UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 Washington,
D.C. 20549
  
 FORM
10-Q
 
 x QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
 EXCHANGE
ACT OF 1934
 For the
quarterly period ended September 30, 2009
 
  ̈ TRANSITION REPORT UNDER
SECTION 13 OR 15(d) OF THE EXCHANGE ACT
 
 Commission
File Number 000-21522
 
 WILLAMETTE
VALLEY VINEYARDS, INC.
 
 (Exact
name of registrant as specified in charter)
 
 Oregon
                  
                  93-0981021(State
      or other jurisdiction of
                  
                  (I.R.S.
      Employerincorporation
      or organization)
                  
                  Identification
      No.)
  
 8800 Enchanted Way, S.E., Turner,
      Oregon
                  
                  97392(Address
      of principal executive offices)
                  
                  (Zip
      Code)
  Registrant's
telephone number, including area code:  (503)
588-9463
  
  Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act 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.
 
 x YES         ̈ NO
 
 Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
 
  ̈ YES         ̈ NO
 
 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                                                                   x Smaller reporting
company
 
 Indicate
by checkmark whether the registrant is a shell company (as defined in Rule 12b-2
of the Exchange Act).
 
  ̈
YES        x NO
 
 Number of
shares of common stock outstanding as of October 31, 2009:
 4,888,977
shares, no par value
  
  WILLAMETTE
VALLEY VINEYARDS, INC.
 INDEX TO
FORM 10-Q
 
 Part
      I - Financial Information
                3Item
      1 - Financial Statements
                3Balance
      Sheet
                3Statement
      of Operations
                4Statement
      of Cash Flows
                5Notes
      to Unaudited Interim Financial Statements
                6Item
      2 - Management's Discussion and Analysis of Financial Condition and
      Results of Operations
                10Item
      3 – Quantitative and Qualitative Disclosures about Market
    Risk
                17Item
      4 - Controls and Procedures
                17Part
      II - Other Information
                19Item
      1 - Legal Proceedings
                19Item
      1A – Risk Factors
                19Item
      2 - Unregistered Sales of Equity Securities and Use of
      Proceeds
                19Item
      3 - Defaults upon Senior Securities
                19Item
      4 - Submission of Matters to a Vote of Security Holders
                19Item
      5 - Other Information
                19Item
      6 - Exhibits
                20Signatures
                21
  2
  Part
1                       
FINANCIAL INFORMATION
 
 Item
1                       FINANCIAL
STATEMENTS
 
 WILLAMETTE
VALLEY VINEYARDS, INC.
 Balance
Sheet
 September 30,
                                  
                                  
                                  December 31,2009
                                  
                                  
                                  2008(unaudited)ASSETSCurrent
      assets:Cash
      and cash equivalents
                                  
                                  $
                                  7,515
                                  
                                  
                                  $
                                  350,361Accounts
      receivable trade, net
                                  
                                  
                                  1,420,600
                                  
                                  
                                  
                                  1,204,881Inventories
                                  
                                  
                                  11,640,737
                                  
                                  
                                  
                                  10,604,204Prepaid
      expenses and other current assets
                                  
                                  
                                  142,706
                                  
                                  
                                  
                                  68,834Current
      portion of notes receivable
                                  
                                  
                                  62,415
                                  
                                  
                                  
                                  62,415Deferred
      income taxes
                                  
                                  
                                  81,700
                                  
                                  
                                  
                                  81,700Total
      current assets
                                  
                                  
                                  13,355,673
                                  
                                  
                                  
                                  12,372,395Vineyard
      development cost, net
                                  
                                  
                                  1,676,197
                                  
                                  
                                  
                                  1,693,769Property
      and equipment, net
                                  
                                  
                                  6,138,380
                                  
                                  
                                  
                                  6,069,408Note
      receivable
                                  
                                  
                                  134,284
                                  
                                  
                                  
                                  165,491Debt
      issuance costs, net
                                  
                                  
                                  23,370
                                  
                                  
                                  
                                  29,581Other
      assets
                                  
                                  
                                  4,456
                                  
                                  
                                  
                                  4,456Total
      assets
                                  
                                  $
                                  21,332,360
                                  
                                  
                                  $
                                  20,335,100LIABILITIES
      AND SHAREHOLDERS’ EQUITYCurrent
      liabilitiesCurrent
      portion of long term debt
                                  
                                  
                                  362,779
                                  
                                  
                                  
                                  354,536Revolving
      credit line
                                  
                                  
                                  1,753,251
                                  
                                  
                                  
                                  -Accounts
      payable
                                  
                                  
                                  601,147
                                  
                                  
                                  
                                  1,111,499Accrued
      expenses
                                  
                                  
                                  508,323
                                  
                                  
                                  
                                  510,768Income
      taxes payable
                                  
                                  
                                  100,520
                                  
                                  
                                  
                                  350,870Grapes
      payable
                                  
                                  
                                  85,245
                                  
                                  
                                  
                                  594,734Total
      current liabilities
                                  
                                  
                                  3,411,265
                                  
                                  
                                  
                                  2,922,407Long-term
      debt, less current portion
                                  
                                  
                                  1,954,834
                                  
                                  
                                  
                                  2,178,246Deferred
      rent liability
                                  
                                  
                                  218,169
                                  
                                  
                                  
                                  217,742Deferred
      gain
                                  
                                  
                                  321,859
                                  
                                  
                                  
                                  345,930Deferred
      income taxes
                                  
                                  
                                  355,207
                                  
                                  
                                  
                                  355,207Total
      liabilities
                                  
                                  
                                  6,261,334
                                  
                                  
                                  
                                  6,019,532Shareholders’
      equityCommon
      stock, no par value - 10,000,000 shares authorized, 4,888,977 and
      4,851,327shares issued and outstanding at September 30, 2009 and December
      31, 2008
                                  
                                  
                                  8,604,164
                                  
                                  
                                  
                                  8,515,667Retained
      earnings
                                  
                                  
                                  6,466,862
                                  
                                  
                                  
                                  5,799,901Total
      shareholders’ equity
                                  
                                  
                                  15,071,026
                                  
                                  
                                  
                                  14,315,568Total
      liabilities and shareholders’equity
                                  
                                  $
                                  21,332,360
                                  
                                  
                                  $
                                  20,335,100
 
 The
accompanying notes are an integral part of this financial
statement.
  3
  WILLAMETTE
VALLEY VINEYARDS, INC.
 Statement
of Operations
 (unaudited)
 
 Three months ended
                                
                                
                                Nine months endedSeptember 30,
                                
                                
                                September 30,2009
                                
                                
                                2008
                                
                                
                                2009
                                
                                
                                2008Net
      revenuesCase
      revenue
                                
                                $
                                4,360,206
                                
                                
                                $
                                4,056,522
                                
                                
                                $
                                12,052,828
                                
                                
                                $
                                11,344,179Total
      net revenues
                                
                                
                                4,360,206
                                
                                
                                
                                4,056,522
                                
                                
                                
                                12,052,828
                                
                                
                                
