, over the life of the debt. The Company incurred an
additional $15,626 of debt issuance costs in 2008 related to the new long-term
debt from NW Farm Credit Service. For the years ended December 31, 2008 and
2007, amortization of debt issuance costs was approximately $7,200 and $7,200
respectively.





Income
Taxes





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





Significant
judgment is required in assessing the timing and amount of deductible and
taxable items, evaluating tax positions and in determining the income tax
provision. Tax benefits are recognized only when it is more likely than not the
tax position will be sustained upon review by the applicable taxing authorities.
If the recognition threshold is met, the tax benefit is measured at 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 impacts the provision for
income taxes in the period that such a determination is made. If applicable,
interest and penalties related to unrecognized tax benefits are reflected in the
current income tax provision.


29





Deferred
Rent Liability





The
Company leases land under a sale-leaseback agreement.  The long-term
operating lease has minimum lease payments that escalate every
year.  For accounting purposes, rent expense is recognized on the
straight-line basis by dividing the total minimum rents due during the lease by
the number of months in the lease.  In the early years of a lease with
escalation clauses, this treatment results in rental expense recognition in
excess of rents paid, and the creation of a long-term deferred rent
liability.  As the lease matures, the deferred rent liability will
decrease and the rental expense recognized will be less than the rents actually
paid.  For the period ended December 31, 2008 and 2007, rent costs
recognized in excess of amounts paid totaled ($6,194) and $32,985,
respectively.





Revenue
Recognition





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





Cost
of Goods Sold





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





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





Selling,
General and Administrative Expenses





Selling,
general and administrative expenses consist primarily of non-manufacturing
administrative and overhead costs, advertising and other marketing
promotions.  Advertising costs are expensed as incurred or the first
time the advertising takes place. For the years ended December 31, 2008 and
2007, advertising costs incurred were approximately $44,000 and $36,000
respectively.





The
Company provides an allowance to distributors for providing sample of products
to potential customers.  For the years ended December 31, 2008 and
2007, these costs, which are included in selling, general and administrative
expenses, totaled approximately $92,000 and $102,000 respectively.





Shipping
and Handling Costs





Amounts
paid by customers to the Company for shipping and handling costs are included in
the net revenue.  Costs incurred for shipping and handling charges are
included in selling, general and administrative expense.  For the
years ended December 31, 2008 and 2007, such costs totaled approximately
$437,000 and $373,000 respectively.  The Company's gross margins may
not be comparable to other companies in the same industry as other companies may
include shipping and handling costs as a cost of goods sold.





Excise
Taxes





The
Company pays alcohol excise taxes based on product sales to both the Oregon
Liquor Control Commission and to the U.S. Department of the Treasury, Alcohol
and Tobacco Tax and Trade Bureau.  The Company is liable for the taxes
upon the removal of product from the Company's warehouse on a per gallon
basis.  The federal tax rate is affected by a small winery tax credit
provision which declines based upon the number of gallons of wine production in
a year rather than the quantity sold.  The Company also pays taxes on
the grape harvest on a per ton basis to the Oregon Liquor Control Commission for
the Oregon Wine Advisory.  For the years ended December 31, 2008 and
2007, excise taxes incurred were approximately $418,000 and $390,000
respectively.


30





Stock
Based Compensation





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





Tax
Benefit of Disqualifying Disposition of Stock Options





The
Company has certain incentive stock options in 2008 that had been exercised and
the related stock subsequently sold before a required tax holding
period.  The sale of the stock thus became a disqualifying
disposition, which allows the Company to deduct as employee compensation the
difference between the exercise price for the stock option and the stock’s
selling price. Since the deduction reported in the income tax returns exceeds
the compensation costs recognized in the financial statements, the excess tax
benefit is recognized as additional paid in capital.  Accordingly,
$6,798 of the increase in common stock is related to the excess tax benefit
realized by the Company.





Basic
and Diluted Net Income per Share





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





Options
to purchase 445,200 shares of common stock were outstanding at December 31, 2008
and diluted weighted-average shares outstanding at December 31, 2008 include the
effect of 60,908 stock options.  Options to purchase 434,200 shares of
common stock were outstanding at December 31, 2007 and diluted weighted-average
shares outstanding at December 31, 2006 include the effect of 179,165 stock
options.





2008
                
                
                
                
                
                
                
                
                2007Weighted
                
                
                
                
                
                
                
                
                Weightedaverage
                
                
                Earnings
                
                
                
                
                
                average
                
                
                Earningsshares
                
                
                per
                
                
                
                
                
                shares
                
                
                perIncome
                
                
                outstanding
                
                
                share
                
                
                Income
                
                
                outstanding
                
                
                shareBasic
                
                $
                708,594
                
                
                
                4,845,782
                
                
                $
                0.15
                
                
                $
                1,686,661
                
                
                
                4,806,345
                
                
                $
                0.35Options
                
                
                -
                
                
                
                60,908
                
                
                
                -
                
                
                
                -
                
                
                
                179,165
                
                
                
                -Warrant
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Diluted
                
                $
                708,594
                
                
                
                4,906,690
                
                
                $
                0.14
                
                
                $
                1,686,661
                
                
                
                4,985,510
                
                
                $
                0.34





Statement
of cash flows


Supplemental
disclosure of cash flow information:





2008
                  
                  
                  2007Interest
      paid
                  
                  $
                  116,000
                  
                  
                  $
                  108,000Supplemental
      schedule of noncash investing and financing activities:Issuance
      of common stock(Note 7)
                  
                  $
                  8,458
                  
                  
                  $
                  11,808Purchases
      of Property Plant& Equipment included in accounts
    payable
                  
                  $
                  9,493
                  
                  
                  $
                  -


31





Recently
issued accounting pronouncements and proposed accounting changes





SFAS No. 141, “Business Combinations
(Revised 2007).” SFAS 141R replaces SFAS 141, “Business Combinations,”
and applies to all transactions and other events in which one entity obtains
control over one or more other businesses. SFAS 141R requires an acquirer, upon
initially obtaining control of another entity, to recognize the assets,
liabilities and any non-controlling interest in the acquiree at fair value as of
the acquisition date. Contingent consideration is required to be recognized and
measured at fair value on the date of acquisition rather than at a later date
when the amount of that consideration may be determinable beyond a reasonable
doubt. This fair value approach replaces the cost-allocation process required
under SFAS 141 whereby the cost of an acquisition was allocated to the
individual assets acquired and liabilities assumed based on their estimated fair
value. SFAS 141R requires acquirers to expense acquisition-related costs as
incurred rather than allocating such costs to the assets acquired and
liabilities assumed, as was previously the case under SFAS 141. Under SFAS 141R,
the requirements of SFAS 146, Accounting for Costs Associated with
Exit or Disposal Activities,” would have to be met in order to accrue for
a restructuring plan in purchase accounting. Pre-acquisition contingencies are
to be recognized at fair value, unless it is a non-contractual contingency that
is not likely to materialize, in which case, nothing should be recognized in
purchase accounting and, instead, that contingency would be subject to the
probable and estimable recognition criteria of SFAS 5, “Accounting for
Contingencies.” SFAS 141R is effective for the Company on January 1, 2009
and any impact on the Company’s financial position or results of operations will
be dependent upon the circumstances of future business combinations of the
Company, if any.





SFAS No. 157, “Fair Value
Measurements” and FASB Staff Position (FSP) FAS 157-2, “Effective Date of FASB
Statement No. 157”SFAS 157 defines fair value, establishes a framework
for measuring fair value in generally accepted accounting principles, and
expands disclosures about fair value measurements. FSP FAS 157-2 delays the
effective date of SFAS 157 for nonfinancial assets and liabilities, except for
items that are recognized or disclosed at fair value in the financial statements
on a recurring basis (at least annually).  The Company adopted the
provisions of SFAS 157 for financial assets and liabilities on January 1,
2008; there was no material impact on the Company’s financial position or
results of operations at adoption.





