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, 2010





o
            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       o  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).


o YES        o 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.




o Large
      accelerated filer
              o Accelerated
      filero 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).


o
YES        x NO




Number of
shares of common stock outstanding as of September 30, 2010: 4,892,977
shares, no par value







WILLAMETTE
VALLEY VINEYARDS, INC.


INDEX
TO FORM 10-Q





Part
      I - Financial InformationItem
      1 - Financial StatementsBalance
      Sheet
            
            
            2Statement
      of Operations
            
            
            3Statement
      of Cash Flows
            
            
            4Notes
      to Unaudited Interim Financial Statements
            
            
            5Item
      2 - Management's Discussion and Analysis of Financial Condition and
      Results of Operations
            
            
            9Item
      3 – Quantitative and Qualitative Disclosures about Market
    Risk
            
            
            15Item
      4 - Controls and Procedures
            
            
            16Part
      II - Other Information
            
            
            17Item
      1 - Legal Proceedings
            
            
            17Item
      1A – Risk Factors
            
            
            17Item
      2 - Unregistered Sales of Equity Securities and Use of
      Proceeds
            
            
            17Item
      3 - Defaults upon Senior Securities
            
            
            17Item
      4 - Submission of Matters to a Vote of Security Holders
            
            
            17Item
      5 - Other Information
            
            
            17Item
      6 – Exhibits
            
            
            17Signatures
            
            
            19










WILLAMETTE
VALLEY VINEYARDS, INC.




Balance
Sheet





September
      30
              2010

                (unaudited)
            
            
            December
      31
              2009ASSETSCurrent
      Assets:Cash
      and cash equivalents
            
            $
            336,463
            
            
            $
            -Accounts
      receivable trade,net
            
            
            1,497,094
            
            
            
            1,458,497Inventories
            
            
            11,033,187
            
            
            
            12,169,407Prepaid
      expenses and othercurrent
      assets
            
            
            138,476
            
            
            
            58,746Current
      portion of notes receivable
            
            
            62,415
            
            
            
            62,415Income
      tax receivable
            
            
            192,460
            
            
            
            464,958Total
      current assets
            
            
            13,260,095
            
            
            
            14,214,023Vineyard
      development cost, net
            
            
            1,680,740
            
            
            
            1,732,979Property
      and equipment, net
            
            
            6,071,280
            
            
            
            6,192,229Debt
      issuance costs, net
            
            
            34,405
            
            
            
            41,353Note
      receivable, net of current portion
            
            
            99,398
            
            
            
            120,248Other
      assets
            
            
            4,456
            
            
            
            4,456Total
      assets
            
            $
            21,150,374
            
            
            $
            22,305,288LIABILITIES
      AND SHAREHOLDERS' EQUITYCurrent
      liabilitiesBank
      overdraft
            
            $
            -
            
            
            $
            271,911Line
      of credit
            
            
            -
            
            
            
            140,964Current
      portion of long term debt
            
            
            450,268
            
            
            
            432,863Accounts
      payable
            
            
            940,814
            
            
            
            823,517Accrued
      expenses
            
            
            485,148
            
            
            
            467,588Deferred
      income taxes
            
            
            62,000
            
            
            
            62,000Grapes
      payable
            
            
            -
            
            
            
            657,371Total
      current liabilities
            
            
            1,938,230
            
            
            
            2,856,214Long-term
      debt, net of current portion
            
            
            2,949,174
            
            
            
            3,286,005Deferred
      rent liability
            
            
            215,803
            
            
            
            218,205Deferred
      gain
            
            
            289,764
            
            
            
            313,835Deferred
      income taxes
            
            
            491,000
            
            
            
            491,000Total
      liabilities
            
            
            5,883,971
            
            
            
            7,165,259Shareholders'
      equityCommon
      stock, no par value - 10,000,000 shares authorized, 4,892,977 and
      4,888,977 shares issued and outstanding at September 30, 2010 and December
      31, 2009
            
            
            8,623,744
            
            
            
            8,608,658Retained
      Earnings
            
            
            6,642,659
            
            
            
            6,531,371Total
      shareholders' equity
            
            
            15,266,403
            
            
            
            15,140,029Total
      liabilities and shareholders' equity
            
            $
            21,150,374
            
            
            $
            22,305,288





The
accompanying notes are an integral part of this financial
statement.