                                11,344,179Cost
      of salesCase
                                
                                
                                2,231,411
                                
                                
                                
                                2,075,400
                                
                                
                                
                                6,051,242
                                
                                
                                
                                5,803,078Total
      cost of sales
                                
                                
                                2,231,411
                                
                                
                                
                                2,075,400
                                
                                
                                
                                6,051,242
                                
                                
                                
                                5,803,078Gross
      profit
                                
                                
                                2,128,795
                                
                                
                                
                                1,981,122
                                
                                
                                
                                6,001,586
                                
                                
                                
                                5,541,101Selling,
      general and administrative expenses
                                
                                
                                1,668,935
                                
                                
                                
                                1,519,417
                                
                                
                                
                                4,768,443
                                
                                
                                
                                4,693,892Net
      operating income
                                
                                
                                459,860
                                
                                
                                
                                461,705
                                
                                
                                
                                1,233,143
                                
                                
                                
                                847,209Other
      income (expense)Interest
      income
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                17,193Interest
      expense
                                
                                
                                (42,135
                                )
                                
                                
                                (34,906
                                )
                                
                                
                                (111,013
                                )
                                
                                
                                (74,949
                                )Other
      income(expense)
                                
                                
                                895
                                
                                
                                
                                -
                                
                                
                                
                                2,818
                                
                                
                                
                                56Net
      income before income taxes
                                
                                
                                418,620
                                
                                
                                
                                426,799
                                
                                
                                
                                1,124,948
                                
                                
                                
                                789,509Income
      tax expense
                                
                                
                                170,599
                                
                                
                                
                                183,170
                                
                                
                                
                                457,987
                                
                                
                                
                                328,255Net
      income
                                
                                
                                248,021
                                
                                
                                
                                243,629
                                
                                
                                
                                666,961
                                
                                
                                
                                461,254Retained
      earnings beginning of  period
                                
                                
                                6,218,841
                                
                                
                                
                                5,308,932
                                
                                
                                
                                5,799,901
                                
                                
                                
                                5,091,307Retained
      earnings end of period
                                
                                $
                                6,466,862
                                
                                
                                $
                                5,552,561
                                
                                
                                $
                                6,466,862
                                
                                
                                $
                                5,552,561Basic
      earnings per common share
                                
                                $
                                .05
                                
                                
                                $
                                .05
                                
                                
                                $
                                .14
                                
                                
                                $
                                .10Diluted
      earnings per common share
                                
                                $
                                .05
                                
                                
                                $
                                .05
                                
                                
                                $
                                .14
                                
                                
                                $
                                .09Weighted
      average number of basic common shares outstanding
                                
                                
                                4,877,020
                                
                                
                                
                                4,850,327
                                
                                
                                
                                4,862,667
                                
                                
                                
                                4,844,053Weighted
      average number of diluted common shares outstanding
                                
                                
                                4,888,667
                                
                                
                                
                                4,948,301
                                
                                
                                
                                4,845,304
                                
                                
                                
                                4,970,900
 
 The
accompanying notes are an integral part of this financial
statement.
  4
  WILLAMETTE
VALLEY VINEYARDS, INC.
 Statement
of Cash Flows
 (unaudited)
 
 Nine Months ended September 30,2009
                                                              
                                                              
                                                              2008Cash
      flows from operating activities:Net
      income
                                                              
                                                              $
                                                              666,961
                                                              
                                                              
                                                              $
                                                              461,254Reconciliation
      of net income tonet cash provided by (used in) operating
      activities:Depreciation
      and amortization
                                                              
                                                              
                                                              485,011
                                                              
                                                              
                                                              
                                                              473,613Bad
      Debt Expense
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              20,483Deferred
      rent liability
                                                              
                                                              
                                                              426
                                                              
                                                              
                                                              
                                                              (6,879
                                                              )Deferred
      gain
                                                              
                                                              
                                                              (24,071
                                                              )
                                                              
                                                              
                                                              (24,071
                                                              )Stock
      based compensation expense
                                                              
                                                              
                                                              13,482
                                                              
                                                              
                                                              
                                                              28,877Changes
      in operating assets andliabilities:Accounts
      receivable trade
                                                              
                                                              
                                                              (215,719
                                                              )
                                                              
                                                              
                                                              731,996Inventories
                                                              
                                                              
                                                              (1,036,530
                                                              )
                                                              
                                                              
                                                              (1,953,562
                                                              )Prepaid
      expenses and othercurrent
      assets
                                                              
                                                              
                                                              (73,873
                                                              )
                                                              
                                                              
                                                              (20,550
                                                              )Other
      assets
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              8,712Accounts
      payable
                                                              
                                                              
                                                              (510,352
                                                              )
                                                              
                                                              
                                                              211,570Accrued
      expenses
                                                              
                                                              
                                                              (2,446
                                                              )
                                                              
                                                              
                                                              (105,232
                                                              )Income
      taxes payable
                                                              
                                                              
                                                              (270,736
                                                              )
                                                              
                                                              
                                                              (5,293
                                                              )Grape
      payables
                                                              
                                                              
                                                              (509,488
                                                              )
                                                              
                                                              
                                                              (454,569
                                                              )Net
      cash used inoperating
      activities
                                                              
                                                              
                                                              (1,477,335
                                                              )
                                                              
                                                              
                                                              (633,651
                                                              )Cash
      flows from investing activities;Additions
      to property and equipment
                                                              
                                                              
                                                              (495,018
                                                              )
                                                              
                                                              
                                                              (2,233,472
                                                              )Vineyard
      development expenditures
                                                              
                                                              
                                                              (35,183
                                                              )
                                                              
                                                              
                                                              -Payment
      received on note receivable
                                                              
                                                              
                                                              31,207
                                                              
                                                              
                                                              
                                                              -Net
      cash used in investing activities
                                                              
                                                              
                                                              (498,994
                                                              )
                                                              
                                                              
                                                              (2,233,472
                                                              )Cash
      flows from financing activities:Proceeds
      from stock options exercised
                                                              
                                                              
                                                              75,015
                                                              
                                                              
                                                              
                                                              27,250Borrowing
      from revolving line of credit
                                                              
                                                              
                                                              1,753,251
                                                              
                                                              
                                                              
                                                              403,485Proceeds
      from long-term debt
                                                              
                                                              
                                                              28,380
                                                              
                                                              
                                                              
                                                              1,584,374Payments
      on long-term debt
                                                              
                                                              
                                                              (243,549
                                                              )
                                                              
                                                              
                                                              (219,413
                                                              )Excess
      tax benefit on stock optionexercises
                                                              
                                                              
                                                              20,386
                                                              
                                                              
                                                              
                                                              6,798Net
      cash provided by  financing activities
                                                              
                                                              
                                                              1,633,483
                                                              
                                                              
                                                              
                                                              1,802,494Net
      decrease in cash and cash equivalents
                                                              
                                                              
                                                              (342,846
                                                              )
                                                              
                                                              
                                                              (1,064,629
                                                              )Cash
      and cash equivalents:Beginning
      of period
                                                              
