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

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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

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

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

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

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

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

OVERVIEW

Results of Operations

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

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

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

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

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

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

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

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

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

Sales

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

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

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

Wine Inventory

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

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

Production Capacity

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

Wine Quality

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

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

On April 3, 2008 LIVE (Low Input Viticulture and Enology), Oregon's leading industry organization dedicated to sustainable environmental practice, presented Willamette Valley Vineyard's Founder and President Jim Bernau with its first Founders Award. Al MacDonald, LIVE board president, said that Bernau was an obvious choice for the honor because of his early and continuous support of LIVE and its sustainability goals.
"The support Jim has given us has been manifested through contributions of time, expertise and money," MacDonald said. "He served on the LIVE board of directors in its formative years. All vineyards under his control at Willamette Valley Vineyards have been brought into the LIVE program." Willamette Valley Vineyards became LIVE certified in 2000 and Bernau was one of the original board members of the 501(c)3 organization created in 1999.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Seasonal and Quarterly Results

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

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

                         Three months ended          Twelve months ended
                            December 31,                 December 31,
                          2008          2007          2008           2007

Retail Sales, Rental
Income and Events      $      627      $   794     $     2,460     $  2,396
In-state sales              2,382        2,668           7,929        8,199
Out-of-state sales          1,761        1,652           5,998        6,350
Bulk wine/
Misc. sales                    79          134              79          156

Total Revenue               4,849        5,248          16,466       17,101

Less excise taxes            (145 )        (84 )          (418 )       (390 )

Net Revenue            $    4,704      $ 5,164     $    16,048     $ 16,711

2008 Compared to 2007

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

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

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

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

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

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

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

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

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

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

First Quarter 2009 Outlook

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