However,
the application of SFAS 157, coupled with FSP FAS 157-3, “Determining the Fair Value of a
Financial Asset When the Market for That Asset is Not Active. FSP FAS
157-3, as described below, have resulted in both temporary and
other-than-temporary losses on the Company’s Auction Rate
Securities.   The provisions of SFAS 157 for nonfinancial assets
and liabilities will be adopted by the Company on January 1, 2009, in accordance
with FSP FAS 157-2, and is not expected to have a material impact on the
Company’s financial position or operations.


FSP
FAS 157-3 clarifies the application of SFAS No. 157 to financial assets for
which an active market does not exist.  Specifically, FSP FAS 157-3
addresses the following SFAS No. 157 application issues:





·
            How
      the reporting entity’s own assumptions (that is, expected cash flows and
      appropriately risk-adjusted discount rates) should be considered when
      measuring fair value when relevant observable inputs do not
      exist;


·
            How
      available observable inputs in a market that is not active should be
      considered when measuring fair value;
and


·
            How
      the use of market quotes (for example, broker quotes or pricing services
      for the same or similar financial assets) should be considered when
      assessing the relevance of observable and unobservable inputs available to
      measure fair value.





FSP 157-3
applies to financial assets within the scope of accounting pronouncements that
require or permit fair value measurement in accordance with SFAS No. 157, and
was effective upon issuance in October 2008.





SFAS No. 159, “The Fair Value Option
for Financial Assets and Financial Liabilities — Including an amendment of FASB
Statement No. 115.” SFAS 159 permits entities to choose to measure
eligible items at fair value at specified election dates. Unrealized gains and
losses on items for which the fair value option has been elected are reported in
earnings at each subsequent reporting date. The fair value option may be applied
instrument by instrument, with certain exceptions, is irrevocable (unless a new
election date occurs) and is applied only to entire instruments and not to
portions of instruments. The Company adopted the provisions of SFAS 159 on
January 1, 2008 and there was no material impact on the Company’s financial
position or results of operations.





SFAS No. 160, “Noncontrolling
Interest in Consolidated Financial Statements, an amendment of ARB Statement No.
51.” SFAS 160 amends Accounting Research Bulletin (ARB) No. 51, “Consolidated Financial
Statements,” to establish accounting and reporting standards for the
non-controlling interest in a subsidiary and for the deconsolidation of a
subsidiary. SFAS 160 clarifies that a non-controlling interest in a subsidiary,
which is sometimes referred to as minority interest, is an ownership interest in
the consolidated entity that should be reported as a component of equity in the
consolidated financial statements. Among other requirements, SFAS 160 requires
consolidated net income to be reported at amounts that include the amounts
attributable to both the parent and the non-controlling interest. It also
requires disclosure, on the face of the consolidated income statement, of the
amounts of consolidated net income attributable to the parent and to the
non-controlling interest. SFAS 160 is effective for the Company on
January 1, 2009 and is not expected to have a material impact on the
Company’s financial position or results of operations.


32





Emerging
Issues Task Force (“EITF”) No. 07-1, Accounting for Collaborative
Arrangements(“EITF 07-1”). The EITF defines a collaborative arrangement
and concludes that revenues and costs incurred with third parties in connection
with collaborative arrangements would be presented gross or net based on the
criteria in EITF No. 99-19 and other accounting literature. Based on the nature
of the arrangement, payments to or from collaborators would be evaluated and its
terms, the nature of the entity’s business, and whether those payments are
within the scope of other accounting literature would be presented. Companies
are also required to disclose the nature and purpose of collaborative
arrangements along with the accounting policies and the classification and
amounts of significant financial statement balances related to the arrangements.
Activities in the arrangement conducted in a separate legal entity should be
accounted for under other accounting literature; however required disclosure
under EITF 07-1 applies to the entire collaborative agreement. EITF 07-1 is
effective for financial statements issued for fiscal years beginning after
December 15, 2008, and interim periods within those fiscal years, and is to
be applied retrospectively to all periods presented for all collaborative
arrangements existing as of the effective date. The Company is currently
evaluating the impact that EITF 07-1 will have on the Company’s results of
operations or financial condition.





SFAS No.
161, Disclosures about
Derivative Instruments and Hedging Activities – An Amendment of FASB Statement
No. 133(“SFAS 161”). SFAS 161 requires enhanced disclosures about an
entity’s derivative and hedging activities in order to improve the transparency
of financial reporting. SFAS 161 amends and expands the disclosure requirements
of SFAS 133 to provide users of financial statements with an enhanced
understanding of (i) how and why an entity uses derivative instruments; (ii) how
derivative instruments and related hedged items are accounted for under SFAS 133
and its related interpretations, and (iii) how derivative instruments and
related hedged items affect an entity’s financial position, results of
operations, and cash flows. SFAS 161 requires (i) qualitative disclosures about
objectives for using derivatives by primary underlying risk exposure, (ii)
information about the volume of derivative activity, (iii) tabular disclosures
about balance sheet location and gross fair value amounts of derivative
instruments, income statement, and other comprehensive income location and
amounts of gains and losses on derivative instruments by type of contract, and
(iv) disclosures about credit-risk-related contingent features in derivative
agreements. SFAS 161 is effective for financial statements issued for fiscal
years and interim periods beginning after November 15, 2008. SFAS 161
encourages, but does not require, comparative disclosures for earlier periods at
initial adoption. The Company is currently evaluating the impact that SFAS No.
161 will have on its financial statement disclosures, but does not expect SFAS
161 to have a material impact on the Company’s results of operations or
financial condition.





2.    Accounts
Receivable





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





Changes
in the allowance for doubtful accounts are as follows:





Balance at
                    
                    
                    Charged to
                    
                    
                    Charged to
                    
                    
                    Write-offs
                    
                    
                    Balance atBeginning
                    
                    
                    costs and
                    
                    
                    other
                    
                    
                    net of
                    
                    
                    end ofOf period
                    
                    
                    expenses
                    
                    
                    accounts
                    
                    
                    recoveries
                    
                    
                    periodFiscal
      year ended December 31, 2008:Allowance
      for Doubtful accounts
                    
                    $
                    54,330
                    
                    
                    $
                    7,606
                    
                    
                    $
                    (51,467
                    )
                    
                    $
                    -
                    
                    
                    $
                    10,469Fiscal
      year ended December 31, 2007:Allowance
      for Doubtful accounts
                    
                    $
                    63,513
                    
                    
                    $
                    -
                    
                    
                    $
                    (9,183
                    )
                    
                    $
                    -
                    
                    
                    $
                    54,330


33





3.    Inventories





Inventories
consist of:


2008
                  
                  
                  2007Winemaking
      and packaging materials
                  
                  $
                  309,467
                  
                  
                  $
                  283,200Work-in-process
      (costs relating to unprocessed and/or unbottled wine
    products)
                  
                  
                  3,350,830
                  
                  
                  
                  2,710,399Finished
      goods (bottled wine and related products)
                  
                  
                  6,943,907
                  
                  
                  
                  4,982,833Current
      inventories
                  
                  $
                  10,604,204
                  
                  
                  $
                  7,976,432





4.    Property
and Equipment


2008
                  
                  
                  2007Land
      and improvements
                  
                  $
                  2,589,560
                  
                  
                  $
                  959,064Winery
      building and hospitality center
                  
                  
                  4,969,758
                  
                  
                  
                  4,848,249Equipment
                  
                  
                  5,352,835
                  
                  
                  
                  4,617,04012,912,153
                  
                  
                  
                  10,424,353Less
      accumulated depreciation
                  
                  
                  (6,842,745
                  )
                  
                  
                  (6,224,198
                  )$
                  6,069,408
                  
                  
                  $
                  4,200,155





5.     Line
of Credit Facility





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





The line
of credit agreement includes various covenants, which among other things,
requires the Company to maintain minimum amounts of tangible net worth,
debt-to-equity, and debt service coverage as defined, and limits the level of
acquisitions of property and equipment.  As of December 31, 2008, the
Company was in compliance with these covenants.