                                                              
                                                              350,361
                                                              
                                                              
                                                              
                                                              1,083,405End
      of period
                                                              
                                                              $
                                                              7,515
                                                              
                                                              
                                                              $
                                                              18,776
 
 The
accompanying notes are an integral part of this financial
statement.
  5
  NOTES TO
UNAUDITED INTERIM FINANCIAL STATEMENTS
 
 1) BASIS
OF PRESENTATION
 
 The
accompanying unaudited financial statements for the three and nine months ended
September 30, 2009 and 2008, have been prepared in conformity with accounting
principles generally accepted in the United States (“GAAP”). The financial
information as of December 31, 2008 is derived from the audited financial
statements presented in the Willamette Valley Vineyards, Inc. (the “Company”)
Annual Report on Form 10-K for the year ended December 31, 2008. Certain
information or footnote disclosures normally included in financial statements
prepared in accordance with GAAP have been condensed or omitted pursuant to the
rules and regulations of the Securities and Exchange Commission. In the opinion
of management, the accompanying financial statements include all adjustments
necessary (which are of a normal recurring nature) for the fair statement of the
results of the interim periods presented. The accompanying financial statements
should be read in conjunction with the Company’s audited financial statements
for the year ended December 31, 2008, as presented in the Company’s Annual
Report on Form 10-K.
 
 Operating
results for the three and nine months ended September 30, 2009 are not
necessarily indicative of the results that may be expected for the entire year
ending December 31, 2009, or any portion thereof.
 
 The
Company consists of the retail, in-state self-distribution and out-of-state
sales departments.  These departments have mostly similar economic
characteristics, offer comparable products to customers, and utilize similar
processes for production and distribution. The in-state self-distribution
business known as Bacchus Fine Wines has the unique characteristic of selling
wholesale purchased wines and glassware in addition to Company produced wines.
The Company reports limited financial information for two operating segments as
follows: Bacchus Distribution and Produced Wines.
 
 Basic
earnings per share are computed based on the weighted-average number of common
shares outstanding each period. Diluted earnings per share are computed using
the weighted average number of shares of common stock and potentially dilutive
common shares outstanding during the year.  Potentially dilutive
shares from stock options and other potentially dilutive shares are excluded
from the computation when their effect is anti-dilutive. There were no
potentially dilutive shares excluded from the computation for the three and nine
months ended September 30, 2009. 11,647 potentially dilutive shares are included
in the computation of dilutive earnings per share for the three months ended
September 30, 2009, respectively. 97,974 and 126,847 potentially dilutive
shares are included in the computation of dilutive earnings per share for the
three and nine months ended September 30, 2008, respectively.
 
 In June
2009, the Financial Accounting Standards Board (“FASB”) issued Statement of
Financial Accounting Standards (“SFAS”) No. 168, The FASB Accounting Standards
CodificationTM and the Hierarchy of Generally Accepted Accounting Principles — a
replacement of FASB Statement No. 162. The FASB Accounting
Standards CodificationTM (the “Codification”), which was launched on July 1,
2009, became the single source of authoritative nongovernmental U.S. generally
accepted accounting principles (“GAAP”), superseding various existing
authoritative accounting pronouncements. The Codification effectively
eliminates the GAAP hierarchy contained in SFAS No. 162 and establishes one
level of authoritative GAAP. All other literature is considered
non-authoritative. SFAS No. 168 was effective for financial statements
issued for interim and annual periods ending after September 15,
2009. The Company’s adoption of SFAS No. 168 had no effect on its
consolidated financial statements, other than changes to references to GAAP
Statements within the consolidated financial statements.
  6
 
 2) STOCK
BASED COMPENSATION
 
 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 was approved by the
shareholders, permits the grant of stock options and restricted stock awards for
up to 900,000 shares.  All stock options have an exercise price that
is equal to the fair market value of the Company’s stock on the date the options
were granted.  Administration of the plan, including determination of
the number, term, and type of options to be granted, lies with the Board of
Directors or a duly authorized committee of the Board of
Directors.  Options are generally granted based on employee
performance with vesting periods ranging from date of grant to seven
years.  The maximum term before expiration for all grants is ten
years.
 
 The
following table presents information related to the value of outstanding stock
options for the periods shown:
 
 
 
 Three
      months ended
                                      
                                      
                                      Nine
      months endedSeptember
      30, 2009
                                      
                                      
                                      September
      30, 2009Weighted
                                      
                                      
                                      
                                      
                                      
                                      Weightedaverage
                                      
                                      
                                      
                                      
                                      
                                      averageexercise
                                      
                                      
                                      
                                      
                                      
                                      exerciseShares
                                      
                                      
                                      price
                                      
                                      
                                      Shares
                                      
                                      
                                      priceOutstanding
      at beginningof period
                                      
                                      
                                      380,700
                                      
                                      
                                      $
                                      4.01
                                      
                                      
                                      
                                      442,200
                                      
                                      
                                      $
                                      3.77Granted
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -Exercised
                                      
                                      
                                      (25,000
                                      )
                                      
                                      $
                                      1.88
                                      
                                      
                                      
                                      (37,500
                                      )
                                      
                                      $
                                      2.00Forfeited
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      (49,000
                                      )
                                      
                                      $
                                      2.30Outstanding
      at end of Period
                                      
                                      
                                      355,700
                                      
                                      
                                      $
                                      4.16
                                      
                                      
                                      
                                      355,700
                                      
                                      
                                      $
                                      4.16
 
 In
accordance with the current accounting guidance for share-based payments, the
Company recognizes compensation expense for options awarded under its stock
incentive plans. Current accounting guidance requires the grant-date fair value
of all share-based payment awards, including employee stock options, to be
recognized as employee compensation expense over the requisite service period.
The fair value of each stock option granted is estimated on the date of grant
using the Black-Scholes 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.
 
 Black-Scholes
assumptions
 September 30,2009Risk
      Free interest rates
                        
                        
                        3.31
                        %Expected
      dividend
                        
                        
                        0
                        %Expected
      lives, in years
                        
                        
                        5-10Expected
      volatility
                        
                        
                        33.3
                        %
 
  7
  The
Company expenses stock options on a straight-line basis over the options’
related vesting term.  For the three months ended September 30, 2009
and 2008, the Company recognized pretax compensation expense related to stock
options and restricted stock grants of $4,494 and $8,143, respectively; and for
the nine months ended September 30, 2009 and 2008, the Company recognized pretax
compensation expense related to stock options of $13,482 and $28,877,
respectively.
 
 During
the nine months ended September 30, 2009, the following transactions related to
stock option exercise occurred:
 ExerciseShares
                    
                    
                    PriceStock
      Options Exercised
                    
                    
                    1,500
                    
                    
                    $
                    1.8111,000
                    
                    
                    $
                    2.3025,000
                    
                    
                    $
                    1.88
 
 The
exercise of the aforementioned options resulted in a reduction of $20,386 in the
Company’s tax liability.  This tax savings is reflected in the
financials presented at September 30, 2009.
 