2
 
 WILLAMETTE
VALLEY VINEYARDS, INC.
 Statement
of Operations
 (unaudited)


Three
      months ended
              September
      30,
            
            
            Nine
      months ended
              September
      30,2010
            
            
            2009
            
            
            2010
            
            
            2009Net
      revenuesCase
      revenue
            
            $
            4,600,344
            
            
            $
            4,360,206
            
            
            $
            12,249,349
            
            
            $
            12,052,828Total
      net revenues
            
            
            4,600,344
            
            
            
            4,360,206
            
            
            
            12,249,349
            
            
            
            12,052,828Cost
      of salesCase
            
            
            2,629,786
            
            
            
            2,231,411
            
            
            
            6,952,178
            
            
            
            6,051,242Total
      cost of sales
            
            
            2,629,786
            
            
            
            2,231,411
            
            
            
            6,952,178
            
            
            
            6,051,242Gross
      profit
            
            
            1,970,558
            
            
            
            2,128,795
            
            
            
            5,297,171
            
            
            
            6,001,586Selling,
      general andadministrative expenses
            
            
            1,638,320
            
            
            
            1,668,935
            
            
            
            4,974,422
            
            
            
            4,768,443Net
      operating income
            
            
            332,238
            
            
            
            459,860
            
            
            
            322,749
            
            
            
            1,233,143Other
      income (expense)Interest
      income
            
            
            3,419
            
            
            
            -
            
            
            
            9,546
            
            
            
            -Interest
      expense
            
            
            (53,265
            )
            
            
            (42,135
            )
            
            
            (162,962
            )
            
            
            (111,013
            )Other
      income
            
            
            3,182
            
            
            
            895
            
            
            
            16,146
            
            
            
            2,818Net
      income before income taxes
            
            
            285,574
            
            
            
            418,620
            
            
            
            185,479
            
            
            
            1,124,948Income
      tax expense
            
            
            114,229
            
            
            
            170,599
            
            
            
            74,191
            
            
            
            457,987Net
      income
            
            
            171,345
            
            
            
            248,021
            
            
            
            111,288
            
            
            
            666,961Retained
      earnings beginning of period
            
            
            6,471,314
            
            
            
            6,218,841
            
            
            
            6,531,371
            
            
            
            5,799,901Retained
      earningsend of period
            
            $
            6,642,659
            
            
            $
            6,466,862
            
            
            $
            6,642,659
            
            
            $
            6,466,862Basic
      earnings per common share
            
            $
            0.04
            
            
            $
            0.05
            
            
            $
            0.02
            
            
            $
            0.14Diluted
      earnings percommon share
            
            $
            0.03
            
            
            $
            0.05
            
            
            $
            0.02
            
            
            $
            0.14Weighted
      average number ofbasic common shares
    outstanding
            
            
            4,891,760
            
            
            
            4,877,020
            
            
            
            4,889,915
            
            
            
            4,862,667Weighted
      average number ofdiluted
      common sharesoutstanding
            
            
            4,898,203
            
            
            
            4,888,667
            
            
            
            4,896,530
            
            
            
            4,845,304




The
accompanying notes are an integral part of this financial
statement.




3


WILLAMETTE
VALLEY VINEYARDS, INC.
 Statement
of Cash Flows
 (unaudited)
 
 Nine
      Months ended September 30,2010
              
              
              2009Cash
      flows from operating activities:Net
      income
              
              $
              111,288
              
              
              $
              666,961Reconciliation
      of net incometo net cash fromoperating
      activities:Depreciation
      and amortization
              
              
              531,864
              
              
              
              485,011Inventory
      obsolescense reserve
              
              
              20,418
              
              
              
              -Deferred
      gain
              
              
              (24,071
              )
              
              
              (24,071
              )Deferred
      rent
              
              
              (2,402
              )
              
              
              426Bad
      Debt Expense
              
              
              5,390
              
              
              
              -Stock
      based compensation expense
              
              
              8,836
              
              
              
              13,482Changes
      in operating assets and liabilities:Accounts
      receivable trade
              
              
              (43,987
              )
              
              
              (215,719
              )Inventories
              
              
              1,115,802
              
              
              