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








6.    Long-Term
Debt





Long-term debt consists of:
                    
                    December 31,
                    
                    
                    December 31,2008
                    
                    
                    2007Northwest
      Farm Credit Services Loan #1
                    
                    $
                    950,242
                    
                    
                    $
                    1,231,158Northwest
      Farm Credit Services Loan #2
                    
                    $
                    1,582,5402,532,782
                    
                    
                    
                    1,231,258Less
      current portion
                    
                    
                    (354,536
                    )
                    
                    
                    (284,786
                    )$
                    2,178,246
                    
                    
                    $
                    946,732


34





The
Company has two agreements with Northwest Farm Credit Services. Loan #1 requires
monthly payments of $28,642, bears interest at a rate of 4.95%, is
collateralized by real estate and equipment, and matures in
2012.  Loan #2 requires monthly payments of $11,417, bears interest at
a rate of 5.95%, is collateralized by real estate and equipment, and matures in
2028.





The loan
agreements contain covenants, which require the Company to maintain certain
financial ratios and balances.  At December 31, 2008, the Company was
in compliance with these covenants.  In the event of future
noncompliance with the Company's debt covenants, Northwest Farm Credit Services
("FCS") would have the right to declare the Company in default, and at FCS'
option without notice or demand, the unpaid principal balance of the loan, plus
all accrued unpaid interest thereon and all other amounts due shall immediately
become due and payable.





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





Year
      ending
                      December
      31,2009
                    
                    $
                    354,5362010
                    
                    
                    372,9532011
                    
                    
                    363,1162012
                    
                    
                    52,6232013
                    
                    
                    55,841Thereafter
                    
                    
                    1,333,713$
                    2,532,782





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





2008
                    
                    
                    5.55
                    %2007
                    
                    
                    7.25
                    %





7.
            Shareholders'
      Equity





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





In each
of the years ended December 31, 2008 and 2007, the Company granted 1,425 and
1,850 shares of stock valued at $8,458 and $11,808, respectively, as
compensation to employees and agents.  The cost of these grants was
capitalized as inventory or included in selling, general and administrative
expenses in the statement of operations.  The effects of these noncash
transactions have been excluded from the cash flow statements in each
period.





8.
            Stock
      Incentive Plan





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


35





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


2008
                                  
                                  
                                  2007Weighted
                                  
                                  
                                  WeightedAverage
                                  
                                  
                                  AverageExercise
                                  
                                  
                                  ExerciseShares
                                  
                                  
                                  price
                                  
                                  
                                  Shares
                                  
                                  
                                  priceOutstanding
      at beginning of period
                                  
                                  
                                  459,200
                                  
                                  
                                  $
                                  3.90
                                  
                                  
                                  
                                  520,000
                                  
                                  
                                  $
                                  3.94Granted
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -Exercised
                                  
                                  
                                  (14,000
                                  )
                                  
                                  $
                                  4.62
                                  
                                  
                                  
                                  (40,800
                                  )
                                  
                                  
                                  3.84Forfeited
                                  
                                  
                                  (3,000
                                  )
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (20,000
                                  )
                                  
                                  
                                  -Outstanding
      at end of period
                                  
                                  
                                  442,200
                                  
                                  
                                  $
                                  3.77
                                  
                                  
                                  
                                  459,200
                                  
                                  
                                  $
                                  3.90





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


2008
                  
                  
                  2007Intrinsic
      value of options exercised in the period
                  
                  $
                  22,390
                  
                  
                  $
                  105,584Stock
      options fully vested and expected to vest Number
                  
                  
                  442,200
                  
                  
                  
                  434,200Weighted
      average exercise Price
                  
                  $
                  3.77
                  
                  
                  $
                  3.90Aggregate
      intrinsic value
                  
                  $
                  83,705
                  
                  
                  $
                  1,108,426Weighted
      average contractual term of options
                  
                  4.43
      years
                  
                  
                  5.90
      yearsStock
      options vested and Currently exercisable Number
                  
                  
                  434,000
                  
                  
                  
                  416,700Weighted
      average exercise Price
                  
                  $
                  3.80
                  
                  
                  $
                  3.95Aggregate
      intrinsic value
                  
                  $
                  78,477
                  
                  
                  $
                  1,039,904Weighted
      average contractual term of options
                  
                  4.41
      years
                  
                  
                  5.72
      years





Weighted-average
options outstanding and exercisable at December 31, 2008 are as
follows:





Options
      outstanding
                            
                            
                            Options
      exercisableWeightedNumber
                            
                            
                            average
                            
                            
                            Weighted
                            
                            
                            Number
                            
                            
                            Weightedoutstanding
      at
                            
                            
                            remaining
                            
                            
                            average
                            
                            
                            exercisable
      at
                            
                            
                            averageExercise
                            
                            December
      31,
                            
                            
                            contractual
                            
                            
                            exercise
                            
                            
                            December
      31,
                            
                            
                            exerciseprice
                            
                            2008
                            
                            
                            life
                            
                            
                            price
                            
                            
                            2008
                            
                            
                            price$
                            1.56
                            
                            
                            4,000
                            
                            
                            
                            2.58
                            
                            
                            
                            1.56
                            
                            
                            
                            4,000
                            
                            
                            
                            1.561.81
                            
                            
                            1,500
                            
                            
                            
                            0.24
                            
                            
                            
                            1.81
                            
                            
                            
                            1,500
                            
                            
                            
                            1.811.88
                            
                            
                            25,000
                            
                            
                            
                            0.62
                            
                            
                            
                            1.88
                            
                            
                            
                            25,000
                            
                            
                            
                            1.882.30
                            
                            
                            60,000
                            
                            
                            
                            5.58
                            
                            
                            
                            2.30
                            
                            
                            
                            52,300
                            
                            
                            
                            2.302.31
                            
                            
                            12,000
                            
                            
                            
                            6.40
                            
                            
                            
                            2.31
                            
                            
                            
                            12,000
                            
                            
                            
                            2.312.99
                            
                            
                            16,000
                            
                            
                            
                            6.12
                            
                            
                            
                            2.99
                            
                            
                            
                            16,000
                            
                            
                            
                            2.993.29
                            
                            
                            75,000
                            
                            
                            
                            1.12
                            
                            
                            
                            3.29
                            
                            
                            
                            75,000
                            
                            
                            
                            3.293.76
                            
                            
                            96,000
                            
                            
                            
                            6.58
                            
                            
                            
                            3.76
                            
                            
                            
                            95,500
                            
                            
                            
                            3.764.14
                            
                            
                            4,000
                            
                            
                            
                            1.58
                            
                            
                            
                            4.14
                            
                            
                            
                            4,000
                            
                            
                            
                            4.145.00
                            
                            
                            84,700
                            
                            
                            
                            6.99
                            
                            
                            
                            5.00
                            
                            
                            
                            84,700
                            
                            
                            
                            5.005.50
                            
                            
                            64,000
                            
                            
                            
                            1.99
                            
                            
                            
                            5.50
                            
                            
                            
                            64,000
                            
                            
                            
                            5.50$
                            1.50-$5.50
                            
                            
                            442,200
                            
                            
                            
                            4.45
                            
                            
                            $
                            3.77
                            
                            
                            
                            434,000
                            
                            
                            $
                            3.80


36





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





2008
                    
                    
                    2007Risk-free
      interest rate
                    
                    
                    2.25
                    %
                    
                    
                    4.04
                    %Expected
      lives
                    
                    10
      years
                    
                    
                    10
      yearsExpected
      volatility
                    
                    
                    39
                    %
                    
                    
                    44
                    %





Adjustments
are made for options forfeited prior to vesting.  For the year ended
December 31, 2008, the total value of the options granted was computed to be
approximately $1,649,666, which would be amortized on the straight-line basis
over the vesting period of the options.