 3)
INVENTORIES
 
 The
Company’s inventories, by major classification, are summarized as follows, as of
the dates shown:
 
 September 30,
                      
                      
                      December 31,2009
                      
                      
                      2008(unaudited)Winemaking
      and packaging materials
                      
                      $
                      417,527
                      
                      
                      $
                      309,467Work-in-progress
      (costs relating to unprocessed and/or bulk wine products)
                      
                      
                      2,360,117
                      
                      
                      
                      3,350,830Finished
      goods (bottled wines and related products)
                      
                      
                      8,863,093
                      
                      
                      
                      6,943,907Current
      inventories
                      
                      $
                      11,640,737
                      
                      
                      $
                      10,604,204
 
 4)
PROPERTY AND EQUIPMENT
 
 The
Company’s property and equipment consists of the following, as of the dates
shown:
 September 30,
                      
                      
                      December 31,2009
                      
                      
                      2008(unaudited)Construction
      in progress
                      
                      $
                      480,994
                      
                      
                      $
                      242,053Land
      and improvements
                      
                      
                      2,594,155
                      
                      
                      
                      2,589,560Winery
      building and hospitality center
                      
                      
                      4,979,278
                      
                      
                      
                      4,969,758Equipment
                      
                      
                      5,352,744
                      
                      
                      
                      5,110,78213,407,171
                      
                      
                      
                      12,912,153Less
      accumulated depreciation
                      
                      
                      (7,268,791
                      )
                      
                      
                      (6,842,745
                      )$
                      6,138,380
                      
                      
                      $
                      6,069,408
  8
 
 5)  INTEREST
AND TAXES PAID
 
 During
the third quarter ended September 30, 2009, the Company paid $303,500 in
federal, state and local income taxes and $99,455 in payroll tax. Additionally,
$42,135 was paid in interest on the long-term debt and revolving credit line for
the same period. For the nine month period ended September 30, 2009, the Company
paid $538,500 in federal, state and local income taxes and $261,997 in Payroll
tax. Additionally, $111,013 was paid in interest on the long-term debt and
revolving credit line for the same period.
 
 6)
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 Riedel 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 Riedel 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.
 
 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 nine-month period ended September 30, 2009 by operating
segment:
 
 Three months ended September 30, 2009Bacchus
                    
                    
                    ProducedDistribution
                    
                    
                    Wine
                    
                    
                    TotalNet
      Sales
                    
                    $
                    1,188,943
                    
                    
                    $
                    3,171,263
                    
                    
                    $
                    4,360,206Cost
      of Sales
                    
                    $
                    904,781
                    
                    
                    $
                    1,326,630
                    
                    
                    $
                    2,231,411Gross
      Profit
                    
                    $
                    284,162
                    
                    
                    $
                    1,844,633
                    
                    
                    $
                    2,128,795%
      of sales
                    
                    
                    23.9
                    %
                    
                    
                    58.2
                    %
                    
                    
                    48.8
                    %
 
 
 Nine months ended September 30, 2009Bacchus
                    
                    
                    ProducedDistribution
                    
                    
                    Wine
                    
                    
                    TotalNet
      Sales
                    
                    $
                    3,109,223
                    
                    
                    $
                    8,943,605
                    
                    
                    $
                    12,052,828Cost
      of Sales
                    
                    $
                    2,322,368
                    
                    
                    $
                    3,728,874
                    
                    
                    $
                    6,051,242Gross
      Profit
                    
                    $
                    786,855
                    
                    
                    $
                    5,214,731
                    
                    
                    $
                    6,001,586%
      of sales
                    
                    
                    25.3
                    %
                    
                    
                    58.3
                    %
                    
                    
                    49.8
                    %
 
  9
  Total
inventory for Bacchus Distribution was $2,118,897 of purchased wines and
$347,621 of non-wine merchandise at September 30, 2009.  This compares
to produced wine inventory of $6,337,133 and $2,837,086 of non-wine merchandise
and work-in-process for the same period. At September 30, 2008 total inventory
for Bacchus Distribution was $2,210,265 of purchased wines and $231,205 of
non-wine merchandise. This compares to produced wine inventory of $5,732,155 and
$1,756,369 of non-wine merchandise and work-in-process for the same
period.
 
 Item
2
 
 MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
 
 Forward Looking
Statements
 
 This
Management’s Discussion and Analysis of Financial Condition and Results of
Operations and other sections of this Form 10-Q contain forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995.  These forward-looking statements involve risks and
uncertainties that are based on current expectations, estimates and projections
about the Company’s business, and beliefs and assumptions made by
management.  Words such as “expects,” “anticipates,” “intends,”
“plans,” “believes,” “seeks,” “estimates” and variations of such words and
similar expressions are intended to identify such forward-looking
statements.  Therefore, actual outcomes and results may differ
materially from what is expressed or forecasted in such forward-looking
statements due to numerous factors, including, but not limited
to:  availability of financing for growth, availability of adequate
supply of high quality grapes, successful performance of internal operations,
impact of competition, changes in wine broker or distributor relations or
performance, impact of possible adverse weather conditions, impact of reduction
in grape quality or supply due to disease, impact of governmental regulatory
decisions, and other risks disclosed from time to time in the Company’s
Securities and Exchange Commission filings and reports.  In addition,
such statements could be affected by general industry and market conditions and
growth rates, and general domestic economic conditions.  The
forward-looking statements are made as of the date hereof, and, except as
otherwise required by law, we disclaim any intention or obligation to update or
revise any forward-looking statements or to update the reasons whythe actual
results could differ materially from those projected in the forward-looking
statements, whether as a result of new information, future events or
otherwise.
 
 Critical
Accounting Policies
 
 The
foregoing discussion and analysis of our financial condition and results of
operations are based upon our financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States of
America.  The preparation of these financial statements requires the
Company’s management to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities.  On an on-going basis, we evaluate
our estimates, including those related to revenue recognition, collection of
accounts receivable, valuation of inventories, and amortization of vineyard
development costs.  We base our estimates on historical experience and
on various other assumptions that are believed to be reasonable under the
circumstances.  Actual results may differ from these estimates under
different assumptions or conditions.  A description of our critical
accounting policies and related judgments and estimates that affect the
preparation of our financial statements is set forth in our Annual Report on
Form 10-K for the year ended December 31, 2008.  Such policies were
unchanged during the three and nine months ended September 30,
2009.
  10
 
 Overview
 
 The
Company’s principal sources of revenue are derived from sales and distribution
of wine.  Net earnings for the third quarter ended September 30, 2009
were $248,021 compared to net earnings of $243,629 for the third quarter ended
September 30, 2008, a 1.8% increase over the comparable prior year period. Net
earnings for the nine months were $666,961 versus $461,254 for the comparable
prior year period which represents an increase of 44.6% over the prior year’s
nine-month period.
 
 As a
result, the Company generated $0.05 and $0.14 basic earnings per share during
the three and nine months ended September 30, 2009, a change of $0.00 and $0.04
basic earnings per share versus the comparable prior year periods.
 