              (1,036,530
              )Prepaid
      expenses and othercurrent
      assets
              
              
              (79,730
              )
              
              
              (73,873
              )Income
      taxes receivable
              
              
              272,498
              
              
              
              -Accounts
      payable
              
              
              117,297
              
              
              
              (510,352
              )Accrued
      expenses
              
              
              17,560
              
              
              
              (2,446
              )Income
      taxes payable
              
              
              -
              
              
              
              (270,736
              )Grape
      payables
              
              
              (657,371
              )
              
              
              (509,488
              )Net
      cash fromoperating activities
              
              
              1,393,392
              
              
              
              (1,477,335
              )Cash
      flows from investing activities;Additions
      to property and equipment
              
              
              (348,665
              )
              
              
              (495,018
              )Additions
      to vineyard development
              
              
              (3,063
              )
              
              
              (35,183
              )Payments
      received on grape supplier loan
              
              
              20,850
              
              
              
              31,207Net
      cash from investing activities
              
              
              (330,878
              )
              
              
              (498,994
              )Cash
      flow from financing activities:Proceeds
      from stock options exercised
              
              
              6,250
              
              
              
              75,015Bank
      overdraft
              
              
              (271,911
              )
              
              
              1,753,251Net
      borrowings (payments) onrevolving
      line of credit
              
              
              (140,964
              )
              
              
              28,380Payments
      on long-term debt
              
              
              (319,426
              )
              
              
              (243,549
              )Excess
      tax benefit on stock option exercises
              
              
              -
              
              
              
              20,386Net
      cash fromfinancing activities
              
              
              (726,051
              )
              
              
              1,633,483Net
      change in cash andcash equivalents
              
              
              336,463
              
              
              
              (342,846
              )Cash
      and cash equivalents:Beginning
      of period
              
              
              -
              
              
              
              350,361End
      of period
              
              $
              336,463
              
              
              $
              7,515
  The
accompanying notes are an integral part of this financial
statement.




4





NOTES TO
UNAUDITED INTERIM FINANCIAL STATEMENTS





1) BASIS
OF PRESENTATION





The
accompanying unaudited financial statements for the three months and nine months
ended September 30, 2010 and 2009, have been prepared in conformity with
accounting principles generally accepted in the United States (“GAAP”). The
financial information as of December 31, 2009 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, 2009.
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, 2009, as presented in the
Company’s Annual Report on Form 10-K.




Operating
results for the three months and nine months ended September 30, 2010 are not
necessarily indicative of the results that may be expected for the entire year
ending December 31, 2010, 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
month periods ended September 30, 2010. 6,443 and 6,615 potentially dilutive
shares are included in the computation of dilutive earnings per share for the
three and nine month periods ended September 30, 2010, respectively. 11,647 and
17,363 potentially dilutive shares are included in the computation of dilutive
earnings per share for the three and nine month periods ended September 30,
2009, respectively.





2)
Effects of Recently Issued Accounting Standards





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




5




3) 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 September 30, 2010
              
              
              Nine
      months ended September 30, 2010Shares
              
              
              Weighted
      average exercise price
              
              
              Shares
              
              
              Weighted
      average exercise priceOutstanding
      at beginning of period
              
              
              355,700
              
              
              $
              4.16
              
              
              
              355,700
              
              
              $
              4.16Exercised
              
              
              (4,000
              )
              
              
              1.56
              
              
              
              (4,000
              )
              
              
              1.56Expired
              
              
              (79,000
              )
              
              
              3.33
              
              
              
              (79,000
              )
              
              
              3.33Outstanding
      at end of Period
              
              
              272,700
              
              
              $
              4.44
              
              
              
              272,700
              
              
              $
              4.44





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.




6




Black-Scholes
assumptions




September
      30,2010Risk
      free interest rates
              
              
              2.53
              %Expected
      dividend
              
              
              0
              %Expected
      lives, in years
              
              
              5-10Expected
      volatility
              
              
              24.4
              %





The
Company expenses stock options on a straight-line basis over the options’
related vesting term.  For the three months ended September 30, 2010
and 2009, the Company recognized pretax compensation expense related to stock
options of $ 6,626 and $ 4,494, respectively; and for the nine months ended
September 30, 2010 and 2009, the Company recognized pretax compensation expense
related to stock options of $8,836 and $13,482, respectively.