9.
Income Taxes





The
provision for income taxes consists of:


2008
                    
                    
                    2007Current
      tax expense:Federal
                    
                    $
                    443,158
                    
                    
                    $
                    821,714State
                    
                    
                    100,999
                    
                    
                    
                    176,456544,157
                    
                    
                    
                    998,170Deferred
      tax expense (benefit):Federal
                    
                    
                    5,300
                    
                    
                    
                    31,912State
                    
                    
                    5,084
                    
                    
                    
                    4,08810,384
                    
                    
                    
                    36,000Total
                    
                    $
                    554,541
                    
                    
                    $
                    1,034,170





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


Year
      ended December 31,2008
                      
                      
                      2007Federal
      statutory rate
                      
                      
                      34.0
                      %
                      
                      
                      34.0
                      %State
      taxes, net of federal benefit
                      
                      
                      4.5
                      
                      
                      
                      4.4Permanent
      differences
                      
                      
                      0.8
                      
                      
                      
                      (1.1
                      )Other,
      primarily prior year taxes
                      
                      
                      0.0
                      
                      
                      
                      0.7Adjustments
      to deferred tax asset
                      
                      
                      (3.7
                      )35.6
                      %
                      
                      
                      38.0
                      %





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





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





2008
                    
                    
                    2007Accounts
      receivable
                    
                    $
                    4,056
                    
                    
                    $
                    21,000Inventories
                    
                    
                    106,650
                    
                    
                    
                    74,000Deferred
      gain on sale-leaseback
                    
                    
                    134,036
                    
                    
                    
                    145,000Stock
      Compensation
                    
                    
                    3,342
                    
                    
                    
                    -Other
                    
                    
                    6,818
                    
                    
                    
                    3,000Total
      deferred tax assets
                    
                    
                    254,902
                    
                    
                    
                    243,000Prepaids
                    
                    
                    (39,166
                    )
                    
                    
                    (35,000
                    )Depreciation
                    
                    
                    (489,242
                    )
                    
                    
                    (407,000
                    )Stock
      Compensation
                    
                    
                    -
                    
                    
                    
                    (64,000
                    )Total
      deferred tax liabilities
                    
                    
                    (528,408
                    )
                    
                    
                    (506,000
                    )Net
      deferred tax liability
                    
                    $
                    (273,506
                    )
                    
                    $
                    (263,000
                    )


37





10.           Related
Party Transactions





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





In
October 2008 the Company advanced the president $25,000 that was subsequently
reimbursed via a reduction of his 2008 annual incentive compensation paid in
2009.





In
February 2007 the Company entered into a lease agreement for approximately 60
acres of vineyard land at Elton Vineyards.  This lease is for a 10
year term with four 5 year renewals at the Company's option and a first right of
refusal in the event of the vineyard's sale.  For 2008, the annual
costs of this lease were $107,000. For subsequent years there is an escalation
provision tied to the CPI not to exceed 2% per annum.  Betty M.
O'Brien, a Director of the Company, is a principal owner of Elton
Vineyards.





11.           Commitments
and Contingencies





Litigation





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





Operating
Leases





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





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





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


38





In
February 2007 the Company entered into a lease agreement for approximately 60
acres of vineyard land at Elton Vineyards.  This lease is for a 10
year term with four 5 year renewals at the Company's option and a first right of
refusal in the event of the vineyard's sale.  For 2008, the annual
costs of this lease were $107,000. For subsequent years there is an escalation
provision tied to the CPI not to exceed 2% per annum.  Betty M.
O'Brien, a Director of the Company, is a principal owner of Elton
Vineyards.





In
December 2007 the Company entered into a 3 year lease agreement for a small,
four-room office space in Wilsonville, Oregon.  This space was leased
to accommodate the out-of-state sales team.





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





As of
December 31, 2008, future minimum lease payments are as follows:





Year
      ending
                    December
      31,2009
                  
                  
                  319,6562010
                  
                  
                  325,5052011
                  
                  
                  314,5232012
                  
                  
                  320,6452013
                  
                  
                  326,909Thereafter
                  
                  
                  1,983,018Total
                  
                  $
                  3,590,256





The
Company is also committed to lease payments for various pieces of office
equipment.  Total rental expense for all operating leases excluding
the vineyards, amounted to $20,306 and $12,984 in 2008 and 2007,
respectively.  In addition, payments for the leased vineyards have
been included in inventory or vineyard developments costs and aggregate
approximately $307,327 and $263,364 for the years ended December 31, 2008 and
2007, respectively.





Susceptibility
of Vineyards to Disease


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





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





12.           Employee
Benefit Plan





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


For the
year ended December 31, 2008 and 2007 the amount expensed under this plan was
approximately $67,416 and $71,650 respectively.


39





13.          Segment
Reporting





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





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





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





Three months ended December 31, 2008Bacchus
                  
                  
                  ProducedDistribution
                  
                  
                  Wine
                  
                  
                  TotalNet
      Sales
                  
                  $
                  1,378,904
                  
                  
                  $
                  3,325,156
                  
                  
                  $
                  4,704,060Cost
      of Sales
                  
                  $
                  937,753
                  
                  
                  $
                  1,489,047
                  
                  
                  $
                  2,426,800Gross
      Profit
                  
                  $
                  441,151
                  
                  
                  $
                  1,836,109
                  
                  
                  $
                  2,277,260%
      of sales
                  
                  
                  32.0
                  %
                  
                  
                  55.2
                  %
                  
                  
                  48.4
                  %





Twelve months ended December 31, 2008Bacchus
                      
                      
                      ProducedDistribution
                      
                      
                      Wine
                      
                      
                      TotalNet
      Sales
                      
                      $
                      4,881,162
                      
                      
                      $
                      11,167,076
                      
                      
                      $
                      16,048,238Cost
      of Sales
                      
                      $
                      3,452,284
                      
                      
                      $
                      4,777,594
                      
                      
                      $
                      8,229,877Gross
      Profit
                      
                      $
                      1,428,878
                      
                      
                      $
                      6,389,482
                      
                      
                      $
                      7,818,361%
      of sales
                      
                      
                      29.3
                      %
                      
                      
                      57.2
                      %
                      
                      
                      48.7
                      %





Total
inventory for Bacchus Distribution was $2,012,796 of purchased wines and
$231,049 of non-wine merchandise at period end December 31,
2008.  This compares to produced bottled wine inventory of $4,566,902,
produced bulk wine inventory of $3,249,527 and $543,930 of non-wine merchandise
and work-in-process for the same period.





14.  Quarterly
Financial Information (Unaudited)




Following
is a summary of unaudited quarterly financial information for fiscal 2008 and
2007.


40





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





Condensed Consolidated Statements of IncomeYear Ended December 31, 2007
                    
                    
                    Q1
                    
                    
                    
                    Q2
                    
                    
                    
                    Q3
                    
                    
                    
                    Q4(in
      thousands, except per share data)Revenue
                    
                    $
                    3,595
                    
                    
                    $
                    3,726
                    
                    
                    $
                    4,250
                    
                    
                    $
                    5,139Gross
      profit
                    
                    
                    1,699
                    
                    
                    
                    1,725
                    
                    
                    
                    2,126
                    
                    
                    
                    2,732Income
      from operations
                    
                    
                    389
                    
                    
                    
                    442
                    
                    
                    
                    771
                    
                    
                    
                    1,104Net
      income
                    
                    
                    234
                    
                    
                    
                    265
                    
                    
                    
                    523
                    
                    
                    
                    666Basic
      net income per share
                    
                    $
                    .05
                    
                    
                    $
                    .05
                    
                    
                    $
                    .11
                    
                    
                    $
                    .35Diluted
      net income per share
                    
                    $
                    .05
                    
                    
                    $
                    .05
                    
                    
                    $
                    .10
                    
                    
                    $
                    .34Shares
      used in calculation of net income per share:Basic
                    
                    
                    4,800,775
                    
                    
                    
                    4,805,877
                    
                    
                    
                    4,806,112
                    
                    
                    
                    4,812,341Diluted
                    
                    
                    5,004,810
                    
                    
                    
                    5,014,213
                    
                    
                    
                    5,003,549
                    
                    
                    
                    4,966,635





The
following is a summary of the significant fourth quarter adjustments for our
fiscal year 2008:








Inventory
      write-down from year-end physical count
                  
                  $
                  186,466Allocation
      of produced wine expenditures to costs of goods sold
                  
                  
                  140,540$
                  327,006





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





None.