 The
Company sold approximately 37,500 cases during the three months ended September
30, 2009.  Of these cases sold, approximately 28,000 cases were
produced brands and another 9,500 cases were purchased brands.
 
 Sales
revenue for the three and nine months ended September 30, 2009 increased
$303,684 and $708,649, or 7.5% and 6.2%, from the comparable prior year
periods.
 
 Sales
revenue growth for the three and nine months ended September 30, 2009 versus
2008 is being principally driven by new product placements and order activity
from our chain store customers.  The main channel of the growth is
through our National Sales business unit, which deals with out-of-state
customers where product is sold through distributors in each
state.  Additionally in-state sales in the quarter increased versus
the prior year mainly due to the loss of one brand to another in-state
distributor resulting in the total sale of the remaining on-hand inventory, at
cost, to the respective distributor.  The mix of sales in-state has
shifted from purchased brands to produced brands mainly due to the availability
of three produced Pinot Noir products that became available for sale in the 4th
Quarter of 2008. The decrease in purchased brands sales in-state from 2008 to
2009 is largely the result of reduced order activity by on-premise customers who
are experiencing significant reductions in consumer demand in a struggling
economy.
 
 Retail
revenues are slightly down in the third quarter ended September 30, 2009 versus
prior year mainly due to a reduction in room rentals and direct to consumer wine
sales.
 
 Net
operating income performance for the quarter ended September 30, 2009 was
slightly below that of the prior year. Increases in sales volume in National
Sales, coupled with improved gross profit is entirely offset by increased sales,
general and administrative expenses. Cost of sales has decreased mainly due to a
shift in the mix of sales from purchased brands to produced brands where we
achieve a higher gross profit. Additionally, improved inventory controls have
resulted in reduced inventory shrinkage and therefore have improved operations.
The increase in Sales, General and Administrative expense is primarily due to
higher sales labor costs including related payroll taxes and fringe
benefits.  Increased professional service fees for consulting services
also contributed to higher expenses versus the prior year. These increased
expenses are somewhat offset by savings in freight costs in the three and nine
months ended September 30, 2009.
 
 The
winery bottled approximately 44,000 cases in the third quarter of 2009, mainly
2008 vintage Pinot Noir.
 
 The
Company has an asset-based loan agreement with Umpqua Bank that allows it to
borrow up to $2,000,000.  This maturity date on this loan agreement is
June 2010.  At September 30, 2009, the Company had a credit line
balance of $1,753,251 and $246,749 of available credit. The interest rate
charged in the quarter was 3.25%. The interest rate on this note is a variable
interest rate and is subject to change from time to time based on changes in an
independent index which is the Prime Rate as published in the Wall Street
Journal (the “Index”).  The index rate at September 30, 2009 is 3.25%.
The loan agreement contains, among other things, certain restrictive financial
covenants with respect to total equity, debt-to-equity and debt coverage that
must be maintained by the Company on a quarterly basis.  As of
September 30, 2009, the Company was in compliance with all of the financial
covenants.
  11
  
 In the
third quarter of 2009 Willamette Valley Vineyards received significant media
attention surrounding our sustainable efforts and reputation for
innovation.
 
 Willamette
Valley Vineyards’ 2008 Pinot Gris took a Gold medal at the Fourteenth Annual
Tasters Guild International Consumers’ Wine Judging held in the Washington D.C.
area on August 20-22, 2009. This wine has a prestigious history of success, and
we are happy to see that it continues to receive consistently high
honors.
 
 In August
our 2008 Tualatin Estate Semi-Sparkling Muscat Frizzanté was one of only seven
Gold Medal Winners at the 2009 Oregon State Fair professional wine
competition.
 
 The Fall
2009 issue of Heart Healthy Living (a Better Homes & Gardens supplement)
featured our Whole Cluster Pinot Noir in their Marketplace section under the
headline “The Power of Resveratrol”. The resveratrol story is growing, and Whole
Cluster is the best product to highlight the high levels of this powerful
antioxidant in Oregon Pinot Noirs.
 
 We
believe that online, consumer wine reviews are and will continue to play a
significant role in “word of mouth” recommendations and consumer choices, and so
have been focusing our efforts recently on generating online buzz about
Willamette Valley Vineyards and our delicious and sustainable wines. This
endeavor has been largely successful, generating a wide range of coverage,
including a very favorable review of our 2007 Dijon Clone Chardonnay by the
Oregon Wine Blog. The online review stated that the Chardonnay “captured the
essence of what a northwest chardonnay should taste like”
(http://www.theoregonwineblog.com/2009/09/2007-willamette-valley-vineyards-dijon.html).
 
 Our
online efforts include the world of social marketing, and Willamette Valley
Vineyards is now active on Facebook and Twitter. We also upload videos to
YouTube and have re-launched the company blog. The number of people who follow
us on each of these applications has grown consistently in the four months these
programs have been active.
 
 Our Cork
ReHarvest program, which was launched at the beginning of Q1, has continued to
garner media coverage into the third quarter. Cork ReHarvest is a
cradle-to-cradle cork recycling program, executed with zero increase to the
company’s carbon footprint. This program was highlighted in the May/June issue
of UK based publication Living Woods Magazine, followed by a feature story in
the July/August issue titled “Campaign for Cork”, in which Oregon Brand Manager
Patrick Spencer is quoted often.
 
 The Cork
ReHarvest program continues to expand. In partnership with Whole Foods Markets
Cork ReHarvest boxes are being placed in either the wine department or the
recycle center of a store. In Q3 the program expanded into the six Whole Foods
Markets in Canada and the seven Markets in Arizona. Continuing expansion is
expected in Q4. Ultimately, the Cork ReHarvest program aims to be in every Whole
Foods Market nationwide.
 
 On
September 16, 2009, Willamette Valley Vineyards launched our partnership with
Travel Salem at their new downtown Travel Café facility. This ground-breaking
partnership now offers visitors and local consumers the opportunity to taste the
“Fruit of the Vine” at a newly created tasting room and retail outlet. The goal
of this unique partnership is to pique visitors’ interest in the region’s rich
wine country, and ultimately lead to an increased regional economic impact from
tourism.
  12
 
 Our 19th
Annual Grape Stomp and Harvest Celebration was held September 19th and 20th.
Reservations for this highly anticipated event book up months in advance, and
this year’s event was a great success, with net sales rising 200% over last
year.
 
 RESULTS
OF OPERATIONS
 
 Revenue
 
 Net
revenue for the three and nine months ended September 30, 2009 increased
$303,684 and $708,649, or 7.5% and 6.2%, from the comparable prior year periods.
The increase in the quarter and the year is primarily due to increased product
placements in national chain stores and related out-of-state distributors. This
is helped by the increase in in-state wholesale revenue mainly due to a brand
that was transferred to another in-state distributor which resulted in the sale
of all on-hand inventory of that brand at cost. Additionally, the reduction in
the volume of in-state order activity is mainly due to on-premise accounts that
are experiencing significant reductions in consumer demand in a struggling
economy. Retail direct-to-consumer sales for the three and nine months ended
September 30, 2009 decreased over retail direct-to-consumer sales for the three
and nine months ended September 30, 2008 by -6.6% and -2.2%, respectively. A
decrease in retail direct to consumer sales coupled with reduced room rental
revenues are the main drivers in the reduction in overall retail
sales.
 