During
the nine months ended September 30, 2010, the following transactions related to
stock option exercise occurred:





Shares
              
              
              Exercise PriceStock
      Options Exercised
              
              
              4,000
              
              
              $
              1.56
 The
exercise of the aforementioned options resulted in a reduction of $3,036 in the
Company’s tax liability.  This tax savings is reflected in the
financials presented at September 30, 2010.





4)
INVENTORIES





The
Company’s inventories, by major classification, are summarized as follows, as of
the dates shown:





September
      30,
                  2010
                  (unaudited)
                
                
                December
      31,
                  2009Winemaking
      and packaging materials
                
                $
                330,093
                
                
                $
                336,813Work-in-progress
      (costs relating to unprocessed and/or bulk wine
      products)
                
                
                2,492,650
                
                
                
                3,068,934Finished
      goods (bottled wines and related products)
                
                
                8,210,443
                
                
                
                8,763,660Current
      inventories
                
                $
                11,033,187
                
                
                $
                12,169,407


5)
PROPERTY AND EQUIPMENT





The
Company’s property and equipment consists of the following, as of the dates
shown:




September
      30,
                2010
                (unaudited)
              
              
              December
      31,
                2009Construction
      in progress
              
              $
              253,750
              
              
              $
              142,971Land
      and improvements
              
              
              2,603,763
              
              
              
              2,594,155Winery
      building and hospitality center
              
              
              5,328,579
              
              
              
              5,315,163Equipment
              
              
              5,781,619
              
              
              
              5,566,75713,967,711
              
              
              
              13,619,046Less
      accumulated depreciation
              
              
              (7,896,431
              )
              
              
              (7,426,817
              )$
              6,071,280
              
              
              $
              6,192,229


7




6)  INTEREST
AND TAXES PAID





During
the third quarter ended September 30, 2010, the Company paid $0 in federal,
state and local income taxes and $107,401 in payroll tax. Additionally, $ 53,265
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, 2010, the Company
received a Federal tax refund in the amount of $200,000, paid $0 in Federal,
State and Local income taxes and $319,852 in payroll tax. Additionally, $
162,962 was paid in interest on the long-term debt and revolving credit line for
the same period.





7)
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 month and nine month periods ended September 30, 2010 by operating
segment:




Three
      months ended September 30, 2010Bacchus
                Distribution
              
              
              Produced
                Wine
              
              
              TotalNet
      Sales
              
              $
              1,078,711
              
              
              $
              3,521,633
              
              
              $
              4,600,344Cost
      of Sales
              
              $
              884,087
              
              
              $
              1,745,699
              
              
              $
              2,629,786Gross
      Profit
              
              $
              194,624
              
              
              $
              1,775,934
              
              
              $
              1,970,558%
      of sales
              
              
              18.0
              %
              
              
              50.4
              %
              
              
              42.8
              %
  8
  Nine
      months ended September 30, 2010Bacchus
                  Distribution
                
                
                Produced
                  Wine
                
                
                TotalNet
      Sales
                
                $
                3,082,062
                
                
                $
                9,167,287
                
                
                $
                12,249,349Cost
      of Sales
                
                $
                2,457,273
                
                
                $
                4,494,905
                
                
                $
                6,952,178Gross
      Profit
                
                $
                624,789
                
                
                $
                4,672,382
                
                
                $
                5,297,171%
      of sales
                
                
                20.3
                %
                
                
                51.0
                %
                
                
                43.2
                %


Total
inventory for Bacchus Distribution was $1,371,656 of purchased wines and
$367,348 of non-wine merchandise at September 30, 2010.  At September
30, 2009 total inventory for Bacchus Distribution was $2,118,897 of purchased
wines and $347,621 of non-wine merchandise, a reduction of $ 747,241 of
purchased wines and an increase of $ 19,727 of non-wine merchandise from 2009 to
2010. Total inventory for produced wine inventory was $6,471,438 and $2,822,743
of non-wine merchandise and work-in-process at September 30, 2010. At September
30, 2009 total produced wine inventory of $6,337,133 and $2,837,086 of non-wine
merchandise and work-in-process for the same period, an increase of $ 134,305
for produced wine inventory and a reduction of $ 14,343 in work-in-process from
2009 to 2010.