Item
9A.  Controls and Procedures.





Evaluation
of Disclosure Controls and Procedures




We
maintain disclosure controls and procedures that are designed to ensure that the
information required to be disclosed in the reports that we file or submit under
the Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the SEC’s rules and forms, and that such information is
accumulated and communicated to our management, including our Chief Executive
Officer and Chief Financial Officer/Controller as appropriate, to allow timely
decisions regarding required disclosure. In connection with the preparation of
this Annual Report on Form 10-K, our management carried out an evaluation, under
the supervision and with the participation of our CEO and CFO/Controller, as of
December 31, 2008, of the effectiveness of the design and operation of our
disclosure controls and procedures, as such term is defined under Rule 13a-15(e)
and 15d-15(e) under the Exchange Act.  Based upon this evaluation, our
CEO and CFO/Controller concluded that our disclosure controls and procedures
were not effective as of December 31, 2008.


41





Management’s
Report on Internal Control over Financial Reporting





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




Our
management assessed the effectiveness of our internal control over financial
reporting as of December 31, 2008. In making this assessment, management
used the criteria set forth by the Committee of Sponsoring Organizations of the
Treadway Commission (“COSO”) in Internal Control – Integrated
Framework.  In performing this assessment, management
identified the following material weaknesses:





·
            Inadequate
      reconciliations of our general ledger cash balances to the balances per
      our bank statements.





·
            Lack
      of sufficient procedures and controls related to our maintenance of our
      perpetual inventory records of in-state purchased
  wines.





·
            Lack
      of sufficient procedures and controls related to the allocation of costs
      to our produced wines.





·
            Lack
      of adequate job sufficient accounting and finance personnel and
      transition/training of personnel responsible for preparation and review of
      such reconciliations, records, and
allocations.




Based on
its assessment, our management concluded that, as of December 31, 2008, our
internal control over financial reporting was not effective.




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





Management’s
Remediation Initiatives





Management
has commenced a number of initiatives to address the materials weaknesses
noted above, including, but not limited to the following:





Management
has engaged experienced resources in the first quarter of 2009 to ensure that a
process design is created and implemented with proper training of accounting
personnel.





Management
has determined that additional education and proper system training of personnel
in the wholesale inventory department is required.  In the first
quarter 2009 the Company has brought in a qualified instructor/trainer to work
closely with the end users in this department.  This training is meant
to effectively ensure that they have the proper system training and education to
properly adjust inventory cost based on invoice
pricing.  Additionally, more training is being scheduled in Q2 2009 on
purchasing and inventory control.


42





Management
is undertaking a review of its cash reconciliation and inventory costing
processes and intends to revise the related daily and period end cash
reconciliation and inventory procedures, controls and review.





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





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





Changes
in Internal Control over Financial Reporting





In 2008
the Company revised the procedures for accounts receivable and the related cash
receipts posting.  Additionally, the accounts receivable aging is
reviewed carefully for outstanding invoices and customer account statements sent
out timely.  This has greatly improved the accuracy of our outstanding
accounts receivable.  Also, in 2008 the Company’s Senior Accountant
resigned and to date has not been replaced.  The Company has relied on
contract accounting resources to help manage the period end accounting
activities.  There have not been any other changes in the Company’s
internal control over financial reporting (as such term is defined in Rules
13a-15(f) and 15d-15(f) under the Exchange Act) during the Company’s fourth
fiscal quarter that have materially affected, or are reasonably likely to
materially affect, the Company’s internal control over financial
reporting.





Item
9B.  Other Information.





None.





PART
III





Item
10.     Directors, Executive Officers and Corporate
Governance.





Directors,
nominees for election as a director, and each such person's age at December 31,
2008 and position with the Company.





Name
                        
                        Position(s) with the
Company
                        
                        AgeJames
      W. Bernau ***
                        
                        Chairperson
      of the Board,President
      and Director
                        
                        55James
      L. Ellis ***
                        
                        Secretary
      and Director
                        
                        64Sean
      M. Cary
                        
                        Director
                        
                        35Thomas
      M. Brian **
                        
                        Director
                        
                        60Delna
      L. Jones * ***
                        
                        Director
                        
                        68Craig
      Smith **
                        
                        Director
                        
                        62Betty
      M. O'Brien *
                        
                        Director
                        
                        64Stan
      G. Turel * ** ***
                        
                        Director
                        
                        61


_______________________________


*Member
of the Compensation Committee


**Member
of the Audit Committee


***Member
of the Executive Committee





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





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


43





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





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





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





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





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





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


44





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





Section
16(a) Beneficial Ownership Reporting Compliance





Section
16(a) of the Securities Exchange Act of 1934, as amended, requires the
Company's officers, directors and persons who own more than ten percent of a
registered class of the Company's equity securities to file certain reports with
the Securities and Exchange Commission (the “SEC”) regarding ownership of, and
transactions in, the Company's securities. These officers, directors and
stockholders are also required by SEC rules to furnish the Company with copies
of all Section 16(a) reports that are filed with the SEC.  Based
solely on a review of copies of such forms received by the Company and written
representations received by the Company from certain reporting persons, the
Company believes that for the year ended December 31, 2008 all Section 16(a)
reports required to be filed by the Company's executive officers, directors and
10% stockholders were filed on a timely basis.





Code
of Ethics





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





Willamette
Valley Vineyards, Inc.


Attention:
Corporate Secretary


8800
Enchanted Way SE


Turner,
OR 97392





Nominating
Committee





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





Audit
Committee





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





Audit
Committee Financial Expert





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





Compensation
Committee





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


45


Item
11.  Executive Compensation.
 
 Summary
Compensation Table
 
 The
following table sets forth certain information concerning compensation paid or
accrued by the Company, to or on behalf of the Company's principal executive
officer, James W. Bernau (the “Named Executive Officer”) for the years ending
December 31, 2008 and 2007.  No officer, director or other employee of
the Company other than Mr. Bernau received total compensation in 2008 in excess
of $100,000.  In accordance with Item 402(m) of Regulation S-K, Mr.
Bernau is the only executive officer of the Company for whom disclosure is
required.
 
 SUMMARY
COMPENSATION TABLE
 NonqualifiedNon-Equity
                          
                          
                          Deferred
                          
                          
                          AllStock
                          
                          
                          Option
                          
                          
                          Incentive Plan
                          
                          
                          Compensation
                          
                          
                          OtherSalary
                          
                          
                          Bonus
                          
                          
                          Awards
                          
                          
                          Awards
                          
                          
                          Compensation
                          
                          
                          Earnings
                          
                          
                          Compensation
                          
                          
                          TotalName and Principal Position
                          Year
                          
                          ($)
                          
                          
                          ($)
                          
                          
                          ($)
                          
                          
                          ($)
                          
                          
                          ($)
                          
                          
                          ($)
                          
                          
                          ($)
                          
                          
                          ($)Bernau,
      James W.,
                          2008
                          
                          
                          167,840
                          
                          
                          
                          41,960
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          14,476
                          
                          
                          
                          224,276President,
      Chief Executive
                          2007
                          
                          
                          162,511
                          
                          
                          
                          40,502
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          10,645
                          
                          
                          
                          213,658Officer
      and Chairman
 
 Bernau
Employment Agreement
 
 The
Company and Mr. Bernau are parties to an employment agreement dated August 3,
1988 and amended in February 1997 and again amended in January of
1998.  Under the amended agreement, Mr. Bernau is paid an annual
salary of $167,840 with annual increases tied to increases in the consumer price
index.  Pursuant to the terms of the employment agreement, the Company
must use its best efforts to provide Mr. Bernau with housing on the Company's
property.  Mr. Bernau and his family live in the mobile home free of
rent and must continue to reside there for the duration of his employment in
order to provide additional security and lock-up services for late evening
events at the Winery and Vineyard.  The employment agreement provides
that Mr. Bernau's employment may be terminated only for cause, which is defined
as non-performance of his duties or conviction of a crime.
 