 Our
revenues from winery operations are summarized as follows:
 
 Three months ended
                        
                        
                        Nine months endedSeptember 30,
                        
                        
                        September 30,2009
                        
                        
                        2008
                        
                        
                        2009
                        
                        
                        2008Retail
      Sales, Rental Income and Events
                        
                        $
                        664,124
                        
                        
                        $
                        711,358
                        
                        
                        $
                        1,792,655
                        
                        
                        $
                        1,833,563In-state
      sales
                        
                        
                        2,089,612
                        
                        
                        
                        1,969,613
                        
                        
                        
                        5,572,194
                        
                        
                        
                        5,547,490Out-of-state
      sales
                        
                        
                        1,688,621
                        
                        
                        
                        1,478,136
                        
                        
                        
                        4,992,344
                        
                        
                        
                        4,236,202Misc.
      sales
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        10,991
                        
                        
                        
                        (946
                        )Total
      Revenue
                        
                        
                        4,442,357
                        
                        
                        
                        4,159,107
                        
                        
                        
                        12,368,184
                        
                        
                        
                        11,616,309Less
      excise taxes
                        
                        
                        (82,151
                        )
                        
                        
                        (102,585
                        )
                        
                        
                        (315,356
                        )
                        
                        
                        (272,130
                        )Net
      Revenue
                        
                        $
                        4,360,206
                        
                        
                        $
                        4,056,522
                        
                        
                        $
                        12,052,828
                        
                        
                        $
                        11,344,179
 
 Retail
sales, rental income and events for the three and nine months ended September
30, 2009 decreased -$47,234 and -$40,908 respectively or -6.6% and -2.2%
compared to the corresponding prior year periods.  For the quarter,
the reduction in revenue is primarily due to decreased volumes of
direct-to-consumer retail sales and a drop off in room rental revenues. For the
first nine months of 2009, the decrease in direct-to-consumer retail sales is
minor and most of the decrease is due to the decrease in on-site room rentals
and event revenue versus the prior year.
  13
 
 Sales in
the state of Oregon, through our wholesale department, Bacchus Fine Wines,
increased $119,999 and $24,704, or 6.1% and 0.4%, for the three and nine months
ended September 30, 2009, compared to the corresponding prior year periods. The
increase is largely the result of the transfer of one purchased brand to a new
distributor in Oregon which resulted in the sale of all on-hand inventory of
that brand at cost.  The increase in sales of produced brands is
almost entirely offset by reduced order activity for purchased brands. This is
mainly due to on-premise customers whom are experiencing significant reductions
in consumer demand in a struggling economy.  The release of the 2007
vintage Pinot Noir in the fourth quarter of 2008, allowed a key in-state
customer to begin receiving shipments that were unavailable in the first nine
months of 2008. Sales to our largest wholesale in-state customer for the three
and nine months ended September 30, 2009 represent 17.2% and 18.6% of total
wholesale in-state sales. Compared to the three and nine months ended
September 30, 2008 sales to this customer as a percentage of total wholesale
in-state sales has increased 43.3% and 92.5% respectively. This growth
represents increased reliance upon a retailer who customarily rotates there
stock of producer brands, therefore no assurance can be given of continued
placement. The Company does not anticipate a shortage of the 2007 vintage Pinot
Noir in 2009.
 
 Out-of-state
sales in the three and nine months ended September 30, 2009 increased $210,485
and $756,142, or 14.2% and 17.8% respectively, versus the comparable prior year
periods. The increase in the quarter and the year is primarily due to increased
volume of 2007 and 2008 Pinot Gris shipments to a key customer and their related
out-of-state distributors. These distributors are carefully managing their
inventory levels even though sales to end consumers are up over last
year.
 
 Gross
Profit
 
 Gross
profit for the three and nine months ended September 30, 2009 increased $147,673
and $460,485, or 7.5% and 8.3% respectively, versus the comparable prior year
periods.
 
 As a
percentage of net revenue, gross profit from winery operations was 48.8% and
49.8% respectively in the three and nine months ended September 30, 2009,
compared to 50.0% and 48.0% in the comparable prior year periods. The slight
decrease in gross profit as a percentage of net revenue for the three months
ended September 30, 2009 is mainly due to the higher cost of goods on produced
brands versus across all sales departments. The shift in the mix of sales to
produced brands versus purchased brands in our in-state wholesale distributor,
Bacchus Fine Wines, represents a higher percentage of total gross profit and has
favorably impacted our gross profit percentage for the first nine months of 2009
versus prior year. The Company continues to focus on improved distribution of
higher margin Willamette Valley Vineyards brand products as well as continuing
our efforts to reduce grape and production costs.
 
 Selling,
General and Administrative Expense
 
 Selling,
general and administrative expense for the three and nine months ended September
30, 2009 increased $149,518 and $74,551, or 9.8% and 1.6% respectively, compared
to the corresponding prior year periods.  This increase is due
primarily to incremental labor and related taxes and benefits for sales and
administrative staff. Increased professional service fees for consulting and
legal services also contributed to the increase in expenses for the three months
ended September 30, 2009. On the other hand, the Company has experienced
significant savings in overall freight costs for inbound and outbound shipments.
In total, as a percentage of net revenues from winery operations, selling,
general and administrative expenses were 38.3% and 39.6% respectively for the
three and nine months ended September 30, 2009, as compared to 37.4% and 41.4%
for the comparable prior year periods.
 
 Interest
Income, Interest Expense
 
 There was
no interest income for the third quarter 2009 and 2008 due to the lack of cash
available for investment.  Interest income decreased $17,193, or
-100%, for the nine months ended September 30, 2009, compared to the comparable
prior year period.  Interest expense for the three and nine months
ended September 30, 2009, increased $7,229 and $36,064 or 20.7% and 48.1%,
compared to the corresponding prior year periods.  The average
interest rate paid for the three and nine months ended September 30, 2009,
respectively was 4.5% and 4.6%.
  14
  Income
Taxes
 
 Income
tax expense was $170,599 and $457,987 for the three and nine months ended
September 30, 2009, compared to $183,170 and $328,255 for the prior year
periods.  Our estimated tax rate for the three and nine months ended
September 30, 2009 was 40.8% and 40.7%, respectively.
  Net
Income and Earnings per Share
 
 As a
result of the factors listed above, net income for the three and nine months
ended September 30, 2009 was $248,021 and $666,961, compared to net income of
$243,629 and $461,254, respectively, in the comparable prior year periods. This
is an increase of 1.8% and 44.6%, versus 2008 for the three and nine months
ended September 30, 2009, respectively.  Diluted earnings per share
was $0.05 for the quarter ended September 30, 2009, compared to $0.05 per
diluted share in the comparable prior year period. Diluted earnings per share
for the nine months ended September 30, 2009 was $0.14 compared to $0.09 for the
nine months ended September 30, 2008, an increase of 55.6%.
 