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  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,
2009.  Such policies were unchanged during the three and nine months
ended September 30, 2010.




9




Overview





Net
revenue for the three months ended September 30, 2010 increased $240,138 or
5.5%, from the comparable prior year period.  Sales to out-of-state
distributors in the third quarter of 2010 through our National Sales Department
increased $213,355 or 12.6% and our Direct Sales Department increased by $96,396
or 14.5% but these gains were partially offset by a reduction of $190,533 in
revenues from our in-state wholesale department, Bacchus Fine
Wines.  Last year, significant Oregon sales through a large national
chain were not duplicated this year due to retailer product
rotation.





Despite
Oregon's poor economy, these direct retail gains are due to increased winery
visitations and related sales activity at on-site and off-site events as well as
a substantial increase in Wine Club sales during the quarter. The addition of a
new tasting room in McMinnville, OR known as the Wine Center also helped sustain
retail tasting room sales in the third quarter 2010 versus 2009.





The
Company sold approximately 38,868 cases during the three months ended September
30, 2010.  Of these cases sold, approximately 28,951 cases were produced
brands and another 9,917 cases were purchased brands.





Our cost
of goods on produced wines have increased sharply for those vintages sold
resulting in a decrease in Gross Profit of $68,699 over the prior
period.  Management expects margins to return to historical levels
when the '09 vintage wines are sold and the portion of purchased wine which is
aged and discounted is sold.





The
reduction in gross margin, partially offset by a decrease in administrative
costs produced a net income for the third quarter ended September 30, 2010 of
$171,345 compared to net earnings of $248,021, a 30.9% decrease over the
comparable prior year period.  As a result, the Company generated
$0.04 basic earnings per share during the three months ended September 30, 2010,
a decrease of $0.01 basic earnings per share versus the comparable prior year
period.





The
winery bottled approximately 33,950 cases in the third quarter of 2010, mainly
2009 vintage and Estate Pinot Noir as well as Riesling.





The
record '09 harvest has significantly added to produced wine inventory and
work-in-progress.  However, purchased wine and merchandise inventories
are being brought into balance through tighter sales and purchasing management -
a reduction of $1,136,220 in this carried inventory value since December 31,
2009.




10




The
Company has an asset-based loan agreement (the “line of credit”)with Umpqua Bank
that allows it to borrow up to $2,000,000.  The maturity date on this
loan agreement is June 2011.  The index rate at September 30, 2010 is
3.25%. the loan agreement contains 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, 2010, the
Company was in compliance with all of the financial covenants.





At
September 30, 2010, we had no amount outstanding on the line of credit. At
September 30, 2010, the availability on the line of credit was
$2,000,000.





At
December 31, 2009, we had $140,964 outstanding on the line of credit. At
December 31, 2009, the availability on the line of credit was
$1,859,036.





Willamette
Valley Vineyards continues to garner high praise from consumer media and wine
reviewers for high quality wines and high-profile marketing
efforts.





Our 2008
Willamette Valley Vineyards Pinot Noir was “Recommended” in the summer edition
of Wine Press Northwest. It was also featured in the October issue of Sunset
Magazine as one of Top Seven Pinot Noirs. The summer edition of Wine Press
Northwest also reviewed the 2008 Estate Pinot Noir, 2008 Signature Cuvee Pinot
Noir, and 2008 Elton Pinot Noir as “Excellent” and the 2009 Whole Cluster Pinot
Noir as “Outstanding!”.





Our 2008
Dijon Clone Chardonnay was rated 91 points by editor Meredith May in the July
issue of Patterson’s Tasting Panel. This was our first wine to carry the Oregon
Certified Sustainable Wine seal on its label.





In the
August issue of Wine & Spirits Magazine, our 2008 Dry Riesling was awarded
88 points, as well as named a “Best Buy” and a “Year’s Best Riesling”. Of 183
Rieslings tasted over a 12 month period, only 14 qualified as Best Buys and 30
made the rank of Year’s Best. Additionally, wine writer Gregory Dal Piaz, Editor
in Chief of Snooth – a web-based wine review and shopping site – scored the 2008
Dry Riesling at 90 points and our 2008 semi-sweet Riesling at 92
points.