 Stock
Options
 
 In order
to reward performance and retain high-quality employees, the Company often
grants stock options to its employees.  The Company does not
ordinarily directly issue shares of stock to its employees.  Options
are typically issued at a per share exercise price equal to the closing price as
reported by the Capital Market at the time the option is granted.  The
options vest to the employee over time.  Three months following
termination of the employee's employment with the Company, any and all
unexercised options terminate.
 
 Outstanding
Equity Awards at Fiscal Year-End
 
 The
following table provides information, with respect to the Named Executive
Officer, concerning exercised options during the last fiscal year and
unexercised options held as of December 31, 2008.
 
 Stock AwardsEquityIncentiveEquity
                                      
                                      Plan Awards:Option Awards
                                      
                                      
                                      
                                      
                                      
                                      Incentive
                                      
                                      Market orEquity
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      Plan Awards:
                                      
                                      PayoutIncentive
                                      
                                      
                                      
                                      
                                      
                                      
                                      Market
                                      
                                      Number of
                                      
                                      Value ofPlan Awards:
                                      
                                      
                                      
                                      
                                      Number
                                      
                                      Value of
                                      
                                      Unearned
                                      
                                      UnearnedNumber of
                                      
                                      
                                      Number of
                                      
                                      
                                      Number of
                                      
                                      
                                      
                                      
                                      of Shares
                                      
                                      Shares or
                                      
                                      Shares,
                                      
                                      Shares,Securities
                                      
                                      
                                      Securities
                                      
                                      
                                      Securities
                                      
                                      
                                      
                                      
                                      or Units
                                      
                                      Units of
                                      
                                      Units or
                                      
                                      Units orUnderlying
                                      
                                      
                                      Underlying
                                      
                                      
                                      Underlying
                                      
                                      
                                      
                                      
                                      of Stock
                                      
                                      Stock
                                      
                                      Other
                                      
                                      OtherUnexercised
                                      
                                      
                                      Unexercised
                                      
                                      
                                      Unexercised
                                      
                                      Option
                                      
                                      
                                      that
                                      
                                      that
                                      
                                      Rights that
                                      
                                      Rights thatOptions
                                      
                                      
                                      Options
                                      
                                      
                                      Unearned
                                      
                                      Exercise
                                      Option
                                      
                                      Have Not
                                      
                                      Have Not
                                      
                                      Have
                                      
                                      Have Not(#)
                                      
                                      
                                      (#)
                                      
                                      
                                      Options
                                      
                                      Price
                                      Expiration
                                      
                                      Vested
                                      
                                      Vested
                                      
                                      Not Vested
                                      
                                      VestedName
                                      
                                      Exercisable
                                      
                                      
                                      Unexercisable
                                      
                                      
                                      (#)
                                      
                                      ($)
                                      Date
                                      
                                      (#)
                                      
                                      ($)
                                      
                                      (#)
                                      
                                      ($)Bernau,
      James2/11/2005
                                      
                                      
                                      75,000
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      3.289
                                      2/11/2010
                                      
                                      
                                      -
                                      
                                      -
                                      
                                      
                                      -
                                      
                                      -8/1/2005
                                      
                                      
                                      4,000
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      4.136
                                      8/1/2010
                                      
                                      
                                      -
                                      
                                      -
                                      
                                      
                                      -
                                      
                                      -12/27/2005
                                      
                                      
                                      64,000
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      5.50
                                      12/27/2010
                                      
                                      
                                      -
                                      
                                      -
                                      
                                      
                                      -
                                      
                                      -
  46
 
 Director
Compensation
  The
following table sets forth information concerning compensation of our directors
other than Mr. Bernau for the fiscal year ended December 31,
2008.
  Name
                    
                    Fees Earned
                      or
                      Paid in Cash
                      ($)
                    
                    
                    Stock
                      Awards
                      ($)
                    
                    
                    Option
                      Awards
                      ($)(1)
                    
                    
                    Non-Equity
                      Incentive Plan
                      Compensation
                      ($)
                    
                    
                    Change
                      in Pension
                      Value and
                      Nonqualified
                      Deferred
                      Compensation
                      Earnings
                      ($)
                    
                    
                    All Other
                      Compensation
                      ($)
                    
                    
                    Total
                      ($)James
      L. Ellis
                    
                    
                    0
                    
                    
                    
                    0
                    
                    
                    
                    0
                    
                    
                    
                    0
                    
                    
                    
                    0
                    
                    
                    
                    0
                    
                    
                    
                    0Sean
      M. Cary
                    
                    
                    0
                    
                    
                    
                    0
                    
                    
                    
                    0
                    
                    
                    
                    0
                    
                    
                    
                    0
                    
                    
                    
                    0
                    
                    
                    
                    0Thomas
      M. Brian
                    
                    
                    0
                    
                    
                    
                    0
                    
                    
                    
                    0
                    
                    
                    
                    0
                    
                    
                    
                    0
                    
                    
                    
                    0
                    
                    
                    
                    0Delna
      L. Jones
                    
                    
                    0
                    
                    
                    
                    0
                    
                    
                    
                    0
                    
                    
                    
                    0
                    
                    
                    
                    0
                    
                    
                    
                    0
                    
                    
                    
                    0Craig
      Smith
                    
                    
                    0
                    
                    
                    
                    0
                    
                    
                    
                    0
                    
                    
                    
                    0
                    
                    
                    
                    0
                    
                    
                    
                    0
                    
                    
                    
                    0Betty
      M. O’Brien
                    
                    
                    0
                    
                    
                    
                    0
                    
                    
                    
                    0
                    
                    
                    
                    0
                    
                    
                    
                    0
                    
                    
                    
                    0
                    
                    
                    
                    0Stan
      G. Turel
                    
                    
                    0
                    
                    
                    
                    0
                    
                    
                    
                    0
                    
                    
                    
                    0
                    
                    
                    
                    0
                    
                    
                    
                    0
                    
                    
                    
                    0
 (1)
                      The amounts provided in this
      column represent the compensation cost recognized in the fiscal year ended
      December 31, 2008 as calculated in accordance with FAS 123R with respect
      to all option awards granted to our directors in previous fiscal years and
      in the fiscal year ended December 31, 2008.  The aggregate
      number of option awards outstanding for each director as of December 31,
      2008 is as follows: Mr. Ellis – 81,130, Mr. Cary – 16,000,
      Mr. Brian – 22,000, Ms. Jones – 27,800, Mr. Smith – 0,
      Ms. O’Brien – 40,700, and Mr. Turel –
    37,517.
 
 The
members of the Company's Board of Directors did not receive cash compensation
for their service on the Board in 2008, but were reimbursed for out-of-pocket
and travel expenses incurred in attending Board meetings.  Under the
Company's Stock Incentive Plan adopted by the shareholders in 1992 and further
amended by the shareholders in 1996, beginning in 1997 an option to purchase
1,500 shares of Common Stock is granted to each Director for service on the
Board during the year.  This option was increased to 4,000 per year
when the 50-share grant per Director’s meeting was discontinued for the year
2000 and beyond.  In December 2005, each Director was granted 14,000
options for service during 2005.  In the foreseeable future, as a
result of the Financial Accounting Standards Board ("FASB") Statement of
Financial Accounting Standard ("SFAS") No. 123R, Share-Based Payment, requiring
all share-based payments to be recognized as expenses in the statement of
operations based on their fair values and vesting periods, the Company does not
intend to issue stock options to the Directors for their service.
 