 Liquidity
and Capital Resources
 
 At
September 30, 2009, we had a working capital balance of $9.9 million and a
current working capital ratio of 3.92:1. At December 31, 2008, we had a working
capital balance of $9.4 million and a current working capital ratio of
4.23:1.  We had a cash balance of $7,515 at September 30, 2009,
compared to a cash balance of $350,361 at December 31, 2008.  The
decrease in cash in this year is primarily due to the build-up of inventory,
payments on grape contracts related to the 2008 harvest and capital project
expenditures.
 
 Total
cash used in operating activities in the nine months ended September 30, 2009
was ($1,477,335) compared to cash used by operating activities of ($633,651) for
the same period in the prior year.  The increase in cash used in
operating activities versus prior year was primarily due to the timing of
payments related to trade payables and the change in trade receivables versus
prior year. This is offset somewhat by a reduced build-up of inventory versus
2008.
 
 Total
cash used in investing activities in the nine months ended September 30, 2009
was ($498,994), compared to ($2,233,472) in the prior year
period.  The decrease was due to the reduction in capital expenditures
related to one-time vineyard acquisitions in the prior year.
 
 Total
cash provided by financing activities in the nine months ended September 30,
2009 was $1,633,483 compared to $1,802,494 provided by financing activities in
the prior year period. Cash provided by financing activities in the current year
primarily consists of revolving credit line advances needed to support working
capital requirements. This is offset somewhat by cash used to repay long-term
debt.
 
 At
September 30, 2009, the line of credit balance was $1,753,251, on a maximum
borrowing amount of $2,000,000.  We have a loan agreement with Umpqua
Bank that contains, among other things, certain restrictive financial covenants
with respect to total equity, debt-to-equity and debt coverage that must be
maintained by us on a quarterly basis.  As of September 30, 2009, we
were in compliance with all of the financial covenants.
 
 As of
September 30, 2009, we had a total long-term debt balance of $2,317,613,
including the portion due in the next year, owed to Farm Credit Services. There
was $28,380 of new long-term debt related to a tractor purchase incurred in the
quarter ended September 30, 2009. The remaining debt balance mainly represents
the debt service with Farm Credit Services which was used to acquire vineyard
land, finance our Hospitality Center, invest in new winery equipment to increase
our winemaking capacity, and complete a larger warehouse storage
facility.
  15
  At
September 30, 2009, we owed $85,245 on grape contracts. For the 2009 harvest,
there are grape purchase contracts in place with local growers that will be
accrued when the grapes are received, typically in October.
 
 We
believe that cash flow from operations and funds available under our existing
credit facilities will be sufficient to meet our foreseeable short and long-term
needs.
 
 Segment
Reporting
 
 The
Company’s in-state self-distribution business know as Bacchus Fine Wines sells
wholesale purchased wines from other wineries and Riedel glassware in addition
to Company produced wines. The sale of purchased wines and Riedel glassware is a
distinct category of the Company’s sales versus the retail and out-of-state
sales organizations of the Company and therefore warrants segment
discussion.  The purchased wine and Riedel glassware segment is shown
below as Bacchus Distribution. For purposes of segment reporting the produced
wines sold by Bacchus are consolidated with retail and out-of-state sales and
shown below as Produced Wines. Sales, general and administrative expenses are
not allocated between operating segments, and therefore net income information
for the respective segments is not available.
 
 The
following table outlines the sales, cost of sales and gross profit, for the
three and nine-month periods ended September 30, 2009 by operating
segment:
 
 Three months ended September 30, 2009Bacchus
                      
                      
                      ProducedDistribution
                      
                      
                      Wine
                      
                      
                      TotalNet
      Sales
                      
                      $
                      1,188,943
                      
                      
                      $
                      3,171,263
                      
                      
                      $
                      4,360,206Cost
      of Sales
                      
                      $
                      904,781
                      
                      
                      $
                      1,326,630
                      
                      
                      $
                      2,231,411Gross
      Profit
                      
                      $
                      284,162
                      
                      
                      $
                      1,844,633
                      
                      
                      $
                      2,128,795%
      of sales
                      
                      
                      23.9
                      %
                      
                      
                      58.2
                      %
                      
                      
                      48.8
                      %
 
 Nine months ended September 30, 2009Bacchus
                      
                      
                      ProducedDistribution
                      
                      
                      Wine
                      
                      
                      TotalNet
      Sales
                      
                      $
                      3,109,223
                      
                      
                      $
                      8,943,605
                      
                      
                      $
                      12,052,828Cost
      of Sales
                      
                      $
                      2,322,368
                      
                      
                      $
                      3,728,874
                      
                      
                      $
                      6,051,242Gross
      Profit
                      
                      $
                      786,855
                      
                      
                      $
                      5,214,731
                      
                      
                      $
                      6,001,586%
      of sales
                      
                      
                      25.3
                      %
                      
                      
                      58.3
                      %
                      
                      
                      49.8
                      %
 
 Total
inventory for Bacchus Distribution was $2,118,897 of purchased wines and
$347,621 of non-wine merchandise at period end September 30,
2009.  This compares to produced wine inventory of $6,337,133 and
$2,837,086 of non-wine merchandise and work-in-process for the same period. At
September 30, 2008 total inventory for Bacchus Distribution was $2,210,265 of
purchased wines and $231,205 of non-wine merchandise. This compares to produced
wine inventory of $5,732,155 and $1,756,369 of non-wine merchandise and
work-in-process for the same period.
  16
  Item
3
 
 QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
 None.
 
 Item
4
 
 CONTROLS
AND PROCEDURES
 
 Evaluation
of Disclosure Controls and Procedures
 
 We
maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in our reports under the Securities
Exchange Act of 1934, as amended (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 management,
including our Chief Executive Officer, as appropriate, to allow timely decisions
regarding required disclosure.  For the period ended September 30,
2009, management performed an evaluation, under the supervision and with
the participation of the Chief Executive Officer, and Chief Financial Officer,
of the effectiveness of our disclosure controls and procedures, as defined in
Rules 13a-15(e) and 15d-15(e) of the Exchange Act. Based on this
evaluation, the Chief Executive Officer and Chief Financial Officer have
concluded that the disclosure controls and procedures as of September 30,
2009 were not effective in providing a reasonable level of assurance that
information required to disclosed by the Company in reports that it files or
submits under the Exchange Act is recorded, processed, summarized and reported
with the time periods specified in the Securities and Exchange Commission’s
rules and forms, as a result of the material weaknesses identified as of
December 31, 2008 in our annual report on Form 10-K and the nature of which are
summarized below.
 
 As of
December 31, 2008, the Company had identified the following material
weaknesses:
 
 1.           
Inadequate reconciliations of our general ledger cash balances to the balances
per our bank statements.
 (a)This
weakness was identified during the 2007 year-end audit by management and
accounting staff present at the time of the audit, in conjunction with our
independent auditors, Moss-Adams LLP.
 