Continuing
efforts to expand distribution in Hong Kong garnered media attention during the
third quarter, with the Oregon Business Magazine and The Oregonian both running
stories that featured WVV’s involvement in international trade efforts. As
one of 14 Oregon wineries to announce our carbon neutrality in April, coverage
of the story continues in regional publications. Portland Monthly Magazine, the
Oregon Wine Press and the Portland Business Journal all ran stories highlighting
WVV’s involvement in this first-of-its-kind program.





In
October, Willamette Valley Vineyards hosted its 12th annual Chefs’ Nite Out,
this year raising $52,000 for the Marion-Polk
Foodshare.  Additionally, the winery and Founder Jim Bernau were
honored with the prestigious Oregon Governor’s Gold Award for having “achieved
the status of one of the region’s leading wineries; recognized for its
environmental concerns and sustainable winegrowing practices; and has earned the
title of one of America’s great Pinot Noir producers.”





11





RESULTS
OF OPERATIONS





Revenue





Net
revenue for the three months ended September 30, 2010 increased $240,138 or
5.5%, from the comparable prior year period. Sales through our in-state
distribution arm, Bacchus Fine Wines, decreased $ 190,533 or 9.1% but were
offset by gains through our other sales departments.





Sales to
out-of-state distributors in the third quarter increased $213,355, or 12.63% and
our Direct Sales Department (direct-to-consumer) sales increased by $96,396 or
14.5% versus prior year. These retail gains are due to increased attendance and
related sales activity at the on-site and off-site events as well as a
substantial increase in Wine Club sales during the quarter. The increase in
revenue in the third quarter of 2010 is also reflective of $137,777 in bulk wine
sales during the period. There were no bulk wine sales in the prior year
period.





The
Company sold approximately 38,868 cases during the three months ended September
30, 2010.  Of these cases sold, approximately 28,951 cases were
produced brands and another 9,917 cases were purchased brands.




Our
revenues from winery operations are summarized as follows:




Three
      months ended September 30,
              
              
              Nine
      months ended September 30,2010
              
              
              2009
              
              
              2010
              
              
              2009Retail
      Sales, RentalIncome
      and Events
              
              $
              760,520
              
              
              $
              664,124
              
              
              $
              2,067,420
              
              
              $
              1,792,655In-state
      sales
              
              
              1,899,078
              
              
              
              2,089,611
              
              
              
              5,385,419
              
              
              
              5,572,194Out-of-state
      sales
              
              
              1,901,976
              
              
              
              1,688,622
              
              
              
              4,969,309
              
              
              
              4,992,344Bulk/misc
      sales
              
              
              138,340
              
              
              
              -
              
              
              
              148,989
              
              
              
              10,991Total
      Revenue
              
              
              4,699,914
              
              
              
              4,442,357
              
              
              
              12,571,137
              
              
              
              12,368,184Less
      excise taxes
              
              
              (
      99,570
              )
              
              
              (
      82,151
              )
              
              
              (321,788
              )
              
              
              (315,356
              )Net
      Revenue
              
              $
              4,600,344
              
              
              $
              4,360,206
              
              
              $
              12,249,349
              
              
              $
              12,052,828




Sales in
the state of Oregon, through our wholesale department, Bacchus Fine Wines,
decreased $190,533 or 9.1%, for the three months ended September 30, 2010,
compared to the corresponding prior year period.





Out-of-state
sales in the three months ended September 30, 2010 increased $213,354 or 12.6%
versus the comparable prior year period.





Cost of
Goods Sold





Our cost
of goods on produced wines have increased sharply from prior vintages sold and
an aggressive push to reduce our aged purchase wine inventory has resulted in a
decrease in Gross Profit of $158,237 over the prior period. Management expects
margins to return to historical levels when the ’09 vintage wines are sold and
we have worked through our aged inventory to an acceptable level.





Gross
Profit





Gross
profit for the three months ended September 30, 2010 decreased $158,237 or
-7.43%, versus the third quarter of 2009.




12




As a
percentage of net revenue, gross profit from winery operations was 42.84% in the
three months ended September 30, 2010, compared to 48.82% in the comparable
prior year period. The decrease in gross profit as a percentage of net revenue
for the three months ended September 30, 2010 is mainly due to the increase in
the cost of our produced brands across our product lines as well as the
aggressive push to reduce our aged purchase wine inventory.