 In
January of 2009 the Board of Directors upon recommendation of the Compensation
Committee who sought outside counsel regarding revision of the Company’s Board
Compensation Plan, adopted the final version of the revised WVV Board Member
Compensation Plan.  The Plan has the following provisions a) that any
member can elect not to receive any or all of the compensation components and
the Board reserves the right to suspend this plan at any time depending on the
effects of the economy on the Company. The basic elements of the plan are:
$1,000 yearly stipend for service on the Board, $500 per Board meeting attended
in person, $250 per Board meeting via teleconference, $200 per committee meeting
in person and $100 per committee meeting via teleconference. A set per diem for
expenses associated with meeting attendance, as well as, a yearly wine and
glassware allowance were also approved.
 
 Item
12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters.
 
 Equity
Compensation Plan Information
 
 The
following table summarizes information, as of December 31, 2008, with respect to
shares of our common stock that may be issued under our existing equity
compensation plans.
  47
 
 (A)
                      
                      (B)
                      
                      (C)Number of
                        securities to be
                        issued upon
                        exercise of
                        outstanding
                        options,
                        warrants and
                        rights
                      
                      Weighted
                        average
                        exercise
                        price of
                        outstanding
                        options and
                        warrants
                      
                      Number of
                        securities
                        remaining
                        available for
                        future issuance
                        under equity
                        compensation
                        plans (excluding
                        securities reflected
                        in column (A))(share numbers in table are
                        in thousands except per share amounts)Equity
      compensation plans approved by security holders (1)
                      442,200
                      
                      $
                      3.77
                      
                      132,476Equity
      compensation plans not approved by security holders
                      -
                      
                      
                      -
                      
                      -Total
                      442,200
                      
                      $
                      3.77
                      
                      132,476
 
 (1)
                  Includes shares of our common
      stock issuable upon exercise of options from the Company’s 1992 Stock
      Incentive Plan and 2001 Stock Incentive
  Plan.
  The
Company does not have compensations plans under which equity securities of the
Company are authorized for issuance which were adopted without the approval of
security holders
 
 Security
Ownership of Certain Beneficial Owners and Management
 
 The
following table sets forth certain information with respect to beneficial
ownership of the Company's Common Stock as of March 27, 2009, by (i) each person
who beneficially owns more than 5% of the Company's Common Stock, (ii) each
Director of the Company, (iii) each of the Company's named executive officers,
and  (iv) all directors and executive officers as a
group.  Except as indicated in the footnotes to this table, each
person has sole voting and investment power with respect to all shares
attributable to such person.
  Percent ofNumber of
                                                                  
                                                                  
                                                                  SharesShares Outstanding
                                                                  
                                                                  
                                                                  BeneficiallyStock
                                                                  
                                                                  
                                                                  OwnedJames
      W. Bernau   President/CEO, Chair of the
    Board
                                                                  
                                                                  
                                                                  681,990
                                                                  (1)
                                                                  
                                                                  
                                                                  14.1
                                                                  %2545
      Cloverdale RoadTurner,
      OR  97392James
      L. Ellis Secretary,   Director
                                                                  
                                                                  
                                                                  81,130
                                                                  (2)
                                                                  
                                                                  
                                                                  **7850
      S.E. King RoadMilwaukie,
      OR  97222Thomas
      M. Brian   Director
                                                                  
                                                                  
                                                                  22,000
                                                                  (3)
                                                                  
                                                                  
                                                                  **7630
      SW FirTigard,
      OR  97223Delna
      L. Jones   Director
                                                                  
                                                                  
                                                                  27,800
                                                                  (4)
                                                                  
                                                                  
                                                                  **14480
      SW Chardonnay AveTigard,
      OR 97224Sean
      M. Cary   Director
                                                                  
                                                                  
                                                                  18,083
                                                                  (5)
                                                                  
                                                                  
                                                                  **3188
      Blacktail DriveEugene,
      OR 97405Betty
      M. O'Brien   Director
                                                                  
                                                                  
                                                                  40,700
                                                                  (6)
                                                                  
                                                                  
                                                                  **22500
      Ingram Lane NWSalem,
      OR  97304Stan
      G. Turel   Director
                                                                  
                                                                  
                                                                  37,517
                                                                  (7)
                                                                  
                                                                  
                                                                  **2125
      NE 11th
      PlaceBend,
      OR  97701Craig
      Smith   Director
                                                                  
                                                                  
                                                                  0
                                                                  
                                                                  
                                                                  
                                                                  **367
      Sanrodee DriveSalem,
      OR 97317Jeff
      Fox   CFO/Controller
                                                                  
                                                                  
                                                                  1,000
                                                                  
                                                                  
                                                                  
                                                                  **14940
      Seal Rock Ave NEAurora,
      OR 97002All
      Directors, executive
                                                                  
                                                                  
                                                                  910,220
                                                                  (8)
                                                                  
                                                                  
                                                                  18.8
                                                                  %officers
      and persons owning5%
      or more as a group (7 persons)
 ______________________________
 **         Less
than one percent.
  48
  (1)
Includes 143,000 shares issuable upon exercise of options exercisable within 60
days of the date of March 27, 2009.
 
 (2)
Includes 76,000 shares issuable upon the exercise of options exercisable within
60 days of the date of March 27, 2009.
 
 (3)
Includes 22,000 shares issuable upon the exercise of options exercisable within
60 days of the date of March 27, 2009.
 
 (4)
Includes 26,000 shares issuable upon the exercise of options exercisable within
60 days of the date of March 27, 2009.
 
 (5)
Includes 2,083 shares issuable upon the exercise of options exercisable within
60 days of the date of March 27, 2009.
 
 (6)
Includes 30,000 shares issuable upon the exercise of options exercisable within
60 days of the date of March 27, 2009.
 
 (7)
Includes 14,000 shares issuable upon the exercise of options exercisable within
60 days of the date of March 27, 2009.
 
 (8)
Includes 312,500 shares issuable upon exercise of options exercisable within 60
days of the date of March 27, 2009.
 
 Item
13  Certain Relationships and Related Transactions, and Director
Independence.
 
 In 2007,
the Company entered into a long-term lease for Elton vineyards which consists of
60 acres of mature grapevines, of which approximately 42 acres are Pinot Noir.
The agreement was for an initial 10 year lease with the option to renew for 4
successive terms of 5 years each, plus a first right of refusal on the
property’s sale.  Betty O’ Brien, a member of the Company’s Board of
Directors, is a 50% owner of the lessor, Elton Vineyards, LLC.  As
such, she is therefore entitled to 50% of the net income of Elton Vineyards,
LLC.
  49
 
 The
Company believes that the transactions set forth above were made on terms no
less favorable to the Company than could have been obtained from unaffiliated
third parties.  All future transactions between the Company and its
officers, directors, and principal shareholders will be approved by a
disinterested majority of the members of the Affiliated Transactions Committee
of the Company's Board of Directors, and will be on terms no less favorable to
the Company than could be obtained from unaffiliated third parties.
 
 The Board
of Directors has determined that each of our directors, except Mr. Bernau,
Mr. Ellis and Mr. Cary, is “independent” within the meaning of the applicable
rules and regulations of the SEC and the director independence standards of The
NASDAQ Stock Market, Inc. (“NASDAQ”), as currently in effect. Furthermore, the
Board of Directors has determined that each of the members of each of the
committees of the Board of Directors is “independent” under the applicable rules
and regulations of the SEC and the director independence standards of NASDAQ, as
currently in effect.
 
 Item
14.  Principal Accounting Fees and Services.
  Fees for
professional services provided by our independent registered public accounting
firm in each of the last two fiscal years, in each of the following categories
are:
  Years
      Ended
                                    December 31,2008
                                  
                                  
                                  2007Audit
      Fees
                                  
                                  $
                                  292,917
                                  
                                  
                                  $
                                  415,959Audit
      - Related Fees
                                  
                                  
                                  -
                                  
                                  
                                  
                                  7,512Tax
      Fees
                                  
                                  
                                  29,830
                                  
                                  
                                  
                                  41,256Other
      Fees
                                  
                                  
                                  -
                                  
                                  
                                  
                                  8,348$
                                  322,747
                                  
                                  
                                  $
                                  469,815
  Moss
Adams LLP served as the Company’s independent registered public accounting firm
for the years ended December 31, 2008 and 2007.
 