 2.           Lack
of sufficient procedures and controls related to our maintenance of our
perpetual inventory records of in-state purchased wines.
 (a)This
weakness was identified during the 2007 year-end audit by management and
accounting staff present at the time of the audit, in conjunction with our
independent auditors, Moss-Adams LLP.
 
 3.           Lack
of sufficient procedures and controls related to the allocation of our costs to
our purchased and produced wines.
 (a)This
weakness was identified during the 2008 year-end audit by management and
accounting staff present at the time of the audit, in conjunction with our
independent auditors, Moss-Adams LLP.
 
 4.           Lack
of adequate accounting and finance personnel and transition/training
of personnel responsible for preparation and review of such reconciliations,
records, and allocations.
  17
  (a)This
weakness was identified during the 2008 year-end audit by management and
accounting staff present at the time of the audit, in conjunction with our
independent auditors, Moss-Adams LLP.
 
 The
Company does not expect that its disclosure controls and procedures will prevent
all errors and instances of fraud. A control procedure, no matter how well
conceived and operated, can provide only reasonable, not absolute, assurance
that the objectives of the control procedure are met. Because of the inherent
limitations in all control procedures, no evaluation of controls can provide
absolute assurance that all control issues and instances of fraud, if any,
within the Company have been detected. These inherent limitations include the
realities that judgments in decision-making can be faulty, and that breakdowns
can occur because of simple error or mistake. Additionally, controls can be
circumvented by the individual acts of some persons, by collusion of two or more
people, or by management override of the control. The Company considered these
limitations during the development of its disclosure controls and procedures,
and will continually reevaluate them to ensure they provide reasonable assurance
that such controls and procedures are effective.
 
 Changes
in Internal Control over Financial Reporting
 
 In our
Management’s Report on Internal Control Over Financial Reporting included in the
Company’s Form 10-K for the year ended December 31, 2008 and 2007, management
concluded that our internal control over financial reporting was not effective
due to the existence of certain material weaknesses.
 
 In an
attempt to remediate the material weaknesses outlined above, the Company
implemented the following remedial actions during the first nine months of
2009:
 
 •           With
respect to weakness number 1 identified above, the Company engaged additional
temporary resources in the accounting department at the end of 2008 with the
main goal of reconciling cash to zero on a monthly basis. During the second and
third quarter of 2009, the Company made significant progress in remediating the
cash ledger balance to bank account reconciliation by allocating full-time
accounting resources to review, reconcile and improve the cash reconciliation
process.
 
 •           With
respect to weakness number 2 identified above, the Company commenced a review of
our documentation and where necessary we have put into place policies and
procedures to document such evidence to comply with our internal control
requirements and improve our perpetual inventory accuracy. The Company also
retained a financial consultant to assist us in further reviewing and improving
our internal control processes.
 
 •           With
respect to weakness number 3 identified above, the Company has adopted the
costing methods that were utilized by the Companies independent audit firm, Moss
Adams LLP, during the 2008 year-end audit. Additionally, the Company is in the
process of preparing work-flow diagrams and documented control procedures for
ease of understanding and review going forward.
 
 •           With
respect to weakness number 4 identified above, the Company engaged
additional temporary resources in the accounting department at the end of 2008.
The Company maintained those temporary resources through September 2009. The
Company then converted the temporary resource to permanent accounting personnel
during the second quarter of 2009.
 
 We
believe that as of the date hereof, the measures the Company has implemented
have fully remediated some but not all of the material weaknesses
identified above. Management, with oversight of the Audit Committee of our
board of directors and our independent auditors, Moss Adams LLP, will continue
to work on remediating all of the material weaknesses noted above.
 
  18
  PART
II.               OTHER
INFORMATION
 
 Item
1.       Legal Proceedings.
 
 From time
to time, we are a party to various judicial and administrative proceedings
arising in the ordinary course of business.  Our management and legal
counsel have reviewed the probable outcome of any proceedings that were pending
during the period covered by this report, the costs and expenses reasonably
expected to be incurred, the availability and limits of our insurance coverage,
and our established liabilities.  While the outcome of legal
proceedings cannot be predicted with certainty, based on our review, we believe
that any unrecorded liability that may result as a result of any legal
proceedings is not likely to have a material effect on our liquidity, financial
condition or results from operations.
 
 Item
1A.    Risk Factors
 
 As a
smaller reporting company, we are not required to provide the information
required by this item.
 
 Item
2.       Unregistered Sales of Equity Securities
and Use of Proceeds.
 
 None.
 
 Item
3.       Defaults Upon Senior
Securities.
 
 None.
 
 Item
4.       Submission of Matters to a Vote of
Security Holders.
 
 On July
19, 2009, at the Annual Meeting of the Company’s Shareholders (“Annual
Meeting”), the shareholders approved each of the proposals set forth in the
Company’s Proxy Statement dated June 12, 2009, briefly described
below:
 
 (i) The
shareholders were requested to elect and elected the following individuals to
the Board of Directors:
 
 Nominee
                  For
                  AgainstJames
      W. Bernau
                  2,477,824
                  16,736James
      L. Ellis
                  2,480,482
                  14,078Sean
      M. Cary
                  2,480,933
                  13,627Thomas
      M. Brian
                  2,486,616
                  7,944Delna
      L. Jones
                  2,482,766
                  11,794Craig
      Smith
                  2,482,591
                  11,969Betty
      M. O’Brien
                  2,484,267
                  10,293Stan
      G. Turel
                  2,486,016
                  8,544
 
 (ii) The
shareholders were asked to ratify the appointment of Moss Adams LLP as the
Company’s independent auditors.  The proposal was approved by the
shareholders, as 2,494,560 votes were cast for the proposal, 15,122 votes were
cast against the proposal, and 2,350 votes abstained.
 
 Item
5.       Other Information
 
 None.
  19
  Item
6.        Exhibits
 
 Exhibit
No. Description
 
 3.1   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   Articles
of Amendment, dated August 22, 2000 (incorporated herein by reference to Exhibit
3.4 to the Company’s Form 10-Q for the quarterly period ended June 30, 2008,
filed August 14, 2008, File No. 000-21522)
 
 3.3   Bylaws
of Willamette Valley Vineyards, Inc. (incorporated herein by reference to
Exhibit 3.5 to the Company’s Form 10-Q for the quarterly period ended June 30,
2008, filed August 14, 2008 File No. 000-21522)
 
 31.1  Certification
of Chief Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a) of the
Securities Exchange Act of 1934 (Filed herewith)
 
 31.2  Certification
of Chief Financial Officer required by Rule 13a-14(a) or Rule 15d-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)
  20
  SIGNATURES
 
 Pursuant
to the requirements of the Security 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.Date:
      November 16, 2009
                  By
                  /s/
      James W. BernauJames
      W. BernauPresidentDate:
      November 16, 2009
                  By
                  /s/
      Jeffrey J. FoxJeffrey
      J. FoxController
  21