Selling,
General and Administrative Expense





Selling,
general and administrative expense for the three months ended September 30, 2010
decreased $30,615 or 1.8% compared to the corresponding prior year
period.  This decrease is due primarily to a reduction
in  professional service fees for accounting and legal services. In
total, as a percentage of net revenues from winery operations, selling, general
and administrative expenses were 35.6% for the three months ended September 30,
2010, as compared to 38.3% for the comparable prior year period.





Interest
Income, Interest Expense





Interest
income for the third quarter 2010 was $3,419 and for the nine months ended
September 30, 2010 was $ 9,546. During the corresponding periods in 2009 the
Company earned no interest income. Interest expense for the three months ended
September 30, 2010 was $ 53,265 an increase of $11,130 or 26.4% compared to the
corresponding prior year period. Interest expense for the nine months ended
September 30, 2010 was $ 162,962 an increase of $52,079 or 47.0% compared to the
corresponding prior year period.  The average interest rate paid for
the three months ended September 30, 2010 was 6.2%.





Income
Taxes





The
income tax expense in the third quarter 2010 was $114,229 for the three months
ended September 30, 2010, compared to income tax expense of $170,599 for the
comparable prior year period. Our estimated tax rate for the three months
ended September 30, 2010 and 2009 was 40.0% and 40.0%,
respectively.




Net
Income and Earnings per Share





The
reduction in gross margin although offset somewhat by a decrease in selling and
administrative costs produced a net income for the third quarter ended September
30, 2010 of $171,345 compared to net income of $248,021, a 30.9% decrease over
the comparable prior year period. As a result, the Company generated a $0.04
basic earnings per share during the three months ended September 30, 2010, a
decrease of $0.01 basic earnings per share versus the comparable prior year
period.





The
winery bottled approximately 33,950 cases in the third quarter of 2010, mainly
2009 vintage Pinot Noir-OCS, 2009 vintage Pinot Noir-Estate and 2009 vintage
Riesling.





The
record ’09 harvest has significantly added to produced wine inventory and
work-in-progress. It is offset, however, by a reduction in purchased wine and
merchandise inventories through tighter sales and purchasing management – a
reduction of $ 1,136,220 in this carried inventory value since December 31,
2009.





Liquidity
and Capital Resources





At
September 30, 2010, we had a working capital balance of $11.3 million and a
current working capital ratio of 6.84:1. At December 31, 2009, we had a working
capital balance of $11.4 million and a current working capital ratio of
4.98:1.  We had a cash balance of $336,463 at September 30, 2010,
compared to a cash balance of $0 at December 31, 2009.




13




Total
cash provided by operating activities in the nine months ended September 30,
2010 was $1,393,392 compared to cash used in operating activities of $1,477,335
for the same period in the prior year.  The decrease in cash used in
operating activities versus prior year was primarily due to the reduction in
on-hand inventory.





Total
cash used in investing activities in the nine months ended September 30, 2010
was $330,878, compared to $498,994 used in the comparable prior year
period.  The decrease was due to a reduction in the current period of
capital expenditures for property and equipment and vineyard development costs
versus the prior year.





Total
cash used in financing activities in the nine months ended September 30, 2010
was $726,051 compared to $1,633,483 provided by financing activities in the
comparable prior year period. Cash used by financing activities in the current
year primarily consists of the reduction of the bank overdraft as well as
payments on the revolving credit line and long-term debt.





The
Company has an asset-based loan agreement (the “line of credit”) with Umpqua
Bank that allows it to borrow up to $2,000,000. The maturity date on this loan
agreement is June 2011. The index rate at September 30, 2010 is 3.25%. The loan
agreement contains 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, 2010, the Company was in compliance
with all of the financial convenants.





At
September 30, 2010, we had no amount outstanding on the line of credit. At
September 30, 2010, the availability on the line of credit was
$2,000,000.





At
December 31, 2009, we had $140,964 outstanding on the line of credit. At
December 31, 2009, the availability on the line of credit was
$1,859,036.