 Pre-Approval Policies and
Procedures
 
 It is the
policy of the Company not to enter into any agreement for Moss Adams LLP to
provide any non-audit services to the Company unless (a) the agreement is
approved in advance by the Audit Committee or (b) (i) the aggregate
amount of all such non-audit services constitutes no more than 5% of the total
amount the Company pays to Moss Adams LLP during the fiscal year in which such
services are rendered, (ii) such services were not recognized by the
Company as constituting non-audit services at the time of the engagement of the
non-audit services and (iii) such services are promptly brought to the
attention of the Audit Committee and prior to the completion of the audit were
approved by the Audit Committee or by one or more members of the Audit Committee
who are members of the Board of Directors to whom authority to grant such
approvals has been delegated by the Audit Committee.  The Audit Committee
will not approve any agreement in advance for non-audit services unless
(1) the procedures and policies are detailed in advance as to such
services, (2) the Audit Committee is informed of such services prior to
commencement and (3) such policies and procedures do not constitute
delegation of the Audit Committee’s responsibilities to management under the
Securities Exchange Act of 1934, amended.  To date, the Audit Committee has
not established such policies and procedures because we do not intend to have
our auditors provide any non-audit services in the foreseeable future.  If
our intentions change, the Audit Committee will adopt the appropriate
pre-approval policies and procedures as outlined above.
 
 Item
15.  Exhibits, Financial Statement Schedules.
 
 (a)  The following documents
are filed as part of this report:
 
 (1)   Financial
Statements.
 
 See
“Index to Financial Statements” in Item 8 on page 23 of this Annual Report on
Form 10-K.
  50
  
 (2)   Financial
Statement Schedules.
 
 All
financial statement schedules are omitted either because they are not required,
not applicable or the required information is included in the financial
statements or notes thereto.
 
 (3)   Exhibits.
 
 Exhibit
                        Number
                      
                      Description3.1
                      
                      Articles
      of Incorporation of Willamette Valley Vineyards, Inc. (incorporated by reference
      from the Company's Regulation A Offering Statement on Form 1-A [File No.
      24S-2996])3.2
                      
                      Bylaws
      of Willamette Valley Vineyards, Inc. (incorporated by reference
      from the Company's Regulation A Offering Statement on Form 1-A [File No.
      24S-2996])10.1*
                      
                      Employment
      Agreement between Willamette Valley Vineyards, Inc. and James W. Bernau
      dated August 3, 1988 (incorporated by reference
      from the Company's Regulation A Offering Statement on Form 1-A [File No.
      24S-2996])10.2
                      
                      Indemnity
      Agreement between Willamette Valley Vineyards, Inc. and James W. Bernau
      dated May 2, 1988 (incorporated by reference
      from the Company's Regulation A Offering Statement on Form 1-A [File No.
      24S-2996])10.3
                      
                      Indemnity
      Agreement between Willamette Valley Vineyards, Inc. and Donald E. Voorhies
      dated May 2, 1988 (incorporated by reference
      from the Company's Regulation A Offering Statement on Form 1-A [File No.
      24S-2996])10.4
                      
                      Shareholders
      Agreement among Willamette Valley Vineyards, Inc. and its founders, James
      Bernau and Donald Voorhies, dated May 2, 1988 (incorporated by reference
      from the Company's Regulation A Offering Statement on Form 1-A [File No.
      24S-2996])10.5
                      
                      Revolving
      Note and Loan Agreement dated May 28, 1992 by and between Northwest Farm
      Credit Services, Willamette Valley Vineyards, Inc. and James W. and Cathy
      Bernau (incorporated by
      reference from the Company's Regulation A Offering Statement on Form 1-A
      [File No. 24S-2996])10.6
                      
                      Founders'
      Escrow Agreement among Willamette Valley Vineyards, Inc., James W. Bernau,
      Donald Voorhies and First Interstate Bank of Oregon, N.A. dated September
      20, 1988 (incorporated
      by reference from the Company's Regulation A Offering Statement on Form
      1-A [File No. 24S-2996])10.7
                      
                      Amendment
      to Founders' Escrow Agreement dated September 20, 1988 (incorporated by reference
      from the Company's Regulation A Offering Statement on Form 1-A [File No.
      24S-2996])10.8
                      
                      Stock
      Escrow Agreement among Willamette Valley Vineyards, Inc., Betty M. O'Brien
      and Charter Investment Group, Inc. dated July 7, 1992 (incorporated by reference
      from the Company's Regulation A Offering Statement on Form 1-A [File No.
      24S-2996])10.9
                      
                      Stock
      Escrow Agreement among Willamette Valley Vineyards, Inc., Daniel S. Smith
      and Piper Jaffray & Hopwood, Inc. dated July 7, 1992 (incorporated by reference
      from the Company's Regulation A Offering Statement on Form 1-A [File No.
      24S-2996])14.1
                      
                      Code
      of Ethics (incorporated
      by reference from the Company's Proxy Statement on Schedule 14A, filed on
      June 30, 2004)23.1
                      
                      Consent
      of Moss Adams LLP, Independent Registered Public Accounting Firm (Filed
      herewith)31.1
                      
                      Certification
      of Chief Executive Officer required by Rule 13a-14(a) of the Securities
      Exchange Act of 1934 (Filed
      herewith)
  51
 
 31.2
                    
                    Certification
      of Chief Financial Officer required by Rule 13a-14(a) of the Securities
      Exchange Act of 1934 (Filed
      herewith)32.1
                    
                    Certification
      of James W. Bernau pursuant to 18 U.S.C. Section 1350 as adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Furnished, not filed,
      herewith)32.2
                    
                    Certification
      of Jeffrey J. Fox pursuant to 18 U.S.C. Section 1350 as adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Furnished, not filed,
      herewith)
 
 *
Management contract or compensatory plan or arrangement required to be filed as
an Exhibit to this Annual Report on Form 10-K pursuant to
Item 15(b) thereof
 
 (b) 
The exhibits listed under Item 15(a)(3) hereof are filed as part of this
Form 10-K, other than Exhibits 32.1 and 32.2, which shall be deemed
furnished.
 
 (c)   All
financial statement schedules are omitted either because they are not required,
not applicable or the required information is included in the financial
statements or notes thereto.
  52
  SIGNATURES
 
 Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
 
 WILLAMETTE
      VALLEY VINEYARDS, INC.(Registrant)By:
                        /s/ James
      W. BernauJames
      W. Bernau,Chairperson
      of the Board,
President
 
 Date:
March 30, 2009
  53
  Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
 
 Signature
                                        
                                        Title
                                        
                                        Date/s/ James
      W. Bernau
                                        
                                        Chairperson
      of the Board,
                                        
                                        March
      30, 2009James
      W. Bernau
                                        
                                        President(Principal
      Executive Officer)/s/ Jeffrey
      J. Fox
                                        
                                        CFO/Controller
                                        
                                        March
      30, 2009Jeffrey
      J. Fox
                                        
                                        (Principal
      Accounting Officer)/s/ James
      L. Ellis
                                        
                                        Director
      and Vice-President
                                        
                                        March
      30, 2009James
      L. Ellis
                                        
                                        and
      Secretary/s/ Thomas
      M. Brian
                                        
                                        Director
                                        
                                        March
      30, 2009Thomas
      M. Brian/s/ Delna
      L. Jones
                                        
                                        Director
                                        
                                        March
      30, 2009Delna
      L. Jones/s/ Craig
      Smith
                                        
                                        Director
                                        
                                        March
      30, 2009Craig
      Smith/s/ Betty
      M. O'Brien
                                        
                                        Director
                                        
                                        March
      30, 2009Betty
      M. O'Brien/s/ Stan
      G. Turel
                                        
                                        Director
                                        
                                        March
      30, 2009Stan
      G. Turel/s/ Sean
      M. Cary
                                        
                                        Director
                                        
                                        March
      30, 2009Sean
      M. Cary
  54