As of
September 30, 2010, we had a total long-term debt balance of $3,399,442,
including the portion due in the next year, owed to Farm Credit Services, GMAC
and Kubota. As of December 31, 2009, we had a total long-term debt balance of
$3,718,868. There was no new long-term debt incurred in the quarter ended
September 30, 2010. 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.





At
September 30, 2010, we owed $0 on grape contracts. For the 2010 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 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.




14




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, 2010 by operating
segment:




Three
      months ended September 30, 2010Bacchus
                Distribution
              
              
              Produced
                Wine
              
              
              TotalNet
      Sales
              
              $
              1,078,711
              
              
              $
              3,521,633
              
              
              $
              4,600,344Cost
      of Sales
              
              $
              884,087
              
              
              $
              1,745,699
              
              
              $
              2,629,786Gross
      Profit
              
              $
              194,624
              
              
              $
              1,775,934
              
              
              $
              1,970,558%
      of sales
              
              
              18.0
              %
              
              
              50.4
              %
              
              
              42.8
              %
 
 Nine
      months ended September 30, 2010Bacchus
                Distribution
              
              
              Produced
                Wine
              
              
              TotalNet
      Sales
              
              $
              3,082,062
              
              
              $
              9,167,287
              
              
              $
              12,249,349Cost
      of Sales
              
              $
              2,457,273
              
              
              $
              4,494,905
              
              
              $
              6,952,178Gross
      Profit
              
              $
              624,789
              
              
              $
              4,672,382
              
              
              $
              5,297,171%
      of sales
              
              
              20.3
              %
              
              
              51.0
              %
              
              
              43.2
              %


Total
inventory for Bacchus Distribution was $1,371,656 of purchased wines and
$367,348 of non-wine merchandise at September 30, 2010.  At September
30, 2009 total inventory for Bacchus Distribution was $2,118,897 of purchased
wines and $347,621 of non-wine merchandise, a reduction of $ 747,241 of
purchased wines and an increase of $ 19,727 of non-wine merchandise from 2009 to
2010. Total inventory for produced wine inventory was $6,471,438 and $2,822,743
of non-wine merchandise and work-in-process at September 30, 2010. At September
30, 2009 total produced wine inventory of $6,337,133 and $2,837,086 of non-wine
merchandise and work-in-process for the same period, an increase of $ 134,305
for produced wine inventory and a reduction of $ 14,343 in work-in-process from
2009 to 2010.





Item
3





QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK





None.




15




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,
2010, 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, our Chief
Executive Officer and Chief Financial Officer have concluded that our disclosure
controls and procedures as of September 30, 2010 were not effective in ensuring
that information required to be disclosed in our Exchange Act reports is
(1)recorded, processed, summarized and reported in a timely manner, and (2)
accumulated and communicated to our management, including our Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure. Management’s conclusions are based upon the
continued existence of the material weakness identified in our annual report on
Form 10-K for period ended December 31, 2010, the nature of which is summarized
below.





As of
December 31, 2009, the Company had identified the following material weakness.
Management has determined this material weakness continued to exist as of
September 30, 2010.





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





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, 2009, management concluded
that our internal control over financial reporting was not effective due to the
existence of the material weakness identified above.





In an
attempt to remediate this material weakness, the Company implemented the
following remedial actions during the first nine months of 2010:





·
            The
      Company has added additional accounting resources to develop, implement
      and maintain procedures and controls related to the costing of our
      produced wines.  As of September 30, 2010, these controls and
      procedures are in the process but had not been fully developed or
      implemented and the material weakness identified above had not been fully
      remediated




16


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.





None.





Item
5.    Other Information




None.




17




Item 6.
Exhibits




Exhibit
                No.
              
              Description3.1
              
              Articles
      of Incorporation of Willamette Valley Vineyards, Inc. (incorporated by
      reference from the Company's Regulation A Offering Statement on Form 1-A,
      File No. 24S-2996)3.2
              
              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 (Filed
      herewith)32.2
              
              Certification
      of R. Steven Caldwell pursuant to 18 U.S.C. Section 1350 as adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Filed
      herewith)


18


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 15, 2010
              By
              /s/
      James W. BernauJames
      W. BernauPresidentDate:
      November 15, 2010
              By
              /s/
      R. Steven CaldwellR.
      Steven CaldwellChief
      Financial Officer




19